Abdul Kamara

Albert Mafusire

Chouchane, Audrey

Leonce Ndikumana

English

Research Papers in Economics

Editorial Committee
Ndikumana, Léonce
Kamara, Abdul B.
Chouchane, Audrey
Mafusire, Albert
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The Policy Briefs on the Financial Crisis
(PBFC) are produced by the Complex of
the Chief Economist with contribution
from other departments of the African
Development Bank. The PBFC are inten-
ded to present analyses of experiences
and lessons emerging from the Financial
Crisis, so as to encourage policy debate
that guides the search for sustainable
solutions to the crisis.
The findings, interpretations, and conclu-
sions expressed in this paper are entirely
those of the author(s) and do not neces-
sarily represent the view of the African
Development Bank, its Board of Directors,
or the countries they represent.
The Policy Briefs on the Financial Crisis
are available online at http://www.afdb.org/
Copyright © African Development Bank 2009PANEL 2
The Financial Crisis, Trade and Regional
Integration in Africa
Dakar, Senegal, May 2009
AFRICAN DEVELOPMENT BANK GROUP
The 2009 African Development Bank
Annual Meetings
Ministerial Round Table Discussions and High Level Seminars
This Policy Brief was produced by Albert Mafusire, Research Economist;
Tonia Kandiero, Principal, Research Economist and Abdul B. Kamara,
Manager Research Division, with input from NEPAD, Regional Integration
and Trade Department, African Development BankEXECUTIVE SUMMARY
Trade has been a key driver of Africa’s
growth surge in the last ten years. The
sustainability of this trade-led growth is
now threatened at a time when progress
in the Doha Development Round has stal-
led and fears of incresaed trade protec-
tion are growing.
Africa’s share of global trade is still low,
amounting to only 3 percent in 2008. In
addition, intra-African trade remains
modest, representing just 8.3 percent of
exports and 9.3 percent of imports. The
continent’s poor performance is a result of
both infrastructural constraints and poor
trade facilitation such as customs and stan-
dards that make the movement of goods
on the continent costly, thereby reducing its
competitiveness in global trade.
Efforts to address existing constraints are
already underway and the crisis presents
an opportunity for Africa to accelerate the
pace towards deeper regional integration.
Issues of multiple memberships in econo-
mic communities, harmonisation and
coordination of regional trade policies,
and improvements in trade facilitation
have recently attracted renewed donor
interests. The Bank can play a critical role
in supporting deeper regional integration,
riding on the current wave of political sup-
port being expressed by its Regional
Member Countries (RMCs).
As the impact of the financial crisis conti-
nues to unfold, Africa remains challenged
to think out of the box, as it seeks appro-
priate responses to the crisis. In particu-
lar, the efficacy of some of the suggested
solutions needs further interrogation.1. INTRODUCTION
Trade has been one of the major drivers
of Africa’s growth surge in the last ten
years. The sustainability of this trade-led
growth is now threatened due to the glo-
bal financial crisis. While trade had been
correctly identified as one of the channels
through which the financial crisis would
impact the continent, its magnitude had
been underestimated. The real sector
effects, emerging largely through the
trade and investment channels, are pro-
ving to be more damaging than had pre-
viously been expected. Weakening global
demand for Africa’s exports and the resul-
ting decline in commodity prices, projec-
ted to reach about 45 percent in 2009, will
have far-reaching implications for the
continent’s growth prospects.
Furthermore, many African countries are
heavily dependent on mineral and oil
exports, which contribute up to 90 percent
of total export earnings and over 50 per-
cent of government revenue in some
countries. Consequently, both social and
infrastructure expenditures face possible
drastic cuts unless alternative financing
resources are found.
Given the limited linkages of export-orien-
ted sectors with the rest of the economy,
substantial job losses in these sectors
affect other sectors through the income
channel. As a result, reduced demand for
exports and a slowdown in private sector
activity, the continent’s growth prospects
are bleak: a meagre 2.8 percent real GDP
growth rate is expected for 2009, down
from 6 percent in 2007 and 5.7 percent in
2008.
Africa’s low share of global trade (only 3
percent in 2008), up to 50 percent of
which is accounted for by South Africa,
makes the situation even more dire. Intra-
African trade remains modest, represen-
ting just 8.3 percent of exports and 9.3
percent of imports. Low intra-African trade
is a result of both the lack of production
