Oxfam International has released The Impact of the Global Financial Crisis on the Budgets of Low-Income Countries, prepared by Development Finance International, Inc (DFINTL). By examining the financial performance and policies of 56 low-income countries (LIC) during the period 2009-2010, the study aims to analyze the impact of the global financial crisis on the budgets of low-income countries and consequently on their spending to reach the Millennium Development Goals (MDGs).

It finds that the crisis created a huge “fiscal hole,” with LICs’ budget revenues being reduced by US$65 billion in 2009-2010. Prospects for the whole of 2010 are neither very promising, as the report expects that 46% of the LICs will have revenues that are below 2008 levels. It warns that, even if rich countries recover from the crisis, poor countries will continue to suffer because of the "time lag in transmission."

To face the crisis, the greater part of LICs resorted to “fiscal stimulus” in 2009. However, only a few of them continued this policy in 2010 as the International Monetary Fund advised them to reduce their social spending. The report notes "While the IMF protected social sector spending at the start of the crisis, it is now advising countries to reduce it."

Regarding the impact of the crisis on MDG spending, the report finds that, despite the crisis, some countries made efforts to focus expenditures on MDG-related issues. Nevertheless, these spending policies varied widely per country and per sector. In particular, health, infrastructure and agriculture were the sectors benefitting most, while social protection and education were the most neglected. In addition, the report warns that for 2010 most countries are further reducing their budgets for “one or more of the priority pro-poor sectors of education, health, agriculture and social protection, just at a time when they need to massively increase such spending."

While recalling the promises made by G20 leaders to increase external financing in order to help poor countries to combat the crisis and reach the MDGs, the study underlines that so far the average increase in grants "filled only 13% of the ‘fiscal hole’ created by the crisis." In addition, the mechanism to deliver the grants is very slow due to related conditionalities and bureaucracy. Too much time is lost between the making of financial commitments and the actual distribution of these resources to LICs through the international financial institutions (IFIs). As a consequence, the report stresses, LICs must resort to domestic loans or run down their reserves.

The report concludes by calling upon the international community to sign up to tough new aid targets at the Millennium Summit in September 2010; to guarantee additional sources of “innovative financing;” and to provide grants in exceptional circumstances. It further recommends to take into account domestic debts and to monitor MDG spending in a transparent way.

Finally, the report proposes LICs to increase their MDG-related expenditure, in particular on education and to try to "fill the revenue hole caused by the crisis by raising taxes on income and property … as well as on foreign investors."

The report is available online.

Source: NGLS