Trade Negotiations Insights • Volume 8 • Number 4 • April 2009

The financial crisis and Africa

Monitoring the effects, policy responses, and new development models

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The G20 London Summit is over and the verdict is out. So, what is in it for Africa? While there are some really good promises on aid and finance, now we need to wait and see whether and how the USD 50 billion earmarked for low-income developing countries (1) will actually flowto those who need it, under what conditions, and whether this will flowthrough reformed or old style institutions. We also need to wait and see whether the G20 countries refrain from becoming more protectionist, and if they will engage in a ‘rainbow stimulus’, (2) thereby investing in Aid for Trade, protecting the poorest, and supporting low-carbon technologies. And we need to wait and see if global financial regulationwill be improved. Finally, the G20 has also asked for a monitoring of the effects of the global financial crisis on developing countries.

In light of this, the Overseas Development Institute (ODI) is co-ordinating a large study examining the effects of the global financial crisis in ten developing countries. This links developing country research institutes, think tanks, and donor agencies, with funding from the UK Department for International Development (DFID) and the Dutch Ministry of Foreign Affairs. The research is ongoing, and the following reflects the views of the authors alone, but there are already important preliminary findings.

The International Monetary Fund (IMF) suggests that around 30% of low income countries could be considered highly vulnerable to the consequences of the global financial crisis. About 50% of these highly vulnerable countries are in sub-Saharan Africa (SSA) and the majority face sizable declines in projected GDP, some in excess of 5%. About 60% of the countries are also found to be highly vulnerable to the simulated shock (trade remittances, foreign direct investment (FDI), aid). Here too, more than half are in SSA. Of the African case studies, Ghana and Zambia are highly vulnerable to the effects of the global financial crisis, followed by Benin, Nigeria, Kenya, and Uganda.

We are engaging in a unique monitoring study that has, at its heart, 40 researchers working in 10 developing countries: Bangladesh, Benin, Bolivia, Cambodia, Ghana, Kenya, Indonesia, Nigeria, Uganda, and Zambia. The current research examines the ways in which different countries are
being affected by the developed countrycreated economic crisis. Even though there is some inevitable time lag between the impact in the north and in the south, and while it is always difficult to interpret high frequency data, the research has already found clear signs of stress, which are further elaborated on below.

For one, portfolio investment flows experienced a dramatic drop in 2008 in most countries, resulting in some large net outflows and a significant decline in equity markets in 2008 and into 2009. In Uganda and Zambia there was a considerable drop in foreign portfolio investment. Kenya too experienced net portfolio outflows of about USD 48 million in June 2008 and USD 12 million in October 2008. There is also evidence of the increased tightening of credit conditions for bank lending in Ghana and Zambia. FDI has been less affected, but this varies across countries. The financial contagion is not, however, the severest of the shocks revealed in our results so far.

The real shock facing the 10 countries reviewed is worse: export values are falling. InKenya, remittances were down 27% in January 2009 compared to January 2008, after a year of volatility. Aid to Uganda fell i2008, and might decline further due to the global financial crisis. Zambia lost 8,100 (25%) of its 30,000 mining jobs in 2008.

Economic policy responses to the global financial crisis vary widely in Africa, from ‘business as usual’ to more pro-active approaches. Some countries are considering implementing or accelerating growth policies (e.g. Mauritius), or even implementing a fiscal stimulus. But others have responded with only very small monetary policy steps and not much else (e.g. Kenya or Uganda).

There is also a wide range of social policy responses in the ten countries. These range from significant reductions in overall social sector allocations (Nigeria and Zambia) to countries where, with donor support, social protection provisions are being extended rapidly from a low base, to others where an already well developed system is being expanded to respond to increased need. The scale of the social protection response may be determined by the extent of revenue contraction, the ability of the government to access resources to finance the fiscal deficit, and the pre-existence of a social protection system.

It will be important to continue monitoring the effects of the global financial crisis on developing responses. And while this alone will not help the poorest, it may well lead to a faster understanding of developing country policy and better informed actions focused on addressing the fall out of the global financial crisis on developing countries.

Author
This article was authored by: Dirk Willem te Velde, ODI; Olu Ajakaiye, African Economic Research Consortium; Oluwatayo Oni Fakiyesi, University of Lagos, Nigeria; Sarah Ssewanyana, Economic Policy Research Centre, Uganda; Amoussouga Gero Fulbert, Professor, Université d’Abomey-Calavi, Benin; Manenga Ndulo, Dale Mudenda, Lutangu Ingombe, and Lillian Muchimba, Department of Economics, University of Zambia; Francis Mwega, Department of Economics, University of Nairobi; Charles Ackah and Ernest Aryeetey, Institute of Statistical, Social and Economic Research, University of Ghana

Notes
1. See: www.londonsummit.gov.uk/resources/en/ news/15766232/communique-020409
2. See: www.odi.org.uk/resources/details.asp?id=2863&title=blue-green-red-rainbow-stimulus-tackle-global-recession

One response to “The financial crisis and Africa”

ubani anderson 30th April 2009 at 12:14
nigeria should do enough to takle the crisis by diversifying the economy