How is Africa affected by the financial crisis –and by global recession?

Some recent voices on Africa and the financial crisis:

  • IMF World Economic Outlook, released 8 October 2008 (reflecting an analysis prior to that date):
    “Economic growth in Sub-Saharan Africa (SSA) is expected to moderate in the face of the financial  turmoil and high energy and food prices… Overall growth is projected to decline from near 7 percent in 2007 to just over 6 percent 2008-2009.”
  • Shanta Devarajan, World Bank chief economist, 6 October:
    “Now there is a risk that if there is a really difficult  financial crisis in the United States and Europe and risk aversion rises, it is possible that these capital flows which have fuelled growth in Africa will fall… It will be very, very serious problem for the continent.”
  • Donald Kaberuka, president African Development Bank, 7 October 2008:
    “Although Africa is relatively protected from the initial impacts  on the financial markets, the continent could be seriously affected by the weakening of global economic growth and a decline in demand  for products from emerging markets... The current crisis will increase the cost of borrowing on capital markets, and make access to the markets more difficult… Budgetary pressures resulting from the various rescue plans could reduce the volume of aid and investments in Africa, and lead to rise of protectionism.”
  • Raila Odinga, Prime Minister Kenya, 8 October:
    “They say that when America sneezes, Europe catches cold, Asia develops pneumonia and Africa’s tubercolosis gets worse. This is what we are beginning to see.”
  • Dominique-Strauss-Khan, head of IMF, 9 October:
    “The crisis has turned out worse than even the relatively pessimistic IMF forecast.”

As reflected in these statements, impact assessments of how the financial crisis may affect Africa are changing rapidly. The issue is no longer to what extent Africa is protected from financial turmoil on Wall Street. It is about how Africa will endure a deep and global economic recession, at present of unknown magnitudes. The forecasts on African growth now available from the World Bank and IMF are likely to be revised downwards over the coming months. By how much, and who will be worst hit?

Below just some figures indicating the magnitude of some of the flows that connect Africa to the global economy:

Foreign Direct Investment: Amounts to some 15 billion USD (net inflow to SSA 2006). Time series data reveals it to be a highly volatile flow. It is unevenly distributed across the continent, with South Africa receiving more than a third. South Africa is also an important investor on the African continent.

Official Development Assistance: Amounts to approximately 40 billion USD (net flow 2006). The ODA flow declined during the 1990s and has increased since 2000. The (undesirable) pro-cyclical nature of the ODA flow is debated. It is pro-cyclical in two ways: On aggregate donors tend to reduce aid flows in recession (the cases of Sweden and Finland reducing ODA after the financial crisis in the 1990s illustrative). But it is also pro-cyclical in relation to individual recipients as aid is being cut back when countries in economic (and political) crisis fail to meet conditionality related to economic policies. How much the recession will impact on aggregate ODA flows is a political guess work. However, it is probably completely safe to bet on G8 not honoring its commitment to double the aid flow to Africa by 2010. (When Barak Obama has been asked where he will cut Government spending if forced to, his only concession so far has been to backtrack from the promise to double the aid budget. See Financial Times, 10 October 2008.)    
Workers’ remittances: African diasporas send back some 15 billion USD per year, hence the same amount as FDIs. Africa depends less on remittances than Latin America or Asia, but remittances have increased steadily. As a flow it appears to be less volatile. However it is likely to be affected if there is a drastic worsening of European (and South African) labor markets. Their importance varies considerably across the continent. Examples of countries with a high dependency on remittances (measured in percent of export earnings) are Lesotho (60%), Uganda (40%), Senegal Guinea-Bissau, Togo, Benin, Burkina Faso (15-25%).

Exports, imports and terms of trade: Exports amounts to approximately a third of Sub-Saharan GDP. On average Africa has benefitted from improved terms of trade over the last years. Oil and mineral exporters in particular have benefitted greatly from booming prices. Net importers of oil and food have been on the loosing side, and they constitute the majority of African countries. Just some months ago IMF signaled out 18 countries of particular concern as they are the hardest hit by rising oil and food prices (Liberia, Guinea-Bissau, Eritrea, Togo, Comoros, Malawi, Guinea, Gambia, Sierra Leone, Madagascar, Burundi, Ethiopia, Burkina Faso, Central African Republic, Benin, Mali, Zimbabwe, Congo DemRep). A global recession is likely to put downward pressure on oil prices and probably also on food prices (via cheaper inputs and reduced demand, including for bio-fuels). If so, that would bring in an element of relief to these countries that now have balance of payment accounts under stress. Global recession is hence likely to mean worsening terms of trade for Africa on average, but maybe some reversal of the present trend when it comes to winners and losers on the continent.

The China/India factor: Chinese and Indian trade and investments have increased sharply in Africa. However, when forecasting the impact of global recession it should be kept in mind that that their share of the cake remains limited: It is estimated that 13% of African exports go to China and India (86% of it oil). Asian FDIs are estimated to make up less than 10% of FDI in Africa. So even if China and India were to be unaffected by a recession in the West, which is unlikely, that factor would still not provide Africa with much of a cushion.

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