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December 2008

Impact of the Global Financial Crisis on Zambia

Submitted by Julio Revilla on Tue, 2008-12-30 08:50

The direct financial effects of the global financial crisis have so far been limited due to Zambia’s reliance in domestic funding and limited exposure to external credit lines. However, the central bank has increased interest rates sharply as a result of portfolio outflows.

The largest affect has been the sharp fall in global copper prices. Copper exports, which accounted for almost 80 percent of total exports in 2007, have played a major role in sustaining Zambia’s growth, averaging close to 6 percent in the last five years. The fall of copper prices has already resulted in a significant depreciation of the domestic currency and more than doubled the external current account deficit in 2008. Lower copper prices have also contributed to weakening the fiscal position due to the government relying heavily on increased tax revenues (including a windfall tax) introduced in April.

As the economy slows down, second round effects are expected to negatively impact not only the financial sector but also the rest of the economy. Lack of infrastructure development (roads and energy) is likely to reduce growth of non-traditional export sectors in agriculture which could benefit from the exchange rate depreciation.

DR Congo Perspectives on the Financial Crisis

Submitted by Emilie Mushobekwa on Sat, 2008-12-27 04:19

The main impact of the global financial crisis on the DRC economy is the slowdown in overall economic growth, which is projected to be 6 percent in 2009. With the crisis going on, the situation is likely to deteriorate. Two of the major sectors expected to drive DRC growth in 2009, i.e. infrastructure and mostly mining, have already been severely affected by the crisis.

The fall in global prices for key DRC commodity exports (including copper which declined by half within a few weeks) is at the foundation of the problem. As a result, a number of mining companies are scaling down activities until commodity markets stabilize. This also poses a great threat on employment. Most of the investment in infrastructure for the coming years is expected to be financed through the Chinese deal “Infrastructure against Mining”. Given the sharp decline in mineral prices, infrastructure investment at this scale can no longer be achieved or will have to be postponed. Export revenues will decline significantly due to lower commodity prices, and the current account surplus, sustained by booming commodity prices, is projected to turn into a deficit in 2009-10. International reserves are also expected to decrease significantly, and debt service payments are to be delayed. In the domestic financial system, there is risk of bank deposits and credits shrinking. Foreign aid is likely to be affected as well.

Using economics to fight AIDS

Submitted by Shanta on Mon, 2008-12-22 10:58

I gave one of the keynotes (based on joint work with Markus Goldstein) at the recent ICASA 2008 in Dakar, Senegal on the title of this post. The fight against AIDS involves allocating scarce resources to multiple uses; and contracting, avoiding, preventing, testing for, and treating the disease all involve behavioral choices.

Fertilizer Subsidies in Malawi

Submitted by Shanta on Wed, 2008-12-17 10:17

At a recent AERC research workshop in Nairobi, I made a comment about African governments’ not spending enough money on public goods, and spending too much on private goods such as fertilizers. The comment seemed to have struck a nerve. Several people in the audience pointed out that, in Malawi, fertilizer subsidies have increased cereal production, so government spending on fertilizers was not such a bad thing. Going beyond the general arguments that these fertilizer subsidies often don’t reach farmers (they’re stolen by middlemen) and that they benefit large (and hence less poor) farmers more, I suggested that even the Malawi case is not clear-cut. 

As Maggie McMillan points out, it was improved seeds and the relaxation of farmers’ credit constraints that contributed most to the improved yield in Malawi: “Low fertilizer use is indeed one of the Africa’s most vexing challenges. But subsidizing is only a band-aid, masking its high cost and low productivity without sustaining growth. Such band-aids can be useful, but they can also be a distraction, drawing attention away from the interventions needed for large-scale improvements."

Impact of the Global Financial Crisis on Lesotho

Submitted by Preeti Arora on Wed, 2008-12-17 10:07

In the last few years, Lesotho has made significant progress in macroeconomic performance (strong GDP growth, fiscal surplus, current account surplus, and high international reserves). Nevertheless, Lesotho remains exposed to economic developments in South Africa (through the monetary union and the pegged exchange rate) and relies heavily on workers’ remittances, customs revenues from SACU, and royalties for transfer of water to South Africa. 

Lesotho’s vulnerability arises from two main sources: its huge dependence on textile exports to the US and on revenues from SACU (60 percent of total revenues). Firstly, the USA is Lesotho’s largest importer of its manufacturing exports (mainly textiles), and the recession lowered the aggregate demand by US consumers. Secondly, a slowdown in South Africa is likely to have a significant impact on remittances and SACU revenues. The recent large SACU transfers are in fact mostly due to growth in South African imports. Lower South African imports will therefore negatively affect Lesotho’s revenue stream. Similarly, retrenchments in South Africa will lower workers’ remittances towards Lesotho.  

SACU revenues are expected to decline in the next two years, resulting in the current account moving from surplus to deficit. Lesotho’s challenge is to reposition itself to take advantage of its proximity to SA markets, improve the efficiency of public resources, and exploit the potential of non-traditional sectors.

  

The Impact of the Financial Crisis on Malawi

Submitted by Khwima Nthara on Tue, 2008-12-16 10:07

The impact of the financial crisis on Malawi has so far been limited. The financial sector is small and less sophisticated, with two (out of nine) commercial banks dominating the banking sector. Foreign direct and portfolio investment levels are very low. However, most commercial banks have reported difficulties accessing foreign credit lines. Furthermore, exchange rate movements in the west are having a negative impact on foreign aid inflows to Malawi. For example, DFID’s inflows (in Malawi Kwacha equivalent) have been reduced by about 25 percent due to a depreciation of the British Pound against the US Dollar.

