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World downturn squeezing Africa

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World downturn squeezing Africa

Calls for more aid, greater voice in recovery plans
From Africa Renewal: 
Reuters / Howard Burditt
An African stock exchangeAn African stock exchange: Although the initial impact on Africa of the global financial crisis was limited, the slowdown in the world economy is now seriously affecting Africa’s own growth prospects.
Photograph: Reuters / Howard Burditt

As the world’s economic woes deepen, Africa’s leaders are delivering a strong message to the international community that it must help the continent protect the development gains of recent years. Ahead of the April meeting of the Group of 20 (G-20), a high-level consultative body, African leaders met with its host, UK Prime Minister Gordon Brown, in mid-March to tell him that donors must honour their commitments to increase aid, improve trade access and agree to a fairer, more flexible system of managing international financial affairs.

With a global stimulus package on the G-20’s agenda, Ethiopian Prime Minister Meles Zenawi appealed to the self-interest of richer countries. He argued that in the long run “the global stimulus impact of every dollar spent in Africa is higher than if it is spent in the US or UK.” If the crisis is allowed to worsen, he warned, there could be total chaos in some countries and the cost of the resulting violence “is going to be much higher than the cost of supporting Africa.” The World Bank has urged developed countries to devote 0.7 per cent of their stimulus packages to a vulnerability fund for developing countries not able to afford similar stimulus measures.

‘The greatest danger’

The current crisis “poses the greatest danger ever to Africa’s development,” Tanzanian President Jakaya Kikwete told a 10–11 March conference on African development in Dar es Salaam. The International Monetary Fund (IMF) is now predicting the global economy will fall into recession this year, with economic growth in sub-Saharan Africa forecast at best to be barely above 3 per cent — only half the average of the past decade, with a real risk that millions of people will be thrust into deeper poverty (see box).

At the Dar es Salaam meeting, African leaders reconfirmed the need to strengthen economic policies and ensure good governance. But in return they called on donors to urgently increase their aid, not cut it as during previous crises. Moreover, they pointed out, the amounts required are tiny compared to the stimulus packages in many developed countries.

Africa’s development partners must deliver on their commitments, UN Deputy Secretary-General Asha-Rose Migiro (a former Tanzanian foreign minister) told the meeting: “What we don’t need is more promises.” According to some estimates, only 14 per cent of the extra $50 bn in annual aid for Africa by 2010 promised by the industrialized countries’ Group of Eight at its 2005 summit has been delivered.

‘Safety net’ needed

The meeting also stressed the importance of trade, warning that any turn towards protectionism would only deepen Africa’s problems further. There must be a “level playing field on trade and the removal of subsidies that penalize Africa,” as well as “a continental safety net to support those sliding into trouble,” Kofi Annan, chair of the Africa Progress Panel, an advocacy group, said in his keynote address.

“We thought we were safe from the impact of the crisis on the financial sector,” Nigerian Finance Minister Mansur Muhtar said in Lagos in March, “but today, no country is safe.”

Mineral and oil exporters have been hit particularly hard. Copper prices are down over 60 per cent. Oil, at around $40 a barrel, is at a fraction of its highs of over $140 less than a year ago. Prices for rubber, cotton, palm oil and timber are also well down. In Tanzania the number of tourists, a significant source of earnings, is expected to fall by as much as 18 per cent.

Shrinking world demand is translating into mounting unemployment, with the mining sector particularly badly affected. In the Democratic Republic of the Congo (DRC), estimates of the number of miners thrown out of work in the last six months range between 200,000 and 300,000, with a further 1 million people feeling the indirect impact.

Carrying a sack of “export quality” coffee in Uganda Carrying a sack of “export quality” coffee in Uganda: The global economic downturn is depressing prices for many of Africa’s export commodities.
Photograph: Panos / Karen Robinson

African families are also seeing less money coming in from members working abroad. The recent growth in such remittances slowed notably last year, and flows are expected to actually fall in 2009.

Worsening economic prospects and a far more cautious attitude by investors has led to a flight of capital from many countries. Foreign investors withdrew some $4 bn from the Nigerian capital market in 2008, according to the Nigerian Stock Exchange’s Director-General Ndi Okereke-Onyiuke.

