Caleb M Fundanga: Africa and the global financial and economic crisis -
an opportunity or a curse?
Speech by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the Forum
"Developing Africa - an opportunity for Europe, Italy and Sicily", Taormina, Sicily,
1-2 October 2009.
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Chairperson,
Distinguished Participants,
Today we gather at a time when the world economy has gone through a tremendous
economic and financial shock, which may well have long lasting social consequences. When
we met last year, we were on the eve of disaster although we did not, and perhaps could not,
appreciate the depth and severity of the crisis that we faced. In many ways we were in the
calm before the storm. What subsequently transpired in September and October 2008, when
financial markets froze and stock markets collapsed, was the greatest macroeconomic
challenge that many of us, as practicing economists, are likely to face in our lifetime. As we
all know, trade and output contracted sharply across the globe particularly in the fourth
quarter of 2008 and first quarter of 2009, the downward trend in commodity prices witnessed
since the historic highs of July 2008 accelerated, and perhaps most significantly confidence
and trust in the market economy was severely impaired. In this regard, estimates from the
International Monetary Fund (IMF) are that in the fourth quarter of 2008 global exports
contracted by an average of 15.1%, whilst global output contracted by 6.5%.1 This broad
based deterioration in the global economy was carried through into the first and second
quarters of 2009.
The most recent projections by the IMF suggest that global growth will contract by 1.4% in
2009 before recovering to a growth rate of 2.5% in 2010. For the United States of America
and the Euro Area, growth in 2009 is projected to contract by 2.6% and 4.8%, respectively;
whilst in Japan and the United Kingdom, growth is projected to contract by 6.0% and 4.2%,
respectively. Although emerging and developing economies are projected to perform much
better, with a projected growth rate of 1.5%, this rate of growth is significantly below the
estimate of 6.0% growth in 2008. Further, growth in Sub-Saharan Africa is projected to
decelerate sharply to 1.5% from 5.5% in 2008.
Thankfully, as we meet today there is growing evidence that in many parts of the world, the
worst of the crisis may be over. At the epicenter of the crisis, i.e. the United States of
America (USA) and Europe, the collapse in output has decelerated - with the most recent
evidence pointing to some increase in growth both in terms of actual output as well as some
of the leading indicators of output. In the USA, second quarter GDP growth figures of -1%
indicate a deceleration in the pace of contraction. Further, in the second quarter of 2009,
important Euro areas economies such as Germany and France actually posted positive rate
of GDP growth. More broadly industrial production, exports, and retail sales figures appear to
have improved, although they remain sharply negative on an annual basis. In addition the
broad-based recovery in commodity prices also suggests that the global economy is on a
path to recovery.
However, despite this more positive outlook for the global economy, it is not clear that Africa
has seen its worst days. For many countries in Sub-Saharan Africa, the ramifications of the
crisis are still working themselves through the system. Initially, financial markets rather than
the financial system bore the initial brunt of the crisis in Africa, as economies experienced a
sharp reversal of financial flows, and exchange rates depreciated sharply, and capital
markets registered sharp declines in market capitalization and trading volumes. Thankfully
there are clear signs that financial markets have now stabilized, with exchange rates
appreciating and inflows of portfolio flows and FDI showing tentative signs of recovery. In
Zambia, for example, between September 2008 and April 2009, the country experienced a
negative portfolio inflow. Non-resident holdings of Treasury bills declined from around 16% of
outstanding bills in September 2008 to zero by end March 2009. During this period the
exchange rate of the Kwacha against the US dollar depreciated by around 60%.
Whilst non-performing loans in the banking sector rose from around 5% in July 2008 to their
current levels of around 10%, they remain within the prudential ceilings above which
concerns of systemic risks would be warranted. The increase in non-performing loans thus
reflects the deterioration in the real sector of the economy. It is in this sense, i.e. the absence
of a significant volume of impaired assets in the financial system, that I describe "financial
markets" rather than the "financial system" as bearing the brunt of the crisis. The weight of
adjustment was reflected in exchange rates and the Balance of Payments - reflected in a
marked draw down of international reserves. However, the ramifications of the crisis on the
real sector of many sub-Saharan African economies are real and potentially far reaching, and
it is to these that I now turn.
