Saturday, October 11, 2008

How the global credit crunch will effect Africa

The International Monetary Fund released a statement yesterday on how the global credit crisis will effect Africa. We have heard plenty of how the rising prices of food and fuel have reversed gains on poverty reduction on the continent. Now the number crunchers are starting to analise how this credit crisis will hurt poverty efforts.

This snippet comes from a press release from the International Monetary Fund. The press release helps to promote a report that the fund release on the subject. The quote is from Ms. Antoinette Sayeh, Director of the IMF's African Department.

from the International Monetary Fund

"The worsening macroeconomic situation reflects headwinds from strong increases in food and fuel prices, slower world growth, and global financial turmoil. So far, the main effects of the global financial turmoil appear to be indirect, in the form of slower global growth and volatile commodity prices. Recent heightened turbulence raises the risks, including of a decline in resource flows to Africa in the form of private capital, remittances, and even aid.

"The food and fuel price shock has put upward pressure on inflation and current account deficits. Further, donor support has not risen to cover the larger import bills caused by the price shock, leaving the adjustment to domestic resources. Foreign exchange reserves have held up fairly well so far but cannot be expected to absorb the long-term consequences of the food and fuel price shock. High volatility means that the situation is changing rapidly, but these concerns remain valid for many countries in spite of the recent easing of oil and food prices. In a number of countries, adjustment to higher price levels is not yet complete, and inflationary pressures may still be present.

"The challenge for policymakers is to adjust to the food and fuel price shock, preserve economic stability in the face of global financial turbulence, and shield the poor. With food and fuel prices substantially off recent peaks, it should be easier to fully pass through higher prices to the economy to encourage adjustment. With food accounting for a major part of household expenditure, the resulting loss in the purchasing power of the poor is a serious concern. Measures to cushion the impact of higher food and fuel prices on the poor therefore need to be well targeted—and also supported by donors. For oil exporters a particular challenge is to preserve a medium-term perspective; caution use of oil revenue windfalls permits smoothing of fiscal spending in the face of price declines as well.

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