What are African leaders saying about the impact of the crisis? Latest overview

May 26, 2009

     By Duncan Green     

The African Development Bank is doing some excellent analysis and has just updated the paper submitted to the April G20 Summit by African Finance Ministers and Central Bank Governors (new paper here, original paper for G20 here). Main points:

‘For the first time since 1994, per capita income will contract in 2009 for the continent as a whole. Indeed a growth crisis has set in. The revised forecasts put Africa’s growth at 2.3 percent for 2009.

The biggest concern is that the growth crisis may degenerate into a development crisis as the recession deepens.

Effective crisis response requires a scaling up of resources in addition to delivery of planned development aid.

Exports from the continent are expected to fall by more than USD 250 billion in 2009. Oil and mineral exports will suffer the largest losses. Mineral and coffee exporters will also be hit.

Trade taxes will fall dramatically. In 2009, the continent will suffer a shortfall in trade tax to the tune of USD 15 billion, representing 1 percent of GDP and 4.6 percent of government revenue. Oil and non-oil exporting companies will be equally affected.

The one relatively bright spot in this gloomy picture is that remittances appear to be relatively more resilient to the economic downturn [see my recent post on remittances for the explanation]. The relative resilience of remittances and their direct impact on household incomes, calls for increased attention to this form of external financing by policy makers. The focus should be on policies to reduce transactions costs for remittances transfers. Remittances can contribute to increasing the pool of long term finance, notably by channeling them into infrastructure bonds and Diaspora bonds.

The crisis threatens to undermine macroeconomic stability due to widening current account and budget deficits. The Bank projects a budget deficit 5.8 percent of GDP, down from a surplus of 2.8 percent in 2008. The current account balance will deteriorate from a surplus of 2.7 percent of GDP in 2008 to a deficit of 5.3 percent of GDP in 2009. The widening “twin deficits” severely limit the ability of African governments to undertake needed crisis response initiatives and to sustain their development programs.

While the banking sector had been spared the first-round effects of the financial crisis, it is now experiencing second-round effects through a surge in non-performing loans [resulting in] contraction of credit.

With lower commodity prices and reduced access to credit, farmers will be unable to buy fertilizers and seeds. This leads to reduced productivity and lower food production. In some countries, farmers are already cutting back on the cultivated area, as a result of rising fertilizer and fuel prices. Few farmers have been able to take advantage of the higher food prices by raising production.

What to do?
Just to achieve the pre-crisis growth rates, African countries would need USD 50 billion [per year] to finance the investment-saving gap. To achieve the 7 percent growth rate that is deemed required to achieve the MDGs, the financing gap rises to USD 117 billion. Fulfilling the preexisting aid pledges is not enough to meet the rising demands from African countries; aid needs to be scaled up.

Africa still has opportunities to continue growing. However, this requires promoting growth driven by domestic investment and consumption. The policy focus should be on: i) sustaining adequate levels of public spending; ii) pursuing efforts to improve the business environment; iii) increasing domestic resource mobilization; iv) alleviate supply side bottlenecks, especially by increasing investment in infrastructure and increasing access to credit for the domestic private sector; v) fostering regional economic integration.

In addition, African countries need to pursue prudent capital control strategies to promote private capital inflows while minimizing the risk of abrupt capital reversals.’