Managing Global Growth Risks and Commodity Price Shocks - Vulnerabilities and Policy Challenges for Low-Income Countries

International Monetary Fund

doi:10.5089/9781498338455.007.A001

Author: International Monetary Fund

Publication Date:: 21 Sep 2011

eISBN:: 9781498338455

Language:: English

Keywords:: PP; price; low-income country; commodity; price shock; exchange rate; price stability; output gap; global commodity price; price subsidy; Non-commodity exporter; commodity exporter

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As part of its work to help low-income countries (LICs) 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 (VE-LIC) 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 I reviews recent macroeconomic developments, including the spike in global commodity prices earlier this year. Chapter II assesses current risks and vulnerabilities, including how a sharp downturn in global growth and further commodity price shocks would affect LICs. Chapter III discusses policy challenges in the face of these risks and vulnerabilities.

Abstract

I. Macroeconomic Situation

Most low-income countries (LICs) recovered quickly from the global crisis and have grown rapidly since early 2010. The spike in global commodity prices earlier this year led to a moderate uptick in inflation in most countries.²

1. A strong economic recovery has been underway in most LICs. Growth held up well at the peak of the global crisis in 2009 compared to advanced and emerging market countries, partly reflecting their limited exposure to the global financial sector troubles in advanced economies. Moreover, many LICs were able to use their strong pre-crisis macroeconomic buffers to pursue—for the first time—countercyclical fiscal responses, safeguarding and often increasing spending as revenues dropped (see Fabrizio, 2010). And, in contrast to past global slowdowns, the recovery in LICs was swift and synchronized with the rest of the world, reflecting strong export demand from trading partners. While advanced economies still account for a large share of LICs’ trading partners, fast-growing emerging markets have played an increasing role in supporting growth in LICs (see IMF, 2011b). The “pull” factor from trading partner growth has continued to support growth well into 2011, in particular for LICs in Asia and the Pacific and those in the Middle East and Europe, with real GDP growth projected at around 5 percent for the median LIC.

2. Earlier this year, LICs were affected by a renewed spike in global commodity prices. Commodity prices started increasing in mid-2010, driven in part by demand from fast-growing emerging market countries. Oil prices surged in early 2011 mainly in response to oil supply risks, including those related to the social unrest in the Middle East and North Africa region. Food prices started rising in the second half of 2010 and surged in early 2011 as disappointing harvests in major grains as a result of adverse weather conditions were exacerbated by trade restrictions in some food-exporting countries. The annual average increases in global food and fuel prices in 2011 are projected to be similar in size to those in 2008.³ However, this time around, the rally in commodity prices included also metals and agricultural raw materials, in contrast to 2008. While global commodity prices have softened since peaking in early May on account of slowing global demand, they are expected to stay elevated in the near term (Appendix III).

3. The inflationary impact of the recent price shock has been relatively limited in most LICs, reflecting, in some cases, good harvests and measures to limit pass-through of international prices. Inflation is expected to rise moderately in 2011 but, at a median of almost 8 percent, remains well below the rate observed during the 2008 episode. It is also lower than would have been expected based on historical pass-through from global food and fuel prices to domestic prices: a simulation exercise suggests that inflation could well have reached 14 percent if past experience had been repeated, though with substantial regional variation. The limited inflation pass-through is partly explained by price subsidies adopted in some LICs (see below), contained global rice prices, which have an important impact on inflation in Asia, and good local harvests in several countries. Moreover, inflation pressures may be contained by cyclical factors in many countries where output is still below potential in the wake of the global crisis (in contrast to the 2008 episode).

4. Strong external demand and, for many LICs, higher export prices have mitigated the impact of the commodity price surge on trade balances. While oil exporters have benefited from the surge in export prices, net oil-importing LICs are projected to see a widening in their current account deficits by about 1½ percent of GDP, well below the 2008 experience. The more muted response this time partly reflects offsetting effects from high export demand from LICs’ trading partners and higher export prices for other commodities, especially for metals and agricultural raw materials. This is most apparent for oil-importing countries that are classified as primary commodity exporters, which are estimated to have experienced an overall positive effect from the recent global commodity price surge.

5. More than half of LICs have adopted countervailing fiscal measures to mitigate the impact of higher global food and fuel prices, with fiscal costs exceeding the 2007–08 experience in several cases.⁴ The bulk of the fiscal cost arises from fuel subsidies and tax reductions, and several LICs have not yet unwound the tax measures taken in 2007–08. The median (annual) fiscal cost is projected to exceed 1 percent of GDP for those countries adopting new measures. Twenty-two countries have introduced or expanded price subsidies. Most fuel or food subsidies are universal, and few are explicitly targeted to the poor. Fourteen countries have implemented other mitigating safety net expenditure measures with a median cost of ½ percent of GDP.⁵ Tax cuts were deployed by about half of the LICs adopting measures, with fiscal costs ranging from 0.1 to 1.6 percent of GDP (median cost of 0.4 percent of GDP).⁶

In response to the recent global commodity price increases, more than half of LICs are adopting countervailing fiscal measures.

Source: IMF staff estimates based on data provided by country teams and authorities.Note: the fiscal cost for the current run-up includes only 23 countries which provided quantitative information.

In response to the recent global commodity price increases, more than half of LICs are adopting countervailing fiscal measures.

		2007/08 episode		2010/11 episode
		Number of countries	Median fiscal cost (in percent of GDP)	Number of countries	Median fiscal cost (in percent of GDP)
Fuel
	Tax decreases	10	0.3	18	0.4
	Subsidy increases	13	0.2	15	1.2
Food
	Tax decreases	17	0.4	10	0.1
	Subsidy increases	9	0.2	10	0.4
Other responses		18	0.3	16	0.5
Total		39	0.6	37	1.2

Source: IMF staff estimates based on data provided by country teams and authorities.Note: the fiscal cost for the current run-up includes only 23 countries which provided quantitative information.

In response to the recent global commodity price increases, more than half of LICs are adopting countervailing fiscal measures.

		2007/08 episode		2010/11 episode
		Number of countries	Median fiscal cost (in percent of GDP)	Number of countries	Median fiscal cost (in percent of GDP)
Fuel
	Tax decreases	10	0.3	18	0.4
	Subsidy increases	13	0.2	15	1.2
Food
	Tax decreases	17	0.4	10	0.1
	Subsidy increases	9	0.2	10	0.4
Other responses		18	0.3	16	0.5
Total		39	0.6	37	1.2

Source: IMF staff estimates based on data provided by country teams and authorities.Note: the fiscal cost for the current run-up includes only 23 countries which provided quantitative information.

6. The commodity price shock has had a substantial impact on poverty. The poorest segments in society are especially vulnerable to increases in food prices given the large share of food in their overall consumption basket. The World Bank estimates that the recent food price increases may have pushed about 44 million more people into poverty in low- and middle-income countries in 2011 (Ivanic, Martin, and Zaman, 2011). By comparison, the 2008 price shocks had pushed an estimated 105 million into poverty.

II. Vulnerability Analysis

Despite the strong recovery, LICs’ macroeconomic policy buffers remain fragile, and the global outlook is deteriorating. LICs are more exposed to a sharp downturn in global growth than they were before the 2009 crisis as their fiscal buffers have not yet been rebuilt. LICs also remain exposed to further commodity price volatility given, in particular, the severe impact of high food prices on poverty.

A. How Vulnerable are LICs Currently?

7. So far, the strong underlying growth dynamics during the recovery have reduced LICs’ near-term risk of a recession caused by a shock. With strong demand for LICs’ exports, real GDP and fiscal revenues are recovering rapidly from the 2009 trough of the global crisis. An illustrative “growth decline vulnerability index” suggests that the near-term risk of a shock-induced recession increased in the run-up to the global crisis and peaked at the end of 2009, with 37 percent of LICs showing a high degree of vulnerability (Box 1). In the context of the recovery, this share of countries is expected to decline to around 16 percent in 2011–12. This recent improvement is broad-based—with the notable exception of small economies and LICs in Latin America and the Caribbean.

8. However, in most LICs, little progress appears to have been made in rebuilding macroeconomic policy buffers after the crisis. Fiscal adjustment started in 2010 as revenues rebounded along with the economic recovery, but has since halted, with the median fiscal deficit of net oil importers remaining at around 3 percent of GDP. Public debt has remained broadly stable, and at manageable levels for most LICs (although stubbornly high for small island economies).⁷ On the external side, current account deficits (net of foreign direct investment (FDI)) have widened since the crisis, especially for net oil importers. Reserve coverage, bolstered by the 2009 SDR allocation (which boosted reserve coverage of the median LIC by about 0.4 months of imports), has declined more recently, in particular in many LICs with pegged exchange rate regimes.

9. The slow progress in rebuilding fiscal buffers partly reflects the commodity price shock earlier this year. At the onset of the 2007/08 crisis, fiscal buffers (fiscal balances and public debt) were much stronger than in the past, reflecting a decade of buoyant economic performance, as well as HIPC debt relief. The countercyclical fiscal response of many LICs helped them navigate the twin crises that started in 2008, protecting spending and supporting growth, but also inevitably reduced fiscal space. While LICs began rebuilding fiscal buffers in 2010 along with the economic recovery, this consolidation appears to have come to a halt this year. This is in part due to the measures taken in response to the renewed rise in global commodity prices. It also reflects stepped-up public investment, in particular among countries with more comfortable fiscal space (Box 1) where the median fiscal deficit is estimated to have increased by 0.3 percent of GDP, driven by a 16 percent real expansion in public investment. By contrast, LICs with limited fiscal space are projected to have continued to reduce their fiscal deficits by a median 0.5 percent of GDP. Overall, this may have led to some convergence in fiscal buffers across LICs, including on public debt.

10. The global outlook is deteriorating, with recent downward revisions in global growth projections and severe downside risks. Growth in advanced economies has slowed sharply since the second quarter of 2011, and renewed concerns about private and sovereign balance sheets have tilted global economic risks sharply to the downside. At the same time, commodity prices remain volatile and subject to supply shocks. To assess the impact of external risk on LICs, we conducted two alternative (mutually exclusive) tail-risk scenarios: (i) a sharp downturn in global growth and (ii) a new spike in global commodity prices.

Box 1.

Assessing Vulnerabilities in LICs: Concepts and Approaches

This paper uses various concepts and approaches to assess vulnerabilities in LICs from different angles. Among those are macroeconomic policy buffers, fiscal space, a vulnerability index, and scenario analysis.

