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Analysis: Africa suffers ‘grave’ hit

The global economic downturn has “gravely affected” Africa, according to a report by several leading international organisations.

The African Economic Outlook (AEO) – produced by the African Development Bank (ADB), Organisation for Economic Cooperation and Development (OECD) and the United Nations – predicts that the continent’s growth rate will fall to 2.8% this year. If anything the rate will be worse rather than better than this, the report says. However, the authors predict that growth will rebound to 4.5% in 2010.

This year’s slump in growth follows half a decade of unprecedented growth rates of over 5% a year. Africa benefited from a combination of internal reform and a benign global economic environment.

The report notes that the economic crisis has eroded those benefits accumulated through reforms. “Many people will fall back into poverty. This is a setback beyond the control of Africans and is likely to be protracted.”

And according to the AEO, “only a handful” of African countries are on track to meet the official UN target of halving the proportion of those living on less than one dollar a day by 2015 (compared with 1990 levels). Workers’ remittances, trade finance and foreign direct investment are also expected to dry up, the report says, posing grave risks to balance of payment sustainability.

Growth in oil-exporting countries is expected to fall to 2.4% this year, compared with 3.3% for the net oil importers.

The collapse of commodity prices (mineral and non-mineral) and plummeting demand from developed countries, the report says, will have an adverse effect on Africa’s budget balances. This year’s regional budget deficit for 2009 is expected to be about 5.5% of GDP. One year ago, the AEO predicted a surplus of 3.4%.

However, last year, foreign direct investment increased by about 10%, while the report also notes that Africa is better positioned to weather the crisis than it was 10 years ago.

Louis Kasekende, the chief economist of the ADB, says the reforms introduced have resulted in efficient macroeconomic management and made African economies more competitive.

These reforms, he adds, have strengthened fiscal balances and reduced inflation to single-digit levels. Many African countries have also benefited from substantial debt relief, with the result that debt service/export ratios are low in most countries, Kasekende adds.

He highlights that individual countries should therefore not implement policies that restrain further integration of the continent into the global trading and financial environment.

Javier Santiso, the director and chief development economist of the OECD Development Centre, says that Asian and Latin American emerging markets have become increasingly important trade and development partners. This reduces the continent’s vulnerability to the economic performance of OECD countries.

The AEO says: “During the crisis, governments should preserve gains obtained in the recent past by pursuing structural reforms, infrastructure development and poverty reduction. They will have to balance these efforts with the preservation of macroeconomic fundamentals.”

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