On a global level, how would you analyse the financial and economic crisis? Where does responsibility lie?
For some, it was originally a financial crisis due to the failure of regulatory procedures. This failure first caused chaos in the financial markets and then in the banking system. This resulted in a credit crunch which led to the curbing of investment eventually affecting the real economy.
For others, the crisis was the result of inequitable development in which a minority controlled most of the wealth to the detriment of the majority, who had to rely on credit for housing, food, healthcare, education, etc. With the poor falling further and further into debt, the exacerbation of the rise in the prices of food commodities and energy led to the high-risk mortgage-backed security market crisis, or better known as the “subprime” crisis. The securities on this market involved high risk mortgages, with no additional risk premium, awarded to clients who could not normally obtain credit. This financial market crisis would affect the banking system, then the real economy which, in any case, grew above its potential, that is to say above consumer purchasing power. Based on this theory, developing countries constitute consumers who are on the fast track to becoming poor. In fact, these countries’ export earnings for some products are evaporating, leading to a reduction in imports from developed countries.
This is a bit like the age-old question “which came first, the chicken or the egg?” Was it first a financial problem affecting the real economy, or vice versa? No one can say for sure because it is difficult to understand the collapse of the financial system if it is based on a solid real economy, nor the collapse of a sustainable economy when there is the least bit of weakening in the financial markets. Thus we have to believe that the current crisis is that of a real economy that became fragile at the same time that equity holders had the false impression of easy gains that were not explicitly linked to real economic performance. In some circles this is referred to as the “casino economy”.
According to the World Bank, “Direct effects of the global financial and economic crisis are likely to be much more limited than in other regions, because African economies are less integrated into the international financial system and rely relatively less on international capital and bond markets to finance investment.” (Global Economy Prospects 2009). What do you think?
While Bretton Woods institutions initially focused on the purely financial aspect of the crisis concluding from this perspective that Africa was not very implicated in international financial markets and thus less exposed, they now assess the full extent of the crisis. On 3 March 2009, the IMF published a study in which it estimates that the poor countries, generally those in Sub-Saharan Africa, are exposed to a “third wave” of the crisis, after developed and then emerging countries. Developing countries are losing the benefits of the adjustment efforts undertaken during the last decade and that is due to some financial speculators and the lack of transparency in the economic management of developed countries.
The IMF identified "22 low-income countries that face the most acute financing constraints", their external reserves having fallen below the equivalent of three months of imports (International Monetary Fund, Press Release No. 09/53 (Washington, 3 March 2009). These countries face a sudden decrease in growth (just greater than 4% this year compared with 6% initially forecasted) of their exports, in foreign direct investment in their country, and the remittances from their citizens working abroad. The IMF estimates that "to keep their external reserves at safe levels", they will need at least 25 billion US dollars in additional concessional financing, and up to 140 billion US dollars "if global growth and financing conditions deteriorate further"; the number of vulnerable countries could then almost double. The IMF Director, Mr. Dominique Strauss-Kahn, urged donors “to rise to the challenge and provide the financing needed to preserve these hard-won gains and prevent a humanitarian crisis”.
For their foreign currencies and thus for their imports of capital investment goods, UEMOA member countries rely heavily on exports of raw/unprocessed agricultural and mineral products of which the price has dropped due to the economic recession in the North. This could have medium-term effects on production capacities of countries in the sub-region.
On the other hand, the stimulus plans of UEMOA partner countries require considerable financial resources that could affect the financial support from which our zone benefits. We are not there yet and I think that developed countries realise that it is important not to create another bloodletting in the South which would only exacerbate the economic crisis, notably with further contraction of their markets.
However, trade between emerging countries and West Africa has increased greatly over the last ten years. This could accelerate, with the deepening of the crisis in developed countries, and particularly so if these countries where tempted by protectionist measures or a propensity to reduce their financial support.
Today, what do you think the average growth rate would be for UEMOA countries in 2008 and 2009 (even 2010)? Are UEMOA countries being affected by the economic and social crisis?
According to the UEMOA Commission’s forecasting service, the growth rate in 2009 will be around 4.9% compared with 3.9% in 2008 if the effects of the global financial and economic crisis do not get worse than they are today. The majority of the population in our countries is essentially dependent on agriculture and the service sector, notably the segments of these sectors which are geared towards the domestic or sub-regional market. In the short-term, this will lead to a relative isolation from international market conditions which is due to the short-term inelasticity of agricultural supply to prices shocks.
The major short- and medium-term risks for most economies come from variations in climate conditions. These conditions are deteriorating due to this global environmental crisis known as climate change but which, in fact is much greater with prevailing lifestyles in the world in general, and especially in developed countries, having a destructive effect on natural resources.
Furthermore, our growth forecasts also depend on the socio-political context and the reestablishment of political stability in some States. From this viewpoint, what has just happened in Guinea-Bissau pulls into question some forecasts if the situation is not resolved rapidly. Of course, Guinea Bissau’s economic weight does not affect the evolution of the Union’s GDP, but we believe that any fragile socio-political situation can upset the economic dynamics in the UEMOA zone more or less in the long-term.