Macroeconomic policy buffers are indicators of the overall external and fiscal positions of an economy. Key buffers include the overall fiscal balance, total public debt, international reserve coverage, the current account balance (adjusted by adding FDI), and inflation. Countries with high fiscal deficits and high and/or increasing public debt stocks would generally have less flexibility to use fiscal policy when hit by a shock than countries with low deficits and debt. Likewise, countries with low current account deficits and comfortable reserve coverage may be in a better position to absorb external shocks than countries with large deficits and limited reserve cushions. Finally, countries with relatively low inflation have more scope for accommodative macroeconomic policies.
Fiscal space is a broad concept that considers the extent to which government expenditure can be increased (or taxes cut) without jeopardizing medium-term fiscal sustainability. While it is closely related to the overall fiscal deficit and public debt, its scope is more general and may include, for example, long-term growth and interest rate prospects and quality of fiscal institutions (Heller, 2005) For illustrative purposes, we define fiscal space in this paper as the difference between the baseline primary balance and the constant primary balance that would be needed to reach a debt to GDP ratio of 40 percent within 20 years, i.e., the usual time horizon for DSAs (see Appendix VI for details).
An illustrative Growth Decline Vulnerability Index was constructed to measure a country’s underlying vulnerability to sudden growth declines that lead to negative real per capita GDP growth in the event of exogenous shocks and a protracted period of growth below the pre-shock trend, using a methodology that considers historical relations among economic, fiscal, and external indicators (see Appendix IV for details).
Scenario analysis is a tool for assessing the macroeconomic impact of tail risks. In this paper, we focus on two alternative tail risks: a sharp downturn in global growth and further global commodity price shocks. The impact of these shocks on macroeconomic buffers, fiscal space, and the vulnerability index is used to assess the ability of LICs to withstand these shocks.
Under the scenario analysis, additional external financing needs are calculated as the amount needed to bring international reserve coverage (in months of next year’s imports) back to three months for those countries that had at least three months reserve coverage prior to the shock; or, for those countries with less than three months already in the baseline, as the amount of the loss in reserves resulting from the shock. Additional financing needs are zero for countries where reserve coverage exceeds three months after the shock, or if reserve coverage increased under the shock scenario.

B. How Would a Sharp Downturn in Global Growth Affect LICs?

11. While the baseline forecast for the world economy envisages continued, albeit moderating, growth in 2011 and 2012, in an alternative tail-risk scenario, we analyzed the potential vulnerabilities of LICs to a sharp downturn in global growth. The scenario assumes shocks to financial conditions in some advanced economies that would lower global growth by 1.3 and 1.6 percentage points in 2011 and 2012, respectively, relative to the World Economic Outlook (WEO) baseline. The shock to global growth is simulated to affect LICs through several channels: global export demand, commodity prices, remittances, and FDI (see Appendix VI for details on the methodology). The scenario can also give a qualitative indication about the possible impact of a shallower, but more protracted, global slump.

12. A 1½ percentage point decline in global growth would shave an estimated 1 percent off LIC growth in 2011–12, and have a strong adverse impact on poverty. A little over a quarter of LICs would experience a slowdown in growth of more than 2 percentage points relative to the baseline, though overall growth is expected to remain positive in most countries.

13. A downturn in global growth would also erode external and fiscal buffers. Slower global growth would adversely affect the balance of payments of LICs through lower export receipts, negative terms of trade for some countries, and reduced remittances and FDI inflows, causing current account balances (including FDI) to deteriorate and reserve coverage to fall for the median LIC. Similarly, the fiscal position would be weakened for the median LIC as a result of revenue losses, with public debt increasing and fiscal deficits rising.

14. Fiscal balances would deteriorate to 2009 experience. Fiscal deficits in 2012 would increase by 1 percentage point of GDP for the median LIC, relative to the baseline.⁸ While the fiscal impact of the shock would be smaller than that observed during the 2009 global crisis, the post-shock fiscal deficit (of about 4 percent of GDP) would be comparable to the 2009 level, given the weaker starting point this time around.⁹

15. Additional external financing needs of US$27 billion in 2012 could emerge under this scenario. A large part of these needs would be accounted for by a small number of large economies in Sub-Saharan Africa (SSA) and Asia. However, almost half of those countries that experience a negative external impact in the scenario would face additional external financing needs (a median of about 4 percent of GDP). The additional needs would emerge in LICs across all regions, and the number of LICs with international reserves below three months of imports would increase from less than a quarter to about half of LICs.

16. An additional 23 million people in LICs could be pushed into poverty by 2012 under the scenario.¹⁰ The median poverty rate is estimated to increase by 1.4 percentage points by 2012, in a framework that uses elasticities to link growth rates with changes in poverty rates.¹¹ The impact would correpond to about 23 million additional people left in poverty; most of those would be in SSA and Asia-Pacific.

17. The scenario analysis can give an indication of the potential impact of a shallower but more protracted global slump, which is not explicitly modeled here. In the event that global growth were to decline less sharply, but remain lackluster over the medium term, LICs could also be expected to experience protracted lower growth, as the demand for their exports, FDI inflows, and remittances would stay below trend, and macroeconomic buffers would weaken over time. In particular, fiscal deficits would be elevated for a prolonged period as the revenue base would be diminished because of the lower volume of international trade and weaker domestic demand. Debt dynamics would also gradually worsen, reflecting both lower growth and higher deficits. Moreover, to the extent that countries would have to realign their policies to adjust to the new lower global growth rates, there may be second-round effects on domestic growth, unless the implementation of structural reforms to boost competitiveness were to be accelerated.

C. How Would Another Spike in Global Commodity Prices Affect LICs?

18. The potential vulnerabilities of LICs to spikes in commodity prices are assessed using an alternative tail-risk scenario. This scenario¹² assumes (based on the information embedded in commodity futures options, see Appendix V) that food prices would increase by 25 percent in 2011 and 31 percent in 2012 relative to the current WEO baseline scenario; fuel prices would surge by 21 percent in 2011 and 48 percent in 2012; and metals prices by 21 percent in 2011 and 36 percent in 2012. The scenario explicitly recognizes that commodity price shocks tend to create winners and losers within and across countries, depending on the terms of trade, sectoral employment, and consumption baskets. But there are also repercussions that affect countries in a more symmetric way, in particular with respect to inflation and related social pressures.

19. While the impact on growth is likely to be muted in most LICs, inflation is highly sensitive to global commodity prices, as indicated by the tail-risk scenario analysis. Assuming that the pass-through from global to domestic prices follows historical patterns and that, as in the past, only mild countervailing policy monetary action is undertaken, inflation could more than double, to a median of around 16 percent. These large effects reflect the high share of food in LICs’ CPI baskets, while global fuel prices have a more limited impact.

20. While the external impact of a commodity price spike would differ significantly across LICs depending on their trade structure, a large majority would be adversely affected, with the median trade balance deteriorating by almost 3 percent of GDP. About 80 percent of the deterioration in the trade balance would be accounted for by higher global oil prices and one third by higher food prices. Higher global prices for metals would have little effect on the median LIC, although this masks large differences between countries. For example, while higher oil and food prices have a negative median impact on the trade balance of commodity exporters, this is more than offset by the median gain from higher prices of other commodities.

21. In this scenario, external financing needs could increase by around US$9 billion in 2012 for LICs experiencing a negative terms of trade shock. Much of the additional financing needs would be accounted for by a small number of large non-commodity exporters in Sub-Saharan Africa and Asia. About one-fifth of LICs would stand to gain from higher commodity prices. Among the four-fifths of countries that would be adversely affected by higher prices, about half would have sufficient reserves to absorb the shock. The other half would face additional external financing needs amounting to about 2¼ percent of GDP in the median case. Overall, the shock could reduce median reserve coverage by more than half a month of imports compared to the baseline, to just over three months.

22. The simulated increase in global commodity prices could put pressure on the fiscal positions and debt dynamics in many LICs. The scenario would cause the median budget balance to deteriorate by around 1 percent of GDP in 2011–12 compared to the baseline. About half of the worsening would arise from existing policies (such as maintenance of fuel subsidies), and the other half from the possible adoption of new measures (such as new tax breaks, transfers, or subsidies).¹³ The largest median deterioration would be in the Asia-Pacific region. If higher commodity prices were to persist beyond 2012, median public debt could increase by about 9 percents of GDP in steady state.¹⁴ This would be problematic for many LICs, in particular those with a high risk of debt distress and LICs in Latin America and the Caribbean, where public debt would approach 90 percent of GDP.

23. An additional 31 million people in LICs could be pushed into poverty by 2012 under the scenario, while middle-income households would also suffer.¹⁵ While higher food prices would benefit net producers of food, large segments of the population, especially the urban poor and landless rural, would be hard hit, given the high share of food in their consumption basket. Higher fuel prices would cut into household income across the economy. About half of the poverty increase would be in SSA, reflecting its large population share clustered near the poverty line. Middle-income households are also vulnerable to higher prices, especially in Africa, Europe, and the Middle East where consumption baskets do not differ substantially across income groups. By contrast, in Asia, Latin America, and the Caribbean food and fuel prices play less of a role for middle- and upper-income households.

D. Conclusions from the Vulnerability Analysis

24. LICs are highly vulnerable to tail risks, in particular to a sharp global downturn. A sharp slowdown in global growth would significantly raise the near-term recession risk for many LICs, with the illustrative Growth Decline Vulnerability Index returning to levels similar to those experienced at the height of the global crisis. An additional commodity price shock is not as likely to raise the recession risk, but could still undermine price stability and increase poverty.

25. Fiscal room for maneuver, already reduced during the crisis, could be further eroded should tail risks materialize. The ability of individual countries to absorb the fiscal costs of shocks depends on many country-specific factors, as well as the nature and persistence of the shock. However, an illustrative fiscal space measure that combines deficit and debt dynamics (see Box 1) can give a broad indication of the dispersion of fiscal room for maneuver. Based on this measure, a little less than half of LICs (including most commodity exporters) could fully absorb either of the tail-risk shocks without jeopardizing medium-term sustainability. At the other end of the spectrum, more than a third of LICs (including many small island economies and about half of all non-commodity exporters) already appear to lack fiscal space in the baseline and would have little room for maneuver. The remaining countries could at least partly absorb the shock.

26. While many LICs would have sufficient reserves to absorb a further shock to the balance of payments, some would face additional external financing needs. The tail-risk scenarios suggest that the share of LICs with reserve coverage below three months of imports could rise from just over a quarter to about half if one of the shocks were to materialize. Non-commodity exporters would be more affected by higher global commodity prices, while the adverse growth scenario would hit commodity exporters harder. Among non-commodity exporters, those in Sub-Saharan Africa would experience a more severe erosion of their reserve cushions, though most would still be able to absorb the impact at least in part.

