Africa’s underdeveloped financial systems and relatively limited links to the global economy have not insulated the continent from the impacts of the financial crisis, as low commodity prices, depressed external demand, and declining remittances wreak havoc on the long awaited growth acceleration that characterized the last quinquennium. African economies will likely suffer about $578 billion in lost export earnings over the next two years, representing 18.4 percent of GDP and five times the aid to the region over the period. Oil exporters will suffer the largest losses, with a shortfall of $420 billion over the next two years. Capital inflows, tourism receipts and remittances are all declining in parallel, and trade financing is drying up. The effect of this massive external shock on growth and poverty is severe.

Channels of Transmission
The global financial crisis is impacting African economies in a variety of ways. The most significant are the decline in export prices and volumes. Largely as a result of falling prices and demand for their commodities, many countries have experienced sharp drops in primary commodity exports. During the second half of 2008, non-energy commodity prices plunged 38 percent. Oil prices fell 69 percent between July and December 2008. The expected decline in exports is huge: 42 percent in 2009 and 43 percent in 2010.

African countries that have been dependant on remittances for the last two decades, and have typically seen remittances grow rapidly, will face severe contractions in the flow of these funds. According to World Bank, remittances to Sub-Saharan Africa will drop between 5 to 8 percent in 2009. Declines in remittances contribute to foreign exchange shortages and increased poverty, as some of the most vulnerable and poorest populations lose a significant source of income.

Private capital flows to the region, mainly consisting of foreign direct investment (FDI), have slowed to a trickle, hindering economies that had been relying on these flows to finance much-needed infrastructure and natural resource access projects. In Mozambique, for example, FDI related to expansions of hydroelectric and mining projects has been delayed or suspended.

The inflow of portfolio capital has also been affected. For example, Ghana and Kenya have postponed sovereign bond issues worth about $800 million. The stocks of foreign exchange reserves are deteriorating. In the Democratic Republic of Congo, reserves are down to only a few weeks of import cover. At this pace, many countries will not be able to afford even basic commodity imports such as food, medical supplies, and agricultural inputs.

The Effect on Growth and Poverty
The financial crisis will reverse the recent achievements by African countries in raising growth rates. According to African Development Bank (AfDB), real GDP growth is expected to slow to 4.6 percent in 2009 from 6.2 percent in 2007. Southern Africa will be hit the hardest with its forecast growth rate slowing to 4.0 percent in 2009. Oil exporting countries will also be badly affected—for example, Angola’s growth is projected to decline from 20.9 percent in 2007 to 7.6 percent in 2009. East Africa will grow at a rate of 6 percent in 2009, down from 8.4 percent in 2007.

Fiscal balances are also expected to deteriorate significantly as tax revenues, especially those that are tied to commodity sales, decline sharply. Fiscal balance in Sub-Saharan Africa will deteriorate by as much as 6 percentage points of GDP to a deficit of about 4 percent of GDP in 2009. Rising demand for social spending is compounding the stress on government budgets. With fewer resources, countries will be unable to reach their development goals of reducing poverty and investing in infrastructure.

Although some African countries were making significant progress toward their Millennium Development Goals before the crisis, the shortage of export revenues, foreign finance, and slower growth will certainly hamper these advances. Growth collapses are costly for human development outcomes, which can be irreversible, and which deteriorate more quickly during growth decelerations than they improve during growth accelerations. As just one point of reference, countries that suffered economic contractions of 10 percent or more between 1980 and 2004 experienced more than one million excess infant deaths. The average GDP growth rate of African countries is now projected to fall in 2009 to less than half the pre-crisis rate, as will growth in developing countries as a group. Unless reversed, this corresponds to a total of 1.4 to 2.8 million excess infant deaths during this period.

In contrast to the severe beating taken in many of the region’s other sectors, the African financial sector has been hit relatively mildly by the global crisis. Changes in ownership structure and integration of African banks into the global financial market have been slow. Most African countries have little or no access to market flows of capital other than FDI. As a result, African banks’ exposure to foreign capital markets has not been as deep as in other developing regions In the third quarter of 2007, international claims (claims denominated in foreign currency) to sub-Saharan Africa accounted for only 6 percent of their total.

Yet despite having weaker financial linkages to the rest of the world, African countries have not been immune to financial havoc. The Nigerian stock exchange all Share Index fell 37 percent this year, the steepest quarterly decline in more than a decade and the sharpest decline in the world. The Johannesburg Stock Exchange—the largest in the region—ended 2008 with a 25.7 percent loss.

Can the G20 Come to the Rescue?
On paper at least, leaders of G20 agreed to provide $250 billion in new trade credit guarantees, $100 billion for more lending by Multilateral Development Banks (including the African Development Bank), gold sales to support concessional finance for the poorest countries, and support for a new allocation of Special Drawing Rights of $250 billion, as well as recapitalization of the IMF to the tune of $500 billion. While some of these large sums (especially IMF contributions) are likely to materialize, it is unclear how much, and also how much will find their way into support for Africa.

The AfDB estimates that sustaining African growth in the face of today’s crisis would require an injection of at least $50bn this year, and more next, on top of existing aid flows. To accelerate progress towards eradicating poverty to rates in line with the Millennium Development Goals would require more than twice that amount.

The G20 commitments, vague as they are, increase the likelihood that social protection measures will be enacted and that new investments will be targeted to encourage Africa trade. Still, in the best of circumstances, the impact of many of these measures will take time to bear results. Their speedy implementation should now be the top priority. In the meantime, attention should be directed towards protecting the poor through expanded safety nets to mitigate the human impact of the crisis.

Conclusion
The impact of the financial crisis has been transmitted to African economies not through the credit crunches and liquidity freezes that are currently strangling advanced and emerging economies, but rather through the global recession that followed.

The slowdown in growth will likely deepen the deprivation of the poor and of the large number of people clustered just above the poverty line, who are particularly vulnerable to economic volatility and temporary slowdowns. There is also a possibility that the real economy impacts may spill over into the financial markets, as weaker growth blunts new business and increases bad loans.