Africa finally on the road to recovery

African countries were largely innocent victims of the global financial crisis.

It struck Africa through many different channels.

We saw trade plummet, capital flows dry up, remittances slow, and banks run into difficulties.

The result was a disappointing year for the African economy, marking the end of the longest and broadest expansion in modern history.

In 2009, growth in sub-Saharan Africa was close to 2 per cent, while it had been humming along at 5-7 per cent beforehand.

Average per capita incomes fell marginally in 2009, the first decline in nearly two decades.

Human suffering

Behind this lies an enormity of human suffering.

Jobs were lost in both formal and informal sectors.

Progress in reducing poverty was set back.

Nutrition suffered. In other parts of the world, you might lose your job, or maybe your house, in this kind of crisis.

In Africa, you could very well lose your life, or the life of your child.

The tide seems to have turned. In line with the rest of the world, an African recovery began in the latter half of 2009.

All across the continent, we can see signs of life, with rebounds in trade, export earnings, bank credit, and commercial activity.

In 2010, the IMF expects growth of around 4.5 per cent.

Africa is back—although a lot depends on a global recovery that is still in its early stages.

As the dust settles, one thing is clear—it could have been worse.

This recession could have been deeper and longer.

Indeed, this was the historical experience—traditionally, recoveries in Africa tended to lag well behind the rest of the world.

But this time was different. Why?

The main reason is that many African countries ran good policies before the crisis, policies that inoculated them against a more severe downturn — strengthening budget positions, reducing debt burdens, bearing down on inflation, and building comfortable reserve cushions.

Fiscal policy was appropriately countercyclical in two-thirds of sub-Saharan African countries in 2009.

A major benefit of the fiscal cushion is that it can protect the poor and vulnerable.

Fortunately, during the crisis, social spending was preserved.

Thirty-two countries operated conditional cash transfer programs.

Some countries adopted a developmental approach to social protection, encompassing public works programs and food security.

For many countries, it is still too early to remove the fiscal crutch.

The recovery is still hesitant and unsteady, in need of policy support— but plans should be laid now to begin rebuilding the buffers that served Africa so well during this crisis.

In 2009, the IMF committed $3.6 billion in zero-interest lending to Africa, more than three times greater than in 2008 and have revamped its financial toolkit to tailor lending to the diverse needs of an increasingly diverse group of African countries.

IMF has moved toward less intrusive conditionality, focusing only on core policy measures that are critical for stability, growth, and poverty reduction.

And programs must have sufficient measures to protect social spending and pro-poor initiatives.

The Fund has also adopted a more flexible approach to debt.

Countries with lower debt vulnerabilities and strong capacity to manage public resources will have greater leeway to borrow more from both concessional and non-concessional sources.

This is not the time to rest on our laurels.

Africa remains highly vulnerable to economic dislocation from many different sources.

So Africa will continue to face large, persistent and costly shocks, and these shocks will continue to cause great human suffering.

Without a secure standard of living, people might turn to unproductive or even violent activities, possibly leading to instability, a breakdown of democracy, or war—all compounding the initial suffering.

The twin challenges for Africa are to revive strong growth and reinforce resilience to shocks.

The first place to start is with macroeconomic policies.

A major lesson from the crisis is that countries that sowed in times of plenty were able to reap in times of loss.

Policy buffers must therefore be rebuilt, to allow for future countercyclical responses, with fiscal policy and with reserves.

Social safety nets must be strengthened—this is the first line of defence for the population against adverse shocks.

When we talk about shocks, we cannot ignore climate change.

In fact, this could well be the shock to end all shocks.

Unfortunately, it will hit low-income countries soonest and hardest.

Africa has contributed little to the carbon emissions that endanger our planet, but Africa is already paying the price.

Without action, Africa will suffer more from drought, flooding, food shortages, and disease—possibly provoking further instability and conflict. We must take urgent action.

New ideas

Now is the time to put new ideas on the table, as the United Nations High Level Advisory Group on Climate Change Financing—co-chaired by Gordon Brown and Meles Zenawi—is about to begin its work.

Much of this financing should come as grants or highly-concessional loans. For this, we need subsidies.

Ultimately, these will have to come as budgetary transfers from developed countries, drawing on scaled-up carbon taxes and expanded carbon trading mechanisms.

But these new revenue sources will take time to put in place.

So we need an interim solution. A “Green Fund” could provide a mechanism that could act as a bridge to large-scale carbon-based financing in the medium term.

Transforming Africa’s economy to boost living standards and increase resilience to shocks is a hefty agenda. Africa must take a leadership role.

Strauss-Kahn, is the Managing Director of the IMF.