Page last updated at 00:54 GMT, Friday, 24 October 2008 01:54 UK

African investment could be hit

BBC News has been running a series of commentaries this week by economists on the challenges facing the global financial system. In the final instalment, Shanta Devarajan considers the implications for Africa.

Shanta Devarajan
Shanta Devarajan is Chief Economist of the World Bank's Africa Region

We at the World Bank think that the effects of the global economic crisis on Africa will be at least fourfold.

First, there could be fall-out within the banking system because of foreign ownership.

If a parent bank in the US or Europe is suffering, it might have an effect on a bank in Africa.

We do not think, however, that African banking systems are going to suffer the kind of turmoil that the US and European banking systems have been suffering.

African banks tend to keep their loans on their own balance sheets; there is a very small secondary market; and the market for derivatives is almost non-existent.

Several African countries are suffering signs of macroeconomic imbalances quite independent of the financial crisis

The second and biggest effect is going to be the potential decline in private capital flows.

In the last three years, private capital flows have been rising faster in Africa than in any other part of the world.

If the global credit crunch leads to a decline in capital flows and a reduced appetite for risk, this could severely affect African countries that have been relying on these flows for their infrastructure investment.

The third area is the potential decline in commodity prices.

This has already started. We have just seen the price of oil fall to nearly $70 a barrel.

However, we are confident that today we are a little bit better prepared to cope with falling prices than we were in the 1980s, when oil prices fell and threw Africa into major turmoil.

Finally, there are several African countries that are suffering signs of macroeconomic imbalances quite independent of the financial crisis.

Ethiopia, for example, has an inflation rate of about 60%.

These countries are going to have to undertake some kind of macroeconomic adjustment, and the presence of the financial crisis may speed this up.

Of course, there is also a danger that foreign aid might decline.

But that's based on two other events. One is that there's a major recession in the US and Europe, or in the donor countries.

And second, whether the spending allocations that governments make will lead to cutbacks in foreign aid.

There is always that risk, but we are reasonably confident that there may be other ways of shoring up some of those resources, because for many aid is a matter of life and death.

Shanta Devarajan is Chief Economist of the World Bank's Africa Region.

Also in the series:

Linda Yueh: China, 'engine of growth'

Jayati Ghosh: India: boom, what boom?

Jagdish Bhagwati: Capitalism is alive and kicking

Robert Mabro: Middle East 'bound to be affected'

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