Will the Dragon Come to Africa’s Rescue?

When the financial crisis began to unravel early last year, there was a sense of relief in Africa as the local banks were not exposed to toxic time bombs such as sub-prime collateralised debt obligations (CDOs). But as the financial crisis snowballed into a global economic crisis, the mood has changed in Africa.

By Aruna Urs

Published: Thu 12 Feb 2009, 12:55 AM

Last updated: Sun 5 Apr 2015, 9:34 PM

Africa was one of the key beneficiaries of the global economic boom of the preceding years. Since 2001, the sub-Saharan African countries have outperformed the global growth after lagging for decades. Much of the growth can be attributed to China and India’s insatiable appetite for commodities. The Elephant and the Dragon’s march into Africa and the intense competition within them and between the West made headlines every other day. In 2007, the continent attracted $53 billion as foreign direct investments, up 16 per cent from 2006 according to UN’s World Investment Report 2008.

The World has changed in the last few months, and Africa, yet again, is on the brink. The majority of the continent depends on trade, aid and remittance, though not necessarily in that order. The commodities have plunged, the donor countries are in deep crisis and expatriate Africans might be sending less money home. In its latest report, the IMF expects the world’s poorest continent to grow at 3.5 per cent this year, with sub-Saharan Africa expected to grow by 3.3 per cent. the IMF shaved 3 per cent from its earlier estimate. The growth rate is hardly enough for a continent whose population is growing at twice the rate of others. According to the World Bank, sub-Saharan Africa is growing at a pace of 2.5 per cent a year compared to 1.2 per cent in Asia and Latin America. At this rate, the Bank projects the African population to double in 28 years.

Unemployment is on the rise as scores of miners, plantation firms and textile manufacturers have started retrenchments. It is unfortunate that the good times didn’t last long enough for Africa to diversify its economies. However, countries including Tanzania, Mozambique, Ghana and to some extent Kenya made remarkable progress amidst the war, poverty and disease.

All is not yet lost. China, the main growth driver of Africa, may come to the rescue. In 2008, the two-way trade between Africa and China was over $100 billion, with Africans importing cheap consumer products and exporting commodities. The recent rally in the Baltic Dry Index, which measures the price of moving the major raw materials by sea, provides some hope for the continent. The index has rallied about 174 per cent from its December lows on hopes that Chinese demand will keep the ships afloat. According to Standard Chartered’s report, the Baltic index rally shows that demand for commodities has fallen but not disappeared and the collapse in freight rates late last year was as much a reflection of the global inventory overhang as of weak end use consumption. With the Baltic Rally and the Chinese President Hu Jintao scheduled to visit in the coming days, Africa’s prospect of managing the slower growth look plausible.

aruna@khaleejtimes.com