RSS FeedBy M. Isi Eromosele
The global financial crisis has worsened the budgetary positions of governments in low income countries. Government revenues have suffered as economic activities slowed and commodity prices fell. Declines in donor support as well as tighter development financing conditions imposed by such institutions as the International Monetary Fund put additional pressures on low income countries’ budgets.
Concurrently, the need for these governments to increase social spending to protect the poor increased. Additional spending pressure arose from currency depreciation and rising interest rates, which inevitably raised debt service costs.
The risk is that the impact on low income countries could become more serious. As previously stated, 28 countries are particularly vulnerable to the continuing crisis. Practically all of these countries are heavily dependent on commodity exports and others are in such fragile financial positions that they have virtually no room to maneuver.
Baseline projections for 2011 foresee a total balance of payment shock of $190 billion. Low income countries may need at least $30 billion to mitigate the impact the financial crisis has had on their foreign reserves and in the worst case scenario, this amount could easily increase to $160 billion.
Emerging and developing countries that were initially in a strong budgetary position have had the flexibility to be able to contain the recurring fiscal worsening, and in some minority cases, increase spending to cushion the impact of the financial crisis.
These countries do not have public debt sustainability and financing restraints and have achieved macroeconomic stability. Additionally, a few commodity producers who had the foresight to build up financial cushions during the global economic boom have been able to maintain global spending or adjust slowly.
However, in most low income countries, the ability to mitigate the effects of financial shocks caused by the financial crisis virtually depends on their obtaining increased donor support.
Unfortunately, many of these countries are facing compulsory fiscal constraints and with the level of bilateral aid flow so uncertain, many of these countries will have to reduce spending and increase their efficiency in order to create fiscal room for protecting social and MDG-related spending. Additional structures would have to be put in place to strengthen revenue mobilization.
Countries need to focus on macroeconomic stability. In countries where inflation is low, monetary policies could be eased. Those with flexible exchange rates should allow their currency to move, to enable them function as fiscal shock absorbers. Fixed exchanged rate regimes could come under particular pressure due to the negative direct impact of the financial crisis. Steps also need to be implemented to forestall the global financial crisis from spreading to the domestic financial sectors of these low income countries.
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
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