27. Taken together, the analysis indicates that macroeconomic buffers appear still fragile in many LICs, although vulnerabilities vary significantly across countries. Based on the illustrative scenario analysis, while a large majority of LICs have some policy space on the fiscal and/or external side, only a few would have room to absorb in full either a sharp downturn in global growth or a further commodity price spike. At the other end of the spectrum, a few LICs appear to have inadequate fiscal and external buffers even under the baseline.

III. Macroeconomic Policy Challenges

A. Rebuilding Policy Buffers

A central policy challenge facing LICs is to balance the rebuilding of macroeconomic buffers against pressing spending needs, whether for shock mitigation or growth-enhancing investment. To ease the trade-offs, LICs should aim over the medium term to boost their fiscal revenue base, improve the efficiency of public investment, and put in place better-targeted social protection systems. The beneficial effects of these policies on economic resilience could be complemented by longer-run reforms to increase domestic savings, deepen the financial sector, and diversify the economy.

28. A key policy challenge for many LICs is to balance the rebuilding of macroeconomic buffers against pressing spending needs. Striking the right balance is important for building resilience against shocks while supporting economic developoment. As shown above, many LICs have emerged from the global crisis with weakened buffers, exposing them to shocks that could have severe economic and social effects and undermine long-term poverty reduction and growth objectives. At the same time, there is a pressing need to invest in public infrastructure and social systems. This underlying tension becomes even more acute when LICs experience shocks, as the authorities may need to take potentially costly measures to mitigate the adverse economic and social consequences, in particular in the context of weak automatic stabilizers and very limited social safety nets. Moreover, the expected persistence of shocks is an important consideration in finding the right balance between financing and macroeconomic adjustment. While the initial response to a shock may well rely primarily on temporary financing, this may prove too costly to maintain over the medium term if the shock persists.

29. Many LICs could still benefit from a further strengthening of their fiscal buffers. As shown above, a large number of LICs can only partially absorb large tail-risk shocks and may need to adjust over the medium term to preserve fiscal sustainability. This group could consider a mix of gradual fiscal adjustment combined with realignment of priorities, for example shifting spending in favor of investment and social programs, and building a stronger revenue base. Those LICs that have no fiscal space already under the baseline would have limited room for maneuver in the event of a tail-risk shock. For this group, rebuilding fiscal buffers and strong concessional support from development partners will be particularly important. Some LICs already have adequate fiscal buffers, and may even be able to expand their fiscal deficits in the baseline, for instance to step up critical spending, without compromising their ability to absorb large shocks.

30. Despite the recent commodity price spike, inflation is projected to remain in the single digits for most LICs, although a few countries face stronger price pressures and may need to tighten monetary policy. Monetary and exchange rate policies did not react much to the recent uptick in inflation caused by the global commodity price spike. Median policy rates are broadly unchanged, which has brought (ex post) real rates to around zero. The commodity price rise has also not had a major impact on exchange rates. Real effective exchange rates have remained broadly stable, though still above the pre-2008 levels. Many countries are projected to have narrowing but still sizable excess capacity through 2012. Reflecting stabilizing food and fuel prices, albeit at a high level, median inflation is projected to come down to 6 percent in 2012, from 7.8 percent in 2011. However, for a few countries, in particular in SSA, inflation has already reached double-digit levels and is not expected to ease in the short term without monetary tightening.

31. While many countries have sufficient external buffers to absorb shocks, others have less available room and may need to focus on preserving or rebuilding external buffers. While many LICs have built up sufficient reserves to absorb the impact of either shock fully without the need for adjustment (and import compression), others would benefit from further building reserve buffers through a mix of monetary and fiscal tightening, combined with greater exchange rate flexibility where appropriate. A quarter of LICs already have import coverage of less than three months under the baseline. For this group, rebuilding external buffers should be a high priority. These countries are most in need of help from the international community.

32 While there is no one-size-fits-all policy advice, several policy priorities apply to most LICs as they aim to strengthen macroeconomic buffers while supporting longer-term development objectives. The broad policy agenda discussed in a 2010 staff paper on post-crisis macroeconomic challenges (Fabrizio, 2010) remain valid in this context:

Boosting the domestic revenue base, which remains low in most LICs, by (i) strengthening customs and tax administrations, including in the areas of large taxpayers and non-compliance; (ii) moving to a simple, broad-based VAT; (iii) removing minor taxes and fees that are costly to administer; (iv) building simple and broad-based corporate income taxes that also cover multinationals; and (v) balancing royalties, auctioning and profit-related charges in taxing natural resources;¹⁶
Continuing to increase spending in priority areas to the extent possible, including social sectors and infrastructure investment, while improving spending efficiency and public financial management, (see Lledó and Poplawski-Ribeiro, 2011; and Dabla-Norris and others, 2010a) and ensuring that public investment projects are carefully selected, prioritized, and monitored;
Developing targeted social support mechanisms that can strengthen automatic stabilizers during crises, replacing less efficient and more costly subsidy schemes (see Gupta and others, 2008; and Coady and others, 2010), which would help strengthen fiscal buffers;
Prudent borrowing strategies that help maintain debt sustainability and balance the use of external nonconcessional financing against expanded use of domestic financing, supported by measures to boost domestic savings, develop financial sectors, and enhance debt management frameworks; and
Advancing structural reforms that increase economic diversification to reduce exposure to exogenous shocks and achieve higher growth.

B. Policy Challenges in the Event of a Sharp Downturn in Global Growth

In the event of a sharp global downturn, 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 fiscal, monetary, and exchange rate policies may be necessary.

33 The appropriate macroeconomic policy response to a sharp global downturn would depend in part on available policy buffers While all LICs should aim to soften the economic and social impact of such a shock, there is no one-size-fits-all policy advice as countries would not all be affected in the same way and do not all have the same policy space to respond. During the global downturn in 2009, LICs with more comfortable buffers were able to mount a stronger countercyclical fiscal response, with large increases in real spending, than countries with weaker buffers. The countercyclical response helped cushion the impact of the global crisis on spending, and likely also on growth (see earlier IMF staff analysis in Fabrizio, 2010). However, the risk of a new slowdown in growth comes at a time when LICs’ buffers have already been weakened during the 2009 crisis. The macroeconomic policy recommendations for LICs discussed in earlier analytical work on the global crisis may continue to provide useful guideposts. This section elaborates on how those broad recommendations might be applied or adapted to current circumstances.

Fiscal policy

34. In the event of a sharp global downturn, the scope for fiscal stimulus would be more limited than in 2009 for most LICs, given weaker fiscal buffers and constrained aid envelopes, but countries with sufficient fiscal room should aim to protect spending. Thanks to the fiscal buffers built over the last decade, most LICs were able to afford a countercyclical fiscal response during the 2009 crisis. In the event of another global downturn, LICs should again aim to preserve spending to the extent possible to avoid aggravating the negative economic and social effects of the shock. However, fiscal buffers are weaker now for most countries. Under the global downturn scenario analyzed above, many LICs could only partly accommodate another shock, and a few lack fiscal room for maneuver already under the baseline. Moreover, available external financial support from donor countries could be more constrained this time around due to tight budget envelopes, which make many LICs even more vulnerable. In the event that a global downturn were to persist beyond 2012, even LICs that could initially accommodate a shock may need to adjust fiscal policies, including through expenditure realignment and enhanced revenue efforts, to maintain fiscal sustainability.

35. If fiscal space allows, LICs should seek to soften the economic and social impact of a global downturn by preserving—and where feasible increasing—real fiscal spending in priority areas. Labor-intensive investment spending could help sustain growth in the short run and limit the increase in unemployment while supporting longer-term investment needs, which remain substantial in most LICs. Spending in priority areas, such as health and education, could help limit the adverse social impact of the downturn and remove bottlenecks to growth. Pushing ahead with public financial management reforms could help improve the efficiency of spending, freeing up resources for priority needs.

36. While many LICs lack a comprehensive social safety net to protect the most vulnerable, ad hoc programs can help alleviate the social pressures. Food voucher programs with proxy-means testing, school-based or maternal and child feeding schemes, “job for food” programs, and conditional cash transfer programs targeting vulnerable groups such as orphans or people with chronic physical conditions are examples of ad hoc schemes that a number of countries, such as Burkina Faso, Sierra Leone, Ghana, and Kenya (see Box 2), have successfully implemented.

37. At the same time, responding to a shock with general public wage increases should be avoided as they are poorly targeted and may have negative implications for fiscal sustainability. Salary increases in the public sector may crowd out public investment or spending on the social safety net and are typically irreversible. Public salary increases may also spill over into the private sector, creating second-round effects and ultimately undermining competitiveness.

38. For countries lacking fiscal room, key challenges will be to limit the decline in domestic revenue to the extent possible and prioritize spending. Continued efforts to strengthen tax and customs administration and policies could help broaden the revenue base and facilitate a pickup in revenues as the economy recovers. Ad hoc tax reductions or exemptions, while tempting as a stimulus measure in a downturn (Senegal and Guinea, see Box 2), should generally be avoided as they are difficult to reverse. Reducing non-priority spending would also help create the space to protect priority spending.

39. With donor countries facing severe budget constraints, LICs may find it difficult to finance larger deficits and may need to rely on domestic financing even more than in 2009. Domestic sources financed more than half of LICs’ additional fiscal deficits in the 2009 global crisis, including drawing down of government deposits, borrowing from the central bank, and borrowing in domestic debt markets. Countries would need to weigh the merits and costs of nonconcessional external and domestic borrowing, and concessional support, while also considering potential crowding-out effects.

Monetary and exchange rate policy

40. In the 2009 downturn, LICs did not fully exploit the scope for monetary easing. Rather than pursuing a comprehensive countercyclical response, LICs instead relied primarily on fiscal policies, and in some cases, exchange rate flexibility. As shown in earlier analytical work by IMF staff (Fabrizio, 2010), while most LICs did lower nominal policy rates, they did so by less than the decline in inflation would have allowed, resulting in sharply higher real policy rates at the peak of the crisis.

41. In the event of another global downturn and related softening in commodity prices, more active monetary easing may be appropriate in LICs with moderate inflation. A weakening in commodity prices owing to the global slowdown would likely bring inflation down rapidly, similar to the experience in 2009. Also, in many cases, output may fall well below potential, widening excess capacity. However, for the few countries where inflation pressures have recently spiked, a more conservative monetary policy response may still be appropriate.

42. Greater use of exchange rate flexibility could help in the event of another downturn, especially for countries with low reserve cushions. During the global downturn in 2009, LICs made greater use of exchange rate flexibility to cushion the external shock than in past shock periods. In the event of a double dip in global growth, many LICs would experience renewed pressures on exports, FDI, and remittances. For countries with flexible exchange rate regimes, the exchange rate could play an important role in smoothing the adjustment, especially among countries with low reserve buffers. In the event of a more protracted global downturn, exchange rate realignment, together with reforms to boost competitiveness, would be even more important to facilitate external adjustment.

