International Monetary Fund (IMF)Position Paper on Global Financial CrisisSubmitted By: Anand Kumar Srivastava M. Sc. Development Finance Frankfurt School of Finance and Management Sonnemannstraße 9-11, 60314 Frankfurt am Main, Germanywww. frankfurt-school. de Global Financial Crisis: IMF PerspectiveThe Financial crisis has affected the economies around the world very seriously at various fronts. On one hand, the advanced economies experienced an unprecedented 7½ percent decline in real GDP during the fourth quarter of 2008, and output is estimated to have continued to fall almost as fast during the first quarter of 2009. Although the U. S.
economy may have suffered most from intensified financial strains and the continued fall in the housing sector, Western Europe and advanced Asia have been hit hard by the collapse in global trade, as well as by rising financial problems of their own. In the context of emerging economies, they too are suffering badly and contracted 4% in the fourth quarter in the aggregate. This damage in the global system is created by both financial and trade channels, particularly to East Asian countries that rely heavily on manufacturing exports and the emerging European and Commonwealth of Independent States (CIS) economies. Simultaneously with the rapid cooling of global activity, inflation pressures have subsided quickly.
Commodity prices fell sharply from midyear highs, causing an especially large loss of income for the Middle Eastern and CIS economies but also for many other commodity exporters in Latin America and Africa. At the same time, rising economic slack has contained wage increases and eroded profit margins. As a result, 12-month headline inflation in the advanced economies fell below 1 percent in February 2009, although core inflation remained in the 1½–2 percent range, with the notable exception of Japan.
As mentioned above, there are many reasons to be considered for this problem. Continuous de-leveraging by the financial sector and serious declines in consumer as well as business confidence has started a sharp deceleration in domestic demand across the globe. The decline in commodity prices is providing some support to commodity importers, but is affecting the growth of commodity exporters severely. Global growth is also a very important point to consider because activities are expected to decelerate from 3½ percent in 2008 to ½ percent in 2009 before embarking on a gradual recovery in 2010.The developed economies are facing their sharpest post-war reduction.
The euro area and Japan have been hard hit by the decline in external demand. Activity in these countries is now expected to contract by 2 percent in 2009, followed by a modest rebound in 2010.On the other hand, LICs are exposed to the current global downturn more than in previous episodes because they are now very much integrated than before with the world economy through trade, FDI, and remittances.
The crisis significantly impacts these countries because of the reduced demand for their exports. Many LICs are also hit by lower remittances and foreign direct investment (FDI) while aid flows are under threat. Growth of remittances was flat in the second half of 2008, and is expected to be negative in 2009. A sharp slowdown in FDI is expected in about half of all LICs.