The Impact of the Global Financial Crisis on Africa and LDCs

Presentation at workshop on ‘Impact and Responses to the Crisisin Low-income Countries’ as part of the North-South Institute

Project on Policy Responses to Unfettered Finance, Geneva 8 June 2009

Charles GoreSpecial Coordinator for Cross-sectoral Issues

Division for Africa, LDCs and Special Programmes, UNCTAD

Causes of the Financial Crisis

• The crisis is not simply a failure of the financial system (lax financial regulation, misunderstood financial innovations, outrageous financial incentives)

• Rather the crisis is rooted in the contradictions of the current global development trajectory and of the currentdevelopment paradigm

IMF Real GDP Growth,1980-2015

1.6

-1.3

-3.8

Emerging andDeveloping Economies

World

Advanced Economies

African Economic Outlook 2009: Economic Forecast February and May

Real GDP Growth

Source: OECD Development Centre / African Development Bank, 2009

Δ = 6.6%

Δ = 4.1%

Δ = 3.5%

Δ = 4.8%

‐6

‐4

‐2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008(e) 2009(f) 2010 (f)

Real GDP Growth %

Africa (Febr) Total OECD Africa (May)

2.8 Feb2.3 May

Different Real GDP Growth Estimatesfor Developing Countries, 2009IMF April WEO

• Africa 2.0 • Asia 4.8• Middle East 2.5• Lat. Am. -1.5

• Sub-SaharanAfrica (April 24) 1.6

• UNDESA May WESP

• Africa 0.9• E. and S.Asia 3.2• W. Asia -0.7• Lat. Am. -1.9• CIS -5.4

• SSA -0.1• SSA (minus RSA and Nigeria) 1.5

Real GDP growth in LDCs in 2009

IMF April WEO• 13 LDCs with more

than 5 per cent growth in 2009

• LDC Median 3.8 per cent

• LDC Average 3.3

UNDESA May WESP• LDCs: 2.7 per cent • LDCs without

Bangladesh: 2.1 per cent

Regional Variations within Africa: GrowthProjections for 2009

• IMF April 24 2009

• Oil Exporters 1.4• Oil Importers 1.6

• AEO 2009 (Feb/May)

• Oil Exporters 2.4/2.5 • Oil Importers 3.3/2.1• Central 2.8/2.0• East 5.5/5.1• North 3.3/3.5• South 0.2/-1.0• West 4.2/3.3

Key AEO 2009 Assumptions• Africa has become more resilient to exogenous shocks• Impact of deteriorating external account will be offset bz prudent

macroeconomic management and increased trade links with China and India

• Average current account deficit in oil-importing countries is expectedto improve in 2009 as reduction in international price of their imports will exceed reduction in prices of their exports and will worsen in 2010 as imports pick up along with economic growth

• Oil 50 dollars a barrel in 2009, 55 in 2010• Worsening fiscal balances will be fully financed• Oil exporter worst hit, then globally integrated countries RSA and

Egypt, then LICs coz decrease in energz bill and less integration intothe world economy

Possible Time Path of the Recession: V, U or L?

Source: UN/DESA, based on policy stimulations with the UN Global Policy Model.

Channels of Impact• Africa and LDCs cannot count on decoupling• Some affected by capital outflows – stock

markets in RSA, Egypt and Nigeria sharply down • Trade crash. AfDB submission to G20. Exports

in 2009 down from US$635B. (pre-crisisprojection) to US$383B (post-crisis projection).

• Remittances down (SSA -4.4 per cent in 2009 World Bank)

• FDI inflows also falling (though up significantlyfrom US$54B in 2007 to US$72B in 2008)

• Aid remains vital and negative impact of the global recession will be seriously increased if aiddeclines.

The trade crash

• Falling commodity prices and weakerdemand for commodities

• Weaker demand for manufactured exports• Falling tourism receipts

Transmission Mechanism: Not exports as engineof growth but import sensitivity, i.e. effect of import compression on utilization and development of production capacities

Selected Commodity Price Indexes and Prices

(January 2000 - April 2009)

All Food IndexMonthly data (base = 2000)

(April 2008)

279

020406080

100120140160180200220240260280300

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Minerals, Ores and Metals Price Index Monthly data (Base = 2000) (April 2008)

392

0

50

100

150

200

250

300

350

400

450

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Crude petroleum, average of Dubai / Brent / Texas

equally weighted ($/barrel) (july 2008)

133 $/brl

0102030405060708090

100110120130140150

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

($/b

arre

l)

Agricultural Raw Materials Price Index Monthly data (base = 2000) (june 2008 )

229

0255075

100125150175200225250

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: UNCTAD, Commodity Price Bulletin, May 2009

Selected Monthly Commodity Price Indices(Base 2000=100)

% Change April 09 over March 09

April 09 over Peak value

All Food 1.3 -27.2Food -0.4 -26.8

Wheat 1.7 -45.6Rice -7.7 -43.2Sugar 1.9 -6.6Fish meal 1.0 -15.6Tropical Beverages 4.7 -12.6

