Straus-Khan - IMF head
The global economy will shrink this year for the first time since the second world war as the "Great Recession" ravages businesses, consumers and financial institutions around the world, the International Monetary Fund warned today.
Speaking in Tanzania, IMF managing director Dominique Strauss-Kahn said the economic downturn would be more severe than previously thought.
"The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes," Strauss-Kahn told African political and financial leaders in Dar Es Salaam.
"Continued de-leveraging by world financial institutions, combined with a collapse in consumer and business confidence, is depressing domestic demand across the globe, while world trade is falling at an alarming rate and commodity prices have tumbled."
Strauss-Kahn dubbed the downturn the "Great Recession". The world economy has not suffered an annual contraction since 1945. There appears to be broad consensus that the economic downturn will be much deeper and more protracted than most experts thought just a few months ago.
In January, the IMF predicted that the world economy would grow by 0.5%, which was already a sharp revision of its earlier prediction of 2.2% growth. That was based on 3.3% expansion in developing countries and 2% contraction in advanced economies.
Strauss-Kahn's warning, made at a conference to examine the impact of the financial crisis on Africa, comes just two days after the World Bank predicted that the global economy would shrink by at least 1% this year.
The World Bank also forecast on Sunday that trade would suffer the biggest decline in 80 years, and said that by this summer industrial output could be 15% lower than in 2008.
And veteran investor Warren Buffett warned yesterday that the world faced "an economic Pearl Harbor".
Most major economies are now officially in recession. The UK economy shrank by 1.6% in the last three months of 2008, following a 0.7% contraction between July and September, and is expected to keep shrinking through 2009. Japan's economy is shrinking at its fastest rate for 35 years, with GDP falling by 3.3% in the fourth quarter of 2008. And in America GDP declined by 3.3% in the last quarter on an annualised basis.
The downturn has already sent unemployment rising sharply on both sides of the Atlantic, with analysts fearing that the UK jobless total will exceed 3 million before the crisis is finished. There are concerns, though, that developing nations will be hit even harder. Writing in the Guardian today, Alistair Darling says that Europe's leaders have a "moral imperative" to step in to help poorer nations.
"The International Monetary Fund has identified 26 countries, half in sub-Saharan Africa, that are particularly vulnerable to the crisis. Central and eastern European economies are estimated to face a financing gap of $100bn in 2009. And the World Bank estimates that 129 developing countries are facing a financing shortfall of between $270 and $700bn," writes the chancellor.
"Many decades of economic union have brought greater prosperity, but closer economic integration also brings challenges. We are all affected by what happens to our neighbours," he adds.
The IMF has already bailed out several countries that have been particularly badly hit by the financial meltdown, including Iceland, Ukraine and Hungary. With the crisis escalating, there is growing pressure to double the IMF's emergency rescue fund to $500bn.
This issue will be debated when finance ministers from the group of 20 leading economies meet this weekend, and European Union finance ministers are expected to announce their support for this move later today.
Darling has already indicated that he backs the proposal, writing in the Guaridan: "For those most at risk, we need to increase financing through the International Monetary Fund and multilateral banks, through swap lines between central banks, and an enhanced lending facility at the EU level."
In a series of panel discussions, conference participants representing a broad range of viewpoints debated how Africa could forge a path out of the current global economic crisis into a new period of sustained growth.
Participants reached broad agreement on the severity of the global crisis and the main channels of transmission to the continent—decreased trade, lower foreign direct investment, lower export and tourism receipts, and weaker remittances. A number of panelists emphasized the importance of having the IMF and other international financial institutions form a united front to urge donors to honor their commitments—particularly the one made at Gleneagles to double aid to Africa in real terms by 2010. “My continent is hurting,” said Ngozi Okonjo-Iweala, World Bank Managing Director.
Benno Ndulu, Governor of the Bank of Tanzania, expressed skepticism that aid would be immediately forthcoming, but stressed the importance of stepping up pressure on donors—while at the same time emphasizing the need for African countries to mobilize domestic resources. Ndulu also noted that African leaders must look beyond the current crisis and invest in the capacity for future growth—in particular, through infrastructure.