C. Policy Challenges in the Event of Global Commodity Price Spikes

Spikes in global commodity price rises present LICs with difficult trade-offs between inflation, external, and social objectives. A pragmatic response could include targeted measures to protect the poor 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.

Fiscal policy

43 As in the case of a growth shock, the scope for mitigating the social impact of higher commodity prices depends in large part on the available fiscal space, which is country specific. In framing an appropriate fiscal response, it remains critical to ensure a sustainable fiscal stance and avoid excessive debt accumulation, bearing in mind that the persistence of commodity price shocks is highly uncertain ex ante. As indicated in the illustrative tail-risk scenario, many LICs appear to have adequate fiscal space to absorb the effect of a large, but temporary, global commodity price shock. By contrast, those LICs that lack fiscal space even under the baseline would need to adjust over the medium term to preserve fiscal sustainability after such a shock.

44 Institutional and political constraints limit LICs’ ability to adopt a “first-best” policy response to global price shocks. Such a policy response would consist in fully passing on price increases while relying on an effective, well-targeted social safety net—in combination, these measures would ensure fiscal affordability and avoid economic distortions, while protecting the most vulnerable. For LICs the need for well-target social transfers would be particularly important in light of the fact that poorer households have weaker economic buffers and limited access to consumption-smoothing mechanisms compared to other countries (for example, low savings rates and limited access to credit). However, institutional and political constraints may limit LICs’ ability to opt for the first best when responding to shocks in the foreseeable future:

LICs lack comprehensive social safety nets that could cushion the impact of shocks on the most vulnerable, and introducing broad-based welfare programs or social insurance schemes would be prohibitively expensive.
Even if some support to the poorest is provided, it is important not to overlook the impact of the price increases on a broader share of the population, given generally low incomes and the high share of food in consumption for middle-income households.

45 These constraints may imply a need to resort to pragmatic policy responses—a challenge then being to make the measures as cost effective and targeted as possible In adopting such “second-best” solutions, policymakers need to weigh the benefits against the fiscal and social costs, including opportunity costs, inefficiencies, and distortions of incentives. Even in a second-best setting, fiscal affordability is essential, and the aim, as far as possible, should be to: (i) target the most vulnerable including by proxy means-testing using information on household characteristics, (ii) limit potential economic distortions, (iii) tailor measures to the duration of shocks, and (iv) enhance the longer-term resilience of automatic stabilizers to future shocks. Second-best solutions that have proved to be effective in a number of countries (see Box 2) could include, in addition to the ad hoc social support schemes discussed in Section B:

Well-targeted commodity price subsidies Subsidies could be targeted at commodities that are predominantly consumed by the poor (e.g., kerosene), although leakage to non-poor households will remain a problem. Agricultural input subsidies, if well targeted, could help stimulate domestic production. To avoid leakages and inefficiencies, such subsidies should be targeted at low-income farmers and be part of a more comprehensive strategy focused on increasing agricultural productivity.
Import tariff reductions on selected food items This could be a pragmatic approach to help mitigate the impact of higher global prices, while also potentially reducing existing trade distortions to domestic consumption and production. Targeting of tariff reductions to food items primarily consumed by the poor would also help limit the revenue loss.

46 Country experience has also shown that some measures, while politically tempting, may have negative implications for fiscal sustainability, competitiveness, and production incentives (see Box 2):

Large buffer stocks used as a price smoothing mechanism While building buffer stocks may well be needed for strategic reasons or for social support in emergency situations, maintaining large buffers will entail substantial administrative and operational costs. Also, when prices rise over a prolonged period, stock interventions may undermine private investment and, in the case of perishable items, may add to volatility in the market place.
Export restrictions. Export restrictions can be highly distortionary as they prevent domestic farmers and exporters from capturing the gains from higher prices in global markets, undermine the long-run supply response by discouraging domestic food production, and may risk retaliatory responses from other countries. In response to the commodity price shock earlier this year, eight countries initiated export bans on food (compared with ten in 2007–08).
Generalized (untargeted) subsidies. As in the case of the response to growth shocks, these subsidies often prove unsustainable for the budget, distort production incentives, and may mostly benefit the non-poor. If subsidies create a substantial wedge between the world price and the domestic price, smuggling incentives could create the perverse effect that the budget ends up subsidizing consumption in neighboring countries.
Ad hoc tax reductions and exemptions. As discussed in the previous section, they are difficult to reverse and often benefit the better-off segments of society disproportionately. Also, reducing selective Value Added Tax (VAT) rates would be particularly distortive for the tax system, as they could, for example, weaken compliance.
General public sector wage increases. As noted, salary increases in the public sector may crowd out priority spending, undermine competitiveness, and become hard to reverse, even if the price shock is temporary.

Box 2.

Policy Measures During the 2008 Food and Fuel Price Shocks--Country Experiences

Experience from the 2007–08 food and fuel price shock and the current episode has shown that some measures, though not the “first best” option, can be well targeted and cost effective. At the same time, across-the-board measures may have serious negative implications for fiscal sustainability, competitiveness, and production incentives.

Targeted measures

In Senegal, subsidies on small butane gas bottles, which were introduced in 2006 and benefitted mostly the higher-spending households, were eliminated in 2009 and an excise exemption was introduced on lamp oil (kerosene) that benefits mostly the poorer.
Liberian authorities in May 2011 proposed limited yet targeted measures through ring-fenced import duty exemptions for diesel consumed by the national electricity company, transit authority, and broadcasting system (estimated costs below 0.1 percent of GDP).
In 2009 Burkina Faso introduced limited cash transfers providing food vouchers to the lowest quintile households in the two largest urban areas, identified through proxy-means testing (beneficiaries were identified by household characteristics). A pilot scheme tested conditional and unconditional cash transfers for households affected by HIV/AIDS.
The expansion of school feeding programs in Sierra Leone is estimated to raise the proportion of school children covered by 20 percent to 30 percent in 11 vulnerable school districts, and expansion of food-for-work programs create 10,000 food-for-work jobs.
Ghana is rolling out a cash transfer program to households in extreme poverty, while Kenya has introduced a conditional cash transfer program targeting orphans and vulnerable children.
Liberia adopted a fuel pricing mechanism in April 2008 that adjusts retail ceiling prices for gasoline, diesel, and kerosene to changes in world prices, where almost all changes in international fuel prices are passed through promptly to pump prices.

Across-the-board measures

In 2007, the Senegalese authorities suspended customs duties on rice, wheat, and powdered milk and VAT on powdered milk and bread. These measures, poorly targeted, cost 1 percent of GDP annually and benefited mostly the richer as the value of tax preferences was linked to the level of spending.
Burkina Faso suspended taxes on food products and introduced subsidies and tax exemptions on fuel, which benefited mostly richer households—the ..7½ percent of households below the poverty line received 19 percent of the food tax relief and just 13 percent of the benefits from the fuel measures.
In Guinea, a reduction in retail prices of petroleum products in 2007 carried large costs for the budget and spurred illegal re-exports to neighboring countries, especially when world oil prices started rising.
In March 2008, Vietnam announced a temporary curb on rice exports. The temporary ban on rice exports was lifted in June once it was clear that the new harvest was strong and domestic stockpiles abundant. By that time world prices started to fall rapidly, and falling demand and pressure to clear stockpiles amid plentiful supply from the new harvest caused Vietnamese exporters to accept more severe price drops than their Thai counterparts. By the end of 2008, Vietnam had exported 4.7 million tons of rice and received US$2.7 billion in revenue, short of its target of US$3 billion.

Monetary and exchange rate policy

47 The standard monetary policy advice is to accommodate the direct impact of commodity price shocks while counteracting potential second-round effects The rationale is to avoid exacerbating the impact of the price shock on output while preventing a persistent effect on inflation (and inflation expectations). This policy is often pursued by targeting some measure of “core” inflation that excludes volatile components, such as food and energy.

48 Applying this standard policy advice in the LIC context is not straightforward, in part because first-round effects may be much greater than in more advanced economies. Chapter II.C shows that a sharp upward spike in global commodity prices could more than double headline inflation, to almost 16 percent for the median LIC, and would exert significant pressure on the external positions of non-commodity exporters. This reflects, in part, two LIC-specific factors, and makes more complex the application of the standard policy advice:¹⁷

First, given the large share of food in the CPI basket, headline inflation in LICs is highly sensitive to global food prices. This implies that accommodation of first-round effects from global price shocks comes at the cost of high volatility of headline inflation and the real exchange rate, and it could undermine central bank credibility. However, tightening monetary policy to offset these effects may also have negative consequences for economic activity.
Second, exchange rate pass-through to inflation is significant for LICs, potentially creating a difficult trade-off between inflation and external objectives. For non-commodity exporters, global price shocks will exert pressures on reserves and the exchange rate. Adjustment will thus often require some degree of exchange rate depreciation, amplifying the inflationary impact of the shock. For these countries, some monetary tightening may be helpful in reducing the dual pressure on inflation and the balance of payments, although again at some cost in terms of aggregate demand.

49 A further difficulty is that second-round effects are difficult to measure and distinguish from first-round effects, though they seem to be relatively muted for most LICs:

It is difficult for many LICs to define and monitor an effective core inflation measure that would give a sense of second-round impacts. The high shares of food, administered prices, and imported goods in the CPI leave a relatively limited basket of domestic goods and services that may not be a very representative measure of underlying inflation. Moreover, data on wages and other factor costs that may give indications of potential second-round effects are often not available or of poor quality. Finally, even the first round effects depend on the monetary policy response (e.g., because it affects the exchange rate that in turn determines the local currency price of food imports) making it hard to distinguish first- and second-round effects in practice. Hence, central banks will have very limited information to act on potential second-round effects.
Inflation inertia is relatively low in LICs, and the volatility of headline inflation relatively high, compared to advanced and emerging market economies (Box 3). This may reflect the fact that many LICs have recently been able to maintain their nominal anchor, even though they have been hit frequently with domestic and external shocks (IMF, 2011d). It may also reflect the lack of formal wage indexation and collective bargaining. Hence, while the direct impact of global food prices on domestic inflation is high, these shocks do not have very persistent effects, i.e., second-round effects are relatively muted.

50 Notwithstanding these complications, most LICs would be justified in following the conventional prescription and setting monetary policy to accommodate the direct impact of further global commodity price spikes While an accommodative monetary policy stance could imply a sharp spike in headline inflation, the inflationary impact is unlikely to be very persistent, given low inflation inertia. Thus, risks to credibility from an accommodating policy would appear less severe than the risks to output from undue tightening in most LICs.

