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Global commitment to multilateral agreements key towards achieving sustainability, says UN Secretary-General
With billions of lives hanging in the balance, the next phase of development depended on the international community’s commitment to build on recent multilateral agreements and put the world on a sustainable path, stressed Secretary-General Ban Ki-moon as the Economic and Social Council opened its inaugural forum on financing for development follow-up on Monday, 18 April 2016.
“Now is the time for smart investments in people and the planet,” he said, calling on States, United Nations entities and other stakeholders to sustain the political momentum that had led to the adoption of the 2030 Agenda for Sustainable Development, the Addis Ababa Action Agenda on Financing for Development and the Paris Agreement on climate change in 2015.
While those agreements were triumphs of multilateralism, he said, the time for implementation was now. The Addis Agenda, in particular, provided a full range of actions to realign financial flows and policies with economic, social and environmental priorities. The global response to the 2030 Agenda must match the scope of the challenge, which meant tapping into the potential of all actors to achieve the transformation that was needed.
Opening the meeting, Oh Joon (Republic of Korea), President of the Economic and Social Council, said the launch of the forum marked a new chapter in the organ’s history. Mandated by the Addis Agenda, the Council served as a platform for policy dialogue on financing for development follow-up. Among other things, it was tasked to assess progress, identify challenges and facilitate the delivery of the means of implementation of sustainable development.
High-level speakers throughout the meeting agreed with the Secretary-General that implementation would be the true test of the international community’s commitment to achieving the targets of the 2030 Agenda. The heads of a number of United Nations departments and agencies described their contributions to those ends.
“We can all do something, wherever we have expertise,” said Christine Lagarde, Managing Director of the International Monetary Fund (IMF), who spoke via video link. Echoing calls from other speakers for concerted action that was tailored to the needs of countries and their people, she described work being done by the Fund in areas including macroeconomic policy, taxation, climate change and inclusive growth. On the latter, for example, spending on the education of young people could deliver the biggest development gains.
Helen Clark, Administrator of the United Nations Development Programme (UNDP), said that while monitoring the implementation of sustainable development commitments would be a complex exercise, the forum could support the process with adequate planning. For its part, UNDP could showcase a wide range of innovative approaches, from green financing to impact investing, and would continue to provide a platform for Member States to share their ideas, technologies and capacities.
Other speakers pointed to current global challenges, including slow economic growth and massive waves of forced migration, as hurdles to be overcome by concerted action and innovative development financing.
“We have started off on a bumpy ride” to realize the efforts of the 2030 Agenda, said Mukhisa Kituyi, Secretary-General of the United Nations Conference on Trade and Development (UNCTAD). Flows of foreign direct investment to sub-Saharan Africa had declined and there was limited positive recovery in trade. Meanwhile, official development assistance (ODA) was at a standstill, he said, calling for “repurposed” international institutions, refocused expertise and more coherent action.
As the forum began its general debate, ministers and other high-ranking officials from Governments around the globe underscored the important role of the meeting, as well as the Addis Agenda itself, in financing the next era of sustainable development. Many called for increased capacity-building and the creation of enabling environments to assist developing countries in achieving the aims of the 2030 Agenda.
Unfair trade rules were only one obstacle to sustainable development, said the representative of Uganda, speaking on behalf of the African Group. Others included inadequate resources exacerbated by illicit financial flows and unmet official development assistance commitments. Highlighting the importance of national ownership in sustainable development, he said the Group was committed to take the lead in formulating policies that would facilitate the integration of the Addis Agenda and the 2030 Agenda into its national plans and priorities.
“It doesn’t matter how much money we spend, if we spend it on the wrong things,” said Isabella Lövin, Minister for International Development Cooperation of Sweden. Countries, institutions and the private sector must work together to deliver the resources needed for climate finance, she said, adding that gender equality and the empowerment of women and girls would be necessary given the linkages between women’s economic participation and increased growth.
In the afternoon, the Forum held an interactive dialogue with intergovernmental bodies of major institutional stakeholders on the theme “Fostering policy coherence in the implementation of the Addis Ababa Action Agenda”.
Also addressing the forum this morning were Roberto Azevêdo, Director-General of the World Trade Organization (WTO); Mahmoud Mohieldin, Senior Vice-President for the 2030 Development Agenda, World Bank Group; Bambang Brodjonegoro (Indonesia), Chairman, IMF/World Bank Development Committee; Alfredo Suescum (Panama), President, Trade and Development Board, UNCTAD; Calvin McDonald, Deputy Secretary of IMF and Acting Secretary of the International Monetary and Financial Committee; Wu Hongbo, Under-Secretary-General for Economic and Social Affairs, and Chair of the Inter-Agency Task Force on Financing for Development; and Shamshad Akhtar, Under-Secretary-General and Executive Secretary of the Economic and Social Commission for Asia and the Pacific (ESCAP).
Participating in the general debate were the representatives of the European Union, Guatemala, Panama, Netherlands, Iran, Thailand (on behalf of the “Group of 77” developing countries and China), Maldives (on behalf of the Alliance of Small Island States), Honduras (on behalf of the Like-Minded Group of Supporters of Middle-Income Countries), Mexico, Denmark, Philippines, Lebanon, United Arab Emirates, Norway, Italy, Argentina, Colombia, Brazil, Sri Lanka, Indonesia and the Organisation for Economic Co-operation and Development (OECD).
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State of the Africa region: The time to reform is now
During the recent State of the Africa Region, World Bank Vice President Makhtar Diop cited reforms as key to reigniting growth and helping African countries achieve structural transformation.
While growth in African countries continues to slow amid a weakened global economy, reforms can stimulate growth and help countries achieve structural transformation.
This was the message from World Bank Africa Vice President Makhtar Diop in his State of the Africa Region address during the World Bank-IMF Spring Meetings.
“Despite weak global growth, a difficult external environment facing Sub-Saharan Africa in the near-term, and low and volatile commodity prices, this worsening situation also presents us with a significant opportunity to transform Africa’s economies,” Diop said. “It has signaled an urgent need for economic diversification in Africa.”
Using data from the recently-released Africa’s Pulse, Diop led a panel discussion with a presentation highlighting challenges and opportunities for countries in the short and medium term. The panel included Louis-Paul Motazé, Cameroon’s Minister of Economy, Planning and Regional Development and Claver Gatete, Minister of Finance and Economic Planning for Rwanda.
According to the latest World Bank projections, Sub-Saharan Africa’s gross domestic product (GDP) growth slowed to an estimated 3.0% in 2015 from 4.5% in 2014. This low pace of growth was last seen in 2009 following the global financial crisis.
The fall in commodity prices represents a significant shock for the region, as fuels, ore and metals account for more than 60% of the region’s exports. The impact is seen most in oil-exporting countries, such as Nigeria, the Republic of Congo, and Equatorial Guinea. Activity also weakened significantly in non-energy mineral-exporting countries, including Botswana, Sierra Leone, South Africa and Zambia.
“In order to start tackling challenges we are facing, we have no other choice but to increase domestic resource mobilization, remove trade barriers, improve education, invest in agriculture and renewable energy,” Diop said.
There were some bright spots, mostly among oil importers, where economic activity remained robust. Côte d’Ivoire saw broad-based growth, supported by a favorable policy environment, rising investment, and increased consumer spending. Ethiopia and Rwanda continued to post solid growth, supported by public infrastructure investment, private consumption, and a growing services sector. Elsewhere, growth remained buoyant in Kenya, amid improving economic stability; Tanzania registered strong growth, underpinned by expansion in construction and services sectors.
“What helped us leap frog is the digitalization of the economy,” Gatete said. “ICT is part of almost everything in Rwanda today. It is transforming our lives, people are paying by phone and we are moving very fast in that area. We have also been improving the efficiency of tax collection and put in place policies to improve regional integration between Kenya, Uganda and Rwanda, eliminating all unnecessary costs and hurdles for transporting goods.”
With commodity prices expected to remain low for longer amid a gradual pickup in global activity, the Pulse forecasts that average growth in the region will remain subdued at 3.3% in 2016. For 2017-18, growth is projected to average 4.5%.
“In Cameroon, despite all the efforts we make, the results are still not good enough, as there are so many challenges we are facing. Security is one of them, which leaves us with less resources for other areas,” said Motazé. “That is why specialization is very important for us. For example, in education, we need to train a critical mass of students in specific areas that the country actually needs, and this, in turn, will help us transform our economy. We are determined to put in place all the right policies to help the situation, but we need all the partners to work with us in order to succeed.”
Africa’s Pulse finds that well-managed cities provide a major opportunity for much needed economic diversification. Today cities in Africa are crowded, disconnected, and costly for families and for companies, according to World Bank research. Cities must offer services, amenities, and housing for the poor and the middle class. Successful urbanization will also support Africa’s agricultural and rural transformation by effectively absorbing the labor being released by these sectors; by providing a market for agricultural produce; and by financing further transformation and commercialization.
“These are not small tasks, and they require reforms that will not be easy – they will require commitment and courage on the part of Africa’s leaders. The cushion that high commodity prices provided to many countries is now largely gone. We are here to work with you and to support you,” closed Diop.
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tralac’s Daily News Selection
The selection: Monday, 18 April 2016
Today, in Gaborone: President Jacob Zuma visits Botswana, then Namibia and Swaziland, on SACU issues
Today, in Mauritius: seminar on WTO Agreement on Subsidies and Countervailing Measures
Today, in New York: Special High-Level Meeting of ECOSOC with the Bretton Woods institutions, WTO, UNCTAD
Tomorrow, in London: tralac's Trudi Hartzenberg, and others, participate in the inquiry into the UK’s Africa Free Trade initiative
On Thursday, in Geneva: Aid for eTrade consultation on a draft call for action (UNCTAD)
UNCTAD is taking the lead in exploring possibilities for launching a new global initiative called Aid for eTrade, aimed at unlocking the potential of e-commerce in developing countries. Aid for eTrade is intended to be a multi-stakeholder initiative to improve the ability of developing countries and countries with economies in transition to use and benefit from e-commerce. It will be a demand-driven mechanism in which leading development partners cooperate with the private sector to pool capabilities and resources. The goals of the initiative are as follows: [Download the draft]
The World Bank, IMF Spring Meetings concluded over the weekend. A guide to some key outcomes:
African Consultative Group Meeting: statement by Abdoulaye Bio-Tchané, Christine Lagarde (IMF)
We concurred that the decline in commodity prices is likely to be long lasting, as the causes seem structural rather than temporary—including the ongoing rebalancing of demand in China and, in the case of oil, technological innovation that has enhanced supply. We also recognized that non-economic shocks such as weather- and security-related challenges, are posing downside risks to Africa’s economic prospects.”
Related: Drought, insecurity add to commodity woes – African Ministers, AfDB Governors from Rwanda and Nigeria paint realistic – and optimistic – picture of Africa
Development Committee: communiqué (IMF)
We are encouraged by progress on the Forward Look exercise on the medium to long term future of the WBG, which aims to ensure that the Group remains a strong global development institution in an evolving development landscape; and we expect a final report by the Annual Meetings. The Board and management shall develop proposals to ensure that the WBG remains responsive to the diverse needs of all its clients; leads on global issues and knowledge; makes the “billions to trillions” agenda a reality; partners effectively with the private sector; becomes a more effective and agile development partner; and adapts its business model accordingly.
Global Infrastructure Forum: inaugural meeting
Mandated by the Addis Ababa Action Agenda on financing for development to help bridge the infrastructure gap, which is key to achieving the Sustainable Development Goals (SDGs), the Forum aims to improve alignment and coordination among the partners, while respecting the diversity of approaches, policies, and procedures among them, to facilitate the development of sustainable, accessible, and resilient infrastructure for developing countries. The Forum will be held annually, with responsibility for hosting rotating among the MDBs. [Akinwumi Adesina at the GIF: 'The future of Africa lies inside Africa']
International Monetary and Financial Committee: communiqué
We welcome the IMF’s growing engagement with small states. We welcome proposed work on other challenges facing the membership—within the IMF’s mandate and where they are macro-critical—including migration, income inequality, gender inequality, financial inclusion, corruption, climate change, and technological change, including by leveraging the expertise of other institutions. To support countries managing spillovers from non-economic sources, such as large refugee flows and global epidemics, the IMF should be prepared to contribute within its mandate, including to global initiatives. We look forward to a review of the Guidance Note on The Role of the Fund in Governance Issues. We encourage the IMF to continue helping countries to strengthen their institutions to tackle illicit financial flows.
The 2016 edition of World Development Indicators is out: three features you won’t want to miss (World Bank)
The Global Consumption and Income Project: project launch, data
African trade and regional integration updates:
Namibia: Livestock industry jittery as SA stays mum on requirements (New Era)
Almost four months after meeting all the requirements set out by South African authorities regarding new import measures on January 08, Namibia’s N$2bn per annum livestock industry remains in the dark about the future as no date has yet been announced for implementation of the prerequisites. Neither has South Africa confirmed whether the Standard Handling Procedure, as communicated with Namibia, been accepted or not, or the contents of a new official veterinary import certificate to accompany the Standard Handling Procedure been made known. What has been dubbed a cat-and-mouse-game by SA authorities since May 2013, has now resulted in an urgent livestock industry meeting to take place today regarding markets for cattle producers in the northern communal areas , which produce up to 70 percent of the lucrative weaner exports of some 180 000 animals per year.
Zim records trade surplus against SA (Fin24)
According to figures from Zimstat, Zimbabwe imported goods worth $476.1m from South Africa in the three months ended March 31 2016. This was against exports to South Africa amounting to $504.6m for the period under review. As a result, Zimbabwe has recorded a trade surplus of 5.98% against its neighbour for the first time in years. Overall, Zimbabwe's trade deficit narrowed 17.7% after imports came down 17% to $1.32bn from $1.6bn in the same comparable period last year. Exports were at $625.96m, a 12.6% drop from $716.6m last year. [In the three months to March, Singapore overtook South Africa as Zimbabwe's largest import destination]
African governments urged to invest in cashew industry (GhanaWeb)
Ms Rita Weidinge, Executive Director of African Cashew Initiative (ACI), has called on African governments to invest in the production and policy development of the cashew sector, to increase economic value and enhance private investment. She noted that it is imperative for Africa to put in place consistent and coherent strategy in the value chain by investing in research for the growth of the sector. Ms Weidinge made the call at the weekend in Accra at a consultation of African Public and technical Actors in Cashew on the theme: "Opportunities of the African cashew sector”. The workshop brought together public officials from the ministries related to the cashew sector, public Pan-African actors: African Union Commission and Regional Economic Communities.
Uganda exports 70 tonnes of ARVs to Namibia (The East African)
Quality Chemicals broke into regional markets in 2011 when its drugs were bought by Global Fund, to fight HIV/Aids, tuberculosis and malaria in Kenya. Later, the company exported drugs to Tanzania, South Sudan, Zambia, Cameroon, Comoros; Namibia is its seventh export market. Company officials told The EastAfrican that the deal was reached after six months of bilateral negotiations with Namibia’s Ministry of Health. [Uganda launches plan to promote IT exports]
Non-tariff barriers on selected goods faced by exporters from the EAC to the EU and USA (CUTS Geneva)
Based on two case studies, this study found that the main NTBs for EAC Exporters in the cut flowers and coffee sectors, facing the EU and the US, are: [The authors: Françoise Guei, Famke Schaap] [KNCCI automates issuance of Certificates of Origin]
Kenya: The makers of fake goods now cover practically every sector (Daily Nation)
In the past year alone, the Kenya Bureau of Standards (KEBS) has destroyed substandard goods valued at Sh57.7 million impounded in Nairobi and its environs. The goods have now gained a wider market. KEBS Chief Manager for Market Surveillance Raymond Michuki said the dealers in fake products are increasingly targeting far-flung towns. KEBS has launched an SMS platform to verify the authenticity of goods, where you send a brand name after a # to 20023 to verify if a product is genuine (i.e. sms SM#Brand name or permit number to 20023).
Draft Bill proposes new EAC regional retirement policy (Daily Nation)
“The draft is being handled by the Treasury and stakeholders are contributing their input and aligning it with the country’s labour laws before it is taken to the Cabinet. We want to come up with a guiding policy that could apply throughout Kenya, Uganda, Tanzania, Rwanda, Burundi and South Sudan,” said Retirement Benefits Authority chief executive Edward Odundo. Mr Odundo said a committee had also been set up by EAC member states to harmonise tax regime and retirement issues across the region.
Uganda systematic country diagnostic: boosting inclusive growth and accelerating poverty reduction (World Bank)
The report noted that Uganda’s physical and social economic progress over the last three decades represents a mixed bag of positives and negatives. While major milestones have been achieved in terms of growth, primary school enrollment and access to health services, the report notes that stakeholders still present strong concerns about inclusiveness of the growth, sustainability of progress made as well as quality of services. The SCD also notes that while there is a significant reduction of poverty from 54.6% in 2002/2003 to 19.7% in 2012/2013), there’s a wide inequality with 85% of the poor found in the North and Eastern Uganda of which two-thirds of the population is vulnerable. Recommendations from the report for prioritization include: [Download]
Mozambican researchers question weak investment in Zambezia (Club of Mozambique)
An analysis published this month by the Observatory of Rural Environment (Observatório do Meio Rural / OMR) asks why Zambezia province occupies the worst positions when it comes to economic development in the country. Although about 19% of the total population of the country live in Zambezia and about 5% in the city of Maputo, the capital receives 10% of the state budget and Zambezians only 9%.
Making trade work for Least Developed Countries: a handbook on mainstreaming trade (UNCTAD)
Least developed countries have very high trade-to-GDP ratios, reflecting the fact that they are heavily dependent on trade. Over the past few decades, they have also embarked upon significant trade reforms. LDCs account for about 12% of world population but less than 2% of world trade, indicating that they have not fully reaped the potential benefits of trade for development. A key reason for this is that these countries have low productive capacity and have not effectively integrated trade into their national development strategies and plans. The project had six LDCs as beneficiaries: Ethiopia, Lesotho, and Senegal in Africa:
South Africa: Mining Charter changes worsen division (Business Day)
Indian Ocean Dialogue adopts ‘Padang Consensus’ for enhancing cooperation (BDNews24)
AU, US Congress talks on strengthening cooperation, including trade (AU)
Africa expands trade presence in east Chinese city, Yiwu (New Era)
Financing healthcare in Africa: CABRI position paper
Development aid rises again in 2015, spending on refugees doubles (OECD)
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Hearings: Inquiry into the UK’s Africa Free Trade initiative
The All-Party Parliamentary Group on Trade Out of Poverty is undertaking an inquiry into the UK’s Africa Free Trade Initiative (AFTi), which was launched by the Prime Minister five years ago.
