Recent Economic Developments in Africa

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Recent Economic Developments in Africa

• Louis Kasekende
• Chief Economist,
• African Development Bank

Dublin, 25 May 2009
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Main Messages

• Africa not decoupled as previously thought
• although GDP is positive, per capita incomes are
  falling growth drivers severely affected by the
  crisis
• The recent growth deceleration largely due to
  external factors
• Africa is in a much better position to manage the
  crisis than in previous periods due to better
  economic management
• ..But long term development challenges remain

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Outline of the Presentation

• Pattern of African Growth
• Explaining Recent Growth Acceleration
• The Impact of the Global Crisis
• Transforming accelerations into sustainable
  dynamic growth

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I. Pattern of African Growth
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Africa Real Per Capita GDP growth ()
History Booms and Busts a feature of African
Growth
Episodic growth is typical of natural resource
driven growth
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Natural resources underpin most of the growth
cycles in Africa
External factors underpin growth accelerations
and decelerations
Real GDP Growth ()
Africa and World GDP Growth ()
driven by growth in global demand
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Explaining recent growth accelerations
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Sustained growth period

• Recent growth acceleration was underpinned by
• Strong global demand for Africas raw materials
• Large financial inflows
• Good macroeconomic management

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Openness a key driver of recent growth
acceleration
Hard commodities
Soft Commodities
Source OECD Development Centre, based on World
Bank, 2009
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Oil exporters were growing faster than importers
Source African Economic Outlook 2008
Net Oil exporters Algeria, Angola, Cameroon,
Chad, Congo, Côte d'Ivoire, Congo DRC, Egypt,
Equatorial Guinea, Gabon, Libya, Nigeria, Sudan
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Higher financial inflows also a key growth driver
Remittances (USbn)
Source IMF Regional Economic Outlook, 2008
Foreign reserves (USbn)
Aid, esp. debt relief also made a difference
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Africa benefitted from improved economic
management which strengthened growth
Payoffs from more than two decades of reforms
leading to greater macroeconomic stability,
despite the food price increases in 2008
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Africa not decoupled continent hit by the global
crisis
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Severe macroeconomic impact (February forecast)
Fiscal balance

• Twin deficit problem the crisis will cause
  fiscal and current account balances to
  deteriorate significantly across the continent.
• Inflation will, however, stabilise as commodity
  prices fall, though food prices have remained high

Current Account
Inflation
Source OECD Development Centre / African
Development Bank. 2008
Excluding Zimbabwe Estimations for 20078and
predictions for 2009/10
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Shortfall in Trade Taxes
Fiscal balance
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The crisis is taking a toll on Africas growth
prospects
Real GDP Growth ()
April 08 projections
Nov 08 projections
Feb 09 projections
May 09 projections
Source OECD Development Centre / African
Development Bank. 2008
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Oil Exporters
Suffering from lack of diversification
and little room left for manoeuvre
Taking a hit from the oil price fall ..

• Many oil exporters did not take advantage of
  commodity windfalls to improve governance and
  diversify their economies
• Nevertheless, some oil exporters have performed
  well in terms of reducing external debt

Source OECD Development Centre / African
Development Bank
African Economic Outlook forecasts
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Oil Importers
Benefiting from low commodity prices reforms
yet challenges rising
Holding up against the crisis so far

• Oil-importing countries find it difficult
  preserving pre-crisis gains. Rising inflation and
  deteriorating macroeconomic balances.
• Good performers assets
• Sustained growth Prudent macroeconomic policies
  Diversification Decreasing poverty
• Challenges
• Fiscal deficits ODA dependency widening trade
  deficit climatic price shocks

Source
African Economic Outlook forecasts
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But the shock is not a disaster for Africa
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Africa today is in a much better position to
weather the crisis
Africa today is much more resilient to exogenous
shocks

• Committed macro management in many countries has
  brought inflation under control and improved
  fiscal balances
• Debt relief initiatives (HIPC MDRI) have
  significantly reduced debt levels in many
  countries
• The commodity boom helped to improve terms of
  trade
• Business climate indicators are steadily
  improving, reflecting government efforts in
  nurturing private sector and enterprise
• Political conflicts are on the wane

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Growth set to recover in 2010

• -Growth pause in 2009 Recovery in 2010 and
  beyond is promising.
• Net oil exporters (4.1)
• Net oil importers (3.8)
• -The challenge is for Africa to transform this
  acceleration into sustainable dynamic growth

Africa
Sub-Saharan Africa
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Some countries weathering the crisis
Cost of the crisis