51 However, for some LICs, in particular those with weak external buffers, policy tightening may be needed, supported by exchange rate flexibility where appropriate. Higher global commodity prices would exert pressure on the balance of payments of non-commodity exporters, implying a potentially difficult trade-off between maintaining external stability and price stability. For LICs that have low reserve buffers and would also experience very high inflation as a result of the price shock—for example, one in seven LICs has reserve coverage of less than three months of imports and inflation would rise above 20 percent under the scenario—there would be very little room for maneuver. In these cases, monetary and fiscal tightening would be particularly important to safeguard both external and inflation objectives. Some degree of policy tightening may also be appropriate for other LICs that have either high inflation or low reserves. For countries with a flexible exchange rate, the extent to which exchange rate depreciation is desirable would depend on available reserve buffers and the exchange rate pass-through into inflation. For fixed regimes, tighter monetary and possibly fiscal policies will likely be appropriate to facilitate the required external adjustment and avoid excessive losses in reserves.

52. Commodity exporters should generally rely on exchange rate appreciation to mitigate inflation pressures from a global commodity price spike. This would limit potential overheating and reduce the degree of necessary monetary tightening. As the recent experience in Mongolia shows, attempts to limit nominal exchange rate flexibility can undermine inflation objectives in commodity exporters (Appendix VIII).

53. For countries with money targeting regimes, accommodating first-round effects typically implies missing or adjusting the money targets. Adjusting money targets would allow the central bank to satisfy the increase in money demand that will likely result from higher consumer prices. Otherwise, the increase in money demand will raise interest rates and result in an undesired tightening of monetary conditions. How much target adjustment is warranted depends on whether second-round effects are building up, whether there are signs of aggregate demand pressures, and whether there are additional increases in money demand unrelated to commodity prices. The difficulty in identifying these factors suggests greater flexibility in the money targeting regime, as well as paying attention to movements in short-term interest rates and other indicators of the policy stance.

Box 3.

Impact of Global Commodity Prices on LIC Inflation

Staff’s empirical analysis suggests that inflation in LICs is particularly responsive to higher global food prices, exchange rate movements, and the output gap. These results hold for all oil-importing LICs as well as the subset of flexible exchange rate regimes. International food prices have both a contemporaneous and a lagged effect on LIC headline inflation. While it is difficult to associate these empirical results with first- and second-round effects, one reasonable approximation is to associate first-round effects with the direct effects of international food prices, holding other variables in the regression constant. With this approach, first-round effects under flexible regimes are estimated to be substantial—a one percentage point increase in global food prices would add 45 basis points to headline inflation over two years and a long-run pass-through of about 64 basis points.

Second-round effects are difficult to measure, but there is some evidence suggesting that they are relatively muted in LICs. Staff’s regression analysis finds that headline inflation inertia is low, as captured by the low coefficient on lagged inflation. This reflects in part weaker transmission channels such as formal wage bargaining or indexation, but also the high frequency and impact of shocks.¹ / While a low estimated coefficient need not imply small second-round effects—since an endogenous monetary policy response may be embedded in this outcome—an analysis of the experience of 31 SSA countries during the last food crisis is consistent with the latter hypothesis. In particular it finds that most of the increase of inflation during this period is due to the direct effect of food and fuel prices, i.e., first-round effects.

Determinants of Inflation during the Commodity Boom-Bust Cycle ¹

^¹Regression coefficients estimated by Arellano-Bover/Blundell-Bond linear dynamic panel-data system-GMM estimator. NEER depreciation and output gap are treated as endogenous. T-statistics are presented in brackets below the c oefficients.

Determinants of Inflation during the Commodity Boom-Bust Cycle ¹

	Oil Importers
	LICs	Excuding monetary unions	Flexible exchange rate regimes
	Sample 2006–09	Sample 2006–09	Sample 2006–09	Sample 2001–09
Lagged headline inflation	0.3203 (4.64)	0.3718 (4.92)	0.3034 (3.53)	0.4591 (8.9845)
NEER appreciation weighted by openness			-0.0025 (-2.29)	-0.0028 (-3.10)
NEER appreciation weighted by openness interacted with flexible exchange rate dummy	-0.0024 (-1.58)	-0.0026 (-2.05)
Output gap	0.5600 (2.29)	0.5104 (2.29)	0.7459 (2.16)	0.2612 (1.71)
Change in international food prices (%)	0.2099 (6.85)	0.2349 (5.98)	0.2519 (4.65)	0.2653 (6.40)
Lagged change in international food prices (%)	0.1595 (3.30)	0.1417 (2.62)	0.1954 (2.54)	0.0786 (2.99)
Number of observations	180	132	82	197
Number of countries	46	34	26	28

Determinants of Inflation during the Commodity Boom-Bust Cycle ¹

	Oil Importers
	LICs	Excuding monetary unions	Flexible exchange rate regimes
	Sample 2006–09	Sample 2006–09	Sample 2006–09	Sample 2001–09
Lagged headline inflation	0.3203 (4.64)	0.3718 (4.92)	0.3034 (3.53)	0.4591 (8.9845)
NEER appreciation weighted by openness			-0.0025 (-2.29)	-0.0028 (-3.10)
NEER appreciation weighted by openness interacted with flexible exchange rate dummy	-0.0024 (-1.58)	-0.0026 (-2.05)
Output gap	0.5600 (2.29)	0.5104 (2.29)	0.7459 (2.16)	0.2612 (1.71)
Change in international food prices (%)	0.2099 (6.85)	0.2349 (5.98)	0.2519 (4.65)	0.2653 (6.40)
Lagged change in international food prices (%)	0.1595 (3.30)	0.1417 (2.62)	0.1954 (2.54)	0.0786 (2.99)
Number of observations	180	132	82	197
Number of countries	46	34	26	28

¹ / In the same vein, the standard deviation of monthly changes in 12-month headline inflation in LICs is almost 2 percent compared with 0.6 percent for AMs and 1¼ percent for EMs, and changes in inflation are distributed quite symmetrically around zero.

54. In all cases, close monitoring of potential second-round effects and clear communication by the monetary authorities would be critical for an effective response to shocks. Monetary policy should be forward-looking and respond to emerging demand-driven inflationary pressures and potential second-round effects of higher food and fuel prices. As the output gap continues to narrow, stronger demand and tighter capacity constraints could lead to wage pressures and pass-through from food and fuel prices to prices of other goods and services. For oil importers with floating exchange rates, expectation of continued exchange rate depreciation could lead to an inflationary spiral. For commodity exporters, rising income and external inflows could boost domestic credit growth and demand. Central banks should therefore signal a strong commitment to bring inflation back to the pre-shock rates over time. Transparent communication to the public on the drivers of inflation and the temporary nature of this spike would be crucial, especially for inflation-targeting LICs, and help anchor the medium-term inflation expectations.

D. How Can Development Partners Help Mitigate Shocks?

55. Looking ahead, it will be important for the international community to provide highly concessional support, particularly to the more vulnerable LICs, in the event of shocks. As the vulnerability analysis suggested, additional external financing needs could be in the range of US$9–27 billion under the tail-risk scenarios, coming at a time when bilateral external support could be constrained by the current advanced economies’ tight budgets. This could increase the demand for multilateral financial support. The IMF’s financing instruments for LICs have been made more flexible and concessional in 2009, and the financing envelope has been doubled, to US$17 billion for 2009–14. The World Bank’s IDA support was increased by 18 percent during the 16^th IDA replenishment, to US$49 billion, and the World Bank’s Crisis Response Window expands the range of facilities available to support LICs in times of severe exogenous crises. The World Bank is also currently reviewing its existing facilities to address shocks more rapidly.

56. Coordinated international initiatives aimed at improving the functioning of global commodity markets would also benefit LICs. Greater price stability would follow from better information on inventories and from steps toward greater transparency in commodity derivatives markets. Reforms to commodity derivatives markets, such as the use of central clearing and standardized contracts, can contribute to market stability, though these would need to proceed in tandem with broader derivatives market reforms. Moreover, development aid specifically targeted to modernizing the agriculture sector and making more efficient use of land in LICs would enhance food security.

Appendix I. List of Low-Income Countries (LICs)

The group of LICs analyzed in this work is formed by the 70 PRGT-eligible countries for which data were available,¹⁸ which include, by region:

Sub-Saharan Africa:

Benin, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Comoros, Democratic Republic of Congo, Republic of Congo, Côte d’Ivoire, Eritrea, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Nigeria, Rwanda, São Tomé and Príncipe, Senegal, Sierra Leone, Tanzania, Togo, Uganda, and Zambia.

Middle East and Europe:

Afghanistan, Armenia, Djibouti, Georgia, Kyrgyz Republic, Mauritania, Moldova, Sudan, Tajikistan, Uzbekistan, and Republic of Yemen.¹⁹

Asia:

Bangladesh, Bhutan, Cambodia, Kiribati, Lao People’s Democratic Republic, Maldives, Mongolia, Myanmar, Nepal, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tonga, and Vietnam.

Latin America and Caribbean:

Bolivia, Dominica, Grenada, Guyana, Haiti, Honduras, Nicaragua, St. Lucia, and St. Vincent and the Grenadines.

Appendix II. Selected Economic Indicators

Sources: WEO database, and IMF staff calculations.

^¹Next year’s imports of goods and services.

