Africa and the Global Economic and Financial Crisis

Shanta Devarajan

World Bank

http://africacan.worldbank.org

Despite a resilient financial system, Africa may be the worst hit

• “Resilient” because – African banks keep their loans on their

balance sheets– Interbank and derivative markets are small– Foreign ownership is low (5%) in two largest

countries (Nigeria and South Africa)– But:

• 40% of South Africa’s loans are in mortgages; house prices are falling

• Nigeria’s domestic credit grew rapidly in 2007-8

Source: IMF World Economic Outlook, 2008

1. Africa has been increasingly relying on private capital flows

Signs that capital flows are slowing down or reversing

• Stock prices are falling (private capital was a large share of market assets)– Nigeria’s stock exchange index has fallen

60%, Kenya’s 40%

• Ghana and Kenya have postponed their sovereign bond offerings (worth $800m); D.R. Congo expects $1.8 billion shortfall in FDI

2. Remittances are slowing

• Currently estimated at $20 billion

• Expected to decline by 4.4% in 2009

• 75% of Africa’s remittances come from U.S. and Western Europe

• Lesotho gets 29% of GDP in remittances

3. Foreign aid may be affected

Source: David Roodman, Center for Global Development

4. Commodity prices are falling

4. Commodity prices are falling

Terms of trade shocks(change in trade balance as percentage of 2006 GDP)

Bottom 5, 2008

Seychelles -13.90

Eritrea -11.68

Togo -7.79

Cape Verde -7.25

Senegal -7.07

Top 5, 2008

Nigeria 22.92

Gabon 28.23

Congo, Rep. 30.53

Angola 34.77

Equatorial Guinea 49.12

Bottom 5, 2009

Equatorial Guinea -26.05

Angola -19.00

Congo, Rep. -17.15

Gabon -15.69

Nigeria -13.01

Top 5, 2009

Ethiopia 1.39

Mauritius 2.44

Togo 3.44

Eritrea 3.39

Seychelles 5.92

5. Macroeconomic imbalances

• Ethiopia– 60% inflation– Trade deficit of 30% of GDP

• Ghana– Current account deficit of 19% of GDP, fiscal

deficit of 14.5% of GDP

• South Africa– Current account deficit of 8% of GDP

Implications

• Africa’s GDP growth rate will slow from 4.9% in 2008 to 2.4% in 2009

GDP growth in Sub-Saharan Africa

5.1

6.9

6.26.6

6.9

6.1

4.2

5.5

2.4

4.9

4.1

0

1

2

3

4

5

6

7

8

2003 2004 2005 2006 2007 2008 2009 2010

GD

P g

row

th %

November 2008estimates

March 2009 estimates

Implications

• Africa’s decade-long growth has raised expectations among its people– Political fallout?

• Part of Africa’s growth due to reforms undertaken since the 1990s

Lower inflation across the board

Source: World Bank WDI database. Indices were calculated based on the GDP weighted growth rates.

17

2429 31 33 31 33

30 3227 28

31 33

13 13

7 6 6 7 6 5 4 2 3 2 2

0

20

40

60

80

100

120

140

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Ave

rag

e In

flat

ion

Rat

e %

0

5

10

15

20

25

30

35

40

45

Nu

mb

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10%<inflation<=20%

Inflation<=10%

Average inflation rate

Implications

• If there is a growth collapse—a human crisis

Differences between sample averages, selected variables, SSA 1975-2005

Growth

acceleration Growth

deceleration During Otherwise During Otherwise Life expectancy (years) 51.3 50.1 48.1 51.0 Dependency ratio .91 .93 .93 .92 Under 5 mortality (per 1,000) 145.8 161.9 187.1 148.8 Infant mortality (per 1,000 live births) 84.3 93.9 113.2 85.5 Primary completion rate (% of relevant age group) 52.5 49.9 41.4 52.9 ODA (% GDP) 13.6 13.6 11.9 14.11 ODA per capita (US$) 68.3 53.2 41.5 61.2 Consumer price index (%) 15.1 75.2 177 23.2 Source: Arbache and Page (2007).

Policy response

Initial Conditions

Weak Moderate to Strong

Impact

Immediate e.g. Comoros, DR Congo, Guinea, Kenya, Seychelles, Sudan

e.g. Mauritius, Sao Tome and Principe, Zambia

Short term e.g. Burundi, Cote d’Ivoire, Ghana, Ethiopia, Guinea-Bissau, Liberia, Sierra Leone

e.g. Benin, Botswana, Burkina Faso, Cape Verde, Lesotho, Nigeria, Swaziland

Tailor assistance to initial conditions and impact

Initial Conditions

Weak Moderate to Strong

Impact

Immediate Fast-disbursing financial assistance (e.g. $100 million emergency credit to DR Congo)

Scale up existing operations; possible fiscal stimulus; dialogue with civil society and other stakeholders (e.g. $30 million loan to Mauritius increased to $100 million)

Short term Knowledge and financial assistance to smooth the reduction in macroeconomic imbalances (e.g. possible program in Ghana, coordinated with the IMF)

Contingency planning and “front-loading” assistance (e.g. credits to Gambia, Benin, Mali increased)

GDP growth in Sub-Saharan Africa

5.1

6.9

6.26.6

6.9

6.1

4.2

5.5

2.4

4.9

4.1

0

1

2

3

4

5

6

7

8

2003 2004 2005 2006 2007 2008 2009 2010

GD

P g

row

th %

November 2008estimates

March 2009 estimates

The Hope and the Challenge of Africa