Speech

IMF High-Level Seminar “Commodity Price Volatility and Inclusive Growth in Low-Income Countries”, Opening Remarks by Christine Lagarde - Managing Director, International Monetary Fund

September 21, 2011

As prepared for delivery

Video of the speech

It is my great pleasure to welcome you to the Fund for what I consider to be a very important seminar on low-income countries.

The caliber of those joining us here today—including two Nobel laureates, representatives from leading civil society organizations, and top policymakers—speaks to the critical nature of the issues that you will be discussing.

I want to touch on four points this morning: the great progress made by low-income countries over the past decade, and the new risks they face; the urgent need to rebuild policy buffers; how the IMF can help; and the road ahead.

Past progress, but new risks

Over the past decade, we have witnessed a remarkable transformation in the low-income countries.

Strong economic growth has lifted millions of people out of abject poverty. The low-income countries also coped well with the global financial crisis, and staged a rapid recovery. This year, growth is expected to reach a strong 5 percent in the average low-income country.

This impressive performance is a testament to the hard work and dedication of policymakers across the developing world over the past decade. They reduced deficits and public debt. They brought down inflation and built up foreign exchange reserves. In short, they built up macroeconomic buffers and put their economies on a fundamentally stronger footing.

But the news has not all been good.

The food and fuel crisis of 2008, and the global financial crisis that followed, have been devastating for the poor. And this year, we have seen a renewed surge in commodity prices that could plunge an additional 44 million people into poverty. We will be hearing more about this—as well as the catastrophe in the Horn of Africa—from Josette Sheeran, the Director of the UN’s World Food Programme.

At the same time, downside risks to global growth have increased markedly—at a time when the capacity of many low-income countries to absorb further shocks has yet to be re-built from the last two crises.

Navigating the storm, rebuilding resilience

Once again, the low-income countries find themselves at a critical juncture. What policies are needed at this challenging time? And how best to rebuild resilience to future shocks?
In the face of a more uncertain global environment, policymakers in low-income countries—as in many others—should be prepared to adapt policies as needed, according to country-specific circumstances.

In the event of a sharp downturn, the key will be to protect vital spending—to mitigate the impact on growth, and to protect the most vulnerable. Because the scope for countercyclical fiscal policy has become more limited, monetary and exchange rate policy could be used more actively—provided that inflation is moderate.

Turning to how best to rebuild resilience, I see three priorities.

The first priority is to build up “self insurance” during the good times.

When growth is strong and external conditions are favorable, it makes sense to rein in deficits and shore up reserves. This builds a cushion for the bad times—and especially for protecting the most vulnerable.

Of course, self-insurance can only go so far. This is why low-income countries must be able to count on continued support from development partners when shocks hit.

The second priority is to strengthen social safety nets, so that in times of crisis, support can reach the most vulnerable quickly and efficiently.

Here, I am thinking of programs like Burkina Faso’s means-tested food vouchers, or Sierra Leone’s school-based feeding scheme. Such programs are especially important when food prices surge—and when public support can mean the difference between life and death.

The third priority is structural change, to boost longer-term resilience.

Economies that are more diversified—and not overly dependent on a few products and trading partners—are better able to withstand shocks.
Better domestic resource utilization also matters. For example, financial deepening—as is happening in Kenya, through their mobile banking revolution—can get more credit to underserviced populations. Broadening the tax base is also important.

More diversified economies are also likely to deliver more inclusive growth—growth that creates jobs for more people, and shares the benefits more widely. We know from recent experience how much the social dimension matters for long-run stability.

Of course, countries that are commodity exporters have in recent years benefitted from higher prices. For them, the challenge is to use the gains from higher prices wisely—to preserve macroeconomic stability, but also to share the natural resource wealth fairly across society, and across generations.

What can the IMF do to help?

This is a broad and extremely challenging agenda. It is up to the low-income countries themselves to chart the course, and set the priorities. And it is up to us—the donor community and the international organizations—to support them.

As for the Fund, a deeper dialogue—with the IMF listening even more carefully to the needs of our low-income country members—will help us serve them even more effectively.

I personally am committed to this deeper, more fruitful dialogue.

An important lesson that the IMF has learned in recent years is that for our financial support to be effective, it must reach our members quickly and with fewer strings attached. It must also leave sufficient room for high-priority spending, to support growth and protect the most vulnerable.

That is why we have made our lending instruments more flexible.

Two years ago, we boosted the capacity of our concessional lending window to $17 billion through 2014, and doubled the amounts countries can draw. We also cut interest rates on all concessional lending to zero through 2011—and are on track to keep rates at or near zero next year.

As a matter of immediate urgency today, I can tell you that we are working closely with international partners to help address the crisis in the Horn of Africa. Specifically, we are working to provide the governments of Djibouti and Kenya with additional resources to deal with the impact of the devastating drought.

Looking forward

How can we better help our low-income members avoid crises in the future—and be better prepared to deal with them when they hit? Forewarned, as the saying goes, is forearmed.

Improving our understanding of the world economy’s growing interconnectedness—through trade and through finance—is clearly essential.

We are developing a range of new tools to this end, including a new “vulnerability exercise” specifically for low-income countries. These tools should help us highlight the key risks, and the implications for policy.

And we will continue to work closely with country authorities as they seek to rebuild policy buffers, while safeguarding critical spending and longer-term development objectives.

We will also continue our efforts to help low-income countries build up their capacity to design and implement policies. In this context, we will be opening our 9^th regional technical assistance center next month—and our fifth in Africa—in Mauritius.

Conclusion: helping LICs help themselves

The low-income countries have achieved remarkable gains during recent years—and they should be commended for that. But today, these gains are under threat.

The international community—including the IMF—must be prepared to do even more to help the low-income countries help themselves.

Aid commitments must be met.

Trade channels must remain open.

Private investment must be encouraged.

We must all do our part. If we do, I believe that the low-income countries will be able to withstand this new phase of the crisis—and we will be able to help bring lasting gains to the world’s poorest and most vulnerable people.

Thank you. I wish you stimulating and fruitful discussions!