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Economic ill winds hitting Africa

9 March 09 09:23 GMT

By Andrew Walker
Economics correspondent, Dar-es-Salaam, Tanzania

Africa is a long way from the eye of the global financial storm. But there are early signs of the international economic winds doing damage to the continent.

Many African countries have seen a real revival of economic growth in the last decade. Those gains could be in danger.

The International Monetary Fund (IMF) is certainly worried, and along with President Kikwete of Tanzania, has convened a conference on the problem in Dar-es-Salaam, to run from Tuesday to Wednesday.

Less than a year ago, the IMF's forecast for sub-Saharan Africa was economic growth of 6.7% in 2009.

Its most recent projection is sharply lower, between 3% and 3.5%.

That translates into very weak growth in output per person, which is a rough measure of average living standards.

To get some perspective on how much difference this makes, suppose the population of the region continues to grow at 2.4%, as it did in 2007.

With economic growth of 3% it would take 118 years to double output per person.

But at 6% economic growth it would take 20 years. At 9% - the kind of performance China has achieved in recent years - it would take just 11 years.

Oil price impact

The good news for Africa is that it has little direct exposure to the credit crisis. African banks have not invested much, if at all, in the problem financial assets at the heart of the crisis.

It might also help that a large share of the region's economy is agriculture for domestic markets, which is less exposed to the international storms.

But there are likely to be several indirect effects.

The global downturn has undermined demand for many industrial commodities, which are important exports for several African countries.

This includes oil in Nigeria, Angola and Equatorial Guinea, and copper in Zambia.

Prices of both have fallen sharply since last summer.

Crude oil is down by about 70% from its peak last July, and copper by about two-thirds.

These developments are, however, helpful for those countries that are importers of these commodities.

There are many anecdotal reports of other exports also being affected by weaker demand from the rich countries, including cut flowers and textiles.

Vital funds

Remittances, money sent home by people working abroad, also look vulnerable.

The money can be used to support family living standards, or to invest in small enterprises.

In 2007, $19bn (£13bn) was sent home by Africans, more than double the level just three years earlier.

But three-quarters of African remittances come from Western Europe or the US, which are already in recession.

Further job losses are likely, and migrants are bound to be affected.

Another possible casualty is foreign direct investment - when a foreign firm buys a large stake in a local one or sets up a new operation of its own.

That too has grown rapidly in the last few years in Africa, much of it linked to the extraction of industrial commodities.

More than $30bn poured into African economies in 2007, not very far short of what it got in aid - $39bn dollars in the same year.

The swings in commodity prices make investing in the business look less attractive, and foreign firms with declining profits and difficult credit markets will find it harder to fund new projects.

Africa cannot rely on being immune from global financial problems.

More aid?

African banks are in reasonable shape now, but weaker economic growth could mean more firms getting into difficulty with loan repayments, which would in turn increase losses for banks.

There is also a possibility that foreign owned banks with problems at home might want to pull funds out of Africa.

In several countries more than half of banking business is in the hands of such banks.

The slowdown is also likely to hit government tax revenues.

The IMF says some countries can cope - they have used the good times to strengthen government finances.

But others will struggle, and will have to make spending cuts unless they get more aid.

Aid is controversial. Some say it is often wasted.

But one of the big messages from the IMF is for the rich countries - it's time to step up, not cut back on aid.

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