Africa: Dealing with the Global Economic and Financial Storm

African leaders meeting this week in Addis Ababa (Ethiopia) are, very appropriately, focusing attention on the need to develop and improve Africa's infrastructure, notably in the transport and energy sectors.

With better infrastructure - water, transport, electricity - Africa could increase growth by at least 2 percent and raise productivity by 40 percent, helping business to expand, deepening regional integration and opening opportunities to compete in international markets. 

 The summit, which is also set to discuss the impact on Africa of the ongoing global financial meltdown, the food and fuel crises and governance issues linked to post-conflict and fragile states, holds at a time of unprecedented challenges for the continent.

Until a few months ago, the growth prospects for Sub-Saharan Africa were bright and re-assuring. For the first time in two decades, the region was growing at the same rate as the rest of the developing world, except China and India.

Years of painful reforms and sound macroeconomic policies had begun to yield dividends. Private capital flows to Africa reached $55 billion last year. Remittances rose to about $11 billion a year. Even the impressive 5.7 percent GDP growth averaged in 2006 look mediocre in the face of forecasts of 6.4 percent for 2008.

Foreign aid - though still about $20 billion short of the pledges made at the Gleneagles summit in 2005 - had started to rise.

 Then, with very little warning, the crisis hit, and the global economy went into a tailspin. It did not take long for Africa to feel the pinch. Portfolio flows have already started to reverse.

African stock markets have fallen by an average 40 percent, with some such as Uganda , falling by over 60 percent. Ghana and Kenya have postponed sovereign bond offerings worth over $800 million, delaying the construction of toll-roads and gas pipelines.

African exports are expected to fall by 2 percent in 2008, relative to 2007, with some countries - Angola, for example, experiencing a 30 percent decline. Africa"s oil exporters, erstwhile basking in the bonanza, now face terms of trade shocks equivalent to losing 15 percent of GDP in 2009.

Other mineral exporters (who are oil importers), such as South Africa, Zambia and Ghana are looking at negative terms of trade shocks of 2-4 percent of GDP. South Africa is estimated to have lost about 64,000 mining jobs over the last few months.

Revenue flows from tourism are slipping and remittances drying up. Kenya has already lowered its growth rate of remittances in 2008 from 11.1 percent to 5.4 percent.

The projected growth in 2009 is zero. The growth rate of international arrivals to Africa has already slowed down to 4.2 percent in 2008 compared to 7.5 percent in 2007. In Mauritius, tourism revenues were by 27 percent lower in November 2008, compared to a year ago.

The impact of the decline will be huge for a country like Seychelles, where tourism accounts for 2 percent of GDP, employs about 30 percent of the labour force, and provides more than 70 percent of hard currency earnings.

As a result of these crises, Africa's economic growth is projected to be only 3.5 percent in 2009.

What can or should be done? Working with its development partners, African governments must take action to prevent what started as a financial crisis and grew into an economic crisis from becoming an employment and human crisis.

There will be pressure to slow or reverse reforms; temptations to opt for interventionist policies over assuming a more rigorous regulatory role; avoid potentially rewarding but politically suicidal policy choices.

Without doubt, not all reforms will pay dividends or work in every context. Yet, economic and financial reforms must remain a top priority.

 The successful implementation of such reforms was the main reason for optimism about the region's prospects. This is not the time to abandon, or even slow down, reforms.

Growth slowdown will be accompanied by a decline in fiscal revenues and the kind of fall in public expenditure generally associated with times of fiscal stress.

So, reforms aimed at improving the efficiency of public expenditures, such as the removal of untargeted subsidies in favour of subsidies going to the poor, will be increasingly important.

 Utility reform and regulation of infrastructure will become critical as declining public revenues put pressure on loss-making public utilities.

Reforms that protect spending on infrastructure operations and maintenance will cushion the fall in growth and leave the economy better able to take advantage of the rebound of the global economy, not if, but when it occurs.

Financial sector reform that makes the banking system more transparent and accountable will be important to avoid knock-on effects of the global financial crisis.

Macroeconomic stability, which has enabled Africa to sustain and accelerate growth over the last decade, will need to be preserved so that the impact of the global crisis is not exacerbated in the domestic

Some countries may have the space to undertake a modest fiscal stimulus to keep growth from falling too fast, but it should be done in such a way that government spending does not crowd out private spending. 

Working with development institutions and bilateral donors, African countries must continue to improve accountability and transparency in the use of their domestic resources - especially income from natural resources - as well as demonstrate the effectiveness of development aid.

While indispensable - in fact, vital for several African countries - aid works best if it complements trade in a global economy that can only be further bruised by protectionism.

Bottom line: Africa needs to stay the course of reforms. Most of these will remain demanding but, ultimately, very rewarding. It is the price Africa must pay to stir itself out of the eye of a financial storm it bears no responsibility for bringing about, yet must help resolve in what the food, fuel and financial crises have proved is, indeed, a globalized world.

Obiageli Ezekwesili is the Vice-President for the Africa Region at the World Bank.