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Africa urged to take fiscal action over eurozone crisis

By Thierry Ogier, Sid Verma
24 May 2010

African policy-makers should be gearing towards pre-emptive tightening of fiscal policy to safeguard against the eurozone fallout, economists have urged

African policy-makers should be gearing towards pre-emptive tightening of fiscal policy to safeguard against the eurozone fallout, economists have urged.

“Tighter fiscal management is needed,” AfDB chief economist Mthuli Ncube said in an interview. “Be careful about the monetary policy; be prudent. There is so much risk out there that your traditional sources of financing may be under pressure [in] the coming years.”

He added: “Governments need to make revenue collection and spending commitments in a three-year time horizon rather than relying on annual budget programmes” and must “take the view that there might be a squeeze in aid.”

Henri-Bernard Solignac Lecomte, head of the Africa desk at the OECD development centre, said: “We have to be careful about the exit to the crisis.

“Foreign currency reserves that were accumulated during the crisis have been almost depleted to implement [counter-cyclical] policies. We do not have the same margin of manoeuvres. We must be careful not to let the deficits on the loose again.”

Pierre Van Peteghem, AfDB treasurer, also warned about the re-emergence of twin deficits in the region, and the sombre prospects for foreign aid flows.

“Any interruption would cloud growth perspectives,” he said. African countries that are dependent on official development aid are bound to face an even more difficult social and economic situation, because of tightening budgets in the donor countries.

Jean Philippe Stijns, economist at the OECD development centre’s Africa desk, said: “Budget retrenchment would have an impact on demand for export products and aid flows.

“Up to now, aid levels have held up very well, but looking forward, there may be risks that will be affected by fiscal consolidation in the pipeline in Europe and the US.”

Official aid flows to Africa fell from $18 billion in 2008 to $17.5 billion last year, according to AfDB president Donald Kaberuka. Nevertheless, the view that donor countries from the G7 have so far almost respected their commitment to double aid between 2005 and 2010 has been contested.

A report issued Tuesday by the One campaign against poverty, an NGO supported by rock stars Bono and Bob Geldof, says that there is now enough data available to show that the G7 countries have actually fallen short of their pledge made at the Gleneagles summit five years ago.

The outlook for official development aid is gloomier. Aid dependence is one element of the continent’s extreme dependence on external flows. “This is still the Achilles’ heel of the development model in Africa,” said Solignac Lecomte. “All public sectors will be affected by cuts. It is difficult to see how development aid could escape.”

By Thierry Ogier, Sid Verma
24 May 2010