After the ‘Great Recession’: Africa’s Global Emergence

1. After the ‘Great Recession’: Africa’s Global Emergence • Khaled F. Sherif • Chief Administrative Officer • Africa Region

2. Africa and the World Economy • After a decade of strong economic growth in sub-Saharan Africa, the ‘Great Recession’ has led to a significant decline in the region’s 2009 output • Although global economic downturns have consistently had quite an immediate effect on the region’s economy… • …Africa has often found itself being left behind during the recovery process • How the region manages and responds to the worst economic crisis since the 1930s will play a major role in shaping its medium-term economic future Source: IMF

3. Africa and the World Economy • Although Africa’s GDP has increased by more than three-fold since 1980, its share in the global economy has actually decreased over that period • This trend has been reversed over the past five years, however, as GDP has outpaced the world average • And, Africa is expected to continue to grow at a faster rate than the world average in 2009 and beyond Source: World Development Indicators The time has come for Africa to truly integrate with the world economy

4. Africa and the Great Recession • In its earliest stages, the Great Recession had the most considerable impact in countries that were more closely linked to international capital markets • As a consequence, many of Africa’s economies were somewhat shielded from the recession in 2008 • This was followed by foreign direct investment flows to the continent coming to a near standstill, as well as a major decrease in the demand for exports • …Inducing a significant decline in commodity prices and the rise of recessionary cycles across the continent • Without question, the slowdown has adversely impacted sub-Saharan African countries—and certainly the continent is not out of the woods yet—but many of the region’s countries have been better-equipped to handle this crisis in the past Source: IMF

5. Foundations for Africa’s Future • Africa’s macroeconomic performance has improved significantly and the region’s growth prospects exceed most emerging markets • The past decade’s structural reforms have played a significant part in ensuring that Africa has been better-prepared to handle the current global slowdown • Approximately one-third of Africa’s trade is now with emerging markets • Although Africa’s foreign exchange reserves have decreased over the past twelve months, the remain close to their record highs • The region has seen a significant rise in the number of democracies: From 10 in 1980 to 34 in 2007

6. Foundations for Africa’s Future • Africa boasts some of the fastest-growing economies in the world, including 3 of the top 7 in 2008 • In 2006, private capital flows to Sub-Saharan Africa exceeded official aid flows for the first time • A growing middle class can serve as the foundation for a consumer-driven economy (Projected to increase from 12.8 million people in 2000 to 43 million in 2030) Source: CIA World Fact Book Source: IMF, World Economic Outlook

7. Africa’s Growth Outlook • China, and now India, have significantly expanded their presence in Africa • These new entrants have changed development environment: Focusing more on partnership development and limited conditionality engagement • Although economic growth slowed to 1 percent in 2009, it is projected to increase to over 4 percent in 2010 and over 5 percent thereafter Projected GDP Growth, 2008–11 Sources: IMF, Australian Institute of Export

8. Key Challenges in Africa • Most of the world’s countries whose aid represents 20% or more of their GDP are in Sub-Saharan Africa • Within the FSD and PSD agendas, the region continues to lag in terms of: • Human capital development • Investments and progress in technology • Access to finance and capital markets development • Institutional capacity • Eliminating barriers to business development • The best way for Africa to fight poverty continues to be through stimulation of economic growth and wealth creation

9. …But Sub-Saharan Africa Looks a Great Deal Like ASEAN Countries in 1980 • In 2007, the Africa maintained slightly lower GDP growth than ASEAN countries in the 1980s, but the region boasts lower inflation, higher reserves, higher portfolio flows and higher FDI inflows. Source: IMF

10. Africa’s Economic Transformation • In the 1980s, ASEAN economies coined the term ‘emerging market’ with their unprecedented economic transformation • Since then, every continental region has experienced economic growth driven by its emerging economies, including: • Russia and the EU Accession Countries • Brazil and Mexico amongst those in the Americas • China, India, South Korea amongst several in Asia • Sub-Saharan Africa’s only emerging market economy has been South Africa, and the region is seeking to facilitate a major paradigm shift in that respect • The required transformation must be strongly driven by industrialization, financial sector strengthening, international trade and economic integration with the rest of the world, with a focus on supporting the emergence of a prosperous and sustainable Africa

