African Development Bank’s Economic Outlook shows decline in regional economies
The African Development Bank has expanded its flagship publication, the African Economic Outlook, with five regional reports. The regional economic studies were released in Tunis (North Africa), Abidjan (West and Central Africa), Nairobi (Eastern Africa) and Pretoria (Southern Africa).
“By offering regional approaches for the first time, we want to leverage the Bank’s expertise and give more depth of analysis and relevance to this publication,” said Celestin Monga, Chief Economist and Vice President of the African Development Bank’s Economic Governance and Knowledge Management.
“The integration of specific reports for each region reflects the importance the Bank’s focus on the regional dimensions of development and inclusive growth in Africa,” said Mohamed El Azizi, Director General of the North Africa Region.
North Africa: a positive outlook for 2018 and 2019
North Africa ended 2017 with growth of 4.9% of real GDP, up from 3.3% recorded in 2016. The region’s economic performance is above a 3.6% average for the continent, thanks to higher than expected oil production in Libya and the performance of Morocco, which saw growth rise from 1.2% in 2016 to 4.1% in 2017, on account of increased agricultural productivity.
Egypt’s macroeconomic and structural reforms led to a 4% growth in 2017. Overall, growth in the North Africa region was fueled by new high value-added sectors such as electronics and mechanics, as well as private and public consumption. The region’s outlook remains positive for 2018 and 2019, on account of structural reforms. Growth in North Africa is expected to reach 5% and 4.6% respectively in 2018 and 2019.
East Africa: the best economic performance of the continent
According to Nnena Nwabufo, the Bank’s Deputy Director General for the East Africa Region, the East African Economic Outlook highlights a number of policies that member countries must implement to transform their economies.
East Africa, with thirteen countries, recorded the continent’s best economic performance with a GDP growth rate of 5.9% in 2017 − a rate much higher than the growth recorded by the other regions of the continent, and above the continental average of 3.6%.
The good performance of the East African sub region is stimulated by six countries: Ethiopia, Tanzania, Djibouti, Rwanda, Seychelles and Kenya. The outlook remains positive for 2018 and 2019, with growth expected to continue, reaching 5.9% in 2018 and 6.2% in 2019.
Southern Africa: economic recovery started, but contrasting growth
Estimated at 1.6% on average in 2017, real GDP growth in Southern Africa is expected to improve to 2% in 2018 and 2.4% in 2019.
Deputy Director General of the Bank for Southern Africa, Josephine Ngure said: “The Southern Africa region has made considerable progress in the fight against poverty and improvements in the quality of life of its inhabitants, through the implementation of policies targeting the acceleration of industrialization and the promotion of growth and job creation.”
However, economic forecasts remain cautious, especially given the very different growth patterns of the region’s economies. The economic “locomotive” of the region, South Africa, shows signs of slow growth, and possibly declining growth, while low-income countries and the economies in transition, such as Madagascar and Mozambique, recorded more important growth.
“High fiscal deficits and rising public debt pose challenges to macroeconomic stability in several southern African countries. Governments should put in place measures to improve the mobilization of domestic resources and funds from the private sector to ensure adequate levels of development spending, stimulate growth and create jobs, especially for young people, “said Stefan Muller, Bank’s Senior Economist for Southern Africa.
West Africa: Progress in a contrasting panorama
After several good years, economic growth in West Africa stagnated at 0.5% in 2016. The decline in the price of raw materials and the unimpressive performance of Nigeria, which alone accounts for about 70% of the sub region’s GDP, were some of the key factors identified as responsible for stagnation. Economic growth in West Africa rebounded to 2.5% in 2017 and is projected to rise to 3.8% in 2018 and 3.9% in 2019. Household consumption and the relative price recovery of certain materials are expected to contribute to this performance.
Marie-Laure Akin-Olugbade, Deputy Director General of the African Development Bank for West Africa, identified job creation, especially for young people as the big challenge for the sub-region.
