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Mitigating the impacts of the financial and economic crisis in Africa

De
211 pages
The global economic crisis revealed a high fragility of growth in African economies, especially among those that are heavily dependent on commodity export. The fragility and lack of depth in African financial markets has also exposed them to adverse effects of volatility of foreign capital outflows. This calls for an urgent need to design strategies to exploit the full potential of domestic resource mobilization and pooling of resources, as well as a rebalancing of exportled growth strategies.
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MITIGATING THE IMPACTS OF THE FINANCIAL AND ECONOMIC CRISIS IN AFRICA

African Development Bank Group

MITIGATING THE IMPACTS OF THE FINANCIAL AND ECONOMIC CRISIS IN AFRICA
........-......-.---...--.---.-------.---...-------.---....----.--..--...............................-...........................................-.............-........-....-.........................-....--..........-...-..............-..-.....................--.-...........---..

Proceedings of the Workshop on 'The Global Financial and Economic Crisis: Strategies for Mitigating its Impacts on Africa'

Held on 10thApril 2009 In Tunis, Tunisia

Edited by: L. Kasekende, L. Ndikumana and A. B. Kamara

This book has been prepared by staff of the African Development Bank (AfDB) Group and views expressed therein do not necessarily reflect those of the Boards of Directors or the countries they represent. Designations employed in this publication do not imply the expression of any opinion on the part of the African Development Bank, concerning the legal status of any country, or the limitation of its frontier. While efforts have been made to present reliable information, the African Development Bank accepts no responsibility whatsoever for any consequences of its use.

@ The

African Development

Bank Group

ISBN: 978-2-296-10731-1 EAN : 9782296107311

FOREWORD

It has now become obvious that Africa's limited integration into global trade and financial markets have not shielded it from the global economic slowdown. Africa has been severely affected and its macroeconomic fundamentals have been substantially weakened, making its pre-crisis development challenges even more daunting. It is therefore imperative, more than ever, that African countries seek strategies that will revitalize growth to pre-crisis levels, and lead the continent to a higher and sustained growth trajectory. In this context, the African Development Bank was instrumental in cohosting the meeting of the African Ministers of Finance and Central Bank Governors in November 2008 in Tunis, and the formation of the Committee ofTen Ministers of Finance and Central Bank Governors (the C-lO). The CIO was specifically mandated to monitor the impact of the crisis and to report back to the African Heads of State and governments. While the activities of the C-IO were critical in the search for a common African position in the global dialogue on the crisis, the Committee expressed a strong need for detailed analytical inputs to guide policy making. Thus, the April2009 Workshop on 'Strategies for Mitigating the Impact of the Crisis on Africa', which forms the basis of this publication, was a direct response to the call by the Bank's Regional Member Countries (RMCs) for more analytical evidence to guide policy responses to the crisis. The publication particularly highlights the fragility of growth in African economies, especially among those that are heavily dependent on commodity exports. This has crucial implications for economic diversification, with a need for renewed attention to industrial policies that promote manufacturing and value addition activities. This also calls for a rebalancing of export-oriented growth policies with strategies that promote domestic markets as a basis for industrial development. Indeed, the continued pursuit of macroeconomic stability and effective regional integration remain fundamental to this process. Financial sector reforms need to be pursued and deepened to enhance financial stability and resilience to external shocks. Of particular importance is the need for caution, especially with regard to financial sector liberalization, which has to be undertaken in tandem with other reforms. The report is timely and provides analytical insights that go a long way in informing policy options and strategies for mitigating the impact of the 5

crisis on African economies and accelerating growth in the post-crisis period. With this publication the Bank has once again fulfilled a crucial milestone in its effort to becoming a first port of call for knowledge on key African development issues.

~~
Louis Kasekende Chief Economist, African Development Bank 30 September 2009, Tunis

6

ACKNOWLEDGEMENTS

This publication presents the proceedings of the African Development Bank Workshop held in Tunis in Apri12009, under the theme The Financial
Crisis

-

Strategies

for

Mitigating

its Impact

in Africa.