West Africa has to face two successive crises : the food crisis between 2007 and 2008 followed by the financial and economic crisis. Do countries today have the means to deal with this new situation? Which countries are/will be the most seriously affected? Why? Which countries are best equipped to deal with this crisis? On which resources can they rely to respond effectively?
Looking at the changes between the second half of 2008 and now, we can see that countries in the sub-region have been able to implement some safeguard mechanisms, notably in the areas of food production and the supply of petroleum products. Countries which are doing the best are those that are effectively exploiting their comparative advantages, notably those that are doing everything to stimulate their agriculture and agro-food industries.
In fact, the two crises that you mentioned are precursors to this current crisis which is one and the same and is now shakening up the world . Of course, the mechanisms that resulted in the crisis within developed economies appeared as a sharp rise in food prices in Africa and even in the developed world. This occurred when the crisis was just beginning thus the mechanisms were able to mask the deep relationship between the two types of crises.
Coming back to the crises to which you referred, on the one hand, the consequences of the global crisis were seen early on in the sharp rise in oil and basic food commodity prices. This was due, in large part, to the backwardation of finance market speculators leaning towards commodity markets including food commodities. On the other hand, the economic and financial crisis was also the result of the bursting of real estate, financial and commodity speculative bubbles.
Is the banking sector in the UEMOA zone sound? Why? How is this sector adapting to the financial crisis? How is the Abidjan stock market reacting?
Our banking sector is greatly evolving due to the arrival of many banks from South Africa, Nigeria and Maghreb countries, in particular Morocco. Having become more international, these banks are seeking to exploit the potential of the West African market. This is a positive trend, even if there are concerns that the effects of the international financial crisis will reduce available resources on the international financial market.
The Union has formidable foreign exchange reserves. The cover rate of the monetary base was greater than 125% at the end of October 2008. Similarly, the evolution of lending to the real economy was relatively favourable despite crowding out which took place in the second half of 2008 by public loans issued to deal with the effects of the food and energy crisis. As of September 2008, banks have been rather tepid regarding the issuing of long-term credit, but that is related to the wariness of international bank branches located in the zone fearing the effects of the crisis on the parent entity.
Of course, we have to worry about the recessionary effects of a slowdown of financial flows from the international financial market as well as parent entities of some banks draining bank liquidity in the zone. Such changes will compromise production capacities in the medium-term through their impact on investment.
UEMOA countries are very open with regard to trade. The volume of regional exports could decrease due to OECD countries’ and emerging countries’ slowing economic activity. Prices of mineral raw materials and food products have significantly dropped since autumn 2008. The dollar has been climbing over the last several months although the exchange rate has varied greatly. To what extent is this an advantage or a disadvantage for the region
Certainly the economies of our sub-region are fairly open, around 73% compared with barely 30% in France, but that is still like most developing economies. A key factor is the dependency on foreign currency generated by a small number of exported products such as coffee, cocoa, cotton, gold, and phosphate by-products, etc for the provision of capital goods, petroleum products and some food commodities such as rice. Our overly high export concentration in only a few products is a source of vulnerability to price fluctuations for basic food products and the imported products that I just mentioned.
An illustration of this would be the “food riots” that occurred between the end of 2007 and throughout 2008, exacerbated by the sharp rise in the price of petroleum. Our economies feel the drop in exported raw material prices as a hindrance to future growth to the extent that it will limit our capacity to import capital goods and food products. But the decrease in the price of these food products somewhat offsets the drop in the prices of our exports.
Given our tie to the Euro, the dollar’s rise against the euro offsets the fall in prices of our exports while at the same time eliminating some of the advantages of the decrease in imported food product prices and the drop in petroleum prices.
The measures we undertook in 2008, to revive our agricultural production and find joint community solutions to the energy problems, show international turmoil as an opportunity to correct the structural weaknesses of some policies. To this end, it can be said that the UEMOA has capitalised and will continue to capitalise on the evolutions of the international market in order to strengthen its economy, better orient its economic policies and strengthen solidarity among its member States.
What is the UEMOA’s position with regard to the current crisis? What point would you like to get across to West African countries? To development partners? What actions do you envisage in the next few weeks and/or months? How can development partners help you?
The current crisis calls for a serious overhaul of our economic fundamentals. Our economies cannot function properly nor sustainably by excluding a growing part of the population, destroying natural resources, having blind confidence in the capacity of international markets to guarantee the population sufficient supply of food commodities and energy products at the best prices.
It is still important to be at least somewhat self-sufficient and the virtues of globalisation are not the absolute solution as one would like to believe. Our fragile economies should guarantee a minimum of food production capacity in order to prevent the disastrous effects of an imperfect global market.
Within this context, we would like development partners to continue to provide support, despite the difficulties which they are currently facing.
As for envisaged actions by UEMOA, in addition to the short-term measures to support States and the most vulnerable populations, we are focusing on the implementation of the Union’s Agricultural Policy, on the improvement of infrastructure and strengthening the energy sector. The Regional Economic Programme that we began in 2006 conveys this willingness before this current crisis occurred.
Furthermore, we expect current negotiations with the European Union, within the framework of the Economic Partnership Agreement (EPA), to lead to economic co-operation for the benefit of all and to strengthen the global competitiveness of our economies.