Contrary to the positive picture painted by the International Monetary Fund in its 2010 World Economic Outlook, poor countries are being forced to cut back on their economic crisis-response spending too soon, international agency Oxfam said today.
The IMF’s 2010 World Economic Outlook finds that “Sub-Saharan Africa is weathering the global crisis well.”
Oxfam spokesperson Elizabeth Stuart said: “The IMF’s overly-optimistic attitude is based on a measurement of growth rates, not on what poor countries are having to do – which is cut budgets. Poor countries are cutting vital spending to bail themselves out. This is exactly the opposite of what’s needed. The IMF must work with developing country governments to help them ramp up rather than cut health or education spending.”
New budget data from 56 poor countries surveyed by Oxfam - including detailed breakdowns of social spending in just over half of these countries - shows that poor countries have had to slash education, health, agriculture and social protection spending.
- Budgets in 2010 are being cut on average by 0.2% of GDP.
- Two thirds of the countries for which social spending details are available (18 out of 24) are cutting budget allocations on one or more of the priority social sectors of education, health, agriculture and social protection.
- Education and social protection are particularly badly affected, with average spending levels in 2010 lower even than those in 2008.
Rich countries are failing to provide the support needed to prevent these cuts. Oxfam has found that the economic crisis has left 56 poor countries with a combined ‘fiscal hole’ (that is, a shortfall in budgetary revenue) of $65bn in 2009 and 2010. Despite promises by the G20 and donor countries to help poor nations survive the crisis, just 13 percent of this revenue gap has been filled by grants. Given this failure by the international community, poor countries were forced to resort to expensive domestic borrowing to finance spending in 2009; now they are cutting spending prematurely to avoid a new debt crisis.
This comes on the heels of the OECD’s report that development aid fell $3.5 billion in 2009, and World Bank calculations that 50,000 more children in Sub-Saharan African countries may have died last year because of the financial crisis.
“The world’s attention is on bailing out Greece to prop up European financial markets, but it should also be on helping the poorest who have been saddled with a crisis not of their own making,” said Stuart.
“The IMF has said a Financial Transaction Tax is possible. The G20 now needs to deliver it. At rates of around 0.05% per currency transaction, a tax would raise hundreds of billions of dollars annually. Otherwise, this poor country fiscal gap risks becoming a black hole into which the education, health and future prospects of the world's poorest will disappear,” said Stuart.
Notes to editors
New research on poor country fiscal hole
These preliminary findings are drawn from forthcoming research commissioned by Oxfam from Development Finance International which has examined the impact of the economic crisis on budgets in 56 low income countries over 2009 and 2010.
Findings on the fiscal hole in low income countries:
- The financial crisis reduced the budget revenues of the low income countries surveyed by more than $52bn in 2009, and $12bn in 2010, compared to 2008, resulting in a fiscal hole of $65bn.
- For half of all low income countries analyzed, revenues will still be below 2008 levels by the end of 2010.
- Due to falls in direct taxes, countries have had to rely more on indirect taxes on consumption. Consumption taxes, for example VAT, are typically regressive ie they hit the poor hardest.
Countries’ response to the fiscal hole:
- In 2009, countries responded to the fiscal hole by borrowing, or running down reserves so as to maintain or increase spending. They also managed to mobilize some additional grants, however the amounts were wholly inadequate (see below).
- However, due to lack of aid and concerns about debt levels, many countries are having to cut vital spending in 2010.
- Initially, sub-Saharan African countries that had an IMF programme were best able to cope, having the financial and policy support to increase spending. Of the Sub-Saharan African countries that had an IMF programme, three-quarters of them increased spending in 2009, and most of that was poverty-related spending.
- But in 2010, countries with an IMF programme are having to exit from their fiscal stimulus slightly faster than countries without a programme, cutting spending in 2010 by 0.1% more of GDP. Half of the countries in Sub Saharan Africa with an IMF programme are cutting spending in 2010. For other, non African, low income countries with an IMF programme, this figure rises to 75%. This is at a time when developing countries need to massively increase spending if they are to meet the MDGs.
- Examples of countries with an IMF programme that increased poverty-reducing spending in 2009 were Burkina Faso and Cameroon, which both increased health and education spending; Sierra Leone and Zambia, which increased education spending: and Guinea-Bissau which increased health spending.
- For the 56 countries, the average spending cut in 2010 is 0.2 per cent of GDP.
International community response to the drop in revenues:
- The international community is providing only $8.2bn of additional grants in 2009 and 2010, which is woefully inadequate to fill a fiscal hole of $65bn, plugging just 13 per cent of the revenue gap. Just one third of countries foresee an increase in grants in 2010.
- External financing in total (including loans) is estimated to have filled less than one third (US$20 billion) of this fiscal hole.
- The OECD reported a fraction of an increase in 2009 aid levels in real terms from $122 – 123 billion, a rise of 0.7%. However, when compared with last year’s prices, aid has fallen by $3.5 billion. Donor countries remain well off-track on their aid commitments, which have risen from just 0.30% 2008 to only 0.31% in 2009.
Download the OECD report on aid
Rising debt - especially domestic borrowing:
- Because the international community reacted to the crisis too slowly and with far too little money, in 2009 three quarters of low income countries were forced to borrow more from expensive domestic markets.
- Though most external loans were cheap, the crisis has exacerbated risks of external and especially domestic debt problems for low-income countries.
- Though the IMF responded reasonably quickly to the crisis by disbursing loans, its rules must be changed so that it can give grants to poor countries to combat shocks.
- It also needs to reduce the burden of its economic policy conditions further, to make it a more attractive funder of last resort in the event of global and national crises.
- The IMF agreed in 2008 that it would sell a portion of its gold holdings to create an endowment to generate income for its activities. The IMF sold the first half of this gold, about 212 tonnes, in 2009. The profits from the first half of these sales exceeded what was initially projected.
- This windfall (defined as any profit above $850/oz) was equivalent to almost $1.44 billion, according to the IMF. The IMF’s Board agreed in late 2009 that a portion of this windfall, almost $900 million, would be made available for lending to low income countries. The remaining $500 million has not been committed and is considered “excess” windfall profits.
- The Fund expects that it will realize further “excess” windfall profits when it sells the remaining 191 tonnes. In total the “excess” windfall profits may amount to $1.4 billion depending on the market price of gold. This “excess” windfall amount could be invested in an endowment, along with other resources, to generate income for grants.
Financial Transaction Tax:
The IMF has produced its preliminary report on a financial sector tax for G20 finance ministers, in response to G20 leaders’ request last year to review how the financial industry can help pay for efforts to repair the banking system. While the FTT was not the IMF’s preferred option, the report said it was technically feasible.
Oxfam’s view is that any tax agreed by the G20 must raise at least $200 billion annually to help pay for the impact of the crisis on the poorest, and to fight climate change. A financial transaction tax is the best route to achieve this - at rates of around 0.05%, the FTT could raise at least $400bn dollars annually.