11. Forward-Looking Financial Sector Reform • Transformational Interventions for Sub-Saharan Africa

12. SSA: Financial Sector Overview • Africa has been able to successfully avert a systemic banking crisis over the past twelve months because the majority of its financial institutions had very little exposure to the complex financial instruments that fueled the crisis in the US and other leading economies • There has, however, been a severe liquidity problem that stems from the overcorrection in the financial system which led to a significant decrease in in capital market liquidity and the flow of funds from bilateral donors • Despite progress in the financial sector reform agenda in recent years, the depth and breadth of the financial system in Africa remains highly inadequate • Only South Africa and Botswana have well-developed financial sectors by emerging market standards • African capital markets still maintain a global share well-below 1 percent

13. SSA: Financial Sector Priorities • The reform of the financial system in Africa is a priority because countries with well-developed financial systems grow significantly faster—and are much better-equipped to undergo industrial expansion—that those with underdeveloped financial systems • Regional integration is key to successful financial sector reform in SSA because many of the individual countries’ financial sectors are too small to be as efficient, diversified, well-regulated and evolved from an infrastructure perspective as larger financial systems • Yet regional integration must also be undertaken in a manner that takes into account local priorities for countries at different stages of development and with different needs

14. SSA: Financial Sector Priorities • The real estate sector can play a significant role in shaping economic growth in SSA over the coming decade • It can serve as a priority issue within the regional integration agenda because it can accelerate regional progress towards global economic integration • SSA countries can consider for launching international zones for land ownership by foreign entities • The Bank can help to facilitate mortgage finance reform, to accelerate wealth creation through house and land ownership in SSA • This will require an overhaul of the legal, regulatory and judiciary systems, as well as facilitating access to finance and eliminating of barriers to land ownership • The goal would be on facilitating the right kind of environment that facilitates asset acquisition • The evolution of a mortgage finance framework can serve as the driver to facilitate capital markets development (including development of secondary markets, stock exchanges and markets for paper), payment systems, credit information systems and a more sound financial system

15. Middle Income CountriesFinancial Sector Overview • Financial Sector Performance Indicators • *World Bank and IMF Data (2003-2005) Botswana Gabon Mauritius Namibia Seychelles South AfricaSwaziland

16. Middle Income CountriesFinancial Sector Priorities • The financial sectors for Africa’s MICs have amongst those most heavily affected by the global financial downtown—largely due to their greater integration with global financial markets • The MIC work program would tie closely into the MIC Action Plan, focusing on new models for MIC cooperation in Africa and emphasizing innovative financial instruments for our MIC clients, such as: • Secondary capital market risk and financial management tools • Infrastructure finance and PPP instruments • Are there opportunities to work with IFC to provide instruments to be used by equity funds or facilities in the region?

17. Middle Income CountriesFinancial Sector Priorities • Further Strengthening of the Legislative Framework • The global financial crisis—and the international effort that followed to accelerate recovery—is set to result in another wave of regulatory reform in the financial sectors of many developed and emerging economies • It is imperative that Africa’s MICs are engaged in this global dialogue • The Bank can assemble a Task Force to interface with MICs to assist them in ensuring that their regulatory framework incorporates the key lessons from the downturn and best-positions these countries to mitigate their exposure in the future • Africa’s MICs have seen progress in the evolution of their secondary markets, and the Bank can serve as a partner in helping governments establish strong institutions and secondary market instruments, including urgently needed housing finance vehicles (including the development of primary and secondary mortgage market laws, mortgage default insurance schemes and mortgage-backed securities)

18. Middle Income CountriesFinancial Sector Priorities • Innovation Finance • In conjunction with investments in human capital development, building a business-enabling environment and enhancing the intellectual property rights framework, the Bank can support: • The development of instruments to fund early-stage technological development • Government risk-sharing and partnership in private risk capital funds • Payments System Modernization • Aligning the legislative and supervisory framework to support modern electronic payments systems, including integration of new technologies in today’s rapidly changing marketplace • The Bank should also take the lead in supporting regional harmonization efforts to facilitate expanding the payments system infrastructure

19. Middle Income CountriesFinancial Sector Priorities • Pensions Systems • Even amongst Africa’s MICs, there are several countries that are in the early stages of reform of their pensions systems • Supervision, regional integration and efficiencies in pension fund administration are amongst the most immediate priorities in SSA • MIC countries can play a major role in leading the way to assisting with the most important issue influencing poverty rates amongst the elderly in the world today • Credit Systems • Access to credit is severely hampered in SSA due to the absence of credit information systems • In conjunction with PSD initiatives targeting the transition to a knowledge-based economy, the Bank can drive a regional agenda which leverages today’s technological advances and strongly supports regional standards and data collection for credit systems to properly evolve

