Supporting Global Development through the Crisis and Beyond
One year after the global financial crisis impacted the world economy, there are signs of stabilisation in some of the larger countries. It remains to be seen whether the momentum of growth will be sustained when the authorities begin to implement expected macroeconomic measures such as lower monetary expansion, normalised interest rates and policies to reduce fiscal deficits.
Some Asian economies, particularly those with close trading links to China, have already seen high rates of growth of exports and industrial production in the second quarter but these gains are mainly limited to middle income countries. The economic and social conditions of most developing countries remain badly affected by the many various shocks which accompanied and followed the unfolding of the crisis.
The ‘development emergency’ has many aspects. Most notable has been the volatility of commodity prices. Since mid-2008 exporters have suffered from a sharp deterioration in their terms of trade and export volumes. Labour incomes have fallen whilst governments have seen a marked downshift in tax revenues. Inward flows of capital reversed as foreign investors moved to reduce their risk exposure to poorer countries. Remittances from workers in developed countries were cut as unemployment levels rose. Future allocations of official development assistance may be at risk as advanced countries attempt to mitigate the effect on their fiscal deficits of unprecedented support for their banks and insurance companies. The private sector has been affected by a shortage of affordable credit. Governments in low-income countries have been unable to assist private business, in contrast to the extensive support provided by the authorities in the developed countries.
Overall many developing countries faced, and continue to face, a crippling shortfall in financial resources. The outcome in the short term has been a marked increase in the borrowings of many developing countries, in some cases threatening the progress made towards debt sustainability. Financial reserves, built up over many years, are being rapidly eroded to pay for essential imports of food and commodities.
In addition to the financial shock, the economic crisis may cause developing countries, particularly the poorest, to reconsider their polices towards globalisation and integration into the world economy. For many years such countries have been urged to follow policies of restraint and reform in the expectation that sustained capital inflows would revitalise the private sector and help alleviate poverty. In 2008 these expectations were shaken by the crisis.
A crisis, not of their making, rooted rather in the over-leveraged financial sectors of advanced countries, deprived many poor countries of investment capital without warning. Capital was urgently repatriated to strengthen weakened balance sheets with serious and lasting consequences for long term investment in both productive capacity and infrastructure. Poor countries had no say in the governance of the financial and regulatory systems which allowed this meltdown and little influence over the policy response.
The response to the crisis so far has not been proportionate to the needs of the poorest countries. Top priority has been help for highly indebted countries in Eastern and Central Europe which have substantial obligations to banks in advanced countries. Some development assistance reflects economic performance. Such criteria, however sound in principle, will exclude many countries which are least able to weather the storms of the crisis.
These circumstances underline the value of the consistent, needs-driven support which has been provided for over thirty years by the OPEC Fund for International Development (OFID). The mandate of OFID is to help all non-OPEC developing countries, particularly the poorest, achieve their economic and social potential through the provision of financial and technical assistance which is unconditional and offered in the spirit of partnership. This assistance is made available through public and private sector facilities; a facility for trade finance is a recent, and timely, addition.
The struggle against energy poverty is a major priority for OFID. It is impossible for the poorest countries to sustain economic and social development without reliable supplies of modern energy yet the financial and economic crisis has severely dented the willingness and ability of the private sector to make such big-ticket investments. The Riyadh Declaration of November 2007 recognized that energy is essential for poverty eradication, sustainable development and the achievement of the Millennium Development Goals. OPEC Member Countries resolved to align the programmes of OFID and their other aid institutions with the objective of eradicating energy poverty in developing countries. In accordance with the Declaration, King Abdullah of Saudi Arabia in June 2008 called on the World Bank to cooperate with an Energy for the Poor Initiative to improve access to affordable modern energy services in the poorest countries.
This initiative now forms part of the World Bank Infrastructure Recovery Assets Platform (INFRA). At the launch of the Platform in April, the Bank noted the importance of investing in infrastructure which “can provide the platform for job creation, sustainable economic growth and overcoming poverty, and help jump start a recovery from the crisis”. Considering that the first priority of the initiative is an economic and flexible energy supply for the poor, investment in fossil fuel solutions will not be neglected. Together with renewables, such fuels should form part of an efficient and commercially viable, non-subsidized, energy supply.
In June the Governing Board of OFID approved a record level of operations - USD$455 million in new commitments. The operations included support for vital energy infrastructure projects in Mozambique, Pakistan and Rwanda complementing previous energy projects in Armenia and Gambia. Earlier this year the Governing Board approved assistance for a program to rehabilitate a hydro-electric plant in Haiti and an innovative project to improve the efficiency and financial sustainability of the electricity distribution network of the Dominican Republic.
A related priority for OFID is the need to provide finance for SMEs, workshops, farmers and local communities. Solving energy poverty requires sustained growth in incomes from manufacturing and agriculture so that people can afford to use energy for further productive applications. OFID actively cooperates with regional development banks, commercial banks and microfinance institutions in order to start and maintain the momentum of viable commercial activities at all levels. Earlier this year OFID extended a loan to an innovative microfinance provider in Africa, a continent largely deprived of credit finance at the local level. This provider has brought affordable loan products to the lower-income parts of the market, helping small businesses, retailers and franchise operations.
One of the first impacts of the crisis was a shortage of trade finance to cover transactions with poor countries. The short maturity of letters of credit and other such instruments meant that it was easy for commercial banks to withdraw capital back home. This year OFID has taken part in many trade finance syndicates, with a particular emphasis on Africa.
OFID has always been open to fruitful collaboration with the World Bank and the IFC. At this meeting of the Development Committee, it is particularly appropriate to illustrate the expanding scope of such ventures which should make a significant contribution to the alleviation of poverty.
OFID is already committed to three elements of the IFC Private Sector Platform. In June the Governing Board authorised OFID participation in the Global Trade Liquidity Pool. This vehicle is designed to aggregate funding from many institutions and route trade liquidity through approved commercial banks in an efficient manner. The Pool will have a global reach beyond the capacity of any individual development finance institution.
OFID has also committed resources to the Africa sub-fund of the Bank Capitalization Fund (BCF). Banks in Africa are suffering from higher default rates and lower earnings. These trends will erode their capital base and inhibit further lending. The BCF is a global private-equity fund which will invest in significant, viable commercial banks which are in need of additional capital.
The IFC Microfinance Enhancement Facility (MEF) is a response to cuts in commercial bank refinancing possibilities. Even healthy microfinance banks are now unable to access previously available sources of funding. The MEF will finance over 150 microfinance institutions in over 30 countries; these lenders will, in turn, support as many as 60 million low-income borrowers in many of the world's poorest countries.