The Inquiry, taking place on Tuesday, 19 April 2016, will look at progress, potential and future development of the Africa Free Trade Initiative. This Inquiry seeks to answer the following three main questions:
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What has been achieved in AFTi since 2011 and what lessons can be learned?
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Is there a case for a successor to AFTi in the area of further facilitating trade and investment within Africa as a driver of growth and poverty reduction, and between African and the rest of the world, including the UK?
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What should a future AFTi look like, what targets should it seek to achieve, and through which means and partnerships should it be delivered?
The Inquiry is led by a committee co-chaired by Lord Stephen Green, former Minister of State for Trade and Investment and Group Chairman of HSBC, and Mr. Ali Mufurki, Board Chair of TradeMark East and founder and Chairman of Infotech Investment Group. Other Committee members include Prof. Myles Wickstead, former Head of Secretariat, Commission for Africa and Ambassador Darlington Mwape, Senior Fellow at International Centre for Trade and Sustainable Development (ICTSD) and former Permanent Representative of Zambia to the WTO.
The Secretariat for the APPG-TOP, Saana Institute, will support the Inquiry committee in gathering evidence, organising hearings and preparing its Report.
» Written submissions supporting the Inquiry are available here.
About the Africa Free Trade initiative (AFTi)
The UK government launched the Africa Free Trade initiative (AFTi) in February 2011 to help African countries integrate into the global world trade system, using trade as an instrument for economic growth and poverty alleviation.
Recognised as a priority in the UK Trade and Investment for Growth Whitepaper, AFTi has brought together regional trade initiatives from across the Department for International Development (DFID), the Department for Business Innovation and Skills (BIS) and the Foreign and Commonwealth Office (FCO) to provide investment, technical assistance and political support to enhance trade in Africa. This included providing support to African countries on the design of border posts, infrastructure investment and analysis of major transport bottlenecks.
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Development Committee: World Bank Group, IMF urged to help solve refugee crisis, other challenges
Government ministers from around the world confronted the refugee crisis, a slowing economy, and other global challenges at the 2016 World Bank Group-IMF Spring Meetings.
“Forced Displacement and Development” was the only item on the agenda at the Development Committee meeting on Saturday. The committee, which represents the 189 shareholder countries of the Bank Group and the IMF, urged its members to take action to support vulnerable people who have been forced to flee their homes, and encouraged the institutions to partner with humanitarian organizations to help forcibly displaced people and host communities confront the root causes of the problem.
“We will not reach our end poverty goal unless nations are secure and citizens are not confronted by conflict and violence,” said World Bank Group President Jim Yong Kim. “The tragedy of forced displacement causes a tremendous amount of human suffering, as we have seen on a daily basis with the Syrian refugee crisis.”
The meeting followed pledges on Friday by eight countries and the European Commission, who contributed to a package of more than $1 billion in support of Syrian refugees and host communities in Jordan and Lebanon, as well as reconstruction in the Middle East and North Africa.
Japan, France, the United Kingdom, the United States, Germany, Canada, the Netherlands, Norway, and the European Commission pledged contributions to the New Financing Initiative to Support the Middle East and North Africa Region, launched jointly by the World Bank Group, the United Nations, and the Islamic Development Bank Group last October.
Earlier Friday, Jordan’s Queen Rania and other high-ranking officials called for a new approach to forced displacement and a refugee crisis that has spread from the Middle East into Europe over the last year.
“We must respond to this monumental crisis with monumental solidarity,” said United Nations Secretary-General Ban Ki-moon, adding that the issue will be addressed at next month’s World Humanitarian Summit.
Countries are facing the refugee crisis and other global challenges such as climate change in an environment of slowing global growth. The Development Committee asked the Bank Group and IMF to provide developing countries with policy advice and financial support amid weak demand, tighter financial markets, softening trade, persistently low oil and commodity prices, and volatile capital flows.
Demand for lending from the Bank Group is at its highest for a non-crisis period and is on track to climb to more than $150 billion over four years.
“We’re now working urgently and in new ways with partners to find solutions to these issues that affect all of us,” Kim said, addressing the media at the beginning of the Meetings.
One of those issues is climate change. The committee welcomed the Bank Group’s Climate Change Action Plan to help developing countries add 30 gigawatts of renewable energy – enough to power 150 million homes – to the world’s energy capacity, bring early warning systems to 100 million people, and develop climate-smart agriculture investment plans for at least 40 countries – all by 2020.
The committee urged the Bank Group to work with the World Health Organization and others to help developing countries strengthen their health systems, including pandemic prevention and preparedness. It also urged the Bank Group to finish preparing its Pandemic Emergency Facility “as soon as possible and foster a new market for pandemic risk management insurance.”
On Thursday, Kim and UNICEF Executive Director Anthony Lake urged global and national leaders to step up and accelerate action and investment in nutrition and early childhood development programs as a critical foundation for equitable development and economic growth. The Bank and WHO also hosted a livestreamed event on the need to make mental health a global development priority.
The committee urged the Bank Group and IMF to step up efforts to find financing for the ambitious Sustainable Development Goals, approved in September, which are expected to require far more resources than official development aid can supply. It said the multilateral development banks should partner to “support developing countries’ efforts to meet the SDGs, while adjusting to a slower growth environment and reduced private capital flows.”
The committee said gender equality is central to the SDGs and welcomed the Bank Group’s renewed gender strategy.
A special event with U.S. First Lady Michelle Obama on Wednesday highlighted the issue in the context of equal access to education for girls. Obama urged leaders to put girls’ education at the “very top” of their agenda. Kim announced the Bank Group would invest $2.5 billion in education projects benefiting adolescent girls over the next five years.
The committee said the International Development Association, the World Bank’s fund for the poorest countries, remains an important source of financing for these countries and asked donors to show strong support for IDA’s replenishment this year.
Development Committee Communiqué
World Bank/IMF Spring Meetings 2016
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The Development Committee met today, April 16, in Washington, D.C.
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Global growth continues to disappoint in 2016. Substantial downside risks to growth remain, including weak demand, tighter financial markets, softening trade, persistently low oil and commodity prices, and volatile capital flows. We call on the World Bank Group (WBG) and the International Monetary Fund (IMF), within their respective mandates, to monitor these risks and vulnerabilities closely, and update the Debt Sustainability Framework for Low-Income Countries. We also call on them to provide policy advice and financial support for sustained, inclusive and diversified growth and resilience.
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We are encouraged by progress on the Forward Look exercise on the medium to long term future of the WBG, which aims to ensure that the Group remains a strong global development institution in an evolving development landscape; and we expect a final report by the Annual Meetings. The Board and management shall develop proposals to ensure that the WBG remains responsive to the diverse needs of all its clients; leads on global issues and knowledge; makes the “billions to trillions” agenda a reality; partners effectively with the private sector; becomes a more effective and agile development partner; and adapts its business model accordingly. The Board and management should continue to consider ways to strengthen the financial position of the WBG institutions, including by optimizing the use of their existing resources, so that they are adequately resourced to accomplish the Group’s mission.
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Fragility and conflict have displaced millions of people, significantly impacting both origin and host countries. We look forward to WBG and IMF action in this area, within their respective mandates and in partnership with humanitarian and other actors, to mitigate the vulnerabilities of forcibly displaced persons, to help host communities manage shocks, and to tackle the root causes of forced displacement. We urge the international community to take action in supporting these vulnerable populations who largely live below the poverty line. We recognize the sacrifices and generosity of host countries and the lack of adequate instruments to support them. We welcome Islamic Development Bank, UN and WBG efforts to develop the financing facility for the Middle East and North Africa and donor commitments to this initiative. We ask the WBG to explore options to develop a long term global crisis response platform. We look forward to the upcoming first World Humanitarian Summit and the Summit on Refugees at the UN General Assembly.
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IDA remains the most important source of concessional financing for the poorest countries. We advocate for a strong IDA 18 replenishment with the support of traditional and new donors that ensures continued focus on the poorest countries. We look forward to a concrete and ambitious proposal on IDA leveraging options in the context of the replenishment.
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In 2016, we begin the task of implementing in earnest the challenging program we committed to in the 2030 Development Agenda. In line with their comparative advantage, the IMF, MDBs, UN and WBG should partner to support developing countries’ efforts to meet the SDGs, while adjusting to a slower growth environment and reduced private capital flows. We support collaboration among MDBs on developing high quality financing for sustainable and growth-oriented infrastructure investments. The WBG and IMF should also step up efforts to implement the Addis Ababa Action Agenda on Financing for Development, in particular, crowding in the private sector and boosting domestic resource mobilization, including by tackling illicit financial flows.
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The private sector is critical to achieve our ambitious development objectives. Inclusive job creation is central to shared prosperity. We encourage all WBG institutions to work together in support of this agenda. In particular, we call on IFC and MIGA to do more to catalyze sustainable economic growth, including by mobilizing funds and providing guarantees in the most challenging environments, and to small and medium enterprises. We also urge IFC, IBRD and IDA to help countries undertake reforms and invest in the quality infrastructure needed to establish business environments that support private investment and local entrepreneurs.
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Achieving gender equality is central to the 2030 Agenda for Sustainable Development. We welcome the WBG’s recent adoption of the renewed gender strategy and look forward to its effective implementation.
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The WBG should continue to deliver evidence-based development solutions at the country, regional, and global levels, including through improved country data systems, and South-South cooperation both in low- and middle-income countries. We urge the WBG and IMF to become more effective in fragile and conflict situations, through strengthened operational capacity in affected countries, better-tailored capacity development activities, incentives and enhanced security for staff, and innovative financing and resourcing.
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We stress the need to strengthen country institutions and health systems, including enhancement of pandemic prevention and preparedness, in close collaboration with the World Health Organization and other stakeholders. We urge the WBG to finish the preparatory work on the Pandemic Emergency Facility as soon as possible and foster a new market for pandemic risk management insurance.
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We applaud the historic Paris Agreement, which set the stage for ambitious climate action for all stakeholders. The WBG’s recent Climate Change Action Plan sets out its commitment to help operationalize, based on client demand, climate-smart policies and projects as well as to scale up technical and financial support for climate change mitigation and adaptation, consistent with UNFCCC. Small states, the poor and the vulnerable are among the most exposed to the negative impacts of climate change and natural disasters and we urge the WBG and IMF to continue to step up their support to build resilience in these countries.
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We welcome the Progress Report on Mainstreaming Disaster Risk Management. We call on the WBG to implement actions and policies using the principles of prevention and preparedness and to continue to build capacity for disaster response guided by the Sendai Framework for Disaster Risk Reduction, in particular, in Small Island Developing States. We look forward to an update on the Progress Report in two years.
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We encourage management and the Board to finalize the modernization of the World Bank’s Environmental and Social Framework by August 2016.
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We welcome the interim report on the Dynamic Formula and stress the need for the planned further work aiming to reach an agreement by the 2016 Annual Meetings in line with the Shareholding Review principles and the Roadmap agreed in Lima.
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The next meeting of the Development Committee is scheduled for October 8, 2016.
Related News
Drought, insecurity add to commodity woes – African Ministers
The dramatic decline in commodity prices combined with severe drought conditions and rising insecurity has hit many countries hard, African finance ministers said during the IMF-World Bank Spring Meetings in Washington.
Ministers from four strongly affected countries told a press briefing that weak global demand is taking a toll on growth prospects for the region, forcing significant fiscal adjustments.
Chad has lost over 60 percent of their budget revenue from the slump in oil prices, and the country’s Finance Minister, Mahamat Allamine Bourma Treye, said insecurity in the Lake Chad region caused by Boko Haram and an ISIS offshoot in the north has triggered a massive influx of refugees, putting added pressure on the country’s limited resources.
“This security situation has brought about a new problem, because we are no longer able to trade with neighboring countries. We have major agricultural production which is usually traded with Niger, but now the border is hermetically closed,” Treye said. “Thus far, assistance by the international community is very significant, but nonetheless insufficient given the tremendous challenges Chad faces.”
Climate change having an impact
Swaziland’s Finance Minister, Martin Dlamini, said the effects of climate change have caused macro-critical challenges for the country, noting that the frequency of natural disasters, such as droughts and floods, had intensified in recent years.
“Swaziland, like many other countries in southern Africa region is currently facing severe drought conditions, affecting agriculture – especially subsistence and livestock farming, disrupting water and power supply, fueling inflation and adding to fiscal pressures,” Dlamini said.
Swaziland is facing a 30 percent decline in trade revenues due to the slowdown in neighboring South Africa, also partly caused by the drought.
Burkina Faso’s Finance Minister, Rosine Sori-Coulibaly, said a shorter rainy season has forced them to control the use of water, especially for agriculture.
“We are one of the region’s biggest producers of Cotton, which provides a livelihood to 2-3 million people,” Coulibaly said, noting the country is also feeling the effects of lower cotton prices.
Reaching out for assistance
Somalia’s Finance Minister, Mohamed Aden Ibrahim, said Somalia has abundant natural resources, but the potential for its economic development largely depends on its ability to manage the country’s external debt of more than $5 billion.
“Without addressing that issue we will not have real growth in Somalia,” Ibrahim said. “For that reason, we have engaged with the IMF three years ago, and last July concluded our first country review in 26 years. Also, Somalia concluded an agreement with the Fund only one week ago that we hope will eventually make financial resources available to us.”
Ibrahim told the room of reporters that after decades of conflict, Somalia is working hard to rebuild its economy and institutions.
“I’d like to ask you today to adjust your lenses. Somalia is no longer the Somalia of 10 or 20 years ago. Somalia is moving forward, and it’s a positive story, a story of progress,” Ibrahim said, adding that he is looking forward to a peaceful and smooth presidential election later this year.
African Consultative Group Meeting: Statement by the Chairman of the African Caucus and the Managing Director of the IMF
Mr. Abdoulaye Bio-Tchané, Chairman of the African Caucus, and Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), co-chaired the African Consultative Group meeting on 17 April 2016 at the IMF Headquarters. They issued the following statement after the conclusion of the Group’s meeting in Washington.[1]
“We had very productive discussions on Africa’s economic prospects, highlighting the near-term policy challenges as well as the continued opportunities. Reflecting the more difficult external economic environment and, in particular, the sharp drop in commodity prices, and tighter financial conditions, growth in Africa is projected to decline to about 3 percent in 2016, the lowest level in a long while. However, there is significant variation in growth performance across countries, with low-income countries in sub-Saharan Africa continuing to grow by over 5 ½ percent.”
“We concurred that the decline in commodity prices is likely to be long lasting, as the causes seem structural rather than temporary – including the ongoing rebalancing of demand in China and, in the case of oil, technological innovation that has enhanced supply. We also recognized that non-economic shocks such as weather- and security-related challenges, are posing downside risks to Africa’s economic prospects.”
“Against this backdrop, we agreed that prompt fiscal adjustment is needed to safeguard macroeconomic stability and rebuild policy buffers across the region, especially in oil-exporting countries. We also concurred that, in pursuing these consolidation efforts, country authorities should aim at protecting priority expenditures, such as social expenditures and well-prioritized and efficient infrastructure spending, with a view to ensuring that longer term development goals remain achievable. Furthermore, we agreed that, where feasible, the exchange rate should be allowed to adjust as needed to absorb shocks and improve competitiveness, with central banks’ interventions limited to mitigating disorderly market movements.
“Beyond immediate policy reactions, we agreed on the need to reinvigorate the economic diversification agenda. Stepped-up structural reforms to improve the business environment as well as labor and financial markets and opening to trade are critical for boosting economic prospects, creating jobs, and improving living standards.”
Mr. Abdoulaye Bio-Tchané noted that “it is indispensable for African countries to adapt policies to the new environment and use all tools at their disposal – fiscal, monetary, exchange rate and structural policies to preserve hard-won macroeconomic stability, contain social impact, further strengthen our economies’ resilience to shocks, and support growth. As public investments have helped greatly in preserving positive growth in a very challenging period, it is particularly essential to not slow abruptly the economic dynamism impulse by public and private investment. In this context, African countries look to the Fund not only to continue its effective engagement with Africa, but also to adapt its instruments and financial support to the magnitude of the shocks experienced by African countries. One avenue would be to increase access to the general resources of the Fund for low-income countries. Going forward, as countries seek to achieve the Sustainable Development Goals, we agreed that it will be important for governments to maintain macroeconomic stability, strengthen institutions and the business environment, address critical infrastructure gaps, expand access to financial services in our economies, and seek to ensure that growth is both broad-based and inclusive.”
Ms. Lagarde stated that “as in the past, the IMF will remain closely engaged with its African members. Appropriate policies will be key to weathering this difficult time and to maintaining a strong foundation for sustainable growth and poverty reduction. The Fund’s support can take several forms, depending on countries’ needs: policy advice, technical assistance and capacity development, and – where appropriate and needed – financial assistance. The IMF will continue to strengthen the analytical underpinnings of its policy advice and instruments and seek to adapt to meet the evolving needs of the membership”.
[1] The African Consultative Group comprises the Fund Governors of a subset of 15 African countries belonging to the African Caucus (African finance ministers and central bank governors) and Fund management. It was formed in 2007 to enhance the IMF’s policy dialogue with the African Caucus. The Group meets at the time of the Spring Meetings, while Fund Management meets with the full membership of the African Caucus at the time of the Annual Meetings.
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Spending more and better: Essential to tackling the infrastructure gap
Countries will need to spend resources better – by improving efficiency and building capacities – in order to support high-quality infrastructure projects that can achieve significant development results to meet the Sustainable Development Goals.
Increasing coordination among development institutions to support planning and development of infrastructure projects is one of the objectives of the Global Infrastructure Forum 2016. In its inaugural gathering, on Saturday, in partnership with the United Nations (UN), the Forum brought together, for the first time, the leaders of the multilateral development banks (MDBs) – African Development Bank, Asian Development Bank, Asian Infrastructure Investment Bank, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank Group, Islamic Development Bank, New Development Bank, and the World Bank Group – as well as development partners and representatives of the G20, G24, and G77, to enhance multilateral collaborative mechanisms to improve infrastructure delivery globally. The Forum is organized in close partnership with the United Nations.