The International Finance Corporation, the private sector arm of the World Bank, reports that in 2008 some 450 investment commitments were cancelled in African infrastructure projects, a key sector for the continent’s development plans.

All this means that governments have far less money available for their budgets, at a time when costs are rising. Oil and food prices may be falling on world markets, but local currencies have also been depreciating, sometimes at a much faster rate. Zambia’s kwacha is down 60 per cent over the past six months, making imports more expensive.

What started out as a financial crisis is now threatening to become a humanitarian one. Reduced growth this year will mean that average incomes in Africa, already pitiful, will take a 20 per cent hit, according to Kevin Watkins, one of the authors of a report by the UN Educational, Scientific and Cultural Organization’s Education for All Global Monitoring team.

Walking a tightrope

Most African countries “must walk a tightrope” between preserving hard-won gains from economic reform and trying to protect the poor from the worst impacts of the downturn, the IMF says. Few African countries are in a position to spend their way out of trouble, warns African Development Bank (ADB) President Donald Kaberuka. “We do not have the same fiscal space as developed countries to pump-prime the economies via massive spending,” he told a summit meeting of the African Union in February.

While debt levels are generally down, finding willing lenders has become more difficult and borrowing costs are on the rise. Ghana, Kenya, Nigeria, Tunisia and Uganda have all postponed plans to raise funds on international capital markets.

This predicament makes fast-disbursing official aid flows particularly important for ensuring the success of the balancing act facing most African countries. According to the IMF, the 25 low-income countries — 13 of them African — that are “especially vulnerable” to any further global economic downturn will need at least $25 bn in emergency funding this year.

By March, five African countries — the Comoros, DRC, Ethiopia, Malawi and Senegal — had drawn financing from the Fund’s Exogenous Shocks Facility, designed to help countries hit by external events. The World Bank has also made some $2 bn available for emergency funding, with the DRC its first recipient.

In a move away from its normal project and development lending, the ADB has established a $1.5 bn emergency liquidity fund for countries’ short-term financing needs, as well as a $1 bn trade finance initiative to help African banks and other financial institutions maintain operations. Altogether, the ADB expects to increase its lending to some $11 bn.

A greater voice

African leaders are not asking only for more urgent funding. They also want a seat at the table when plans are made for economic recovery. South African President Kgalema Motlanthe is Africa’s only representative in the G-20. Africa needs “a rightful voice in the shaping of the global financial system and the responses to the current crisis,” President Kikwete told the Dar es Salaam meeting.

“Africa must be fully represented in the evolving global architecture,” said the Dar es Salaam statement. This should include a further strengthening of Africa’s voice in the IMF, which must increase its support for Africa with more financing, greater flexibility and enhanced policy dialogue.

Such calls for reform mirror many of the recommendations of a commission of experts established by UN General Assembly President Miguel d’Escoto, to prepare for a conference in June on the development impact of the world economic and financial crisis. According to the commission’s chair, Nobel laureate Joseph Stiglitz, there needs to be a global stimulus response that is fair, adequate and with “no conditionality attached,” as well as long-term measures including new international lending facilities and better global financial monitoring.

Shrinking growth forecasts

Just a year ago the International Monetary Fund (IMF) predicted that the gross domestic product (GDP) of sub-Saharan African countries would grow an average 6.7 per cent in 2009. Then in October 2008 it reduced its forecast to 5.1 per cent. By January a deepening world economic crisis led the Fund to cut its forecast yet again, to 3.5 per cent. And by March the best forecast for 2009 growth was 3.25 per cent, with the IMF warning that growth could fall still further.

The African Development Bank (ADB), meanwhile, is forecasting average growth of 3.2 per cent in 2009 for all African countries, compared with the estimated 5.75 per cent in 2008. For sub-Saharan Africa, it is predicting 2009 growth of 2.6 per cent, against 5.55 per cent in 2008. Highlighting the continent’s financial constraints, the ADB expects that African countries will move from an overall budgetary surplus equivalent to 1.8 per cent of GDP in 2008, to a deficit of 5 per cent in 2009.