“After hitting first the advanced economies and then the emerging economies, a third wave from the global financial crisis is now hitting the world’s poorest and most vulnerable countries,” said Strauss-Kahn at the launch of a new IMF study, entitled “The Impact of the Financial Crisis on Low-Income Countries.”

“This puts at risk the major achievements of higher growth, lower poverty, and greater political stability that many low-income countries have made over the past decade. I urge donors to rise to the challenge and provide the financing needed to preserve these hard-won gains and prevent a humanitarian crisis,” the Director said.

The study finds that the global crisis is squeezing exports of low-income countries severely, while also curtailing inflows of foreign direct investment and remittances, which had become important sources of financing in recent years. As a result, many countries will face sharply lower fiscal revenues and some may also experience pressure on their foreign exchange reserves.

The economic outlook for low-income economies has deteriorated dramatically. According to the IMF’s most recent forecast, low-income country growth in 2009 is projected at just over 4 percent—more than 2 percentage points lower than expected a year ago—with risks heavily on the downside. In per capita terms, this means that many of the world’s poorest countries will at best see incomes stagnate this year, and possibly even contract.

The IMF analysis identifies 22 low-income countries that face the most acute financing constraints. To keep their external reserves at safe levels (around 3–4 months of imports), at least US$25 billion in additional concessional financing is needed in 2009. This represents about 80 percent of annual aid to all low-income countries in recent years.
If global growth and financing conditions deteriorate further, the number of vulnerable countries could almost double, while additional financing needs could approach US$140 billion.

200 vulnerable

The IMF study finds that more than 20 countries are particularly vulnerable to the unfolding crisis. At least US$25 billion in urgent concessional financing will be needed this year in the most affected countries, but much more may be needed given the heavy downside risks to the global economic outlook, and the prospect of more countries being affected as the crisis deepens.

“Bilateral donors must ensure that aid flows are scaled up, not trimmed back,” Mr. Strauss-Kahn said. “At a time when the advanced economies are spending hundreds of billions of dollars on fiscal stimulus and financial sector restructuring, we must find room to help low-income countries.”

He warned that lower growth could have serious implications for poverty and potentially also for political stability, adding that spending on targeted social safety net programs should be ramped up to protect the poor. At the same time, it will be critical to protect spending on health, education, and vital infrastructure.

Mr. Strauss-Kahn emphasized his goal to double the IMF’s concessional lending capacity. He added that the IMF is also looking at ways to make its lending to low-income countries more flexible, reflecting their growing diversity and heightened exposure to global volatility. “The IMF is mounting an extraordinary response to what is an extraordinary crisis facing
the world’s poorest economies,” he said.

The IMF called on the international community to act urgently and generously
to avoid the potentially devastating effects of this crisis on the most vulnerable countries.