DFID Annual Report 2008 - International Development Committee Contents


Supplementary memorandum submitted by the Department for International Development

12 November 2008

  At the IDC oral evidence session on the 30 October, you requested analysis on the impact of the financial crisis on countries where my Department has particularly large programmes. We have undertaken a preliminary analysis of the vulnerability of our Public Service Agreement (PSA) countries, most of which are low-income countries, focused on the impact of both the immediate financial crisis and the global slowdown.

  Some emerging economies are directly impacted by the global economic downturn and have had to seek support to avert a financial crisis. Low income countries and most of the PSA countries have suffered less direct impact, but are experiencing a drying up of short term and trade credits, which curtail trade and raise production costs. To date, Pakistan is the only PSA country that has had to go to the IMF for emergency support.

  I am also concerned about the impact of the recession in Europe and the US on poverty reduction and growth in our PSA countries. The IMF has revised down its growth projections for low income countries. Sub Saharan Africa is now expected to grow by 5.5% and 5.1% in 2008 and 2009 respectively, compared to projections of 6.1% and 6.3% for 2008 and 2009 made in its October World Economic Outlook. Similarly, Developing Asia is expected to grow at 8.3% and 7.1% in 2008 and 2009 respectively, compared to earlier projections of 8.4% and 7.7% for 2008 and 2009.

  We expect slower world growth to hit hardest the PSA countries that are heavily dependent on world markets for capital or export sales. But, where policies are sound, we do not expect the consequences to be massive. However, where reserves are low, fiscal and foreign balances weak and debt high, the dangers are significant. A particular threat is inflation with 17 out of 24 PSA countries having inflation rates of over 10% in the last year. Preliminary analysis has identified several PSA countries vulnerable in several of the above dimensions—for example, Ethiopia, Rwanda and Cambodia.

  Governments will need to adjust fiscal and monetary policies to minimise the impact on growth and protect the poorest, for example through safety nets and access by the poor to credit. Maintaining a competitive exchange rate is important for countries suffering from a negative shock to their export markets. But closing their own markets will not be helpful.

  Our bi-lateral programmes will help PSA countries make adjustments needed, while protecting the poor and keeping up budget expenditures on health and education. My department is prepared to consider reallocations or increases in country level aid budgets to help, if this is needed. In Malawi we are already proposing to bring forward £5 million in budget support so the government can continue pro-poor spending.

  However, the main response to the crisis needs to be multilateral. We will strongly support the IMF and World Bank in financial stabilisation and emergency lending. We will also maintain our ODA commitments and respond to partner governments who need to re-prioritise the use of aid resources. Other donors should be pressed to do the same.

  I also undertook to provide information on our evolving ideas for a Global Partnership for Agriculture and Food (GPAF), specifically with regard to how many countries might participate, and when the international community might achieve its ambition of doubling agricultural productivity in Africa. Ultimately there should be no limit to the number of developing countries who might sign up to the GPAF. But realistically, given that it will take a little time for consultations to conclude in relation to the development of agreed national strategies in agriculture and food security, we envisage perhaps 20 developing countries joining in the first raft by the end of 2009. Thereafter, countries will join as and when national strategies are agreed.

  On target dates for doubling agricultural productivity in Africa, or for doubling the rate of agricultural growth in Asia, I am keen to see clear and monitorable targets set for each country at the time it joins so that those making commitments to achieve these targets (both donors and developing country governments) can be held to account. To be worthwhile such targets need to be ambitious, and in the appropriate circumstances I see no reason why these targets should not be set at 2015, or as soon as possible thereafter.

Douglas Alexander







 
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