The technical

contributors include renowned African and international scholars with rich knowledge of Africa's development issues: Ernest Aryeetey, Lemma Senbet, Victor Murinde, John Page, Louis Kasekende and Léonce Ndikumana. The individual papers benefited from inputs by workshop participants, who included Central Bank Governors and other high level policymakers, researchers and Bank Staff, as well as peer reviewers. These inputs greatly improved the quality of the report, and are hereby duly acknowledged. The production of this publication was managed by Albert Mafusire, under the immediate supervision of Abdul B. Kamara, Manager, Research Division and guidance by Léonce Ndikumana, Director, Development Research Department of the African Development Bank. The Editors, Louis Kasekende, Léonce Ndikumana and Abdul B. Kamara are grateful for editorial services from Dieudonné Toukam and Yasmin Brainerd, translation coordination from the Language Services Department of the African Development Bank, and administrative support from Rhoda Bangurah, Ines Hajri and Abiana Nelson.

7

Table of Contents

CHAPTER 1: ......................................................................................... 13 INTRODUCTION: LESSONS FROM AND OPTIONS FOR DEALING WITH THE CRISIS, John Page 13 1.1 Introduction............................................................................. 13 14 1.2 Lessons from the Crisis. .......................................................... 20 1.3 Options to Respond ................................................................. 1.4 Conclusions............................................................................. 27 CHAPTER 2: ......................................................................................... 29 CAPITAL FLOWS AND CAPITAL ACCOUNT IN THE POSTCRISIS ERA: CHALLENGES, OPPORTUNITIES AND POLICY RESPONSES, Victor Murinde 29 2.1 Introduction 29 2.2 Flow-of-Funds Framework 31 2.3 The Global Financial Crisis 35 2.4 Capital Flows and Capital Account Liberalisation in Africa.. 39 2.5 Conclusions: Lessons and Policy Agenda for Africa 64 CHAPTER 3: .. ...... ... 73 THE GLOBAL FINANCIAL CRISIS AND DOMESTIC RESOURCE MOBILIZATION IN AFRICA, Ernest Aryeetey 73 3.1 Introduction 73 3.2 The Problem with Domestic Resource Mobilization in Africa 76 3.3 The Financial Crisis and Domestic Resource Mobilization in Africa 89 3.4 African Responses to Global Financial Crisis and Implications for Domestic Resource Mobilization 93 3.5 Moving Forward: Mobilizing Additional Domestic Resources 95 3.6 Summary and Conclusions 106 CHAPTER 4: ... ... ... 109 FINANCIAL SECTOR POLICY REFORMS IN THE POSTFINANCIAL CRISIS ERA: AFRICA FOCUS, Lemma W. Senbet 109 4.1 Introduction 109 4.2 Essential Factors to be Considered in the Propagation of the Crisis . 111 4.3 Africa on the Move, But Damaged from Global Crisis .......... 115 4.4 Africa and Global Responsibility ............................................ 127 4.5 Africa and Its Own Responsibilities: Getting the House in Order 132 4.6 Concluding Note 158

9

CHAPTER 5: SEIZING THE DAY? THE GLOBAL ECONOMIC CRISIS AND AFRICAN MANUFACTURING, John Page 5.1 Introduction 5.2 A Perfect Storm: The Collapse of Global Production and Trade 5.3 "When You've Got Nothing, You've Got Nothing To Lose": Africa' s Deindustria1ization 5.4 "Africa is Not a Country": Leading Manufactured Exporters 5.5 Achievers at Risk: Product and Market Concentration 5.6 More Bad News: Some Countries are more Vulnerable than Others . 5.7 Opportunity in Adversity?...................................................... 5.8 Conclusions .....