In the medium to long term, the second round effects of the financial crisis could have a significant negative impact on Malawi through its impact on commodity exports and remittances. Malawi’s productive sector could be severely affected through reduced demand for the country's exports, mainly tobacco, sugar, and tea. These exports are particularly vulnerable because the EU and the US are the principal destinations. Further, Malawi receives significant amounts of remittances from abroad (around 4 percent of GDP). Therefore, a slowdown in the world’s economy is likely to have a significant negative impact on Malawi’s current account.

The Impact of the Financial Crisis on Madagascar

Submitted by Noro Andriamihaja on Mon, 2008-12-15 14:35

The negative impact of the financial crisis on economic growth in Madagascar is expected to be relatively limited; growth is still likely to attain 7% in 2008. Over the medium term, declining demand in industrial countries is expected to affect strategic export oriented sectors such as mining, tourism, textiles and agribusiness. The depth of the banking sector in Madagascar is still very modest with deposits accounting for less than 9 percent of GDP. Therefore, the transmission mechanism is more likely to affect the real sectors, especially labor intensive ones.

The short term impact of the current financial crisis on the domestic financial sector is likely to be modest because of weak integration in international markets; the local banking sector has remained highly liquid, adequately capitalized and profitable. Prudential indicators provided recently by the Central Bank confirm that the average regulatory capital risk to weighted assets is high (14.1%) and the share of non-performing loans is low (8.5% of gross total loans). In the long run, the banking sector will remain vulnerable to delinquent loans coming from exporting firms.

The challenge ahead for the government would be to take away lessons from the current situation and address certain structural issues by accelerating international competitiveness by reducing the logistic costs on exports (customs, transportation, forwarding agents); increasing labor productivity and redefining the export strategy; securing the fiscal position of the government by increasing tax revenue and promoting more effective government spending.

The Impact of the Global Economic Slowdown on Uganda

Submitted by Charlotte Lundgren on Mon, 2008-12-15 14:21

Uganda has in the past few years showed impressive growth rates despite a number of shocks including prolonged drought, severe energy shortage and the adverse impact of high oil and food prices. Public finances are in good shape with a very favorable debt situation and the financial sector is sound and well-capitalized. Uganda is, therefore, entering the global economic slowdown in a relatively strong position.

The first effects of the global financial crisis are already being felt on the currency and stock markets; both had been falling sharply but have now stabilized. The main transmission channels from the global economic crisis to the Ugandan economy are expected to be receding demand for Ugandan exports, reversing terms of trade and slackened capital inflows. All in all, the assessment is that the global economic slowdown will have noticeable but manageable effects on the Ugandan economy. In our new ‘global economic slowdown’-scenario for Uganda, we have revised growth downwards to average 6.9% (7.9%) during 2008/09-2010/11.

In terms of policy implications, there is room for prudent widening of the fiscal deficit. It should therefore be possible to accommodate spending as planned, including much-needed infrastructure investments. This will also serve as a much needed fiscal stimulus to the economy. Given the increasing concerns about domestic factors keeping inflation above target, the room for monetary relief is very limited.

The Impact of the Financial Crisis on South Africa

Submitted by Michele Zini on Mon, 2008-12-15 13:32

When the storm hit, South Africa had been sitting on relatively strong fundamentals and emerging from a protracted period of economic expansion. The meltdown allowed “not-so-well-hidden” vulnerabilities to surface. Unemployment, inequality, poverty, crime, and HIV/AIDS still continue to plague the country. Agriculture, mining and manufacturing declined while the trade and current account deficit (CAD) widened. Household indebtedness reached worrying levels in a low-interest rate environment and inflationary pressures mounted. Moreover, severe energy shortages erupted (inducing blackouts) and a tense political climate resulted in President Mbeki’s resignation.

In months ahead, the sustainability of the CAD and the impact of the crisis on the real economy will remain the key issues. The financial account has so far been sufficient to finance the CAD, but sudden stops of capital inflows are not unheard of in developing countries during hard times. While the free-floating exchange rate rules out insolvency issues, financing the CAD will be much more difficult and costly; on the other hand, lower global demand will hurt South Africa’s export-sector and the falling rand is not expected to significantly counter the decline.

The crisis has also impacted the real economy. House prices have been declining, along with vehicle sales. Manufacturing production has slowed, the mining sector is shrinking further, and retrenchments are on the increase. Growth is expected to slow-down which is a risky proposition for South Africa and for Africa as a whole. Luckily, the sound fiscal position will somewhat cushion the economic slowdown.

Angola: Perspectives on the Financial Crisis

Submitted by Ricardo Gazel on Thu, 2008-12-11 10:17

The impact of the current global crisis on Angola’s economy can be divided into three parts. First, a marginal impact on the financial sector: no stock exchange, very small inter-banking credit markets, limited transaction flows with international markets (except via Portuguese Bank), low level of banking services, low ratio of loans to deposits, etc. Nonetheless, there was a decline of around 20% in demand deposits in foreign currency in November. 

Second, a favorable impact is expected on the inflation rate due to the decline in import prices, especially food and construction materials, and an appreciation of the Kwanza vis-à-vis the Euro. 

Third, a large negative impact on the real economy is expected as oil prices decline to very low levels. Despite positive real growth, nominal GDP in billion of dollars would decline from 85.5 in 2008 to 77.3 in 2009. Lower government revenue implies lower government expenditures, the main source of demand for the non-oil sector. The proposed budget for 2009 includes: oil at US$55 per barrel; the lowest growth rate in expenditures in the last years; a negative real rate of growth for current expenditures; and a budget deficit of 7.7% of GDP in 2009.