Impact of the Global Financial Crisis on Sub-Saharan Africa

Impact of the
Global Financial Crisis
on Sub-Saharan Africa
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Impact of the
Global Financial Crisis
on Sub-Saharan Africa
A f r i c a n D e p a r t m e n t
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N
A
T
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©2009 International Monetary Fund
Production: IMF Multimedia Services Division
Typesetting: Alicia Etchebarne-Bourdin

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The downturn in global growth, the decline in most commodity prices, and tighter credit
have significantly worsened the economic outlook for sub-Saharan Africa. Risks are
rising and it is uncertain how long the crisis will last. Policy makers must walk a
tightrope between not aggravating the shock in aggregate demand on the one hand, while
protecting hard-won gains in economic fundamentals on the other. Any policy response
must also take into account the impact on the poor and seek to incorporate social safety
nets. Countries that do not have debt sustainability and financing constraints may have
some scope for fiscal easing. But it is also clear that countries will depend critically on
donors honoring their commitments to aid and even increasing aid, despite new
competing demands on their own budgets. The IMF itself is moving fast to increase
financial support to affected countries, step up technical assistance, and reinforce the
policy dialogue with its African members.
I. The Global Financial Crisis and the Short-Term Outlook
The current financial crisis is more global than any other period of financial turmoil in
the past 60 years. The extent and severity of the crisis that began with the bursting of the
housing bubble in the United States in August 2007 reflects the confluence of several
factors: some are familiar from previous crises, others are new.
As in previous times of financial turmoil, the pre-crisis period was characterized
by (i) surging asset prices that proved unsustainable; (ii) a prolonged credit
expansion leading to accumulation of debt; (iii) the emergence of new types of
financial instruments; and (iv) the inability of regulators to keep up.
New this time is the rapid expansion of securitization (not itself a new
phenomenon), which changed incentives for lenders and lowered credit standards.
Systems became fragile because balance sheets became increasingly complex
(further complicated by increased use of off-balance-sheet instruments); financial
market players were highly leveraged; and they relied on wholesale funding and
external risk assessments. Cross-border spillovers intensified after the crisis broke
because financial institutions and markets across borders were closely linked and
risks highly correlated.
As a result of the financial crisis, the world economy is facing a deep downturn. The
January 2009 update of the World Economic Outlook projects global growth to slow from
just under 3½ percent in 2008 to about ½ percent in 2009 before recovering somewhat in
2010 (Figures 1 and 2). However, risks to this outlook remain on the downside.
________________________
Note: The projections presented in this note are based on the IMF’s World Economic Outlook update
published on January 28, 2009.
1

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2
Advanced economies are suffering their
Figure 1. GDP Growth by Country Groups
worst downturn since World War II,
10
10
with economic output expected to
(in percent)
8
8
contract by over 1¾ percent in 2009.
Emerging and developing
6
countries
6
With the help of monetary and fiscal
World
stimulus and slowly improving financial
4
4
conditions, growth is expected to resume
2
2
gradually in 2010—but there is a
0
0
significant risk that the downturn
Advanced
-2
-2
could be deeper than currently
countries
-4
-4
expected.
1970
1978
1986
1994
2002
2010
Source: IMF.
Growth is also expected to fall in China,
India, Brazil, and other emerging market
Figure 2. Growth in Global Industrial
economies, dragged down from 6¼ percent
Production and Trade
in 2008 to about 3¼ percent in 2009 by
15
50
(Annualized 3-month percent change)
falling export demand, subdued capital
10
40
Industrial Production (left scale)
30
inflows, and lower commodity prices.
5
20
Similarly, growth in all emerging market and
0
10
developing economies, including sub-
0
Saharan Africa, is expected to slow to
-5
-10
3 percent in 2009 from 6 percent in
-10
Merchandise Export Value
-20
2008, and then gradually pick up with
(right scale)
-15
-30
world demand in 2010.
Jun- Nov- Apr- Sep-Feb- Jul- Dec-May- Oct-
97
98
00
01
03
04
05
07
08
Source: IMF.
II. How Is Sub-Saharan Africa Affected?
Many countries in sub-Saharan Africa enjoyed robust economic growth in recent years
that strengthened their balance sheets. Sound economic policies were an important factor,
as was the favorable external environment and increased external support in the form of
debt relief and higher inflows.1 But the food and fuel price shocks of 2007–08 that
preceded the current global financial crisis weakened the external position of net
importers of food and fuel, caused inflation to accelerate, and dampened growth
prospects. The global financial crisis greatly compounds the policy challenges
confronting the region as it strives to consolidate its economic gains and meet the
Millennium Development Goals (MDGs).
The global financial crisis initially affected advanced economies, emerging markets, and
low-income countries in very different ways. Advanced economies were first hit mainly
by the systemic banking crisis in the United States and Europe. Emerging markets with
well-developed financial systems were initially mostly affected by cross-border financial
1See Regional Economic Outlook: Sub-Saharan Africa, Chapter 2: “The Great Sub-Saharan African
Growth Takeoff: Lessons and Prospects,” October 2008 (Washington: International Monetary Fund).