In my reflections on the impact and implications of the global economic crisis on Africa, I wish
to emphasize four key points: The first and perhaps the most significant effect of the global
financial and economic crisis has been the marked slow-down in real GDP growth in SSA, to
a projected 1.5% in 2009 from an estimated 5.5% in 2008. This slow-down in growth has
occurred after a significant period of strong economic growth and investment that had laid
the platform for sustained and significant reductions in poverty across the continent. Further,
whilst real GDP growth is anticipated to recover to 4.1% in 2010, this is significantly below
the minimum annual growth rate of 7% that is thought necessary to move SSA towards a
significant achievement of its Millennium Development Goals (MDGs) by 2015.2 There is
thus a strong possibility that without an appropriate policy response, SSA may be caught in a
period of much lower growth rates over the coming years than is necessary to reduce
poverty on a sustainable basis - reversing the important gains that have been made this
decade. Africa, with 30% of the global population, still contains a large proportion of the
world's poor. Africa's share of global trade and investment inflows also remains small in
absolute terms and relative to Africa's vast potential.
The second point I wish to make is that prior to the crisis, many Governments in SSA
registered improvements in fiscal space which reflected not only the broad commodity price
boom that began at the turn of the current decade, but also painful structural reforms aimed
at expanding the market economy and implementation of greater fiscal discipline. In this
regard, the impact of the crisis for many Governments in SSA is lower growth, the sharp
contraction in imports as the external sector adjusted, and lower trade volumes in general,
have led to a sharp reduction in Government revenues and a contraction in fiscal space. This
contraction in fiscal space represents a grave challenge to the implementation of critical
investment expenditures in the education and health sectors and in building infrastructure
that supports the proper functioning of the market economy and expands its reach,
particularly into the rural areas, where the majority of the poor live. With deteriorating fiscal
positions in the donor Government, there also remains a real risk of cuts in donor flows to
developing countries. In Zambia for example, Government revenues during the first half of
2009 were 25% below the projections in the 2009 Budget, largely reflecting lower trade taxes
as well as lower donor inflows. For Africa, as a whole, recent estimates by the IMF are that
budget deficits will drop from a surplus of 2.8% of GDP in 2008 to a deficit of 5.4% of GDP in
2009 - with fiscal outturns deteriorating across both oil and non-oil commodity exporters.
The global financial and economic crisis has also impacted Foreign Direct Investment (FDI)
and credit flows in Africa, with serious consequences on the ability of African economies to
build their productive capacities. For many countries in SSA, FDI flows as well as commercial
lines of credit have been an important source of finance for growth, particularly because of
insufficient domestic savings and the shallowness of domestic capital markets. In Zambia, for
example, over the past 5 years FDI flows have averaged over US$ 900 million per annum,
particularly in the mining, agriculture, manufacturing, construction, and tourism sectors. I
believe this is an important part of the reason why Zambia's real GDP growth in 2009 is
estimated at 4.5%, well above the 1.5% forecast for SSA. As indicated earlier, FDI flows to
Africa are projected to fall by 18% in 2009, relative to 2008 inflows of US$ 30 million. In
addition trade credits have been impaired as has the access of Government's to the
international capital markets. Efforts, for example, by several African countries to raise
longterm financing in international markets through sovereign bond issues have either failed,
been cancelled (for example the Ghana Telecom bond issue for US$ 300 million) or have
been delayed (for example the Eurobond issues for Kenya, Nigeria, Tanzania, and Uganda).
My fourth point is related to the actual, as well as imagined, failures of the market
mechanism at the heart of the advanced economies, and the inevitable institutional reforms
that need to be undertaken, as the relative boundaries of the public and private sector are
reassessed. This is really a point of caution for SSA, because there have been calls for the
Governments in Africa to emulate the actions taken by developed economies to support
private sector companies and the financial sector in general in a manner that expands the
reach of government. This course of action needs to be avoided in Africa because it risks
undermining both public and private institutions, whose development has been an important
part of the success of African economies in generating high rates of growth during this
decade. Whilst greater fiscal discipline has led to lower and more sustainable budget deficits,
real yield rates on long-term government bonds remain high in many African economies,
suggesting that investors have not yet fully priced in the significant improvement in
macroeconomic fundamentals and that their inflation expectations remain high. Central
banks in Africa are also constrained in their ability to inject liquidity into the financial system
by purchasing available government or any other type of securities in the market. This
constraint is at two levels: first the financial systems in Africa have not been impaired and the
money markets have continued to function regularly, without a significant and prolonged
liquidity crisis - largely due to the absence of any impaired or toxic assets in the banking
system. Second, credit expansion to the non-Government sector remains strong. Both of
these facts suggest that any rapid expansion of Central Bank balance sheets or government
deficits may be viewed as inappropriate and would therefore undermine the credibility of
these institutions and their ability to anchor inflation expectations, which remain fragile.
