HomeHuge Budget Shortfalls For Developing Countries in 2009
In this coming fiscal year, developing countries around the globe could potentially face a huge gap in financing which would in turn deal a blow to infrastructure development and poverty alleviation initiatives.
According to the World Bank,
Developing countries face a financing shortfall of $270-700 billion this year, as private sector creditors shun emerging markets, and only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty
This is especially grim news for many African governments that rely on Direct Budgetary Support from the WB, IMF and other private donor institutions to run government programs and payroll. According to UNCTAD, it represents about 30% of central government spending in countries of Sub-Saharan Africa.
The long term effects caused by the current global financial crisis could be even more dire for developing economies:
Debt issuance by high-income countries is set to increase dramatically, crowding out many developing country borrowers, both private and public. Many institutions that have provided financial intermediation for developing country clients have virtually disappeared.
Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future.
The concern now is that aid flows will become more volatile as some countries cut their aid budgets while others reaffirm aid commitments, at least for this year.
African nations will be scrambling to gain access to credit and it is during these times of desperation that less-than-favorable loan agreements are reached:
Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future.
World Bank Chief Economist and Senior Vice President Justin Yifu Lin makes the argument that developing countries should spend some of their fiscal stimulus in developing nations:
Clearly, fiscal resources do have to be injected in rich countries that are at the epicenter of the crisis, but channeling infrastructure investment to the developing world where it can release bottlenecks to growth and quickly restore demand can have an even bigger bang for the buck and should be a key element to recovery.
How this overture will be received by other large economies remains to be seen, but with the US having included a Buy American provision in the American Recovery and Reinvestment Act 2009 a.k.a the Stimulus Bill, I’m not holding my breath yet.
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