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linkages through capital flows, stock market investors, and exchange rates. In financially
less-developed countries the growth and trade effects dominated, with lags. Now,
however, growth and trade effects are crucial for all countries.
In Africa, frontier and emerging markets were hit first; by now indirect channels are fully
at work in all countries, and risks are mounting that other channels may gain in
importance, especially in the financial sector.
Frontier and emerging markets: Through their financial links with other regions
in the world, South Africa, Nigeria, Ghana, and Kenya were hit first, suffering
falling equity markets, capital flow reversals, and pressures on exchange rates.
Ghana and Kenya had to postpone planned borrowing, and in South Africa and
Nigeria external financing for corporations and banks is becoming scarce.
All countries: The global
Figure 3. Growth and Trade Openness
slowdown in economic activity
80
has pushed commodity prices
(in percent)
9
down (Figures 3 and 4), with
75
negative effects on export
earnings and the external current
70
Trade openess
7
account, fiscal revenues, and
(left scale)
household incomes. Commodity
65
5
exporters face a major terms of
60
GDP Growth
trade deterioration. IMF research
(right scale)
shows that in the past a
3
55
1 percentage point slowdown
in global growth has led to an
50
1
estimated ½ percentage point
1997
1999
2001
2003
2005
2007
slowdown in sub-Saharan
Source: IMF.
African countries. The effects
may be more pronounced this
Figure 4. Sub-Saharan Africa: Commodity Prices
time because the tightening
470
470
of global credit compounds
(Index, 2003=100)
Oil
420
420
the impact of the slowdown,
exacerbating risks for trade
370
370
finance and other capital
Metals
320
320
flows.
270
270
220
220
Fragile states whose political
and social situation is inherently
170
170
vulnerable. Countries like
120
Other (cocoa, coffee, etc.)
120
Burundi, Guinea-Bissau, and
70
70
Liberia are dependent on very
2003
2004
2005
2006 2007 2008
concessional financing that
Sources: IMF and UN Comtrade.
may well be affected.
Financial sectors in sub-Saharan Africa are also vulnerable to several risks that could still
unfold. Unlike in developed economies, there has been no systemic banking crisis in sub-

