Strategy, Policy, and Review Department
INTERNATIONAL MONETARY FUND
Managing global growth risks and commodity price shocks : vulnerabilities and policy challenges for low-income countries/a staff team led by Stefania Fabrizio.
—Washington, D.C. : International Monetary Fund, 2012.
p. ; cm.
At head of title: Strategy, Policy and Review Department.
1. Economic development—Developing countries. 2. Developing countries—Economic conditions. 3. Developing countries—Economic policy. 4. Prices—Developing countries. I. Fabrizio, Stefania. II. International Monetary Fund.
Disclaimer: The views expressed in this paper are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.
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This study was prepared by a staff team led by Stefania Fabrizio and comprising Chris Geiregat, Yasemin Bal Gündüz, Katrin Elborgh-Woytek, Marco Arena, Kazuko Shirono, Julia Bersch, Svitlana Maslova, Trung Bui, and Song Song, all from the Strategy, Policy, and Review Department (SPR); Emanuele Baldacci, Thomas Baunsgaard, Alejandro Guerson, Nathaniel Arnold, Javier Kapsoli, Baoping Shang, Marcos Poplawski-Ribeiro, Matias Antonio, and Oriel Fernandes, all from the Fiscal Affairs Department (FAD); Thomas Helbling, Roberto Garcia-Saltos, Felipe Zanna, Rafael Portillo, Joong Shik Kang, Patrick Blagrave, Enrico Berkes, David Reichsfeld, Marina Rousset, and Stephen Snudden, all from the Research Department (RES); Domenico Fanizza, Chris Lane, Olumuyiwa Adedeji, Alun Thomas, and Darlena Tartari, all from the African Department; Brian Aitken, Yasuhisa Ojima, Boriana Yontcheva, and To-Nhu Dao, all from the Asia and Pacific Department. General guidance was provided by Hugh Bredenkamp and Christian Mumssen (both SPR), Sanjeev Gupta (FAD), and Andrew Berg and Jonathan Ostry (RES). Merceditas San Pedro-Pribram (SPR) and Joanne Blake, Michael Harrup, and S. Alexandra Russell (External Relations Department) managed the production of the publication.
Acronyms and Abbreviations
Asia and the Pacific
change in fiscal balance
dynamic stochastic general equilibrium
Exchange Market Pressure Index
Fiscal Affairs Department
foreign direct investment
Global Integrated Monetary and Fiscal
Global Projections Model
Poverty Reduction and Growth Trust
World Economic Outlook
As part of its work to help low-income countries1 manage volatility, the IMF has recently developed an analytical framework to assess vulnerabilities and emerging risks that arise from changes in the external environment (see IMF, 2011a). This report draws on the results of the first Vulnerability Exercise for LICs conducted by IMF staff using this new framework. The report focuses on the risks of a downturn in global growth and of further global commodity price shocks, and discusses related policy challenges.
The report is organized as follows: Chapter 1 reviews recent macroeconomic developments, including the spike in global commodity prices earlier this year. Chapter 2 assesses current risks and vulnerabilities, including how a sharp downturn in global growth and further commodity price shocks would affect low-income countries. Chapter 3 discusses policy challenges in the face of these risks and vulnerabilities.
Most low-income countries (LICs) recovered swiftly from the global crisis and have grown strongly since early 2010, with real GDP growth in 2011 projected at around 5 percent for the median LIC. The surge in global commodity prices earlier this year led to a moderate uptick in inflation in most countries.
However, progress in rebuilding macroeconomic buffers after the crisis has been slow in many LICs, partly reflecting recent measures adopted to mitigate the social impact of the recent price spikes. As a result, LICs are now less well prepared to deal with external shocks than they were prior to the crisis.
There are now severe downside risks to the global outlook, and LICs are highly vulnerable to the risk of a sharp global downturn. Should this materialize, the scope for fiscal stimulus would be more limited than in 2009 for most LICs, given weaker fiscal buffers and constrained aid envelopes. However, countries with sufficient fiscal room should maintain spending levels to avoid aggravating the negative economic and social effects of the shock. In addition, in countries with moderate inflation, monetary and exchange rate policy could be used more actively to mitigate the impact of the shock. If the downturn were to persist over the medium term, further realignment of macroeconomic policies might be necessary.
LICs also remain vulnerable to continued commodity price volatility, given in particular the severe impact of high food prices on poverty. A pragmatic response could include targeted measures to protect the poor, fiscal space permitting, and a monetary policy response that may largely accommodate the first-round impact on inflation, although LICs with limited reserves may need to tighten policies in support of external and price stability.
If downside risks materialize, a large number of LICs would need additional concessional financing from the international community to help mitigate these shocks without aggravating debt vulnerabilities.
To build resilience against shocks over the medium term, LICs should aim to boost their revenue base and ensure the efficiency of public investment, while pursuing structural reforms to deepen the financial sector, strengthen the social safety net, and diversify the economy.