Financial Crisis

The financial crisis is having an adverse impact on African countries and on the Bank’s clients.

The African Development Bank (AfDB) Group has been at the forefront of efforts at analyzing the crisis’ impact on Africa and in supporting its regional member countries.

It initially published a paper, titled: “Impact of the Global Financial and Economic Crisis On Africa", presenting a preliminary assessment of the ongoing financial crisis’ impact on African economies.

The paper discusses the direct impact of the crisis on financial markets, foreign exchange markets and commodity markets. The study shows that the negative effects will mainly be felt through trade and capital flows, including foreign direct investment and migrant remittances. A sectoral analysis is also carried out, highlighting the impact on tourism and mining. It concludes by a discussion on some policies that could mitigate the impact of the crisis.

The AfDB released the findings of a similar research in a 2010 study published in the Journal of Globalization and Development and titled "Africa: Africa’s Counter-Cyclical Policy Responses to the Crisis".

The Crisis and Africa: Preventing a Development Crisis and Gearing up for Recovery

The developed economies can help Africa recover by:

Pursuing strategies that boost demand for African exports. Indeed, recovery in the developed and emerging markets will help Africa out of the crisis by increasing African exports and capital inflows.
Discouraging protectionist practices in trade and finance. Protectionism would have the lamentable effect of curtailing trade and capital flows.
Supporting increased provision of concessional financing and grants to African countries through bilateral and multilateral mechanisms.
Providing adequate funding for African low income countries as well as supporting funding for programs aimed at enhancing response to vulnerability.
Honoring pledged funding for Africa.

But much of the effort must come from the continent. Thus, African countries need to:

Strike a balance between crisis response and alleviation of structural constraints to long term growth;
Rebalance between external and domestic sources of growth;
Give priority to infrastructure, trade logistics and regional integration;
Accelerate institutional reforms;and
Strike a balance between the role of the state and the role market mechanisms; they must not quit markets nor disengage from the global economy.

Concrete actions

Considering the severity of the crisis and the Bank’s capacity as the continent’s premier development finance institution, the AfDB Group is also providing concrete support to institutions and projects on the continent, given the intensity of external shocks and evaporating financial resources.

To this end, the AfDB Board of Directors on Wednesday, March 4, 2009, in Tunis, Tunisia, adopted a policy paper on the "Bank’s Response to the Economic Impact of the Financial Crisis”. The response comprises four initiatives to be collectively considered:

An Emergency Liquidity Facility, with a US$ 1.5 billion budget
A Trade Finance Initiative: The Board of Directors of the African Development Bank (AfDB) Group approved on July 1, 2009, in Tunis, a US$ 500 million investment in the Global Trade Liquidity Program as the second phase of its Trade Finance Initiative. The first phase approved in March 2009 was a US$ 500 million in lines of credit to support trade finance by African banks, bringing the combined ceiling for both phase 1 and 2 to US$ 1 billion. The initial US$ 500 million investment by the Bank makes the GTLP the single-largest contributor to African trade finance. The Bank’s presence helped increase the share of GTLP resources specifically targeted for Africa.
A Framework for Accelerated Resource Transfer of African Development Fund Resources to eligible countries
Enhanced Policy Advisory Support.

This response is largely based on the conclusions of the African Finance Ministers and Governors of Central Banks Conference, on the AfDB’s initiative. On November 12, 2008, the heads of the African Development Bank, the African Union and the United Nations Economic Commission for Africa converged on Tunis, Tunisia, to discuss Africa in the face of the global financial and economic crisis.

The meeting created a Committee of Ten to take stock of the impact of the crisis on Africa and provide appropriate advice to African heads of state.

On March 17, 2009, the Committee presented a report titled ‘Impact of the Crisis on African Economies – Sustaining Growth and Poverty Reduction: African Perspectives and Recommendations to the G20’ to the British Prime Minister, Gordon Brown.

Mr. Brown hosted the G20 Summit in London, on April 2, 2009.

The United Kingdom chaired the Group of Twenty (G20) in 2009.

There is continued international focus on the economic and financial crisis. There is a consensus that the slowdown is more severe and recovery will be slower than initially expected. MDBs have taken exceptional action in response, but their resources will need to be replenished earlier that previously anticipated.

The AfDB, for its part, has faced an unprecedented increase in requests from its Regional Members, and has responded accordingly. Total AfDB Group financing is expected to be $15bn in 2009, about three times the pre-crisis projections in the Bank’s Medium Term Strategy (MTS). It has already received borrowing requests in 2010, estimated at US$7.7 billion, more than double the projections under the Medium Term Strategy (MTS).

2009 therefore witnessed an increase in global attention to the impact of the financial and economic crisis,and the global response. Following the G8 Summit which took place from July 8-10, in Italy, attention was focused on the process leading up to the next G20 Summit in Pittsburgh, on September 26, 2009.

On September 25, 2009, the G20 summit ended in Pittsburgh with an agreement to revive the global economy, establish rules on financial matters and promote a new governance system that would leave more space for developing countries.