Economic growth in Africa rebounds, but not fast enough

Sub-Saharan Africa’s growth is projected to reach 3.1 percent in 2018, and to average 3.6 percent in 2019-20, says Africa’s Pulse, a bi-annual analysis of the state of African economies conducted by the World Bank, released today.

The growth forecasts are premised on expectations that oil and metals prices will remain stable, and that governments in the region will implement reforms to address macroeconomic imbalances and boost investment.

“Growth has rebounded in Sub-Saharan Africa, but not fast enough. We are still far from pre-crisis growth levels,” said Albert G. Zeufack, World Bank Chief Economist for the Africa Region. “African Governments must speed up and deepen macroeconomic and structural reforms to achieve high and sustained levels of growth.”

The moderate pace of economic expansion reflects the gradual pick-up in growth in the region’s three largest economies, Nigeria, Angola and South Africa. Elsewhere, economic activity will pick up in some metals exporters, as mining production and investment rise. Among non-resource intensive countries, solid growth, supported by infrastructure investment, will continue in the West African Economic and Monetary Union (WAEMU), led by Côte d’Ivoire and Senegal.

Growth prospects have strengthened in most of East Africa, owing to improving agriculture sector growth following droughts and a rebound in private sector credit growth; in Ethiopia, growth will remain high, as government-led infrastructure investment continues.

“For many African countries, the economic recovery is vulnerable to fluctuations in commodity prices and production,” said Punam Chuhan-Pole, World Bank Lead Economist and the author of the report. “This underscores the need for countries to build resilience by pushing diversification strategies to the top of the policy agenda.”

Public debt relative to GDP is rising in the region, and the composition of debt has changed, as countries have shifted away from traditional concessional sources of financing toward more market-based ones. Higher debt burdens and the increasing exposure to market risks raise concerns about debt sustainability: 18 countries were classified at high-risk of debt distress in March 2018, compared with eight in 2013.

“By fully embracing technology and leveraging innovation, Africa can boost productivity across and within sectors, and accelerate growth,” said Zeufack.

This issue of Africa’s Pulse has a special focus on the role of innovation in accelerating electrification in Sub-Saharan Africa, and its implications of achieving inclusive economic growth and poverty reduction. With Sub-Saharan Africa’s household electrification rate at the lowest in the world, boosting access to electricity is a key development issue for the region.

The report finds that achieving universal electrification in Sub-Saharan Africa will require a combination of solutions involving the national grid, as well as “mini-grids” and “micro-grids” serving small concentrations of electricity users, and off-grid home-scale systems. Improving regulation of the electricity sector and better management of utilities remain key to success.

“Access to electricity will lift productivity within and across sectors,” said Zeufack. “African governments must fully embrace technology and leverage innovation to ensure quality, affordable and sustainable electricity.”

The region’s household electrification rate averaged 42% in 2016. There is wide variation in electricity access across countries, with some fragile countries having rates less than 10%. There are also huge disparities in electricity access between rural and urban households; the report notes access rates among urban households are about 71%, compared to 22% among rural households. Aside from low access, the region is also facing issues such as low consumption, low reliability, high per kilowatt cost, and utilities running at loss.

Leveraging technology and better governance to boost electrification

Substantial cost reductions from rapid technological improvements in home-scale solar power production offer opportunities to improve the lives of people without access to electricity in more lightly populated rural and remote areas of Sub-Saharan Africa, according to the Pulse. But home systems in themselves cannot do much to increase incomes and employment, the report says, given the limited quantities of electricity they provide compared with the electricity needed for most productive uses.

According to the analysis, mini-grids are a viable possibility for scaling up electricity availability in areas where grid extension is costly or can only be accomplished some ways into the future. Although there has been limited investment in mini-grids so far in Sub-Saharan Africa outside Tanzania, several other countries, including Nigeria and Rwanda, have been undertaking regulatory reforms to lower barriers to mini-grid investment.

The report notes that a major challenge for inducing private sector mini-grid investment is confidence with respect to cost recovery, and what happens to mini-grid assets when the grid begins to penetrate the service territory.

“Leapfrogging over the traditional stages of national grid-based electrification will require a combination of different systems to answer diverse needs,” said Chuhan-Pole. “Leveraging the private sector will be critical to scaling-up electrification.”

According to the report, improved governance of the electricity sector is a prerequisite, regardless of the technical configurations used to expanding access to electricity in Sub-Saharan Africa. Report recommendations include rationalizing electricity pricing, reducing regulatory barriers that limit private sector investment in grid or off-grid power production, making utility operations more efficient and transparent, and fostering more independent sector regulation.

This report was prepared by the Office of the Chief Economist for the Africa Region. by a team led by Punam Chuhan-Pole.