Mounting public debt crises is expected to push most European countries into an economic recession, whose effects are likely to be felt around the globe.
An estimated 37 per cent of African non-oil exports go to Europe, making the projected recession a real threat to the continent’s economies, and further highlighting the urgent need for diversification of export destinations.
In a recent interview with the Business Daily, World Bank chief economist for Africa region, Shantayanan Devarajanand, said Africa’s economy could take a major hit if the unfolding European sovereign debt crisis develops into a severe recession.
The tragedy for Kenya and Africa, he said, is that a major downturn could worsen social welfare at a time when most of the continent’s economies are recovering from the 2008 global financial crisis.
Business Daily’s Geoffrey Irungu talked to Mr Devarajan when he recently visited Kenya for the launch of Kenya Economic Update report for the month of December:
To what extent is the sovereign debt crisis in Europe likely to affect Kenya and Africa?
The crisis is likely to affect demand for commodity exports from sub-Saharan Africa to Europe.
Sub-Saharan Africa is not very much linked up to Europe in terms of the financial sector except for South Africa and Mauritius, and therefore this sector is not likely to be affected by developments in Europe. In 2009 when economic recession hit Western countries, it affected the African continent, through no fault of its own, such that growth went down to 1.7 per cent from five per cent in 2008.
How do you see a likely double-dip recession in the US affecting Africa?
Recession in the US depends very much on what is going to happen in Europe in the coming months. India and China have slowed down and the threat of recession in the US remains. But if this were to materialise then you could see more adverse effects on demand for Africa’s commodity exports.
How do you rate Kenya’s chances of attracting budgetary funding from international lenders?
In principle, Kenya could access international financial markets because Africa’s growth prospects are pretty good while its risks are lower than in many other places where it is just getting riskier.
Even though paying a premium is a must, investors would still be keen to take up a sovereign bond. Africa has risks but other places are getting riskier.
What is World Bank’s experience in dealing with countries that are hit by external shocks, such as the recent depreciation of the Kenya shilling?
When countries are hit by external shocks, they should not control the exchange rate because doing so creates bigger problems. Letting the currency depreciate is always the right thing when shocks strike.
To what extent do speculators and hedge funds influence currency swings in free-float economies?
I would not blame speculators or hedge funds, because that is the business they do. But I would see depreciation as reflecting underlying problems in an economy. If the bond markets, for example, show a high premium for the Euro zone countries they reflect the risk of possible default.
The hedge funds therefore keep governments focused on what they are supposed to do because they will come in if a government fails.
There appears to be a currency war around the world with some countries defending their currencies.
How is it likely to unfold in the coming year, and how will it affect Kenya and Africa?
If a currency war leads to a recession in developed countries such as in Europe, then people will reduce their consumption. But in Africa the problem is likely to be more severe. It is a permanent shock.