Africa, particularly the Sub-Saharan region, would experience brighter economic conditions in 2003, provided the war in Iraq ended quickly, the World Bank’s Global Development Finance report shows.
The conflict made rough an already uneven global expansion but it had very little impact on emerging markets, said author of the report Philip Suttle in Johannesburg on Monday.
”The build-up to the war and the oil price shock has had no impact really on emerging markets, apart from Turkey,” he said.
”Sub-Saharan Africa will be the region in which the biggest turnaround will be seen. Moderately optimistic growth will be lead by South Africa.”
While sub-Sahara’s Gross Domestic Product in 2001 rose by 3,2% and 2,6% in 2002, estimates for the region in 2004 were at 3,6%.
The estimate for 2003 was three percent.
Suttle said Foreign Direct Investment (FDI) and worker remittances had become more important sources of finance for developing countries than private lending.
Sub-Saharan Africa is showing the highest returns on FDI of any region in the world and the flow of workers remittances back to this region doubled in only two years, reaching $4-billion last year.
”FDI will continue to be the backbone of developing countries. There is a lot more durability to FDI flows,” he said.
Workers remittances in the region doubled from $2-billion in 2000 to $4-billion in 2002, the highest level in six years.
The report also showed that the demand for debt was falling.
”Countries are saying that they do not see debt financing as an appropriate vehicle for funding,” he said.
”The increased reliance on FDI is generally positive for developing countries since FDI investors tend to be committed for the long haul and are better able than debt holders to tolerate near-term adversity.”
However, governments borrowing domestically were reducing their foreign exchange risk but short-term debt increases the risks from local interest rate fluctuations and the reluctance of investors to roll over exposures at times of stress, the report said.
On the upside the lower volatility of FDI and remittances is fostering a more stable environment for those developing countries that have learned to live with less external debt.
”The decline in private lending was especially steep in 2001 and 2002 as the global economy struggled through a recession caused by the bursting of the equity market bubble in the major economies,” Suttle said.
Debt financing for developing countries has shrunk and would not return quickly.
”Over reliance on debt has been a problem for many countries. Looking ahead there is room for cautious optimism that capital flows to developing countries will be less volatile in the future. This would be good for growth and for poor people.” – Sapa