“We can get the most of every dollar of infrastructure capital by helping countries improve governance, local planning, preparation, and administration capacity,” said World Bank Group President Jim Yong Kim, during the opening plenary. More efficient spending should also encourage more investment from the private sector – which is seen as a key source of financing for infrastructure projects.
Addressing the world’s infrastructure challenges is critical to achieving the goals of ending extreme poverty by 2030 and ensuring prosperity for all. At least 660 million people lack access to safe drinking water while 1.2 billion people live without electricity. More than one-third of the world’s rural population is not served by an all-weather road.
“If we are to achieve our goals and leave no one behind, we must address large infrastructure gaps in developing countries,” said UN Secretary General Ban Ki-Moon, also at the opening of the event. “The forum will allow for a great range of voices to be heard. Developing countries, especially the most vulnerable, need international support to bridge their infrastructure gaps.”
Countries and development partners are expected to use the forum to jointly build on existing multilateral collaboration mechanisms and coordinate efforts with multilateral and national development banks, UN agencies, and the private sector.
The space should also help partners identify and address infrastructure and capacity gaps, as well as highlight opportunities for investment and cooperation – while ensuring investments are environmentally, socially and economically sustainable.
Unprecedented collaboration among development partners to improve infrastructure implementation
Mandated by the Addis Ababa Action Agenda on financing for development to help bridge the infrastructure gap, which is key to achieving the Sustainable Development Goals (SDGs), the Forum aims to improve alignment and coordination among the partners, while respecting the diversity of approaches, policies, and procedures among them, to facilitate the development of sustainable, accessible, and resilient infrastructure for developing countries. The Forum will be held annually, with responsibility for hosting rotating among the MDBs.
Infrastructure plays a critical role in growth, competitiveness, job creation, and poverty alleviation. Yet increasing access to basic infrastructure services remains a critical challenge in developing countries. At least 663 million people lack access to safe drinking water. By 2025, 1.8 billion people will live in areas with absolute water scarcity. Sixty percent of the world’s population lacks internet access, while 1.2 billion people in the world still live without electricity. At least one-third of the world’s rural people are not served by an all-weather road. Addressing the infrastructure gap requires a boost in investment including better leveraging of private investment, but also better governance, capacities, and improving efficiency to get more from existing spending on infrastructure.
MDBs have a strong track record of collaboration in the direct financing of projects and mobilizing private capital, as well as improving capacities and knowledge around infrastructure. Some examples include the Global Infrastructure Facility, the International Infrastructure Support System, the PPP Knowledge Lab, the PPP Days conference, Infrascope, and the PPP Certification program.
The Chairman’s Statement highlights the idea that to achieve the objectives of the Forum, the MDBs and development partners resolve to work together on strengthening project preparation, promoting financing, building on shared principles and promoting compatible and efficient approaches, and improving data and information. A session to review progress will take place during the Global Infrastructure Forum 2017.
Chairman’s Statement
Global Infrastructure Forum, April 16, 2016
Mandated by the Addis Ababa Action Agenda (para 14), as an outcome of the Third International Conference on Financing for Development, the Global Infrastructure Forum is being established by the MDBs to help bridge the infrastructure gap, as key for achieving the Sustainable Development Goals (SDGs). This will provide a forum for countries and development partners to work together by building on existing multilateral collaboration mechanisms, and to “improve alignment and coordination among established and new infrastructure initiatives, multilateral and national development banks, UN agencies, national institutions, development partners, and the private sector.” (AAAA Para 14) It will encourage a greater range of voices to be heard, particularly from developing countries, and identify and address infrastructure and capacity gaps in particular in LDCs, LLDCs, SIDS, sub-national entities in MICs, and African countries. It will highlight opportunities for investment and cooperation, and work to ensure that investments are environmentally, socially, and economically sustainable, climate-smart and climate-resilient, and in line with partner countries’ national commitments under the United Nations Framework Convention on Climate Change.
The Forum will also support the infrastructure-related agendas of the G20, G-24, G-77 and g7+ by encouraging MDBs to take joint actions to demonstrate their commitment to infrastructure investment.
We, as MDBs and development partners, by nature of our roles and our convening power to partner with both the public and private sectors, and our ability to deploy a suite of knowledge, advice, financing, and commercial and non-commercial risk mitigation, are committed to working with countries and investors to support the provision of greater access to, and better quality of, affordable infrastructure services which are environmentally, socially, and economically sustainable. We will do this through a two-pronged approach.
i) We will continue to support country-led approaches to planning, executing, supervising, and evaluating sustainable, resilient, inclusive, and well-prioritized infrastructure programs and robust infrastructure frameworks. In addition, we will continue to support the involvement of all stakeholders in planning, financing through domestic resource mobilization as well as national/international financing, and operating infrastructure services, including governments, consumers, the private sector and civil society; and
ii) We will consolidate and scale up where possible existing multilateral mechanisms to promote greater knowledge transfer, project preparation, and implementation support in the form of global and regional platforms and tools, including de-risking and risk allocation mechanisms, that have already been developed in close cooperation by MDBs, such as the Global Infrastructure Facility, the Global Infrastructure Hub, the International Infrastructure Support System, the PPP Knowledge Lab, Infrascope, the PPP Certification program, and environmental, social and governance standards.
To achieve the objectives of the Forum, we resolve the following.
Improving data and information on infrastructure
MDBs and development partners will endeavor to help client countries to achieve:
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better planning and prioritization of infrastructure, including improved provision of data, unit costs, and information on infrastructure, where feasible;
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more informed decisions by the public and private sectors around investment, which in the case of the public sector may imply access to support from good advisors;
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improved accountability in asset maintenance and service delivery;
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greater levels of disclosure and transparency; and
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a greater voice for users and the public at large.
To help achieve this, the MDBs and development partners agree to work together with client countries to improve data acquisition and develop systematic reporting where possible, on:
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MDB lending and advisory support to infrastructure, as well as metrics on catalyzation of private investment;
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infrastructure spending and investment (both actual and required), asset quality, service standards, and fostering disclosure and transparency;
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assessments that promote a sound enabling environment to attract increased investment for infrastructure; and
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private participation in the delivery of infrastructure services and the mobilization of long-term finance from investors, both domestic and international.
Promoting compatible, efficient approaches
While recognizing differing institutional characteristics, country objectives, needs, legal/regulatory frameworks, including those related to the SDGs and UNFCCC Paris Agreement, and the diversity of priorities and strategies of the mandates of the MDBs, the latter and development partners can reduce transaction costs of building and implementing sustainable infrastructure by continuing the promotion of efficient approaches to key bottlenecks or constraints, by:
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Promoting capacity development by policy support, and via project preparation and advisory facilities, technical assistance, and capacity building support.
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Supporting the planning and development of infrastructure in the context of Nationally Determined Contributions to the UNFCCC.
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Supporting, when appropriate, early stage project preparation through the International Infrastructure Support System.
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Further developing risk management principles and mechanisms for:
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approaches to risk allocations in different sectors and markets and associated contractual clauses; and
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planning investment under uncertainty, to build more resilient assets, notably taking into account climate change and disaster risks.
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Further developing tools for assessing:
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fiscal implications of public investment versus public-private partnerships (PPPs);
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risks of implementation of projects as PPPs or as a public option; and
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approaches for improving transparency on infrastructure contracts and projects.
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Strengthening the capacity of economic regulators to ensure that efficiency gains obtained throughout the lifecycle of infrastructure projects are shared fairly between service providers and users.
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Continuing our work on developing environmental, social, and governance standards, including through the work of the Multilateral Financial Institutions working group on environmental and social standards (MFI-WGESS).
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Continuing our coordination on climate finance methods, tools, and approaches for jointly improving the effectiveness of these resources, including for mobilizing new sources of capital for investment in low carbon and climate resilient infrastructure services.
Strengthening project preparation
MDBs and development partners agree on the need to develop sustainable infrastructure project pipelines regardless of whether they are funded publicly, privately, or in combination. MDBs and development partners will continue to support existing and planned project preparation facilities and related databases to support countries to prioritize and prepare bankable pipelines of infrastructure projects (including regional and cross-border projects), to better negotiate complex legal contracts, and to better manage projects.
Promoting financing for infrastructure
The MDBs and development partners will explore taking specific actions to:
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Achieve higher levels of private sector participation (PSP) in infrastructure, to leverage improved results regarding reduced time from construction to operation, asset management over the long-term, and overall management delivery;
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Promote cooperation between new and existing MDBs, with a particular focus on opening up co-financing opportunities on mutually beneficial terms;
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Pursue new innovative approaches to collaboration, including with providers of concessional sources of climate finance, donors, private foundations, and institutional investors;
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Foster the secondary market for infrastructure equity and debt, with MDBs supporting the development of secondary markets for equity and debt, to allow project developers to recycle their scarce capital in the secondary market into new PPPs coming to tender, and to create long term assets with a risk profile that is more attractive to institutional investors;
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Identify opportunities to support viability gap funding arrangements to help PPP projects meet bankability and affordability criteria;
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Further increase MDBs’ financial capacity through the use of risk sharing instruments such as political risk insurance and reinsurance, partial risk and credit guarantees, issuance of green bonds, and other such instruments to crowd in other investors;
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Develop new tools to leverage MDB balance sheets and bring in new private sector capital, including from the insurance market and institutional investors; and
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Further strengthen domestic financial systems in client countries to support sustainable infrastructure financing.
Future meetings of the Global Infrastructure Forum and Reporting
We expect that the Global Infrastructure Forum will be held annually, to review progress. The responsibility for hosting the Forum will rotate among the MDBs. Preparations for the Forum will continue to be carried out in an inclusive manner, in cooperation with the UN system through UN-DESA. The outcomes of the Global Infrastructure Forum will be reported to UN Member States via the Financing for Development Forum.
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Making trade work for Least Developed Countries: A handbook on mainstreaming trade
Least developed countries (LDCs) have very high trade-to-GDP ratios, reflecting the fact that they are heavily dependent on trade. Over the past few decades, they have also embarked upon significant trade reforms. Although LDCs had relatively high economic growth during the past decade, unemployment, poverty, and inequality continue to be major development challenges in these countries.
LDCs account for about 12 per cent of world population but less than 2 per cent of world trade, indicating that they have not fully reaped the potential benefits of trade for development. A key reason for this is that these countries have low productive capacity and have not effectively integrated trade into their national development strategies and plans.
Against this backdrop, the United Nations Conference on Trade and Development (UNCTAD) developed a project to strengthen the capacity of trade and planning ministries of selected LDCs to develop and implement trade strategies conducive to poverty reduction. The project was funded by the UN Development Account for the period 2013–2015 and had six LDCs as beneficiaries: Ethiopia, Lesotho, and Senegal in Africa, and Bhutan, Kiribati, and Lao PDR in Asia and the Pacific. As part of the project, national workshops on the trade policymaking and trade mainstreaming experiences of the beneficiary countries were organized by UNCTAD in collaboration with the governments involved and partner organizations. Two regional workshops were also organized: one on Africa and one on Asia and the Pacific.
This handbook is the outcome of the workshops and research conducted under the project. It draws lessons from the experiences of the six countries that participated and provides fresh insights on how to design and implement an effective trade strategy in LDCs. It also provides clarity on the concept of mainstreaming trade and identifies criteria on how to measure success in this endeavour. The handbook should be useful to policymakers in developing countries, development analysts, academics, and students of development. In this regard, it is meant to be a guide to policy formulation and implementation in LDCs, with the understanding that its application will vary from country to country because of differences in economic structure, history, and social and political realities.
Development opportunities and challenges in LDCs in the new global environment
The global economic environment has changed significantly over the past few decades: real output in many least developed countries (LDCs) is growing faster than the rate of population growth; there is increasing trade in tasks and the location of production is shifting; technological innovation and progress have enhanced access to information and communication technologies in developing countries and reduced trade and transaction costs; there is greater international focus on the development needs and challenges of LDCs; and emerging economies – such as Brazil, Russia, India, China and South Africa – are beginning to play more active roles in global trade, finance, and governance than in the past.
These developments present both opportunities and challenges for LDCs in their quest for sustained growth and poverty reduction. For instance, the integration of economic activities into global production networks and global value chains (GVC) presents an opportunity for LDCs to participate in global production networks for manufacturing, where they often do not have a competitive or comparative advantage in the production of entire products, by permitting them to specialize in the production of specific tasks along the value chain for a product. But GVCs also present challenges for LDCs in the sense that they may be stuck in lower-value segments of the chain and hence not derive significant benefits from the globalization process. Similarly, the increasing role of emerging economies in global trade and finance also presents opportunities and challenges for LDCs. It has diversified export markets for LDCs and also increased the sources of development finance available to them, thereby relaxing their development financing constraints. But it has also exposed them to international competition, particularly in export markets for labour-intensive manufactures. These trade-offs underscore the fact that if LDCs are to effectively integrate into the global economy and achieve their development objectives, they and the international community will have to put in place policy measures to maximize the benefits and minimize the risks associated with the changing global economic environment.
The 2030 Agenda for Sustainable Development adopted by the international community in September 2015 is now the framework and vision guiding formulation and implementation of development policies over the next 15 years. The Sustainable Development Goals (SDGs) are more ambitious than the Millennium Development Goals (MDGs), and reflect lessons learned in the implementation of the MDGs.
One of those lessons is that an ambitious development agenda requires credible and ambitious means of implementation to enhance the likelihood of success. Trade is one of the means of implementation identified for financing the SDGs. Its vital role in the development process of LDCs has also been underscored in the Istanbul Programme of Action (IPoA) for the period 2011-2020 (Box 1). Despite this recognition of the potential role of trade in the development process, LDCs have not been able to use trade effectively in support of their development efforts, as evidenced by their very low shares of global trade, high poverty rates, and the fact that they export mostly primary commodities rather than dynamic and rapidly growing products in global trade. UNCTAD research has shown that one of the reasons for the inability of LDCs to fully harness the potential of trade for sustained growth and poverty reduction is that they have not fully and effectively integrated trade into their national development strategies. In this context, if trade is to play a positive and crucial role in the implementation of the SDGs in LDCs, efforts have to be strengthened to fully and effectively integrate trade into the national development strategies and plans of those countries.
Against this backdrop, this policy handbook provides guidelines on how LDCs could effectively integrate trade into their development strategies and plans to achieve better development outcomes from trade than has been the case to date. More specifically, the aims of the handbook are to:
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Provide an operational and results-based definition of the concept of mainstreaming trade with a view to identifying criteria for measuring success;
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Discuss various instruments and approaches to mainstream trade into national development strategies;
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Examine the experiences of selected LDCs in Africa and Asia in mainstreaming trade into their development strategies and draw lessons from these varied experiences for other LDCs; and
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Provide a framework for the design and implementation of an effective trade strategy in LDCs in the new global economic environment.
The handbook is expected to serve as a guide to LDC policymakers in the design and formulation of trade policies and their integration into national development strategies and plans. History has taught us that what works in one country may not work in another due to different political realities and institutional settings. In this regard, the handbook should not be seen as a blueprint but rather as a guide on how to mainstream trade effectively.
Box 1. The Istanbul Programme of Action for LDCs
The basic international framework that has been agreed upon to guide national development policies in LDCs and related assistance by the development community is the 2011 Istanbul Programme of Action (IPoA). The framework aims to overcome the structural challenges LDCs confront to eradicate poverty, achieve internationally agreedupon development goals, and exit from the LDC category. The IPoA lays out a vision and strategy for the sustainable development of LDCs during the 2011-2020 period with a strong focus on developing their productive capacity and the specific goal of enabling half of the LDCs to meet the criteria for graduation.
The IPoA stresses the importance of a number of key principles, including ownership, a balanced role of the state and market in the development process, genuine partnership and solidarity. It also emphasizes a results-based orientation, an integrated approach to peace and security, development and human rights, equity at all levels, and the effective participation, voice, and representation of LDCs.
Key objectives of the IPoA include strengthening productive capacity in LDCs, reducing their vulnerability to economic, natural, and environmental shocks, ensuring enhanced financial resources, and improving the quality of governance. A number of trade-related areas were identified as priorities, including productive capacity, agriculture, food security and rural development, trade, commodities, mobilizing financial resources for development and capacity-building, and good governance at all levels. Specific goals are to double the share of LDCs’ exports in global exports by 2020, commit to ensuring timely and sustainable implementation of duty-free, quota-free market access for all LDCs, and enhance the share of assistance to LDCs by the development partners for Aid for Trade.
The IPoA also puts strong emphasis on technological innovation and technology transfer to LDCs, and on ensuring mutual accountability of LDCs and their development partners for delivering on their commitments. The programme calls for the mainstreaming of its provisions into national policies and development frameworks, as well as regular reviews at the country level with the full involvement of all stakeholders. Likewise, development partners are urged to integrate the IPoA into their cooperation frameworks and monitor the delivery of their commitments.
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As Uganda chooses Tanzania pipeline route, Kenya to go it alone
Uganda will take its oil to the market through Tanzania’s Tanga port, leaving Kenya to build its own pipeline to Lamu, if the positions taken at the just-ended talks in Kampala are maintained.
“We have lost the pipeline deal to Tanzania. The only deal is to go back to the drawing board to construct our own pipeline to Lamu port,” a senior Kenyan official told The EastAfrican on Friday.
The outcome of the talks was closely guarded, with the technocrats meeting in Kampala insisting that the final position would be announced during the Northern Corridor Heads of State Summit next week.
The EastAfrican, however, learned that Uganda may have already sealed a deal with Tanzania to take the Tanga route and to let oil firm Total E&P of France fund and operate the pipeline.
Last week in Kampala, Uganda held two separate meetings with Kenya and Tanzania; each consultation came up with a report. It had been agreed that the technical teams would compile the two reports and hand over a joint report to the heads of State.
However, the Ugandan team is said to have been reluctant to share the report of its consultations with Tanzania.
“Uganda is playing hardball and has refused to share the report from its discussions with Tanzania. This then leaves us nowhere,” said one of the Kenyans close to the discussions.
However, it has also emerged that the Kenyan officials participating in the Kampala talks may not have had all their facts right as they tried to address the concerns raised by Uganda over the northern route for the pipeline.
For example, Uganda had raised concerns over the location of the pipeline terminal at Lamu port – a spot that they feared was prone to Monsoon winds – as well as the financing for the pipeline.