“The 2018 Regional Economic Outlook for West Africa presents a comprehensive analysis of the economy and the labor market of 15 countries, focusing on macroeconomic stability, employment and poverty of the population living in West Africa. Let us not forget that some of the countries in this sub-region are facing enormous security challenges,” she said.
Central Africa: Better prospects after a modest performance
The Central African region recorded 0.9% real GDP in 2017, the lowest growth rate of the continent, although it represents a relative improvement over growth of 0.1% in 2016. This sub regional performance masks many disparities between countries: relatively good growth for Cameroon and the Central African Republic, and very low growth for Equatorial Guinea and Congo.
The economic difficulties in Central Africa are largely due to lower raw material prices, which some countries in the region are heavily dependent on, as well as recurring security threats in others.
The outlook for 2018 and 2019 is more encouraging, fueled by rising world prices for raw materials and domestic demand. According to the Bank’s projections, real GDP growth in Central Africa is expected to reach 2.4 percent in 2018 and 3 percent in the following year. Other enabling factors include sound macroeconomic management and a more favorable institutional environment.
“With improvements in the economic situations of Congo and Equatorial Guinea, the economic performance of the sub-region is expected to improve in 2018 and 2019. It would be good to include this improvement over time through the diversification of economies of the sub region,” said Racine Kane, Deputy Director General of the African Development Bank for Central Africa.
The African Economic Outlook is a flagship publication of the Bank, which provides an overview of the economies of the 54 African countries. The general launch took place on January 17 in Abidjan, Côte d’Ivoire. A second presentation ceremony was held in Addis Ababa on 26 January, on the sidelines of the Thirtieth Summit of the African Union.
Southern Africa Economic Outlook 2018
GDP growth and key drivers
Over the last two decades, the economies of Southern Africa experienced two distinct growth patterns. Before the 2008-09 global recession, they experienced moderate growth, reaching 6.5 percent in 2007, just below the regional growth target of 7 percent. These were the region’s high-growth years, underpinned by high commodity prices and favorable domestic conditions, especially in low-income economies, some graduating to lower middle-income (Zambia).
The sharp decline in growth in 2008 and the mild recession the following year were mainly due to the global recession, which had a large contractionary effect on global demand, especially for the region’s main exports. This constrained incomes and cut jobs in mining. The spillovers to other sectors were considerable, as growth faltered, reaching a nadir of 0.08 percent in 2009. Although growth has since recovered, it has remained below the pre-crisis levels and for the most part been on a downward trend. This slowdown has reinforced structural weaknesses in the region, highlighting the imperative of strengthening alternative sources of growth.
Individual countries contributed differently to the overall trend – some are consistent as growth leaders while others trade places. Before the global crisis, Angola, Mozambique, and Namibia exhibited robust growth trends that collectively outperformed the region’s growth expectations. The postcrisis recovery has been largely led by smaller economies, posting moderate but consistent growth. Clustering reveals weakgrowth economies, average-to-moderate growth economies, and expansive-growth economies.
The notable exception is the persistently weak growth in South Africa, weighing down the regional average. Apart from its short-lived post-crisis rebound, South Africa has registered weak and declining growth since 2011. In the last decade, South Africa has consistently posted the lowest growth rates in the region.
While real GDP gains from select economies offer a positive outlook, they are inadequate and do not create sufficient momentum to significantly alter the region’s medium-term growth trajectory, which remains fairly flat. With population growth largely unchanged across the region, per capita income has tracked real GDP growth’s low levels.
The neighborhood effects of South Africa’s slow growth have been significant, particularly on Namibia and Swaziland, the latter’s situation compounded by domestic macroeconomic imbalances characterized by large fiscal deficits. In contrast, Lesotho has grown at respectable rates, benefiting from strong manufacturing activity, boosted by AGOA exports.
