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The impact of the financial crisis on the African financial system may be worse than we thought

The conventional wisdom that African financial systems have little to worry about in the wake of the global financial crisis needs to be challenged. In the attached note, I raise five* concerns:

  1. Weakened local investor confidence in equities and bonds on African Stock Exchanges
  2. Return to ultraconservative lending practices
  3. Losses arising from central bank reserve management practices
  4. Renewed debate on the role of governments in the financial system
  5. Weakened balance sheets resulting from a downturn in the real economy.

In the note, I also propose policy options for dealing with these concerns.

*In the note, I say "four concerns" and then go on to list five, which confirms the old joke: "There are three kinds of economists. Those who can count and those who can't."

Comments

Submitted by Anonymous on
It is no secret that nobody could predict and still cannot what the long-term effect of the financial crisis will be. While it is still unfolding as a global contagion we can't simply wait and do nothing for all the recent economic gains in Africa to evaporate. What is the World bank and the IMF going to do to help Africa deal the the problem of liquidity in their economies?

The impact of the world financial crisis on African economies has been the subject of much debate in academic, business and popular circles on the African continent. Economic professors, financial analysts, ministers of finance, political scientists, journalists, and even opinion leaders in drinking spots, are all volunteering explanations like the six blind men describing an elephant. Some are parroting CNN without quotation marks, others are plagiarizing economic textbooks or financial journals but the question on what impact the crises will have on African economies remains. It is often taken for granted that Africa accounts for an insignificant proportion of world financial transactions. In the playground of world economics African countries can conveniently be relegated to the reserve bench even if South Africa is invited to sit among the emergent nations. Economically speaking, Africa has always provided problems for the world to solve and not solutions to world problems. One can therefore say that Africa will not have an impact on the world financial crisis but the crisis will have an impact on Africa. In order to perceive how the crisis will affect African countries one must consider what I have decided to call "African Side Economics". Imagine an economy where the politicians decide what growth rate to announce today and what to announce tomorrow. The economic growth rate must thus be politically palateble irespective of the true performance of markets, and the laws of demand and supply. The government in place must constantly be given a good economic image. That is African side economics. Imagine an economy where the most successfull businessmen are civil servants of the customs and taxation departments, or treasury officials who pay out money to government contractors for a percentage. Imagine an economy where those who succeed are those who win government contracts to supply everyday items at ten times their market value. That is African side economics. Just imagine a setup where all economic solutions are recommendations from IMF, the World Bank, the European Union and other bilateral donors. That is African side economics. Now, how will African countries embrace the crisis if the global effect syndrome were to grip their countries? 1. The overbearing presence of politicians on the economy will become even more suffocating. 2. Commercial banks which are already reluctant to grant loans to investors will become more prudent. And this means that economic activities will slow down, for want of capital. Unemployment will attain astronomical proportions, and many more families and individuals will be recruited into the vicious cycle of poverty. 3. World Bank and IMF solutions will no longer be applied like gospel truth because the USA did not go to the IMF or the World Bank. If the US government attempted to bail out the economy why should African governments not also try this modus operandi? 4. The average honest investor will suffer a down turn as civil servants in "lucrative" government services invent new corruption tactics in order to finance their already arrogantly lavish lifestyles. 5. European countries and the USA are devoting more attention to their economies. This means that the money sent to Africa for debt relief and poverty reduction will dwindle or be granted with greater scrutiny. 6. Armed struggles resulting from illicit trade in diamonds and other natural resources will find more fertile grounds in Africa. The sale of arms will also be catalysed with the emergence of new warlords, followed by more blood shed. 7. African side economics will undoubtedly compete with capitalism, the welfare state, and diluted forms of socialism as different governments forge for a headway. Truly speaking, if you ask me about Africa and the Financial Crisis, I will say that while Africa may not have any impact on the crisis, the crisis will have a huge impact on Africa.

The loss of confidence in bonds and equities in ASE is not a surprise with the global scenario. I agree that some policies should be implemented to overcome this. The question may be how long will this crisis continue and what are the nature of policies to be adopted. For example XYZ amount invested in equities/bonds would be tax free but for how many years?

In my opinion the emerging markets and the local peer to peer lending have proven that micro-finance can be more of a sustainable model than the geniuses on wall st. I believe Africa will be fine after this bump...

Submitted by surplus on
..but I am not as optimitic as you are. I think crisis will get stronger. And first who will affected hard by crisis are always countrys with the most problems. Hope you are right with your optimistic viewing - but cant believe at the moment.

