Working Paper 96 - Impact of the Global Economic and Financial Crisis on Africa

Louis Kasekende, Leonce Ndikumana and Taoufik Rajhi

Working Paper Series from African Development Bank

Abstract: Prior to July 2008 and despite the subprimecrisis, Africa recorded excellent economicgrowth. The drivers of strong economicgrowth included macroeconomicreforms, a world economic situation thatwas characterized by high demand forcommodities, rising capital inflows andChina’s strong growth. Analysts were optimisticabout the capacity of the continentand the world economy to generate thenecessary resources for development andpoverty reduction.Despite early signs of a pending downturnsince 2007, few could have anticipated acrisis of the magnitude observed since thesecond half of 2008. Today, the world economyis officially in stagnation, industrializedcountries are in recession and Africafaces serious uncertainties over its growthand development prospects. The currentfinancial and economic crisis has affectedAfrica’s growth drivers. Demand for andprices of commodities are falling, capitalinflows are declining and promises ofincreased aid have not materialized yet.China’s growth has slowed. The only goodnews is the easing in inflationary pressures.Although the immediate impact of the crisiswere contained, the medium-term effectsare likely to be greater.This paper presents a preliminary assessmentof the impact of the financial crisis onAfrican economies thus far. The paper firstexplains the impact on the banking sectorand why Africa has not been directly affectedby the banking crisis (Section 2). Itgoes on to discuss the direct impact of thecrisis on financial markets, foreign exchangemarkets and commodity markets(Section 3). Section 4 shows that the negativeeffects will mainly be felt through tradeand capital flows, including foreign directinvestment and migrant remittances.Section 5 discusses the prospects forpublic finance, inflation and growth. A sectoralanalysis is also carried out, highlightingthe impact on tourism and mining.Section 6 concludes by a discussion onsome policies that could mitigate the impactof the crisis.

Date: 2009-05-25
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