The Impact of the Current Global Crisis on Ethiopia from an African Perspective

Addis Ababa Chamber of Commerce and Sectoral Association

By

Alemayehu Geda

Addis Ababa University

Addis Aaba June 2009

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Impact of the Financial Crisis on Africa

Main Message

Ethiopia is feeling the impacts of the crisis

Short run impact-less development finance

Medium term impact - global economic slow down will reduce commodity prices and demand for African exports (and hence export and GDP growth slow down)

Countries may need to have strategic response to maintain growth trajectory

Explore alternative sources and markets (Emerging economies)

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Economic Performance up to 2007: robust and strong

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Rising Investment underpinning growth

World Africa

2003-08 Africa growing 6.5 better than global average of 4%

Export growth (high commodity prices) and rising investment main drivers

Exports the main driver of growth

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Growing Integration of Africa into the global economy

Source: IIF 2008

Some indicators:• private capital flows rising•The share of trade in GDP increasing•Regional debt markets are expanding•More investors interested in African equities•Remittance growth

Trade is a growing share of GDP

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Remittances a major source of external finance

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The Crisis and the Impact of the Crisis on Africa

A Simple narrative of the crisis

– The subprime markets

– McCulloch (2008) 3 fundamental factor

The Channels through which it will affect Africa (see Tables)

The Effect on Africa:

– Direct (see details)

– Indirect (see details)

– What to do? (see details)

A Simple narrative of the crisis

– The subprime markets

– McCulloch (2008) 3 fundamental factor

The Channels through which it will affect Africa (see Tables)

The Effect on Africa:

– Direct (see details)

– Indirect (see details)

– What to do? (see details)

Transmission Channels

(IDS 19 policy makers)

Exports

FDI

Exchange rate

World Interest rate

Remittance

Declining aid

Lower growth

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The Direct Effects

The Direct Effects

– A) Weakening of local and foreign investor confidence see next slide)

– B) Slowdown in Private Sector Lending and Aid flows

– C) Increased Role of Governments in the Financial System and Beyond

The Direct Effects

– A) Weakening of local and foreign investor confidence see next slide)

– B) Slowdown in Private Sector Lending and Aid flows

– C) Increased Role of Governments in the Financial System and Beyond

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Indirect Impacts 1

The The growth slow-down in industrial countries and evolution of global interest rate in the course of this crisis.

– These two events figure prominently in affecting the global commodity market upon which African countries depend for more than half of their GDP (Ethiopia over 90% of exports).

– Using IMF’s economic outlook (IMF, April, 2009) the advanced economies are expected to grow at -3.8% in 2009 and at 0.0% in 2010.

– (LIBOR) is expected to be 1.6 and 2.0 in 2009 and 2010 respectively for Euro deposits (and 1.5 and 1.4 for US dollar deposit), respectively.

• Import from Africa is expected to fall by 5% in EU&Asia; 2% in US

• Commodity price is declining (Metal and oil lost 30 and 65% since mid 08; cocoa and coffee about 23%)

• Africa’s ToT will deteriorate by 3.2%; Tourism declined 3 pp form 07

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Indirect Impacts 2

2) Possible decline in official development assistance.

– that may result from the slowdown in economic growth in industrialized countries.

– The crisis may entails a decline in official capital flows.

– Thus we have assumed AID to decline by 8% each in 2009 and 2010 from its current level of about $40 bln, following OECD forecast in April, 2009.

• With large fiscal cost in donor courtiers: no G8 honouring of commitment of 0.51% (2010) and 0.71% (2015) of GNI

• Even before the crisis donors were not on course for their target

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Indirect Impacts 3

3) A decline in private capital flows to Africa in general and that of foreign direct investment (FDI) in particular.

– Both FDI and private capital flows are assumed to decline by 20% in 2009 and 2010 each following UNCTAD’s forecast.

– Similarly, World Bank estimated a decline in remittance to Africa in the range of 1 to 7%. Although we have not simulated this effect, it might have similar effect to AID or private capital flows. (talk of reverse remittance)

• Likely reversal of financial flows to Africa (WB, half )

• New FDI will decline; implementation of current project may be decline

• Some courtiers are extreemly dependent on Reimitance (Lesotho 60%; Uganda 40%; West African 15-25%, Ethiopia 2.5bln). North Africa may suffer most

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Indirect Impacts 4

4) fourth scenario examined is the impact of change in oil prices.

– The effect oil price have an asymmetric effect on oil importers and exporters.

– According to the latest IMF Economic outlook (Jan, 2009) the oil price is expected to decline by 48.5% in 2009 (from about $97 in 2008) and to increase by 20% in 2010– BOP crisis for oil importers such as Ethiopia

– Unpredictable spending plan for exporters

– All these are happening simultaneously and hence a joint simulation of all combined.

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The Combined Effect of the Crisis

The combined Effect of the crisis on Africa could be categorized in two main features

– (A) Slow down in economic growth in Africa

– (B) Macroeconomic instability and the challenge of macroeconomic management

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Indirect Impacts 1

The growth slow-down in Africa

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2008 2009 2010

World Bank Forecast 5.4 4.6 5.8

IMF Forecast

November, 2008 5.2 4.7 ..

