The G20 deal was an extraordinary achievement. With the stroke of twenty signatures, the summit has delivered an important fiscal stimulus to the world economy, provided a credit safety-net under vulnerable economies in central and Eastern Europe, transformed the IMF, and signalled a regulatory overhaul of banking, hedge funds, and (with some large loopholes) off-share tax havens.
Give credit where it’s due. No other G20 leader would have had the vision, the ambition, or the long-term strategy to forge such an agreement. The summit has confirmed Gordon Brown’s status as a major international leader and strengthened Britain’s standing.
For all the positives, it’s important to recognise what the G20 has not delivered. If one of the benchmarks for measuring success is delivery for sub-Saharan Africa and the world’s poorest countries, the outcome is mixed at best – and disappointing at worst. The result is somewhere around 5/6 out of 10.
Like the rest of the world, sub-Saharan Africa stands to gain from a coordinated global economic recovery. An improved trade performance has been at the heart of recent economic success in the region – and many countries have been hard hit by the sudden contraction of world trade. Sub-Saharan Africa also stands to benefit from the early closure of tax havens. Measured as a share of GDP, the region probably loses more revenue than any other part of the world through tax evasion. The problem is that Africa also needed early delivery of a large fiscal stimulus in the form of concessional finance. And on this front the G20 has not delivered.
There are two distinctive problems. First, the summit has not delivered Africa the fiscal stimulus needed to prevent the economic downturn from translating into long-term setbacks for poverty reduction, health and education. Second, most of the resources that have been delivered are being provided on the wrong terms and through the wrong institution. Instead of using the summit to marshal support for the early delivery of highly concessional finance through the World Bank’s International Development Association, the chosen vehicle is the IMF’s less concessional and more conditional Poverty Reduction and Growth Facility.
Beyond the numbers, the G20 deal is important at three levels. First, it signals a marked increased in the role of the IMF relative to the World Bank. This has important implications for the development and implementation of poverty reduction strategies – an area in which the Fund does not have a distinguished record. Second, the G20 has separated the question of IMF financing from governance reform. This has the potential to further weaken the legitimacy and accountability of the Fund. Third, the deal does not create the conditions for a large and early fiscal stimulus to limit the damage caused by the economic crisis on Africa’s poor. This omission should be addressed at the Spring meeting of the IMF-World Bank as a matter of urgency.
The resources
What does the communiqué promise the poorest countries?
The headline figure is $50bn broken down roughly as follows:
- Doubling the IMF’s lending capacity for low income countries through the Poverty Reduction and Growth Facility (PRGF) and Exogenous Shocks Facility (ESF). This is reported as a provision that will facilitate another $4bn, with a further $6bn in lending facilitated through interest rate subsides facilitated in part by gold sales. The PRGF and ESF operate through an IMF-administered Trust Fund financed by member contributions and the IMF itself. PRGF loans are provided at 0.5 per cent interest repayable within 10 years with a five year grace period. The PRGF has a grant element of around 30 per cent, which is far less concessional than the World Bank’s International Development Association (IDA) facility. This provides interest-free credits repayable over a 35-40 year period (with a ten year grace period) – more than double the concessionality available through PRGF.
- More Special Drawing Rights (SDRs). Another $19bn is expected to arrive through the low-income country share of the new Special Drawing Rights (SDRs) Issue (with another $2bn through an amendment to SDR rules).
- Increased Multilateral Development Bank (MDB) lending. Around $6bn is expected to come through multilateral development bank financing for the private sector in low income countries, most of it through the extension of IBRD (non-concessional) loans to low income countries. This provision is linked to a proposal to increase IBRD lending by $100bn over the next three years – a commitment made several months ago, with countries such as the Ukraine, India and Indonesia identified as early potential beneficiaries.
- Increased support for the International Finance Corporation’s trade liquidity pool. This is expected to generate $12bn in finance for low-income countries. It is not clear how much of the headline amount is a new commitment – or whether the resources will materialise. The agreement to launch a trade liquidity fund under the IFC, the World Bank’s private sector division, to provide short-term trade credits predates the G20 summit (it was announced in February, 2009). The agreement at the summit was to provide $3-4bn in bilateral contributions to the IFC pool. Uptake will depend on the degree to which firms and banks underwrite risks in the poorest developing countries. The resources are non-concessional.
