The World Financial Crisis: How Sub-Saharan Africa Will Fare

Monday, November 10, 2008 

By Alhassan Attaquayson,, Accra 

Africa BusinessA financial system is made up of a principles and institutions which together ensure that individuals and organizations, in a given society, with surplus funds to save as well as those in need of such funds meet in varying forms through all sorts of means to ensure that funds move from the surplus sector to the deficit sector. The world financial system is a complex collection of institutions established with the intention of bringing people who want to borrow and those who want to lend together to ensure and enhance transfer of funds. The world financial crisis could thus be viewed as a systematic meltdown of the various institutions as well as constituents of the world’s complex financial system.

The root cause of the crisis, in various analyses, has been attributed to the collapse of the sub prime mortgage loans market. The sub prime lending is a sort of lending to borrowers who, under normal circumstances, would not qualify to access loans due to poor credit worthiness and poor credit records. These sub prime borrowers, as a result, pay higher interest on these credits. All big banks in the U.S. financial system involved themselves in the sub prime market because it was quite lucrative. The sub prime loans usually appear doubtful or bad due to associated high risk. Financial engineers in the U.S were quite smart that they repackaged these loans in the form of securities (which quickly hit exchanges in some forms) and sold them in order to rid these risky assets off their books. In essence, this market became essential aspect of the complex international financial system; consequently its collapse easily became a contagion.

The immediate impact of the crisis, beside near bank failure in some cases and failure in others, has been the freeze of credit even among banks ,a very critical arrangement within the financial system which enhances , and sometimes hold the key to the channeling of funds from one sector to the other , ones again through various mediation processes and instruments . The collapse of the financial system which held the wealth of individuals and corporations meant an overnight sharp falls in different kinds of incomes, particularly permanent income. These developments resulted in sharp fall in demand (as demand even depends more on permanent income) and corresponding fall in supply hence production. Cuts in production necessitated cuts in employment as well as income hence demand. All these have dynamic implications for Africa, which appears ‘reasonably insulated’ from the impacts of the financial crisis.

First grants and loans, which form over 40% of our national budgets, are feared to further fall sharply for obvious reasons. The industrialized countries in particular and other emerging economies that have been supporting African governments have been significantly implicated in the recent debacle. Most of them have made commitments worth third of their sizes. They themselves would have to turn to rich countries’ reserve for assistance. The UK Prime Minister Gordon Brown visited the Gulf-rich Arab countries last week to persuade them to help address the crisis.

The next consequence is the impact on remittances, whose relevance in Africa has sharply increased over the past decade or so, though they have already started falling in a fashion way beyond slow.

With the global economy heading towards recession, another fear has been the impact on exports (particularly of extractive resources) as well as on production and employment in Africa. In an article, Serena Chaudry of Reuters mentioned that Lonmin Plc, the world’s third largest platinum producer, advised workers of possible lay-offs due to significant decrease in demand as well as prices for its metal. The value of the metal has fallen by more than half over the past four months (due to slow auto sales data and the outlook for demand).

In another development, four mining companies in Ghana have laid off hundreds of workers as a result of the credit crunch which has meant for the mining companies significant downward revision of projects. South Africa’s AngloGold Ashanti, the world’s third largest producer of gold, has noted that it plans to review capital expenditures by $400 million for next year by quitting some of its projects and this is likely to further worsen the situation. It is worth noting that with high natural resource dependence ratios across the continent, these developments have serious implications for the various economies on the continent.

World Bank President Robert Zoellick has mentioned that the financial crisis could become a human crisis in the developing world. Elsewhere, a founding member of the Evian Group, a think tank which focuses on international economies in the era of globalization has also noted that this crisis could have a long-term consequence on developing countries. He said "its going to be significant in the sense that were going to be seeing a lot of money that should be going towards development, going towards sustainability being used to try and clean up the financial mess".

But what could and should be done by sub-Saharan African governments? Well, given the looming danger, it is inevitable that some government programmes and projects would be put on hold in the coming years. It is also relevant to mention that at the height of rising food prices and fuel prices last year, governments around the continent removed significant portion of import duties and taxes to lessen the burden on citizens.

All these developments point to the fact that internally generated funds have been falling and will continue to fall, especially because governments depend largely on these taxes. Perhaps, it is time for governments to fast track the formalization of small and medium businesses, assisting them with lesser or no barriers to succeed, so they can make minimal contributions by way of lower taxes for the public purse.

 Above all else, African leaders should also maintain small and smart governments as against large and inefficient governments which have become a drain on poor Africans’ meager incomes.

Alhassan Attaquayson is a graduate student of the University of Ghana and columnist of