Crisis batters fragile states’ finances

06/10/2009 | Phil Thornton

Countries in a fragile state because of conflict or natural disaster – and which had no part in causing the financial crisis – are being hit by a slump in remittances and foreign investment, the World Bank is warning.

Aid revenues and grants for fragile and conflict-affected countries (FCC), most of which are low-income countries, shrank by an average of 4% of GDP between 2007 and 2008.

Alastair McKechnie, director of the FCC Group at the Bank, told Emerging Markets that remittances – money sent back by workers who have gone abroad for jobs – could contract by as much as 8% this year in sub-Saharan Africa, which is home to most FCCs.

The FCC category includes Afghanistan, Timor-Leste, Sudan, Somalia, Guinea and about 30 others countries. They account for a sixth of the world’s population but a third of all people surviving on less than $1 a day.

Many FCCs are heavily dependent on exports of commodities such as oil, cocoa, cotton and metals, whose prices has fallen substantially from pre-crisis levels although they have risen over the summer.

“In the absence of appropriate countervailing action, the economic environment in many FCCs could further deteriorate, with associated risks of collapse and conflict relapses,” McKechnie said.

The loss of remittances would undermine governments’ tax revenues which in turn would make it harder for them to meet rising unemployment bills and to pay for police and security forces, which may in turn fuel instability, he added.

McKechnie said the World Bank may need to ask for more donors. Axel van Trotsenburg, the Bank’s Vice President for Concessional Finance, last week told Emerging Markets that the bank may call for a short-term cash injection later this year to help it assist low-income countries hit by the crisis.

“Potentially we may need to look outside [existing resources] and we are in the process of thinking through this and consulting with the donors on this,” he said.

McKechnie said that the bank may need more resources specifically for FCCs, which had been hit by the crisis much later than middle- and low-income countries and had received support from either the IMF or the bank.

A key message is “to use the resources they have to achieve the greatest impact on poverty and development,” he said.

Globally the bank estimates that the crisis will add 90 million people to the 2010 poverty headcount. In sub-Saharan Africa and South Asia, the largest proportional increases in poverty are expected hit the FCCs.

Cape Verde’s finance minister, Cristina Duarte, told a forum of small states on Sunday that remittances were a huge issue for her country.”We’ll concentrate on analysing and discussing the role of remittances—how can we better manage remittances, which are an important capitals inflow for our country.”

She said that no single country could survive on its own, and so far, she says, her small state was “fighting with success the international crisis”.

McKechnie said the largest worry for FCCs was that now they had been weakened by the financial crisis, they were more vulnerable to the impacts of an unexpected natural disaster, who would sap its already depleted resources.

“Lower growth and higher unemployment rates, notably among the youth, can have further destabilizing effects and increase the risk of conflict relapses,” he said.

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