The global economic crisis of 2008 has brought Africas
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
continents 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 810 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 3050,000 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 Africas mineral exporters.
Nigerias budget balance shifted from a surplus of 5%
of GDP in 2008 to a projected deficit of 8.4% in 2009. Half of
Zambias 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. Sudans 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%
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
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
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 Banks
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 Banks 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 Banks 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
The assistance goes a long way to support the
plans 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.
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 UKs
assistance in dollar terms is about 1015% 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,
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
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