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| THE IMPACT OF THE CURRENT GLOBAL CREDIT CRISIS ON AFRICA :: By Oliver Nwankwo MBA :: |
1/16/2009 |
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In the face of global recession, it will be deceptive to believe that Africa will not be affected for the simple fact that African banks are decoupled from the current financial crisis. In today’s global village where nation states interact with each other especially in the financial and economic arena, no part of the globe will remain untouched by the current crisis. This crisis came as many African countries are adopting/implementing some policies to make their countries reliable investment destinations in order to attract more foreign capital. The central question is not whether Africa will be impacted or not, but it’s about estimating the extent of the impact to Africa and how to mitigate the undesirable effects.
The key impact on Africa is basically on declining growth resulting from fall in foreign direct investments; cut back on development assistance; and likely sharp drop on remittance amongst others. To gain insight on the impact of the credit crisis on African, we will highlight some key areas of impact, giving examples and later on proposing some mitigating measures. Sound Policy framework - several African countries have been spending both human and financial resources to implement free market policies and reforms to diversify their economies and have now been left in limbo. The possibility of confusion exists as some will start questioning the relevancy of these policies. Development Assistance - one thing for sure is that promised funding from western countries will decline e.g. we do not believe that the G8 given the credit crisis will honour its commitment to aid flow to Africa by 2010. The money spent by the western governments on the various rescue plans will definitely reduce the amount available for foreign aid. It is equally a well known phenomenon that donors tend to cut aid flows in times of recession and we do not expect anything different this time. Foreign Direct Investment - the foreign capital flows to Africa will fall, the costs of borrowing capital will increase and access to foreign capital market becoming more difficult. Examples – critical infrastructural projects could be delayed or scaled back as the world’s biggest banks move funds from new projects to take care of their selves.
Tanzania for instance is delaying a move to seek capital because of the prevailing circumstance. Product & Services while African countries have benefited recently from improved terms of trade, given the credit crises, protectionism will re-surface and thus worsening terms of trade for Africa. Examples - lowering the prices of African products, decline in the demand for African products, etc.
Tourism will certainly be affected and thus having impact on the revenue some African countries earn from tourism. Diasporas’ Remittance: African diaspora remittance is estimated to be US$15 billion per year. With the looming economic turmoil in the west, some Africans abroad are likely to loose their jobs and homes thus having less to remit to their homelands. Uganda for example depends on remittance which represents 40% of its export earning and any decline in remittance will impact Uganda. It is important to focus on measures that could mitigate the adverse effect of the credit crisis on Africa. In looking for solution, we advise that the emphasis must be on what Africans can do rather than what others could do for Africa.
China has been seen as alternative to the western countries in recent years but its important to mention that while Chinese investments in Africa has increased significantly, Chinese foreign direct investment in Africa remains under 10%. And it is equally estimated that less than 10% of African export goes to China. Given the above information, it is obvious that China cannot be an alternative to the western countries in Africa. The efforts and investment made so far on sound policy implementations need to be even intensified as corrective measures could be taken based on the lessons learnt from the current turmoil. It could even be an opportunity if Africans could provide policy solutions or part of the solutions to the causes of the crises. We would however caution that measures which increase market regulation or strangle free market economy will be counter-productive. Africans have learnt enough and should now be a part of the coalition to the solution. There has been strong argument for and against the role of aid in African development.
Development and improvement on agriculture could be part of the mitigating measures – how could Africans bring improvement to small farming initiatives e.g. storage facilities to preserve produce through to the market place? Some might argue that agriculture should not be among the key areas to focus on for solution but given the need for poverty alleviation, agriculture holds some key to success. Looking inwards for areas of additional improvement, African countries need to: Start outlining partnership initiatives with the western countries instead of relying on age-old developmental aid Deploy better economic and fiscal management Develop and implement more efficient revenue and tax collection system Train, develop and build local capacities in various areas to power and sustain growth Bring African financial institutions to reduce cost of capital and spearhead African
development and investment funding needs – provide easy credit based on sound risk-management process. While the credit crisis will likely have adverse effect on Africa on a short-term, the credit crisis equally comes with lasting opportunities; it is up to Africans to contribute in developing solutions that will reshape capitalism in the new century. We will continue to explore further on this subject matter in the weeks and months ahead and will highly welcome your contributions and responses.
Oliver Nwankwor, MBA
Senior Banking Executive, The Netherlands.
/Media Consultant, The Voice Magazine
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