161 161 161 164 166 170 175 178 182 187

191 CHAPTER 6: .. ... '" THE FINANCIAL CRISIS - STRATEGIES FOR MITIGATING ITS IMPACT IN AFRICA: CONCLUSIONS AND THE WAY FORWARD, Louis Kasekende and Léonce Ndikumana 191 6.1 Fragility of the Production and Export Base 191 6.2 Risk and Financial Fragility 192 6.3 Financial Sector Regulation to Reduce Vulnerability 194 6.4 The Way Forward: Policy Balancing and Preserving the Foundations of Long-Term Growth 197

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List of Tables

Table 1: Flow of Funds Framework....................................................... Table 2: Typology of controls on portfolio investment and FDI in African countries.................................................................................... Table 3: Examples of Capital Account Liberalisation Process ............. Table 4: FDI flows and stock for selected African and BRIC countries (US$ million) ......................................................................................... Table 5: Capital Market Indicators and Capital Flows for a Sample of African and BRIC Countries.. ..................................................... Table 6: Official Financial Flows for Selected African and BRIC countries (US$ million).......................................................................... Table 7: Impact ofthe crisis on selected African financial markets in an international context.............................................................................. Table 8: Exchange rates for selected African countries ........................ Table 9: International Reserves Excluding Gold for African and BRIC Countries . Table JO: Examples of Capital Account Liberalization Challenges and Policy responses..................................................................................... Table Il: Distribution of Savings Rates in Africa, 2000 - 2005........... Table 12: Gross Fixed Capital Formation/GDP..................................... Table 13: Africa: Selected Macroeconomic Indicators 2003-2007...... Table 14: Positioning ofSub-Saharan Africa in World Financial Development Table 15: Financial Development and Selected Determinants - Africa versus the Rest of the World 1995-2007 Table 16: African Stock Markets Performance in Crisis Table 17: Country Ratings Table 18: Shares in World Manufacturing Value Added, 2000 and 2005 Table 19: GDP Growth 2007 - 2010 Table 20: Growth in World Trade: 2007 - 2010 Table 21: Selected Indicators of Industrial Dynamism in Africa, 2005 Table 22: Top Ten Per Capita African Manufactured Exporters, 2005 Table 23: Top Ten African Manufactured Exporters by Per Capita Growth 2000-2005 ...... ... Table 24: "African Achievers" in Manufactured Exports ..................... Table 25: Per Capita Manufactured Exports Asia and Latin America. Table 26: Product and Market Concentration for the Africa 17............ Table 27: Product and Market Concentration Africa 17, Asia NICS and China, 2005 Table 28: Product Lines with High Market Concentration

33 41 43 47 48 52 55 57 59 61 78 83 116 119 121 124 155 162 165 165 167 171 172 173 174 176 177 180

11

List of Figures Figure 1: Remittance inflows to GDP ratio for the SANE economies Figure 2: Gross Domestic Savings by Developing Regions, 1960 -2004 .............................. Figure 3: Financial Deepening, M2/GDP Ratio .............................. Figure 4: Complex and Opaque Securitization Figure 5: Market Meltdown Around the Globe Crisis Performance for Selected African Countries (2008) ............................................ Figure 6: Volatility Spikes for Selected African Countries .......... Figure 7: Bank Investments and Deposit Insurance ....................... Figure 8: Incentive Features of Bank Management Compensation Structure Figure 9: Regional Ratings: Sub-Saharan Africa versus Others Figure 10: Developing countries have gained market share in all categories ofmanufactured exports, 2000-2005 (Percentage) Figure Il: Shift-Share Decomposition of Global Manufactured Exports: 1990-2005 51 77 82 114 123 126 138 145 154 163 168

12

CHAPTER

1

INTRODUCTION:

