Global financial woes prompt action to avert humanitarian crisis

Afghan boys - all of whom live on the streets of Kabul - take to the mats with gusto in Aschiana's Judo class. Education is just one sector threatened by the global financial crisis. The World Bank and others are vowing to step in. Photo by: David Lepeska

The World Bank is taking steps to increase financial support to developing countries in an effort to prevent the global financial crisis from turning into a humanitarian crisis. The move comes shortly after the International Monetary Fund vowed to “act quickly” on requests for assistance.

World Bank President Robert B. Zoellick said during a teleconference with media on Nov. 11 that the International Bank for Reconstruction and Development could commit as much as $100 billion over the coming three years, while this year lending could triple to $35 billion, from $13.5 billion in 2007.

The multilateral lender is also speeding up grants and long-term interest-free loans to the world’s 78 poorest countries, 39 of which are located in Africa.

Donors already pledged last year to give $42 billion to the International Development Association fund to be disbursed at an average of $14 billion annually. About 60 percent of these donors have affirmed their commitment.

“This is not only a financial crisis; it’s a human crisis,” Zoellick said ahead of a special meeting of the G-20 in Washington on Nov. 15. “If you look at the composition of the G-20, while it does include a number of developing countries, you really don’t have the poorest there. So, we need to make sure that countries not only keep up their aid flows, but add to them.”

The World Bank warned that many developing countries are moving into “a danger zone” as growth forecasts are shaved on the heels of a global economic slowdown brought about by a liquidity crisis and food and fuel price shocks.

Speaking at a separate teleconference for Asia-based journalists on Nov. 12, Justin Yifu Lin, the bank’s chief economist, said Asian economies were not affected by the financial crisis directly but are suffering from “contagion” as liquidity dries up in developed countries, making access to capital harder.

Vikram Nehru, regional chief economist for East Asia, is worried that the financial crisis will result in lower foreign direct investment and slower export growth, which will translate into “a crisis for the real sector.”

To avert a worst-case scenario, the World Bank is encouraging fiscal responses to boost domestic demand similar to China’s massive stimulus package of $570 billion in the next two years.

Since China contributes significantly to global growth, a boost to its domestic economy will augur well for the rest of the world, believed Lin.

He indicated that increased government spending, especially investment in infrastructure, environment and climate change, is desirable. While tax cuts may help, people may opt to save their extra cash rather than spend while uncertainty remains in the financial markets, added Lin.

Nehru noted that while there has been a shortage of foreign exchange liquidity in the system in many countries, the Philippines has managed to maintain adequate domestic liquidity.

Furthermore, he said countries that do not have sufficient foreign exchange reserves should improve tax and revenue collections to be able employ expansionary fiscal policies.

Indonesian President Susilo Bambang Yudhoyono is expected to propose at the G-20 summit the establishment of a global expenditure support fund to help tide developing nations over the crisis.

Nehru said the bank will study the details of the proposal before it can make an official position but agreed that it is an issue that should be taken up at the summit. To his understanding, the proposal would allow countries with “very reasonable debt positions, relatively stable macro policies, decent growth rates and a pretty good track record of poverty reduction” gain access to financing to continue their development programs.

Meanwhile, the World Bank will likewise boost support for the private sector through the International Finance Corp. by doubling its Global Trade Finance Program to $3 billion; launching a recapitalization fund for troubled banks; providing rollover financing for privately funded infrastructure projects in financial distress; and focusing its advisory services to clients affected by the crisis.

Similarly, IMF has vowed to act quickly on requests for assistance. About $200 billion is ready for immediate lending, while another $50 billion can be tapped if necessary.

IMF Managing Director Dominique Strauss-Kahn called for increasing the fund’s resources as part of reform efforts in the face of the crisis.

In an interview with Caijing Magazine, he said: “The related size of the fund has shrunk compared to the aglobal economy.”

About the author

  • Josefa Cagoco

    Sef Cagoco served as one of Devex's international development correspondent from mid-2008 to mid-2009. Her writing focused on social entrepreneurship and multilateral agencies such as the U.N. and Asian Development Bank. She previously worked as senior reporter for the national daily BusinessWorld and a production journalist for the Financial Times.