Africa’s vulnerability in the crisis
Kwesi Botchwey, Professor of Practice in International Development at The Fletcher School, Tufts University, US
The current crisis in the global economy and financial system could not be happening at a worse time for Africa – a time when it is experiencing something of a turnaround in economic performance and political governance, a turnaround marked by relatively strong growth over the past decade, a much improved fiscal situation, declining debt stocks and significantly higher levels of external reserves.
By comparison with the financial impact, the macroeconomic implications of the crisis for Africa may be medium- to long-term and depend on the level of each country’s exposure to global trade. The IMF forecasts slowing growth in Africa in 2008 and 2009, a higher level of inflation in 2008 and some easing in inflationary trends in 2009. But it also points to graver, and as yet unquantified, risks if the global financial turmoil becomes deeper and more protracted – something many analysts are predicting.
There may be good reason not to fret about the susceptibility of African banks to systemic banking failures on the scale we have witnessed in the US. African banks had little or no access to the mountain of synthetic (and toxic) products that Wall Street erected on the foundation of the sub-prime mortgage market and sold around the world. Nor have they benefited to any significant extent from the easily-reversible flows whose large-scale withdrawal precipitated the East Asian credit crisis. Moreover, as some commentators have rightly pointed out, in general, secondary markets for trade in bank loans are small in Africa, as are markets for derivatives. Still, it is unwise to be complacent.
Even in the short term, trade credits from prime European and American banks, which African banks need in the normal course of their business, may well begin to slacken if the credit crunch should persist. More importantly, it needs to be recognised that there is a dialectical relationship between the macroeconomic environment and the stability of the banking system.
A severe downturn in growth will, unless compensated for by other interventions, lead to fiscal retrenchment and poverty-aggravating cuts in public expenditure. It may also affect the banking system in significant ways. Bank lending (especially to enterprises) has grown significantly in a number of African countries, including Nigeria, Ghana and Kenya.
A severe and protracted downturn in economic performance will doubtless affect the ability of borrowers, especially net foreign exchange users, to service their debts, leading to a rise in non-performing assets in banks and creating solvency problems for them, as happened for instance in many countries in the mid-1970s and early 1980s.?
If this should happen today, especially in well-banked and pivotal regional markets like Nigeria and Kenya, where major banks are publicly-listed, it would put these banks in crisis, causing panic among depositors and intensifying liquidity problems. A run on the banks in Nigeria could quickly spread to the rest of the Economic Community of West African States.
If such a scenario should unfold, three questions arise: 1. Will central banks be able to provide generalised guarantees to depositors to stem a systemic crisis? 2. Will regulators have the capacity to take over insolvent banks and other financial institutions, turn them around and restore banking confidence? 3. Are there regional or sub-regional institutions that could help coordinate efforts by African central banks and governments to manage the crisis and avoid the severe region-wide reversal of human development gains that would come with a meltdown? ?
Rather than be lulled into inaction by assessments that see the current crisis as marginal to Africa’s economic growth and human development prospects, it is sensible to address the fundamental problems of the African banking system, by improving banking efficiency and expanding banking access, deepening markets and improving prudential regulations across the region. It may also make sense to renew the debate on the role of development banks, especially now that the hubris and triumphalism of free market ideologues appear to be subsiding in the citadels of Anglo-American capitalism.