Building capacity to help Africa trade better

Signs suggest global economic growth spurt has peaked but will remain steady at 3 percent in 2019-2020


Signs suggest global economic growth spurt has peaked but will remain steady at 3 percent in 2019-2020

Signs suggest global economic growth spurt has peaked but will remain steady at 3 percent in 2019-2020
Photo credit: Jan Hoffmann

Economic prospects threatened by weakened support for multilateralism, tightening of financial conditions and heightened trade tensions

The global economy will continue to grow at a steady pace of around 3 percent in 2019 and 2020 amid signs that global growth has peaked. However, a worrisome combination of development challenges could further undermine growth, according to the United Nations World Economic Situation and Prospects (WESP) 2019, which was launched on Monday, 21 January.

UN Secretary-General António Guterres cautioned: “While global economic indicators remain largely favourable, they do not tell the whole story.” He said the World Economic Situation and Prospects 2019 “raises concerns over the sustainability of global economic growth in the face of rising financial, social and environmental challenges.”

Global growth is expected to remain steady at 3.0 per cent in 2019 and 2020, after an expansion of 3.1 per cent in 2018. Growth in the United States is projected to decelerate to 2.5 per cent in 2019 and 2 per cent in 2020, as the impulse from fiscal stimulus in 2018 wanes. Steady growth of 2.0 per cent is projected for the European Union, although risks are tilted to the downside, including a potential fallout from Brexit.

Growth in China is expected to moderate from 6.6 per cent in 2018 to 6.3 per cent in 2019, with policy support partly offsetting the negative impact of trade tensions. Several large commodity-exporting countries, such as Brazil, Nigeria and the Russian Federation, are projected to see a moderate pickup in growth in 2019-2020, albeit from a low base.

However, economic growth is uneven and is often failing to reach where it is most needed. Per capita incomes will stagnate or grow only marginally in 2019 in several parts of Africa, Western Asia, and Latin America and the Caribbean. Even where per capita growth is strong, economic activity is often driven by core industrial and urban regions, leaving peripheral and rural areas behind. Eradicating poverty by 2030 will require both double-digit growth in Africa and steep reductions in income inequality.

Further clouding the prospects are a confluence of risks with the potential to severely disrupt economic activity and inflict significant damage on longer-term development prospects. These risks include waning support for multilateral approaches; the escalation of trade policy disputes; financial instabilities linked to elevated levels of debt; and rising climate risks, as the world experiences an increasing number of extreme weather events.

The contemporaneous appearance of several important risks endangers efforts to achieve the 2030 Agenda for Sustainable Development – the universally adopted plan containing 17 specific goals to promote prosperity and social well-being while protecting the environment.

“Alongside various short-term risks, there is an increasing urgency to deal with much more fundamental problems. What we have hitherto viewed as long-term challenges, such as climate change, have become immediate short-term risks,” emphasized Elliott Harris, UN Chief Economist and Assistant Secretary-General for Economic Development.

Strengthening global cooperation is central to advancing sustainable development

The report underscores that strengthening global cooperation is central to advancing sustainable development. The multilateral approach to global policy making is facing significant challenges, including a trend toward greater unilateral actions. Pressures have materialized in the areas of international trade, international development finance and tackling climate change.

These threats come at a time when international cooperation and governance are more important than ever – many of the challenges laid out in the 2030 Agenda for Sustainable Development are global by nature and require collective and cooperative action. Waning support for multilateralism also raises questions around the capacity for collaborative policy action in the event of a widespread global shock.

Global trade tensions pose a threat to the economic outlook

Amid the rise in global trade tensions, global trade growth moderated over the course of 2018, from growth of 5.3 per cent in 2017, to 3.8 per cent. While tensions have materially impacted some specific sectors, stimulus measures and direct subsidies have so far offset much of the direct economic impacts on China and the United States. But a prolonged escalation of trade tensions could severely disrupt the global economy.

Directly impacted sectors have already witnessed rising input prices and delayed investment decisions. These impacts can be expected to spread through global value chains, particularly in East Asia. Slower growth in China and the United States could also reduce the demand for commodities, affecting commodity exporters from Africa and Latin America.

An abrupt tightening of global financial conditions could spark financial turmoil

As global financial conditions tighten, an unexpectedly rapid rise in interest rates or a significant strengthening of the US dollar could exacerbate emerging market fragilities, leading to heightened risk of debt distress. This risk can be further aggravated by global trade tensions, monetary policy adjustment in developed economies, commodity price shocks, or domestic political or economic disruptions.

