africa program policy brief September 2009 The Effects of the Global Financial Crisis on African Economies Justine Lindemann, Program Assistant, Kemah Dennis-Morial, Intern, Daniel Asin, Intern Since the onset of the financial crisis in 2007 Africa s generally weak integration with the rest of the global economy has proven to be something of a blessing in disguise. While a lack of integration has hindered trade opportunities, and infrastructural development in many countries is not advanced enough to facilitate high levels of profitable regional or international trade, economic isolation has also shielded many countries from feeling the direct and complete effects of the global financial crisis. Additionally, many have argued that a lack of the toxic asset holdings that have been so detrimental to countries such as the United States and Germany may have shielded the continent from the full impact seen in these western countries economies. Nonetheless, African economies will not emerge from the crisis unscathed. The region s pillars of economic support trade relations, remittances, foreign aid, and foreign investment are all threatened by the worldwide recession. Countries such as South Africa and Nigeria whose economies are more integrated with international markets, saw the effects of the crisis from the beginning, and are continuing to struggle with substandard growth rates and domestic banking crises of their own. Lamido Sanusi, newly in charge of Nigeria s central bank has recently announced a multi-billion dollar bail-out of the country s five largest banks, and is cracking down on corruption as part of a banking reform initiative. While the initial effects of the global financial crisis were slow to materialize in Africa, the impact is now becoming clear and many countries are recording negative growth rates for the first time in close to a decade, making the achievement of their Millennium Development Goals targets that much harder.
Brief THREE-FOLD IMPACT While the banking sector may not have been disturbed in every country, decreases in private investment flows and foreign demand have detrimentally affected the continent as a whole. In general, a depressed external demand has lead to a drop in commodity prices - and thus a reduction in trade - and a decline in capital inflows, including private sector investment, remittances, and tourism receipts. Mozambique s Prime Minister, Remittances, which run at about $15 billion a year to Africa...are likely to be affected. A downturn in this financial support does not bode well for the families who depend on it or for the communities and businesses that benefit from steady cash injections to the local economy. Luisa, Diogo spoke of the so-called credit crunch, saying that his country is suffering from all of the above indicators of an economic downturn 1. The crisis has significantly lowered demand for African exports, especially base metals such as iron, nickel, copper, and zinc, as well as crude oil. This trend is particularly alarming as trade has been the mainstay of recent strong growth in Africa. African economies will likely suffer about $578 billion in lost export earnings over the next two years, representing 18.4 percent of GDP and five times the aid to the region over the period. According to a World Bank study, remittances to Sub-Saharan Africa will drop between 5 and 8 percent in 2009 2. This is not surprising as unemployment rates have soared in Western countries, with some approaching double-digits. Diogo also noted that in sub-saharan Africa as a whole, growth rates in 2009 are estimated to fall to about 1.5 percent, a 4 percentage point drop from the previous year 3. Confirming this analysis, World Bank Chief Economist for Africa, Shanta Devarajan, stated in November 2008 that the impact of the global financial crisis and the ensuing recession on Africa will be mainly three-fold: First, a slowdown in private capital flows will adversely affect economies that had been relying on these flows to finance much-needed investment, particularly infrastructure investment. Already Ghana and Kenya have postponed sovereign bond issues worth about $800 million, he said. In fact, private capital flows fell from $1.16 trillion in 2007 to $707 billion on 2008 4. Second, commodity prices are falling, which hurts exporters but helps importers. Third, he said, remittances, which run at about $15 billion a year to Africa, and foreign aid, are likely to be affected 5. In countries such as Lesotho, where remittances account for 28 percent of the GDP, a downturn in this financial support does not bode well for the families who depend