It is with these four points in mind that I pose the question: Is the global financial and
economic crisis an opportunity or a curse for Africa? I do not see the global crisis as a
curse on Africa - some unknown force guiding us to our inevitable doom. Rather I see the
global crisis as presenting a set of circumstances to which Africa is capable of responding
proactively - to the great benefit of its people and indeed to the global economy. My reading
of the current debates on the state of economics is that the poor predictive power of most
macroeconomists in calling the financial crisis has bred the widespread belief that it is not so
much that economists failed in their duties, this they certainly did; but that the science of
economics itself has been found to be severely wanting. I myself have a more balanced
view. There were certainly ample signs that trouble was brewing in the global economy -
best reflected in the growing financial imbalances across the globe, for example between the
United States and China, in an ever more interconnected financial landscape. Economists
understood the broad problem, but somehow failed to draw or contemplate the correct
conclusions, despite our knowledge of previous episodes of financial collapse. However, the
charge against the economics profession also has merit in that ultimately these global
imbalances gave rise to or produced perverse economic incentives in financial markets
which existing models did not or could not contemplate. This was compounded by a lack of
regulatory oversight of key sectors of the financial market.
But let me return now to the question of Africa and the global financial and economic crisis.
How does Africa respond to the real prospect of lower growth than is necessary to
reduce poverty on a sustainable basis? I believe that Africa needs to retain open
economies, expand regional markets and integration; and expand the reach and benefits of
the market economy. Zambia has been an active and founder member of the Southern
African Development Community (SADC) as well as the Common Market for Eastern and
Southern Africa (COMESA). Through these bodies Zambia is looking to leverage its own
potential through projects such as the North-South Corridor under COMESA, which seeks to
open up efficient transport routes for the flow of goods, service, and people, from the south to
the north of Africa. Further, under SADC Zambia is looking to develop its vast hydro-electric
power potential, estimated at around 6,000MW, as well as transmission infrastructure to
enable Zambia to supply countries in the East African Community which face severe power
deficits. Zambia already trades power within the SADC region, through the Southern African
Power Pool (SAPP). In the mining sector, Zambia is already seeing investment in value
addition to raw materials being driven by the opportunities available in regional markets as
close as the Democratic Republic of Congo (DRC) and as far away as Egypt.
How does Africa respond to the loss of fiscal space that has robbed the Government
of critical resources needed to build their economies by investing in human capital
and physical infrastructure projects such as roads, irrigation schemes, and power
plants? First of all it is important to recognize the extraordinary response of the international
community, especially through the G20 group of countries, in mobilizing resources to
address both the liquidity needs of financial markets and the fiscal challenges faced by
Governments. A significant amount of this support has been channeled through the
multilateral financial institutions such as the IMF, World Bank, and the various Regional
Development Banks, including our own African Development Bank (AfDB). The operating
procedures and practices of these institutions have also been reformed to a significant
degree - although it is true to say that it will take more time to change the organizational
mindset and attitude of staff.
In this regard, at the end of August and the beginning of September, Zambia received an
SDR allocation amounting to US$ 625 million that has augmented our reserves and provided
a boost of confidence in our financial markets. Zambia has also benefitted from increased
support from bi-lateral donors, with the prospect of additional resources being made
available in the current calendar year from the European Union amounting to around 13% of
all the grants that were scheduled to be received in 2009 from the EU and individual donors.
Institutions such as the African Development Bank have also made changes to their
procedures aimed at fast tracking the disbursement of critical development finance
resources, against already approved projects.