Many low-income countries have already experienced a substantial rise in interest burdens. Countries with a substantial amount of dollar-denominated debt, high current account or fiscal deficits, large external financing needs and limited policy buffers are particularly vulnerable to financial stress.

Climate risks still not fully integrated into economic decision-making

A fundamental shift in the way the world powers economic growth is imperative. Economic decision-making must fully integrate the negative climate risks associated with emissions. This can be achieved through tools such as carbon pricing measures, energy efficiency regulations such as minimum performance standards and building codes, and reduction of socially inefficient fossil fuel subsidy regimes. Governments can also promote policies to stimulate new energy-saving technologies, such as research and development subsidies. In countries that remain highly reliant on fossil fuel production, economic diversification is vital.

Chapter III. Regional developments and outlook

Africa: Short-term economic outlook improving but continent still faces significant medium-term vulnerabilities

Aggregate GDP growth in Africa slowed to 3.2 per cent in 2018, from 3.4 per cent in 2017. The continent is expected to grow marginally faster at 3.4 per cent in 2019 and 3.7 per cent in 2020. Supporting this performance is the rising demand for Africa’s exports, together with robust private consumption and sustained investments in infrastructure.

However, aggregate GDP on a per capita basis is projected to increase by only 0.6 per cent in 2018 and by 0.9 per cent in 2019 – insufficient to improve living standards for large segments of the population. The continent would need to at least double the current growth rate in order to make significant progress towards achieving many of the SDGs.

Economic performance and prospects differ widely among the five African subregions. After an estimated expansion of 3.7 per cent in 2019, growth in North Africa is forecast to moderate slightly to 3.4 per cent in 2019 and 3.5 per cent 2020, as external conditions are projected to be stable amid a consistent expansion of European economies – the largest export destination.

East Africa will remain the fastest-growing subregion. GDP growth is projected to accelerate from 6.2 per cent in 2018 to 6.4 per cent in 2019 and to 6.5 per cent in 2020, supported by large infrastructure investments and the expansion of domestic markets.

In Southern Africa, economic growth is projected to pick up modestly from 1.2 per cent in 2018 to 2.1 per cent in 2019 and 2.6 per cent in 2020. In South Africa, the subregion’s largest economy, growth will remain subdued amid socio-political challenges, heightened uncertainty in the mining sector, and weather-dependent agriculture. This will continue to weigh on the performance of other economies in the subregion.

Growth in Central Africa is estimated to accelerate mildly from 2.2 per cent in 2018 to 2.5 per cent in 2019, supported by firming oil production, rising investment and diversification measures. Inflation is projected to remain close to the 3 per cent convergence criteria set by the Central African Economic and Monetary Community.

In West Africa, GDP growth is projected to strengthen to 3.4 per cent in 2019, up from 3.2 per cent in 2018, supported by expanding domestic demand, improving terms of trade and capital inflows. The relatively modest aggregate growth largely reflects the performance of the Nigerian economy, which is projected to expand by only around 2 per cent in 2019. In the eight-country West African Economic and Monetary Union, growth will remain above 6.5 per cent in 2019-2020.

The report also notes that inflation receded in 2018 as exchange rate shocks triggered by the commodity price crash of 2014-15 were absorbed into the price level. Inflation in the continent is expected to continue to moderate in 2019 as exchange rates and food production stabilize in most countries.

Risks and policy challenges

Risks to Africa’s economic outlook stem from external and domestic factors. On the external side, the tightening of monetary policies across developed countries – and the strengthening of the US dollar – can limit the capacity to service current debt positions. As monetary conditions are projected to tighten further, the risk of debt defaults could significantly rise and thus increase debt sustainability concerns. Also, a further escalation of trade tensions or a global economic slowdown resulting in lower demand for commodities could substantially impact the economic prospects of African economies.

On the domestic side, the report highlights the weak fiscal positions in several economies as a source of vulnerability. Several African countries are undertaking fiscal reforms, aiming to expand government revenues and to cut down expenditures. This could significantly affect the more vulnerable segments of the population, particularly of those living in poverty. Thus, the implementation of effective fiscal reforms is a crucial challenge for some economies. Also, despite remarkable achievements in peace processes recently in Eritrea, Ethiopia, Somalia and South Sudan, armed conflict and political instability remain a major risk.

African Continental Free Trade Area: opportunities and challenges for achieving sustainable development

The African Continental Free Trade Area (AfCFTA) declaration, signed by 49 African Union Members in 2018, is believed to have the capability of boosting intra-African trade and producing the kind of growth that can support economic diversification, industrialization and development of the continent. An additional six Member States signed the Kigali Declaration, committing to signing the AfCFTA after finalizing domestic review processes. Among other goals, the AfCFTA is envisaged to facilitate, harmonize and better coordinate trade regimes, and eliminate the challenges associated with multiple and overlapping trade regimes across countries as well as across regional economic communities (RECs).

