African Slowdown

Although not at the heart of the current economic crisis the winds of the current storm are beginning to be felt on African shores.

Many African countries have seen a revival in economic growth over the last decade but it looks like things are about to change. Last year the IMF’s forecast fro growth in sub-Saharan Africa was 6.7% in 2009. In it most recent projection it has slashed its forecast to between 3% and 3.5%.

This slowdown in the rate of growth also means a significant slowdown in growth of output per person. The later being a rough measure of living standards. For example if the population continues to grow at 2.4%, as it did in 2007, with economic growth of 3% it would take 118 years to double output per person.

At a growth rate of 6% it would take 20 years to double output per person and at 9% (similar to Chinese growth over the decade) just 11 years. Hence a slash in growth rates has a significant developmental impact.

Africa has yet has not been directly hit by the credit crisis. The major African banks have invested very little in the problem assets that have bought western financial institutions to their knees. It has also been helped by the fact that a large share of output is agriculture for domestic markets, and is less exposed to declining international markets.

Africa is likely to experience some indirect effects of the global crisis. The global demand for many industrial commodities, which are at the heart of the export industry in some countries, has fallen. This includes oil in Nigeria, Angola and Equatorial Guinea, and copper in Zambia. (Other export markets have also been hard hit, for instance a previous blog has examined how the Zambian flower exporting industry has suffered). Falling demand means falling prices. Crude oil is down by about 70% from its peak in July and copper about 66%.

Money sent home by African nationals working abroad (remittances) also looks set to fall. This money sent home is often used to support family income and provide funds for small businesses. In 2007, £13bn was sent home in the form of remittances. The problem in 2009 is that 75% of all remittances come from employment in Western Europe and the US, areas already in recession. As firms in these developed economic areas shed jobs, African remittance levels look set to fall. This will mean a lower level of funds injected into the African economy.

Foreign Direct investment into Africa is also set to fall. Overseas firms in recent times have been keen to take advantage of the rising profits available from raw material/commodity extraction. More than $30bn was injected into Africa in 2007 in the form of FDI, nearly the same level as the $39bn received in aid. Falling commodity prices are going to make firms less attracted to an FDI projects in Africa (along with the inability of firms to access funds for investment, due to poorly functioning credit markets).

Although the African banking sector is performing better than most there is a risk that falling business activity could mean a larger number of firms getting into difficulty with loan repayments, which in turn could lead to potential bad debts and losses for banks.

There is also a possibility that foreign owned banks with problems in their domestic markets may want to pull funds out of African banks.

As with many countries across the globe, the indirect effects of the slowdown may well be a decline in government revenues for many African administrations.

There is no doubt that once again the African economy is facing bleak and uncertain waters.

Further Reading

The original BBC article.

IMF warns of slowing growth

How falling remittances are hitting the economy in Senegal

How Sudan is adapting to the global economic downturn

How the global recession is now hitting the African economy.