20. South African Development CommunityFinancial Sector Overview Financial Sector Performance Indicators *World Bank and IMF Data (2003-2005) Angola Lesotho Madagascar Malawi Mozambique Tanzania Zambia Zimbabwe

21. South African Development CommunityFinancial Sector Priorities • Facilitating the Transition Away From the State Banking Sector • SADC has made progress with regards to transitioning towards strong private-sector partnership in the banking sector • We must be making the case to our clients that Continued state ownership in the banking sector entails major direct economic costs • The Bank has the experience in facilitating the transition away from state banks in other parts of the world and should be leading the dialogue on best practices for managing systemic risk • This can be done in partnership with IFC, as has been done in other regions

22. South African Development CommunityFinancial Sector Priorities • Expanding the Financial Infrastructure and Facilitating Remote Access to Financial Networks • Decreasing costs of technology have provided new models and frameworks for expanding the financial infrastructure • Public-private initiatives can expand upon existing technologies that provide citizens access to the banking and NBFI network via mobile devices and low-cost terminals • The Bank has an opportunity to help Africa redefine the way it approaches ‘rural finance’ • Technology frameworks that are widely adopted in developed—and more so in emerging—markets have the capability to radically expand citizen access to financial services in the region

23. South African Development CommunityFinancial Sector Priorities • Local Economic Development • The Bank can have a significant impact by helping capacity building efforts in local institutions in order to facilitate the emergence of access to microfinance in local communities • The Bank can also serve as a partner in supporting the emergence of industrial clusters—which played a major role in the growth of BRIC countries and other emerging markets over the past decade • Financial sector interventions for local economic development efforts should be demand-driven, and would be coupled with strong PSD-led interventions that support the industrialization of communities at the local level and development of linkages with national, regional and eventually global markets

24. Eastern AfricaFinancial Sector Overview Financial Sector Performance Indicators *World Bank and IMF Data (2003-2005) Ethiopia Kenya Rwanda Uganda

25. Eastern AfricaFinancial Sector Priorities • The financial sectors of Eastern Africa are dominated by its banking sectors • There is very little competition at the local level, with the sector dominated by large state owned banks and large multinational bank subsidiaries which are already achieving regional integration • The financial sector in Eastern Africa mirrors some of today’s MICs from a decade ago • We can be incorporating a great deal of our experience from those transitions to the technical assistance we provide our clients • Regional harmonization (including accounting standards) can be achieved through a greater commitment and impetus to overcoming structural impediments

26. Eastern AfricaFinancial Sector Priorities • There is evidence to support that there is sufficient capital availability within the region to support investment requirements • This means that the Bank can have a significant impact if we can help foster a framework for kick-starting capital flow: through FSD legislative and regularly reform, as well as strong PSD-side interventions • Continued success in regional integration can pave the way to the evolution of an integrated NBFI sector (which would benefit from harmonization) • Kenya became a global pioneer in the use of mobile telephones to make payments digitally: a model that has since been very successful in numerous other economies • This model can be expanded in partnership with local mobile companies and this would rapidly facilitate a truly modern regional payment system that would be more advanced than what currently exists in many developed economies

27. West African Economic and Monetary UnionFinancial Sector Overview Financial Sector Performance Indicators *World Bank and IMF Data (2003-2005) Benin Burkina Faso Cote d’Ivoire Guinea-Bissau Mali Niger Senegal Togo

28. West African Economic and Monetary UnionFinancial Sector Priorities • The region must begin by addressing the key factors that will make economic integration viable and sustainable • Given the UEMOA’s common currency, there can then be a focus on trade linkages within the region to help stimulate economic growth, in conjunction with developing a more sound financial sector • The World Bank has supported UEMOA’s efforts to develop a modern and secure regional payment system • Regional integration can pave the way towards greater depth in the financial sector, as opportunities arise for international companies to realize the economies of scale associated with access to the regional market

29. West African Economic and Monetary UnionFinancial Sector Priorities • Although there is a unified banking law in UEMOA, as well as unified prudential norms and requirements for only a single banking license to operate within the region, market participants have reported substantial barriers to entry to new markets • The Bank can assist with bond issues guaranteed by the member states of the ECOWAS and backed by a credit guarantee for senior bonds issued by the Bank • Diversifying the number of institutions investing in infrastructure to include partnerships with the capital markets, IFC and national and local governments

30. West African Monetary ZoneFinancial Sector Overview Financial Sector Performance Indicators *World Bank and IMF Data (2003-2005) Gambia Ghana Guinea Nigeria Sierra Leone

