High Level Panels Address Major Issues of Concern for Africa

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Dakar, May 12, 2009 – As part of the activities taking place before the Annual Meetings, the AfDB is holding high levels panels addressing major issues of the day for Africa. Below is a synthesis of these panels.

The Global Financial Crisis and Fragile States in Africa

Fragile states have been hard hit by the global economic crisis. Falling export prices and volumes, and declining capital flows, are causing balance of payments and fiscal difficulties, exchange rate depreciation, job losses and declining growth. With little room to maneuver, fragile states need additional donor resources to deal with the crisis. The AfDB is well placed to channel those additional resources to them, having institutionalized a framework – the Fragile States Facility – for addressing the special needs of fragile states. Priority areas for additional financial resources include capacity building, employment creation, support for arrears clearance, and support to vulnerable groups – women, children, the elderly and the disabled. The Bank would also require additional capital to meet the rising demands from fragile states.

The Financial Crisis, Trade and Regional Integration in Africa

Trade has been a key driver of Africa’s growth surge in the last ten years. The sustainability of this trade-led growth is now threatened at a time when progress in the Doha Development Round has stalled and fears of increased trade protection are growing. Africa’s share of global trade is still low, amounting to only 3 percent in 2008. In addition, intra-African trade remains modest, representing just 8.3 percent of exports and 9.3 percent of imports. This poor performance of the continent is a result of both infrastructural constraints and poor trade facilitation such as customs and standards that make the movement of goods on the continent costly, thus reducing competitiveness in global trade.

Efforts to address the existing constraints are already underway and the crisis presents an opportunity for Africa to accelerate the pace towards deeper regional integration. Issues of multiple memberships in economic communities, harmonisation and coordination of regional trade policies, and improvements in trade facilitation have recently attracted renewed donor interests. The Bank can play a critical role in supporting deeper regional integration, riding on the current wave of political support being expressed by Regional Member Countries (RMCs).

The financial crisis and decades of reforms: Options for Africa’s future

Improved policies, institutions and political leadership in Africa over the past decades have played a critical role in helping the continent achieve stronger macroeconomic fundamentals. The reform dividends have resulted in better economic performance as reflected in higher economic growth, fiscal surpluses, lower and more stable inflation, low and declining external debt burden. These gains, achieved through painful reforms, are threatened by the current economic crisis. In particular, the crisis is causing a deterioration of macroeconomic balances in most African countries. For example, Africa’s growth is expected to slow down to 2.8% in 2009, down from 5.7% in 2008 and 6.1% in 2007. From an overall current account surplus position of 3.5% of GDP in 2008, the continent will face a deficit of 3.8% of GDP in 2009. The budget deficit is forecasted at about 5.5% of GDP in 2009.

While the current crisis has affected all the countries, it appears that countries that had stronger economic fundamentals before the crisis have weathered the storm better so far. These are typically the ones that successfully implemented comprehensive economic reforms. The lesson is that reforms are not only important for achieving higher economic performance, but they are also essential for cushioning the effects of external shocks. Thus, while focusing on mitigating the impact of the crisis, it is important that African countries do not backslide in their reform programs. To sustain the reform efforts, African countries will need strong and targeted assistance from development partners, including the African Development Bank.

In particular, it is necessary to scale up the resource envelope at the disposal of regional and sub-regional banks to enable them to effectively respond to the crisis. The AfDB, as a knowledge bank, is complementing this effort with policy advocacy. In addition to scaling up resources, the crisis and post-crisis situation calls for more policy flexibility in order to optimize resource utilization. It also calls for differential application of instruments and measures to country groups given that the speed and nature of the impact of the crisis in Africa vary very significantly across countries depending on economic structure, policy constraints, natural resource endowments, and other specificities.

The Financial Crisis and Access to Financing

Africa’s access to international capital has been substantially reduced as a result of the financial crisis. Foreign lines of credit have virtually closed. Local African banks that have relied on credit lines from the international capital markets have had to scale back operations or have turned to alternative sources of financing from regional development banks, such as the African Development Bank. Private capital flows, which have recently overtaken Official Development Assistance (ODA) in Africa (increasing from US$ 29 billion in 2000 to US$ 52.98 billion in 2007) are now severely at risk of drying up as a result of the financial crisis. Similarly, remittances have already started to decline significantly due to the economic down turn in developed and emerging economies.

The situation calls for increased efforts to improve domestic resource mobilization. This will require deepening domestic financial intermediation to mobilize savings, introduce instruments with longer maturity to meet long-term investment needs, and provide adequate incentives and capacities to banks to lend to traditionally credit rationed sectors. To channel resources more efficiently, it is important to explore the use of innovative mechanisms for reducing risks, such as loan guarantees, which have proven to be effective in developed countries and several African countries. Moreover, developing national and regional bond markets can help channel excess banking sector liquidity into productive sectors. MDBs, and especially the African Development Bank have an important role to play in this process.

While posing serious challenges for the development of the African economies, the financial crisis presents some opportunities that need to be seized.