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Saharan Africa. Commercial banks and other financial institutions there so far remain
largely sound. Cross-border banking system linkages are minimal; there is less exposure
to complex financial products, and financial systems are not well integrated with other
global financial markets. However, as the crisis continues, risks could grow because
A protracted economic slowdown elevates credit risk. For instance, the domestic
financial sector is vulnerable to a substantial weakening in client incomes and
debt servicing capabilities, particularly where credit growth has been rapid in
recent years. Banks could also incur losses on other financial assets, such as
deposits with troubled correspondent banks.
Concentrated bank portfolios have become a source of vulnerability in several
African countries. With global demand significantly lower and hefty declines in
the prices of most commodities, major industries, such as timber and cotton, are
hard hit. Problems in these sectors could quickly affect the banking sector.
In some countries banking systems may be increasingly exposed to market
volatility. Countries where high equity returns had led to borrowing for
investment in the stock market (e.g., Kenya, Nigeria, and Uganda) are at greatest
risk.
Parent banks could withdraw funds from subsidiaries and local banks. Risks of
contagion from distressed foreign parent banks to local subsidiaries within sub-
Saharan Africa could be associated with parent banks (i) withdrawing capital
from African subsidiaries; (ii) calling in loans to their African subsidiaries; (iii) no
longer investing local profits in local subsidiaries; or (iv) a combination of these.
Thus, the financial sector, especially banks, must be monitored vigilantly in order to
minimize vulnerabilities and mitigate risks.
III. What Is the Outlook for Sub-Saharan Africa?
The outlook for economic growth in
Figure 5. Current and Pre-Crisis Forecasts for 2009
GDP growth (Percent)
sub-Saharan Africa in 2009 has
worsened in recent months (Figure 5).
Pre-crisis forecast
With the expectation of a more
5
pronounced global downturn, lower
commodity prices, and pressure on
Current account balance
Inflation
-5
0
5
capital flows, in January 2009 the IMF
(Percent of GDP)
(Percent)
Current
projected that growth in sub-Saharan
forecast
-5
Africa will slow from just over 5 percent
in 2008 to about 3¼ percent in 2009—
over 3 percentage points less than
Source: IMF.
Fiscal balance (Percent of GDP)
forecast a year ago. Although annual
inflation has started to decline, it remains high in many countries, largely because of the
fuel and food price increases through mid-2008. Fiscal balances are expected to
deteriorate significantly as tax revenues, especially those that are commodity-related,
come under pressure because governments face additional demands for social spending
(Figure 6). For sub-Saharan Africa as a whole, the fiscal balance declines by about

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6 percentage points of GDP, from a surplus to a deficit of about 4 percent of GDP. The
negative terms of trade shock to commodity exporters is also widening current account
deficits, by about 4 percentage points of GDP for the region to 6¾ percent in 2009,
though with significant divergence between groups of countries (Figures 7 and 8).
Figure 7. Sub-Saharan Africa: External Current
Figure 6. Sub-Saharan Africa: Overal Fiscal Balance
9
9
(Percent of GDP)
Account, Including Grants
11
11
(Percent of GDP)
6
6
8
8
3
3
5
5
2
2
0
0
-1
-1
-3
-3
-4
-4
-6
-6
-7
-7
-9
-9
-10
-10
2007
2008
2009
2007
2008
2009
2007
2008
2009
2007
2008
2009
Oil Exporters
Oil Importers
Oil Exporters
Oil Importers
Source: IMF.
Source: IMF.
Figure 8. Sub-Saharan Africa: Economic Outlook
GDP Growth
Inflation
18
35
(Percent)
Sub-Saharan Africa
(Percent)
Sub-Saharan Africa
16
Oil-exporting countries
Oil-exporting countries
30
Middle-income countries
Middle-income countries
14
Low-income countries
Low-income countries
12
Fragile countries
25
Fragile countries
10
20
8
6
15
4
10
2
0
5
-2
-4
0
2000
2002
2004
2006
2008
2010
2000
2002
2004
2006
2008
2010
Central Government Overall Fiscal Balances
External Current Account Balances
15
16
(Percent of GDP)
(Percent of GDP)
Sub-Saharan Africa
Sub-Saharan Africa
Oil-exporting countries
12
Oil-exporting countries
10
Middle-income countries
Middle-income countries
Low-income countries
Low-income countries
8
Fragile countries
5
4
0
0
-4
-5
-8
-10
-12
2000
2002
2004
2006
2008
2010
2000
2002
2004
2006
2008
2010
Source: IMF.

