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Friday, 7 August 2009

IFIs are back...

Important reading from the Standard Chartered Global Research on the rapid growth of IFI concessional- term funding in the wake of the global recession :

Many Sub-Saharan African (SSA) economies have been severely affected by the global economic downturn. Experiences differ across the spectrum of SSA economies, but, in general, current account and fiscal balances – which saw several years of steady improvement on the back of improved macroeconomic management, debt relief and favourable external demand – have deteriorated.

In response, the key international financial institutions (IFIs) are ramping up their support. Given less foreign investor interest in ‘frontier’ markets, the shallowness of domestic capital markets, and the risks to official bilateral funding posed by the severity of the global recession, such IFI involvement is important to the macroeconomic outlook for Africa in the near to medium term. Here, following our recent discussion of these issues (see SCB Global Focus, 9 July 2009 ‘On growth, green shoots and stabilisation’), we evaluate the scale of IFI financial support and its possible impact. On the whole we see IFIs playing a positive role in preserving a supportive macro framework for private capital by bolstering FX reserve buffers, minimising public spending disruptions, and alleviating the public financing burden on domestic capital markets.

IFI financial assistance has grown quickly

Global lending commitments by the World Bank Group reached a record USD 58.8bn at its financial year-end in June. Lending commitments to Africa by the World Bank stood at USD 8.1bn (almost all of it in the form of concessional loans from the International Development Agency [IDA]). This is a 44% rise compared with World Bank IDA and International Bank for Reconstruction and Development (IBRD) funding to Africa as at the end of the previous, 2008, fiscal year (Chart 1).

The leading regional concessional-term lender in Africa, the African Development Bank (AfDB) has also boosted funding. In addition to its usual African Development Fund (ADF) allocations, the AfDB has launched a new Emergency Liquidity Facility (ELF), and is a key participant in the Global Trade Finance Liquidity Programme (GTFL), administered by the IFC. Approved AfDB loans totalled USD 3.5bn at the organisation’s last financial year end (December 2008) – also on Chart 1. Subsequently, loan growth has continued; notable deals include USD 1.5bn in budget support to Botswana in the institution’s biggest ever single loan, and the provision of USD 200mn in credit lines to two Nigerian banks.

IMF lending facilities to Africa on concessional terms plummeted in 2005 following the Multilateral Debt Reduction Initiative, or MDRI (Chart 2). Today, the value of concessional loan facilities extended by the IMF to SSA economies totals about USD 4.2bn, roughly half of which has not yet been drawn down (USD 1.9bn). The IMF’s lending commitment to Africa has more than doubled over the year to June 2009. Most of this is in the form of the IMF’s Poverty Reduction and Growth Facility (PRGF), though financing under the related Exogenous Shocks Facility has become increasingly important too.

Chart 1: World Bank and AfDB Funding commitments to SSA have risen rapidly

Chart 2 : IMF concessional term credit (PRGF + ESF) still below MDRI levels, but growing

IFI assistance looks set to continue growing

All indications are that IFI inflows will continue to grow. The April G-20 summit in London resolved to use IMF gold sales to boost lending to poor countries by USD 6bn over the next two to three years. The IMF has just announced a target of USD 17bn in lending to low-income countries (LICs) through to 2014. Much of this is likely to go to Africa (we calculate that well over 80% of current PRGF and ESF lending is to SSA). A new set of lending facilities for LICs – essentially facilitating rapid disbursement and reducing loan conditionalities – will also become effective later in 2009. In May, multilateral lenders, led by the World Bank, pledged an additional USD 15bn in financial crisis response funding. This included the ‘fast-tracking’ of IDA commitments, and a general front-loading and acceleration of disbursements.

The concessional nature of new lending complicates the funding challenge for the IMF, in particular (which usually lends on market terms). However, Africa also stands to benefit from a new IMF Special Drawing Right (SDR) allocation. Slated to occur in late August 09, this should boost global FX reserves by about USD 250bn. We calculate that the SSA allocation is worth USD 10.8bn, providing a substantial boost to many countries’ reserves (Chart 3). Unlike much World Bank and AfDB lending (but as with all IMF lending) the impending SDR allocation does not represent budget support. Countries will, however, be able to convert their allocation into tradable currency to fund FX liabilities in the current or capital accounts of their balance of payments (albeit at some funding cost).

Chart 3: Upcoming IMF SDR allocations as % of current FX reserves (Top 25 beneficiaries)

Not all IFI assistance is created equal, but the amounts are material

Considering the financial assistance of the IFIs in aggregate poses difficulties. World Bank and AfDB assistance comprises mostly finance for targeted anti-poverty spending programmes and development projects (notably infrastructure). IMF funding is a form of macroeconomic management assistance, aiming to stabilise countries’ external positions. Assistance is not, generally, a ‘free lunch’ – it consists mainly of credit (albeit on highly concessional terms), not grants; and repayment terms, conditionalities and disbursement timetables vary. Table 1 provides details. Certainly, however, most funding appears cheap. Notably, for LICs, the IMF has announced interest payment relief on concessional loans until 2011. And, while conditionality varies by country, the days of ‘austerity’ packages are gone; on the contrary, the IMF has actively encouraged counter-cyclical policy responses to the crisis. Where funds are disbursed in tranches this may appear, superficially, to be less desirable than an immediate, one-off shot in the arm. But a multiple-tranche financing structure can play a valuable role in signalling the sustainability of policy stances.

Quantifying the degree to which such support acts as a boost to balance of payments positions and public financing requirements must be done on a country-by-country basis, with external trade composition, access to alternative sources of finance, and other domestic circumstances playing a role. Considered in combination, however, the increased IFI funding – amounting to tens of billions of dollars – is material. For context (and with the caveat that assumptions and potential errors in these forecasts abound), it can be compared with the IMF’s April 2009 WEO estimate of a collective SSA current account deficit of almost USD 70bn in 2009 (improving to -USD 47bn in 2010); or, similarly, an aggregate budget balance of SSA economies which is projected to swing into a deficit of around USD 33bn this year, following a surplus of USD 19bn in 2008 (with oil exporters accounting for the bulk of the deterioration) Calculation based on recent rating agency and OECD/AfDB/UN ‘African Economic Outlook (2009)’ forecasts, and national sources. .


The figures we have presented provide an idea of the scale of IFI assistance inflows to SSA. These are:
  • Rising substantially (albeit off a low base, in the case of the IMF).
  • Of material size relative to the expected external financing requirements generated by current account and fiscal deficits. They are, however, far from sufficient to plug the gaps fully. Government belt-tightening, increased domestic funding burdens, and (where possible) exchange rate adjustments, are inevitable. In many instance, these are already well underway.
  • Likely to continue rising given the increased funding available to the IFIs.
Increased IFI engagement is neither a free lunch nor a panacea. But by boosting FX inflows and available resources, it is helping to stabilise balance of payments positions, minimise macro-policy dislocation and should help to preserve development spending in the face of a cyclical downturn. For markets, any stigma that may in the past have been attached to countries seeking IFI support should not in general be a concern: SSA faces headwinds not as a result of domestic policy failures, but of external forces, and extraordinary public interventions have been a feature of the economic crisis globally. A watchful eye should be kept on the mounting long-term obligations of governments tapping IFI resources (though it is reassuring that loan terms are concessional, and debt sustainability is taken into account in IFI lending decisions). It also remains to be seen how increased IFI engagement affects the policy stance of African governments in the future, and how private capital flows will pick up as the global economy recovers. The nature and impact of IFI involvement varies markedly across countries. But market participants will want to take note that, for better or worse, the IFIs are back.

Table 1: Key IFI concessional lending facilities

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