A fiscal stimulus to address the effects of the global financial crisis on sub-Saharan Africa

The global financial crisis will have a major impact on developed and developing countries alike. The developed and richer developing countries have begun to address the consequences of the crisis and have announced various fiscal stimuli. The G 20 countries have announced fiscal stimuli worth around 1.5% of GDP, or some US$ 2 trillion, to cushion the consequences of the global financial crisis. It will matter greatly for poor countries (non-G20) countries, such as African countries, whether part of such a stimulus is provided in poor countries or whether the entire stimulus is kept in the G20. This paper examines the effects of various fiscal stimuli on growth in the world, in developed countries, and sub-Saharan Africa (SSA) and uses a calibrated macroeconomic model of the world economy. Several recent studies discuss a fiscal stimulus for developing countries. The World Bank President, Robert Zoellick, has argued that 0.7% of the developed country stimulus, worth around US$ 15 billion, should be used to finance a vulnerability fund for developing counties to spend on infrastructure, safety net and SME projects. The campaigning organization One suggests that 1% or some US$ 20 billion should be provided to Africa. IMF (2009) provides current baseline projections for 2009 which suggest an aggregate additional financing need for LICs of about US$ 25 billion. However much larger financing needs, up to US$ 140 billion, would result if various downside risks were to materialise. The World Bank (2009) suggests that developing countries face a financing gap of US$270-US$700 billion depending on the severity of the crisis and the strength and timing of the policy responses. Birdsall (2009) discusses the financial resources for a cash injection into the world economy and suggests that one trillion US$ could be resourced, though this is not based on needs. Te Velde (2009) uses the revisions in growth forecasts by the IMF (July 2008 to present) and suggests that the global financial crisis has already led to an estimated output loss (assuming that the revisions can be attributed only to the crisis) of US$ 2.7 trillion in the world (around 5% of world GDP), US$ 737 billion in developing countries and US$ 51 billion in SSA. This paper examines the effects of providing an aid financed fiscal stimulus in sub-Saharan Africa. Section 2 provides a brief review of the literature on aid, public expenditure and growth in Africa. Section 3 discusses the policy scenarios. Section 4 explains the results of the model simulations.