This 79th meeting of the Development Committee takes place against the background of an unusually long, deep, and severe global economic downturn. A credit crunch that originated in the U.S. pushed advanced economies into a profound financial crisis that rapidly spilled over to activity in developing and emerging market economies after September 2008, triggering a crisis of global proportions. The global financial crisis prompted extraordinary liquidity injections by central banks to restore the flow of credit. Nonetheless, the world economy has continued to deteriorate and a prospective global recovery is likely to be weak and slow.
The global economic crisis will have long-term implications for developing countries, which do not only see their growth stifled as a result of a collapse in external demand and a marked reduction in worker’s remittances, but which also face deteriorating financing conditions as a result of an exodus of private capital flows. In addition, the credit crunch and the volatility in commodity prices have led to serious shortages of trade finance and supply constraints to export growth. Millions of workers were pushed into poverty as the crisis deepened and purchasing powers diminished due to weaker trade and investment, higher unemployment, and reduced incomes, reversing hard-won gains towards the United Nations (U.N.) Millennium Development Goals (MDGs).
The impact of the meltdown is most devastating for low-income countries (LICs) - the traditional focus of the OPEC Fund for International Development (OFID) - most of which are in sub-Saharan Africa (SSA). These poor countries do not have much room for manoeuvre, and stand to suffer disproportionately from a financial crisis born elsewhere. Before the global financial crisis, some African countries had started to attract new investment inflows and had begun borrowing on international capital markets. With a more pronounced global downturn, a fall in import demand, a slump in commodity prices and scarcer capital inflows, growth in SSA is foreseen to drastically cool off. Many LICs are becoming ever more dependent on development assistance as their exports and fiscal revenues decline: at the same time aid flows will become more volatile and unpredictable as some countries cut their aid budgets. Countries will be forced to cut back on basic public services for the poor such as health and education. An important factor putting additional pressure on the balance of payments of poor countries is the price of food. While food prices have fallen from the peaks of 2008, they remain high and the food crisis has not gone away. Underlying the global food crisis has been a historic neglect of investment in agriculture and rural development, increased global demand, low grain stocks and changing weather patterns. Also contributing to the food crisis has been the growing use of food crops to satisfy the needs of a rapidly growing bio-fuels industry.
The relationship between bio-fuels and food security was discussed in detail during an OFID Special Session held during the Fourth International Seminar of the Organization of the Petroleum Exporting Countries (OPEC) earlier this year. During the OFID Special Session, I presented the conclusions of a special study commissioned by OFID on Food Security: Implication of an Accelerated Biofuels Production. The study - conducted by the Austrian-based International Institute for Applied Systems Analysis (IIASA) - concludes that care should be taken to ensure that policies to promote bio-fuels are consistent with maintaining food security and achieving social, economic and environmental sustainable development goals. The study demonstrates that the increase in production of certain crops for first-generation bio-fuels may drive up the price of food and worsen food security in the world’s poorest countries.
The food crisis, and now the global economic crisis, will lead to greater hunger and malnutrition. The number of chronically hungry people in the world was estimated at 960 million in 2008 and may climb past 1 billion this year, halting recent progress towards reducing global poverty.
Conscious of the need to soften the destructive impact of the inter-related global crises on particularly the world’s poorest countries, OFID and its Member Countries have continued to ensure access to a predictable, concessional, flexible, and untied stream financing for development, based on the fundamental principles of mutual accountability, equality among partners, and national sovereignty. Cumulatively as at March 31, 2009, OFID had committed US$10.6 billion in financing for development to 121 countries in developing regions worldwide, half of which had been allotted to Africa. OFID harmonizes its activities with its sister development finance institutions of the Arab Coordination Group . Together, the nine members of the Arab Coordination Group have contributed a cumulative total of some US$90 billion in financing for development, benefiting 135 developing countries in regions worldwide.
