AFRICAN AID: Bearing the brunt

05/10/2009 | Shantayanan Devarajan

Africa will suffer more than any other region from the global crisis – in human terms. A sharp drop in aid flows is likely to worsen the impact, argues the World Bank's Africa chief economist, Shantayanan Devarajan

The global economic crisis of 2008 has brought Africa’s decade-long, sustained and accelerating growth to a grinding halt. Economic growth in Africa accelerated from 3.1% in 2000 to 6.1% in 2007 on the back of improved macroeconomic policies, strong commodity prices, and significant increases in aid, capital flows and remittances.

The proportion of Africans living on less than $1.25 a day fell from 58% in 1996 to 50% in 2005. The prevalence of HIV/Aids was stabilizing and declining in some countries; 60% of the children were completing primary school education, and child mortality was falling in 24 countries.

The global economic crisis following the food and fuel price crises of 2008 threatens this hard-won progress. With private-capital flows, remittances, commodity prices, export demand, and tourist arrivals either slowing or declining, the continent’s GDP growth rate is expected to drop from 4.6% in 2008 to 1% in 2009.

For the first time in a decade, GDP per capita will fall. This decline will likely throw 8–10 million more people into extreme poverty. There is a real danger that Africa, unlike other regions, will suffer a human crisis, as children drop out of school, and some additional 30–50,000 infants – most of them girls – will die from increased malnutrition and poor water and sanitation.

But these aggregate figures conceal differences among African countries both in terms of how their economies have been adversely affected by the crisis and the health of their economies when the crisis started.

The overall decline in primary commodity prices since 2008 has severely hurt the fiscal and balance-of-payments positions of Africa’s mineral exporters.

Nigeria’s budget balance shifted from a surplus of 5% of GDP in 2008 to a projected deficit of 8.4% in 2009. Half of Zambia’s 2009 deficit of 2.6% of GDP comes from the decline in mining revenues.

Perhaps the hardest-hit country is Sudan which, unlike many of the other mineral exporters, did not accumulate reserves during the commodity boom. Sudan’s government revenues are running at about 27% below budgeted levels for 2009, leading to sharp cuts in spending.

Many small African countries rely on remittances and tourist revenues, both of which were rising before the crisis. Since 75% of remittances to Africa originate in the US and western Europe, migrant transfers are expected to decline by about 8% this year.

The impact on countries such as Senegal, Togo and Sierra Leone – all of which receive more than 8% of GDP in remittances – could be severe. In Senegal, the regions that receive the bulk of migrant transfers are also those adversely affected by the drop in tourism. The country that receives the highest share of GDP in remittances (28%) is Lesotho. Most of these originate in South Africa, an economy that contracted by 6.4% on an annualized basis during the first quarter of 2009.

CAPITAL FLOWS SLUMP

After surging to $53 billion in 2007, private-capital flows to Africa are slowing substantially. Foreign direct investment (FDI) is expected to decline from $32.7 billion in 2008 to $26.7 billion in 2009.

Portfolio investments are reversing. Kenya has cancelled a $500 million sovereign bond offering. Ghana and Senegal have postponed FDI-related investment projects in mining and tourism. The recent surge in capital inflows to South Africa may be a double-edged sword as these portfolio investments can easily reverse.

When the global economic crisis hit Africa, there was a concern that in addition to facing cuts in capital flows, remittances, export revenues (and possibly development assistance), African governments might attempt to reverse some of the macroeconomic reforms of the previous decade, as the payoffs to these reforms were diminishing.

Furthermore, policies in developed countries were going in the opposite direction – towards large fiscal deficits and nationalization of private banks.

So far, this has not happened. Instead, countries such as Mauritius, South Africa, Tanzania and Zambia are using their fiscal space – the result of careful macroeconomic management in the past – to maintain their public expenditure programmes and run modest deficits.

Zambia is protecting pro-poor spending as part of its medium-term expenditure framework. Tanzania, Burkina Faso and Senegal are strengthening public expenditure management because the premium on expenditure efficiency has become high. The Democratic Republic of the Congo used a $100 million emergency grant from the World Bank to finance essential imports for infrastructure maintenance and teachers’ salaries.

Not all countries had the fiscal space to run counter-cyclical policies. In 2008, Ghana had a fiscal deficit of 14% of GDP; Ethiopia had an inflation rate of 60% and a trade deficit of 30% of GDP; and Senegal had been running arrears to the tune of 6% of GDP.

These countries are taking steps to reduce their macroeconomic imbalances, albeit in a constrained global environment. Ghana, for instance, has a programme with the World Bank and IMF to reduce its fiscal deficit by two percentage points a year.

Countries that had reasonably well-functioning safety-net programmes, such as Ethiopia, Sierra Leone and Liberia, are scaling these up to cushion the impact on the poor. Some are accelerating reforms. Nigeria, for instance, is deregulating its downstream petroleum sector, reducing costly and regressive subsidies.

In short, economic policies in Africa are generally sound – precisely the environment where additional external resources can be very productive.

Up to now, additional resources have come from front-loading existing, multi-year commitments, such as the World Bank’s International Development Association (IDA) allocation. As a result, the World Bank transferred a record $7.8 billion in IDA over the past year.

Some 20 countries received front-loaded assistance, with about four at 150% of their annual IDA allocation. While African countries appreciated the World Bank’s speedy response in a time of need, they have expressed concerns about the future. Benno Ndulu, governor of the Bank of Tanzania, said, “The World Bank’s front-loading of its IDA allocation to Tanzania has been an invaluable and timely source of financing for its plan to respond to the global financial crisis.

“The assistance goes a long way to support the plan’s focus on providing safety nets for the victims of the crisis and protecting key investments in capacity for growth, especially infrastructure, to ensure growth momentum when the world recovers from the crisis.”

AID LEVELS

While the international community has pledged to honour its commitments to low-income countries by keeping aid as a share of GDP constant, these same donors’ GDPs are shrinking, so the dollar volume of aid may decline.

A weaker pound, for example, means that the UK’s assistance in dollar terms is about 10–15% lower than a couple of years ago. (And one should remember that these same G-8 donors pledged in 2005 at Gleneagles, when the global economy was more buoyant, to double aid to Africa by 2010 – a pledge that is $20 billion short today.)

There is a case not only for aid levels to be maintained but also to increase, to allow those that have been prudent in the past to pursue counter-cyclical policies that offset the slowdown. The fact that the policy environment in Africa today is as good as it has ever been means that this increased aid is bound to be productive.

Leaving aside the question of the volume of aid, there is also the issue of how the aid is committed and to whom it is given. To minimize the growth shortfall in Africa, the aid must be as flexible as possible – because the particular sectors that will benefit from additional resources will vary from country to country, and within countries over time.

For instance, it makes little sense to scale up a safety net programme that is poorly targeted and prone to corruption. It similarly may not be advisable to undertake an infrastructure investment that is import-intensive and creates few jobs. Often, the best option is to continue with the development programme that the country was undertaking before the crisis – in which case aid should be sufficiently flexible to allow this programme to continue and, if possible, accelerate.

While donors have pledged to maintain aid levels, there is a danger that this aid will be concentrated around the so-called “donor darlings” at the expense of some potential “donor orphans” who may be at the greatest risk from the crisis.

Specifically, some of the fragile states such as Central African Republic (CAR) are facing not just an economic slowdown, due to falling timber and diamond prices, but also a threat of a political crisis and possibly a resumption of civil conflict. If no new money goes to countries such as CAR, the consequences could be devastating.

Shantayanan Devarajan is chief economist of the World Bank's Africa region

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