LESSONS FROM AND OPTIONS FOR DEALING WITH THE CRISIS John Page

1.1

Introduction

The world economy is experiencing its deepest recession since World War n. Based on the latest projections by the IMF, experts believe that the output in developed economies will contract by 3.8 percent in 2009 - the first annual decline in the post-war period - and it is not expected to grow in 2010. Growth in developing economies is also expected to slow sharply from over six percent in 2008 to about 1.6 percent in 2009, due to falling export demand, lower commodity prices, and much tighter external financing constraints. Stronger fiscal and balance of payments positions in some emerging economies - especially in Asia - have helped to cushion the impact of the external shock somewhat even though developing economies as a whole will experience serious slowdowns; their growth is projected to remain positive in 2009 and 2010. The slowdown in economic activity - especially in the high income countries - is having a major impact on exports from developing countries. Developing economies are highly dependent on developed country markets for their exports; only about ten percent of global trade is South-South trade. Imports by high income countries are now projected to decline by more than 12 per cent in 2009 and to remain flat in 2010. As a result, although developing country exports are projected to contract by less than half of the projected fall in advanced country exports (of -13.5 percent), they are likely to decline by more than six percent this year. The global economic crisis has serious consequences for Africa - a continent that endured nearly 25 years of slow growth and started enjoying a recent growth recovery. Early predictions, suggesting that Africa's relative isolation from global financial markets might delay and reduce the impact of the crisis, have proved to be dramatically wrong. The severity of the contraction of the world output has had a major impact on the region. 13

Countries have come under intense fiscal pressure, particularly those with no access to.private capital markets. In response to their own domestic fiscal pressures, some donors are finding themselves obliged to scale back the official development assistance (ODA) on which African economies rely for their balance of payments and budget support. Foreign direct investment is falling, particularly in natural resource sectors. Remittances, which represent a major source of foreign exchange for many countries and an important source of income support for many households, are expected to contract in 2009. Commodity prices and demand have also fallen. Recent projections by the African Economic Outlook 2009 suggest that the overall rate of growth for the continent will be about 1.5 per cent in 2009 and may only recover to about three percent in 2010. Confronted with this challenge, the African Development Bank convened a workshop on The Financial Crisis - Strategies for Mitigating its Impact in Africa, in April 2009. The papers in this volume formed the basis for a high level discussion on the lessons from the crisis and the measures that African governments can take to deal with it. This introductory chapter highlights some of the key lessons from the workshop and some of the options that the African governments have to address both the immediate impact of the crisis and - equally as important - to prepare themselves to participate in a possible global recovery. 1.2 Lessons from the Crisis

The papers and workshop discussions pointed out a number of key lessons from the crisis. Five of these lessons stand out because of their relevance to economic management in Africa.

1.2.1

Both the financial

and real sectors have been affected by the crisis

As Lemma Senbet shows in his paper based on common indicators of financial development, the financial sector in most African countries remains quite underdeveloped even in relation to the standards of other developing countries. In 2007 liquid liabilities averaged about 30 percent of GDP for Sub-Saharan Africa, while all other regions had shares less than 40 percent. The private credit to GDP ratio was about 17 percent versus a range of 33 to 43 percent for other developing regions, and stock markets were thin and illiquid. For this reason, when the financial crisis in the United States began to unfold, there was a widespread view that the decline in asset prices and credit in the United States and Europe would have little impact on the vast majority of Africa's economies. 14

Early analyses of the origins of the crisis in Africa and its policy solutions tended to focus on the real sector consequences of the global recession. The two papers by Lemma Senbet and Victor Murinde provide a more nuanced view: financial sectors in the region felt both the immediate impacts of the developed country financial market meltdown and the followon effects due to the decline in economic activity. Because of the increasing integration of Africa's economies - especially the larger ones - into the global financial markets, the financial crisis in high-income countries affected directly Africa in terms of deteriorations in asset prices, especially in stock prices, and declines in foreign direct investment. Both Senbet and Murinde demonstrate that the African economies enjoyed substantial increases in private capital inflows during 2000-2007. Using a "flow-of-funds approach", Murinde identifies several important instruments: private non-bank lending, corporate debt and equity, FDI, ODA (aid), and remittances. A few African governments even began to issue sovereign bonds in 2007. Senbet concludes that extensive economic and financial sector reforms over the last two decades - including large scale privatization programs as well as measures to empower private investors have had important implications for capital market development in Africa. The emergence of stock markets is a particularly interesting feature. Despite the challenges faced in terms of low capitalization and liquidity, the recent performance of African stock markets has been remarkable even after their adjustment to the standard risk measures. Mean annual returns for stocks in Africa for 1990-2007 averaged 38.5 percent in local currency (with a Sharpe measure of 0.54) and 21.8 percent in dollar terms (with a Sharpe measure ofO.10). The downside of this improved financial sector performance and the greater integration with global financial markets was that key financial indicators (exchange rates - short- to long-term -, asset and stock prices) deteriorated rapidly in the large African economies. This occurred despite the low exposure of the African financial institution to the complex instruments that had driven many banks of the advanced economies into liquidity problems when the crisis broke out. In his contribution, Ernest Aryeetey shows that for many African countries, the banks generally reduced credit supply in the last quarter of 2008, particularly for SMEs and households. For instance, the Bank of Ghana reported that over the last three months of 2008, credit supply was being tightened by banks. More than 35 percent of banks reported such a credit supply tightening in December compared to just over 25 percent in October. Credit to households declined