Another source at the meeting told The EastAfrican that, although Kenya had indicated that the site at Lamu had been moved to the main port, this was not the position when teams from Uganda and Kenya toured the area recently.
“On financing, Kenya was not clear on how to finance the pipeline even though it indicated that many organisations were willing to provide funds. Uganda felt this could take long and result in delays in the export of the oil,” he said.
Meanwhile, Total reaffirmed its commitment to construct the $4 billion crude oil pipeline to Tanga.
Total is eyeing production of an estimated 6.5 billion barrels of Uganda’s crude oil by 2018.
The French oil company is UK Tullow Oil’s partner in the Ugandan oil fields and the main financier of the operations. China National Offshore Oil Companies is also a partner.
Kenya’s apparent resignation and decision to go it alone is in line with President Uhuru Kenyatta’s recent remarks that the Lamu Port – Southern Sudan – Ethiopia Transport (Lapsset) Corridor must and would proceed, even without Uganda.
“The Lapsset project will move forward whether or not Uganda opts to have its oil pass through Kenya’s Northern Corridor,” said President Kenyatta.
Heads of State summit
The Kenyan president and his Ugandan and Rwandan counterparts, Presidents Yoweri Museveni and Paul Kagame, are expected to meet on April 22 for the Northern Corridor Infrastructure Summit where the pipeline will be a key agenda item.
“Tanzania will also attend the Summit for the pipeline discussions,” said Andrew Kamau, Kenya’s principal secretary, department of petroleum, at Ministry of Energy and Petroleum.
“We expect that a harmonised report compiled by Uganda from the two meetings will be tabled for the presidents to make a decision,” Mr Kamau had earlier told The EastAfrican, adding that the outcome of the report and decision by the presidents on the pipeline would determine the next step Kenya would take on the issue.
Total has also promised to finance Uganda’s contribution of 40 per cent to the construction of the refinery in Hoima, which stands at $3.8 billion.
“Uganda is struggling to raise the funds. Total has warned Uganda that the northern route, which is 1,120km, will encounter rough land terrain because of the Rift Valley in Kenya, driving the cost of the pipeline higher and delaying it. Tanzania is flat, given the Lake Victoria Basin,” said the source.
“Total also warns that the port of Lamu has not been built and the entire Lapsset project is behind schedule. It is practically impossible for Kenya to complete construction of the port by 2018. The port of Tanga has already been built.”
Tullow’s group head of communications George Cazenove said the decision around a regional pipeline was a government-to-government issue and his company would work with whichever route the East African countries choose.
Prior to the Kampala meetings, Kenya and Ugandan officials had conducted tours to Lamu, Mombasa and Tanga ports.
According to Mr Kamau, it was established that although all the ports are sheltered, Tanga was shallow and would require extensive work of dredging, which would increase the project cost and delay potential oil export.
In addition, a load-out facility will be required at least 2.3km offshore, which is complex and expensive to build.
This is unlike the Lamu port that would require a dredge channel that is less than 300m, has pre-allocated land in Lamu industrial area for marine storage, and the port is designed to handle construction material and large maritime cargo.
The 1544km Hoima to Tanga route being favoured by Total of France will cost $5.5 billion, while a joint one with Kenya through the southern route will cost $4.4 billion: The Tullow Oil of the UK preferred northern route will cost $4.2 billion.
Kenya’s loss
Over about 25 years of standalone pipeline, Kenya is projected to lose $3.32 billion, and Uganda the $3.32 billion in revenue collection for not constructing the joint pipeline.
A joint pipeline between Kenya and Uganda would have had an initial throughput of 300,000 barrels per day (200,000 barrels for Uganda and 100,000 barrels for Kenya). This could have earned the pipeline companies $1.66 billion a year, which would be shared between the countries according to throughput.
“A regional pipeline offers greatest synergy and lowest tariff for both Kenya and Uganda,” said Mr Kamau.
If the two countries go for a standalone pipeline, Uganda will lose $300 million every year due to an increase of $4.07 in tariff per barrel, and Kenya will lose $250 million per year due to the increased tariff of $6.96 per barrel.
Kenya and Uganda had until late last year agreed to construct a pipeline from Hoima to Lokichar and to Lamu. But fears of insecurity in the region bordering Somalia and huge compensation costs for privately owned land, saw Uganda explore the option of the southern route through Tanzania to Tanga.
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IMFC calls for stronger policy mix to fight subdued growth
The world’s financial leaders called for a forceful and balanced policy mix – a three-pronged approach of structural reforms together with fiscal and monetary policy – to lift slowing global growth.
Communiqué of the Thirty-Third Meeting of the IMFC
Chaired by Mr. Agustín Carstens, Governor of the Bank of Mexico – April 16, 2016, Washington, D.C.
Global economy
The global economy continues to expand modestly. Global growth, however, has been subdued for a long time, and the outlook has weakened somewhat since October. Although recent developments point to some improvements in sentiment, financial market volatility and risk aversion have risen, reflecting partly the reappraisal of potential growth. The significant slowdown in global trade growth also persists. Recoveries in many advanced economies are restrained by a combination of weak demand, low productivity growth, and remaining crisis legacies. Activity in emerging market and developing economies has cooled down, although it still accounts for the bulk of world growth. Globally, lower commodity prices have adversely affected exporters, while their short-term growth impact on energy importers has been less positive than expected.
Downside risks to the global economic outlook have increased since October, raising the possibility of a more generalized slowdown and a sudden pull-back of capital flows. At the same time, geopolitical tensions, refugee crises, and the shock of a potential U.K. exit from the European Union pose spillover risks. Against this backdrop, it is important to buttress confidence in our policies.
Policy response
We reinforce our commitment to strong, sustainable, inclusive, job-rich, and more balanced global growth. To achieve this, we will employ a more forceful and balanced policy mix. Implementation of mutually-reinforcing structural reforms and macroeconomic policies – using all policy tools, individually and collectively – is vital to stimulate actual and potential growth, enhance financial stability, and avert deflation risks. Clear and effective communication of policy stances will be key to limit excessive market volatility and negative spillovers.
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Growth-friendly fiscal policy is needed in all countries. Fiscal strategies should aim to support the economy, providing for flexible use of fiscal policy to strengthen growth, job creation, and confidence, while enhancing resilience and ensuring that debt as a share of GDP is on a sustainable path. Tax policy and public spending needs to be as growth-friendly as possible, including by prioritizing expenditure in favor of high-quality investment.
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Accommodative monetary policy should continue in advanced economies where output gaps are negative and inflation is below target, consistent with central banks’ mandates and mindful of financial stability risks. Monetary policy by itself cannot achieve balanced and sustainable growth, and hence must be accompanied by other supportive policies. In a number of emerging market economies, monetary policy will need to address the impact of weaker currencies on inflation. Exchange rate flexibility, where feasible, should be used to cushion the impact of external shocks, including terms-of-trade shocks.
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Structural reforms need to be advanced, benefitting from synergies with other policies to support demand. Structural reforms should be appropriately prioritized and sequenced in each country. Commodity exporters and low-income developing countries should implement policies to promote economic diversification.
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Timely, full, and consistent implementation of agreed financial reforms, including the Basel III and Total Loss-Absorbing Capacity (TLAC) standard, remains important to boost the resilience of the financial system. Efforts must continue to facilitate the repair of private sector balance sheets. Advanced economies must deal with remaining crisis legacy issues. Emerging market economies need to monitor foreign currency exposures and bolster their ability to withstand financial shocks. Further analysis and solutions are needed, as appropriate, with the aim to prevent de-risking from unduly impeding access to financial services, including correspondent banking relationships.
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Global cooperation is needed on several fronts, including ensuring a well-functioning international monetary system; reinvigorating global trade integration; combating corruption and improving governance; addressing international tax issues including transparency; coping with challenges of non-economic origin, including those pertaining to refugees; and consistently implementing and completing the financial regulatory reform agenda – including policies to transform the shadow banking sector into a stable source of market-based finance. We reiterate our commitment to refrain from all forms of protectionism and competitive devaluations, and to allow exchange rates to respond to changing fundamentals.
IMF operations
The IMF has a key role to play in supporting a stronger policy response by the membership.
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Policy advice and surveillance: We support efforts to deepen analysis of the impact of macro-critical structural reforms, including the new initiative to increase the efficiency of infrastructure investment, and on principles to guide prioritization. To improve the policy mix for strong, balanced, and sustainable growth, we support work to identify country-specific priorities for fiscal policy based on a careful assessment of fiscal positions, and to identify areas where fiscal policy can play a larger and more effective role, consistent with maintaining debt sustainability. We look forward to the review of members’ experiences and policies in dealing with capital flows, and welcome plans to bring together the work on capital flow management and macro-prudential policies to inform financial and macroeconomic risk management. We look forward to the analysis of the implications of negative policy rates. We welcome efforts to strengthen exchange rate analysis. We also welcome plans to examine a framework of options to reduce risks from rising corporate and household indebtedness and unresolved crisis legacies in banks.
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International Monetary System (IMS): We welcome the recent stocktaking of the IMS and the global financial safety net (GFSN) to determine what areas need further consideration. We reiterate that strong policies and effective IMF surveillance remain the cornerstone of crisis prevention. We agree that a strong and coherent GFSN – with an adequately resourced IMF at its center – is important for the effective functioning of the IMS, safeguarding stability, and helping reap the benefits of further financial integration. We call on the IMF to continue to explore ways to further strengthen the GFSN, including through more effective cooperation with regional financing arrangements. The IMF will discuss the case for a general allocation of SDRs and the reporting of official reserves in SDR. We support the examination of the possible broader use of the SDR.
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Revisiting the lending toolkit: We emphasize the IMF’s central role in supporting adjustment and fostering effective implementation of sound policies. In this context, and in light of the risks that have been identified, we call on the IMF to explore ways to strengthen its approach to helping members manage volatility and uncertainty – including through financial assistance, also on a precautionary basis. We recognize the particular challenges for commodity exporters and emphasize the IMF’s role in assisting them in their adjustments. We also look forward to work on non-financial instruments, such as a policy signaling instrument covering emerging market and advanced economies.
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Support for low-income countries: We welcome the IMF’s continued work in support of the implementation of the 2030 Agenda for Sustainable Development, as well as continued efforts to support growth and boost resilience in fragile states. We look forward to discussions on how to enhance countries’ access to precautionary financial support and reviewing current practices in regard to blending resources between the General Resources Account and the Poverty Reduction and Growth Trust (PRGT). We also look forward to the successful conclusion of the current efforts to mobilize additional loan resources for the PRGT and to broadening the group of contributors. We support efforts to integrate capacity development and policy advice more closely, in particular, plans to assist low-income countries in boosting their domestic resource mobilization efforts, alongside international tax issues. We welcome the ongoing review of the IMF and World Bank Debt Sustainability Framework for low-income countries.
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Addressing other challenges facing members: We call on the IMF to continue to collaborate with the Financial Stability Board, the World Bank Group, and other relevant bodies to help solidify a view on the drivers, magnitude, and impact of de-risking by global financial institutions on developing and emerging market economies, and provide advice and capacity development, where warranted. We welcome the IMF’s growing engagement with small states. We welcome proposed work on other challenges facing the membership – within the IMF’s mandate and where they are macro-critical – including migration, income inequality, gender inequality, financial inclusion, corruption, climate change, and technological change, including by leveraging the expertise of other institutions. To support countries managing spillovers from non-economic sources, such as large refugee flows and global epidemics, the IMF should be prepared to contribute within its mandate, including to global initiatives. We look forward to a review of the Guidance Note on The Role of the Fund in Governance Issues. We encourage the IMF to continue helping countries to strengthen their institutions to tackle illicit financial flows. We welcome progress made in Argentina’s effort to end a decade-long dispute and regain access to international capital markets. We also welcome its efforts and those of other countries to normalize relations with the IMF.
IMF resources and governance
We strongly welcome the effectiveness of quota increases under the 14th General Review of Quotas and of the Seventh Amendment on the Reform of the IMF Executive Board. We call on the Executive Board to work expeditiously toward completion of the 15th General Review of Quotas, including a new quota formula, by the 2017 Annual Meetings, and look forward to a progress report for our next meeting. Any realignment under this Review is expected to result in increases in the quota shares of dynamic economies in line with their relative positions in the world economy, and hence likely in the share of emerging market and developing countries as a whole. We are committed to protecting the voice and representation of the poorest members. We reaffirm our commitment to maintain a strong, quota-based, and adequately resourced IMF. We reiterate the importance of maintaining the high quality and improving the regional, gender, and educational diversity of the IMF’s staff, and of promoting gender diversity in the Executive Board.
We welcome the appointment for a second five-year term of Ms. Christine Lagarde as IMF Managing Director, and of Mr. David Lipton as IMF First Deputy Managing Director. We look forward to their continued excellent and unwavering leadership in the challenging period ahead.
Our next meeting will be held in Washington, D.C. on October 7-8, 2016.
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G-20 threatens penalties on tax havens after Panama Papers
Group of 20 economies threatened to penalize havens that don’t share information on their banking clients after the leak of the Panama Papers provoked a global uproar over tax evasion.
The G-20 will consider “defensive measures” against financial centers and jurisdictions that don’t commit to an international standard requiring the exchange of information about account holders, the group’s finance ministers and central bankers said Friday in a statement after meeting in Washington.
The group said it would work with the OECD to come up with criteria for identifying “non-cooperative jurisdictions” by July, adding that improving the transparency on who controls legal tax entities is vital to the international financial system.
The leak this month of offshore financial records, known as the Panama Papers, exposing billions of dollars in assets hidden in tax havens around the world, has set off a global furor. Seeking to contain the fallout from the scandal – implicating everyone from world leaders to prominent business people – some governments have pledged to crack down on tax evasion and money laundering to help regain public trust.
“We welcome some kind of enforcement integrated into the multilateral framework for information exchange,” said Clark Gascoigne, deputy director of the Financial Accountability and Corporate Transparency Coalition, which includes the AFL-CIO and Oxfam America. “Without a stick, it’s not going to work. You need some sort of enforcement mechanism, so this will encourage other countries to comply. So this is a positive step.”
Canadian Finance Minister Bill Morneau told reporters that “I have a high level of confidence that we won’t need to get there” in imposing actual penalties.
Global Standard
The statement refers to a global standard developed by the OECD and endorsed by the G-20. The standard calls on tax jurisdictions to share information on an annual basis about their banking systems, including the names and tax identification numbers of account holders.
The language on tax and financial transparency amounts to a victory for major European nations including the U.K., France and Germany, who a day earlier agreed to automatically share information on the ultimate owners of companies and trusts.
China put up the most resistance to the tax-related part of the G-20 statement, and the U.S. was also reluctant, according to two G-20 officials familiar with the talks; one person said China was the main reason why the statement didn’t single out Panama. The officials asked not to be identified because the meetings were private.
Chinese Finance Minister Lou Jiwei, asked at a press briefing for more details on possible penalties for non-cooperative tax havens, reiterated the G-20 statement without elaborating.
A spokesman for the Chinese embassy in Washington didn’t immediately respond to a request for comment on China’s position during the G-20 talks.
Bright, Dark
“With the Americans, there’s always a bright side and a dark side. They have helped us a lot to move things forward,” German Finance Minister Wolfgang Schaeuble told reporters on Friday, citing the automatic exchange of account information. “The Americans have a slightly different system and it’s very difficult to win majorities in the U.S. Congress to adapt to the international system.”
U.S. Treasury Secretary Jacob J. Lew said at a press briefing that the G-20 made a “very strong statement in the communique on our collective view that we need to act to deal with tax shelters and the problem of an international tax system permitting havens to develop.”
In an April 11 op-ed column in the New York Times, Panama’s President Juan Carlos Varela said his government is committed to the automatic exchange of financial and corporate information, and has proposed steps consistent with the goals of the international community.
On the world economy, finance chiefs said risks to the global recovery have stabilized while threats to the outlook remain, including terrorism and the U.K.’s potential exit from the European Union.
“Growth remains modest and uneven, and downside risks and uncertainties to the global outlook persist against the backdrop of continued financial volatility, challenges faced by commodity exporters and low inflation,” according to the statement. “Geopolitical conflicts, terrorism, refugee flows, and the shock of a potential U.K. exit from the European Union also complicate the global economic environment.”
Calmer Tone
The G-20 struck a less alarmed tone than it did at its previous meeting in Shanghai in February, when officials acknowledged the rocky start to the year for financial markets and expressed growing concern about a downgrade in the global economic outlook.
The finance chiefs and central bankers took heart from a rally in global stock markets. The MSCI All-Country World Index has risen about 8 percent since the finance chiefs met in Shanghai, leaving it little changed this year and up about 14 percent from its low on Feb. 11.
As in Shanghai, finance ministers and central bankers pledged to use all policy tools – monetary, fiscal and structural reforms – to stimulate growth. They reiterated that monetary policy alone can’t produce balanced growth.
G-20 members also reiterated that they would consult closely on currencies. “We reaffirm our previous exchange-rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes.”
The statement repeated that the G-20 will resist “all forms of protectionism.”
G20 Finance Ministers and Central Bank Governors Meeting: Communiqué
14-15 April 2016, Washington D.C.
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The global recovery continues and the financial markets have recovered most of the ground lost earlier in the year since our February meeting in Shanghai. However, growth remains modest and uneven, and downside risks and uncertainties to the global outlook persist against the backdrop of continued financial volatility, challenges faced by commodity exporters and low inflation. Geopolitical conflicts, terrorism, refugee flows, and the shock of a potential UK exit from the European Union also complicate the global economic environment.
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We welcome policy actions being taken by a number of G20 members to support growth and stabilize markets. We reiterate our commitments to using all policy tools – monetary, fiscal and structural – individually and collectively to foster confidence and strengthen growth. Monetary policy will continue to support economic activity and ensure price stability, consistent with central banks’ mandates, but monetary policy alone cannot lead to balanced growth. Our fiscal strategies aim to support the economy and we will use fiscal policy flexibly to strengthen growth, job creation and confidence, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path. We are also making tax policy and public expenditure more growth-friendly, including by prioritizing high-quality investment. Furthermore, we will continue to explore policy options, tailored to country circumstances, that the G20 countries may undertake as necessary to support growth and respond to potential risks. We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will consult closely on exchange markets. We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes. We will resist all forms of protectionism. We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimize negative spillovers and promote transparency.
