What’s the economic outlook for Sub-Saharan Africa?

May 19th, 2009 2:40 PM UTC
By Beth Adler

The IMF recently released their April 2009 Regional Economic Outlook for Sub-Saharan Africa, which provides statistics and insights about sub-Saharan Africa’s economy in 2008, and some predictions for 2009. The primary message is that countries need to take action to contain the effects of the financial crisis, while preventing erosion of the gains SSA has made over the last several years. The IMF recommends countries avoid protectionist measures to address the impact of the crisis.

The report acknowledges that unfortunately, the hope that quick policy actions in developed economies would protect developing countries from the impact of the crisis were unfounded; it also warns that the global slowdown’s magnitude and spillover may be greater than initially expected. The report notes that to maintain the momentum of the last decade, Africa will need additional aid resources – at least the doubling of aid that was promised by the G8 at Gleneagles in 2005. Although donor countries are under pressure, commitments should still be honored to avoid setbacks in poverty reduction and economic development, and to prevent political instability.

There are three channels through which Africa is experiencing the effects of the financial crisis. Lower global growth has reduced demand for African exports, decreased commodity prices and government revenues, and decreased remittances from abroad – all of which reduce domestic consumption, and subsequently reduce GDP growth. Foreign direct investments (FDI) are down as investors look for safer investments. Lastly, even though African banks aren’t dealing with toxic assets, a global economic slowdown could affect the quality of their credit portfolios. The global crisis could also eventually cause donors to reduce aid to Africa.

The report provides some key facts for 2008…

• SSA has been more resilient than other regions due to lags in the transmission of shocks, and because SSA financial systems are less integrated into global markets. Nevertheless, growth in sub-Saharan Africa fell from nearly 7%in 2007 to just under 5.5% in 2008.
• The decline in growth has been felt faster and stronger in middle-income and oil/commodity exporting countries of Africa, like South Africa and Nigeria.
• Inflation has declined across sub-Saharan Africa, reflecting the decline in commodity prices in the second half of 2008.

And predictions for 2009…
Growth:

• Growth for sub-Saharan Africa is projected at 1.5% for 2009 (from 5.5% in 2008), and just under 4% in 2010.
• A more rapid and serious slow-down in South Africa and Nigeria could seriously affect other African countries, especially neighboring countries with close trade and financial linkages.

Poverty:

• The global financial crisis could substantially increase poverty, especially since it comes right after the food and fuel price shock of 2008. The poverty impact in the near term could be compounded by still-high food and fuel prices, and by the absence of well-functioning social safety net systems in sub-Saharan Africa.
• The financial crisis could also decrease the demand for low-skilled labor, and hence cause a decrease in wages and employment. These, in turn, contribute to declining remittances and tight borrowing conditions for small businesses, further impoverishing people. Labor-intensive sectors like tourism and manufacturing are already being hit.
• Tighter global funding conditions are expected to have noticeable effects, particular on middle income countries like South Africa, and the frontier markets of Ghana, Kenya, Nigeria, and Tanzania.

The report also provides some suggestions as to how countries can mitigate the effects of the crisis. These include financing growing balance of payment deficits, and conducting short-term initiatives like strengthening surveillance mechanisms, while staying focused on medium and long-term goals like strengthening public financial systems and scaling up well-targeted social safety-net programs. Countries are also cautioned to avoid imposing new trade restrictions.

It remains to be seen exactly how the crisis will play out in sub-Saharan Africa; we at ONE will be bringing you new developments as they emerge.

-Beth Adler

TAGS: IMF, Policy News