Professor Happy SiphambeUniversity of Botswana

The collapse of the investment bank, Lehman Brothers on September 15, 2008 is widely regarded as the start of the severe global economic crises

Economic forecasts steadily worsened so that by January 2009, the IMF was forecasting negative growth in all major industrial economies and global GDP for the year was forecasted at 0.5 percent

As charts 1 and 2 show economic growth of the world and that of Africa will decline due to the financial crisis in 2009

The worst hit will be Sub-Saharan Africa which is forecast to grow at 1.7 percent in 2009 compared to 5.5 percent in 2008.

IMF forecast are that the world economy will recover from the economic recession in 2010, where growth is expected to be small but positive at 1.9 percent.

This recovery is in response to the economic policies that have been put in place since the beginning of 2009

Four main channels: banking failures and reduction in domestic

lending Reduction in export earnings Reduction in tourism demand Reduction in financial aid flows to

developing countries

First channel is very small if at all it exists due to banks in developing countries having limited interrelationships with international banks

Main effect in terms of 1 is thru stock market volatility- most stock market indices were observed to decline since the beginning of the crisis

There is limited evidence of non performing loans due to the crisis. Eg Lesotho increased from 2% to 3.5 % between 2006 and 2008.

Major impact of the crisis in developing countries comes thru second round effects- in particular decline in export demand and tourism

Comes from fall in commodity prices as well as decline in demand for commodities especially those that are luxurious.eg diamond, tourism.

ODA and remittances also fell

Focus on five small African countries- Botswana, Lesotho, Gambia, Namibia and Swaziland

Four of the countries are SACU members and also highly dependent on SA and some to the extent of using the SA currency, Rand.

Therefore the response of the SA economy will largely shape the SACU countries as well.

IMF forecast SA economy to record negative growth of 0.3% in 2009

Benefit is low inflation- 11.5 in 2008 to 6.1 in 2009- due to fall in commodity prices especially oil

Between 1991 and 2008 the five countries recorded positive growth rates which were quite impressive even though lower than those required to achieve the MDGs.

IMF forecast is that all the five countries will decline in 2009 due to the crisis- worst hit are Botswana and Namibia- due to decline in diamond sales.

Botswana- -10.4 in 2009 Result- closure of some diamond plants in

Botswana and Namibia- low Govt revenue which led to postponement of NDP 10 for Botswana and budget cuts of 7%

Lesotho forecast to grow marginally at 0.6% compared to 3.5% in 2008- slow growth due to decline in textile exports to USA.

Also reduction in SACU revenues as a result of low imports- SACU revenue account for 60% of total Govt revenue.

Also fall in remittances as SA reduces labour in its mines in response to low prices of gold and platinum.

Swazi economy is forecast to grow marginally at 0.5% compared to 2.5% in 2008.

Also affected by decline in SACU revenue and fall in remittances similar to Lesotho

Also decline in exports of textile But likely to be cushioned by exports of

sugar and agro based products which are income inelastic.

Gambia is forecast to have a lower growth of 4% in 2009 compared to 5.9 in 2008.

Impact is felt more in terms of tourism. Demand for ground nuts less likely to be affected given that

A positive impact of the crisis in the low inflation sue to decline in commodity prices.

After having relatively high inflation rates of up to 18 percent in November 2008, Botswana’s inflation started declining and had reached a low of 8 percent in May 2009.

The same trend is observed for the other countries and this trend is expected to continue into most of 2009.

As the commodity market worsens due to both low prices of exports and low demand for exports from developing countries, the balance of payment is also likely to worsen

For Africa the current account is expected to worsen to -6.5% of GDP in 2009 compared to 1% in 2008.

For sub-Saharan Africa it is expected to be -7.7 in 2009 compared to -1.8 recorded in 2008.

Countries experience- Botswana expected to decline from 14.3 % of GDP current account balance in 2008 to 7% in 2009; Lesotho 12.7 to -3.2 in the same period and Namibia from 9.2% to 2.3 % in the same period.

Swaziland- -6.4% of GDP from -1.4% and Gambia -17.1% in 2009 compared to -13.4% in 2007

Most currencies have depreciated against the USD since the crisis started- leads to high foreign debt and increase in cost of imported intermediate inputs- less production and loss of employment.

Decline in commodity prices especially oil –none of the five is a major exporter of oil.

The prices of copper, coffee, cotton and sugar declined by more than 20 percent between 2008 and 2009

Swaziland is a major exporter of sugar meaning therefore that it faced a major decline in its revenue from that commodity

The volume of exports has also declined due to low demand from the major traders like USA due to the crisis

Forecasts from World Trade Organization indicate that the volume of global trade is expected to decline by 9 percent in 2009 due to the crisis

Another area is the fall in remittances – Lesotho, Swaziland and Gambia remittances represent more than 10% of GDP.

FDI also expected to decline. Donors also likely to reduce ODA- a number of African

countries highly dependent on ODA.eg Gambia 14.7% of GNI in2000-2007.

Have implications for balancing their budgets. Eg Botswana had to postpone NDP 10 and cut budget by 7% .

The need to cut expenditure poses problems given that Govt also needs to use fiscal policy to stimulate the economy.

Another impact is in terms of loss of employment and increases in unemployment.

Most have resorted to interest rate reductions, recapitalization of financial institutions, increasing liquidity to banks and firms, fiscal stimulus packages, trade policy changes, and regulatory reforms

For most of these countries a major policy available was fiscal policy given that they are operating a fixed exchange rate regime.

Botswana used both monetary and fiscal policy measures

Monetary- reduced bank rate several times- the latest in June 2009 by 1.5%.

Namibia and Swaziland also responded by either reducing interest rates or keeping them unchanged while SA was raising its interest rates.

In terms of fiscal policy, most countries went for belt tightening

Botswana for instance froze civil service salary increments, cut Govt budgets by 7%, put restrictions on travel budgets, vehicle purchases and the creation of new posts

But a number of capital projects were allowed to take off to provide the needed stimulus to the economy- some are to be financed through international borrowing

Namibia was exceptional in that it allowed a 24% salary increment during a crisis year

Govt has not resorted to suing the foreign exchange reserves which currently stand at USD8.1 billion.

Lastly countries allowed energy prices to decline to benefit consumers generally when prices of petrol and oil went down.

Given that the small African countries have very little control on what has happened to the global economy, it is however very important that they have a good set of policy responses that will not worsen the condition of their economies

To a certain extent, these countries should also take advantage of the bad economic times to realign their economic policies to best practice

Botswana has for instance deviated from its past practice of good macroeconomic management where only viable projects were financed after having been subjected to rigorous cost benefit analysis.

The country can perhaps use these bad economic times to move the economy back to good economic management

The international world also has a major role in terms of assisting these economies to quickly recover from the negative impact of the economic slowdown through financial and technical assistance

There is also need to adequately understand the impact of the economic and social impact of the economic slow down through continuous dialogue, research and sharing information and best practices amongst the African leaders.

Thank you for Listening