Africa - An economic crisis that will lay waste, not go to waste
When I left the African Development Bank a year ago, 21 African countries were in different stages of debt distress. Almost a dozen of these countries now risk default over the next 12 months. The new debt crises in Africa now threatens a humanitarian and social disaster in the continent. So, how did this all come about?
Millions could face starvation from the soaring prices of staples, and the World Food Programme’s $24 billion request is only half funded. (Ashraf Shazly/AFP)
A litany of African countries are reeling from declining prices for their exports, they have yet to recover from the exogenous shocks stemming from the COVID-19 pandemic, and are dealing with soaring food prices, surging fuel and fertilizer prices, and depleting foreign exchange reserves in part because of the strong dollar.
Twenty-three of Africa’s 54 countries depend on Russia and Ukraine for half of their staples. Some African countries are even more reliant on Russia and Ukraine for grain amongst them: Egypt, Sudan, Tanzania, Eritrea and Benin. They import 80 percent of their wheat from these two countries alone. These countries are seeing higher prices for staples across the board, putting additional fiscal pressure on their already challenged budgets.
Global inflation has already pushed millions of Africans into the territory we define as extreme poverty (people living on less than $2 a day). The number of Africans living in extreme poverty is set to rise from 424 million in 2019 to 463 million this year. This is more than one third of the African continent’s 1.2 billion population.
Millions of Africans could face starvation from the soaring prices of staples, and the World Food Programme’s appeal for $24 billion in aid is so far only half funded.
One African country after the next is going into economic crisis. Nigeria has seen prices rise by more than 20 percent, while the naira has fallen by 25 percent against the dollar since the start of the year. In Ethiopia, prices increased by 32 percent and the birr’s value has fallen to about 82 against the dollar, down from 60 at the beginning of June. In Ghana, prices are up 31 percent and the currency is plunging. Bigger and more resilient economies like Egypt are facing the same challenges.
But, this bleak scenario doesn’t end there. African industry is in peril in ways not seen in recent history. Most African industry was built on the concept of using cheap labor to create profit margins that allow for some form of competitiveness. But, African industry is built around the premise of assembly with most intermediate inputs and raw materials for production being imported.
Take the meager automotive industry in Africa for example, mostly located in North Africa. These industries are nothing more than assembly points. Kits for car production come from Europe, Eastern Europe and Asia. Cheap labor just assembles these kits and rolls cars off assembly lines. With the strong dollar, kits are now 20 to 30 percent more expensive than a year ago.
These price increases, of course, have to be passed on to consumers. This has led demand to plummet and these industries will likely need massive cash injections from governments to survive.
The story of Africa’s automotive industry isn’t isolated. Virtually all African industry depends on imported raw materials for manufacturing. With the currencies of every major nation in Africa devaluing from between 15 to 40 percent, the cost of intermediate inputs for African industry are sky rocketing. This is fueling inflation and a general decline in demand which is never a good outcome for business cash flow.
So, how can a debt crisis, a humanitarian crisis, and a crisis of African industrial producers all be thwarted at the same time? The best economists, who know Africa like no one else, will need to work as a collective to save what’s possible.
My fear is the world has barely begun to notice what is ailing Africa at the moment. Or, maybe there is awareness, but not the resources for the G~7 to do anything about it.
Of course, the multilateral development banks will come to the rescue as they always do, but the current problem is bigger than their collective purse. And, yes the saying is never let a serious crisis go to waste. But, this may be a crisis that no African nation singularly, or collectively, can address on their own.