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IMFSurvey Magazine: Countries & Regions

IMF Pushes on Aid for Africa, Revival of World Trade Talks

Food aid in Isinya, Kenya: some African countries will depend critically on donors honoring aid commitments, IMF report says (photo: Radhu Sigeti/Reuters)

IMPACT OF CRISIS ON AFRICA

IMF Pushes on Aid for Africa, Revival of World Trade Talks

IMF Survey online

March 9, 2009

  • Global crisis to drag down African growth
  • IMF presses advanced economies to live up to aid promises
  • Recommends that stalled global trade talks be resumed

The International Monetary Fund (IMF), worried that economic gains in Africa will slip away because of the global downturn, is pressing advanced countries to honor, and even scale up, aid commitments and called for a revival of stalled world trade negotiations.

The IMF released its assessment of the impact of the global economic and financial crisis on Africa on the eve of a major conference March 10–11 in the Tanzanian city of Dar es Salaam about Africa’s future.

The downturn in global growth, the decline in most commodity prices, and tighter credit have significantly worsened the economic outlook for sub-Saharan Africa, the IMF assessment said. “Risks are rising and how long the crisis will last is uncertain. Policymakers must walk a tightrope between not aggravating the shock in aggregate demand on the one side, while protecting hard-won gains in economic fundamentals on the other.”

Reversing trend

Many countries in sub-Saharan Africa had enjoyed robust economic growth in recent years that strengthened their balance sheets. Sound economic policies were an important factor, as was the favorable external environment and increased external support in the form of debt relief and higher inflows.

But the food and fuel price shocks of 2007–08 that preceded the current global financial crisis weakened the external position of net importers of food and fuel, caused inflation to accelerate, and dampened growth prospects. The global financial crisis greatly compounds the policy challenges confronting the region as it strives to consolidate its economic gains and meet the Millennium Development Goals (MDGs).

How the crisis is affecting Africa

    • Frontier and emerging markets. Through their financial links with other regions in the world, South Africa, Nigeria, Ghana, and Kenya were hit first, suffering falling equity markets, capital flow reversals, and pressures on exchange rates. Ghana and Kenya had to postpone planned borrowing, and in South Africa and Nigeria external financing for corporations and banks is becoming scarce.

    • Across Africa. The global slowdown in economic activity has pushed commodity prices down, with negative effects on export earnings and the external current account, fiscal revenues, and household incomes. Commodity exporters face a major terms of trade deterioration. IMF research shows that in the past a 1 percentage point slowdown in global growth has led to an estimated percentage point slowdown in sub-Saharan Africa. The effects may be more pronounced this time because the tightening of global credit compounds the impact of the slowdown, exacerbating risks for trade finance and other capital flows.

    • Fragile states whose political and social situation is inherently vulnerable. Countries like Burundi, Guinea-Bissau, and Liberia are dependent on very concessional financing that may well be affected.

The IMF said any policy response must take into account the impact on the poor and seek to incorporate social safety nets. Countries that do not have debt sustainability and financing constraints may have some scope for fiscal easing.

Honoring commitments

But it is also clear that countries would depend critically on donors honoring their aid commitments, and even increasing aid levels, despite new competing demands on their own budgets. The IMF itself is moving fast to increase financial support to affected countries, step up technical assistance, and reinforce the policy dialogue with its African members.

IMF Managing Director Dominique Strauss-Kahn, in Tanzania to attend conference, speaks at University of Dar es Salaam March 9 (photo: Stephen Jaffe/IMF)

The IMF said that current financing constraints make it even more important for donors to ensure, in keeping with the Paris Declaration, that aid is predictable, transparent, and aligned with the policy priorities of the recipients. Aid would be particularly useful now as fiscal pressures are building up, to prevent undue compression of investment budgets and make it possible to maintain the scope and size of social safety nets. Although many donor countries face problems of their own, aid flows are still a relatively small share of their budgets and can be accommodated even with the new competing demands.

Resume Doha Round

The IMF said stalled global trade talks need to be resumed to stimulate global growth and welfare. Successful conclusion of the Doha Round would help to better integrate developing countries, including those in Africa, into the global trading system, which would spur global and regional growth and facilitate African attainment of the MDGs.

Temptations to respond to weakening balance of payments positions with protectionist measures need to be avoided. Less global trade would likely harm all countries.

How the IMF is helping

• The IMF increased its financial support to African countries during last year’s food and fuel price crisis and remains a catalyst for critically needed donor support.

• Its lending window known as the Exogenous Shocks Facility was modified in September 2008 to provide assistance more quickly and in larger amounts to low-income countries dealing with exogenous shocks. Malawi was the first country to benefit from this facility, and since then Comoros, Senegal, and most recently Ethiopia have accessed the facility. The IMF has also increased access to the Poverty Reduction and Growth Facility for a number of countries.

• To meet the diverse and evolving needs of low-income countries, the IMF is considering further major reforms of the architecture of its financing facilities, higher access limits to Fund resources, and additional concessional assistance, as well as more flexibility to finance infrastructure projects and other critical investments.

• The IMF will continue to provide extensive technical assistance to strengthen public sector capacity in Africa, because over the long term African countries need efficient and careful public financial management to ensure that their development priorities can be met. To this end, the IMF plans to add two new Regional Technical Assistance Centers in Africa to the three that are already operational.

Comments on this article should be sent to imfsurvey@imf.org


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