Submitted by Gwenn on
Hello Samuel, I think that there is no country in the world can now say that it is completely independent from the global financial crisis. In addition, we are staying only at the threshold. The main thing here is to draw conclusions and to reconsider the positions in the field of financial management and staff management, as well as in the legislative sector, regulating the financial relations. Regards, Gwenn

The impact of the crisis in less developed continents such as Africa and South America, where I live, will certainly be higher than in developed continents. Here the resources and reserves are smaller, and what should be done is a policy aimed to decrease interest rates, reduced tax burden. So we create more purchasing power (consumption) and therefore more investment and growth to overcome the crisis. Great article!

Submitted by web design on
I agree - positivism is very difficult at this juncture... "..but I am not as optimitic as you are. I think crisis will get stronger. And first who will affected hard by crisis are always countrys with the most problems. Hope you are right with your optimistic viewing - but cant believe at the moment."

I agree, in countries with more poverty there is a smaller comfort zone in economic terms. The impact is higher, many countries like Brazil also have a problem with the crisis because they sell a lot of raw materials to the European and American continents. Because production is lower their exports will also decrease a lot!

"In my opinion the emerging markets and the local peer to peer lending have proven that micro-finance can be more of a sustainable model than the geniuses on wall st. I believe Africa will be fine after this bump..." I agree with this statement although Im not sure if Africa will be immediately fine or if it will just be a 'bump'. Stock MArkets and Wall street will eventually be disseminated.

It is very difficult to remain so positive. However, no country is as entrenched in imports/stocks/commodities and the general wall street foundation than the US. To say the US will be the hardest hit is something I can agree upon. But due to the already shaky economic client of Africa (as a whole), even this small 'bump' can be catastrophic.

for reason Weakened balance sheets resulting from a downturn in the real economy. Because current economy is very bad, I feel serious to the future for about economy

Submitted by muffin9129 on
Maybe I am a pessimist, but can the state that Africa is in get any worse simply due to a financial crisis. Would you not consider that they are constantly struggling with a financial crisis? I mean I am sure it will effect the small percentage of Africa that is 'well-off', but how can you take something away from people who have nothing?

Submitted by dotgigg on
for reason Weakened balance sheets resulting from a downturn in the real economy. Because current economy is very bad, I feel serious to the future for about economy

Submitted by Pat.R on
I think we have to treat Africa's crisis a little different then the rest of the worlds. You should check out how this global crisis seems to benefit Mongolia, and perhaps Africa could follow there lead.

Submitted by chance on
Yes all the countries are affected by the crisis is a fact. The problem is that the conclusions were not drawn as it should! The capitalists are selfish.

Submitted by YorTz on
I agree - positivism is very difficult at this juncture..."..but I am not as optimitic as you are. I think crisis will get stronger. And first who will affected hard by crisis are always countrys with the most problems. Hope you are right with your optimistic viewing - but cant believe at the moment."

Submitted by thaidigg on
for reason Weakened balance sheets resulting from a downturn in the real economy. Because current economy is very bad, I feel serious to the future for about economy

Submitted by bwin fr on
Thank you to the author of this article interesting and informative on Africa.

I believe Crisis is still with us and most of the countries are not able to get rid of it. And as for Africa, I think these people are in the worst situation.

Submitted by Eric C. on
"In my opinion the emerging markets and the local peer to peer lending have proven that micro-finance can be more of a sustainable model than the geniuses on wall st. I believe Africa will be fine after this bump..." Thumbs up!

Submitted by Eric C. on
In my opinion the emerging markets and the local peer to peer lending have proven that micro-finance can be more of a sustainable model than the geniuses on wall st. I believe Africa will be fine after this bump... Thumbs up!

I believe that Africa will stand strong while the rest of the world crumbles from their greed. They will drive themselves neck-deep in credit and the economy will not be able to recover. Africa's financial institutions are of the best in the world and have been rated so for many years. - Farmville Cheats

Submitted by Graficas on
Many thanks for the exciting blog posting! I really enjoyed reading it, you are a brilliant writer. I actually added your blog to my favorites and will look forward for more updates. Great Job, Keep it up..

Great post I would like to thank you for the efforts you have made in writing this interesting and knowledgeable article.

I agree "positivism is very difficult at this juncture..." and with Im not sure if Africa will be immediately fine or if it will just be a 'bump'

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