Over and above these commitments there are a range of further options that will be explored. These include more effective use of existing facilities, including the front-loading of IDA resources, the World Bank’s Rapid Social Response Fund, and existing IMF facilities. There will be a review of capital support commitments for the Africa Development Bank.
The headline figures overstate real resource transfers by a considerable margin. To mention some obvious concerns:
- The $21bn in SDR allocations is not a financial transfer. It will form part of the national currency reserve. This does not detract from the importance of the provision. Strengthening currency reserves will have important benefits for exchange rate stability, trade financing, and balance-of-payments support. But this is not ‘development finance’ or a financial transfer.
- The extra $10bn directed through the Poverty Reduction and Growth facility is a financial transfer. However, the transfer is far less concessional than finance provided through IDA. Apart from their limited concessionality, IMF loans also come with high levels of conditionality – an arrangement that often leads to low rates of disbursement.
- Giving credit-worthy low-income countries access to IBRD loans and IFC trade credits and guarantees makes sense (especially when interest rates are low). The drying up of trade credits is unquestionably contributing to sub-Saharan Africa’s balance of payments problems. However, it is far from clear that the countries most in need will be in a position to benefit.
The problem
The G20 agreement has to be assessed against the scale of the challenge facing sub-Saharan Africa. Macro-economic balances have deteriorated rapidly, with many countries facing widening current account and budget deficits:
- Growth is projected to decline from the 5.9 per cent projected for 2009 to less than 3 per cent
- The fiscal position is deteriorating rapidly, with a 2 per cent surplus in 2008 giving way to a 4 per cent deficit in 2009 – a turn around equivalent to around $50bn.
- Slower export growth, worsening terms of trade and losses of remittance, will reduce export revenues by over $250bn in 2009 and 2010.
- The export downturn and fiscal problems are linked in many countries because poor countries often depend most on trade for their fiscal revenues. For example, in Lesotho, Swaziland and Cote d’Ivoire, between 40 and 50 percent of fiscal revenues come from trade.
- The private sector has been affected by shortages of liquidity and credit constraints, with adverse consequences for trade and investment.
Beyond the macro-economic balances the crisis will impact most heavily on the poor. Since 2000, the region has taken its first steps in over two decades towards a reduction in the incidence of poverty. Slower growth threatens to bring that progress to a halt. With 340 million people below the poverty line, accounting for almost half of the region’s population, the implications are clear.
Progress in other areas is also under threat. In recent years, sub-Saharan Africa has registered extraordinary progress in education – enrolment has been growing at 6 times the rate of the 1990s. Another 29 million children are in school. From Senegal and Burkina Faso to Zambia, Tanzania and Ethiopia, education opportunities have been widening. The danger now is that a combination of increased poverty and pressure on education budget could push children out of school and into the ranks of the one-in-three primary school age children who still don’t get to see the inside of a classroom. The same lethal combination of rising poverty and budget pressure threatens to reverse gains in health. To take one example, Senegal has already been forced to cut projected priority sector budget spending by 0.6 per cent of GDP for 2009.
What did Africa need from the G20 to counteract the impending crisis? The Africa Development Bank has put the real external financing requirement for counteracting the growth downturn at around $50bn for 2009 and $56bn for 2010. Even if the headline figure of $50bn from the G20 is taken at face value it falls short of these benchmarks because the resources will feed-in over 2-3 years. More seriously, many of the poorest countries will be bypassed by the non-concessional loans.
The bottom-line is that sub-Saharan Africa alone needed a commitment of around $106bn over the next two years, with immediate action on delivery. The G20 agreement will deliver somewhere between one-quarter and one-half of this level, with limited front-loading.
The role of the IMF
The institutional big winner in the G20 deal is the IMF. Most of the new and additional concessional finance envisaged in the communiqué will be channelled through the Fund’s PRGF facility. The question is why?
