4 step plan to help Africa during the global crisis

Wednesday, February 4, 2009

The African Development Bank has developed a four-step plan to minimise the burden of the global financial crisis on African countries, writes Bathandwa Mbola.

The bank, which promotes economic and social development in Africa, has only in the last six years begun tasting success after two decades of structural adjustment. However, the global financial crisis is threatening to upset it.

Speaking to BuaNews at the African Union Summit in Addis Ababa, Ethiopia on Tuesday, bank's President Donald Kaberuka said: "Now suddenly we are suffering from the effects of this crisis and Africa is the victim."

He said the bank had taken four major steps to minimise the burden, including setting up a $1.5 billion emergency liquidity facility and $1 billion trade financing facility. In addition, the bank has set up an African Bond initiative to mobilise resources.

"We also plan to accelerate the finance system in order to make short and fast loan receiving procedures," said Mr Kaberuka, adding that they had set up a board to push for closer regional economic integration and reduce the red tape that slows funds from reaching low-income countries.

At the summit on Tuesday, African leaders discussed ways to ride out the global economic downturn, fearful that 2009 would see trade reduced and more reductions in much-needed aid and development finance.

The African Development Bank warned that many projects risked losing financing due to tightening global credit.

"We are concerned at the amount of infrastructure projects being cancelled," Mr Kaberuka said, indicating that the bank was keen to come in and ensure the completion of those projects.

This follows projections that the current global economy will affect Africa's economic growth. It is expected to slow to 3.5 percent this year, from an annual average of 5.8 percent over the last decade. It may even drop to 2.5 percent in 2010.

"Signals are not very encouraging. The demand for commodities is declining dramatically, both hard and soft. Investment is quickly slowing down, even in extractive industries. Sectors which are dependent on international demand are contracting quickly."

This in turn means that Africa runs the risk of rising social tension, the rollback of economic reforms, unwise financial regulations and an erosion of global competitiveness, not only because of shrinking revenues and rising budget deficits, but also because of cuts in foreign investment and aid.

The president of the only multilateral development body devoted specifically to Africa, cautioned against hasty decisions that were not anchored on sound confidence in light of governments attempting to recapitalise banks faced with a credit crunch.

Apart from recapitalising banks, dealing with bad assets and getting credit moved, Mr Kaberuka said the issue of confidence was yet to be resolved. "There is still doubt as to whether the entire stimulus package will actually succeed."

Despite some assurances that the minor role African financial institutions play in global economies had cushioned them against the crisis, the bank's chief warned that the continent could be exposed to deflation, a reverse of inflation that follows an economic recession as commodity prices plunge.

"It was a matter of time before the real economy began to suffer. But even then, residual risk to our banking system cannot be excluded in countries where domestic banks have built up significant negative foreign positions."

He said that in Africa, which has not experienced any serious banking failure or currency run, economies have been contracting in reaction to the gloomy situation in the West. This has affected the demand of African exports and reduced remittances to Africa as well as led to the scaling down of tourism.

"Our ability to withstand a prolonged crisis is limited, Africa's total reserves are less than those of Norway at $370 billion with only 4.7 million people," Mr Kaberuka said.

On Monday, World Bank President Robert Zoellick called for rich countries to donate 0.7 percent of the stimulus packages they approve for their own economies to a fund for developing countries which would be managed by international lenders.

United Nations Secretary General Ban Ki-moon echoed the call for rich countries to consider poor nations' needs as they seek to keep their economies afloat.

However, both leaders warned that the downturn would likely hurt Africa's growth, trade and financial flows, but also the fight against poverty and the likelihood of reduced development assistance.

Even before the global downturn, Africa was not expected to meet all of the Millennium Development Goals, a series of targets aimed at reducing poverty and raising living standards around the globe, Mr Ban noted.

"In responding to this crisis, the international community must take into account the needs of poor countries, and stimulus packages must take this appropriately into consideration," Mr Ban said.

African leaders gathered for the AU summit on Tuesday, called for its member states to enhance their economic cooperation in a bid to harmonise their tax and macroeconomic policies to withstand the global financial crisis.

In a working paper, leaders said this would help speed up the implementation of economic integration programmes by strengthening the African financial market through regulation mechanisms.

The summit urged the member countries where the African financial institutions will be sited, to speed up and facilitate the set-up procedures. These institutions are the Central Bank, the Monetary Fund and the Investment Bank which were created by Article 19 of the Constituent Treaty.

According to a draft document submitted for approval to the summit by the AU Executive Council, the Heads of State have reminded the commitment to promote the development and the integration of African economies through the creation of these three financial institutions.

About 30 Heads of State are attending the 12th AU Summit, in the Ethiopian capital, which has been extended until Wednesday on the theme "Infrastructure Development in Africa."