This is really a point of caution for SSA, because there have been calls for the Governments in Africa to emulate the actions taken by developed economies to support private sector companies and the financial sector in general in a manner that expands the reach of government. This course of action needs to be avoided in Africa because it risks undermining both public and private institutions, whose development has been an important part of the success of African economies in generating high rates of growth during this decade. Whilst greater fiscal discipline has led to lower and more sustainable budget deficits, real yield rates on long-term government bonds remain high in many African economies, suggesting that investors have not yet fully priced in the significant improvement in macroeconomic fundamentals and that their inflation expectations remain high. Central banks in Africa are also constrained in their ability to inject liquidity into the financial system by purchasing available government or any other type of securities in the market. This constraint is at two levels: first the financial systems in Africa have not been impaired and the money markets have continued to function regularly, without a significant and prolonged liquidity crisis – largely due to the absence of any impaired or toxic assets in the banking system. Second, credit expansion to the non-Government sector remains strong.
The Government has in fact been able to draw on its PRGF resources to compensate for the shortfalls in Government revenues over the first half of 2009 that I have alluded to earlier. However, when all is said and done, Africa still needs to mobilize both foreign and domestic sources of finance that provide sustainable sources of investment. How can Africa best arrest the recent reversal of FDI inflows generated by the global financial and economic crisis and encourage domestic resource mobilization i.e. boost domestic savings rates? In my view, ensuring that we retain our focus on consolidating macroeconomic stability is a critical element of Africa’s response to the current crisis. For many of our economies, inflation has been pushed beyond the single digit level, and we must all therefore work hard to re-establish low levels of inflation as soon as possible. The ability to attract FDI inflows is also a function of the supporting infrastructure and the existence of a business environment that supports innovation, initiative, and hard work. In this regard Africa must not relent on efforts to improve infrastructure development, and lower the cost of doing business. This is a process which is being actively pursued in Zambia, where great strides have been made to reduce the number of business licenses required and to streamline licensing procedures, in addition to the establishment of an organisation, the Zambia Development Agency, to spearhead and support FDI flows and domestically financed investment.