Concerns for Africa ahead of Doha talks

November 25, 2008 12:00 am

, NAIROBI, November 25 – In just a few days, leaders from around the world will gather in Qatar for talks that will be crucial not just for the global economy but for many African countries as well.

The United Nations’ Doha Review Conference on Financing for Development presents a unique opportunity to address many of the issues that have been pushed to the forefront by the global financial crisis.

This crisis has rocked the foundations of many of the world’s most prosperous economies and threatens the welfare of hundreds of millions of people in the developing world.

While the epicenter – and the source of the current financial meltdown is in the world’s most advanced economies – this crisis has the potential to hit Africa hard.

In addition to the current financial turmoil, many countries on the continent also have to contend with an ongoing and extreme volatility of food and fuel prices while trying to mitigate the growing impact of climate change.

Africa is no longer made up solely of isolated economies, disconnected from the world at large.  Of course, different countries will be hit in different ways, with countries like mine-rich Angola and DRC facing different challenges than countries like Mozambique, Uganda and Rwanda, which are heavily reliant on Official Development Assistance (ODA) flows.

Meanwhile, Africa’s decade-old expansion into the global financial market has made it vulnerable to the global financial downturn, even as it has opened up the region to new possibilities and relatively strong growth.

Last year, the region as a whole recorded over $60 billion in mergers and acquisitions as Foreign Direct Investment (FDI) surged and several low income African countries launched highly successful debt issues on the international capital markets.

It has sought out and successfully partnered with emerging market countries notably China, India and Brazil, as it shifts away from near total dependence on aid and investment flow from more traditional donors of the developed world.

As a result, many countries in the region are set to suffer too, alongside developed countries and the much-touted ‘Emerging Markets,’ a group that, out of the Africa region includes only South Africa.

Initially, African banks may begin to see vital trade credits from Western banks begin to disappear with an on-going credit crunch. In the long-term, the banking system could be affected in substantial ways.

In recent years bank lending has grown greatly in a number of African countries such as Ghana, Kenya and Nigeria.  A deep and protracted downturn will affect the ability of borrowers to service their debts, leading to a rise in non-performing assets and solvency problems for many banks.

Most worrisome however, a downturn in growth whether from falling commodity prices, reduced remittances, lower flows of ODAs, or other external shocks will – unless accompanied by fiscal intervention – lead to fiscal retrenchment and poverty-aggravating cuts in public expenditure.

Most estimates, including one from the International Monetary Fund (IMF) in October, predict modestly slowing growth for the region through 2009, and a high rate of inflation for this year that will ease off during the next.

But the IMF also points to the risks related to a much deeper and longer period of financial turmoil and resultant slowdown in global activity and commodity price volatility.

While some countries in the region may be able to cushion these effects with accumulated reserves, the vast majority will need to make macroeconomic adjustments that will include cuts in development expenditure, including spending on education and health, with all that this means for human development in Africa.

For African countries that are particularly dependent on ODA in-flows, the cuts could be painful indeed.

Doha’s timing, however, is not just critical but also opportune. Much has been made of the chance to use Doha as a springboard for articulating a new, more inclusive multilateral financial architecture that can address the current financial crisis and accompanying commodity and climate volatilities in a manner that reduces the likelihood of future crises and supports the development of low-income countries.

With very serious threats to human development and macroeconomic stability in Africa looming on the horizon – and the very real possibility of an increase in protectionist trade policies by bruised economies and further marginalization of countries in the region – urgent action should be taken to ensure a coordinated regional response to ensure voice and representation of African countries within the new international financial architecture.

The time has come to discuss the need for counter-cyclical fiscal measures in the region and to forge some consensus on making structural changes to the global financial system.

Additionally, there must be a push for the provision of adequate, quick and predictable disbursing of development finance to African countries.

Otherwise, the region faces intolerable reverses in human development gains as a result of current and future crises.  As Africa continues to integrate within the global economy more fully in terms of trade and finance it stands much to gain but also much to lose. 

The author is the United Nations Development Programme RBA Director


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