Two months ago, when concerns about the global financial crisis were peaking, I eagerly watched what the African leadership would have to say about the crisis and its possible effects on the continent. They rushed to announce that African banks wouldn't be affected. "It's not like we have stocks in London, New York or Tokyo, you know," chuckled one of the finance ministers who had been interviewed. It would seem that, for the first time, 'underdevelopment' was a saving grace. African banking systems probably won't experience the turbulences seen in U.S banking systems. The chief economist of the Africa region at the World Bank, Shanta Devarajan, explains:
"African banks retain loans they originate on their balance sheets, the interbank market is small, and the market for securitized or derivative instruments is either small or nonexistent. Even though some African countries’ banking systems have significant foreign ownership, the parent banks are typically not in the U.S. Furthermore, the foreign ownership share in the largest economies, Nigeria and South Africa, is less than five percent (compared with a developing-country average of 40 percent)."
While the banking systems may not feel the impact as much, consequences engendered by the crisis will manifest themselves in other sectors; particularly those sectors dependent on foreign capital inflows- foreign direct investment, portfolio investment and loans. The African Development Bank's chief economist, Louis Kasekende, says that stock markets in Uganda, Tanzania, Kenya, Egypt, and South Africa are already feeling the impact of the financial crisis, due to international investors withdrawing in fear of future impacts.
Most countries were using foreign capital inflows to finance infrastructure investment. For anyone who has ever traveled to an African country, lack of infrastructure is a daily obstacle to economic and human development, especially in the rural areas. A halt or delay in such projects would also mean the loss of livelihood for so many whose employment was tied to infrastructure and construction projects. In addition, if the cutbacks spread to official development assistance, public health efforts, particularly HIV/AIDS prevention and treatment, and education monies could be greatly affected. Foreign N.G.Os will also probably see their funds dry up as their benefactors re-adjust their financial priorities. Whether the latter is a bad thing, I don't know...
The bigger challenge, though, is how African countries, especially those already battling high inflation, will be affected on a macroeconomic level. Ethiopia’s inflation rate is 61 percent, Kenya’s 28 percent, Ghana’s 18 percent and South Africa’s 13.6 percent. Ethiopia’s trade deficit is 30 percent of GDP, Ghana’s current account deficit is 13 percent of GDP, and South Africa’s 8.2 percent of GDP. In addition, a number of African currencies, namely, the Ugandan and Kenyan shillings, have been depreciating since October. Devarajan says that, "although unrelated to the financial market crisis in the U.S. (but closely related to the food and fuel price increases of earlier this year), these developments will require early and decisive actions to avoid the situation getting worse."
What are the 'early and decisive actions' these countries should take? The two main economic policy approaches advanced by economists when trying to reach macroeconomic stability are monetary policy and fiscal policy. Check out my next post as I go deeper into the differences of these two approaches, and the implications following either could have on the future of African economic development.
"African banks retain loans they originate on their balance sheets, the interbank market is small, and the market for securitized or derivative instruments is either small or nonexistent. Even though some African countries’ banking systems have significant foreign ownership, the parent banks are typically not in the U.S. Furthermore, the foreign ownership share in the largest economies, Nigeria and South Africa, is less than five percent (compared with a developing-country average of 40 percent)."
While the banking systems may not feel the impact as much, consequences engendered by the crisis will manifest themselves in other sectors; particularly those sectors dependent on foreign capital inflows- foreign direct investment, portfolio investment and loans. The African Development Bank's chief economist, Louis Kasekende, says that stock markets in Uganda, Tanzania, Kenya, Egypt, and South Africa are already feeling the impact of the financial crisis, due to international investors withdrawing in fear of future impacts.
Most countries were using foreign capital inflows to finance infrastructure investment. For anyone who has ever traveled to an African country, lack of infrastructure is a daily obstacle to economic and human development, especially in the rural areas. A halt or delay in such projects would also mean the loss of livelihood for so many whose employment was tied to infrastructure and construction projects. In addition, if the cutbacks spread to official development assistance, public health efforts, particularly HIV/AIDS prevention and treatment, and education monies could be greatly affected. Foreign N.G.Os will also probably see their funds dry up as their benefactors re-adjust their financial priorities. Whether the latter is a bad thing, I don't know...
The bigger challenge, though, is how African countries, especially those already battling high inflation, will be affected on a macroeconomic level. Ethiopia’s inflation rate is 61 percent, Kenya’s 28 percent, Ghana’s 18 percent and South Africa’s 13.6 percent. Ethiopia’s trade deficit is 30 percent of GDP, Ghana’s current account deficit is 13 percent of GDP, and South Africa’s 8.2 percent of GDP. In addition, a number of African currencies, namely, the Ugandan and Kenyan shillings, have been depreciating since October. Devarajan says that, "although unrelated to the financial market crisis in the U.S. (but closely related to the food and fuel price increases of earlier this year), these developments will require early and decisive actions to avoid the situation getting worse."
What are the 'early and decisive actions' these countries should take? The two main economic policy approaches advanced by economists when trying to reach macroeconomic stability are monetary policy and fiscal policy. Check out my next post as I go deeper into the differences of these two approaches, and the implications following either could have on the future of African economic development.
3 comments:
I have come to understand that many African currencies are backed by the British Pound and Euro. I was wondering what affect that will have on African economies as these currencies continue to depreciate in value?
I'm far from an economist, but I'll toss my 2 pennies in.
I think the fluctuation of larger currencies impacts African monies less than the inflation from trying to adjust to the the rising prices of goods. And since Africans have little to no say on the prices of these goods, they generally get swindled. Also, a lot of the people in charge, and their advisers are grossly incompetent and still sometimes believe that if you need more money, you should print it. Case in point, Zimbabwe today, Congo and Uganda in the past.
It's terribly sad what happened to the Kenya shilling. It's still relatively strong and it had been on a consistent upward path...until this new divided government came in place.
The financial crisis will have a large effect on how much aid is disbursed to African countries. I do not know much about economics, but there are many effective education programs that depend on foreign assistance, however, if Western countries cannot provide for their own citizens, what makes us think that they will provide for African citizens? A country like Uganda that is depending on foreign assistance to push forward with their Education For All policies is going to suffer dearly. How will they hire more qualified teachers or provide basic inservice training for new or existing teachers? We can just forget about those Special Education programs...
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