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Aggregate projections mask stark differences from country to country. Oil and metal
exporters have been hardest hit: oil prices have fallen over 60 percent from their mid-
2008 peak. Oil exporters are going from fiscal and current account surpluses in 2007–08
to deficits in 2009, putting pressure on fiscal and external accounts. Oil importers benefit
from falling oil prices but are affected by the decline in the prices of other commodities,
such as coffee, cocoa, or cotton, and by lower global demand. Foreign exchange
reserves—generally adequate now in most countries—are likely to decline in several
countries in 2009.
The growing dependence of sub-Saharan Africa and other low-income countries (LICs)
on export receipts from tourism and transportation services, which also tend to be
procyclical, heightens the region’s exposure to the global recession.
Risks to the outlook are serious
and mostly on the downside
Figure 9. Sub-Saharan Africa: Real GDP Growth
(Figure 9).
8
8
(percent)
The slump in global
7
7
growth could persist
longer and the impact of
6
6
the slowdown could be
5
5
more pronounced than
expected, negatively
4
50 percent
4
affecting sub-Saharan
70 percent
Africa’s internal and
3
90 percent
3
external equilibrium.
2
2
In some countries the
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
global crisis could have a
Source: IMF.
spillover effect on external
competitiveness. For instance, countries with a fixed exchange rate pegged to the
U.S. dollar could be adversely affected by the dollar’s recent strength.
Foreign inflows to the region are likely to slow. Remittances are likely to be
affected because the majority originate in advanced economies where the
economic slowdown is most pronounced. External aid could also be affected; aid
has been found to be procyclical with both donor and recipient incomes. The
actual decline in FDI and portfolio inflows could also exceed current
expectations.
Spending pressure might rise more as the economic slowdown continues.
Pressures for added social spending and an increase in debt-servicing costs—
associated with currency depreciation and higher borrowing costs in both
domestic and international markets—could be greater than expected. Contingent
liabilities associated with support for domestic financial institutions and
depositors could also be higher.

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IV. What Should Be the Policy Response?
Macroeconomic stability and steady progress toward medium-term development goals
are both vital for sustaining growth in Africa. Thus, in responding to the crisis countries
should strive to maintain stability and consolidate their hard-won gains while being
mindful of general development goals. Countries should also seize the opportunity to
advance their structural reform agendas in order to boost prospects for growth.
Fiscal Policy
Governments need to walk a tightrope to conserve gains in economic stability without
aggravating the impact of the slowing external demand on domestic activity and
especially on the poor. In countries that have created fiscal space in recent years,
automatic stabilizers should be allowed to work. In low-income countries, stabilizers
work mostly on the revenue side. A slowdown in economic activity tends to lead to lower
tax revenue, but on the expenditure side there are few automatic stabilizers, such as well-
functioning social safety nets. If countries try to keep expenditure at budgeted levels, the
fiscal balance will deteriorate. Moreover, a few countries may have scope for
discretionary fiscal easing to sustain aggregate demand depending on the availability of
domestic and external financing. All this must be done carefully so as not to crowd out
the private sector through excessive domestic borrowing in the often thin financial
markets.
Fiscal revenues will drop most dramatically in oil-producing countries. While those
countries that saved much of the recent windfalls may now have room for countercyclical
policies, the extent to which they can or should maintain spending depends on the
expected duration of the shock and their fiscal position relative to what is sustainable
over the long term. For countries without savings, their ability to finance temporary
deficits will matter.
In designing a fiscal stimulus, policymakers should be mindful of how different types of
expenditure will affect the country’s external position and economic activity. For
instance, any countercyclical fiscal policy should not exacerbate the loss of foreign
exchange reserves. Unlike in advanced economies, government purchases of the
machinery and equipment associated with infrastructure spending is likely to have a
heavy import component that could cause leakage of foreign reserves. Also, the
slowdown in demand does not originate domestically, as in advanced countries, but
externally. Given the region’s heavy reliance on commodity exports, an expansionary
fiscal policy cannot substitute for the decline in external demand. In any case, spending
priorities and effectiveness should be reassessed to achieve maximum value for money.
In other countries, however, the scope for countercyclical fiscal policies is limited. It
depends critically on their macroeconomic and debt conditions and on the financing
available. As in the case of many advanced economies, any discretionary measures
should be timely, targeted, and temporary and accompanied by a definite exit strategy for
reducing debt as the crisis eases.

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