In mitigating the implications of the global economic and related crises for developing countries in a co-ordinated an integrated manner, OFID’s preferred method of work is in strategic partnership with all relevant stakeholders in development. On March 12, 2009, OFID joined the world’s largest international finance institutions (IFIs) and development banks for a meeting in Vienna, Austria to share information and ideas on how to cooperate in mitigating the impact of the global economic crisis on poor countries and peoples by investing in social safety nets and job creation by supporting trade, finance, infrastructure, agribusiness, and micro- small- and medium-sized enterprises (SMEs). At the meeting, OFID announced it will commit sizable financial resources to an Africa-focused sub-fund of an IFC Re-capitalization Fund to help alleviate the effects of the crisis on the African continent. The Re-capitalization Fund will make urgently needed investments to help ensure banks can continue to lend and support economic recovery and job creation through the financial crisis. Alongside other IFIs, OFID further committed to provide financing to vulnerable banking systems - in line with the Vulnerability Fund of the World Bank - to increase investments in vital infrastructure and social sectors, and to continue to ensure access to trade financing as part of an emerging global partnership to deliver practical and timely responses to the crisis, and support a global recovery.
Conscious of the need to re-double efforts to encourage growth and employment creation in the private sector, OFID has further made sure to provide US$216 million in support of SMEs under OFID’s Private Sector Facility in 2008 - a 66% increase over 2007. In addition, US$119 million in lines of credit and US$139 million in risk-sharing guarantees had been approved by end of December 2008 for 19 operations under OFID’s separate Trade Financing Facility (TFF) launched in 2006 to help meet the rising demand for trade finance credits in the South.
OFID and its Member Countries were quick to respond to an extraordinary emergency appeal made by the World Food Program (WFP) in March 2008 for assistance in alleviating hardship and tempering the impact of the world food crisis. OFID’s grant support to the WFP was complemented by donations made by the Kingdom of Saudi Arabia, Venezuela and Kuwait. Conscious of the importance of agriculture and rural development in fulfilling the promise of food security, OFID has systematically taken care to allot 16% of its cumulative public sector lending to support agriculture and agro-industry in 121 countries worldwide – a share our institution plans to increase to prevent the world food situation from worsening, and to support Africa’s Green Revolution.
The importance of energy for sustainable development (SD) cannot be over-emphasized. The predominance of fossil fuels as the most stable, safe, reliable and cost-effective source of energy for development should place fossil fuels at the centre of any concept of SD. A pre-mature diversion of financial resources into investment in renewables could lead to a shortage of investments in fossil fuels required to the global economy running smoothly. Such uncertainties could eventually lead to energy paralysis, where investments in fossil fuels stay out, possibly triggering yet another vicious cycle of global economic instability. Similar to the food and financial crises, the poor and most vulnerable ultimately stand to suffer most from the un-desired side- effects of an eventual global energy crisis.
Considering the pivotal role of energy in meeting the poverty reduction and related MDGs, King Abdullah bin Abdulaziz Al-Saud, Custodian of the two Holy Mosques of the Kingdom of Saudi Arabia on June 22, 2008 placed Energy Poverty on the global agenda by calling on the World Bank to launch an initiative for impoverished countries known as the Energy for the Poor Initiative. In line with the November 2007 Riyadh Declaration, the Initiative aims at enhancing access to affordable energy to millions of poor people in dire need of basic energy services. OFID plays a catalyst role in the Initiative, contributing to its conceptualization and the coordination of stakeholders’ actions in close collaboration with the World Bank and the Saudi Fund. To raise the level of concessionality and achieve a scope and volume commensurate with the financing needs, OFID has proposed a financial mechanism blending grants and loans. Furthermore, concrete energy poverty alleviation projects totalling US$500 million have been identified. Since inception to date, OFID has committed over US$1.2 billion in support of 113 energy-related projects worldwide. OFID will continue to combat energy poverty and to foster pro-poor policies as part of its global mandate, and welcomes collaboration with the energy industry and other financial institutions on the Energy for the Poor Initiative, along the line spelled out in the Riyadh Declaration.