Africa and the Global Economic Crisis: Weathering the Storm

By Antoinette Sayeh

Last week, my colleague Hugh Bredenkamp talked about how the IMF is helping the low-income countries overcome the global  economic crisis. This week, I want to follow this theme, but hone in more on sub-Saharan Africa. I know this region reasonably well, both from current and past vantage points. In my present role, I am the director of the IMF’s African department. Previously, I was minister of finance in Liberia and, before that, I spent a significant part of my long World Bank career working on African countries. Grappling with the kinds of economic challenges that affect the lives of millions of Africans is a passion for me.

In this first post, I want to talk about growth prospects for Africa. Let’s take a step backwards. Before the global recession, sub-Saharan Africa was generally booming. Output grew by about 6½ percent a year between 2002 and 2007—the highest rate in more than 30 years. This acceleration was broader than ever before, going beyond the typical short-lived commodity driven booms and touching many more countries. Hopes were high that the region was slowly but surely turning the corner.

Workers making footwear in Nigeria at a factory funded by Hong Kong investment. (photo: Qiu Jun/Xinhua)

Workers making footwear in Nigeria at a factory funded by Hong Kong investment. (photo: Qiu Jun/Xinhua)

Then, in a great reversal of fortune, the global economy went into a tail-spin. Initially, we hoped that the fallout in Africa would be limited. And, indeed, when the global financial tsunami made landfall, it first hit the relatively small number of countries with well-developed financial linkages to international capital markets. South Africa in particular faced difficult challenges as portfolio outflows spiked. Together with Ghana, Uganda and several other frontier markets, its currency plunged, confidence dipped, and foreign direct investment slowed.

But the impact didn’t stop there.  Falling export demand and commodity prices battered economic activity in many more countries, including oil exporters in western and central Africa, causing fiscal and external balances to deteriorate significantly. Remittances from the diaspora shrank and credit dried up. The result, in many countries, was stalled growth.

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Creating Breathing Room in Low-income Countries

By Hugh Bredenkamp

In my previous postings this week, I have talked about the “double whammy” that low-income countries have faced over the past 2-3 years—the surge in food and fuel prices and global financial crisis—and how the IMF has stepped up its support to help them cope with these shocks. Without this support, and that of other agencies and rich-country donors, governments would have to slash spending as their tax revenues slumped. This, of course, is the exact opposite of what any government should be doing in a recession—it would add fuel to the fire.

But preserving or even increasing spending when revenues are declining means larger budget deficits, and more borrowing. Doesn’t the IMF always preach tight budgets? The answer is “not always.” Fiscal discipline and carefully-managed borrowing policies are essential for long-term economic health. But when economies are hit by temporary shocks—and the current recession, though severe, will surely be temporary—it makes sense for governments to use policy to limit the short-term damage.

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By | September 3rd, 2009|Economic Crisis, Fiscal Stimulus, IMF, LICs, Low-income countries|

Low-income Countries: Different Strokes for Different Folks

By Hugh Bredenkamp

In my last post, I explained how the IMF has dramatically scaled up its concessional financial assistance to its low-income country members to help them cope with the current global financial crisis.

Today, I want to get beyond how much is being lent, and turn to the how. It’s not enough simply to push out money—vital though that is. We also need to meet the particular needs of the country in question, and these are quite varied. Precisely with this in mind, the IMF has been changing the way it lends to low-income countries. In the jargon, we call this “facilities reform.”

We want to make lending more flexible, and better tailored to the different needs of an increasingly diverse group of low-income countries. It’s a question of horses for courses, as the expression goes.

What was the case beforehand? Well, the centerpiece of the IMF’s concessional financial support for low-income countries for the last decade has been the Poverty Reduction and Growth Facility (PRGF). Established in 1999, the PRGF addressed deep-seated balance of payments constraints—the very constraints that prevented low-income countries, year after year, from importing necessary goods and services, including the investment goods they needed to grow and develop. With these kinds of problems, there was no quick fix. So country programs under the PRGF emphasized deep structural reform, implemented over several years and supported by concessional loans from the Fund—backed by debt relief in certain cases—to create the conditions for strong, sustainable growth.

[youtube=http://www.youtube.com/watch?v=ACgk6o6AULI]

It’s no secret that IMF lending to low-income countries attracted some criticism over the years. Some people thought the adjustment policies were too harsh, or even misguided. It is true that, for a while, the results were not encouraging. But all the pieces began to fall into place early in this decade. Governments took heart as outcomes improved, and this created a virtuous circle, with better policies leading to still better results. A strong global economy for much of this time helped too. If we look back now at the overall record, the countries’ efforts paid off—PRGF programs have helped them achieve higher growth and lower inflation, supported by higher levels of foreign aid.

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By | September 2nd, 2009|concessional lending, Debt Relief, Economic Crisis, IMF, LICs, Low-income countries|

Helping Low-income Countries Confront the Worst Economic Crisis in 60 Years

By Hugh Bredenkamp

One of the great tragedies of the present crisis is that it nipped in the bud the longest and most broadly based economic expansion that low-income countries have seen in modern history. These countries were finally reaping the rewards of difficult reforms that go back to the 1980s and 1990s, helped by debt relief and other support. The results were plain to see. During 2000-07, low-income country growth was twice as high as in the previous decade, and inflation fell to single digits. As a result, these countries were finally starting to make inroads in raising living standards and reducing endemic poverty. There was great cause for optimism.

And then came the crisis. Or crises, I should say. For in fact, the low-income countries were besieged by two crises in rapid succession, as the global financial tsunami came hard on the heels of the food and fuel price shock of 2007-08. All of the hard-won gains were suddenly in jeopardy. And the stakes in this part of the world are particularly high, given the potential for human suffering on a wide scale. The effects of lower export volumes, remittances, investment flows, and prices for key export commodities could push hundreds of millions of desperately poor people back (or further) into poverty.

Victims of the crisis

We should remember also that the low-income countries were innocent victims of the crisis. They didn’t make the mistakes of some of the advanced countries, the mistakes that triggered this crisis. Instead, they did many of the right things on the policy front—fiscal positions were strengthened, debt burdens reduced, and comfortable reserve cushions built up in many countries. This makes it all the more important now for the world community to do whatever it can to help.

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By | August 31st, 2009|Economic Crisis, Financial Crisis, LICs|
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