diversity and infrastructural constraints
that limit the movement of goods on the
continent. Notwithstanding improvements
in the business environments on the
continent, increased inflows of foreign
capital and participation by local investors
may not be realized now, especially as
increasing protectionist measures as a
response to the financial crisis limits
access to international markets. Support
to continental growth drivers will, therefo-
re, be critical in building the resilience of
African economies.
The African Development Bank has alrea-
dy been engaged in efforts that can pro-
mote intra-African and South-South trade.
In particular, accelerating processes
towards deeper regional integration, inclu-
ding addressing constraints such as over-
lapping membership, infrastructure deve-
1lopment and the harmonization of econo-
mic, trade and financial policies, is now
imperative. The Bank continues to sup-
port efforts to break the impasse in the
Doha Development Round and scaling up
resources for Aid-for-Trade initiatives.
There are also opportunities for the
African Development Bank, mainly in its
role as the premier development institu-
tion and the continent’s voice. The Bank’s
experience and capacity will be critical
assets in addressing some of the chal-
lenges, as the continent responds to the
financial crisis.
2. IMPACT ON AFRICA’S TRADE
PROSPECTS
As the developed world goes through the
worst recession since the 1930s, African
exports face a contracting market. Trade
revenue in Africa is projected to decline
by USD 251 billion in 2009 from an
expected level of USD 634 billion and
another USD 277 billion in 2010 (Figure
1). The loss in export revenue will have
serious implications for Africa’s current
account position. These projections may
turn out to be underestimations of the
impact of the crisis, as some countries
resort to protectionist responses. Already,
developed countries are providing subsi-
dies (industry support schemes) while
some developing countries are increasing
tariffs (India and South Korea) and restric-
ting import (Indonesia and Argentina).
These measures will have an effect on
the direction of trade flows.
African trade will be further squeezed
through a lack of trade credit. The World
Bank estimates a financing gap of up to
USD 700 billion for all developing coun-
tries. The impact of tightening credit mar-
kets will have dire consequences on trade
performance, further exacerbating the
effects of the crisis. Small-to-medium
enterprises (SMEs) that are key agents in
the diversification of African production
and job creation are particularly at risk.
Export-oriented SMEs have difficulties
accessing low-cost foreign currency
Source: AfDB, March 2009
denominated working capital, leading to
low capacity utilization. The financial crisis
reinforces existing market failures that
result in sub-optimal allocation of credit to
SMEs, while the current regulatory frame-
2works also contribute to these difficulties
as banks respond in a pro-cyclical man-
ner.
At the regional level, the crisis has dam-
pened prospects for increased intra-
African trade by worsening financing
constraints for the RECs. African govern-
ments have not been able to fully provide
for the financial requirements of Regional
Economic Communities (RECs) during
the growth period. The financial crisis will
compound the inability of these countries
to meet their financial obligations to
RECs, undermining their ability to effecti-
vely carry out their mandates. The ratio-
nalization of the RECs, notably to reduce
multiple memberships by African coun-
tries, may partly reduce the burden that
countries face in meeting their obligations
to different regional bodies.
The poor state of infrastructure and inade-
quate trade facilitation in Africa are among
the major factors contributing to lower
intra-African trade. The rolling out of
regional infrastructure projects and trade
facilitation programs, especially within the
context of the Enhanced Integrated
Framework and Aid-for-Trade, is critically
dependent on effective delivery of aid
commitments. It is especially critical to
prevent a retreat from infrastructure deve-
lopment and trade facilitation which would
further weaken the continent’s ability to
absorb the impact of the crisis and further
increase its marginalization in the global
economy. Furthermore, deepening regio-
nal integration requires adequate infra-
structure and trade facilitation, both of
which will need to be funded through sca-
led-up external assistance.
3. OPPORTUNITIES FOR
AFRICAN COUNTRIES
South-South trade – Trade barriers in
Africa remain, with an average tariff rate
of about 19 percent compared to global
tariff peaks at 15 percent. Currently, only
40 percent of exports from developing
countries go to other developing coun-