January, 2009 5.2 3.4 4.9

April, 2009 5.2 2.0 3.9

Africa: Real GDP Growth Rate Forecasts

Source: World Bank (2009) and IMF (2008b &c ; 2009)

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Our combined simulation shows

We note the following on growth slow down

– Recent revision implies about 40 million below poverty

– Our simulation shows that the crisis (compared to base run, in no-crisis)

• Reduce growth by by about 2.7 %

• Exports may contract by about 4 and 3.6% in 2009 and 2010, respectively (SSA being 8 and 7 %)

• Government spending, saving and investment (which were driving growth) will also decline

– Conclusion: the scenario is very gloomy

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Our combined simulation shows

AfriMod Simulation Results

Sub-Saharan Africa Ethiopia (Applying SSA Projected rate)

Forecast Years 2009 2010 2008 Values in Millions

of US $

2009 2010

GDP (real GDP level) -2.71 -2.55

Based on Government figure (10%) 7.3 7.1

Based on IMF figure (6%) 2.3 2.1

Government Spending -9.02 -8.88 19.6**

Private Investment -0.01 0.00 9.3**

Total Export -8.17 -7.27 1530.0 1405.0 1302.9 Export Agricultural Raw Material* -5.24 -6.03 350.0 331.7 311.7 Beverage* -2.54 -2.73 553.0 539.0 524.2 Food Export* -2.04 -2.30 215.0 210.6 205.8 Mineral and Metal Exports* -1.50 -1.59 79.0 77.8 76.6

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IMF Outlook for Ethiopia

IMF Forecast for Ethiopia (WEO, April 2009)

IMF Forecast

Year 2006/07 2007/08 2008/09 2009/10

Real GDP in Billions of Birr, Constant Price 104.2 116.3 123.9 132.0

GDP Growth rate 11.5 11.6 6.5 6.5

Inflation rate 15.8 25.3 42.2 13.3

Gross Domestic Saving (% GDP) 3.2 1.8 0.8

Gross Domestic Investment (% GDP) 21.2 19.9 16.7

Fiscal Balance, exl grants (cash basis) % GDP -8.0 -7.0 -5.4 -4.5

Gross Official Reserves (in months of imports of goods and nonfactor services of following year)

1.9 1.2 1.8 2.3

Balance of Payment (% GDP) -4.5 -5.8 -5.8 -5.8

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B) Macroeconomic Instability &Mgt need

Macro Features and Macro Management Challenge– Apart from the growth slowdown and its detrimental effect on poverty

reduction, the possibility of macroeconomic instability and the required macroeconomic management

– In 2008 African inflation 9% to 15%, Ethiopia over 60% (IMF, 2008d). This is mainly the result of the oil and food price shocks along with the demand pressure (expected to fall to 9% ). Same in Ethiopia 42% and 13%

– IMF (2009) noted that the current account balance for the non oil exporting African countries is projected to deteriorate on average from about 5% of GDP in 2007 to about 5.75% in 2008 and 6.25% in 2009. (Eth= 6%)

– The slowdown in trade is reducing government revenue, thereby worsening

the fiscal position of many countries.– The combined effect of the stress on major macro balances noted above,

points to the macroeconomic challenges of the crisis outlined above

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Policy Response and Strategy

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Strategy 1: There is no single recipe for all African countries, as circumstances differ across countries so Ethiopia’s reaction could be unique, but

– actions to safeguard financial systems are also crucial in Africa

• strengthening of crisis management systems and contingency planning, the enhancement of oversight of banks’ liquidity management and the improvement of risk management to enable the likely rise in non-performing loans.

Strategy 2: Policy direction in Ethiopia should be prudent macro managment

– policy response to the crisis in Ethiopia need to focus on domestic resource mobilization, prudent macroeconomic management, enhancing regional integration through intra-Africa trade and finance and strengthern domestic market.

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Policy Response and Strategey

Strategy 3: Find solution in terms of market and finance from emerging economies such as Brazil, Russia, India and China, in particular from the latter two

Strategy 5 There is no doubt about the impact of the crisis on Ethiopia. In fact the study shows that even the magnitude is very large. – The crisis also affects both the public and the private sector.

– Thus, there is a need for dialogue between the government and the private sector (including researchers, development partners) to specifically identify the problems and design ways of addressing them

– Do not underestimate the impact

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Policy Response and Strategey

Strategy 6 Some initiatives are put forward by the IFIs to assist the African countries in managing the crisis. WB, IMF and AfDB are providing emergency lending for countries in need of urgent liquidity. – The government of Ethiopia in collaboration with the private sector need to examine

these avenues and make a compelling case to access these resources

– As events are unfolding quite rapidly in the global economy, frequent evaluation and revision of strategies need to be part of the strategy.

– THANK YOU-

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Policy Response and Strategey