GTA-AP6 Okpalaobieri.pdf - Global Trade Alert

In Ghana, the ratio of non‐performing loans to gross loans increased from 7.9% to 8.7% between2006 and the third quarter of 2008. So far, bank failures have been rare in the region, largelybecause most African banks do not have any significant exposure to the sub‐prime mortgage marketand asset‐backed securities. They were, however, vulnerable to contagion effects arising from thehigh rate of foreign ownership of banks in several countries in the region. To the extent that ifforeign‐owned banks reduced their support of local banks or sold their assets, it was going to haveserious negative consequences for the financial sector in Africa. The foreign exchange markets ofAfrican countries had been under enormous pressure since the onset of the crisis. In the first quarterof 2009, the Ghanaian cedi depreciated against the US dollar by 14% and the Nigerian naira declinedby 10%.The financial crisis had also increased the risk premiums that African countries had to pay ininternational capital markets. There is evidence that several countries in the region had difficultyobtaining funds from international capital markets. For example, Nigeria, Kenya and Uganda hadcancelled plans to raise funds in these markets. The drying‐up of this source of external finance wasa serious setback for development in the region because the money raised would have been used tofinance infrastructure development and boost growth. The private sector also faced challenges inraising funds in international capital markets.Country‐specific responsesAfrican countries took several steps to mitigate the impact of the financial crisis on their economies,including interest rate reductions, recapitalisation of financial institutions, increasing liquidity tobanks and firms, fiscal stimulus packages, regulatory reforms, etc. The measures adopted differ fromcountry to country, depending on available fiscal space as well as the degree of vulnerability to thecrisis.Since the onset of the crisis, 18 countries in the region made interest rate changes in response to thecrisis. For example, in Botswana, the central bank reduced interest rates by 50 basis points inDecember 2008. This was followed by a percentage point reduction on 27 February 2009. In Egypt,the central bank cut its overnight and lending rates by 50 basis points on 26 March 2009. The CentralBank of Nigeria also cut its interest rate from 10.25% to 9.25%.Liquidity injectionsSome countries took actions to increase liquidity in the banking system and to domestic firms. Forexample, in Benin, Burkina Faso, Côte d’Ivoire, Guinea‐Bissau, Mali, the Niger and Togo, the commoncentral bank (BCEAO) injected liquidity on a weekly basis in the regional money market. In Cameroonand Liberia, a support or guarantee fund was created for firms. In Tunisia, the central bank had setup new deposit and credit facilities to improve flow of credit and increase liquidity in the bankingsystem.Recapitalisation of banks and regulatory changesSome countries took specific measures to recapitalise domestic banks. In Mali, the governmentdecided to recapitalise the Banque de l’Habitat du Mali in order to increase and improve finance forhousing. In Tunisia, the central bank doubled the capital for the financing of small and medium‐sizedenterprises in order to boost domestic investments. The Algerian Credit and Monetary Council alsoissued instructions to commercial banks to increase their capital from 2.5 billion Algerian dinars to aminimum of 10 billion Algerian dinars ($142 million) within 12 months.