The post-crisis recovery in the region generally reveals great diversity in growth patterns, responses to exogenous shocks, and domestic macroeconomic conditions. For instance, despite mounting debt, growth in Mozambique accelerated to 4.7 percent in 2017 from 3.8 percent in 2016, buoyed by mineral exports. Agriculture also performed strongly, bringing much needed relief to inflation, dominated by food inflation. But its fiscal deficit remains elevated, and fears of debt distress could unwind growth’s gains. Per capita income growth remained in positive territory at 2 percent in 2017 and is projected to rise to 2.6 percent in 2018, as GDP growth accelerates to 5.3 percent. The main challenges in Mozambique stem largely from financing constraints amid spending pressures and high external debt burdens, estimated at about 90 percent of GDP in 2016.
Real GDP growth in Namibia is projected to more than double to 2.6 percent in 2018 from 0.8 percent in 2017 and in Swaziland from 1.0 percent to 2.5 percent. Namibia will benefit from recovery in the global prices of its main export commodities.
The change in leadership in Zimbabwe has renewed optimism about the country’s ability to reclaim its position in the region. The budget presented to parliament offered glimmers of hope to investors on prospects of new reforms, especially on minimal investment thresholds for external investors. But the economy is still experiencing financial constraints, and debt remains high, with accumulated arrears. So, real GDP growth is projected to remain weak at 1 percent in 2018, with a marginal gain of 0.2 percentage points the following year. This projection could be reversed however, depending on the outcome of the budget pronouncements and the country’s re-engagement with the international community, especially its creditors.
Boosting structural transformation and industrialization
From a long-term perspective though, transformation of the economies of the region appears to have been toward services not industry. A large share of the growth in (non-farm) employment was in household enterprises, not in modern industrial enterprises.
Policies should, thus, focus on speeding up industrialization in the Southern African countries. Policy harmonization is necessary across regional countries. In addition, policy changes should ensure efficiency in the linkages between the various sectors.
Countries in the region should seize new opportunities emerging from cooperation and collaboration with other economies. In this regard, developing a regional strategy can facilitate the participation of regional firms in global value chains through access to finance, technology, and markets.
Countries also need to strengthen fair trading and competition policies and regulations, since anti-competitive practices are common. Competition policies and laws should level the playing field in the market.
Collaborative measures should also be developed to support the region’s drive toward industrialization by cooperating in public procurement. That would reduce the tendency to exclude regional suppliers from participating in public bids in pursuit of national and local development objectives.
Policy recommendations to promote Southern Africa’s industrialization include:
Identify sectors with good potential for value addition and transformative growth. Madagascar and Mozambique have considerable untapped potential for agro-based and blue economy-led industrialization. Others enjoy endowments of oil, gas, and minerals.
Develop sectors and industries with an identified potential for industrialization and largescale employment as a top priority, notably by providing infrastructure, putting in place adequate legal and regulatory environments, and imparting the right skills.
Design tailor-made support policies and schemes through tax-free land and other incentives, promote business incubators, build industrial clusters and parks, and establish special economic zones.
Enable and promote the transfer of necessary know-how and technology from abroad to boost productivity, with South-South cooperation as entry points.
Modernizing Southern Africa’s agricultural sector – Feed Southern Africa
Agriculture remains a significant source of income and employment for most poor families in the region. So, investments that boost agricultural productivity and technology in the sector should catalyze the conversion of small-scale activities from the informal to the formal sector. Governments in the region should foster a self-reinforcing catalytic economic growth process – investing in agricultural innovations and vocational skills to support and promote youth self-employment as a viable path to economic growth.
Large businesses have operations extending across the region, and are linked into global value chains and international production systems. Economic policies must engage with the interests of these firms if they are to influence their decisions toward investing in productive capabilities. Large firms can realize economies of scale, but they can also exert market power to exclude smaller firms and entrants.
Reaping the benefits of Southern Africa’s rich gas, oil, and mineral resources – Power Southern Africa
Mozambique could become one of the largest economies in Africa when production of natural gas in the north reaches its peak in 2028. The country’s economy is expected to grow at 24 percent a year, and half of Mozambique’s GDP might come from natural gas. Fast-tracking natural gas production and improving budget management can maximize the benefits in human development outcomes.
A portion of the gas should be allocated to meet local demand, especially for power generation, processing, and industrial needs. Mozambique should improve sector governance, put in place a policy framework, and provide fiscal incentives for investments in infrastructure to harness the benefits for inclusive development.
