Global financial crisis a threat to Zimbabwe's revival hopes

A new IMF report released last week said the raging global economic

crisis would severely cripple most sub-Saharan African countries,

particularly those whose economies are donor- or remittance-dependent

and rely on non-oil commodity exports.

The Bretton Woods institution sees a drastic reduction in aid flows in

2009 and beyond as donor nations focus on dousing their own financial

infernos.

Potential reductions in aid flows are a serious concern. Empirical

evidence shows that aid is procyclical with both donor and recipient

incomes, the IMF said.

This casts serious doubts about the ability of countries like Zimbabwe

to attract desperately-needed donor assistance seen as the only way

out of a nine-year economic crisis.

The troubled southern African country, still smarting from a ruinous

political dispute between President Robert Mugabe and former

opposition leader Morgan Tsvangirai wants at least US$2 billion to get

its economy ticking again.

To assist in the rebuilding process, Zimbabwe's neighbours in the

Southern African Development Community (SADC) have announced plans to

convene an international aid conference to appeal for donor funding.

This could prove a tough task as the global downturn and ongoing

stress in the international credit markets have curtailed aid inflows

to low-income countries (LICs).

The financial crisis is also sharply reducing private sector credit,

in part reflecting banks' need to increase liquidity buffers given

expected cuts in external credit lines, said the Bretton Woods

institution.

Given the prevalence of foreign-owned banks, most developing countries

may also face the threat of withdrawal of funds by parent companies of

the financial institutions, the IMF warned.

Desperately needed foreign direct investment (FDI) to LICs is expected

to shrink sharply in 2009, with the IMF saying inflows could drop by

about 20 percent from their 2008 levels.

FDI inflows into Zimbabwe have dried up since 2000 when the country

embarked on a controversial programme to compulsorily acquire

white-owned commercial farms.

The country has experienced an unprecedented flight of capital amid

fears of an infringement on property rights.

Another fall-out from the current global crisis, according to the IMF,

would be its effect on trade by developing countries.

Trade in commodities and services such as tourism has become a

significant source of growth in developing countries over the past 20

years.

Most exports from Africa and other poor regions go to the advanced

economies but, with global demand declining, commodity prices are seen

taking a tumble in 2009.

The high concentration on commodities may further aggravate the

impact of the global growth slowdown on LICs, to the extent that the

demand for commodities is highly pro-cyclical, with implications for

both volumes and prices, said the IMF.

It forecasts that the average proportion of LICs' exports to Gross

Domestic Product (GDP) will decline from 26.6 percent in 2008 to 21.8

percent this year due to the global recession.

The global crisis is also expected to hit the fragile Zimbabwean

economy where it hurts the most – tourism.

Another Zimbabwean cash-cow, the tourism industry is seen contracting

in 2009 as tourist numbers nosedive.

The financial crisis and global recession will aggravate the fiscal

vulnerability of developing countries, with budget revenues expected

to suffer as economic activity slows and commodity prices fall,

pressures on spending increases and financing conditions continue to

tighten.

The slowdown in economic activity and trade will affect fiscal

revenues directly, given the reliance of countries like Zimbabwe on

trade taxes.

This is particularly true of the 2009 Zimbabwe national budget which

is premised on the collection of substantial tax revenue to finance

civil service salaries and other government expenditures amounting to

US$1.9 billion.

In addition, falling remittances from abroad can be expected to hit

domestic consumption and hence revenues from consumption taxes.

The IMF noted that poor countries would experience spending pressures

triggered by an expected rise in poverty and the attendant need to

strengthen social safety nets as well as the impact of falling export

revenues on the budget.