	GDP growth in percent				Inflation in percent				International Reserves months of imports¹				Fiscal Balance in percent of GDP				Current Acc. Balance incl. FDI in percent of GDP				Gross Public Debt in percent of GDP
	2009	2010	2011	2012	2009	2010	2011	2012	2009	2010	2011	2012	2009	2010	2011	2012	2009	2010	2011	2012	2009	2010	2011	2012
Afghanistan, I.S. of	20.9	8.2	7.1	7.2	-12.2	7.7	8.4	3.2					-1.6	0.9	0.0	-1.8	-0.2	4.8	1.5	-1.3
Armenia	-14.1	2.1	4.6	4.3	3.5	7.3	8.8	3.3	5.7	4.7	4.5	4.2	-7.7	-4.9	-3.8	-3.1	-7.4	-7.8	-5.5	-4.6	40.2	39.2	41.5	41.4
Bangladesh	5.9	6.4	6.3	6.1	5.4	8.1	10.1	7.4	4.1	3.6	3.0	2.5	-3.5	-2.9	-3.2	-4.4	4.3	3.0	0.8	0.1
Benin	2.7	2.6	3.8	4.3	2.2	2.1	2.8	3.0	7.7	7.0	6.4	5.9	-3.3	-0.4	-1.7	-1.6	-7.4	-5.1	-6.0	-5.2	28.3	31.1	30.8	30.5
Bhutan	6.7	8.3	8.1	8.5	8.6	7.0	6.5	5.0	13.3	12.7	12.2	12.2	2.1	2.4	-4.3	-6.4	-8.0	-3.3	-9.5	-14.8	64.1	66.0	76.0	89.1
Bolivia	3.4	4.1	5.0	4.5	3.3	2.5	9.8	4.8	14.9	14.9	15.1	16.1	0.6	2.0	1.8	1.2	7.1	6.8	5.9	6.1	40.5	36.6	32.4	31.4
Burkina Faso	3.2	7.9	4.9	5.6	2.6	-0.6	1.9	2.0	6.4	5.9	6.5	6.8	-5.3	-5.8	-4.3	-3.1	-3.1	-3.1	-1.5	-5.1	26.1	27.1	29.1	29.9
Burundi	3.5	3.9	4.2	4.8	10.7	6.4	8.7	12.5	5.0	4.9	4.8	5.1	-8.6	-3.9	-3.1	-3.1	-15.3	-12.5	-15.5	-16.2	48.2	50.0	49.0	44.2
Cambodia	-2.0	6.0	6.7	6.5	-0.7	4.0	6.4	5.6	4.3	3.9	4.0	4.5	-4.1	-2.9	-2.2	-2.4	-0.4	2.5	-1.7	0.6	28.7	29.9	29.2	28.8
Cameroon	2.0	3.2	3.8	4.5	3.0	1.3	2.6	2.5	6.2	5.5	5.3	4.8	-0.1	-1.1	-1.4	-0.4	-1.8	-0.9	-1.9	-1.5	10.6	12.1	14.5	14.7
Cape Verde	3.7	5.4	5.6	6.4	1.0	2.1	5.0	4.9	4.0	3.5	3.1	3.4	-6.3	-10.6	-10.2	-9.0	-7.7	-4.5	-7.1	-5.8	68.6	73.2	73.9	78.3
Central African Rep.	1.7	3.3	4.1	5.0	3.5	1.5	2.8	2.6	5.1	3.9	3.6	3.8	-0.1	-0.8	-2.0	0.2	-6.0	-7.0	-5.3	-5.0	36.8	41.9	37.0	32.8
Chad	-1.2	13.0	2.5	6.9	10.1	-2.1	2.0	5.0	1.1	1.3	2.1	3.1	-9.9	-5.2	2.3	2.5	5.3	-8.6	0.7	-0.5	30.5	32.6	29.8	29.7
Comoros	1.8	2.1	2.2	3.5	4.8	2.7	5.8	3.3	5.3	5.4	4.8	4.6	2.7	2.1	-1.6	-0.9	-6.4	-8.3	-12.0	-10.8	55.3	51.8	47.1	42.9
Congo, Dem. Rep. of	2.8	7.2	6.5	6.0	46.2	23.5	14.8	12.5	0.5	1.2	1.3	1.5	-5.2	1.2	-7.7	-6.2	-1.2	4.6	5.1	9.6	124.3	33.8	46.6	50.5
Congo, Republic of	7.5	8.8	5.0	7.0	4.3	5.0	5.9	5.2	7.0	6.5	12.6	18.5	4.8	16.0	19.5	20.3	12.0	23.5	26.2	27.9	57.2	23.8	22.0	22.2
Côte d’Ivoire	3.8	2.4	-5.8	8.5	1.0	1.4	3.0	2.5	4.6	5.1	4.9	4.7	-1.6	-2.3	-6.4	-3.8	9.0	6.6	2.5	1.1	67.0	66.8	70.0	54.8
Djibouti	5.0	3.5	4.8	5.1	1.7	4.0	7.1	1.9	5.8	4.6	4.3	4.2	-4.6	-0.5	0.4	0.0	0.4	-2.4	-3.5	1.8	59.8	56.1	53.7	53.6
Dominica	-0.7	0.3	0.9	1.5	0.0	3.3	4.2	1.9	3.5	3.4	3.2	3.1	-0.2	-2.6	-1.8	-1.4	-12.7	-15.2	-15.6	-14.2	53.4	55.1	55.9	55.8
Eritrea	3.9	2.2	8.2	6.3	33.0	12.7	13.3	12.3	1.7	2.0	2.1	2.9	-14.7	-16.1	-16.2	-13.5	-2.7	-1.3	2.2	4.8	145.7	144.8	134.4	127.6
Ethiopia	10.0	8.0	7.5	5.5	36.4	2.8	18.1	31.2	2.2	2.3	2.8	2.4	-0.9	-1.3	-2.1	-4.0	-2.3	-1.1	-2.9	-6.0	32.2	36.7	39.4	34.1
Gambia, The	6.7	6.1	5.5	5.5	4.6	5.0	5.9	5.5	6.5	5.2	5.5	5.6	-2.4	-4.9	-3.4	-2.7	-5.5	-7.4	-11.5	-7.8	57.0	57.8	57.7	56.9
Georgia	-3.8	6.4	5.5	5.2	1.7	7.1	9.6	5.0	4.2	3.7	4.4	4.1	-6.5	-4.8	-2.2	-2.3	-5.1	-5.4	-5.2	-3.8	37.3	39.1	36.8	38.0
Ghana	4.0	7.7	13.5	7.3	19.3	10.7	8.7	8.7	2.6	3.1	3.4	3.8	-5.8	-7.4	-4.2	-2.3	2.5	0.2	-2.2	-0.5	36.2	37.4	38.1	37.5
Grenada	-7.6	-1.4	0.0	1.0	-0.3	3.4	4.2	3.2	4.0	3.3	2.3	2.3	-5.3	-3.1	-5.3	-4.8	-11.1	-12.2	-13.6	-12.4	98.2	98.6	101.9	104.3
Guinea	-0.3	1.9	4.0	4.2	4.7	15.5	20.6	13.8	2.9	1.5	2.0	2.0	-7.2	-14.2	-12.2	1.0	-15.2	-18.0	-17.1	-6.0	77.0	88.6	85.5	82.2
Guinea-Bissau	3.0	3.5	4.8	4.7	-1.6	1.1	4.6	2.0	8.2	6.0	6.0	6.1	2.9	-0.2	-1.9	-1.6	-4.3	-4.5	-5.2	-6.7	163.8	49.0	45.1	43.5
Guyana	3.3	4.4	5.3	6.0	3.0	3.7	5.8	5.8	4.3	4.5	4.4	4.5	-3.5	-2.7	-2.4	-2.5	-1.1	0.7	-3.2	-6.7	61.2	60.2	60.4	59.3
Haiti	2.9	-5.4	6.1	7.5	3.4	4.1	7.3	8.0	2.3	5.8	5.1	4.3	-4.4	2.1	0.2	-4.6	-2.9	-0.1	-1.2	-4.7	27.7	17.1	12.6	19.0
Honduras	-2.1	2.8	3.5	3.5	8.7	4.7	7.8	7.9	2.6	2.9	3.0	3.1	-4.7	-2.9	-3.1	-2.5	0.0	-1.0	-1.6	-1.4	24.1	26.3	27.6	27.8
Kenya	2.6	5.6	5.3	6.1	10.6	4.1	12.1	7.4	3.5	3.0	3.0	3.3	-5.2	-6.0	-5.4	-4.8	-4.4	-5.7	-7.1	-6.8	47.6	50.4	51.2	50.2
Kiribati	-0.7	1.8	3.0	3.5	8.8	-2.8	7.7	5.0					-12.6	-9.1	-16.3	-16.1	-29.6	-22.4	-30.9	-26.7
Kyrgyz Republic	2.9	-1.4	7.0	6.0	6.8	7.8	19.1	9.4	4.6	3.8	4.0	3.8	-1.3	-6.1	-8.0	-7.7	4.7	2.3	-3.0	-2.7	58.0	62.6	55.2	54.6
Lao People’s Dem. Rep	7.6	7.9	8.3	8.4	0.0	6.0	8.7	6.7	2.2	2.0	1.9	2.0	-6.5	-4.2	-2.3	-1.6	-6.9	-7.4	-5.8	-4.3	61.7	60.1	55.3	52.2
Lesotho	3.1	3.6	5.1	5.1	5.9	3.4	6.5	5.1	1.7	2.3	3.4	3.1	-3.9	-4.6	-14.9	0.6	0.6	-12.5	-17.2	-2.3	38.4	34.1	38.2	41.9
Liberia	4.6	5.6	6.9	9.4	7.4	7.3	8.8	1.6	2.2	2.4	2.1	2.2	-12.0	-6.5	-3.6	-3.3	-20.8	-3.3	1.5	-0.1	194.0	13.4	13.3	14.5
Madagascar	-3.7	0.6	1.0	4.7	9.0	9.2	10.3	8.5	4.0	3.2	2.9	3.0	-3.1	-0.4	-1.3	-2.3	-11.9	-4.1	-5.3	-5.7	33.7	34.0	36.4	36.0