• Oil exporters the most hit.
• More integrated economies also strongly affected
• Low-income / non-oil exporting countries are less
  affected. because
• -- beverages (cocoa. tea. coffee) less affected
  by decline in global incomes.
• -- less integration to the world economy

Growth differential 2008 - 2009
- 3.1 to 23
- 2 to- 3
Zero to 1.9
Increased growth between 2008-09
Source African Economic Outlook, 2009
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Some regions are weathering the crisis
Source African Economic Outlook, 2008/09
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The China-India factor

• Although China and India have not escaped the
  negative effects of the global crisis, growth
  remains robust.
• They continue as important sources of investment
  and trade for most of Africa.

Source OECD Development Centre, based on China
Mofcom, 2009
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But downside risks loom large
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Some downside risks

• Deteriorating macroeconomic balances
• -difficult to stick to sustainability indicators
• - limited fiscal space for stimulus packages
• Tension between reform and control
• Creeping protectionism
• Interest in Africa may wane

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Deteriorating Macroeconomic balances
Untenable targets on fiscal and debt
sustainability indicators in the face of
worsening macroeconomic balances . Limited
fiscal space for fiscal stimulus packages
Source OECD Development Centre / African
Development Bank. 2008
Excluding Zimbabwe Estimations for 20078and
predictions for 2009/10
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Tension between reform and control

• In the face of the crisis, some countries have
  imposed controls (sometimes temporary or limited)
  to stem sudden capital outflows.
• But the room that capital controls give to policy
  makers is limited
• Their later removal may be accompanied by large
  outflows.
• Time-consistency problem if investors view
  capital controls as a discretionary policy
  instrument, expectations of their imposition may
  encourage capital flight.
• Countries need to persevere with reforms

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Risk of declining ODA

• Crisis related budgetary constraints in donor
  countries may cause them to cut back on ODA.
• Previous crises in donor countries led them to
  also cut ODA budgets (Japan in 1990 Nordic
  countries after 1991)
• In the EU, although ODA is up, many countries
  cutting back on commitments to meet the EU time
  limits of achieving a target of 0.7 of GNI
• e.g. Ireland cut aid budget by 255 million since
  July 2008
• Italy will cut back its aid by 1 billion by 2010
• Good news ODA trend for Africa is upward

See Rooodman, D. (2008) History says
Financial Crisis will Suppress Aid Global
Development and Frot, E. (2009) Aid and the
Financial Crisis Shall we expect Development Aid
to Fall?
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Other Downside Risks

• Prolonged crisis in developed countries may delay
  the recovery in Africa
• Corporate failures as a result of the economic
  crisis may lead to a banking or financial crisis
  in Africa
• Risk of aid dependency
• The transition of some countries to a middle
  income status may be delayed

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Transforming growth acceleration into sustainable
dynamic growth
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Africa still faces many long-term development
challenges

• High cost of doing business in Africa
• Management of natural resources
• Reforming the financial sector
• Large gaps in infrastructure and logistics,
  including ports, roads, energy, IT
• Lack of product and market diversification
• Poverty reduction remains on overarching
  development challenge

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Putting Africa on a long-term growth trajectory

• Increase the level and productivity of investment
• Infrastructure
• Skills development (education and health)
• Pursue globalisation
• Diversification (products and markets), including
  manufacturing
• Deepen economic and institutional reforms
• Invest in IT and RD

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Africa is lagging behind in infrastructure and
logistics
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Lack of diversification a major challenge
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Invest in innovation, especially in ICT and RD
ICTs in Africa has proven to be an innovation
frontier by combining state-of-art technologies
with local customs and constraints through
incremental innovations.

• However, there is still more to be done to
  deliver more and better value added services to
  the poorest population
• Expensive inland high capacity networks require
  government support
• Governments have to ensure that wholesale price
  drops are passed on
• Policies on ICT and Innovation are not yet well
  integrated in broader development strategies
  Donor targets, MDGs and PRSPs.
• With many fixed-line operators close to
  bankruptcy, governments must attract private
  investment and knowhow to the fixed-line sector
  by adapting convergent licensing regimes and
  setting symmetric regulation of termination
  charges.

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Economic and Institutional Reforms

• Strengthen financial and banking sector reforms
• Public management and public expenditure reform
• Revenue reform

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Embrace Globalisation

• Africa should pursue globalisation through
• Enhanced competitiveness
• Reduction of barriers to trade
• Investing in logistics
• Fast-tracking regional integration

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Thank you for your attention