The AfCFTA is likely to support the continent’s industrialization and structural transformation agenda, as manufactured products make up 46 per cent of intra-African trade and only 22 per cent of Africa’s trade with the rest of the world, leaving significant scope for African countries to industrialize. According to United Nations Economic Commission for Africa (ECA) estimates, the AfCFTA is expected to increase Africa’s industrial exports by more than 50 per cent over a period of 12 years. This could promote the type of trade that would potentially create jobs for Africa’s growing youth population and establish opportunities for nurturing Africa’s businesses and entrepreneurs.

All countries and regions are expected to increase their exports, regardless of the approach to liberalization, supporting the continent’s industrialization and structural transformation agenda. Intra-African trade is projected to rise by between 15 and 25 per cent. The more ambitious the liberalization approach, the higher the potential trade creation and revenue gains within Africa. Estimates reveal the largest potential increases of over 40 per cent in textile, wood and paper, vehicle and transport equipment, other manufactures and wearing apparel industries.

The implementation of the AfCFTA has some fiscal policy implications through marginal losses in tariff revenue. The small scale of the losses is mainly due to intra-African trade being a small share of Africa’s total trade (only 18 per cent of total exports in 2016), and most intra-African trade is already liberalized under RECs. The AfCFTA is estimated to affect only about 7 per cent of Africa’s total imports under current trade patterns. Nonetheless, there is widespread fear within participating countries that the revenue losses will prove significantly larger, which could delay implementation of the AfCFTA.

The resulting tariff cuts would lead to a redistribution of income from Governments to consumers and producers. Moreover, the AfCFTA is expected to produce additional welfare gains that surpass tariff losses significantly due to better allocation of resources. Furthermore, countries will be allowed to exclude a certain number of tariff lines (e.g., tariff lines that are important for raising tariff revenues) from the liberalization process. Conveying these messages clearly to participating countries is crucial to accelerating the implementation of AfCFTA.

These tariff revenue losses may also be outweighed by the additional revenues from growth to be generated by the AfCFTA, which would broaden the tax base and boost revenue collection from other sources. Growth in Africa is expected to accelerate by 0.3-0.6 percentage points by 2040 (depending on the liberalization approach or scenario adopted), when compared to the baseline scenario.

All African countries would experience an increase in their GDP with the AfCFTA reforms, whatever the scenario. Countries such as Zimbabwe are expected to increase by between 3.6 and 31.9 per cent, depending on the scenario.a However, these forecasts are likely to substantially underestimate the economic benefits of the AfCFTA, as they do not take into account the impact of liberalization in other areas such as services and investment.

The benefits of the AfCFTA would be further enhanced by maximizing the potential that comes with a fast-growing young population and the associated fast urbanization process occurring on the continent. This would be conducive for agglomeration economies providing major opportunities for industrialization through rising demand and shifting patterns of consumption. Through the AfCFTA, the growing middle class can be leveraged to stimulate industrial development to meet the rising demand domestically and regionally, leading to broader integration through value chains. However, for this to be achieved, Africa needs to take proactive steps to curb the associated risks that come with a rising and urbanizing population.

Implementation of the AfCTA may be delayed by the following circumstances: the multiple and overlapping trade agreements in Africa; fear of significant tariff revenue losses by countries; possible uneven distribution of other costs and benefits among member countries; and poor and inadequate domestic infrastructure. The role of payment systems in facilitating cross-border trade and the associated challenges and constraints of various payment arrangements, both at national and regional levels, need to be examined. There is a need, therefore, for policies to mitigate these challenges and help enhance the redistribution of potential benefits and costs of the AfCFTA.

The importance of infrastructure in enhancing regional integration cannot be emphasized enough. Recognizing the importance of efficient transport, communications, energy infrastructure and related services for trade and the pursuit of the continent’s development goals, the African Union Heads of State and Governments, among others, reaffirmed the high priority accorded to infrastructure and launched the Plan for Infrastructure Development in Africa (PIDA) for its accelerated development. The objective of the PIDA is to help African leaders establish a strategic framework for creating regional and continental infrastructure based on a development vision, strategic objectives and sector policies. Accelerating this process is now all the more imperative for taking full advantage of the opportunities offered by the AfCFTA.

This box was written by Hopestone Kayiska Chavula and Nadia S. Ouedraogo, UNECA.


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