Speech by Mr. Takatoshi Kato, Deputy Managing Director, IMF at the Twelfth African Union (AU) Summit Addis Ababa, Ethiopia February 3, 2009

Honorable Presidents, Your Excellencies, Ladies and Gentlemen:

Thank you very much for inviting the IMF to the twelfth African Union (AU) Summit of Heads of State and Government. It is a great pleasure to join you here today in Ethiopia, one of the oldest independent countries in the world.

The AU Summit takes place at a critical juncture for the world economy. Over the last several months economists and policymakers have come to recognize the seriousness of the global financial crisis. While the headlines have been dominated by the impact of the crisis on advanced economies and emerging markets, the crisis also poses a severe challenge for African countries, which the international community must not ignore.

In my remarks today, I would like to share with you the IMF's perspective, focusing on four key messages.

The Financial Crisis and Global Growth

First, we now expect world growth to come to a virtual halt, which will require a decisive global policy response. World growth in 2009 is expected to decline to its lowest rate in 60 years. Despite wide-ranging policy actions by governments and central banks around the world, financial strains remain acute, pulling down the real economy. We expect a return to growth in 2010, assuming strong policies to stimulate the recovery. But the risks to this outlook remain on the downside.

Advanced economies are suffering their deepest recession since World War II. Major emerging market economies such as China, India, and Brazil are now expected to experience much lower growth than in recent years, dragged down by falling export demand, subdued capital inflows, and lower commodity prices.

How the Financial Crisis Affects Africa

My second message is that the global financial crisis will not spare Africa. Weaker financial linkages with the rest of the world may have limited the impact of the systemic banking sector crisis in advanced economies on Africa, but the continent will be hard hit by the effects of the ensuing slowdown in global economic growth.

There are several channels through which the effects of the crisis will be transmitted to your economies:

• The harsh reality of lower global growth reduces demand for African exports, pushes commodity prices downward, and curtails the flow of remittances from abroad.

• The tightening of global credit has reduced capital inflows and curtailed the availability of trade finance, and could eventually cause donors to reduce their aid to Africa.

• An economic slowdown will affect the quality of the credit portfolios of financial institutions and impose losses on other financial assets, such as deposits with troubled foreign correspondent banks, or capital repatriations by troubled parent banks—which are often foreign owned.

• The slowdown in trade is reducing government revenues, thereby worsening the fiscal position in many countries. Fewer resources would mean that African governments would be unable to meet the heightened expectations of their populations for progress in reducing poverty and investing in infrastructure.

With the expectation of a more pronounced global downturn, weaker commodity prices, and pressure on capital flows, we expect growth in sub-Saharan Africa will slow from about 5 ¼ percent in 2008 to about 3 ¼ percent in 2009, about 3 percentage points less than projected just four months ago. With significant uncertainty at the global level, risks to growth remain tilted to the downside.

For 2009, we see major deteriorations in both the fiscal and external accounts of sub-Saharan Africa. We project a deterioration in the overall fiscal balance by as much as 6 percentage points to a deficit of about 4 percent of GDP in 2009. The current account deficit for the region is projected to widen by more than 4 percent of GDP, to about 6 ¾ percent in 2009.

Policy Challenges for Africa

The third message is that the crisis poses unique and varied challenges for policymakers, particularly because of its complex nature and uncertainty about its duration. Because circumstances differ so much across countries, there is no single recipe. But a priority for all countries in the region must be to protect the hard-won improvements in economic fundamentals—more sustainable debt levels, lower inflation, liberalized trade and structural reforms-that enabled the first period of sustained growth in the region in decades. I would like to suggest a few key principles to guide your economic policy through these difficult times:

• Use the fiscal space you have judiciously. Fiscal responses should be tailored to specific country circumstances. There may be scope for a fiscal stimulus in some countries but, in many other countries, this option may not be available due to already weakened fiscal positions and concerns regarding fiscal sustainability. In some countries, there may even be a need for fiscal consolidation. In all cases, spending plans should be cast in a medium-term context, with targeted measures to protect the most vulnerable.

• Let exchange rates help rebalance growth when possible. In countries where the terms of trade deteriorated, real exchange rates will have to depreciate to preserve macroeconomic stability. Countries with exchange rate flexibility should let the nominal exchange rate depreciate while keeping fiscal and monetary policies sufficiently tight to avoid a devaluation-inflation spiral.

• Closely monitor the balance sheets of financial institutions and be prepared to act promptly if necessary. Governments should identify banking system vulnerabilities and plan how they will react should a banking crisis erupt, recognizing that the resources to support their financial systems may be limited. The liquidity and usability of reserve assets, the status of non-performing loans in the banking sector, and the availability of trade credit deserve particular attention.

• Do not lose sight of your medium-term goals. The gloomy environment puts an even higher premium on keeping your economies stable. It is also important now to make every effort to move ahead with planned structural reforms. The current crisis should be seen as an opportunity to foster domestic consensus for urgently needed reforms.

The Fund's Role in Africa During this Crisis

My final and important message is that the IMF stands ready to do its part. We have increased our financial support to low-income countries in the face of last year's food and fuel price crisis. In September 2008, we also modified a financing facility to provide rapid assistance to countries hit by exogenous shocks. Since then, several developing countries have accessed the facility, the most recent example being Ethiopia, which has suffered from rising food and fuel prices.

To help African countries strengthen their capacity to meet the current and future challenges, we are also expanding our technical assistance by establishing two new technical assistance centers in Africa embarked on an ambitious program to help countries develop medium-term debt management strategies.

The IMF will also play its part in encouraging donors to live up to their financial commitments to the continent.

In the coming months, we will be intensifying the policy dialogue with our African member countries. One important initiative here is the conference that will be co-hosted by President Kikwete of Tanzania and the IMF in Dar es Salaam March 10th and 11th. We will bring together policy makers, the private sector, and civil society from Africa and beyond. The objective of the conference is to draw lessons from successes in Africa over the past decade and discuss policies that will ensure that the current global economic turmoil does not jeopardize this success. A special session will be dedicated to the Fund's engagement with Africa, during which Finance Ministers will engage with the Managing Director on issues facing the continent and how to strengthen the IMF's support for Africa.

Let me assure you that we will be working with you to help Africa meet the challenges of the current crisis and emerge better able to meet and even exceed the expectations of your people.