tries. Thus, concerted efforts are requi-
red to reduce trade barriers in develo-
ping countries to promote South-South
trade.
Fostering regional integration – The
Bank’s medium-term strategy underlines
the growing importance of regional econo-
mic integration and infrastructure develop-
ment, under NEPAD’s development agen-
da. The Bank is ready to join forces with
other partners whose resources can be
leveraged. Deeper political support, as
indicated by the adoption of the Plan of
Action for Acceleration of Industrialization
by African Ministers of Trade, Mining and
Industry in 2008 must be followed by
concrete actions. The continent can take
advantage of current donor interests in
the Spatial Development Initiatives
3(SDIs(1). SDI encourages integrated deve-
lopment within a given space, defined by
its economic potential rather than by poli-
tical exigencies.
Regional infrastructure development –
Financing for infrastructure has declined
significantly, particularly from bilateral
donors. The Bank is willing to contribute
to efforts to fill this gap through a careful
selection criterion that maximizes the eco-
nomic value of projects by stimulating a
diverse range of economic activities in a
regional context. But Bank resources
alone will not close the financing gap.
Other donors and multilateral institutions
will have to complement Bank efforts. In
this regard, the bank will continue suppor-
ting efforts by the Infrastructure
Consortium for Africa (ICA) in implemen-
ting the NEPAD action plan. RECs should
move quickly with programs that enable
the Bank to use its integrated structure as
a source of advantage by building syner-
gies across public/private sectors and fos-
ter Public-Private Partnerships (PPPs).
For instance, development corridors
under the SDI could generate significant
economic value through the configuration,
prioritization and promotion of inter-rela-
ted infrastructure and large-scale econo-
mic sectoral investments in defined geo-
graphic areas. This will optimize the use
of infrastructure, encourage value-added
processing, enhance the competitiveness
of African economies and stimulate
investment-led growth.
Implementing comprehensive policy
reforms – There is evidence that the glo-
bal economic landscape has its own chal-
lenges, but it offers opportunities as well.
The Bank continues to strengthen its sup-
port to its RMCs for comprehensive policy
reforms, including strategies for deepe-
ning regional integration efforts. This sup-
port is critical, especially in this period of
economic crisis where countries face a
real risk of policy reversal.
4. THE ROLE OF THE AFRICAN
DEVELOPMENT BANK
Counter-cyclical role – There is a need for
prompt action to mitigate the impact of the
financial crisis and avoid a “reverse deve-
lopment” in the Bank’s RMCs. The Bank
has quickly moved to implement short-
term targeted interventions to mitigate
procyclicality in the current financial envi-
ronment. Two important objectives in this
regard are: offsetting the decline in
government revenues linked to falling
4
(1)The term SDI refers to a multi-national development in infrastructure that links more than one country and it
also includes all the necessary government policies (tax breaks, investments incentives, government support,
etc.).An SDI can include a development corridor but it can also be a development such as trans-frontier Game
Park of which there are several examples in Southern Africa.trade volume, and compensating the
decline in credit availability. On the trade
front, the Bank will address the short-term
trade credit shortage through the Trade
Finance Initiative that seeks to make avai-
lable trade financing through existing
regional and private banking institutions.
Furthermore, the Emergency Lending
Facility, a multi-faceted revolving credit
facility that is disbursed in Euro or US dol-
lar, has flexible utilization requirements
and quick disbursing. These two mea-
sures compliment exisiting instruments,
namely budget support to governments
and credit lines to commercial and deve-
lopment banks. Efforts are also underway
to scale up the Bank’s financing from
about USD 5.2 billion per annum projec-
ted before the crisis to between USD 8.8
billion and USD 10.5 billion per annum.
Bank support to regional integration –
Deeper regional integration within Africa is
imperative to build markets and new
opportunities for growth, job creation and
improved living standards; to create more
robust, competitive and diversified econo-
mies; and, to attract and reward new
sources of investment finance. With the
Bank’s RMCs having identified regional
integration as a key strategic objective for
the institution, an increasing amount of
resources allocated in support of regional
integration is required. However, the Bank
faces resource constraints, and an increa-
