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Jim Lobe

Poor Countries to Need Up to 700 Billion Dollars

by Jim Lobe

9 March 2009

In the latest in a series of increasingly dire predictions, the World Bank Sunday warned that developing countries may need up to 700 billion dollars in external financing this year due to the squeeze in global credit markets which has seen a dramatic plunge in private investment.

In a new report, prepared for next weekend’s meeting of the Group of 20 finance ministers and central bank governors in Britain, the bank predicted that global gross domestic product (GDP) will actually decline in 2009 for the first time since World War II and that industrial production worldwide will fall 15 percent compared to last year.

The 20-page report, entitled "Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis," also said world trade was on track for its largest decline since 1929, wreaking havoc on commodity prices on which most low-income countries (LICs), in particular, depend.

"We need to react in real time to a growing crisis that is hurting people in developing countries," said the bank’s president, Robert Zoellick. "This global crisis needs a global solution, and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis."

Zoellick, who has proposed the creation of a global Vulnerability Fund, to which developed countries would be asked to contribute the money equivalent of 0.7 percent of the stimulus packages they are adopting to overcome the ever-deepening financial crisis, said developing countries and their aid donors should invest in social "safety nets, infrastructure, and small and medium-size companies to create jobs and to avoid social and political unrest."

The new report, which was clearly written to bolster Zoellick’s case for his proposed fund, is perhaps the most pessimistic by a major multilateral institution regarding global economic prospects to be released since the mid-September onset of the financial crisis that first exploded with the collapse of the Lehman Brothers investment house in the United States but whose shockwaves have since spread around the world to devastating effect.

Just one month ago, for example, the International Monetary Fund (IMF) predicted that, despite likely declines in economic growth in the developed countries, and particularly the newly industrialised Asian countries, such as Taiwan and Singapore, the world as a whole would eke out a 0.5 percent increase in global GDP in 2009. With new data from the fourth quarter in 2008, the bank apparently now believes that will not be possible.

Depending on the severity of the ongoing crisis, according to the report, developing countries face a financing gap of between 270 billion dollars and 700 billion dollars.

"Even at the lower end of this range, existing resources of international financial institutions would appear inadequate to meet financing needs this year," it warned. "Should a more pessimistic outcome occur, unmet financing needs will be enormous."

The plunges in world trade and industrial production have resulted in sharp declines in commodity prices - 68 percent in oil prices and 38 percent in non-oil prices during the second half of 2008.

In addition, developing countries and their small and medium enterprises (SMEs) are being squeezed out of credit markets by heavy borrowing on the part of high-income countries to finance their stimulus packages and their bailouts of major industries. Moreover, many banking institutions that helped developing countries arrange investment and credit package have actually or virtually disappeared, according to the report.

Indeed, net flows of private capital to emerging markets - the wealthiest of the developing countries - are likely to fall to 165 billion dollars in 2009, or about one-third of last year’s net, and less than 20 percent of 2007’s total, according the Institute of International Finance (IIF).

Moreover, the depreciation of most developing-country currencies vis-à-vis the dollar has made borrowing far more expensive.

In addition, flows of worker remittances to developing countries, which reached more than 305 billion dollars last year, according to the report, are likely to decline in 2009 due to layoffs and rapidly growing unemployment in host countries. While sub-Saharan Africa, Central Asia, and Eastern Europe have already been hard hit by the downward trend in remittances, South Asian countries are "particularly vulnerable" as well, due to the plunge in revenues from oil and gas exports in the Gulf states.

All of these factors point to serious setbacks to developing countries, particularly the LICs, despite the fact that they had no role in creating the crisis. Already reeling from the steep rise in food and fuel costs from 2007 and 2008, most LICs lack the budgetary resources they need to address its impact.

Of the 94 out of 116 developing countries that have already experienced a slowdown in economic growth, 43 of them - mostly in sub-Saharan Africa - already have high levels of poverty. The current crisis is likely to drag the incomes of tens of millions of more people below the international poverty line of less than two dollars a day, thus making the achievement by 2015 of the poverty-reduction Millennium Development Goals (MDGs) that world leaders set in 2000 much less likely.

"When this crisis began, people in developing countries, especially those in Africa, were the innocent bystanders in this crisis, yet they have no choice but to bear its harsh consequences," said the bank’s managing director, Ngozi Okonjo-Iweala.

Yet, the prospects for official development assistance (ODA) and other forms of support from wealthy nations for developing countries remain highly uncertain, according to the report, which noted that donor countries have already fallen behind - by around some 39 billion dollars - on their 2005 commitments at the Group of Eight Summit at Gleneagles, Scotland, to double aid to sub-Saharan African countries.

"The concern now is that aid flows will become more volatile as some countries cut their aid budgets while others re-affirm aid commitments, at least for this year," the report said.

The bank said it was itself prepared to nearly triple its lending to some 35 billion dollars this year and could potentially increase its lending to 100 billion dollars over the next three years. Moreover, its soft-loan arm, the International Development Association (IDA) has just been replenished for nearly 42 billion dollars over the same period.

But even with the IMF ramping up its own lending programme with the help of a 100-billion-dollar infusion from Japan, multilateral agencies may well lack the resources to meet their clients’ needs, particularly if the crisis continues to intensify, according to the report, which called for strong support to Zoellick’s proposed Vulnerability Fund.

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