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April 2009

Economic policy in Africa in light of the crisis—watch the video

Submitted by Shanta on Wed, 2009-04-29 10:11

The seminar mentioned here went off very well. You can watch the video here. The main messages were:

(i) Economic policy should strive for flexibility, as the future is uncertain. Emmanuel Tumusiime-Mutabile said this was why he had allowed the Ugandan shilling to depreciate, although the deputy governor of the central bank of Sudan questioned whether an exchange rate depreciation would lead to inflation, and there was an interesting exchange on whether the alternative, holding the exchange rate fixed during a difficult period, wouldn’t be even worse.

(ii) Ishac Diwan suggested that we should design policy to take advantage of the downturn (for instance, the agriculture and manufacturing sectors, which are normally lagging in primary-exporting countries, could receive a boost now); while Ali Mansoor said we should prepare for the rebound in the global economy by, for example, improving infrastructure to be able to export more primary commodities when prices are high. Given that the world is likely to face even more volatility in the future, this two-part advice is sound.

(iii) Consolate Rusagara and Lamine Zeine both made a strong case for continuing to work on the basics during the crisis—improved financial regulation, including bank supervision and human development.

Madagascar: From political crisis to economic decline?

Submitted by Noro Andriamihaja on Tue, 2009-04-21 10:57

Following weeks of political turmoil, President Marc Ravalomanana resigned on March 17, 2009. The leader of the opposition, Andry Rajoelina, ex-Mayor of Antananarivo, became “President of the Transition Authority” with the support of the army. The transition – increasingly being referred to as a coup by the international community – marks the culmination of a pitched power struggle that began in mid-January 2009, has put development on hold, and taken over 150 lives. Political uncertainty is nonetheless likely to remain until a clear consensus on the way forward emerges among the political forces in the country – and its subsequent recognition by the international community.

The impact of this crisis is difficult to predict, more so that Madagascar is also being affected by the global financial turmoil. Preliminary estimates indicate that the GDP growth rate is likely to be negative in 2009 -- down from a pre-crisis projection of 7.5%, through the combination of two forces: (i) the slowdown of private activities in the industrial and service sectors, and (ii) fiscal adjustment of public spending. The details are provided here.

Economic policy in Africa in light of the global crisis—send your questions

Submitted by Shanta on Tue, 2009-04-21 10:30

On Thursday, April 23, 2009, we are holding a seminar on “Economic policy in Africa in light of the global crisis.” The speakers include Emmanuel Tumasiime-Mutabile, the Governor of the Central Bank of Uganda; Lamine Zeine, Minister of Finance of Niger; and Ali Mansoor, Secretary of Finance of Mauritius. I encourage you to send in your questions to this group by 11 a.m. (Washington time) on Thursday, April 23rd. We will read out at least five of the questions received from the blog during the seminar, and report back (on the blog) the answers and comments

The motivation for the seminar is as follows:

The world economy is experiencing the deepest economic crisis since the Great Depression. Stimulus plans in developed countries amount to at least $3 trillion and more is expected to come. Monetary policies have never been so loose. Tax breaks and increasing spending will raise public debts to record levels. Unorthodox policies are being adopted to address the financial and housing crises. All this is turning upside down what was until very recently understood as "sound macroeconomic management." African countries, which had been experiencing unprecedented economic growth since the mid-1990s, are increasingly feeling the pain of the crisis. Previous crises in Africa were blamed on poor macroeconomic policies and management.  This time, however, the story is very different, not only because the crisis started and is spreading from the developed countries, but also because macroeconomic management in Africa has improved significantly.

Africa: Least integrated but worst hit by the crisis

Submitted by Shanta on Mon, 2009-04-20 09:33

Even though it is the least integrated with the global economy, Africa may be the worst hit region by the global economic crisis. Each of the four channels through which the crisis is affecting Africa has a particularly nefarious impact. 

  • Private capital flows, which in 2007 had surged to $53 billion—for the first time exceeding foreign aid to the continent—are declining.  Since last year, African stock markets have fallen by an average of 40 percent, with some such as Nigeria's falling by over 60 percent.  Ghana and Kenya have postponed sovereign bond offerings worth over $800 million, delaying the construction of toll-roads and gas pipelines.  The Democratic Republic of Congo has lowered its expected foreign direct investment by $1.8 billion. These flows were financing much-needed infrastructure and commodity-based investments. More importantly, the surge in capital inflows had raised expectations that African economies had “turned the corner”—only to have those expectations deflated for reasons that are not remotely the fault of Africans.
  • Remittances, which had peaked at about $20 billion a year in 2008, are expected to decline by 4.4 percent this year.  Typically, remittances are counter-cyclical: when your family is having difficulties, you send them more money. But this time the crisis is in the remittance-sending countries. Over 77 percent of Africa's remittances come from the U.S.

Update on the Impact of the Financial Crisis on South Africa

Submitted by Michele Zini on Thu, 2009-04-09 09:15

A while ago we reported on the impact of the financial crisis on South Africa. Following the global trend, the last few months have seen the figures gradually getting grimmer, with the real economy taking the biggest toll.

GDP figures for the last quarter of 2008 came in negative (-1.8% seasonally adjusted and annualized), with manufacturing falling by a jaw-dropping 21.8%, the biggest slump since record-keeping began. The automobile industry (a large employer and the main contributor to international trade tax revenues) is down over 30% year-on-year; indeed, overall job creation is slowing down and jobs are being shed in some sectors. Mining production continues to fall, as global commodity prices remain depressed. Consumers’ expenditure is declining, credit extension to the private sector is slowing down, and housing prices dropping.

The government’s policy response was prompt. Finance Minister Trevor Manuel recently tabled a decidedly expansionary or “countercyclical” budget. While tax revenues are projected to decrease considerably, the budget shows a visible tilt toward social sector expenditure (housing, education, social protection, public works program and health). The country’s budget balance is now expected to reach -3.9% in 2009/10 (it was -1.2% in 2008/09 and +1% in 2007/08).

On the monetary side, the Reserve Bank announced that its Monetary Policy Committee will meet monthly (rather than every two months) during 2009. Soon after the announcement, interest rates were lowered for the third time in a row bringing the repo rate to 9.5%. Since December 2008, the repo rate has already declined by 2.5 percentage points. As inflation slows down and the economic outlook deteriorates, observers are expecting several more rate cuts in the coming months.

A (partial) defense of Dambisa Moyo's Dead Aid”

Submitted by Shanta on Tue, 2009-04-07 23:20

Dambisa Moyo’s book, “Dead Aid,”has been receiving a fair amount of criticism from several quarters (see, for example, here, and here). My own take is that the book is right in the small, wrong in the large, and possibly right in the gargantuan.

What kind of fiscal stimulus for Africa?

Submitted by Shanta on Wed, 2009-04-01 14:26

I said earlier that more important than the level of additional aid is what governments do with their own and donors' resources. My colleague Jorge Arbache provides some answers. He observes that, even if the recession was caused by a commodity price decline, public spending should not necessarily be spent on the commodity exporting sector--unless it employs large numbers of people, as does the cotton sector in West Africa, for instance. He also advocates expenditures on infrastructure (maintenance and even new investment) because they create jobs in the short run, and leave the economy better placed to benefit from a turnaround in the global economy in the medium-run.