se in its resource envelop will be required
to enable it to effectively support the
regional integration agenda.
Strengthening financial integration –
Deeper regional trade integration will
require strengthening financial integration.
This will, in turn, require a comprehensive
program aimed at strengthening and
streamlining financial sector policies and
financial infrastructure (regulatory frame-
work, payments systems). This will help in
the development of strong financial insti-
tutions (banks, non-bank financial institu-
tions bond and capital markets) and
enhance the financial system’s ability to
mobilize and allocate resources, especial-
ly medium and long-term resources for
development financing. This is critical for
supporting private sector development,
regional and international trade and, ulti-
mately, growth and poverty reduction.
While some actions have been taken in
this area, both financial and human
resources limit the Bank’s reach and
impact. Coordination and collaboration
with other players should be pursued.
Voice for and within Africa – The Bank
has committed itself to be an effective and
credible voice for and within Africa. While
there is substantial knowledge of the
impact of the financial crisis, the impact is
differential and is continuing to unfold. To
effectively project Africa’s voice as well as
5meaningfully influence RMCs’ policy
directions, the Bank has to possess
superior information and demonstrate a
deeper understanding of the continent
and the challenges it is facing. This is
possible through:
• An intensive information gathering
process that allows for the conduct of
critical analysis and the drawing of
conclusions to inform country
responses. The establishment of a
network of information sources in
selected parts of the continent, as
recently implemented by the Financial
Crisis Monitoring Group, need to be
strengthened and expanded.
• Using its convening power, the Bank
continues to facilitate the process of
developing a common African position,
especially at the G-20 level and Bretton
Woods Institutions. In addition,
through its participation at various
international forums, the Bank
continues to project Africa’s voice to
ensure its effective participation and
representation at the international level.
• In the same vein, the Bank has added
its voice to efforts calling for a speedy
conclusion of the Doha Development
Agenda, which remains critical to
stimulating the global economy. A
successful conclusion of the Doha
Round would help to better integrate
developing countries, including those in
sub-Saharan Africa, into the global
trading system, which would spur global
and regional growth and facilitate
Africa’s attainment of the MDGs.
Recent developments have shown that,
instead of forging ahead with greater
trade liberalization, developed and
emerging economies are sliding back
into a protectionist mode. Africa and
other developing countries may emerge
as the worst victims of a rise in
protectionism.
Attendant risks can be avoided if Africa
can realize its full potential in regional
trade. Yet it has become very clear that
though the Bank has a strategy to address
major trade constraints on the continent,
its implementation will be limited by the
inadequacy of resources, thereby requiring
a longer time span to unlock existing
potential. Securing a General Capital
Increase (GCI) may help the Bank to
mobilize more resources to help move the
development agenda forward in a quicker
and more effective manner.
67
DISCUSSION ISSUES
1. What preferential arrangements should be put in place to help the integration of Africa
into the global trading environment?
2. How best should national governments respond to the crisis without jeopardizing pro-
gress on the regional integration agenda in Africa?
3. What additional arrangements are needed to boost south-south trade?8
Other Publications in the Series
N° 1/2008 : The Current Financial Crisis: Impact on African Economies, November 2008.
N° 1/2009 : Impact of the Financial Crisis on African Economies - An Interim Assessment,
January 2009.
N° 2/2009 : Preventing a Credit Crunch in Africa : The Role of Financial Regulation,
January 2009.
N° 3/2009 : Africa’s Voice, Representation and Effective Participation, January 2009.
N° 4/2009 : Trade, Investment and Domestic Resource Mobilization, January 2009.
N° 5/2009 : Commodities, Export Subsidies, andAfrican Trade during the Slump, February
2009.
N° 6/2009 : What can the G20 do with trade to benefit Africa?, February 2009.
N° 7/2009 : An Update on the Impact of the Financial Crisis on African Economies, March
2009.
N° 8/2009 : Impact of the Crisis on African Economies - Sustaining Growth and Poverty
Reduction, March 2009.
N° 9/2009 : The Global Financial Crisis and Fragile States in Africa, May 2009.

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