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Analysis: Global crisis hits Africa

Africa is likely to be hit hard by the global economic crisis, according to the latest Regional Economic Outlook for sub-Saharan Africa from the International Monetary Fund (IMF).

After several years of strong growth, the IMF warns Africa’s “hard-won economic gains are now at risk”.

Growth in sub-Saharan Africa, which is “essential for much-needed poverty reduction”, fell from nearly 7% in 2007 to just under 5.5% in 2008.

According to the Regional Economic Outlook, growth on the subcontinent is projected to decline further to 1.5% in 2009, before recovering to about 3.75% in 2010, still below its pre-crisis level.

The IMF estimates one percentage point slowdown in GDP growth in the rest of the world leads on average to an estimated 0.5 percentage point slowdown in sub-Saharan Africa. Part of the effect, 0.2 percentage point, is felt simultaneously, and the remaining 0.3 percentage point in the following year.

According to the report, risk aversion has reduced foreign direct investment and reversed portfolio inflows as investors flee to more liquid or safer assets. Trade finance has become more expensive.

“The economic slowdown is also likely to increase credit risk and non-performing assets, weakening the balance sheets of financial institutions and corporations,” says the IMF.

External positions are also expected to weaken, the IMF says, though the driver will vary depending on a country’s economic structure, income, and access to international capital markets.

“The spiralling effects of a depressed world economy and the increased risk aversion of investors pose growing risks for financial systems. Because of the spill-over of the crisis to real economies, global demand and prices for commodities are depressed, capital flows are declining and economic growth prospects have slowed throughout the region.”

Overall, financial systems in sub-Saharan African countries have so suffered relatively little as a result of the global financial crisis, the fund says. “Although the crisis has exerted significant pressures on money, currency, and capital markets, they have continued to function normally,” the IMF says.

“The relative stability reflects several factors – among them the limited, though increasing, integration with global financial markets, minimal exposure to complex financial instruments, relatively high bank liquidity, limited reliance on foreign funding, and low leverage in financial institutions.”

African countries with financially more developed markets were the first to feel the effects of the global crisis. Those countries with relatively developed financial systems are likely to suffer before those with underdeveloped ones.

“While African banks have little direct exposure to distressed assets weighing down bank balance sheets elsewhere, they are vulnerable to indirect effects. An economic slowdown will affect the quality of their credit portfolios, and they could face losses on deposits with troubled foreign correspondent banks or capital reparations by troubled foreign parent banks.”

The report says this situation could further increase credit risk and non-performing loans, and reduce liquidity.

Financing is likely to “remain strained” because of declining capital inflows. The IMF expects generally tighter global funding conditions to have noticeable effects on middle-income countries, particularly South Africa and the frontier markets of Ghana, Kenya, Nigeria and Tanzania.

The IMF recommends intensified surveillance to facilitate early detection of risks, contingency planning to reduce potential runs on banks and protect depositors. It also suggests improved arrangements for home and host country supervisory relations and cross-border crisis management, flexible provision of liquidity support to the banking system, and strengthened bank resolution frameworks to ensure the orderly winding-down of weak banks.

As commodity prices and global demand both fall, inflation is projected to fall – from about 11.5% in 2008 to 10.5% in 2009, and about 7% in 2010.

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