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We have made concrete progress in our enhanced structural reform agenda with support of the OECD, the IMF and other IOs. We have identified and agreed to the priority areas, based on which by July we will further develop and agree upon a set of guiding principles as a reference guide to national reform actions. We will benefit from the priority areas and guiding principles that will be applied in a flexible way to allow members to account for their specific national circumstances. We look forward to proposals for a set of indicators to help monitor and assess our efforts and progress with structural reforms and challenges, taking into account diversity of country circumstances for endorsement at our July meeting. We agreed on the approach to combine our investment strategies with the growth strategies, and remain committed to the effective and timely implementation of our growth strategies. We are reviewing and updating our structural and macroeconomic policies in our growth strategies, including through an enhanced peer review process, to ensure they remain relevant to evolving economic conditions and consistent with the collective growth ambition set by the Brisbane Summit. We will explore further steps to revitalize global trade, lift quality investment and boost innovation as engines for growth. We remain committed to promoting greater inclusiveness and reducing excessive global imbalances.
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We reaffirm our commitment to advancing the investment agenda with focus on infrastructure, both in terms of quantity and quality. We encourage MDBs to carry out the action plan to optimize their balance sheets as well as take joint actions to formulate quantitative ambition for high quality projects and support infrastructure investment, including catalyzing private sector funding. We look forward to further work on launching the Global Infrastructure Connectivity Alliance to enhance the synergy and cooperation of infrastructure programs, including those at regional level. We will develop a policy guidance note to promote diversified financing instruments for infrastructure and SMEs. We welcome and support the effective implementation of the G20/OECD Corporate Governance and SME Financing Principles as well as the G20 Action Plan on SME Financing as guidance. We welcome the Knowledge Sharing Report submitted by the Global Infrastructure Hub.
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We are taking actions to continue strengthening the stability and resilience of the international monetary system. We support the work to further strengthen the global financial safety net with the IMF at its center, including through more effective cooperation between the IMF and regional financing arrangements. We also support the work to improve the IMF’s toolkit. We reaffirm our commitment to a strong, quota-based, and adequately resourced IMF. We look forward to the completion of the 15th General Review of Quotas, including a new quota formula, by the 2017 Annual Meetings. We reaffirm that any realignment under the 15th review in quota shares is expected to result in increased shares for dynamic economies in line with their relative positions in the world economy, and hence likely in the share of emerging market and developing countries as a whole. We look forward to the outcomes of the World Bank Group’s shareholding review in accordance with the agreed roadmap and timeframe. To facilitate more orderly, timely and predictable sovereign debt restructuring processes, we are working to foster greater dialogue among official creditors and debtors and to promote the incorporation of enhanced contractual clauses into sovereign bonds. We welcome progress made in Argentina’s effort to end a decade-long dispute and regain access to international capital markets. Building on the work of the IMF, BIS, FSB and OECD, we will continue enhancing the monitoring and analysis of capital flows and risks stemming from capital flow volatility. We welcome the IMF’s ongoing work to review country experiences and policies in dealing with capital flows and identify emerging issues. We also note that the OECD is reviewing its Code on Liberalization of Capital Movements. We will discuss the size of the Special Drawing Rights (SDR) during the 11th Basic Period of SDR and reporting official reserves in SDR. We support the examination of possible broader use of SDR.
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We reiterate our commitments to finalizing remaining core elements and support the timely, full and consistent implementation of our agreed financial sector reform agenda, including the Basel III and total loss absorbing capacity (TLAC) standard. We also reiterate our support for the work by the Basel Committee to refine elements of Basel III framework to ensure its coherence and maximize its effectiveness without further significantly increasing overall capital requirements across the banking sector. We will continue to enhance the monitoring of implementation and effects of reforms to ensure their consistency with our overall objectives, including by addressing any material unintended consequences. We look forward to the coordinated work by the IMF, FSB and BIS to take stock of international experiences with macro-prudential frameworks and tools, to help promote effective macro-prudential policies and report back by our next meeting. We welcome the FSB’s work in cooperation with other standard setting bodies to assess holistically the extent, drivers and possible persistence of shifts in market liquidity across jurisdictions and asset classes and consider policy measures if necessary. We look forward to its planned public consultation in mid-2016 on policy recommendations to address structural vulnerabilities associated with asset management activities. We look forward to the FSB peer review report on country-specific implementation of the FSB policy framework for shadow banking entities, and call upon the membership to address identified gaps and on the FSB to evaluate the case for further policy recommendations if appropriate. We reiterate our commitment to expediting implementation of the Principles for Financial Market Infrastructures, and to progressing on the work to enhance central counterparty resilience, recovery planning and resolvability, including on cross-border cooperation arrangements such as Crisis Management Groups, and look forward to the report by the FSB in September. We support the work by the FSB, FATF, World Bank Group, OECD and IMF to assess and address, as appropriate, the decline in correspondent banking services including under the FSB-coordinated action plan, and ask for a report on progress to be sent to the Summit. We reaffirm our support for the work of the GPFI on enhancing SME financing, promoting digital financial inclusion and improving data collection and indicators.
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We reiterate our commitment to timely and widespread implementation of the G20/OECD BEPS package and encourage all relevant and interested countries and jurisdictions to join the new inclusive framework on an equal footing quickly, noting its first meeting will be in June. The G20 strongly reaffirms the importance of effective and widespread implementation of the internationally agreed standards on transparency. Therefore we call on all relevant countries including all financial centers and jurisdictions, which have not committed to implement the standard on automatic exchange of information by 2017 or 2018 to do so without delay and to sign the Multilateral Convention. We expect that by the 2017 G20 Summit all countries and jurisdictions will upgrade their Global Forum rating to a satisfactory level. We mandate the OECD working with G20 countries to establish objective criteria by our July meeting to identify non-cooperative jurisdictions with respect to tax transparency. Defensive measures will be considered by G20 members against non-cooperative jurisdictions if progress as assessed by the Global Forum is not made. We look forward to the Global Forum report on transparency and information exchange for tax purposes before the end of the year. We welcome the collective and continuous efforts by countries and international organizations to build capacity on tax matters for developing economies. We encourage G20 members to consider committing to the principles of the Addis Tax Initiative.
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The G20 reiterates the high priority it attaches to financial transparency and effective implementation of the standards on transparency by all, in particular with regard to the beneficial ownership of legal persons and legal arrangements. Improving the transparency of the beneficial ownership of legal persons and legal arrangements is vital to protect the integrity of the international financial system, and to prevent misuse of these entities and arrangements for corruption, tax evasion, terrorist financing and money laundering. The G20 reiterates that it is essential that all countries and jurisdictions fully implement the FATF standards on transparency and beneficial ownership of legal persons and legal arrangements and we express our determination to lead by example in this regard. We particularly stress the importance of countries and jurisdictions improving the availability of beneficial ownership information to, and its international exchange between, competent authorities for the purposes of tackling tax evasion, terrorist financing and money laundering. We ask the FATF and the Global Forum on Transparency and Exchange of Information for Tax Purposes to make initial proposals by our October meeting on ways to improve the implementation of the international standards on transparency, including on the availability of beneficial ownership information, and its international exchange.
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We reaffirm our resolve to combat decisively and tackle all sources, techniques and channels of terrorist financing. We call on all countries and jurisdictions to join us in these efforts, including through swift and effective implementation of FATF standards, the new Consolidated Strategy on Combating Terrorist Financing, and provisions of the UN Security Council Resolution 2253. We ask the FATF, working with the relevant IOs, to strengthen its work on identifying and tackling loopholes and deficiencies that remain in the financial system and ensure that the FATF standards are effective and comprehensive, and fully implemented. We call on the FATF-style regional bodies to be vigorous partners. We call on the IMF, OECD, FSB, and the World Bank Group to support FATF in addressing the evolving challenges by bringing in their own analysis, within their respective areas of expertise, of the sources, techniques and channels of illicit financial flows.
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We welcome the progress made by the G20 Green Finance Study Group (GFSG) in identifying challenges to mobilize private capital for green investment. Many of these challenges can be addressed by financial innovations, knowledge sharing and capacity building, risk analysis and international cooperation. We ask the GFSG to develop, for consideration by countries, more specific options for developing green banking, scaling-up the green bond market, supporting the integration of environmental factors by institutional investors, and developing ways for measuring progress of green financial activities, as part of its synthesis report to be delivered by July.
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Recognizing the importance of the operating entities of the financial mechanism of the United Nations Framework Convention on Climate Change, we welcome the endorsement of the Strategic Plan for the Green Climate Fund (GCF) and call for the Fund’s continued efforts to scale up its operations. We reiterate our call for timely implementation of the Paris Agreement on Climate Change and the commitments made by developed countries and international organizations and announcements made by other countries on climate finance. We affirm the importance of monitoring and transparency of climate finance. We ask the Climate Finance Study Group (CFSG) to finalize this year’s work and report back to us at our July Meeting. We reaffirm our commitment to implementing the 2030 Agenda for Sustainable Development.
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We reaffirm our commitment to rationalize and phase-out inefficient fossil fuel subsidies that encourage wasteful consumption, over the medium term, recognizing the need to support the poor. Further, we encourage all G20 countries to consider participation in the voluntary peer review of inefficient fossil fuel subsidies that encourage wasteful consumption.
Annex
Issues for further action
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We request the Framework Working Group (FWG) to further work on the guiding principles as well as the proposed structural reform indicator system, with the aim to submit for the Deputies’ review in June and for our endorsement in July. Recognizing the analytical work by the IMF and the OECD, we call on the IMF, the OECD and other IOs to continue to provide technical support on the enhanced structural reform agenda.
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We ask the IMF, OECD and WBG to update the assessment of the implementation of key commitments in our growth strategies, as well as of progress towards our collective growth ambition as defined in Brisbane, and report back to us by our meeting in July.
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We ask relevant IOs to provide assessments of developments in trade and investment to inform our revised growth strategies for the next FWG meeting.
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We ask the WBG, OECD and other relevant IOs to provide draft outcome documents regarding the priorities of 2016 investment agenda, leading to the final deliverables for our July meeting.
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We look forward to the development of assessment methodology of the G20/OECD Principles of Corporate Governance.
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We look forward to the FSB’s second annual report on implementation and effects of regulatory reforms, which will reflect key outcomes from the FSB’s workshop in May.
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We look forward to considering the final report and recommendations of the FSB’s Task Force on Climate-related Financial Disclosures in early 2017.
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We look forward to the G20 Tax Symposium in July, to discuss the role tax policy can play in achieving a strong, sustainable and balanced economic growth.
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We look forward to receiving recommendations from the IMF, OECD, WBG and UN on mechanisms to help ensure effective implementation of technical assistance programs, and on how countries can contribute funding for tax projects and direct technical assistance at our July meeting.
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LDCs urge rapid implementation of Nairobi package amid volatile commodity prices
Least developed countries (LDCs) on 13 April called on WTO members to ensure the implementation of recent decisions favouring LDC goods and services exports as they are experiencing falling commodity export revenues and widening trade deficits.
Doing so will support poorer countries in diversifying their exports away from commodities and also help them climb up the value chain in manufacturing and services, several members said at the first meeting of the Sub-Committee on LDCs since the 10th Ministerial Conference (MC10) held last December in Nairobi.
“Many MC10 outcomes are of critical importance to LDCs,” Uganda, speaking on behalf of the coordinator of the LDC group, said at the meeting.
Members had delivered, as part of the Nairobi Package, several decisions to make it easier for LDC exports to qualify for trade preferences and also enjoy preferential treatment for their services for a longer period.
Members must now ensure that their national regulators recognize these agreements for preferential treatment for LDCs, Uganda said. The LDC Group would also like members to provide them assistance in availing of trade preferences for services. Members were also asked to “develop or expand” their respective rules of origin, which provide the criteria for whether a good qualifies for preferential entry into a foreign market, in line with the agreed guidance from Nairobi.
“These are mandates given by our ministers and should therefore be achieved. The group urges WTO members towards the realization of these comprehensive objectives,” Uganda said.
Furthermore, members were requested to step up their contributions to the Enhanced Integrated Framework (EIF)’s activities to bolster LDC trade, as pledges so far only make up roughly a third of the intended budget.
“Current developments in the world economy pose significant challenges for LDCs,” the chair of the sub-committee, Ambassador Roderick van Schreven (Netherlands), said. “LDCs face an increased need to diversify their exports,” he said.
There is a risk of a continued decline in prices of commodities, which many LDCs produce, as world demand slows, according to an update on LDC trade trends delivered by the WTO Secretariat at the meeting.
Meanwhile, LDC imports continue to grow, which widens trade deficits and threatens macroeconomic stability, the Secretariat’s update stated.
Nevertheless, there is a positive trend of LDCs increasing their participation in the world trade of services and also in the exports of manufactured goods, both of which are labour-intensive and thus could have a positive development impact.
Several LDCs then called for “substantive support” to help them diversify their exports and address trade deficits, noting that the Nairobi decisions are an opportunity to assist in this area.
Besides these discussions, the Sub-committee considered a secretariat note relating to follow-up of WTO decisions taken in favour of LDCs and a received a briefing from the United Nations Industrial Development Organization (UNIDO) on the LDC Ministerial Conference held last November. It also was briefed on the key findings of a study on how issues concerning sanitary and phytosanitary standards are covered in diagnostic trade integration studies as part of the EIF process.
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Development aid rises again in 2015, spending on refugees doubles
Development aid totalled USD 131.6 billion in 2015, representing a rise of 6.9% from 2014 in real terms as aid spent on refugees in host countries more than doubled in real terms to USD 12 billion. Stripping out funds spent on refugees, aid was still up 1.7% in real terms, according to official data collected by the OECD Development Assistance Committee (DAC).
Official development assistance (ODA) from the 28 countries in the DAC averaged 0.30% of gross national income, the same level as in 2014. Measured in real terms – correcting for inflation and for a sharp depreciation in many DAC country currencies against the dollar last year – ODA is up 83% since 2000, when the Millennium Development Goals were agreed.
The 2015 data show that bilateral aid to the poorest countries rose by 4% in real terms, in line with commitments by DAC donors to reverse recent declines. Bilateral aid, making up around two-thirds of ODA, is aid provided by one country to another country. A survey of donor spending plans through 2019 suggests flows to the poorest countries will keep rising.
Funds spent on hosting or processing refugees in donor countries accounted for 9.1% of ODA in 2015, up from 4.8% in 2014, when in-donor refugee costs totalled USD 6.6 billion. The rise in refugee costs did not significantly eat into development programmes, with around half of donor countries using money from outside their aid budgets to cover refugee costs.
“Countries have had to find large sums to cover the costs of an historic refugee crisis in Europe, and most have so far avoided diverting money from development programmes. These efforts must continue. We also welcome that more aid is being provided to the poorest countries,” said OECD Secretary-General Angel Gurría. “Governments must ensure that development aid keeps rising. They also need to develop long-term options for meeting future refugee costs and the integration of refugees in our societies, while ensuring at the same time that ODA reaches those countries and people that need it the most.”
An unprecedented 1.5 million refugees claimed asylum in OECD countries in 2015, more than a million in Europe. DAC rules allow member countries to count certain refugee-related expenses as ODA for the first year after their arrival. Three countries – Australia, Korea and Luxembourg – do not count refugee costs as ODA. Others – Austria, Greece, Italy, the Netherlands and Sweden – saw refugee costs account for more than 20% of their ODA in 2015.
Humanitarian aid also rose by 11% in real terms in 2015 to USD 13.6 billion.
The 2015 data shows ODA rose in 22 countries, with the biggest increases in Greece, Sweden and Germany. Six countries reported lower ODA, with the steepest declines in Portugal and Australia. Of the several non-DAC members who report their aid flows to the OECD body, the United Arab Emirates posted the highest ODA/GNI ratio in 2015 at 1.09%.
Only six of the 28 DAC countries – Denmark, Luxembourg, The Netherlands, Norway, Sweden and the United Kingdom – met a United Nations target to keep ODA at or above 0.7% of GNI.
ODA makes up more than two thirds of external finance for least-developed countries and the DAC is pushing for it to be used more as a lever to generate private investment and domestic tax revenues in poor countries. The DAC is also looking at clarifying the rules for which refugee costs can be counted as ODA.
“We need to remember that the best way to achieve the Sustainable Development Goals and avoid future refugee crises is to continue the current momentum of aid flows, particularly to the neediest and most fragile countries,” said DAC Chair Erik Solheim. “I am glad that we have reversed the recent declines in aid to the poorest countries and that most countries aren’t spending large amounts of their ODA on hosting refugees.”
Development aid in 2015
Stable levels of programmed aid in 2015
Preliminary results from the 2016 DAC Survey on Forward Spending Plans indicate stable levels of programmed aid in 2015, measured by country programmable aid (CPA), which amounted to USD 96.4 billion in 2015.
CPA to least developed countries (LDCs) and other low-income countries (Other LICs) increased by 3% in real terms to USD 39.8 billion in 2015 compared to 2014. However, it decreased by 2% to lower middle income countries (LMICs) and upper middle-income countries (UMICs). This was mainly due to lower level of concessional loans to countries such as Mexico, Morocco, and Vietnam.
The largest volume increases in CPA in 2015 were recorded by countries in sub-Saharan Africa, such as South Sudan, and Ebola-affected Liberia and Sierra Leone. These increases were mainly driven by additional grants from DAC members and concessional loans from multilateral development banks.
A sharp increase in CPA to LDCs and fragile states expected in 2016
The Survey results suggest a large increase in 2016 of global CPA of USD 5.2 billion (constant 2015 prices), stemming from both bilateral and multilateral providers. This increase will benefit countries across all income groups, but primarily LDCs and fragile states, where an increase of 6% in real terms is noted due to larger disbursements by multilateral agencies. Overall CPA to LMICs and UMICs is also expected to increase; however, at a slower pace (3% for LMICs and 4% for UMICs), and with large fluctuations across countries because of the volatility in aid receipts linked to concessional loans.
On a geographical basis, the largest increases in 2016 can be expected for populous countries in Asia, such as Bangladesh, China, Myanmar and Vietnam, and for countries in sub-Saharan Africa, such as Ethiopia, Nigeria, and Uganda. Slight decreases are, however, to be expected for countries in the Americas and in Oceania.