31. West African Monetary ZoneFinancial Sector Priorities • There is a significant need for strong policy coordination within WAMZ • This is reflected in the continued segmentation of the financial sector • For example, only 6 of the 21 foreign-owned banks in WAMZ countries are operating in more than one WAMZ country • Makame and Murinde study points to efficient MFIs have greater potential of reaching the poorest when it comes to microfinance • Given the Bank’s tremendous wealth of experience with local development and capacity building, we should be a key partner for governments across the region • Encouraging strong, consolidated, risk-based supervision

32. West African Monetary ZoneFinancial Sector Priorities • Nigeria has the size and the attributes to serve as a growth center for the region • Access to financial services (in particular in rural areas) can and should be immediately addressed via vehicles that have proved to be highly successful in other emerging markets • Expanding access to housing finance is a major priority • Mortgage legislation and facilitating access to finance • The Bank must help facilitate better corporate governance, which can serve as a pillar for accelerated regional integration

33. Fragile StatesFinancial Sector Overview Financial Sector Performance Indicators *World Bank and IMF Data (2003-2005) Burundi Congo, DR Cote D’Ivoire Liberia

34. Fragile States Financial Sector Priorities • Phase I: Immediate Priorities • Establishing the rule of law and providing the foundation framework for a sound judiciary system • Facilitating capital flows into the economy with market-based signals and interventions that can be effectively built-upon • Restoring a functioning banking sector based on initial prudential framework emphasizing stability • Facilitating broad trade and investment linkage within the region and globally • Creating the conditions that foster and environment where there is recognition of the need for maximum market, fiscal sustainability, and the lowest level of political risk

35. Fragile States Financial Sector Priorities • Phase II: Facilitating Growth • Reforming and privatizing within the banking sector • Facilitating access to finance, in particular for MSMEs • Implementing a comprehensive legal and regulatory framework for banks and the non-bank financial sector • Aligning public sector institutions to international standards, and facilitating capacity building efforts to local institutions • Trade and export-related access to credit, as well as insurance, to stimulate regional trade and industrialization • Serving as a knowledge institution to provide advisory services that emphasize lessons learned from other markets and regions, as well as regional and global benchmarking

36. Facilitating Private Sector-Led Growth • Transformational Interventions for Sub-Saharan Africa

37. SSA: Private Sector Overview • A private sector that is integrated in the world economy can serve as a key driver of reform • This is why the enterprise sector development and trade agendas are so key in SSA • The region is in need of economic growth that is driven by strong structural reforms, investments in infrastructure, sound economic policies, strong legal and judicial frameworks, good governance and a system that promotes stability and mechanisms for resolving and eliminating conflicts • Africa continues to lag the rest of the world in terms of FDI • Although China’s commitment to the region has continued to remain strong—and now Africa has been further bolstered by significant investment flows from India • Multinational corporations remain under-represented across the continent • Most of the exceptions to this have been in the energy and mining sectors, with a focus on exporting natural resources

38. SSA: Private Sector Priorities • Wealth creation and economic growth are central to the success of the enterprise sector agenda • Wealth creation is central to creating the dynamic that is needed for consumer spending and MSME development • There should be a strong drive towards the integration of technology in the human capital development process, for all people of all ages, to facilitate integration in the global economy • SSA has an opportunity to enhance its competitiveness through ICT as a tool for development, as well as to create new opportunities for engagement with the private sector to help solve human capital, energy, healthcare and infrastructure problems

39. Middle Income CountriesEnterprise Sector Overview Doing Business Global Rank Enterprise Sector Performance Indicators Botswana Gabon Mauritius Namibia Seychelles South AfricaSwaziland Source: Little Data Book on Africa, World Bank

40. Middle Income CountriesEnterprise Sector Priorities • Transition to a Knowledge-Based Economy • MICs in the Africa region are in need for innovative tools that leverage their transition towards a knowledge-based economy • Governments should be stimulating private sector development by contracting out a great deal of the public sector modernization process to the private sector • The Bank can guide MICs on best-practice integration of ICT for development, as well as engaging the private sector in the modernization of the health, education, and other public sector reform initiatives • Today, the migration to mobile platforms and information societies can facilitate how the public sector interfaces with the economy and how to implement policies that concurrently achieve private sector-led growth and global competitiveness in sectors that serve the public interest

41. Middle Income CountriesEnterprise Sector Priorities • MSME Development • MICs in SSA have an opportunity to join countries in the West in better-aligning their emerging policies and priorities across all sectors with private sector growth strategies • This can include better-linkages between economic growth policies (e.g. that stimulate consumer spending) with private sector incentives structures • The Government and the private sector can work in partnership to develop and deploy the tools which are needed to enhance access to finance to MSMEs (such as next generation payment systems, credit systems, etc.)

