The Global Financial Crisis: will successful African countries be affected?

Working and discussion papers
December 2008

The effects of the global financial crisis on developing countries will be as high as on developed countries. IMF forecasts for sub-Saharan African growth for 2008 and 2009 have recently been downgraded by between 1-2 percentage points to 5.5% in 2008 and 5.1% in 2009. The revision represents a reduction of up to USD 20 per head in sub-Saharan Africa due to the financial crisis.

The channels through which the global financial turmoil affects developing countries include financial channels and real channels. Financial channels include effects through: stock markets, banking sector (borrowing from advanced economies, foreign ownership of banks, exposure to sub-prime market), and foreign direct investment. Real channels include effects through remittances, exports, imports, terms of trade, and aid. Our previous research based on current updates and forecasts as well as on evidence on what happened in previous slowdowns and in the absence of policy responses, suggested that net financial flows to developing countries may fall by as much as $300 billion in two years, equivalent to a 25% drop.

This paper examines whether Ghana, Kenya, Mali, Mozambique, Rwanda, Senegal, Tanzania, and Uganda, which represent successful countries in Africa recently, are at risk of back sliding on their recent successes. It does this by first painting the picture on how Africa might be affected using the channels mentioned and then by discussing each country in detail, as much as possible taking into account of what has already happened. It is clear that some countries are seriously at risk of being affected by the current global financial crisis either through real contagion or financial contagion. Ghana, Mali, Mozambique and Tanzania are more at risk than the other countries considered since they have a significant share of foreign owned banks and their economies strongly rely on foreign direct investment. Uganda has a high remittances dependency that makes it exposed to the current crisis; the turnover at its nascent stock market has already been more than halved. Kenya’s indicators (remittances down by 40%, tourism by 30%, stock prices down by 40%) suggest it has already been affected in a major way.

The policy space for responding to the impact of the financial turmoil varies across SSA countries. In particular, the effects might be stronger in Ghana as it has both a large current account and a large fiscal deficit, and the level of its reserves was below 3 months of imports of goods and services. In other countries this crisis is yet another set back. Kenya was already under political pressures and the current bad news will make the situation only more precarious.

We suggest that while some evidence has emerged, individual developing countries need urgent access to updated research on country-specific economic, social and political consequences of the financial crisis. Each developing country needs to set up a crisis task force to consider the best possible policy responses – short term and long term economic and social policy responses.

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