The International Monetary Fund doubled the borrowing limits of the poorest countries on Thursday after its sister organization, the World Bank, warned that the global economic crisis could push nearly 50 million people further into poverty this year if financing needs are not met.
“This crisis could have catastrophic implications,” IMF Managing Director Dominique Strauss-Kahn warned in a speech. “As many as 3 million additional children may die between now and 2015 if the crisis persists. We could witness social unrest, political instability and even war.”
With the collapse of world trade, commodity prices and remittances from abroad, many low-income countries have been severely affected by the deepest global recession since the Great Depression.
In addition, emerging and developing countries “are facing a sharp reversal in capital inflows,” IMF chief economist Olivier Blanchard said earlier this week. “The source is, again, the financial crisis in advanced countries and the general increase in risk aversion which the crisis has triggered.”
Mr. Strauss-Kahn said many affected low-income countries “had sound policies and solid fundamentals, and were largely innocent bystanders of the crisis.”
In the past, the IMF required borrowing countries to follow stringent conditions, which often exacted a severe toll on the most vulnerable. Today, Mr. Strauss-Kahn said, “the IMF remains committed to protecting the poorest and most vulnerable.” He cited several examples, including Ukraine and Pakistan, where recent IMF programs required “sizable increases in social spending in the midst of serious and needed efforts to cut deficits.”
Not everybody agrees. Mark Weisbrot, co-director of the liberal Center for Economic and Policy Research, has examined 10 IMF agreements since September. “Despite the recession, all had cuts in spending and some required increases in interest rates. And they had other conditions to make it more difficult to raise demand during the recession,” he said.
While the ultimate solution lies in the repair of the financial systems of advanced countries, this will happen “slowly, at best,” Mr. Blanchard said. “Meanwhile, a number of countries are likely to face serious balance-of-payments problems.”
The Group of 20 industrialized and emerging-market nations recognized these problems at the London economic summit early this month.
In addition to pledging to triple the IMF’s lending capacity to $750 billion, the G-20 asked the IMF to provide an additional $6 billion in concessional funding to low-income nations over the next two to three years, Mr. Strauss-Kahn explained in his speech Thursday at the Center for Global Development at the Johns Hopkins School of Advanced International Studies.