AFRICA: Helping fragile states survive financial crisis
Liberia Finance Minister Augustine Naganfuan says economic crisis poses new challenges for post-conflict states
DAKAR, 14 May 2009 (IRIN) - The global financial crisis has already dealt a heavy blow,
and this week as the African Development Bank (AfDB) held its annual meetings in the Senegalese capital Dakar, finance ministers, donors and academics gathered to examine ways to help the continent cope and mitigate setbacks. Coping is particularly difficult for post-conflict or “fragile” states, where institutions are tattered and donors wary.
Post-conflict states must provide jobs for youth,
make visible progress on reconstruction and build up the formal economy to avoid violence, said experts at a forum of finance ministers, donors and post-conflict experts at the AfDB meetings. Donors, they said, must “take more risks” and invest in the long-term to help fragile states survive.
“It takes over a decade of putting in money, combined with peacekeeping and rehabilitation, to build up states post-conflict,” Oxford University economics professor Paul Collier told forum participants. “Instead, we’ve used short-termism and denied reality….It is all about reconstruction and employment. You need to employ lots of youths; you need to train them and do it early to avoid conflict and help rebuild.”
Zeinab El-Bakri, AfDB vice president, said in the meeting: “Donors should take more risks. It takes a change of mentality. You cannot do business as usual. [In fragile states] you need flexibility and more civil society engagement.”
Risk of violence
The economic crisis could erode many of the gains made by post-conflict states such as Liberia and Sierra Leone over the past decade, say economists.
Liberia’s annual growth reached 12 percent at its post-war peak but dropped to 5 percent in 2008, Nganfuan Augustine, Liberian Minister of Finance, told IRIN. Sierra Leone’s 7-percent growth in 2008 is expected to drop.
In fragile states declining growth can breed unrest, Collier said. “Economic growth will decline, creating a greater risk of violence.” And each condition feeds the other, he said.
|...Donors should take more risks. It takes a change of mentality. You cannot do business as usual...
“Post-conflict governments have very little room to manoeuvre out of financial crises. The scope for government response is limited. There is no fiscal space,” said Collier. This may lead to inflation, he said, but that creates a negative cycle as “capital flight is more sensitive to inflation in fragile states than in others.”
Post-conflict economies tend to be largely informal, which keeps tax income low and discourages foreign investment, Collier pointed out.
This leaves finance ministers with tough choices. Liberia faces 80 percent unemployment
, massive skills shortages, a scale-down of the country’s biggest employer Mittel mining, problems in the rubber industry, and the drawdown of the world’s largest peacekeeping mission, Nganfuan told IRIN. “And amid all this, we have to streamline expenditure.”
The new fragility
The financial crisis is already causing foreign investment to drop in many African states, including Sierra Leone, according to the country’s finance minister Samura Kamara.
Following a decade-long civil war, Sierra Leone’s economy plummeted before picking up again, he said. “Now the nature of the fragility is changing. We are facing dropping diamond prices, falling remittances, imports [which bring in 70 percent government tax revenue] are way down and there is a mounting drug- trafficking problem.”
And 60 percent of Sierra Leonean youths are unemployed, according to the government, which some observers say is enough on its own to threaten stability
|...Post-conflict governments have very little room to manoeuvre out of financial crises. The scope for government response is limited....
“We need serious infrastructure development now in Sierra Leone,” Kamara said. “You can sign up to a peace and security agreement, but it costs to put it into practice.”
Donors should “take risks”
For the AfDB's El-Bakri, it is important that donors accept that loan standards might need to be relaxed when lending to fragile states. “If the standards are not as good as the best, it is still OK,” she told IRIN.
The AfDB used to stop lending money when a government went into arrears, but shifted this two years ago when it set up its Fragile States Facility
, which instead helps countries focus on getting out of debt.
Under the programme a state such as Guinea-Bissau is eligible to receive additional resources above its regular country allocation and support to build up government capacity.
“The African Development Bank is expected to be more engaged than other financial institutions. There is trust there. We need to build on that,” El Bakri said.
The Liberian government faced up to US$5 billion debt burden when it emerged from conflict, said Nganfuan; but in 2008 was the 33rd country to be approved for World Bank and International Monetary Fund debt relief under the Highly Indebted Poor Countries initiative.
And when it comes to pulling through economic shock, some fragile states, despite facing obvious challenges, have a major advantage, says El Bakri: good leadership.
“Good leadership makes a huge difference everywhere. Liberia has that. Leaders need to create strategies out of this crisis. Donors cannot play that role.”