on it or for the communities and businesses that benefit from steady cash injections to the local economy 6. In Senegal, yearly remittances amount to an approximate $1 billion, although some estimate that this figure is actually much higher. This money has been a huge support to the surge in construction seen across the country, accounting for as much as 30 percent of housing construction investments. Worrisome to many is the possibility that a severe downturn in remittances - which is already beginning to be seen - could also stymie the rise in construction and other sectors of development. VARYING EFFECTS ON DIFFERENT TYPES OF MARKET ECONOMIES In general, Africa s weak integration with the rest of the global economy shielded its banking system in particular and its economic system in general from directly and abruptly feeling the impacts of the global financial crisis. Foreign borrowing by banks is regulated in the context of exchange control and banks face little risk associated with off-balance sheet operations 7. However, most African financial markets were affected by the contagion effect, which varies regionally and on a country-by-country basis. The countries most affected were those with the most exposure to banking institutions in Europe and North America - such as South Africa, Nigeria, and 2
The Effects of the Global Financial Crisis on African Economies North African countries, those that rely solely on one or two commodities, and those with a GDP highly dependent on exports to the West. The African Development Bank (AfDB) forecasts that the East African bloc will post better growth on the continent, despite expected poor postings globally because of the economic slow down. Countries such as Uganda, Kenya, and Tanzania are all expected to see improved growth results, with exports and trade as the main economic drivers. Kenya, the AfDB said, is expected to post better economic indicators than previously predicted. The Bank said that while the effects of the global financial crisis are mainly hurting growth in African economies lacking a diverse base of economic activities, Kenya and Uganda should hold up well as their economies export value-added products to neighboring countries as well as agricultural products to the rest of the world. The Bank further observed that the economies that will be hardest hit are those that rely on mining and other natural resource exports, citing the closure of mines in some of the metal producing countries. AfDB also believes that East Africa might end up with the highest growth rate in Africa in 2009, forecasting that Uganda will record 6 percent GDP growth while Kenya s GDP is expected to grow between 5 and 5.5 percent 8. Partly because of their financial integration with other regions in the world, South Africa, Nigeria, Ghana, and Kenya were among the first hit by the global financial crisis, suffering falling equity markets, capital flow reversals, and pressures on exchange rates. Ghana and Kenya had to postpone planned borrowing; in South Africa and Nigeria external financing for corporations and banks is becoming scarce. Similarly, countries like Burundi, Guinea-Bissau, and Liberia are dependent on very concessional financing that may be affected as well 9. SUBSTANTIAL LOSSES TO CRUCIAL SECTORS The financial crisis and global recession will see African economies lose up to $49bn by the end of this year, research by ActionAid suggests. About $27bn of this will be from a fall in aid, export earnings, and income from richer recession-hit nations. The ActionAid report found that countries which liberalized their markets, and were large enough to attract significant investment, will be most affected by the financial crisis. South Africa will be among the hardest hit, as it is likely to see income from abroad plunge to around one fifth of the country s economic output 10. A joint report published in May 2009 by the African Development Bank (AfDB), the Organization for Economic Co-operation and Development(OECD) and the United Nations Economic Commission for Africa (ECA), has predicted that its economy would contract by 1.5 percent in 2009, the first drop in seventeen years 11. The nose-dive in commodity prices has dealt a major blow to mining-based African economies that had registered positive growth over the last few years. Mining companies in mineral dependent economies in Africa are scaling down operations resulting in massive retrenchments and layoffs. Botswana, South Africa, Zambia, the Democratic Republic of Congo, and Zimbabwe are some of the hardest hit countries in southern Africa. These countries have registered significant