Policy recommendations to manage Mozambique’s gas reserves include:
Develop specific domestic gas utilization policies.
Target policies that promote interregional trade of gas resources.
Develop gas revenue management policies.
Promote policies that pursue industrial development using gas, and develop industrial zones where gas can be supplied to several industries.
Angola is Africa’s second largest oil producer, producing 1.8 million barrels of oil per day on average, with an estimated proven oil reserve of 11.6 billion barrels. Although Angola produces a lot of oil, it still imports petroleum products. It needs to develop policies that sustain the economy using petroleum resources processed in the country. The recent restructuring of the national oil company and the general management of the oil and gas sector is likely to improve the oil sector’s performance.
Policy recommendations to ensure that Angola’s oil resources are used transparently and effectively include:
Design policies that review institutional frameworks to separate and enhance clarity on the roles of different institutions in the oil sector.
Develop petroleum revenue management policies.
Favor value addition for petroleum resources in order to satisfy the domestic market.
Promote the maximization of gas resources to generate electricity.
South Africa is endowed with a variety of mineral resources and has a well-developed mining and quarrying industry based on over 100 years of experience, especially in gold, diamonds, and coal mining. While mining is spread across the country, there is a greater concentration of both mining and industry in the northeast covering the Gauteng and Limpopo provinces. Gauteng province is a major industrial area that developed largely as a result of gold and coal mining.
Policy recommendations to allow the mining and quarrying industry to respond to external and internal developments include:
Boost the low investor confidence and therefore increased difficulties in raising capital due in part to the downgrading of the country’s credit ratings.
Improve investor perceptions of regulatory uncertainty. For long-term sustainability, investments are required in exploration to replace or replenish depleted resources
Develop local content policies to increase local communities’ benefits from the mining industry.
Rehabilitate disused mines. Some mines that have not been fully rehabilitated are encouraging illegal mining, which causes both safety issues and risks of criminal activity such as illicit dealing in minerals and money laundering.
Integrating Southern Africa
The Southern Africa region needs to coordinate growth, trade, and job creation policies to engender a multiplier effect. Shifting resource exporters higher on the global value-added chain from raw material conduits to intermediate product processors can provide economies of scale, a base to defray upfront investment costs, and an organic middle-skill job creation engine.
In Zambia, this would involve exporting intermediate and processed copper goods in addition to raw copper. New regional trade agreements with emerging high-demand economies like China could provide ready markets for such initiatives.
Challenges such as food security, energy, water, and transport and communications infrastructure require solutions integrating the region. For example, the Lesotho Highlands Water Project will generate hydroelectric power for Lesotho, while increasing the volume of water transferred to South Africa from the current 10 billion cubic meters a year to about 15 billion. It comprises dams, hydropower stations, and tunnels between South Africa and mountainous, landlocked Lesotho.
More coordinated and robust regional infrastructure corridors such as water, ports, roads, and rail can integrate economies within the region, as can regulatory and legal frameworks for access to and efficient pricing of such services.
Increased regional and international trade will require significant investment in standards, quality assurance, accreditation, and metrology. Strengthening the regional SQAM infrastructure will also prevent the dumping of cheap, substandard manufactured goods in the regional market. A regional approach to SME support and development can promote the formation and growth of the sector to participate in regional trade and global supply chains.
Policy recommendations to promote regional integration in Southern Africa include:
Undertake rigorous political economy analysis of factors preventing progress on the region’s integration agenda, including the identification of winners and losers. This will help policy makers understand the real bottlenecks to regional integration and allow the design of policies and reforms to accelerate the process of integration.
Strengthen regional infrastructure, notably the multimodal transport corridors such as the Maputo Development Corridor, North-South Corridor, Dar-es-Salaam Corridor, Beira Corridor, and the Nacala Corridor, which offer great potential for growth and development.
Remove nontariff barriers to trade, such as cumbersome custom procedures, and strengthen soft infrastructure, such as one-stop border posts and single window information portals.