Financial Crunch Bites AU

By Lillian Tabu

ADDIS ABABA---The AU Summit slated for Addis Ababa later this month takes place at a critical juncture for the world economy. Over the last several months economists and policymakers have come to recognize the seriousness of the global financial crisis.

“While the headlines have been dominated by the impact of the crisis on advanced economies and emerging markets, the crisis also poses a severe challenge for African countries, which the international community must not ignore, “said Mr. Takatoshi Kato, Deputy Managing Director, IMF at the Twelfth African Union (AU) Summit held in Addis Ababa in February 2009 at a time when the global financial crisis became a reality.

At this point in time, many African states dismissed the catastrophe claiming that it won’t affect the African nations.

In the meeting, Mr. Kato went ahead to say that, “The global financial crisis will not spare Africa. Weaker financial linkages with the rest of the world may have limited the impact of the systemic banking sector crisis in advanced economies on Africa, but the continent will be hard hit by the effects of the ensuing slowdown in global economic growth.”

It did not take long before the different sectors of the African economies started feeling the heat of the global financial crisis. Some of the affected sectors included the tourism and horticulture, among others.

Lower global growth reduced demand for African exports, pushing commodity prices downward, and curtailed the flow of remittances from abroad.

The tightening of global credit reduced capital inflows and restricted the availability of trade finance, and eventually causing donors to reduce their aid to Africa.

An economic meltdown affected the duality of the credit portfolios of financial institutions and imposed losses on other financial assets, such as deposits with troubled foreign correspondent banks, or capital repatriations by troubled parent banks-which are often foreign owned.

The slowdown in trade reduced government revenues, thereby worsening the Fiscal position in many countries. Fewer resources meant that African governments would be unable to meet the heightened expectations of their populations for progress in reducing poverty and investing in infrastructure

To the African Union, this meant it would be difficult for it to raise and sustain its annual budget of $150 million (KSh12billion).

For nearly two years, the AU Commission has been exploring, in addition to annual assessed contributions from member states, innovative means of raising finances for activities of its organs.

As Africa still struggles to recover from the global financial crisis, sources close to the AU secretariat, Finance Ministers of the member states have been studying suggested ways of sourcing extra funds for the organization but convergence of ideas remains problematic.

It was proposed earlier on that governments of member states raise money from taxation of lucrative sectors of their economies including oil exports, air tickets, receipts from tourism and insurance premiums in order to prop up implementation of the Union’s strategic programmers.

The African Union has had to rely more on internal sources of funding in view of increasing reluctance of its external partners to release more funds without proper accounting system in the Commission.

It has become evident that while particular attention to follow up on funds provided by partners, the Commission must improve its capacity to manage finances put at its disposal.

The world waits with bated breath to see what plans the Commission has for raising finances for activities of its organs in its forthcoming meeting.