Future outlook: continuing upward trend for LDCs foreseen over the medium-term
Global CPA is projected to remain stable up to 2019 with a continued upward trajectory for the LDCs, in line with DAC members’ recent commitments to allocate more of total ODA to countries most in need. This trend confirms a recent DAC study which suggested that most DAC members were in the process of re-focusing their allocations in accordance with their international agreements to better target ODA to countries most in need.
The Survey projects declining levels of CPA for some individual LDCs between 2016 and 2019, such as Guinea and Niger, two countries repeatedly identified as aid orphans in an OECD6 study. Aid is also expected to rise, although at a slower pace than for LDCs, to other countries most in need, such as other low-income countries, fragile and conflict-affected states and economies, landlocked developing countries and small island developing states.
The medium-term projections show a positive trend in CPA towards some of the poorest and most fragile countries, an encouraging development in view of the challenges of the 2030 Agenda.
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Agriculture vital in leading Africa’s development
The 12th Comprehensive Africa Agriculture Development Partnership Platform (CAADP PP) drew to a close with the reaffirmation of agriculture’s vital role in Africa’s development.
“If we have to successfully move from Maputo to Malabo[1], we need to focus on developing appropriate financing mechanisms, to support industrialisation-led agriculture for the transformation of the continent,” said Dr Hamady Diop, Programme Manager of Natural Resources Governance at the NEPAD Agency.
The 12th CAADP PP sought to identify the capacity needs and the necessary partnerships at all levels to finance agricultural transformation and enable the implementation of the Malabo Declaration, for attaining sustainable agriculture growth.
The importance of the CAADP PP and its role in collating collective and mutual responsibilities among partners was addressed. It was agreed that addressing food security and agricultural development requires significant levels of public investment to address the public good dimensions but also requires significant private sector investments and participation.
As African smallholders start to produce food for the global market, there is a need for greater investment to meet the needs of this shift. It was hence concluded that Africa can only make things happen if the continent collectively innovates and creates fit for purpose instruments for finance and risk management that speak to its unique requirements.
In her concluding remarks, youth representative Nkiruka Nnaemego called for more inclusive credit instruments for young farmers to contribute more along the agricultural value chain.
The meeting brought together close to 400 participants. Also present were Dr Ahmed Yakubu Alhassan, Deputy Minister of Food and Agriculture; Mr Philip Kiriro, President of East African Farmers representing the President of Pan African Farmers’ Organisation (PAFO); Mr Christoph Rauh, Deputy Director, Sub-Sahara Africa, BMZ, Germany and Chair of the CAADP Development Partner Coordination Group (DPCG); Dr Ibrahim Mayaki, CEO of the NEPAD Agency and H.E. Tumusiime Rhoda Peace, Commissioner of the Department of Rural Economy and Agriculture of the AUC.
In closing, the meeting reaffirmed the indisputable role that agriculture has in leading Africa’s development and serving as a catalyst in meeting the socio-economic needs of youth and women.
[1] The CAADP Malabo Declaration is a commitment made by member states in 2014 to implement a number of essential policy reforms toward ending hunger and cutting poverty in Africa in half by 2025. The Declaration is available here.
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Established tax policy ‘not always a good fit for developing nations’
Developing countries could be missing out on substantial tax revenues as a result of ill-suited tax policies, research from the International Growth Centre based at the London School of Economics has shown.
The IGC found that developing countries could be overlooking some of the most effective tax policies for their economies because they run counter to current ideas of sound tax policy, advocated by literature and institutions like the International Monetary Fund, and designed around conditions in advanced economies.
Adnan Khan, research and policy director at the IGC and one of the authors of the report, said that developing countries could be losing out on much-needed funds as they employ “inappropriate policies, designed for different contexts”.
He said today’s tax policies are based on the assumption that authorities face some informational and enforcement barriers to tax collection, which is true in even the top tax collectors like Denmark, which has the world’s highest tax-to-GDP ratio.
An example would be self-employed workers who report their own tax information, which is harder to verify and easier to manipulate.
However, in developing countries, where a significant portion of their economies are made up by the unregistered or informal sector, a much larger proportion of tax information is self-reported and not easily verifiable. This prevents tax authorities from comparing information to uncover discrepancies or detect evasion and represents a significant barrier to effective collection.
The IGC argues that policies that take into account such constraints on tax authorities’ enforcement capacity might be a much better fit for developing countries.
For example, IGC research found that taxing firms on turnover, rather than profit in Pakistan could reduce domestic corporate tax evasion in the country by 70%.
IMF estimates suggest that overall, Pakistan is currently only collecting half of the tax revenue it could potentially collect, losing out on approximately £22.1bn, almost 11% of its GDP. The IGC said policies that take into account Pakistan’s enforcement barriers could close that gap.
Khan explained to Public Finance International that taxing turnover would technically create an inefficiency and distort the production process. However, he continued: “That inefficiency is counterbalanced by revenue gains, which outweigh the losses from the production distortion.
“This is a very clear example of where what the literature suggests and what international institutions also advocate has not been studied in terms of the concerns actually faced by tax authorities in developing countries.”
Because of the related inefficiencies and distortions, such policies and their potential benefits are often overlooked in developing countries, not extensively studied and therefore often not recommended by institutions that guide developing countries on their tax policy, such as the IMF and World Bank.
“We’re not saying the IMF or the World Bank are wrong,” Khan stressed, noting that such policies are not effective in every circumstance.
“We come up with new insights, sometimes they go along with what we already know and show this is true. In other cases we get counterintuitive results.
“We’re saying there is not enough of an evidence base out there for anyone to base their policy advice on,” he continued, calling for “a different kind of approach to issues of taxation in developing countries” that takes their unique challenges into account and establishes the best approach for each context.
The IGC’s research also showed that in countries where enforcement capacity is weak and threats of punishment to tax evaders are less credible, there may be better approaches to encouraging tax payers to pay up.
These include leveraging social incentives and pressures. For example, an IGC study in Rwanda found that encouraging customers to request receipts from retail stores in Kigali increased their use of electronic billing machines, which in turn increased VAT receipts and reported taxable revenues.
Taxing to develop – When ‘third-best’ is best
Taxes are a channel of reciprocal exchange between citizens and governments. Taxes increase government accountability, encourage better governance, public service delivery and enforcement of law and order for the protection of citizen rights – essential ingredients for economic growth. Without widespread monitoring and reporting systems to capture and verify financial transactions, many developing country tax systems generate low tax-to-GDP ratios. Effective tax policies must also address tax morale and administration.
Inability to tax is both a symptom and cause of underdevelopment. In countries with large informal economies, tax policies must account for gaps in monitoring, reporting, and administration to overcome barriers to tax enforcement and collection. Developing country governments are often characterised by poor public service delivery. Without the benefits of public goods and services, citizens have few incentives to pay taxes.
This brief presents a rethinking of tax policy. Traditional tax models assume a ‘second-best’ approach where, in the absence of perfect information (‘first-best’ conditions), tax authorities face some informational barriers to tax collection. Our approach, characterised as ‘third-best’, assumes that developing country tax authorities face severe informational barriers and significant enforcement constraints.
KEY MESSAGES
1. Overcoming barriers to tax policy enforcement requires greater access to information. Large informal economies with limited digital coverage of financial transactions make monitoring, verifying, and enforcing tax liabilities a challenge in developing countries. Policies must address enforcement gaps and strengthen information trails.
2. Third-best policies, inefficient in developed countries, may prove efficient in developing countries. The barriers to information and enforcement that plague developing countries require experimentation and policy innovation. Although taxes of inputs, turnover, and trade, are traditionally considered production inefficient, gains in revenue efficiency may significantly offset losses from production efficiency.
3. Harnessing social incentives may increase compliance. Non-monetary incentives affect tax morale and compliance. Harnessing social and non-monetary incentives may provide a cost-effective mechanism for raising compliance.
4. Motivating tax collectors could bridge wider enforcement gaps. Effective administration systems are crucial to tax collection. Smart interventions like pay-for-performance can incentivise better performance by tax collectors.
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Africa probes the Panama connection
The Panama Papers have prompted governments to look more seriously at the costs of trade mispricing and illicit financial flows
Following the leak of over eleven million company files from the Mossack Fonseca law firm in Panama on 3 April, many African activists and law enforcement officers have been searching the documents for evidence of malfeasance. Of course, being a client of Mossack Fonseca, whose premises were raided by Panamanian police on the morning of 13 April, and establishing shell companies in Panama is legal for nationals of many African countries.
However, when those entities are part of a scheme to misprice transactions deliberately or to evade tax, they are increasingly being picked up by African regulators and tax authorities. Driving those investigations are the effects of the commodity price crash, which has sharply cut state revenue in resource-rich countries and the campaign, led by South African ex-President Thabo Mbeki, to staunch the illicit financial flows from Africa (see Chart) which his United Nations-backed investigation says are running at over US$60 billion a year. The Paris-based Organisation for Economic Cooperation and Development reckons that illicit financial flows – deliberate trade mispricing and tax evasion – out of Africa are running at three times the level of foreign aid coming in.
Sierra Leone is the first country to launch an investigation into claims of deliberate trade mispricing following the Mossack Fonseca leak. It will cover transactions between the biggest diamond mine, Koidu Holdings, which is owned by Octéa Group, a subsidiary of the Guernsey-based Beny Steinmetz Group Resources (BSGR), and Standard Chartered Bank and Tiffany Diamonds (AC Vol 57 No 7, What price recovery?).
Specifically, the investigators will be looking into whether BSGR or Octéa or others have extracted additional, undeclared value from rough diamonds once they leave Sierra Leone, in contravention of their contract with the government. If so, they will want to know how much Standard Chartered and Tiffany (the two companies to which BSGR owes over $130 million) know about these transactions.
There are indications there may be wide discrepancies in the prices per carat of diamonds valued in country and the prices they are sold for abroad. If these concerns are validated, it would mean the country has been losing tens of millions of dollars of value from its diamond business.
‘These are burning issues,’ Mines Minister Minkailu Mansaray told Africa Confidential on 11 April. ‘The Panama Papers are of grave concern to the government, particularly as it relates to Sierra Leone’s minerals sector.’
Documents from Mossack Fonseca reveal a complex, many-layered offshore business structure behind Sierra Leone’s biggest diamond mining company, the deeply indebted Octéa. Israeli billionaire Beny Steinmetz is an advisor to Octéa’s parent company, BSGR, but insist he has no executive role in the business.
Mossack Fonseca’s files raise questions about whether Sierra Leone is receiving the correct value for its rough diamonds. ‘Dodgy dealings within the Steinmetz Group seems to indicate undervaluing of diamonds,’ concluded the International Consortium of Investigative Journalists (ICIJ), which has access to the leaked files. A BSGR spokesman told us that the company had ‘no formal or informal response’ to make about any of the files which might have leaked from Panama. But he added that: ‘PwC [accountants PricewaterhouseCoopers] fully audited the transfer pricing of all the Octéa diamonds produced and sold. There are no dodgy dealings, so any investigation on this will be welcomed by Octéa.’
Independently of the Mossack Fonseca leak, AC has obtained other documents that suggest there is a wide discrepancy between the price per carat of diamonds valued in Sierra Leone (at the central bank in Freetown) and the price per carat when they are sold on through a chain of companies owned directly or indirectly by companies whose owners are related to Beny Steinmetz.
In October 2014, Standard Chartered Bank, which acted as financial advisor to BSGR for the sale of its 100% stake in Octéa, wrote a confidential note to investors. It described Octéa diamonds, all of which are sourced from Sierra Leone’s Koidu mine, as offering ‘high grade, quality & value per carat’.
‘Koidu is one of the highest revenue per carat diamond mines in the world,’ said the Standard Chartered note. It contained a graph entitled ‘Koidu Historic Sales Profile’, which showed that diamond values from the mine surpassed an average of $450 per carat in 2011. It sourced these figures to ‘Company data’. Overall, the 2014 note put average per carat values at the mine at $410, the second highest in the world. Industry insiders say the diamonds are sometimes being valued in Sierra Leone at up to $140 a carat less than that, leaving a potentially mammoth profit margin for the exporters.
As the main creditor of Octéa and Koidu, Standard Chartered would not discuss concerns about transfer pricing or the discrepancies in carat prices in its own documents. Its Regional Head of Business Communications, Lauren Callie, told AC that it was a confidential matter between the Bank and BSGR.
But while Standard Chartered says Koidu Holdings diamonds are worth an average $410 per carat, if they are being valued at over $100 a carat less in Sierra Leone, it would be paying far lower taxes and royalties. If Koidu is using average prices running as low as $270 a carat, that would give the exporter a mark up of around 50%.
‘We are not aware of any transfer pricing, this is why we were astonished,’ Mansaray told us. ‘We will therefore conduct a thorough investigation in collaboration with the NMA [National Minerals Agency]. If what they [Octéa and in-country diamond valuers] are doing is not in line or not in conformity [with the rules], then we will take necessary or appropriate action.’
Sierra Leone’s mining lease agreement with Koidu Holdings, dated 2010, includes several safeguards against transfer pricing. If local diamonds are being undervalued in-country, it could also prove uncomfortable for local officials. Three sets of valuators determine the price for export. One is BSGR’s own nominated valuator; the second is the government’s and the third is independent.
Sierra Leone’s independent valuer is Diamond Counsellor International, run by Britain’s Marriott family. It is also the government-mandated valuator for diamonds exported from Guinea and Liberia. If diamonds are being undervalued to facilitate transfer pricing, experts say it would require collusion between two or three of those groups. Acknowledging this risk, Mansaray said the investigation would spotlight the entire valuation process.
Mansaray is already preparing a response to BSGR’s Octéa over another matter at the Koidu mine: fears that the company faces bankruptcy and is mining a final slew of easy-to-reach diamonds at its Koidu mine in a bid to ‘cut and run’. After a stormy meeting in London between officials from Sierra Leone, Standard Chartered and Octéa, a three-month standstill was agreed pending BSGR’s submissions of more credible plans for the mine. ‘We are being very patient to wait for them [Octéa/BSGR], such that when they finish, if we believe they have not met [the standards], the government will take necessary and appropriate action.’
This article was first published in Africa Confidential, Vol 57 No 8, on 15 April 2016. Read the full article here.
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How to achieve durable development despite hard times
Low-income developing countries need to diversify their economies, promote inclusion, and close infrastructure gaps by tapping both domestic resources and foreign funding to sustain growth.
This was the main lesson of the conference “Sustainable Economic Development in a Challenging Global Environment” on low-income developing countries organized as part of the IMF-World Bank Spring Meetings in Washington, D.C. on April 14.
“The global environment is clearly causing some real difficulties in low-income and developing countries. This is partly due to lower commodity prices, which have been declining for more than a year and a half. For countries which are reliant on the extraction of resources, this is a major problem,” said IMF Managing Director Christine Lagarde in her opening remarks, adding that low commodity prices are here to stay. She also noted the economic slowdown of China – a significant client of and direct investor in many low-income and developing countries – created further difficulties.
A weaker external environment and tighter financing conditions are exacerbated by longer-term mega trends in climate change, demographic changes and technology, IMF Deputy Managing Director Min Zhu remarked.
Resilient growth remains the key to the sustainable development of low-income countries, according to Harvard University Professor Lant Pritchett. Such growth is still lacking in many developing countries: severe growth collapse episodes hit low-income and developing countries frequently and with devastating effect. Cumulative losses in growth decelerations in the 90 recent episodes were larger than 20 percent of GDP, Pritchett said. “This means 90 Greek tragedies,” he said in reference to a 22 percent drop of Greek output between 2008 and 2012.
Moral imperative of equality
Setting the stage for a debate about how structural or macroeconomic policies could contribute to growth, Harvard University Professor Larry Summers noted that resilient growth must be maintained through rainy day buffers, inclusiveness, public investment, and structural reforms in low-income countries the same way as in advanced economies.
“Almost all economic policy errors take the shape of doing today what you wish you had done yesterday,” Summers noted. “Things are likely to get worse in the next couple of years and the tools available in the last two recessions are not going to be available on the scale they were. Otherwise, the greatest victims will be the world’s poorest countries. It’s a moral as well as an economic imperative,” he said.
“Inequality and a lack of resilience, a lack of sustained growth may really be the two sides of the same coin,” said Jonathan Ostry, Deputy Director of the IMF’s Research Department. “When inequality is rampant, all sorts of individuals are excluded from education, credit markets, adequate health, and nutrition.” Inequality does not have a single solution, Ostry emphasized.
Not doomed to be poor
Fighting inequality on a micro level works, as long as help comes in a big enough push, underlined Massachusetts Institute of Technology Professor Abhijit Vinayak Banerjee, in his presentation of efficient ways to help the poorest. “Cash to buy assets, with some training and hand-holding brings results. The poor are able and willing to grab real opportunities,” he said, citing positive examples from Indonesia and India.
Former Nigerian Minister of Finance Ngozi Okonjo-Iweala said diversification of economies, a political will to save in good times to be able to tap buffers during bad times, and mobilizing domestic resources were essential to ensure resilient growth in low-income and developing countries.
“Manufacturing in Nigeria is 9 percent of GDP, which is nothing. If we don’t struggle to process the goods that we produce and create jobs for our young people, we cannot build a diversified economy. I don’t believe we can have resilience unless we encourage manufacturing, services, and agriculture.” Job creation is the best way to fight inequality, she added.
The Governor of the Bank of Tanzania, Beno Ndulu, also underlined the need to diversify.“In Nigeria, oil accounts for 10 percent of the economy, but 90 percent of exports, and 70 percent of revenues. Thus, what one has to deal with is the current account balance and taxes, and that the rest of economy contributes proportionately to the revenues,” he said.
Better tax administration, a larger tax base, removal of tax incentives, financial inclusion and increasing transparency and improving governance are essential to better mobilize internal resources, speakers agreed. That, in turn, has to feed into building “high quality infrastructure that allows diversification, while keeping an eye on debt sustainability,” noted Antoinette Sayeh, Director of the IMF’s African Department.
Infrastructure development without jeopardizing debt sustainability
“Africa is hungry for infrastructure,” said Cameroonian Minister of Finance, Alamine Ousmane Mey. IMF Deputy Managing Director Mitsuhiro Furusawa added that, besides infrastructure, developing countries also have other priority spending needs to achieve their sustainable development goals, such as in health and education. Development areas must be prioritized, bringing in long-term concessional resources to finance the projects in a time when low-income and developing countries sovereign bond issues are no longer feasible due to high risk premiums, Mey added. Indeed, a recent United Nations report put the total investment need at $3.3-$4.5 trillion annually.