The PRGF does not have a good record in sub-Saharan Africa. This is especially true with respect to the record on poverty reduction. In 2004, the Fund’s Independent Evaluation Office concluded that: “Success in embedding the PRGF in the overall strategy for growth and poverty reduction has been limited in most cases.” The review also highlighted a wide range of systemic problems, including weak country ownership, problems in implementing loan conditions, a lack of clarity over the IMF’s role, the reluctance of developing countries to accept an enlarged role for the IMF, and a tendency to apply blueprints. There is no evidence that these problems have been addressed. Yet the IMF has now been authorised to play a far greater role in poverty reduction efforts.
Serious questions also have to be asked over the role of the ESF. Under the ESF countries can draw on up top 25 per cent of their quota fairly quickly in a single disbursement. Resources equivalent to the remaining 75 per cent are disbursed in phases, based on policy reviews and decisions by IMF staff. Since it was reformed in September 2008 to enhance access, the ESF has been drawn on by only a small group of countries (Ethiopia, the Democratic Republic of Congo, Kyrgz Republic and Malawi). Given that the ESF provides a ready-made institutional mechanism for delivering emergency balance-of-payment support, the obvious question that the G20 leaders failed to address is why is it not being more widely used?
IMF conditionality remains a major barrier to the swift disbursement of finance. Given that the G20 appear to have identified the Fund as their preferred vehicle for development finance, a simple rule should have been adopted: namely, more finance with less conditionality. In the case of the ESF, for countries with World Bank programmes the principle should be increased emergency finance with zero conditionality.
More broadly, the deeply undemocratic nature of IMF governance remains a concern. Much has been made of the ‘quota and voice’ reforms implemented in 2008. There have been significant (though still insufficient) gains in voting rights for countries such as China, Brail, India and Korea. However, the whole of sub-Saharan Africa still has a smaller voting entitlement than Britain – an arrangement that calls into question scope the scope for genuine partnership and national ownership.
There was an alternative – and the Spring meeting of the IMF/World Bank is an opportunity to do more
The World Bank is arguably far better placed than the IMF to deliver early financing support on the scale required. Through its involvement in national problems for social protection, health, education and infrastructure, the Bank is also well placed to assess financing gaps and to respond. Yet the World Bank arrived at the G20 meeting having failed to articulate a strategy or agenda for effective crisis response – and the institution was, for practical purposes, written out of the G20 script. Given the scale of the crisis, it is astonishing that no provisions were made for increased IDA support.
Like the Fund, the World Bank has failed to respond effectively to the crisis through current mechanisms:
- The $1.2bn Global Food Response Programme was created in May 2008 to respond to the rise in food prices. Disbursements have taken place or are in process in around 35 countries, supporting vital expenditure on social safety nets, school feeding programmes and balance-of -payments support. Yet only around $730 million has been spent.
- In 2008 the World Bank’s Board endorsed an arrangement for front-loading $2bn in IDA support from the $42bn IDA 15 fund. So far just two loans have been agreed, for Armenia ($35 million) and, for reasons unrelated to the financial crisis, the Democratic Republic of Congo ($100 million). The G20 could have called for the front-loading and early disbursement of around $20bn in IDA support, with a parallel commitment to top-up the replenishment.
Thank you so much Kevin. You have a good understanding of the implications of the G20 deal. I am a Nigerian and each time i read through global efforts towards the current economic crisis, i always feel we are not part of the world. But we are in every sense part of the world in all schemes. The G20 should not forget that a lot of resources being utilised in developed countries come from sub-Saharan African including energy, solid non-energy minerals and human resources. They should also not forget that their multinational companies operate here without much care for the environment and little emphasis on correct tax payments because they take advantage of our corrupt leaders. The G20 should not forget that poverty in developing countries contributes to global terror and crime. The facilitators of these crime cashes in on the poverty level and use money as an incentive to organise their actions. The World needs Africa as much as we need them. Smiles are not complete when your neghbours are not smiling back. Let the world have a complete story. Let G20 include Africa in their plans.