Another panel discussion focused on how to sustain intrastructure creation in today’s difficult environment. Traditional ways of financing infrastructure are no longer sustainable in the current financial crisis, observed panelists Abdoulaye Bio-Tchane, Manuel Change, Abdoulaye Diop, Michael Joseph, and Antoinette Sayeh.
Public-private partnerships might be the answer, some suggested, since Africa should still be in a position to attract liquidity for such arrangements. Panelists pointed to successful cases of regional public-private partnerships—for example, with railways and pipelines in southern Africa. But such partnerships require a stable political and macroeconomic environment, panelists stated.
Effective management of commodity export revenues in good times is key to minimizing the effects of a sudden fall in prices, noted participants in another session.
Linah Moholo, Governor of the Central Bank of Botswana, spoke of her country’s experience in successfully harnessing the revenues from commodity exports for growth. Countries must save during times of commodity price booms, she said, to allow a smoothing out of government expenditure and a buildup of international reserves. Transparency and good governance in the extractive activities—an area of success in Bostwana, particularly for operations related to the diamond industry—are vital to attracting investment, she said.
But increasing the predictability of aid to commodity-exporting countries is also key, noted Jean-Michel Severino, Chief Executive Officer of the Agence Française du Développement. To help countries cope with commodity price shocks, donors should reduce aid volatility and play a countercyclical role.
Another session focused on Africa’s banking sector, which has not yet suffered as much as financial sectors in other parts of the world. Bank are still sound and their balance sheets are clear of toxic assets, participants noted.
In Morocco, for example, net profits in the banking sector are expected to grow at around 15 percent this year, said Mohamed Benchaaboun, CEO of Morocco’s Banque Centrale Populaire.But participants warned against complacency: the financial sector may have escaped the turmoil, but the continent is beginning to feel the impact of the global recession. In Morocco, Benchaaboun said, the recession is slowing demand in such vital sectors as tourism, and remittances are also falling. In sum, panelists concluded, African policymakers will need to be vigilant to the effects of the global economic crisis, which are as yet uncertain.
While some African countries were better placed than in the past to weather the crisis, many African economies will need significant additional concessional financing to get through. The IMF projects that the 22 most vulnerable low-income countries—many of which are in Africa—will require at least $25 billion in additional concessional financing this year alone to keep their foreign reserves at safe levels. If global economic and financial conditions deteriorate further, the financing need will be significantly larger.
Strauss-Kahn called on the international community to both help Africa and avoid protectionist measures that could harm the continent. The IMF, he said, would move quickly to provide African members with the financial resources they need. Last year, the IMF backed countries suffering from the food and fuel price shocks, reaching 15 new financing agreements with African member countries in 2008—up from only four in 2007—and increased access under 8 existing arrangements.
Former U.N. secretary general Annan said that Africa could be part of the solution by including it in a global stimulus plan that would create jobs and promote economic activity. But African countries needed a dramatic increase in concessional lending and temporary financial support to help them cope. The trillions of dollars found to bail out companies and stimulate the economies of advanced countries undermined the claim that money could not be found to fight poverty.
Looking ahead, Strauss-Kahn said his goal was to at least double the IMF’s concessional lending resources. “I urge partner countries to support me in this, so that additional resources for Africa can be available as soon as possible. I am hopeful that significant progress on this front can be made in the near future,” he stated.
The IMF was trying to increase the flexibility of its financing by exploring better ways to provide short-term financing to members facing immediate financing needs. Raising access limits, which have become increasingly binding, is also under discussion. The IMF is also trying to streamline conditionality, and tailor it better to the circumstances of each individual country.
The IMF also wanted to strengthen ownership of the Fund. “Specifically, we need to implement recent agreements on rebalancing quota shares, and also agree on a timetable for the next stage of quota reform. I am hopeful that both can be achieved this year—with welcome consequences for amplifying the voice of our African members,” Strauss-Kahn added.
Former UN Secretary-General Kofi Annan (right), Tanzania's President Jakaya Kikwete (centre) and International Monetary Fund (IMF) managing director Dominique Strauss-Kahn in Dar es Salaam on Tuesday. Photo/REUTERS
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