The Impact of the Global Financial Crisis on Emerging and Frontier Markets in Africa

The financial crisis that has swept through the global economy since the middle of 2007 has led to a sharp deceleration in economic growth in the emerging and frontier market economies in Africa. The record growth performance of gross domestic product of about 6 percent per annum that Africa had experienced during 2002–07 has been seriously interrupted. The consequences on employment and poverty of this interruption could be dire. In the end, the economic impact of the crisis on Africa will depend crucially on the duration and depth of the global recession, the strength of the recovery, the revival of capital markets and foreign investment, and on developments in commodity prices. Ultimately, Africa’s emergence from the crisis will also depend on the policy reactions of the countries that are most seriously affected. Since the transmission channels through which the global crisis is affecting Africa varies significantly across countries, setting common policy guidelines for a group of countries as diverse as the emerging and frontier countries of Africa is impossible. But, policy makers must act! They are faced with the dilemma of responding to the short-term declines on output and rising unemployment that have already occurred, but in an environment of great uncertainty about the future course of the global economy and global financial markets. In this environment, it is important that any short-term responses do not impair medium-term prospects. This paper examines the channels through which countries are being impacted by the crisis, identifies the key policy challenges they are confronting, and makes suggestions for formulating appropriate fiscal policy, dealing with the decline in private remittances and tourism and the likely significantly weaker prospects for foreign direct investment, and for determining the scope for official financing. In general, it is essential that countries continue to pursue policy reforms that will place them in the best possible position to take advantage of the improvement in the global economy when that occurs.