The global financial crisis has put Africa’s hard-won economic gains under threat. While all countries have been adversely affected, the enormous diversity of the continent’s 52 countries makes it especially difficult to generalize. This article gauges the impact of the crisis by reviewing the experience of three countries: South Africa, Nigeria, and Ethiopia, respectively Africa’s largest, second-largest, and ninth-largest economies. These economies, which represent 30 percent of Africa’s population and 40 percent of its GDP, include a diversified middle-income economy (South Africa), an oil exporter (Nigeria), and a low-income agricultural economy (Ethiopia). Together, they are fairly representative of different situations on the continent.
The poorest, most agriculturally dependent economies in Africa emerge as less affected by the crisis, due in part to their relatively low level of integration into global markets.
The poorest, most agriculturally dependent economies in Africa, such as Ethiopia, emerge as less affected by the crisis, due in part to their relatively low level of integration into global markets. However, the lesson is not to withdraw from globalization, but to strengthen resilience to international shocks.
South Africa
Of the three countries examined in this note, South Africa has been the most affected by the crisis, which has dragged it into its first recession since apartheid. GDP, which grew by 3.1 percent in 2008, is expected to fall by 0.3 percent in 2009.
South Africa’s vulnerability is primarily due to its reliance on exports, which account for 65 percent of the country’s GDP. Diminished global demand has taken a severe toll on the economy, with the most notable declines occurring in manufacturing, down by more than a fifth, and mining, down by nearly a third.
A large trade deficit and double digit inflation at the outset of the crisis have severely constrained growth. However, macroeconomic policies put in place before the crisis have mitigated the impact of the downturn. Through tighter monetary policy, the country achieved low public debt and high revenue collection. Conservative fiscal policy kept the budget deficit between 1.5 and 0.4 percent of GDP. Rising capital inflows attracted by good economic prospects resulted in historically high foreign exchange reserves.
South Africa’s vulnerability is primarily due to its reliance on exports. Diminished global demand has taken a severe toll on the economy.
Luckily, South Africa has had only limited exposure to the toxic assets of developed countries. Bad debts have risen only slightly, from 1.1 percent in 2007 to a manageable 3 percent in 2008. However, risk aversion in global markets has put downward pressure on the rand (which has depreciated by around 9 percent against the U.S. dollar since August) and the South Africa All Share Index has plunged by 17.4 percent since last fall. Still, the stability of the foreign exchange reserves ($30 billion), a slight decline in the trade deficit in the first quarter of 2009, and recent signs of recovery in portfolio inflows has shielded the country from the worst financial impacts.
The government’s prompt policy response has increased the likelihood of recovery. The central bank cut its benchmark rate to 7.5 percent. It has adopted expansive fiscal policy, doubling its borrowing in 2009 to 3.8 percent of GDP to finance infrastructure building and create jobs. Further, until these policies and a broader global recovery bring relief to South Africa, the nation’s democratic institutions will hopefully enable the country to protect its most vulnerable citizens.
Nigeria
Nigeria has been directly affected through the financial sector. The NSE All Share index has plunged by 42 percent since September. The naira has shed about 20 percent against the dollar over the same period. The estimated ratio of non-performing loans to gross loans will reach 7.4 percent by the end of 2009, up from 6.2 percent at the beginning of the year.
Nigeria’s dependence on oil, which accounts 90 percent of exports and three-fourths of government revenues, exposed the country to the full brunt of the crisis, as oil prices plummeted. Violence in the oil-producing Niger Delta region added additional stress by paralyzing the country’s oil production, causing losses of about $25 million a day in the last two weeks of May. Oil revenues are projected to drop sharply from 21.0 percent of GDP in 2008 to 12.4 percent in 2009.
The government has, however, taken important steps to mitigate the effects of the crisis. The policy interest rate has been gradually reduced from 10.25 percent to 8 percent. To improve liquidity in the banking system, the Cash Reserve Ratio was reduced from 4 percent to 1 percent. With a large accumulation of foreign reserves, Nigeria has more fiscal space to conduct counter-cyclical policies. However, the 2.9 percent growth predicted for 2009 is too slow to reduce unemployment and poverty in light of Nigeria’s quickly growing population.
Ethiopia
In some respects, the financial crisis has been a blessing in disguise for Ethiopia. Lower oil, steel, and food prices have eased inflationary pressures and improved terms of trade. Further, remittances have not declined as expected. Growth is expected to slow from its double-digit pace of the past few years, but will likely remain at a strong 6.5 percent in 2008/2009.
Ethiopia has been extremely isolated from the financial impacts of the crisis. Its economy is one of the least monetized in the world and over 85 percent of the population has little access to financial services. Still, the birr has depreciated by 13 percent since September, hinting at future debt-service burdens.
Ethiopia has, however, been impacted by the global slowdown in demand for most of its exports. Export revenues are expected to fall over a billion dollars short of the country’s $2.5 billion target for the 2008/2009 fiscal year. Exports of coffee, which last year accounted for nearly two-thirds of the country's export earnings, are down as much as 40 percent this year. Foreign exchange reserves are just enough to cover a few weeks’ imports.
The government has done little to mitigate these impacts, constrained by limited room for fiscal stimulus and inadequate foreign reserves. The government’s budget may be further diminished as aid and loans from more-impacted developed countries slow.
Policy
While these three countries have been impacted to varying degrees by the financial fallout of today’s crisis, all have been hit by the downturn in global demand. Still, the implication is not to retreat from globalization, but to build stronger defenses against shocks coming from abroad.
Weaknesses in the operating environment of financial institutions were a source of vulnerability. More must be done to improve transparency and accountability in the financial sectors of all three countries. There is also a need to carry out deeper and more comprehensive financial stability assessments and to intensify cross-border cooperation to minimize financial contagion.
The lesson is not to withdraw from globalization, but to strengthen resilience to international shocks.
With respect to monetary policy, the crisis makes it doubly important to maintain realistic exchange rates, adequate reserves, and sound macroeconomic fundamentals.
These countries did many things right during the boom years: building up reserves, improving budgetary discipline, and investing in infrastructure, all of which will help them weather today’s economic storm.
Still, given the possibility of the downturn becoming even more protracted, greater efforts are needed to strengthen safety nets to protect vulnerable groups. While South Africa and Nigeria have some fiscal room to do more of this, donor support will be critical for Ethiopia.
.jpg)
