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Long-Term Commitment Vital for Africa’s Growth

By Donald Kaberuka, president, African Development Bank

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Further investment, particularly in food security and infrastructure, is needed if Africa is to reduce its dependency on outside assistance.

The Pittsburgh Summit comes at a pivotal stage in dealing with the financial crisis. At a global level, the world has seen some first tentative signs of recovery. But at the same time, there is considerable uncertainty whether this is a false dawn or a W-shaped recession. In either case, the message from Africa is the same. The real economy in most of its countries has been hit hard. To avoid further damage, action is required now. Additional investment is needed.

The impact on Africa

Initial expectations that Africa would be protected from the impact of the crisis have proved misplaced. Although they vary from country to country, the negative effects are now well documented: minimal or no access to credit, a contraction in trade, declining remittances and withheld foreign investment. As banks shore up their capital and focus first on their domestic constituencies, it could take years for financing flows to Africa to resume. In effect, Africa is unfairly bearing an additional risk premium.

The fall in exports and capital inflows makes it difficult for countries to maintain adequate levels of foreign exchange reserves, thus increasing exposure to future shocks. To maintain pre-crisis growth rates, there is an investment gap of some $50 billion. To reach the Millennium Development Goals, that gap exceeds $117 billion.

Additional investment is affordable, a small fraction of that already deployed within the G20. Without it, growth will be well below the level needed to reduce poverty. Indeed, through no fault of its own, Africa will be worse off than it was before, and less able to participate in the eventual global upturn.

Take two critical cases: infrastructure and food security. Even before the crisis, Africa faced a substantial deficit in infrastructure. In most African countries, infrastructure is a major constraint on doing business, depressing firm productivity by about 40 per cent. This imposes substantial additional costs to trade, reduces Africa’s competitiveness and hinders economic integration. To correct it requires long-term sustained investment. Instead, as budgets shrink, projects are delayed or cancelled, and crucial maintenance is neglected.

Food security has risen up the agenda, and rightly so. The United States brought it to the fore at the G8 summit in L’Aquila in July 2009. But the root cause of food insecurity in Africa is poverty: lack of money to buy food, thin markets, inadequate basic rural infrastructure to connect farmers to markets, high transport costs, poor health and limited irrigation. More than any other continent, Africa depends on rain-fed agriculture and, therefore, on the vagaries of the weather. The effects of climate change are already here and impose new costs.

Africa’s response and the contribution of the African Development Bank

Fortunately, previous reforms have given some of Africa’s economies a degree of resilience. Notwithstanding pressures to do otherwise, African leaders have decided to maintain these efforts. But the overriding limitation is a lack of resources. For almost all, there is no possibility of a fiscal stimulus. Three quarters of investment in Africa is financed domestically. Governments are making additional efforts to increase domestic resource mobilisation, but that is undermined by declining revenues and weaker private sector activity. While the G20’s focus on social safety nets is understandable, very few African countries have the resources to build them.

The African Development Bank (AfDB) has taken exceptional measures to respond to the unprecedented demand from its member countries. Consistent with the recommendations of the G20, it has frontloaded its resources, sped up implementation, unlocked resources through portfolio management and put new instruments in place to provide emergency liquidity and to support trade finance. It has done so while maintaining a sound balance sheet. But the results are predictable: the AfDB has doubled the pace at which its resources are consumed and it has run out of headroom.

The position is stark. Unless the AfDB increases its capital base, new borrowing by both the public and the private sectors in Africa will be severely curtailed. Nor will it be able to play a countercyclical role in response to future shocks unless it has the necessary resources on which to call. The same applies to the bank’s poorer member countries, which rely on concessional resources from the African Development Fund. Without an early replenishment, next year there will be a hiatus in the fund’s commitments to low-income countries.

What Africa wants from the Pittsburgh Summit

The G20 has naturally focused thus far on stimulating global demand and repairing financial systems. Notwithstanding the impact on its people, Africa remains on the margin of global discussions. Africans hope that the Pittsburgh Summit will recognise and respond also to the needs of poorer countries, and that G20 leaders will show the same sense of urgency and determination. If it does so, it will enhance its legitimacy in global governance. Failure to do so will call it into question, at least as far as those many countries not represented are concerned.

The G20 has provided substantial additional resources through the International Monetary Fund, but these are essentially for support for the balance of payments. Africa wants less damaging volatility. It wants to be able to plan ahead with confidence. It wants to reduce dependency on assistance. It therefore needs longer term investment for growth.

At L’Aquila, the G8 leaders yet again repeated previous commitments of development assistance. But, frankly, performance is mixed, as shown by the amount that still needs to be delivered by 2010 if G8 members are to meet their commitments made at the 2005 Gleneagles Summit. What is needed from the G20 are time-bound plans for implementation.

Africa not only wants its voice heard but, in a changing international architecture, also wants more support given to African institutions. Specifically Africa’s finance ministers and central bank governors have urged the G20 to agree on an early and substantial replenishment of the capital of the AfDB at Pittsburgh, and to replenish concessional resources through the African Development Fund. We look forward to an explicit commitment from the G20 to do so.

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