15

significantly in the last quarter of 2008 due to banks' concerns about the economic outlook. Thus, the financial crisis in developed countries has been impacting directly on Africa's financial and economic performance, in addition to the second round effects caused by changes in trade, export demand and the workers' remittances. The contagion of African countries by the global financial crisis also shows that the financial situation of other countries especially high-income countries - should matter for Africa. For this reason, the financial reform packages developed by various countries should be globally coordinated, and at the same time, Africa's voice needs to be heard in the international discussions on the reform of the global financial system and its regulatory structure.

1.2.2 Understanding the crisis in the rich countries is important for reforms in Africa. Aryeetey, Murinde and Senbet all argue that the crisis represents an opportunity for long-term financial sector reforms in Africa. Senbet points out that booms are a defining characteristic of financial sectors and that the role of appropriate regulation is to reduce their likelihood and severity. Thus, understanding the origins of the crisis in the high-income economies can provide valuable lessons for the design of financial sector reforms in Africa. At the center of the global financial crisis was the excessive risk-taking which was fueled by excessive leverage. However, that is only part of the story: risk exposures also became so complex and intertwined that they were opaque and beyond available capacity to evaluate and regulate. In the boom period, excessively high and non-transparent risks (such as credit default swaps) were taken as a result of distorted incentives for banks and Wall Street institutions. Complex and opaque securitization led to, and was abetted by, failures of due diligence by rating agencies and grade inflation. Finally, corporate governance and incentive systems encouraged and rewarded excessive risk taking. The global crisis has also revealed that many major institutions (such as, for example, AIG) had serious oversight gaps. These bank-like institutions, which were outside the banking regulatory scheme, were allowed to grow to a point where their failure would bring down other institutions, with damage to the entire global financial system. This diagnosis contains some important lessons for Africa. First, regulatory regimes need to provide proper incentives for the evaluation and pricing of risk. Moreover, it is critical to distinguish between the government as the regulator and as the business operator. Second, good corporate 16

governance in both the financial and non-financial sectors is central to the development of African financial systems - both the stock markets and the banking systems. There is also evidence that investors paya premium for the stock of a well-managed company stock against a poorly-managed one, thus enhancing resource mobilization. One critical factor in this area is the appointment and empowerment of independent non-executive directors. Good regulatory and governance schemes are also instrumental in building the confidence of international investors. Third, there is an urgent need to build capacity for risk management in Africa. This will entail recruiting skilled financial professionals and improving industry-wide understanding of regulatory risk management. These three initiatives need to be underpinned by the development of well-functioning governance institutions: securities regulators, auditors, equity analysts, and other sources of investor protection.

1.2.3

Stay global but strengthen domestic market institutions

Considering the damage associated with the crisis, the temptation may be - both in African policy and popular circles - to resort to protectionism (the old, dysfunctional and closed economy). There was broad agreement among the contributors that to do so would represent a serious mistake. The global financial crisis should not be regarded as an occasion to reverse the trend, but rather as a rare opportunity for Africa to support - and even accelerate - the momentum of its recent integration into the global economy. Also, any reversal of an expanded role for private finance should be avoided. Both Murinde and Senbet argue that with a crisis of such a global magnitude, those African countries that shun a greater integration into the global financial markets will not be immune to its effects. While the crisis will continue to hit them through the real sector, they run the risk of abandoning some important tools for promoting recovery. These include:

.

. .