Malawi	9.0	6.5	4.6	4.2	8.4	7.4	8.6	11.5	0.8	1.9	1.2	0.9	-5.0	1.5	-4.2	-3.8	-4.4	-0.2	-4.3	-2.3	40.1	35.1	38.6	41.2
Maldives	-7.5	7.1	6.5	4.6	4.0	4.7	12.1	8.4	2.1	2.4	2.0	1.1	-20.8	-16.0	-15.0	-13.6	-14.7	-20.7	-19.7	-18.1	52.2	59.3	62.9	70.5
Mali	4.5	5.8	5.3	5.5	2.2	1.3	2.8	2.3	6.1	4.6	4.2	4.3	-3.3	-1.5	-2.3	-1.7	-1.2	-5.6	-5.3	-4.4	24.2	29.6	30.0	27.2
Mauritania	-1.2	5.2	5.1	5.7	2.2	6.3	6.2	6.3	1.0	1.0	1.4	1.6	-5.1	-1.9	-2.8	-3.8	-10.8	-5.2	-2.5	-3.8	101.5	86.2	62.0	64.2
Moldova	-6.0	6.9	7.0	4.5	0.0	7.4	7.9	7.8	3.9	3.6	3.8	3.9	-6.3	-2.5	-1.9	-1.2	-6.3	-5.0	-6.2	-6.4	29.1	26.6	23.6	21.7
Mongolia	-1.3	6.4	11.5	11.8	6.3	10.2	10.2	14.3	3.9	4.4	6.7	8.0	-5.0	1.2	0.9	-1.9	1.9	10.3	0.6	-4.1
Mozambique	6.3	6.8	7.2	7.5	3.3	12.7	10.8	7.2	5.2	4.6	4.4	4.6	-5.5	-3.9	-6.1	-6.8	-3.3	-2.2	-4.7	-4.2	41.5	37.8	39.0	42.7
Myanmar	5.1	5.5	5.5	5.5	8.2	8.2	6.7	3.7	4.7	4.5	5.3	7.1	-3.6	-3.9	-3.2	-2.8	1.4	1.9	2.8	4.8	44.6	42.8	45.2	47.7
Nepal	4.4	4.6	3.5	3.8	12.6	9.6	9.5	8.0	5.9	5.2	5.1	5.0	-3.0	-1.4	-2.1	-3.1	4.4	-2.2	-0.6	-0.1	39.5	35.9	33.9	33.5
Nicaragua	-1.5	4.5	4.0	3.3	3.7	5.5	8.3	8.2	3.4	3.3	3.2	3.0	-1.9	-0.5	-0.2	-0.5	-5.2	-6.7	-5.5	-8.2	80.9	80.3	77.4	76.0
Niger	-0.9	8.0	5.5	12.5	1.1	0.9	4.0	2.0	2.8	3.0	3.3	3.9	-5.5	-2.5	-2.2	-0.9	-11.1	-2.8	-10.6	-7.4	15.7	16.2	17.7	17.8
Nigeria	7.0	8.7	6.9	6.6	12.5	13.7	10.6	9.0	8.7	6.6	7.8	8.2	-10.2	-8.5	0.4	2.2	16.4	8.7	16.5	14.2	15.2	17.3	15.7	16.3
Papua New Guinea	5.5	7.0	9.0	5.5	6.9	6.0	8.4	8.7	4.4	4.3	4.8	6.0	-9.6	-0.3	1.0	0.4	-2.8	-4.7	-4.3	-3.0
Rwanda	4.1	7.5	7.0	6.8	10.3	2.3	3.9	6.5	5.4	5.2	5.8	5.2	0.3	0.4	-1.5	-3.8	-5.1	-5.2	-3.8	-8.0	23.0	23.2	24.4	26.1
Samoa	-5.1	-0.2	2.0	2.1	14.4	-0.2	2.9	3.0	6.4				-4.1	-11.3	-8.2	-5.1	-3.1	-8.1	-12.7	-13.3
São Tomé & Príncipe	4.0	4.5	5.0	6.0	17.0	13.3	11.4	7.4	4.8	3.6	5.6	5.2	-16.9	-11.0	-17.4	1.5	-18.8	-25.3	-18.6	-24.1	31.0	71.4	82.4	84.1
Senegal	2.2	4.2	4.0	4.5	-1.7	1.2	3.6	2.5	5.0	4.2	4.9	5.4	-5.0	-5.2	-6.2	-5.4	-4.7	-3.9	-5.4	-5.2	32.0	38.0	40.0	41.5
Sierra Leone	3.2	5.0	5.1	51.4	9.2	17.8	18.0	11.0	4.9	2.9	2.8	2.7	-3.2	-6.9	-5.1	-2.3	-4.4	-2.0	-7.6	-3.7	61.8	64.7	61.1	33.2
Solomon Islands	-1.2	6.5	5.6	6.1	7.1	1.0	6.0	5.0	3.3	5.7	6.4	7.0	1.6	5.9	1.7	1.5	-2.0	3.9	-4.0	-6.9	28.9	25.7	23.1	20.6
St. Lucia	-1.3	4.4	2.0	2.6	-0.2	3.3	2.5	2.5	2.7	2.9	2.8	2.8	-4.0	-5.9	-8.2	-5.8	0.5	-2.4	-7.6	-8.2	64.5	66.1	72.0	78.8
St. Vincent & Grens.	-2.3	-1.8	-0.4	2.0	0.4	0.6	2.5	1.4	2.7	4.0	3.4	3.3	-3.2	-5.7	-3.2	-3.7	-14.9	-16.1	-14.4	-12.5	64.9	66.8	69.5	71.2
Sudan	4.6	6.5	-0.2	-0.4	11.3	13.0	20.0	17.5	1.1	0.9	1.1	1.3	-4.8	-3.2	-2.8	-3.0	-8.5	-2.3	-3.1	-3.9	83.6	71.6	78.2	87.3
Tajikistan	3.9	6.5	6.0	6.0	6.5	6.5	13.6	10.0	1.4	1.6	1.7	1.8	-5.2	-3.0	-4.9	-4.2	-5.6	2.4	-2.0	-4.1	36.6	36.7	37.0	38.6
Tanzania	6.7	6.4	6.1	6.1	11.8	10.5	7.0	9.4	5.0	4.8	4.2	4.2	-4.8	-7.0	-8.5	-6.5	-8.2	-6.9	-6.7	-8.0	37.1	40.1	45.0	48.9
Timor Leste, Dem. Rep. o	12.9	6.0	7.3	8.6	0.1	4.9	10.5	6.0	2.9				239.3	238.6	210.2	179.3	245.4	227.1	196.9	167.6
Togo	3.2	3.7	3.8	4.4	1.9	3.2	4.0	2.8	4.9	4.0	3.3	3.1	-2.8	-1.6	-3.9	-4.1	-6.3	-6.5	-6.8	-6.7	67.8	32.3	27.6	27.3
Tonga	-0.3	0.3	1.4	1.7	3.4	4.0	5.9	4.8					-2.6	-3.6	-3.2	-3.5	-11.1	-9.4	-11.3	-11.2
Uganda	7.2	5.2	6.4	5.5	14.2	9.4	6.5	16.9	6.3	5.9	4.6	4.3	-2.4	-5.0	-7.6	-6.5	-3.1	-4.2	1.4	-2.2	22.2	23.6	23.0	25.3
Uzbekistan	8.1	8.5	7.1	7.0	14.1	9.4	13.1	11.8	11.1	9.7	12.9	15.8	3.1	2.7	3.3	4.6	4.7	10.8	11.2	10.3	11.0	10.0	12.6	14.0
Vanuatu	3.5	2.2	3.8	4.2	4.3	2.8	2.2	2.9	4.8	4.7	4.4	4.1	-0.7	-2.7	-1.3	-0.9	-4.0	-3.0	-3.6	-4.4
Vietnam	5.3	6.8	5.8	6.3	6.7	9.2	18.8	12.1	2.3	1.4	1.5	2.2	-9.0	-5.7	-4.0	-3.8	0.8	2.1	1.6	2.4	51.2	52.8	50.3	48.1
Yemen, Republic of	3.9	8.0	-2.5	-0.5	3.7	11.2	19.0	18.0	7.7	5.5	3.3	1.9	-10.2	-4.0	-7.1	-6.1	-10.9	-7.1	-8.2	-7.1	49.9	40.6	42.9	44.4
Zambia	6.4	7.6	6.7	6.7	13.4	8.5	9.1	7.5	4.0	3.3	3.5	3.9	-2.6	-3.1	-3.1	-6.0	7.5	8.4	9.9	7.4	25.6	24.6	25.1	28.7
Medians
All LICs	3.3	5.4	5.2	5.5	4.6	5.0	7.8	5.9	4.3	3.9	4.0	3.9	-4.1	-2.9	-3.1	-2.9	-4.1	-3.3	-4.3	-4.4	41.5	39.1	40.0	41.5
Sub-Saharan Africa	3.6	5.5	5.1	5.8	6.6	4.5	6.5	6.0	4.9	3.9	3.9	4.1	-4.3	-3.9	-3.8	-2.9	-4.4	-4.2	-5.2	-5.1	37.8	35.9	38.4	36.7
Asia	4.4	6.4	6.3	6.1	6.3	6.0	8.4	5.6	4.2	4.3	4.6	4.7	-3.6	-2.9	-2.3	-2.8	-2.0	-2.2	-3.6	-4.1	47.9	47.8	47.8	47.9
Middle East and Europe	3.4	6.4	5.3	5.2	3.6	7.3	11.3	8.6	4.4	3.8	3.9	3.9	-5.2	-3.1	-2.8	-3.1	-6.0	-3.7	-3.3	-3.8	45.0	39.9	42.2	42.9
Latin American and Car	-1.3	2.8	3.5	3.3	3.0	3.4	5.8	4.8	3.4	3.4	3.2	3.1	-3.5	-2.7	-2.4	-2.5	-2.9	-2.4	-5.5	-8.2	61.2	60.2	60.4	59.3
Net oil exporters	4.6	7.9	3.8	6.6	4.3	6.0	8.4	6.7	4.6	5.1	4.8	4.7	-6.5	-3.2	-1.4	-0.4	-1.8	-2.3	-1.9	-1.5	53.5	36.6	36.3	37.1
Net oil importers	3.2	5.2	5.3	5.5	4.7	4.9	7.7	5.8	4.1	3.8	3.9	3.9	-4.0	-2.9	-3.2	-3.1	-4.4	-3.3	-5.2	-5.0	40.5	39.1	40.0	41.5