To be able to develop infrastructure without jeopardizing the sustainability of debt – and in a global context which will be much less favorable than in the last decade – affordable sources of external financing should be made available for low-income and developing countries burdened by an overstated perceived risk, argued Oxford Professor Paul Collier. In addition, Organisation for Economic Cooperation and Development countries should change regulations on their pension funds, which are not allowed to invest into African infrastructure as an asset class, he said.
Convergence with a vengeance
While challenges to maintain growth abound, some consider pessimism out of place. “One should not forget about the exciting heavy development in Africa in the last 20-25 years,” said Arvind Subramanian, Chief Economic Advisor in the Indian Ministry of Finance. “It was what I call unconditional convergence with a vengeance: many emerging countries are catching up,” he added.
“The recent crisis has not changed that narrative fundamentally. In relative terms, the growth decline has not been as dramatic as suggested,” he noted, but cautioned about seeking a balanced approach to the inequality agenda so it does not come at the cost of proven policies to enhance growth.
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The Macro Poverty Outlook is jointly produced by the Poverty & Equity and Macroeconomics & Fiscal Management Global Practices of the World Bank. This semi-annual report, which analyses macro and poverty developments in developing countries, is released for the Spring and Annual Meetings of the World Bank and IMF.
Botswana
Weakening global demand for diamonds in 2015 led growth in Botswana to stall, pressured the fiscal position to deficit and narrowed the current account surplus. GDP should rebound in 2017 as commodity prices improve and counter-cyclical stimulus is undertaken. Medium-term structural reforms are critical to manage volatility and sustainability risks, notably reforms in the water and energy sectors; while labor market distortions require addressing to spur private sector job creation. Recovery to low per-capita growth in the medium-term suggests that gains in poverty reduction are likely to be modest.
Recent developments
Weakening global demand for rough diamonds, combined with falling prices of metals have led to a deterioration in the near term growth outlook. Real growth is estimated to have contracted slightly in 2015 by 0.3 percent, down from a gain of 3.2 percent in 2014 on the back of poor outcomes in the diamond sector. The slowdown in China and falling global prices for commodities caused the mining sector to contract sharply in 2015 Q3 and Q4; mining GDP contracted by 21 percent for the year. Continuing electricity and water supply disruptions have impacted manufacturing, whereas the negative effects of a regional drought adversely effected agriculture. In contrast, service and retail sectors led the non-mining sectors to overall growth of above 3 percent.
The fiscal position moved into deficit in 2015/16 after three years of consecutive surpluses. The fiscal balance swung from a surplus of 3.8 percent of GDP in 2014/15 (the fiscal year starts April 1) to an estimated deficit of 2.9 percent of GDP in 2015/16, as revenues fell and spending increased. On the revenue side, Government relies mainly on two volatile sources of inflows, mineral revenues (which accounts for almost 40 percent of total revenue) and SACU customs revenues (27 percent of total revenue). Both have declined, the former from weak global demand and the latter from the decline in South Africa’s economic growth. On the expenditure side, in 2015 Government started an ambitious Economic Stimulus Program. This Program emphasizes development spending on building construction, roads, tourism development, agriculture and manufacturing. The Government has substantial fiscal savings from diamond revenues (i.e., the Pula fund), and international reserves stand at about 11 months of imports, which provides Botswana ample space to gradually adjust expenditures to the SACU shock in the long run, and to provide counter-cyclical stimulus in the near term.
Weak performance across the mining sector will narrow the current account surplus. In 2014, Botswana achieved a current account surplus of 15.7 percent of GDP. External factors mentioned above adversely affected exports in 2015, and the current account surplus narrowed to 9.3 percent of GDP. Foreign reserves remain strong at USD 7.5 billion at end- 2015, or 65 percent of GDP.
Economic growth has been pro-poor, leading to very significant and rapid poverty reduction. Between 2002/03 and 2009/10, the share of the population living on less than $1.90 a day at 2011 international prices declined steadily from 29.8 percent to 18.2 percent (figure 2) thanks to a combination of equitable growth, demographic changes (e.g. decreasing fertility rates and dependency ratios), increased credit, and expansion of social assistance schemes (especially direct transfers to rural households), and employment expansion (especially of agricultural employment in rural areas by 5.6 percent). Progress in rural poverty reduction has been especially rapid, as it was almost halved (from 45.2 percent in 2002/03 to 23.7 percent in 2009/10). However, inequality in Botswana remains high with the Gini coefficient of 60.5 in 2009/10, down moderately from 64.7 in 2002/03.
Risks and challenges
As long as growth is heavily dependent on commodity exports and public sector activity, Botswana will remain heavily exposed to external shocks. Slowdown in major economies, particularly China, would further constrain diamond and other commodity production, with followon impacts across Government revenues, and the retail and service sectors. Slowing revenue growth over coming years, partly reflecting declining SACU receipts, requires careful management of expenditure pressures, especially in relation to the wage bill. Continued delays in upgrading electricity and water infrastructure will dampen non-mining activity, especially in the manufacturing sector.
Over the medium-term, diversification of the economy and exports away from mining is a priority. Structural reforms remain critical in the medium term to manage volatility and sustainability risks, including reforms in the water and energy sectors and addressing labor market distortions to spur private sector job creation. Investments are needed in infrastructure and human capital, as well as establishment of trade, business environment, and immigration policies that encourage competition.
Lesotho
The decline in growth since 2013 is expected to continue through 2016 due to persistent drought effects and weak regional conditions leading to a decline in SACU revenues and associated fiscal pressures. Accompanying the resumption of moderate economic growth, the poverty rate ($1.9 PPP a day) is projected to fall by 1.1 percentage points to 55.3 percent by 2018.
Recent developments
Following an average growth rate of 4.7 percent in 2012 and 2013, real GDP growth declined to 3.6 percent in 2014, and is estimated to have further declined to 2.7 percent in 2015. The main drivers include shrinking agricultural production due to adverse weather conditions, and industry declines due to uncertainty of AGOA extension and the halt in the Kao mine production. Services remain a relative bright spot, growing at 3.9 percent in 2015.
On the demand side, net exports declined in 2015 due to supply reductions and weak demand from trade partners. Investment contracted both due to the underexecution of the government’s capital budget, AGOA uncertainty and the completion of the Metelong Dam. Government consumption remained high due to the increased wage bill (22 percent of GDP in 2015). The overall budget execution was at 67.3 percent of the approved budget as of December 2015 mostly due to the underexecution of the capital budget.
Fiscal balances will deteriorate over the next years due to lower SACU revenues which equaled 30 percent of GDP in 2014/15 (the fiscal year starts April 1). The overall fiscal balance is estimated to be 0.1 percent of GDP. The non-SACU fiscal deficit is estimated to be 24.6 percent of GDP in 2015/16, improving from 28.6 in 2014/15. The current account deficit in 2015 is estimated to be 10.4 percent of GDP. Lesotho’s public debt has increased to 60 percent of GDP in 2015 due to the recent depreciation.
Although falling fuel prices helped drive CPI inflation down, increasing food prices has mostly offset this decline in 2015. CPI inflation is estimated to be 4.1 percent in 2015 and is expected to rise to 5 percent in the medium term. International reserves are estimated to be 6.1 months of imports in 2015 similar to last year driven mostly by the under-execution of the budget.
Between 2002 and 2010 Lesotho made virtually no progress in reducing extreme poverty. The headcount poverty rate was 57.1 percent in 2010 (national poverty line), accompanied by high inequality, measured at 54.2 percent by the Gini coefficient, itself an obstacle to poverty reduction. Lesotho’s economic structure and poorly targeted social protection policies are at the heart of high and stagnant poverty and inequality. Low-productivity agriculture remains the main source of income for over 1 in 3 households. The benefits of a well-paid public sector mainly flow to the most affluent households. Most of the social protection transfers do not target the poor.
Risks and challenges
Risks to the outlook are the decline in SACU revenues, political instability, slow global recovery, lower growth prospects in South Africa, fiscal sustainability and the competition Lesotho is facing due to the Transpacific Partnership agreement. In the medium term commitment to fiscal adjustments is crucial for macroeconomic stability. The current level of spending places a strong pressure on the sustainability of the public debt and the peg. The government has shown some commitment to consolidation by keeping wage rate increases in 2016 in line with inflation, however proposed measures in the budget fall short of the necessary adjustment. In the medium to long term Lesotho needs to move to a model that can deliver broadbased employment growth to promote shared prosperity and eradicate extreme poverty. In addition to the fiscal adjustment ambitious structural reforms are needed to raise potential output. Improvements in human capital through lower HIV/AIDS prevalence rates and better education outcomes, in investment climate constraints, and in key infrastructures are necessary.
Namibia
Fiscal stimulus, rapid credit growth, and large scale mining investments have been driving strong growth and a widening current account deficit over recent years. As construction of new mining projects winds down and production begins, the current account should narrow, while the government’s recent budget statement signals welcome fiscal consolidation. Strong recent growth and public spending on social programs has contributed to impressive reductions in poverty rates. Further poverty-reduction will require structural change in the economy to generate more jobs for the unskilled.
Recent developments
Growth of the Namibian economy moderated in 2015 to 4.5 percent, from 6.4 percent in 2014. Growth was driven by ongoing massive extractive sector investments and continued government stimulus, partially offsetting the impact of low commodity prices, slowing of private sector credit growth (9.5 percent in 2015, down from 16.5 percent in 2014) and lower agricultural production and exports resulting from drought and an outbreak of foot and mouth disease.
Namibia has maintained an expansionary fiscal stance since 2011, with government pursuing a stimulus program to support job creation and poverty reduction. An overall deficit of around 6.6 percent of GDP is expected in 2015 (the fiscal year runs from April 1 to March 31), higher than the budgeted deficit of 5.4 percent of GDP due to over-optimistic income tax revenue projections. The deficit was partially financed by a US$750 million Eurobond in 2015 (5.375 percent coupon with 10-year maturity), with proceeds used to support foreign exchange reserves and finance investment projects. Total government debt has grown rapidly and now stands at around 36 percent of GDP (from 12 percent of GDP in 2010).
Inflation remained low and stable during 2015, at 3.4 percent down from 5.3 percent in 2014, with low energy prices partly offsetting the impacts of depreciation and increased food prices arising from drought. Monetary policy has tightened, however, to maintain alignment with South African interest rates and avoid capital outflows, and in response to incipient inflationary pressures arising from depreciation, continued credit growth, and increasing food prices. The repo rate has been increased five times since June 2014, most recently with a 25 bps increase to 6.75 percent in February 2016.
The current account deficit remains wide (14.3 percent of GDP in 2015) reflecting low prices for mineral exports and elevated imports for both mining investments and consumer products, the latter driven by fiscal stimulus and credit growth. International reserves reached a low of just 1.5 months of import cover during 2015, but have since recovered to 3.5 months, primarily due to SACU receipts and currency depreciation.
Relatively strong economic growth has not been sufficient to deal with poverty, inequality, and unemployment. Using the national poverty line of N$ 377.96, 28.7 percent of Namibian were poor in 2009/10, following a 9.0 percentage point fall from 37.7 percent in 2003/04. The reduction was driven by gains in in rural areas. Using the international poverty lines, 19.7 percent of the population lived on less than $1.9 a day in 2015 compared to 22.6 percent in 2009. 42.9 lived below the 3.1 per day poverty line in 2015 compared to 45.7 percent in 2009. Namibia remains one of the most unequal countries in the world, with a Gini coefficient of 0.61.
High unemployment is of particular concern. The 2014 Labor Force Survey reports an unemployment rate of 28.1 percent in 2014, down slightly from 29.6 percent in 2013. At 39.2 percent, unemployment is highest among youth. Unemployment is higher among women (31.7 percent) compared to men (24.3 percent). Most employment (31.4 percent) is in low productivity sectors, including agriculture, forestry and fishing. 47.1 percent of employment is in the informal sector, contributing to income insecurity and vulnerability.
Risks and challenges
Planned fiscal consolidation and production from new extractive industry projects should support a reduction in fiscal and current account deficits. This outcome, however, is dependent on successful implementation of planned expenditure cuts in the context of expected declines in SACU revenues. Further declines in commodity export prices and worsening of external conditions also present downside risks.
Over the longer-term, Namibia faces important challenges in diversifying the economy and broadening economic opportunities. The economy remains heavily dependent on mining, while limited demand for unskilled labor leads to concentration of labor in unproductive subsistence agriculture. Policy priorities for a more inclusive economy include: i) improving access to and quality of secondary, tertiary, and vocational education; and ii) addressing labor market rigidities.
South Africa
Real GDP per capita has been falling in South Africa since 2014 – aggravated most recently by drought – which has raised poverty levels. Growth is not expected to exceed population growth until 2018. Weak commodity prices continue to put pressure on exports, the exchange rate and in turn inflation, while structural constraints including rigid labor and goods markets, hamper adjustments to seize the opportunities from the real effective depreciation of the rand.
Recent developments
South Africa’s economy grew by 1.3% in 2015, 0.5p.p. below population growth, making it the second consecutive year of falling GDP per capita. Mining recovered from prolonged strikes in 2014, but decelerated markedly through 2015 due to tumbling global demand (and prices) for commodities. Agriculture was hit by the worst drought in a century. This has plunged at least an estimated 50,000 South Africans into poverty. Manufacturing sector performance has been mixed, somewhat supported by a maintenance-related rebound in steel and stronger automotive exports. Structural constraints, including rigid labor and goods markets, skills mismatches, and barely sufficient electricity provision limit the economy’s ability to rebalance from commodities to manufacturing and services. In addition, policy uncertainty is increasingly undermining investment – in 2015 this ranged from new legislation affecting investor rights, uncertainty on continued access to AGOA, more stringent rules for tourist visas, and abrupt cabinet reshuffles. Finance and business services continue to be the remaining engine of growth in South Africa.
Although tax revenue grew by 8.5% in 2015/16, partly supported by new revenue measures including higher marginal personal income tax rates, the weaker-than expected economy resulted in collection shortfalls, especially in income taxes and VAT. Expenditure growth was propelled by a three-year wage agreement raising wage growth above inflation. The 2015/16 budget deficit was 3.9% of GDP. Defending its investment-grade credit rating, new revenue measures and expenditure cuts were introduced in the 2016/17 budget. Two-thirds of the fiscal adjustment will come from taxes, largely from fuel and sin levies and excises as well as only limited relief from ‘fiscal drag’. The budget deficit is expected to fall to 2.4% of GDP in 2018/19, and net public debt to stabilize at 46.2% of GDP in 2017/18, two years earlier than previously expected (gross debt is expected to peak at 51% of GDP in 2017/18).
In addition to the mining rebound after several strikes, manufacturing exports – such as automotives – benefited from strengthening global demand. Although the drought put pressure on (food) imports, this supported a narrowing of the current account deficit. The rand depreciated by 30% against the US dollar. This helped cushion the effect of falling commodity prices on the current account – however, it also limited tailwinds from falling oil prices.
Imported inflation – aggravated by the drought – largely explains the breach of the 6% upper inflation target (since January 2016), leading the South African Reserve Bank to raise interest rates most recently in January and March 2016, by a cumulative 75bp to 7%. Poverty has fallen over the past decade, however the revised national poverty lines leave 36.9% (close to 20 million people) below the national lower bound of R501 per month. Extreme poverty, based on the international poverty line of $1.9 per day (PPP, 2011), is expected to remain almost unchanged falling slightly from 15.5% in 2010 to 15.0% (close to 8.0 million people) in 2015. The Gini coefficient of 63.4 makes South Africa one of the world’s most unequal countries in the world.
South Africa’s high unemployment hampers progress in poverty reduction. Unemployment was 24.5% in Q4 after briefly reaching 26.4% in Q1 2015, the highest since the early 2000s. The number of unemployed grew by 5.3% y/y in the first three quarters, outpacing growth of the labor force of 4.1% y/y, leaving 5.4 million South Africans unemployed in Q3 2015. Youth and unskilled workers have particular difficulty finding work. Discouragement is a driver of low labor force participation.
Risks and challenges
As less can be expected from global demand, the onus lies on policymakers to spur growth. Making the economy more nimble to help it rebalance toward the non-mineral sectors holds the key to future growth and poverty reduction. South Africa’s economy will need to restructure, and carefully managing labor relations in the process will be vital to secure the required investment. Strong efforts to maintain the integrity of South Africa’s institutions, a major selling point to investors, and to increase investor confidence through greater certainty in policymaking too will be vital for the return of investment and growth. While fiscal consolidation forms part of the policy mix to defend South Africa’s investment grade credit rating, ambitious structural reform will be required to lift South Africa’s weak growth prospects and accelerate poverty reduction.
Swaziland
Economic growth in Swaziland is estimated to have decelerated to 1.7% in 2015 down from 2.5% in 2014, and is forecasted to further decline to 1.3% in 2016. This is partly due to adverse weather conditions and a gloomy regional economic outlook. A marginal recovery is expected in 2017 and 2018 with 1.4% and 1.6% real GDP growth forecasts, respectively. Declining Southern Africa Customs Union (SACU) revenues pose fiscal challenges. As a result of poor macroeconomic conditions, poverty rates are expected to remain high while labor conditions remain weak.
Recent developments
Recent real GDP growth slowed to 1.7% in 2015 from 2.5% in 2014, on the back of declining SACU revenues, adverse weather conditions and poor regional economic outlook especially in South Africa. The manufacturing sector suffered from the loss of the country’s African Growth and Opportunity Act (AGOA) trade benefits in January 2015, and the textile industry was characterized by retrenchments.
Despite significant improvements in domestic revenue collection as a result of tax reforms including the new VAT refund at border posts with South Africa, the fiscal deficit widened to 3.6% of GDP in 2015/16 (the fiscal year starts April 1) on the back of declining SACU revenues (which constitute about 48% of Swaziland revenue) and rising recurrent expenditures especially the wage bill. SACU revenues are estimated to have fallen to 13.3% of GDP in 2015/16 from 15.3% in 2014/15.
The external sector position moderated in 2015. The current account surplus narrowed to 0.4% of GDP in 2015 down from 4.4% in 2014, while international reserves rose slightly to 3.6 months of import cover in 2015 from 3.5 in 2014. This is above the international accepted minimum threshold of 3 months of import cover but below the government’s medium term target of 5-7 months of imports. The current account decline was cushioned by increased exports of textiles to South Africa following the depreciation of the Rand.