42. Middle Income CountriesEnterprise Sector Priorities • Emerging Policy Priorities • The region should be learning from the policy failures which contributed to the global financial slowdown and must ensure that its own policies are likely to stimulate the capital flows to support well-conceived and operated private equity instruments • There should also be a framework that supports continuous learning in the reform process, including with respect to competition policy, governance, trade and investment facilitation and even the regulatory environment • There should also be strong linkages between the Government, its community, its enterprise sector and educational institutions and consistent dialogue between these various stakeholder groups and the Bank

43. South African Development CommunityEnterprise Sector Overview Doing Business Global Rank Enterprise Sector Performance Indicators Angola Lesotho Madagascar Malawi Mozambique Tanzania Zambia Zimbabwe Source: Little Data Book on Africa, World Bank * Excluding MICs and Congo, DR

44. South African Development CommunityEnterprise Sector Priorities • SADC countries must focus on putting in place the appropriate frameworks that will lead to the formalization of what remains of the grey economy • In many emerging markets, this has been successfully achieved through: • The simplification of the taxation process as well as the reduction of tax rate (e.g. migration to a reduced flat-tax system); and • Providing the private sector with incentives to join the formal economy (e.g. low-cost access to human capital development training, better access to healthcare, etc.) • In fact, the creation of incentive structure will itself drive formal enterprise sector development, as the local private sector can partner with regional and international companies to help create the right incentive structures and systems

45. South African Development CommunityEnterprise Sector Priorities • SADC has made progress with regards to transitioning towards strong private-sector partnership in the banking sector • There is an existing framework that can be expanded upon to encourage continued partnership with the private sector across issues related to energy, healthcare, infrastructure development and education • There needs to be a focus on enhancing the business environment and reducing the barriers to market entry and the factors contributing to market risk • Strong mobile penetration can help facilitate the emergence of modern payment systems and other innovations that can help stimulate economic growth within the region • But the incentives for cross-border investment and trade must be strong and can lead to similar economic integration as within South America

46. South African Development CommunityEnterprise Sector Priorities • The judicial system could be further strengthened, as we have already seen consumer-driven growth within pockets of the regional economies • The governments in the region should actively engage the private sector in privatization efforts, as well as stimulate SME growth through ‘outsourcing’ (or contracting out) of inefficient public sector driven functions (e.g. garbage collection) • Poverty alleviation through economic growth should be a priority • We can work closely with every government to identify barriers to regional economic integration and investment flows across all countries

47. Eastern AfricaEnterprise Sector Overview Doing Business Global Rank Enterprise Sector Performance Indicators Ethiopia Kenya Rwanda Uganda Source: Little Data Book on Africa, World Bank

48. Eastern AfricaEnterprise Sector Priorities • Developing a Business-Enabling Environment to Facilitate Investment and Trade • The Eastern African economies have been successful in overcoming many of the challenges that have slowed economic growth in other African states • This includes eliminating some of the barriers to doing business • Continuing the reform agenda will be critical to enhancing the enterprise sector’s competitiveness • Establishing stronger links in trade between Eastern Africa and international markets • Assisting the region’s private sector in attaining international export and WTO standards • This will require engagement at the local-level with the enterprise sector and local NGOs and business associations

49. Eastern AfricaEnterprise Sector Priorities • Expanding the information and communications technology infrastructure • Given some of the success that has emanated from the region within the mobile sector, ICT could be a vehicle for driving economic growth in Eastern Africa in the same way that it has in India and other emerging markets • With technology playing a significant role in the economic growth of numerous emerging markets, this could be a major component of the reform agenda • Infrastructure Finance • Eastern Africa has significant infrastructure finance needs and can benefit from lessons learned from across the continent over the past decade • The Bank can help clients in Eastern Africa in adopting innovative financial instruments that will build local capacity for financing, managing and regulating sustainable infrastructure projects

50. West African Economic and Monetary UnionEnterprise Sector Overview Doing Business Global Rank Enterprise Sector Performance Indicators Benin Burkina Faso Cote d’Ivoire Guinea-Bissau Mali Niger Senegal Togo Source: Little Data Book on Africa, World Bank