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IMFSurvey Magazine: Countries & Regions

GLOBAL ECONOMIC CRISIS

Crisis Threatens Millions in Africa, Ministers Say

IMF Survey online

April 26, 2009

  • Crisis threatens to disrupt Africa’s progress, setting back poverty gains
  • Governments using various strategies to soften crisis impact
  • G-20’s call for resources welcome, but must be implemented quickly

African Finance Ministers welcomed commitments to increase resources for developing countries, but cautioned that assistance was needed quickly if Africa is to contain the impact of the global economic crisis.

Ministers in the 15-member African Consultative Group met at the International Monetary Fund in Washington with Managing Director Dominique Strauss-Kahn to discuss Africa’s response to the crisis and the risk that millions will be thrown back into poverty.

“The impact of the crisis on Africa will be severe,” said the co-chairs of the group, Samura Kamara, Minister of Finance and Economic Development of Sierra Leone, and Strauss-Kahn.

“Growth will be lower, budgets will be strained, and external accounts will weaken. The remarkable gains achieved by Africa over the past decade are now under threat and there is a real risk that millions will be thrown back into poverty.”

Need to implement commitments

The ministers discussed implementation of the joint commitments made in Tanzania in March, when they identified a series of actions to protect and sustain Africa’s achievements in raising growth and reducing poverty and agreed on the importance of implementing these commitments.

The IMF on April 23 announced a doubling of borrowing limits of the poorest countries under its concessional Poverty Reduction and Growth Facility and Exogenous Shocks Facility. The IMF’s Executive Board has also begun discussions on options for raising additional resources for concessional lending to allow the Fund to scale up its capacity to assist low-income countries over the medium term.

The African Governors welcomed the IMF’s decision to double access limits as well as the support by the Group of Twenty (G-20) industrialized and emerging market countries for a doubling of the IMF’s concessional lending capacity for low income countries. They stressed the need to accelerate reforms of IMF governance to amplify Africa’s voice within the institution.

IMF to support Africa

During the discussion, the Managing Director reiterated that the IMF stands ready to supplement its policy advice with financial resources and will act quickly to provide African countries with the support they need. He noted that the IMF will make financing for low income countries more flexible and responsive to the diverse needs of African countries. He also emphasized that the IMF’s framework for assessing debt sustainability is being reexamined to ensure that it can accommodate Africa’s new financing needs and opportunities.

Finance ministers (from l) Musokotwane of Zambia, Mkulo of Tanzania, Koffi Diby of Cote d’Ivoire, with IMF’s Ismaila Dieng (IMF photo)

“We discussed the responses needed within African countries to support growth, preserve macroeconomic stability, and sustain momentum towards achieving the Millennium Development Goals (MDGs),” the consultative group said in a statement. “We agreed that many countries are confronting the crisis from a stronger position than they have been in several years. Some countries have built up sufficient foreign reserves to cushion the external shock. Falling public debt and high savings have provided others with greater fiscal space to counter the crisis. Yet the challenges at this juncture are immense and many countries will need significant additional concessional financing to weather the crisis and to keep the MDGs within sight.”

Ministers agreed that in countries with flexible exchange rates and where inflationary pressures stemming from earlier increases in food and oil prices are starting to recede, there may be scope for more accommodative monetary policies to support growth.

“Fiscal policy must strike a balance between supporting growth while preserving macroeconomic stability and debt sustainability over the longer run. In many countries, there is room to let automatic stabilizers work or introduce stimulus measures to support growth. In other countries, where debt levels are already unsustainable or where financing constraints are binding, there may be little option but to tighten fiscal policies in response to the sharply weaker economic outlook. In all countries, however, priority should be given to strengthening social safety nets to minimize the adverse consequences of the downturn for the poor.

“We agreed that additional donor support will be critical in allowing a policy stance that is more supportive to growth. In this context, we reiterated our call for the international community to fulfill the promises already made to significantly increase aid flows to Africa, the urgency of which has increased as a result of the global economic crisis. All countries must also play their part in rejecting protectionism by ensuring that their borders remain open to trade and financial flows.”

Crisis taking toll on Africa

Ministers told an April 25 press conference in Washington that Africa is now acutely feeling the effects of the economic crisis that originated in the developed countries.

Mustafa Mkulo, Tanzania’s Minister for Finance and Economic Affairs, called on rich nations to do more to help Africa by honoring their aid pledges, providing part of their stimulus funds to developing countries, bolstering the resources of the international financial institutions, and broadening market access to products from developing countries.

Growth for Sub-Saharan Africa is projected to reach only 1½ percent in 2009, noted Mkulo, citing the just-published outlook for the region.

“The crisis is now threatening to wipe out all our gains of the last ten years and disrupt our plans for further progress,” Mkulo warned. The joint IMF-World Bank Global Monitoring Report 2009: A Development Emergency, released April 24, likewise notes that the triple punch of the food, fuel, and financial crises puts the achievement of the Millennium Development Goals at risk.

Spreading through three channels

The crisis is reaching Africa through three main channels, noted Charles Koffi Diby, Côte d’Ivoire’s Minister of Economy and Finance: the collapse of world demand; the drop in commodities prices; and the indirect effects of the financial crisis, such as lower aid, foreign direct investment, and remittances. At the same time, social costs are rising, as the ranks of the unemployed in many African countries swell.

The African ministers detailed their efforts to mitigate the effects of the crisis on their countries. Situmbeko Musokotwane, Zambia’s Minister of Finance and National Planning, spoke of his country’s plans to spur economic activity. “Obviously, there’s less room for a stimulus package in a country such as Zambia, but in a limited fashion, we’ve tried to do that,” he said.

Domestic borrowing in Zambia increased from 1.4 percent of GDP last year to 1.8 percent of GDP this year, Musokotwane explained. Most of this money will go to education, health, and social safety net expenditures. But the country also plans to put funds toward infrastructure that the government hopes will create the basis for private sector investment. “This crisis is not going to last forever,” he said, and observed that African countries should use this time to create conditions that will be favorable to investors once the crisis is over.

“We believe that this is really the future for Africa—to join in the leagues of what the Asian countries did decades ago,” Musokotwane said.

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


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