Africa Confronts the Financial Crisis in Tunis
The African ministerial conference on the global financial crisis opened on Wednesday, November 12, 2008, with some 300 participants in attendance. Jointly organized by the African Development Bank (AfDB), the African Union (AU)and the Economic Commission for Africa (ECA), the event has brought together African finance ministers, central bank governors and finance experts from across the continent to reflect on the impact of the global financial crisis on the African economy. The forum will enable participants to come up with a common African position and response to the global financial crisis that is spreading pain and suffering across the globe.
Opening the event, Tunisian Prime Minister, Mohamed Ghannouchi, said he was sure the conference would offer participants the opportunity to have a profound and constructive dialogue that would lead to useful recommendations and proposals that would work towards the attainment of development objectives and protect the continent’s economy from risks and turbulence. He recalled that global financial mechanisms had become more complex and capital flows had reinforced the global economy’s financial integration.
Bank Group President, Donald Kaberuka, for his part, expressed gratitude to the Tunisian government for its unflinching support to the AfDB. He pointed out that the financial crisis that rocked markets in the United States and Europe had spread to emerging markets. Africa, he said, had been largely spared from the first round effects of the contagion. "Our banking institutions under your stewardship have remained relatively resilient and, as a result, our short-term exposure limited. Economic and financial reforms of the last two decades have strengthened our financial and banking systems," he said.
He advised participants that he had set up a Financial Crisis Monitoring Group within the AfDB at the outset of the crisis. The crisis monitoring group, he pointed out, had carried out a regular assessment of the developments in the financial markets and implications of the crisis on the Bank’s work and the continent.
"It is clear, we cannot be immune from the effects of ongoing crisis – indeed no one can. We are already seeing tight access to liquidity and increased funding costs. It is clear that the global slowdown will lead to a general contraction of the private sector and to business closures, especially in sectors that depend on international demand. That cannot, but affect the health of the banking sector as defaults build up. Before the crisis, our continent’s economies were set to grow on average 6.5%. Our current estimate has now been revised downwards to 5%. We face a very gloomy economic picture going forward. We have enjoyed ten years of sustained growth, partly because of the strengthened integration into the global trading and financial markets. The strong global demand for our exports has sustained high commodity and metal prices. We have succeeded in widening the markets for our exports to Asian emerging markets and diversifying our sources of finance. More recently, new partners have joined traditional donors and creditors in providing concessional financing, foreign direct investment (FDI) and short term capital flows. The remittances from the Diaspora have also provided much-needed financing to households," he said.
He stressed that the financial crisis was threatening these external drivers of Africa’s growth performance and consequently placing the burden on the domestic drivers of growth and a premium on faster economic integration on the continent. "We know too well, that such a transition takes time. It is not an option that will provide relief in the short run and exports driven growth must remain a major objective. One has just to look at Africa’s diversity. Fragile and landlocked countries will find it more difficult to sustain economic performance and to ride through the crisis," he pointed out. He called on rich countries to stimulate the global economy in order to restore confidence in the financial system and honor their commitments.
"As we look to rich countries to stimulate growth and stave off a deep recession, we ourselves are challenged to come up with responses that mitigate the adverse effects. The starting point is to recognize that global integration and implementation of sound macroeconomic policies in recent years have served us well, reinforced by robust export earnings, foreign debt cancellation and stronger donor support. They have provided Africa with opportunities for sustained growth and resilience to absorb shocks," he stressed.
"Early this year, we were faced with the food and oil price crises. The resilience of the economies was put to test. The high import prices for food and fuel began to erode the macroeconomic stability enjoyed by many of our countries. Core inflation in a number of economies crept back to the double digit figures; a major concern. However, I commend the monetary authorities who have reacted in a countervailing manner thereby ensuring that inflation, over the medium and long term, can be contained. Similarly, many of you have been able, via active foreign exchange reserves policies to respond to volatility arising from the speculative behavior by international investors. Nonetheless, while we have been able to build capacity to respond to short-lived shocks, our economies are not deep or diversified enough to mitigate the unprecedented risks associated with the type and magnitude of the crises we face in the global markets today and its spillover to the real economies," he said.
He made suggestions as to how the ministerial conference should proceed. First, agree on a set of measures, within and between countries, to strengthen the resilience of our financial sectors and our economies in this radically different landscape. Second, while commending measures taken to date to restore systemic confidence, we send a strong message to rich nations that this is the time to take bold steps to stimulate the world economy and stave off a recession. Third, to the international community as a whole, take necessary steps to ensure the stability of the financial system in which the voice of every nation, every continent, is heard and their concerns taken into account.
Mr. Kaberuka pointed out that the crisis had clearly exposed the interrelated nature of the global economy. "No solution is possible unless it is global, coordinated and inclusive. We applaud the steps taken by the OECD countries to date to ensure systemic stability and welcome the summit of G20 in Washington this weekend. I see this as a start of a process of intensive consultations. The millions of poor in the world will be expecting to ensure that the interests of all are taken into account. Such interests would include keeping development issues and the fight against poverty at the center of the agenda. It would mean sticking to commitments made to increase development assistance, improve aid effectiveness, tackle climate change, trade reforms and a voice where major decisions affecting humanity are taken," he emphasized.
He cautioned that it would be "prudent, therefore, to deepen rather than ease on the reforms, but also to adopt a strategy that assumes, or at least, prepares us for the worst, both in the short and the medium term. Experience has taught us that international market behavior, such as herding -- sudden shifts of investor sentiment and the rapid movement of capital into, and out of, countries, especially short-term finance can create high volatility and uncertainty. Panics, boom-burst cycles and the fluctuating rates of capital flows can lead to crises and contagion even, and especially, in emerging market economies at the most unexpected times."
The ECA Executive Secretary, Abdoulie Janneh, for his part, pointed out that "Although we are unable to immediately measure the full impact of the crisis on African Economies because of the rapidly changing situation and time lags in reporting, there are clear signs of a slow-down. Indeed recent forecasts show a likely decrease in the continental growth rate by up to 1.5%. There is moreover clear evidence of financial contagion as well as the four major African stock markets have fallen as dramatically as the US stock market. Falling commodity prices, which portend lower export revenues, are of equal concern, especially as many African countries are still struggling to cope with the lingering effects of recent historically high food and oil prices."
He stressed that these developments put at risk the enormous efforts Africa has made and is making to meet the UN Millennium Development Goals. He said that the crisis was not due to failures of policy and economic management on the part of the continent’s officials.
The conference is expected to propose an African response that will help cushion the effects of the financials crisis on the continent, especially regarding levels of official development assistance, Diaspora remittances and foreign direct investments.