The global financial crisis: impact, responses and way forward

Introduction 1. The global financial and economic crisis presents significant challenges for African countries. It has also exposed weaknesses in the functioning of the global economy and led to calls for the reform of the international financial architecture. Although the crisis was triggered by events in the United States housing market, it has spread to all regions of the world with dire consequences for global trade, investment and growth. The crisis represents a serious setback for Africa because it is taking place at a time when the region is making progress in economic performance and management. Since 2000, the Africa region has had an average growth rate of real output above 5 per cent and inflation has declined to single digits. There have also been significant improvements in governance and a reduction in armed conflicts, making the region more attractive for private capital flows. Net private capital flows to Africa increased from $17.1 billion dollars in 2002 to $81 billion dollars in 2007 (ECA and APF, 2008). The global financial and economic crisis threatens to reverse these gains in economic performance and management. 2. The current crisis is also taking place at a time when the region is slowly recovering from the negative effects of the fuel and food crisis. Against this background, the key challenge facing African countries is how to manage the current crisis to ensure that it does not reverse progress made since the beginning of the new millennium and reduce the prospects of achieving the Millennium Development Goals (MDGs). This paper identifies the key channels of transmission of the financial crisis to Africa as well as its quantitative impact on the region. It also examines recent policy measures taken by African Governments and regional organizations to cushion the effect of the crisis on economies in the region. Finally, the paper discusses policy measures and actions to be taken at the international level to ensure that the financial and economic crisis does not develop into a humanitarian crisis in Africa.

Impact of the crisis on Africa 3. In the first few months of the financial crisis, there was the widely held view that the impact on African countries would be minimal because of their low integration into the global economy. Furthermore, African countries tend to have very small inter-bank markets and several countries have restrictions on new financial products as well as market entry, which should shield them from the direct effects of the global financial crisis. Recent developments have, however, shown that the negative contagion effects of the crisis are already evident in the Africa region. For example, available evidence indicates that in 2009 the crisis will reduce economic growth in Africa by 2-4 percentage points depending on assumptions made about the availability of external finance to the region as well as the effectiveness of measures taken by the advanced countries to boost global demand. Given the heterogeneity of African countries, the crisis is certainly going to affect some countries much more than others. For example, the decline in economic growth expected in 2009 will be more severe in Angola, Botswana, South Africa, Equatorial Guinea and the Sudan, which are expected to lose more than 4 percentage points in growth. In Egypt, Kenya, Cape Verde, Nigeria, Ethiopia, Tunisia, Namibia, Mozambique, Sierra Leone, Lesotho, Ghana and the Democratic Republic of the Congo, growth is expected to decline by between 2 and 3 percentage points in 2009. 4. It is also interesting to note that the crisis is affecting all categories of countries in the region those considered to have good economic policies and governance; those with poor macroeconomic records; fragile States; small and large economies; oil- and non-oil exporting countries. A key implication of this assertion is that the real effects of the crisis in the region are not simply due to the nature of macroeconomic policies and governance in African countries Consequently, there is the need to provide assistance to countries in the region to enable them to withstand the global slowdown and protect vulnerable groups,download.