cuts in their export receipts severely affecting revenue flows for the governments. A sharp decline in commodity prices in the past three months for minerals such as platinum, copper, nickel, and diamonds have slowed down economic growth and led to a decline in government revenues. Metal prices overall have declined by 40 percent since the market s peak in 2008, according to Sudhir Satti, Sector Director of Poverty Reduction and Economic Management (PREM), Africa Section, from the World Bank 12. In Botswana mineral revenues accounted for between 35 and 50 percent of the total government revenues over the past five years 13. Furthermore, Sub-Sarahan Africa s GDP growth rate in comparison with the Global Economy 3
Brief economic growth in oil-exporting countries in Africa such as Nigeria is expected to fall to 2.4 percent this year compared to 3.3 percent for net oil importers, according to the report jointly published by the ECA and the African Union. In general, the sectors most affected by the crisis will be mining, tourism, textiles, and manufacturing. Failing enterprises, cancellations and postponements of projects, and a lack of new enterprises or projects are seen with increasing frequency in suffering African economies. Substantial job losses are mounting with commensurate negative effects on household standards of living 14. Given the situation and it s potential to deteriorate, unless a proactive approach is undertaken to mitigate the impact of the global financial crisis on economies in Africa, the continent will likely reverse recent positive economic trends and possibly revert to periods of increasing levels of poverty that were more common in the past. A GENERAL POLICY RESPONSE PROPOSAL Macroeconomic stability and steady progress toward medium-term development goals are both vital for sustaining growth in Africa. Thus, in responding to the crisis, countries should strive to maintain stability and consolidate their hard-won gains while being mindful of general development goals. Countries should also seize the opportunity to advance their structural reform agendas in order to boost prospects for growth. Without immediate action to combat the crisis, progress on the Millennium Development Goals will stall - or even be reversed. There is also a higher probability of an outbreak or recurrence The G8 s most recent focuses concerning Africa include market access, economic diversification, agricultural development, and regional trade within Africa, which is believed to have a much higher potential than recent performance has indicated. of conflict during severe economic shocks. However, as prospects for African economies have deteriorated, many African countries have improved macroeconomic management through reforms over the past few years which have in part helped to mitigate the effects of the crisis. At a Wilson Center on the Hill Event, former Managing Director of the Global Development Program at the William and Flora Hewlett Foundation, Anne Tutwiler, contended that to attain sustainable long-term growth, the continent must build its trade capacity, which requires foreign markets to remain open for African goods. In all, Africa must garner at least $25-40 billion in foreign investment to accomplish this 15. A possible solution to the problem might be the establishment of economic stimulus programs that create jobs within African economies similar to those currently being employed in Western and Asian economies, such as government investment in key areas: transportation, rural infrastructures, health and education, and the industry sector. Funding for these programs will undoubtedly have to come from non-governmental agencies and organizations such as the World Bank and AfDB. Publicly funded stimulus programs have been somewhat successful in Chinese and, to a lesser extent, in Western economies. Kathryn Lavelle, Wilson Center Scholar and Professor at Case Western University, suggests that South Africa develop strategies through the ongoing G20 process to structure its integration in the world market while protecting itself and keeping demand high 16. Other countries, such as Seychelles, should focus instead on alleviating the effects of fluctuating commodity prices. According to the World Bank, small and open economies such as in Seychelles can expect to be the hardest effected, with an 8 to 10 percent decline in Gross Domestic Product 17. The Central African Republic must overcome difficulties in financing its state bank, as Zambia struggles to privatize its largest copper firm in a competitive world copper market where access to credit from international sources is becoming increasingly tight. Countries with significant mining sectors - such as Botswana have responded to declining mineral prices by holding resources in the ground until prices resurge. The world financial community must ensure access to credit and savings and maintain the existing foreign aid structure during these times of economic vulnerability. The Group of Eight (G8) Africa Action Plan intends to support and facilitate partnerships guided by the African Peer Review Mechanism, a 4
