Impact of the global economic slowdown on Sub-Saharan Africa By
The Honourable Sue van der Merwe, MP Deputy Minister of Foreign Affairs
Republic of South Africa
TICAD Ministerial Meeting
Sunday, 22 March 2009
Honourable Lt. General Mompati Merafhe, Vice President of the Republic of Botswana
H.E. Nobuihide Minorikawa, Vice-Minister of Foreign Affairs of Japan
Ladies and gentlemen
When we met for TICAD IV in Yokohama, most commodity prices were at peak levels and general demand for Africa’s exports was strong, financial flows were on the ascendancy and the aid commitments of many OECD members were relatively on track.
At the time of our gathering in Yokohama, we could not have inferred when the commodity super-cycle and boom phase would end.
But, the commodity super-cycle and boom between 2000 and early 2008, which had tremendous benefits for each of our economies, has now turned, and many of our gains in meeting the Millennium Development Goals are threatened. Developing countries and economies in transition had nothing to do with the behaviour that triggered the bust, but what started as high risk lending in the housing market, coupled with a flurry of new financial instruments and risk-management techniques in the US, has turned into an economic and developmental crisis.
During the early stages, of what was still a financial crisis, it was thought that the fallout would be restricted to the developed world, and that developing countries and economies in transition would be insulated. The impact on our economies was treated with complacency – a view that is reinforced by the contents of the extraordinary fiscal stimulus packages that the US and many European governments have introduced to bail out failing and failed banking and financial institutions and programmes that aim to restore growth. The complacency persists, and even more alarming is the possibility that the stimulus packages may be used to protect industrial activity in the developed world, at the expense of the developing world and, may harm the medium-to-long term prospects for the recovery of our economies.
In fact, the broader international economic environment for developing countries has deteriorated sharply, and since the latter part of 2008, the global economic slowdown has shifted rapidly towards these economies. The downturn in global growth, decline in most commodity prices, and tighter credit have significantly worsened the economic outlook for Sub-Saharan Africa (SSA). According to the February 2008 update of the World Economic Report, growth in SSA is projected to slow sharply from 5.4 percent in 2008 to 3.5 percent in 2009, and is now forecast to dip below 3 percent (2.8%).
How the crisis impacts on Sub-Saharan Africa is quantified in an IMF study released in March this year. Three key results stand out:
- A one percentage point slowdown in the rest of the world has led to an estimated ½ percentage point slowdown in Sub-Saharan African countries, felt partly at the same time (0.2%) and partly in the following year (0.3%).
- A non-fuel commodity-price-induced income reduction by 10 percent tends to reduce growth in Sub-Saharan African exporters by about 1.5 percentage points after two years.
- An oil price shock tends to be significant only above a certain threshold, which is assessed to be a 5 percent change in prices. A net oil importer in SSA, with oil imports of some 20 percent of GDP, facing a decline in oil prices of approximately 50 percent, could expect an increase in its growth rate by some 0.3 – 0.4 percentage point.
Single commodity economies, of which there are many in Africa, appear to be the hardest hit by the crisis. Angola and Zambia recorded impressive growth over the past years, predominantly as a result of the rise in copper and oil prices, respectively.
However, with the sharp decrease in the prices of commodities, both Angola and Zambia’s economies have come under pressure.
But the statistical account does not reflect the potential human and social costs of the crisis on our economies.
The downturn has resulted in a number of expansion projects being put on hold, mining operations closed resulting huge job losses, and deepening poverty in Zambia's economic heartland. The closure in December 2008 of the Luanshya Copper Mine in Zambia, a joint venture of the Swiss-based International Mineral Resources and Bein Stein Group Resources, has resulted in 1 700 retrenchments.
Countries that are members of the sub-regional customs union, SACU, will be affected by an estimated decline of R6.8 billion (US$680 million) in customs revenue over the 2008/09 financial year, compared with projections, and a decline of between 8 and 12 percent over the medium-term. Coupled with the rapid decline in customs revenue, Botswana, Lesotho, Namibia, South Africa and Swaziland are experiencing a slowdown in most of the key sectors.
South Africa’s Finance Minister, Mr Trevor Manuel, used the word “crisis” 13 times in his 2009 Budget Speech that he delivered on 11 February. This was not meant to alarm. Its intention was to focus minds and actions.
Not being the cause of this crisis is not an excuse to be idle. Africa needs a co-ordinated response and coherent message that the African Union takes to the G20 Summit in London in April 2009.
During the 12th AU Summit that was held in February 2009, the African Heads of State and Government responded to the global financial crisis, as encapsulated in the Addis Ababa Declaration on the International Financial Crisis. It was emphasised that:
- the global financial crisis should not be used as an excuse to cut development assistance to Africa;
- additional resources should be mobilised aimed at finding innovative solutions to addressing threats posed by the crisis;
- capacity building initiatives should focus on regulation and supervision of the African financial system; and
- it was prudent to fast track the establishment of the African Investment Bank, the African Monetary Fund and the African Central Bank.
In light of the above, the key elements of the AU’s recommendations to the G20 should encapsulate:
- Approaching the impact of the crisis on Africa with the same urgency with which developed countries have responded to their domestic crisis;
- Additional resources that can take the form of a 0.7 percent of rescue packages, increased and sustained investments in infrastructure, an early review of the capital adequacy of the African Development Bank (AfDB) and support for mitigating facilities such as the AfDB’s emergency liquidity facility and trade finance facility;
- Increased policy space and flexibility in a way that promotes results above rigid conditionalities and improves aid effectiveness and assistance to Africa;
- Conclude an ambitious and development focussed Doha Round; and
- Provide adequate voice and voting rights to African countries in International Financial Institutions and major global governing bodies, in a manner that fully integrates Africa into the system.
In conclusion, we are starting to get a clear picture of how the financial crisis is turning into a global economic and developmental crisis, which may still worsen. The international community is coming together to contain the damages and reverse the inevitable downturn. While doing so, we must not lose sight of our collective responsibility to prevent the recurrences and to ensure an international monetary and financial system that supports sustained and equitable development.