Mobilization of capital and access to diversified sources of external capital Enhanced risk-sharing and reduced cost of capital International discipline and use of the available best practices.

As Africa ventures into global integration, it needs to develop appropriate measures to reform the financial system, particularly building risk-management capacity and providing efficient solutions to crises, if and when they arise. For market solutions to work, the markets need to operate adequately, thus reinforcing the need to develop market institutions that

17

should support the evaluation of risks and sanction excessive risk-taking. Aryeetey notes that following the Asian financial crisis in 1997, the tightening of standards and regulations in the financial markets throughout the world was also extended to financial institutions in Africa. The adoption of the International Financial Reporting Standards (IFSR) by Africa-based banks was significant in this regard and led to greater competition within countries. Since the global financial market is an important tool for recovery, countries cannot bypass the challenges of developing their domestic financial systems. In his chapter, Ernest Aryeetey argues that the low rate of investment, especially private investment, in African countries is partly attributable to the dearth of credit to the private sector. Lending is low for several reasons, including policies, institutional constraints, and the structure of financial systems. Well-functioning African financial systems, including domestic stock markets, promote domestic resource mobilization by providing incentives and profitable options for domestic capital to be retained. Given the massive financial capital flight from Africa over the years, the use of domestic financial systems to retain domestic capital is highly desirable.

1.2.4

Low public and private savings will constrain the recovery

Ernest Aryeetey raises the concern that the search for external resources might lead to reduced attention to domestic resource mobilization. Even before the crisis, the capacity of Africa's public sector to mobilize tax revenues was low; savings mobilization was limited in many countries. Moreover lending to the private sector has always been problematic, especially for small borrowers. Central banks in the region do not anticipate any major changes in savings outcomes as a result of the crisis. Before the crisis, Africa's low and stagnant savings rates could not be appropriately compared with those of Asia and other developing regions. Broad money supply to GDP ratios are relatively low as compared to the global standards, although they have began to improve. The significance of foreign savings has grown since 1980 as domestic savings declined. A number of structural and institutional constraints, such as highly fragmented financial markets and high transaction costs, especially in rural areas, hinder savings. One important structural feature of savings in Africa is the propensity of households to hold their assets in a non-financial form.

18

With low household savings, public savings take on a prominent role. Taxes account for most of government revenue in the majority of African countries, but tax revenue as a percentage of GDP in Africa was 22 percent in 2004, far lower than the average for other regions. The capacity of African economies to mobilize domestic resources through taxation is not only hampered by a widespread poverty; it is largely a consequence of institutional failures. Reforms in the 1980s only sought to improve administrative mechanisms for reaching a fairly small tax base. A number of tax administrative procedures lack transparency and are difficult to monitor. For example, the language used in tax laws is generally leads to confusion and considerable discretionary powers for tax enforcers. The implication is that, faced with a downturn, many African countries will have to significantly improve their tax efforts in order to maintain the same level of revenue collection.

1.2.5

Lack of industrial dynamism may limit Africa 's prospects

John Page assesses the likely impact of the global recession on African manufacturing. During the period of explosive growth of manufacturing in developing countries, Africa remained on the sidelines. Africa's share of global manufacturing value added (excluding South Africa) fell from 0.4 percent in 1980 to 0.3 percent in 2005, and its share ofworld manufactured exports went from 0.3 to 0.2 percent. In 2005, the continent's manufactured exports per person were just $ 39, that is, lower than the performance of Vietnam ($ 211), Cambodia ($ 198), and Guatemala ($ 305). Africa's marginalization may provide a cushion against the worst consequences of the recession in global manufacturing. With little to produce and sell, little potential output will be lost. However, while the global downturn will have only a limited impact on manufacturing activity for the region as a whole, the few African countries that have met with success in manufactured exports - especially Mauritius, Morocco, and Tunisia - are likely to be affected by the reduction in global manufacturing demand to the same degree as other newly industrializing countries. Their main export products are highly concentrated in advanced country markets. It is also possible that a number of emerging African manufacturers economies that have recently begun to develop manufactured exports suffer a decline in demand and output. Sectors such as apparel, food products, wood products and minerals are likely to come under heavy pressure. The continent' s failure to grow and diversify its manufactured exports is not a blessing in disguise. Page argues that the vast majority of Africa's 19

