The Global Financial Crisis: The Challenge for AfricaAn Address in Celebration of Africa Week 2009
By Dominique Strauss-Kahn, Managing Director of the International Monetary Fund
Washington DC, May 19, 2009
As Prepared for Delivery
Let me begin by welcoming the ambassadors and representatives of the African diplomatic corps to the IMF this morning. As you know, we are deeply committed to working with our African members. We are keenly aware of the challenges facing your countries, and we are doing our best to meet the needs of the continent during these trying times. Two months ago, I met with African leaders in Tanzania and we sent a joint message to the G-20 leaders meeting in London. In just a few days, I will be privileged to step back on African soil, visiting the Democratic Republic of Congo and Côte d'Ivoire. This morning, I would like to make a few remarks about the serious economic challenges facing Africa, and what we are doing to help.
As you know, we are facing an unprecedented collapse in economic activity, with the global economy mired in the worst downturn in sixty years—what I have called the Great Recession. We expect the global economy to actually shrink in 2009, by 1.3 percent. This recession stands out not just for its depth, but for its breadth—a crisis that began in a segment of the U.S. housing market has spread like wildfire across the whole world, first among advanced countries, then among emerging markets, and lastly—and possibly most potently—to the low-income countries, including across Africa.
In many respects, Africa is an innocent victim of this global financial tsunami. It did not make the mistakes of the advanced countries that are responsible for the crisis. On the contrary, the region did many of the right things, adopting prudent macroeconomic policies and building up reserves. At the same time, the external environment was favorable—commodity prices were high, trade boomed, and the international community put on a high priority on aid and debt relief.
The result was a period of sustained high growth and macroeconomic stability. Growth in sub-Saharan Africa averaged 6 percent since 2000, and inflation fell to single digits—a remarkable achievement that often fell below the radar of the international community.
But over the past few years, Africa has been besieged by bad luck. First came the food and fuel price crisis, which took a heavy toll on the African economy. And now the global financial crisis has made landfall—even though its full impact has been slow in reaching Africa’s shores, it is coming, and it will be severe. We expect growth in the region to fall to a mere 1½ percent in 2009. And inflation is coming down only slowly, with the food and fuel price effects of last year lingering on.
Why is Africa being hit so hard? After all, domestic policies were not really to blame and financial linkages were minimal. The answer lies in the depth and breadth of the crisis. With activity retreating everywhere, and with an unprecedented collapse in world trade, the demand for African exports is dropping fast. Commodity prices have also fallen sharply, and remittance flows are tapering off. On the financial side, even though African banks avoided exposure to toxic assets, private capital is retreating, with both portfolio inflows and foreign direct investment drying up. Fortunately, some countries, especially the oil producers, built up sufficient foreign reserves to cushion the shock.
Let us not forget the stakes, which—given the vulnerability of Africa’s population—are higher than in other regions of the world. According to the World Bank, almost 50 million people could be pushed further into poverty this year—earning less than $2 a day—if financing needs are not met. As many as 3 million additional children may die between now and 2015 if the crisis persists. We cannot allow this to happen.
So how do we respond? I will say a few words about the domestic policy response, and then address how the international community, especially the IMF, can help.
Let me start with fiscal policy. To put it bluntly, fiscal policies should counteract the crisis, not make it worse. As you know, the IMF has been at the forefront of the call for a global fiscal stimulus for countries with the fiscal space to do it. And owing to recent budgetary discipline and debt relief, many African countries have some room on this front. To the extent possible, we encourage letting automatic stabilizers work, which basically means accommodating increases in the deficit as growth slows. In other countries, however, financing and debt sustainability constraints limit room for maneuver. In some cases, fiscal adjustment may be unavoidable. All countries should give priority to strengthening well-targeted social safety nets, or at least shielding them from cuts—this is vital to protect the most vulnerable from the ravages of the crisis.
Monetary and exchange rate policies also have roles to play in cushioning African economies. Exchange rate flexibility can help the adjustment to falling commodity prices and the drying up of capital flows. The drop in commodity prices is lowering inflationary pressures in most countries, providing some breathing space on the monetary front.
Finally, on the financial sector, policymakers need to keep an eye on the health of the banking system as growth slows, and be prepared to act decisively.
Let me now talk about the role of the international community in helping countries weather this crisis. Above all, Africa needs more financing, especially concessional financing. This is not the time for development partners to go back on the commitments they made at Gleneagles to scale up assistance to Africa. Countering protectionist pressures and ensuring that markets are further opened to African products is also critically important.
The IMF itself has a critical role to play, and we are committed to meeting the needs of the region. I am glad to say that world leaders have pledged to double our capacity for concessional lending to low-income countries, and we plan to provide an additional $6 billion in concessional lending over the next 2-3 years.
Marshaling resources is essential, but it is not enough. IMF financing must also become more flexible, better tailoring our lending programs to the needs of our membership. Already, we have doubled all loan access limits, including for low-income countries, to give confidence to countries that we can meet their needs. Our revamped Exogenous Shocks Facility allows us to respond rapidly to countries with large upfront disbursements if necessary. And we are in the process of modifying our concessional lending facilities to further enhance their flexibility and usefulness.
We are also streamlining conditionality. Policy conditions in recent programs have been more tightly focused on core reform objectives and more attuned to the circumstances of each individual country. This flexibility also extends to providing more breathing space to countries as they adjust to the crisis. I would note that fiscal targets have been loosened in about 80 percent of African countries with an active Fund lending program. Related to this, we are re-examining our policies on debt limits, to make them more flexible.
We remain committed to protecting the poorest and most vulnerable in all of our lending programs. We never push to cut health and education spending, and about a third of our low-income country programs contain explicit targets for preserving or increasing social spending. We take these responsibilities very seriously.
A major part of our engagement with Africa comes through our technical assistance programs. Indeed, Africa accounts for one third of our technical assistance, and our regional centers in Tanzania, Mali, and Gabon have proven invaluable. I am pleased to note that we will open two new technical assistance centers in Africa, hopefully this year.
Let me briefly conclude. When it comes to assisting Africa, the IMF does not stand alone, cannot stand alone. To help countries weather this crisis, all development partners need to follow through with their commitments. Of course, we all have different roles and should strive to avoid too much overlap, but we should still work together. Thank you very much.