Coffee, Arabicas 4.8 -13.8Coffee, Robustas, ex-dock France -0.9 -38.1Cocoa beans 1.8 -15.4Tea 5.3 -14.0Vegetables oilseeds and Oils 13.3 -43.2

Selected Monthly Commodity Price Indices(Base 2000=100)

% ChangeApril 09 over

March 09April 09 over Peak value

Agricultural Raw Materials 1.3 -40.5Tobacco, unmanufactured 0.0 0.0Cotton 10.4 -29.2Non-coniferous woods -6.0 -37.0

Minerals, Ores and Metals 10.2 -43.2Iron ore 0.0 0.0Aluminium 6.4 -53.7Copper, grade A LME 22.9 -49.3Copper, wire bars 18.7 -47.5Gold -3.7 -8.1

Crude petroleum 7.0 -62.0

Source: UNCTAD, Commodity Price Bulletin, May 2009

Capital Outflows (based on Yuefen Li)• US$2.5 billion rights issue and public offer by Ecobank

Transnational Incorporated (ETI) simultaneously launched in Ghana stock exchange, Nigerian stock exchange and Bourse des Valeurs Mobilières Régionales raised only US$566 million

• Domestic debt important in many LICs and non-resident purchasesof domestic public and private debt have been substantial. Problemthat this will be dumped in flight to safety. E.g. In the London market, foreign investors in Uganda have converted a significant amount of public and private debt instruments denominated in Uganda shillings to dollars. This has led to exchange rate depreciation.

• Nigerian stock exchange fell from 66,600 in March 2008 to 23,000 in February 2009, leaving some Nigerian banks heavily exposedthrough excessive margin lending and raising uncertainties about their capital adequacy. Forex restrictions imposed in Feb 2009 to stem decline in naira and capital outflow.

How Protracted will the Crisis Be?Will there be Another Lost Decade?• IMFprojects GDP per capita in 2009 will fall by

0.6 per cent. Domestic demand now falling.• Complacency/too optimistic forecasts• Problem of crowding-out of countries perceived

as systemically-irrelevant in international response to the crisis (EURODAD number: $24billion out of £1 trillion in rescue package to LICs)

• Possibility of new debt crisis• Social conflict/political instability

Global Social Impacts

World Bank Global Monitoring Report 2009• People living on less than $1.25 per day in 2009:

1183.9 million • Additional poor due to the crisis: 55 million• ‘200,000 to 400,000 more babies will die each

year’ (Zoellick and Strauss-Khan)ILO Estimates• 45 million new entrants to labour force each• Additional 50 million global unemployed owing to

crisis (currently under revision)

Africa Social Impacts

• Proportion of people living in extremepoverty down from 58 per cent in 1990 to 51 per cent in 2005.

• Number of people living in extremepoverty rose from 296 million to 388 million over same period

• Three quarters of countries in SSA willexperience a rise in the number of extreme poor in 2009 (GMR 2009)

Past Progress Towards MDGs(Least Developed Countries)

Chronic Employment Problem

• In Mali, the new entrants to the labour force were 171,800 in 2005 and they will increase to a peak of 447,800 per annum in 2045, when the annual additional labour force will start to decline.

• In Madagascar, the new entrants to the labourforce in 2005 are estimated as 286,200 and their number will increase to 473,400 per annum by 2035, when the additional labour force will begin to decline.

Policy Response: (1) Need to Re-consider Role of the State

• Focus on development of productive capacities and expansion of productive employment

• Priority of structural transformation – both agricultural and industrial policy

• Build new developmental state• Intensify domestic resource mobilization • Break the chronic credit crunch (financial

systems)• Build knowledge systems to promote

technological learning and innovation

Policy Response (2): RegionalIntegration

• Importance for resilience to international economy (balance between domestic and external demand); also structural change

• Need to focus on hard and soft infrastructure for increasing regional tradein goods and services

• Facilitate regional investment flows and labour mobility

Policy Response (3): International. Need for Anti-shocks Financing Facility• A large-scale, low-conditionality, rapid-disbursing,

grants-based anti-shock funding could serve to cushion the impact of the trade crash.

• The absence of such a facility has long been noted by economic observers as a critical problem for poor countries and its introduction has been identified as a priority by HIPC policy makers.

• The lack of contingency financing can be traced back to the decision of the IMF to introduce the Enhanced Structural Adjustment Facility (ESAF) in 1990.

• The introduction of the anti-shocks financing facility could thus also be associated with a re-consideration of the role of the IMF in poor countries.

Policy Response (3) International Support

• How can Africa and LDCs (LICs) fit into a globally coordinated fiscal stimulus?

• Need to scale-up aid. AfDB submission to G20: ‘Under conservative scenario of maintaining growth at pre-crisis levels, external financing will be needed to bridge a resource gap of $50 million in 2009 and $56 million in 2010.’ To achieve socially-necessary growth rates for MDG achievement - $117B (2009) and $130 billion in 2010.

• Issue of aid effectiveness/ importance of country ownership. Counter-cyclical role of aid.

• Debt moratorium• African/LDC voice in international fora

Thank you

For more analysis of conditions in least developed countries, www.unctad.org/ldcrand the Economic Development in Africareport series on the UNCTAD website.