The Effects of the Global Financial Crisis on African Economies system by which African leaders and politicians are each one responsible and hold each other accountable for maintaining levels of good governance and transparency. The G8 s most recent focuses concerning Africa - including during the July summit in Italy -, include market access, economic diversification, agricultural development, and regional trade within Africa, which is believed to have a much higher potential than recent performance has indicated, for instance in 2007 it accounted for 9.5% of total African trade 18. Several African countries participated in the 2009 summit in L Aquila, which is indicative of the developed world s commitment to working with Africa towards a more sustainably prosperous future. Experts attending the World Economic Forum on Africa in Cape Town, South Africa, this June were nonetheless optimistic about the future growth of Africa, despite possible delays in quantitative results. The economic crisis clearly represents both a challenge and an opportunity for Africa and its people; however, economic partnerships are developing, both internally and externally, to create and strengthen opportunities for growth. The meeting of the Group of Eight led to renewed commitment - both financial and political - to Africa s development, including $20 billion in agricultural aid and food security in Africa 19. Proper adjustment and foresight by both governments and the private sector is needed to stimulate African nations back to the path of rapid growth 20. NOTES 1 Mark Gregory, Top Nigerians Shamed as Debtors, BBC News, 20 August 2009, http://news.bbc.co.uk/2/hi/business/8211577.stm. 2 Shimelse Ali, Impact of the Financial Crisis on Africa, International Economic Bulletin, 1, no. 1 (2009), http://www.carnegieendowment.org/publications/index. cfm?fa=view&id=22995. 3 Country Suffering Effects of Credit Crunch, Agencia de Informacao de Mocambique, 4 June Available From <http://www.afrika.no/detailed/18384.html.> 4 The Economist, Remittances: Big, but Dipping, 17 August 2009, http://www.economist.com/world/international/displaystory.cfm?story_id=14205199. 5 Abdul B. Kamara et al., Impact of the Global Financial and Economic Crisis on Africa, African Development Bank Working Paper Series, no. 96, March 2009, http://www.afdb.org/ fileadmin/uploads/afdb/documents/publications/bad%20 96%20Anglais%20%20INTERNET%20PDF.pdf. 6 The Economist, Remittances. 7 Impact of the Global Financial Crisis on Sub-Saharan Africa, International Monetary Fund, 6 March 2009, http:// www.imf.org/external/pubs/ft/books/2009/afrglobfin/ssaglobalfin.pdf. 8 Afrol News, East African Economies May Escape Global Crisis Effects, AfDB, 20 April 2009, http://www.afrol.com/ articles/33004. 9 Where does it hurt? The impact of the financial crisis on developing countries, ActionAid, 16 March 2009, http://www. actionaid.org.uk/101765/some_african_countries_to_suffer_50_drop_in_income_due_to_financial_crisis.html. 10 BBC News Online. Crisis will cost $49bn. (March 16, 2009), http://news.bbc.co.uk/2/hi/business/7945843.stm 11 Liu Ying, Global Financial Crisis Dims Africa s Outlook, Xinhua News Agency, 30 June http://news.xinhuanet.com/english/2009-06/30/content_11627443.htm 12, Africa and the Global Financial Crisis, 13 Tsiko, Sifelani. ( February 24, 2009) Global Crisis Hits Africa Hardest. Mshale. http://www.mshale.com/article/news/news/global_crisis_hits_africa_hardest/18340 14 Impact of the Global Financial and Economic Crisis on Africa. (March, 2009) http://portal.unesco.org/fr/ev.php- URL_ID=44672&URL_DO=DO_TOPIC&URL_SEC- TION=201.html 15, Africa and the Global Financial Crisis, 16, Africa and the Global Financial Crisis, 17 Liu. Crisis Dims Outlook. 18 Kimenyi, Mwangi S. G8 Africa Action Plan: Enhance Strategies for Development. Brookings Institution. Internet Access, 06 July 2009, <http://www.brookings.edu/opinions/2009/0701_g8_africa_kimenyi.aspx?emc=lm&m=227263 &l=7&v=1062966>. 19 G8 summit ends with 20-billion-dollar aid promise, Chinaview, <http://news.xinhuanet.com/english/2009-07/10/ content_11688764.htm>, 10 July 20 Liu, Crisis Dims Outlook. 5