Inflation remained below the upper bound threshold of 6% in 2015, and averaged 5% in 2015. The decline in international commodity prices kept inflation within the threshold while the 2015 drought exerted an upward pressure on prices.
The decline in growth continued to put pressure on development challenges in Swaziland, which have not significantly improved over the past decade. 63% of Swazis lived below the national poverty line in 2010 which is relatively high for a lower middle income country. Poverty is largely a rural phenomenon: in 2010, 73% of Swazis living in rural areas were living below the national poverty line compared to 31.1% in urban areas. The adverse weather conditions are expected to further widen the gap between rural and urban poverty. Using the international extreme poverty line of $1.9 per day suggests that an estimated 41.1% of Swazis were poor in 2015 compared to 42.0% in 2010.
With a Gini coefficient of 51.5, inequality is high and actually increased in rural areas between 2001 and 2010. Swaziland’s labor markets suffer from low labor force participation rates and high unemployment, exacerbated by skills mismatches and a high prevalence of HIV/AIDS (27.7% among adults). The bulk of employment is in low value added activities, particularly in subsistence agriculture and low value added services. Government accounts for a large share of employment, with the private sector lacking the vibrancy to create employment opportunities to support faster poverty reduction.
Risks and challenges
The economic outlook for Swaziland remains poor, in line with broader concerns for South Africa and the SACU region. Lower SACU transfers and exports to South Africa are expected. There is no scope for public sector stimulus, and a rationalization of expenditures in line with the fall in SACU transfers is needed, particularly with respect to the public wage bill. Postponed implementation of the salary review would help in this regard, as well as improved focus on the quality of spending and coordination of social protection programs, together with adjustments to their design and implementation.
Swaziland needs to step up efforts to increase investment especially in the private sector. This is crucial for stimulating growth and job creation which is key to higher, inclusive economic growth needed to tackle the challenges of high poverty, inequality, and unemployment. To promote private investment, there is need to implement policies that address human capital challenges, improve the regulatory environment and ease of doing business (currently ranked 105 out of 189 countries). Private investment is central to export diversification that will build resilience to external shocks such as the one emanating from expiration of AGOA.
Zambia
The economy has come under strain as external headwinds and domestic pressures have intensified. GDP growth slowed to 3.6 percent in 2015 from 4.9 percent in 2014. External headwinds include slower regional and global growth and the strengthening of the U.S. dollar against the kwacha. Domestic pressures include a power crisis impacting on all sectors of the economy, repeat fiscal deficits that have weighed on investor confidence, and low and poorly-timed rains that have reduced agricultural incomes of the poorest households.
Recent developments
On the back of higher copper production, foreign direct investment in manufacturing and the mining sectors, government infrastructure spending, and stronger private sector investment in construction and services, Zambia grew at an average annual rate of 7 percent between 2010 and 2014. But as copper prices plummeted in 2015 the Zambian economy has come under strain.
External headwinds have intensified, including slower regional and global growth and a sharp decline in the price of copper. While many commodity-driven economies face this threat, it has been more severe for Zambia as copper accounts for 75 percent of exports. Domestic pressures have also risen. Zambia faces a power crisis, repeated fiscal deficits have reduced confidence in the economy, low and poorly-timed rains have dented agricultural incomes of population in poverty, and the mining sector has faced job losses. The country’s currency, the kwacha, lost 41 percent of its value against the dollar during 2015, making conditions yet more adverse. The strength of the dollar globally was a factor, but the kwacha’s decline was much greater than other currencies in the region. Since November 2015 exchange rate stability has been achieved through central bank intervention and changes to inter-bank trading rules. Following the loose fiscal position and depreciation of the kwacha, inflation picked-up from 7.3 percent in August 2015 (year-on-year) to 21.1 percent in December 2015 and remained above 20 percent in February 2016. Inflation will remain elevated until pass through from the depreciation unwinds in the second half of the year.
Fiscal expansion since 2012 has helped to boost GDP, but it has exhausted fiscal space, and reining in deficits is now vitally important for macro-fiscal stability. Government spending advanced by an average 12.3 percent in real terms since 2012, and the fiscal deficit reached 8.0 percent of GDP in 2015, up from 6.1 percent in 2014. The 2016 budget plans a consolidation but one based on higher revenues to meet still -higher expenditures.
Given slower growth, surging external debt service costs (following depreciation), August-11 election spending pressures, and a need for emergency power imports, the 2016 budget appears optimistic. While the deficit can be reduced in 2016, it is unlikely that the government meets its target of 3.6 percent of GDP. Large Eurobond issuances in 2012, 2014 and 2015 have been used to finance the deficits, almost doubling the size of external debt relative to GDP from 13.5 percent in 2012 to 38.7 percent in 2015. Total public sector debt breached 52 percent of GDP in 2015.
Copper prices declined by almost a third from their peak in February 2011 to US$4,595 per metric ton by February 2016 (LME), and are expected to remain soft over the medium-term as global supply currently exceeds demand. Accordingly the current account registered a deficit of 3.4 percent of GDP in 2015 after a surplus of 2.1 percent in 2014.
Poverty in Zambia remains stubbornly high, especially in rural areas where three out of every four people had income below the national poverty line in 2010. Such situation is likely to continue this year linked to the failure- and late onset of 2015 rains, which will reduce agricultural incomes in 2016 and cause some households to fall into poverty. On the other hand, the benefits of growth have accrued mainly to urban areas where many of the gainful economic activities in the country take place, such as in the highly urbanized Copperbelt and Lusaka regions. But recent adverse developments in the country, such as power shortages (and effects on SMEs in industry and services) and depreciation may impact adversely on urban centers. Zambia also has one of the most unequal distributions of income in Sub-Saharan Africa, with a Gini coefficient of 55.6.
Risks and challenges
Lower copper prices, power outages and fiscal imbalances present the major challenges over the medium term. Large fiscal deficits will remain costly to finance, sending adverse signals to investors that reduce confidence in the kwacha. Bringing spending on subsidies and government salaries under control is an urgent priority. Reforming farm subsidies is important for both poverty reduction and fiscal consolidation. And improving the economic benefits from Zambia’s mineral wealth in an environment of depressed world prices is a further challenge. Income inequality poses a major impediment for poverty reduction in Zambia as it erodes possible gains associated with income or economic growth, reflecting inequalities in the access to assets, services and opportunities across the population which could compromise the prospects of future generations.
Zimbabwe
The post-dollarization boom is over and trend GDP growth is now 2-3 percent. Continued adverse weather conditions have drastically reduced agricultural production, and Zimbabwe is forecast to grow by 1.4 percent in 2016. Recently, per capita income has stagnated as trend growth barely covers population growth. In 2016, poverty is expected to rise and the poor, especially in rural areas, will bear the brunt of the decline in economic growth. Moreover, the economic downturn generates continued deterioration in income distribution, leaving the rural poor even poorer.
Recent developments
In 2015 growth slowed to 1.1 percent down from 3.8 percent in 2014 driven by poor agricultural output (figure 1). The worst affected are those that reside in rural areas as agriculture is the foundation of rural livelihoods. As a result, the poverty rate is estimated to have increased by approximately 2.8 percent in rural Zimbabwe (figure 2). Rural areas are home to two-thirds of Zimbabwe’s population, 79 percent of the poor and 92 percent of the extreme poor. The decline in production of both cash and subsistence crops has negative welfare implications. The sharp decline in the rural areas’ production base contrasts with greater resilience displayed by a number of sectors in urban areas, leading to a growing income divide between the rural and urban areas. Though the manufacturing and mining sectors struggled in 2015 due to rising capital costs, decline in external competitiveness, as well as sharp declines in commodity prices among other factors, a persistent shift in economic activity from industry to services ensured that growth continued in urban areas. The services sector grew by 2.7 percent in 2015.
The fiscal situation remained tight in 2015 as Zimbabwe follows a cash budget. The fiscal deficit remained below 3 percent of GDP, far below the average of Sub Saharan African countries. However, about 80 percent of total expenditure covered the wage bill, leaving little for other crucial spending such as social and capital spending that impacts directly on the poor. And user fees became the source of revenue for non-wage expenditures in education and health services, again negatively impacting access for the poor.
The current account balance is large at 10.8 percent of GDP in 2015. This is almost equal to the investment rate of about 13 percent of GDP, mainly driven by appreciation of the U.S. dollar against major trading partner currencies and inadequate domestic production. International reserves remained at around 2 weeks of import cover in 2015, leaving Zimbabwe highly exposed to external shocks.
Inflation remained in negative territory, as prices declined by 2.4 percent in 2015, driven mostly by depressed domestic demand and depreciation of the South African Rand. Deflation was experienced in both tradable and non-tradable goods. The depressed prices at least served as a hedge for the poor, as food inflation remained lower than any other CPI category in 2015.
Risks and challenges
Despite near-term adverse developments, Zimbabwe’s growth prospects appear to be favorable in the medium to longer run, with a pickup in output growth to more than 5 percent in 2017, provided the risks and challenges associated with investment spending are addressed. To rebound above trend growth, Zimbabwe should prioritize attracting stronger foreign investment. For example the current guidelines of the Indigenization Act are still not clear on the compliance levy. There is need for much greater transparency in the design of investment policies.
Zimbabwe’s current challenge is that the rural economy, where most of the poor live is not integrated into the mainstream of economic activity. The reorganization of the rural economy in the wake of land reform provides an opportunity for broad-based growth, but both the extent of this growth and its contribution to public finances will hinge on the authorities’ efforts to strengthen tenure security in the rural sector and create a stable investment climate for both large agribusinesses and smallholder farmers. Formal financial intermediation is critical to strengthen agricultural value chains and tighten integration with international markets.
Zimbabwe has a comparative advantage of a well-educated population that can be exploited to increase economic growth by exporting services. The current stepped up polices on remittance channels should be complemented by government policies that attract service industry into Zimbabwe and build a base for exporting services.
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Development Committee: IMF Managing Director’s written statement – 2016 Spring Meetings
Statement from the Managing Director of the International Monetary Fund, Christine Lagarde, for the Development Committee’s ninety-third meeting to be held in Washington, DC on Saturday, April 16, 2016.
The outlook for the world economy has weakened further over the last six months, and risks have increased. A durable recovery is not yet established, with many countries adversely affected by protracted low commodity prices, financial market volatility and tightening financial conditions, rebalancing of demand in China, and the fallout from geopolitical conflicts. However, market sentiment has recently improved in response to incoming data, providing policymakers an opportunity to consolidate the recovery by committing to a set of policy actions – as determined by available policy space – that contributes to lift both national and global growth.
A three-pronged policy response by member countries in the monetary, fiscal, and structural areas can trigger a virtuous circle, both reinforcing economic activity and reducing macro-financial stability risks. The Fund stands ready to support its members to navigate difficult circumstances and meet their commitment to growth and development as well as to address new challenges.
Economic outlook and risks
The global recovery has weakened
The global economy grew at a sluggish (annualized) pace of 2.7 percent in the second half of 2015, reflecting an unexpected slowdown in the last quarter of the year, including in the United States, Japan, and other advanced Asian economies. The marked drop in commodity prices has hit many commodity-exporting emerging and developing economies (EMDEs) hard, while the favorable impact of lower prices on commodity importers has been less than expected. Incoming data has shown positive signs, albeit with global growth expected to remain modest at 3.2 percent in 2016.
The recovery in advanced economies continues to be restrained
Weak demand, unfavorable demographics, and low productivity growth continue to restrain the recovery in advanced economies (AEs). Growth in the United States is flat, owing in part to a strong dollar, while low investment, high unemployment, and weak balance sheets continue to hold down growth in the euro area. A sharp fall in consumption spending pushed the Japanese economy into recession in the fourth quarter of 2015. While accommodative monetary policy and low oil prices will support domestic demand in AEs, still-weak external demand and somewhat tighter financial conditions will weigh on recovery. Inflation in AEs is now at very low levels, helped by the large decline in oil prices, and should remain well below central bank targets in 2016.
Stresses in several large emerging economies show no signs of abating
Risks remain elevated in emerging economies (EMs). A number of large EMs – including Brazil and Russia – are still mired in recession. These, as well as several other oil and commodity exporters (Ecuador, Colombia, Arab States of the Gulf), continue to adjust to weaker terms of trade and tighter external financial conditions. The ongoing rebalancing in China has slowed growth, albeit to a more sustainable level. Some EMs continue to face tighter financial conditions, strains in corporate balance sheets, and associated banking sector risks. Moreover, civil conflict and large movements of refugees have posed severe challenges for several countries (including Jordan, Lebanon, and Libya). India remains a bright spot, with continued strong growth, while activity remains robust in many other emerging Asian economies (such as Indonesia, Philippines, and Thailand).
Low-income developing countries are also facing important challenges
Having experienced strong growth for more than a decade, economic activity in low-income developing countries (LIDCs) slowed from 6.1 percent in 2014 to 4.5 percent in 2015. Commodity exporters, in particular oil producers, have been hit hardest – for example, the pace of growth in 2015 was halved in Nigeria and Republic of Congo. Countries less dependent on commodity exports have been faring better – with growth remaining above 6 percent in Bangladesh, Tanzania, and Vietnam – although some have been hit by climate shocks and natural disasters (including the Horn of Africa, Liberia, and Nepal). Domestic conflict and difficult security situations have taken a toll in several countries (including Chad, Somalia, and Yemen).
Risks have increased
The balance of risks to economic prospects for EMDEs is still tilted to the downside; these include potential further weakening of commodity prices, continued uncertainty about the near-term growth and spillover effects from China’s transition, and increasing financial turbulence, especially in EMs, which could face a disorderly pull-back of capital flows. Trade growth has slowed significantly and spillovers through the trade channel could exacerbate the weakness in global activity. Also, non-economic shocks – related to geopolitical conflicts, terrorism, refugee flows, and global epidemics – remain a risk factor in several countries and regions, with the potential to have a significant adverse impact on global economic activity.
Policy challenges facing emerging and developing economies
With limited room for maneuver, policymakers in EMDEs face the challenge of strengthening growth and resilience
In many EMDEs, the scope to ease fiscal and monetary policies is constrained by a mix of elevated debt levels, inflation concerns, and balance-sheet exposures. A potent policy mix is needed:
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Countries with room for maneuver should use fiscal policy to support growth while safeguarding debt sustainability (as done by Canada with its recent budget). Where fiscal space is limited, policies need to focus on targeted fiscal consolidation and growth-enhancing fiscal reforms, while protecting the vulnerable and maintaining economic inclusion goals.
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In EMs, monetary policy must grapple with the impact of weaker currencies on inflation and private sector balance sheets (as in Turkey). Exchange rate flexibility should be used to cushion the impact of terms-of-trade shocks. Many EMs also need to carefully monitor and contain the rapid growth of leverage – on both household and corporate balance sheets.
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Structural reforms, outlays on infrastructure, and active labor market policies can provide short-term stimulus while also raising longterm economic potential. Given the diversity of country situations, national reform priorities need to be appropriately sequenced, responding to differences in level of economic development and strength of institutions. And in countries highly reliant on commodities, as well as many LIDCs, policies to promote economic diversification are essential.
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Global cooperation is vital to spur a more resilient and sustainable global economy from individual country efforts. Key actions needed include reforms to strengthen the global financial safety net, shore up global trade, tackle corruption, and further the financial regulatory reform agenda.
Domestic and international policies need to address the refugee crisis in both recipient and source countries
Forced displacement has become a pressing issue for source, transit, and recipient countries alike, against the background of a deepening refugee crisis. Early integration into national labor markets (by allowing asylum seekers to work and receive targeted support to overcome initial barriers to gaining employment) is key to assuring refugee well-being and containing the fiscal cost associated with large refugee inflows. Implementation of international commitments to reduce the costs of sending remittances would provide an important boost for source countries. A concerted effort from the international community – including through financial assistance, grants and humanitarian relief – is urgently needed to help support EMDEs that are shouldering the burden from the ongoing refugee crises. External support to countries with already-high levels of public debt (e.g. Jordan, Lebanon) should be in the form of either grants or highly concessional loans, if risks to medium-term public debt sustainability are to be contained.
Making progress on the long-term development agenda is crucial
Notwithstanding macroeconomic adjustment challenges, countries need to press ahead with strategies to achieve their longer-term development objectives. Priority actions typically include measures to strengthen domestic resource mobilization, improve the efficiency of government spending, and deploying policies to promote inclusion. Strengthened public investment management capacity will help ensure that infrastructure investment boosts productive capacity without threatening sustainability, while the deepening of domestic financial markets will expand funding sources, enabling governments to provide counter-cyclical demand support.
Concluding remarks
Lending The Fund has provided financing to countries hit by lower commodity prices and natural disasters
New disbursements under the Rapid Credit Facility were approved for Central African Republic, Dominica, and Madagascar; new arrangements were approved for Mozambique (Stand-by Credit Facility) and Kenya (combined Stand-by Credit Facility/Stand-by arrangement). Efforts to raise an additional SDR 11 billion in PRGT loan resources are underway that would enable the Fund to continue providing concessional support to eligible countries for several years to come.
Capacity building and policy advice
Delivery of technical assistance and training to support domestic revenue mobilization efforts are being scaled up, including in handling international tax issues. Staff has reached out to development partners for expanded support for Fund capacity-building activities, including in support of the Financing for Development agenda. Synergies between surveillance and capacity development are being strengthened, including in such areas as revenue mobilization, energy subsidy reform, building social safety nets, Islamic finance, and fiscal data compilation and reporting. The Fund has begun implementing a structured approach for capacity development activities in fragile states tailored to national absorptive capacity, with a focus on training, sustained followup, and results-based monitoring. Online learning has been strengthened further with the launching of Spanish and Russian versions of the Financial Programming and Policies course to better serve the needs of members.
Quota and governance reforms
The entry into force of the 14th General Review of Quotas and the Board Reform Amendment resulted in an unprecedented doubling of total quota and a realignment of quota shares to better reflect the changing relative weights of the Fund’s member countries in the global economy. Given the importance of a strong, quota-based, and adequately resourced IMF, the Fund will continue to work toward the completion of the 15th General Review of Quotas, including a new quota formula, by the 2017 Annual Meetings.