economies lack industrial and export diversity, which acts as a powerful constraint to growth. Without a growing manufacturing sector, the region's economies will find it increasingly difficult to sustain growth and to participate fully in the recovery of global economic activity. Fortunately, there are some reasons to believe that the recession may represent an opportunity to boost manufacturing in Africa. Costs will continue to rise in China. Domestic stimulus in Asia may reorient production away from global markets, and task-based production may not return to the South-East Asian NICS. Whether this creates an opportunity for more industrial dynamism in Africa depends largely on whether African economies can solve the problems that have constrained their industrial development in the past. The recession provides additional incentives for African governments to accelerate reforms in the investment climate including in such key areas as infrastructure, spatial industrial policy, trade logistics, and regional integration. It may also provide a new setting in which to push the OECD countries to agree to a better system of preferences for manufactured exports from Africa.

1.3

Options to Respond

Unlike the context of the recessions of the 1980s and 1990s, improved economic management across the continent means that Africa's governments have a number of options available to respond to the current crisis. The workshop papers and discussions highlighted five key areas for both shortterm and medium-term policy action.

1.3.1

Creating a global partnership for policy response to crisis.

The magnitude of the global crisis has brought about staggering bailout and fiscal stimulus commitments around the world. By the end ofNovember 2008, about $2.6 trillion dollars had been globally used to bail out banks and other financial institutions, and to stimulate growth. In addition, there were $2.7 trillion in loan guarantees. More recently, the USA has committed an additional stimulus package of about $800 billion and should probably commit more resources to clean up the toxic assets and to restructure banks. Aggregate fiscal stimulus for G-20 countries is estimated at $ 1.6 trillion. Murinde and Senbet point out in their contributions that little of this stimulus is likely to benefit low income countries directly. Rather, Africa's economies will face shrinking capital flows due to increased risk premiums, a reduction in access to foreign debt markets, and increased costs of capital. 20

These, in turn, will place further stress on the financial sector, including the prospect of domestic banking and industrial failures. Some of these institutions will be "too big to fail" relative to the size of the economy. But most African governments will have a limited capacity to act as "lender of the last resort" or - as in the OECD - "investor oflast resort". The fact that Africa faces "collateral damage" from a crisis not of its own making suggests that a global partnership to deal with its short-term effects is desirable. So far the bailout and stimulus resources have been committed only on a national basis. But Lemma Senbet argues that the global nature of the crisis makes it clear that countries should not be parochial. Global intervention on behalf of low income countries, including African ones, may be mutually beneficial and should be planned in the same manner as the bail-out of the large global financial institutions. Increasing the low-income countries' resources to strengthen their financial systems in the face of the crisis is a form of global risk diversification that will generate growth spillovers. Rich country governments can also act as "foreign investor of last resort" via a government facility or sovereign funds. Highincome country participation may also be needed in building the capacity to administer reform programs and new regulatory structures. There is also a role for collective action at the regional level. The African regional networks of national finance ministers and central bank governors are timely but, to have an impact on the markets, it is essential to publish their deliberations and efforts in policy coordination. Regional bodies can improve the capacity to monitor movements of the main financial prices that propagate contagion effects, namely exchange rates and stock prices. Regional agreements can encourage cross-border banking operations to promote greater competition in domestic markets. For example, the arrival of Nigerian banks in Ghana significantly forced down the lending rates of banks while pushing up deposit rates. There is also a scope for the creation of sub-regional stock exchanges. Natural partners in an exchange consolidation would include West Africa (Francophone and Anglophone), East Africa, SADC, and North Africa.

1.3.2

lntegratingfurther

into global markets

In the post-crisis era, the trend toward a closer integration of Africa into the global financial markets is likely to continue. Murinde and Senbet argue that, in the medium-term, a gradual and well-sequenced liberalization strategy will help countries reap the benefits of capital market access. However, limiting the associated risk countries also requires the implementation of supportive institutional and regulatory reforms to 21