Sources: WEO database, and IMF staff calculations.

^¹Next year’s imports of goods and services.

	GDP growth in percent				Inflation in percent				International Reserves months of imports¹				Fiscal Balance in percent of GDP				Current Acc. Balance incl. FDI in percent of GDP				Gross Public Debt in percent of GDP
	2009	2010	2011	2012	2009	2010	2011	2012	2009	2010	2011	2012	2009	2010	2011	2012	2009	2010	2011	2012	2009	2010	2011	2012
Afghanistan, I.S. of	20.9	8.2	7.1	7.2	-12.2	7.7	8.4	3.2					-1.6	0.9	0.0	-1.8	-0.2	4.8	1.5	-1.3
Armenia	-14.1	2.1	4.6	4.3	3.5	7.3	8.8	3.3	5.7	4.7	4.5	4.2	-7.7	-4.9	-3.8	-3.1	-7.4	-7.8	-5.5	-4.6	40.2	39.2	41.5	41.4
Bangladesh	5.9	6.4	6.3	6.1	5.4	8.1	10.1	7.4	4.1	3.6	3.0	2.5	-3.5	-2.9	-3.2	-4.4	4.3	3.0	0.8	0.1
Benin	2.7	2.6	3.8	4.3	2.2	2.1	2.8	3.0	7.7	7.0	6.4	5.9	-3.3	-0.4	-1.7	-1.6	-7.4	-5.1	-6.0	-5.2	28.3	31.1	30.8	30.5
Bhutan	6.7	8.3	8.1	8.5	8.6	7.0	6.5	5.0	13.3	12.7	12.2	12.2	2.1	2.4	-4.3	-6.4	-8.0	-3.3	-9.5	-14.8	64.1	66.0	76.0	89.1
Bolivia	3.4	4.1	5.0	4.5	3.3	2.5	9.8	4.8	14.9	14.9	15.1	16.1	0.6	2.0	1.8	1.2	7.1	6.8	5.9	6.1	40.5	36.6	32.4	31.4
Burkina Faso	3.2	7.9	4.9	5.6	2.6	-0.6	1.9	2.0	6.4	5.9	6.5	6.8	-5.3	-5.8	-4.3	-3.1	-3.1	-3.1	-1.5	-5.1	26.1	27.1	29.1	29.9
Burundi	3.5	3.9	4.2	4.8	10.7	6.4	8.7	12.5	5.0	4.9	4.8	5.1	-8.6	-3.9	-3.1	-3.1	-15.3	-12.5	-15.5	-16.2	48.2	50.0	49.0	44.2
Cambodia	-2.0	6.0	6.7	6.5	-0.7	4.0	6.4	5.6	4.3	3.9	4.0	4.5	-4.1	-2.9	-2.2	-2.4	-0.4	2.5	-1.7	0.6	28.7	29.9	29.2	28.8
Cameroon	2.0	3.2	3.8	4.5	3.0	1.3	2.6	2.5	6.2	5.5	5.3	4.8	-0.1	-1.1	-1.4	-0.4	-1.8	-0.9	-1.9	-1.5	10.6	12.1	14.5	14.7
Cape Verde	3.7	5.4	5.6	6.4	1.0	2.1	5.0	4.9	4.0	3.5	3.1	3.4	-6.3	-10.6	-10.2	-9.0	-7.7	-4.5	-7.1	-5.8	68.6	73.2	73.9	78.3
Central African Rep.	1.7	3.3	4.1	5.0	3.5	1.5	2.8	2.6	5.1	3.9	3.6	3.8	-0.1	-0.8	-2.0	0.2	-6.0	-7.0	-5.3	-5.0	36.8	41.9	37.0	32.8
Chad	-1.2	13.0	2.5	6.9	10.1	-2.1	2.0	5.0	1.1	1.3	2.1	3.1	-9.9	-5.2	2.3	2.5	5.3	-8.6	0.7	-0.5	30.5	32.6	29.8	29.7
Comoros	1.8	2.1	2.2	3.5	4.8	2.7	5.8	3.3	5.3	5.4	4.8	4.6	2.7	2.1	-1.6	-0.9	-6.4	-8.3	-12.0	-10.8	55.3	51.8	47.1	42.9
Congo, Dem. Rep. of	2.8	7.2	6.5	6.0	46.2	23.5	14.8	12.5	0.5	1.2	1.3	1.5	-5.2	1.2	-7.7	-6.2	-1.2	4.6	5.1	9.6	124.3	33.8	46.6	50.5
Congo, Republic of	7.5	8.8	5.0	7.0	4.3	5.0	5.9	5.2	7.0	6.5	12.6	18.5	4.8	16.0	19.5	20.3	12.0	23.5	26.2	27.9	57.2	23.8	22.0	22.2
Côte d’Ivoire	3.8	2.4	-5.8	8.5	1.0	1.4	3.0	2.5	4.6	5.1	4.9	4.7	-1.6	-2.3	-6.4	-3.8	9.0	6.6	2.5	1.1	67.0	66.8	70.0	54.8
Djibouti	5.0	3.5	4.8	5.1	1.7	4.0	7.1	1.9	5.8	4.6	4.3	4.2	-4.6	-0.5	0.4	0.0	0.4	-2.4	-3.5	1.8	59.8	56.1	53.7	53.6
Dominica	-0.7	0.3	0.9	1.5	0.0	3.3	4.2	1.9	3.5	3.4	3.2	3.1	-0.2	-2.6	-1.8	-1.4	-12.7	-15.2	-15.6	-14.2	53.4	55.1	55.9	55.8
Eritrea	3.9	2.2	8.2	6.3	33.0	12.7	13.3	12.3	1.7	2.0	2.1	2.9	-14.7	-16.1	-16.2	-13.5	-2.7	-1.3	2.2	4.8	145.7	144.8	134.4	127.6
Ethiopia	10.0	8.0	7.5	5.5	36.4	2.8	18.1	31.2	2.2	2.3	2.8	2.4	-0.9	-1.3	-2.1	-4.0	-2.3	-1.1	-2.9	-6.0	32.2	36.7	39.4	34.1
Gambia, The	6.7	6.1	5.5	5.5	4.6	5.0	5.9	5.5	6.5	5.2	5.5	5.6	-2.4	-4.9	-3.4	-2.7	-5.5	-7.4	-11.5	-7.8	57.0	57.8	57.7	56.9
Georgia	-3.8	6.4	5.5	5.2	1.7	7.1	9.6	5.0	4.2	3.7	4.4	4.1	-6.5	-4.8	-2.2	-2.3	-5.1	-5.4	-5.2	-3.8	37.3	39.1	36.8	38.0
Ghana	4.0	7.7	13.5	7.3	19.3	10.7	8.7	8.7	2.6	3.1	3.4	3.8	-5.8	-7.4	-4.2	-2.3	2.5	0.2	-2.2	-0.5	36.2	37.4	38.1	37.5
Grenada	-7.6	-1.4	0.0	1.0	-0.3	3.4	4.2	3.2	4.0	3.3	2.3	2.3	-5.3	-3.1	-5.3	-4.8	-11.1	-12.2	-13.6	-12.4	98.2	98.6	101.9	104.3
Guinea	-0.3	1.9	4.0	4.2	4.7	15.5	20.6	13.8	2.9	1.5	2.0	2.0	-7.2	-14.2	-12.2	1.0	-15.2	-18.0	-17.1	-6.0	77.0	88.6	85.5	82.2
Guinea-Bissau	3.0	3.5	4.8	4.7	-1.6	1.1	4.6	2.0	8.2	6.0	6.0	6.1	2.9	-0.2	-1.9	-1.6	-4.3	-4.5	-5.2	-6.7	163.8	49.0	45.1	43.5
Guyana	3.3	4.4	5.3	6.0	3.0	3.7	5.8	5.8	4.3	4.5	4.4	4.5	-3.5	-2.7	-2.4	-2.5	-1.1	0.7	-3.2	-6.7	61.2	60.2	60.4	59.3
Haiti	2.9	-5.4	6.1	7.5	3.4	4.1	7.3	8.0	2.3	5.8	5.1	4.3	-4.4	2.1	0.2	-4.6	-2.9	-0.1	-1.2	-4.7	27.7	17.1	12.6	19.0
Honduras	-2.1	2.8	3.5	3.5	8.7	4.7	7.8	7.9	2.6	2.9	3.0	3.1	-4.7	-2.9	-3.1	-2.5	0.0	-1.0	-1.6	-1.4	24.1	26.3	27.6	27.8
Kenya	2.6	5.6	5.3	6.1	10.6	4.1	12.1	7.4	3.5	3.0	3.0	3.3	-5.2	-6.0	-5.4	-4.8	-4.4	-5.7	-7.1	-6.8	47.6	50.4	51.2	50.2
Kiribati	-0.7	1.8	3.0	3.5	8.8	-2.8	7.7	5.0					-12.6	-9.1	-16.3	-16.1	-29.6	-22.4	-30.9	-26.7
Kyrgyz Republic	2.9	-1.4	7.0	6.0	6.8	7.8	19.1	9.4	4.6	3.8	4.0	3.8	-1.3	-6.1	-8.0	-7.7	4.7	2.3	-3.0	-2.7	58.0	62.6	55.2	54.6
Lao People’s Dem. Rep	7.6	7.9	8.3	8.4	0.0	6.0	8.7	6.7	2.2	2.0	1.9	2.0	-6.5	-4.2	-2.3	-1.6	-6.9	-7.4	-5.8	-4.3	61.7	60.1	55.3	52.2
Lesotho	3.1	3.6	5.1	5.1	5.9	3.4	6.5	5.1	1.7	2.3	3.4	3.1	-3.9	-4.6	-14.9	0.6	0.6	-12.5	-17.2	-2.3	38.4	34.1	38.2	41.9
Liberia	4.6	5.6	6.9	9.4	7.4	7.3	8.8	1.6	2.2	2.4	2.1	2.2	-12.0	-6.5	-3.6	-3.3	-20.8	-3.3	1.5	-0.1	194.0	13.4	13.3	14.5
Madagascar	-3.7	0.6	1.0	4.7	9.0	9.2	10.3	8.5	4.0	3.2	2.9	3.0	-3.1	-0.4	-1.3	-2.3	-11.9	-4.1	-5.3	-5.7	33.7	34.0	36.4	36.0
Malawi	9.0	6.5	4.6	4.2	8.4	7.4	8.6	11.5	0.8	1.9	1.2	0.9	-5.0	1.5	-4.2	-3.8	-4.4	-0.2	-4.3	-2.3	40.1	35.1	38.6	41.2
Maldives	-7.5	7.1	6.5	4.6	4.0	4.7	12.1	8.4	2.1	2.4	2.0	1.1	-20.8	-16.0	-15.0	-13.6	-14.7	-20.7	-19.7	-18.1	52.2	59.3	62.9	70.5
Mali	4.5	5.8	5.3	5.5	2.2	1.3	2.8	2.3	6.1	4.6	4.2	4.3	-3.3	-1.5	-2.3	-1.7	-1.2	-5.6	-5.3	-4.4	24.2	29.6	30.0	27.2
Mauritania	-1.2	5.2	5.1	5.7	2.2	6.3	6.2	6.3	1.0	1.0	1.4	1.6	-5.1	-1.9	-2.8	-3.8	-10.8	-5.2	-2.5	-3.8	101.5	86.2	62.0	64.2
Moldova	-6.0	6.9	7.0	4.5	0.0	7.4	7.9	7.8	3.9

Topics

Countries

Series

About

Resources

Abstract

I. Macroeconomic Situation

II. Vulnerability Analysis

A. How Vulnerable are LICs Currently?

B. How Would a Sharp Downturn in Global Growth Affect LICs?

C. How Would Another Spike in Global Commodity Prices Affect LICs?

D. Conclusions from the Vulnerability Analysis

III. Macroeconomic Policy Challenges

A. Rebuilding Policy Buffers

B. Policy Challenges in the Event of a Sharp Downturn in Global Growth

Fiscal policy

Monetary and exchange rate policy

C. Policy Challenges in the Event of Global Commodity Price Spikes

Fiscal policy

Monetary and exchange rate policy

D. How Can Development Partners Help Mitigate Shocks?

Appendix I. List of Low-Income Countries (LICs)

Appendix II. Selected Economic Indicators