However, there are serious concerns that Africa has been disadvantaged in the allocation of
resources made available by the international community - particularly to key institutions
such as the AfDB. There is also concern that whilst the principle of increased resource flows
through Institutions such as the IMF should be targeted beyond the traditional BoP needs
has generally been accepted at a political level, there is some reluctance at the institutional
level for institutions such as the IMF to venture outside of their traditional confines of their
support. In Zambia, the Government has engaged our cooperating partners to ensure that
the additional resource provided to help African countries deal with the global crisis can be
utilized to do just that - and not be simply kept for a rainy day that ignores the current
monsoon. In my own personal interaction with the IMF, I believe that in Zambia we do have a
good common understanding on this issue. The Government has in fact been able to draw
on its PRGF resources to compensate for the shortfalls in Government revenues over the
first half of 2009 that I have alluded to earlier. However, when all is said and done, Africa still
needs to mobilize both foreign and domestic sources of finance that provide sustainable
sources of investment.
How can Africa best arrest the recent reversal of FDI inflows generated by the global
financial and economic crisis and encourage domestic resource mobilization i.e.
boost domestic savings rates? In my view, ensuring that we retain our focus on
consolidating macroeconomic stability is a critical element of Africa's response to the current
crisis. For many of our economies, inflation has been pushed beyond the single digit level,
and we must all therefore work hard to re-establish low levels of inflation as soon as
possible. The ability to attract FDI inflows is also a function of the supporting infrastructure
and the existence of a business environment that supports innovation, initiative, and hard
work. In this regard Africa must not relent on efforts to improve infrastructure development,
and lower the cost of doing business. This is a process which is being actively pursued in
Zambia, where great strides have been made to reduce the number of business licenses
required and to streamline licensing procedures, in addition to the establishment of an
organisation, the Zambia Development Agency, to spearhead and support FDI flows and
domestically financed investment. We do see increased interest in cross border investments
from within our region, particularly in the financial sector.
With respect to the need to mobilize domestic savings, Africa certainly needs to expand the
reach of the financial sector and to make the financial sector more efficient. In Zambia, the
majority of the population does not have access to financial products. The Bank of Zambia
has therefore made advancing financial inclusion as one of its strategic objectives. Zambia
has a very low population density and there are many areas that are currently not served by
any financial institution. Reaching these areas will require the application of technology and
the concept of branchless banking. To facilitate such innovation, a robust regulatory regime
governing the payment system has been implemented with the enactment of the National
Payment Systems Act in 2007. In this regard, Zambia is learning a lot from the advances
made in countries such as Uganda and Kenya, where cell phone technology has expanded
the reach of financial services and products. On its part the Zambian Government is also
taking concrete steps to enhance the application of Information and Communication
Technology across the broad spread of Government services and the private sector.
How can we build better and more resilient institutions that boost confidence in the
benefits of a market economy and can act as strong anchors of inflation expectations?
Earlier in my remarks I did make reference to the fact that one of the greatest dangers facing
African economies is the risks that the current crisis might trigger significant policy reversals
that undermine important institutions such as the Government as well as the central bank. It
is important that in Africa, the critical work of consolidating fiscal positions and improving the
Governance arrangements and financial management of public resources is sustained. In
many ways, fiscal sector reform reflected in the curtailment of fiscal dominance, have been
the central platform upon which macroeconomic stability has been built and achieved in
Zambia. From the central bank perspective, the Bank of Zambia has worked to improve its
own credibility by working with commercial banks and other financial institutions to improve
Governance arrangements in the financial sector, improve the frequency and level of
communication between the bank and the institutions that it supervises, as well as the
general public. Much of this work has been done under the framework of a comprehensive
Financial Sector Development Plan (FSDP) that has had broad support from our cooperating
partners. At the regional level, a new SADC Model Central Bank Act has also been approved
by the Ministers of Finance in SADC that enshrines important principles of independence and
good corporate governance as a yardstick to be followed by all central banks in the region.
Chairperson,
Distinguished Participants,
In conclusion, let me simply state that I believe that we in Africa have an opportunity and an
obligation to consolidate reform and ensure that we can return to and surpass the high
growth rates, of above 5%, witnessed in the new millennium. This is important not just for
Africa and the challenge of reducing poverty, but also the world, as demographic changes
shift the burden of production onto the younger generation - which is concentrated in the
developing economies, including Africa. I am happy to note that my invitation for colleagues
to visit Zambia and see the wonderful opportunities for investment and progress that exist
have been heeded as I did receive a delegation from Italy early this year. I cannot therefore
end without encouraging all of you to visit Zambia when you have the opportunity - I can
assure you that you will not be disappointed.
I thank you for your kind attention.