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Economic fundamentals in African countries showed significant improvement

Publishing Date : 18 November, 2019

Author : TLHABO KGOSIEMANG

Global growth has stabilized, with world output estimated to have grown by 3.7 per cent in 2018 and projected to grow by the same magnitude in 2019.


With the volatility of commodity prices and the rise of trade tensions between the United States and its main trading partners, the external environment has created increasingly adverse conditions for Africa’s growth. According to African Development Bank, higher interest rates in the United States and the strengthening of the US Dollar have put pressure on the currencies of developing countries and increased the costs of borrowing.


While the increase in energy prices gave relief for oil producers, it also worsened the terms of trade for oil importers. African Development Bank said in 2018, Africa’s Gross Domestic Product GDP growth reached an estimated 3.5 per cent, roughly the same as in 2017 and up by 1.4 percentage point from 2.1 per cent in the previous year 2016. In the short term, growth is projected to accelerate to 4 per cent in 2019 and 4.1 per cent in 2020. These projections are higher than those of other emerging and developing regions.


However, domestic risks, in addition to external constraints, could limit the continent’s growth. These include climate change, security and migration concerns, increasing vulnerability to debt distress in some countries, and uncertainties associated with elections and political transitions. In 2018, ADB reported, while East Africa remained the fastest growing region at 5.7 per cent, North Africa contributed the most to overall African GDP growth, accounting for 37 per cent.
 

The general drivers of Africa’s economic growth have been gradually rebalancing, moving from consumption to investment and exports. The recent commodity price rebound and particularly the increase in oil prices supported the recovery of commodity exporters. Overall, 17 African countries achieved real GDP growth higher than 5 per cent in 2018, and 21 between 3 and 5 per cent.


Only five African countries recorded a recession in 2018, down from eight in the two previous years. Six of the world’s ten-fastest growing economies (Burkina Faso, Cote d-Ivoire, Ethiopia, Libya, Rwanda and Senegal) are African countries. Some of the non-resource-rich countries had high growth rates in 2018, including Cote d’Ivoire (7.4 per cent), Rwanda (7.2 per cent) and Senegal (7 per cent), supported by agricultural production, consumer demand and public investment.


Economic fundamentals in most African countries continued to improve, thanks to fiscal consolidation along with massive investments in infrastructure, major roads in financial innovation, increased domestic demand, and substantial improvements in the investment climate (more than a third of global reforms). On average, Africa’s fiscal deficit declined from 5.8 per cent in 2017 to an estimated 4.5 per cent in 2018, while inflation fell from 12.6 per cent in 2017 to 10.9 per cent in 2018.


However, growth rates remain insufficient to address the persistent challenges of high unemployment, low agricultural productivity, inadequate infrastructure and fiscal and current deficits as well as debt vulnerabilities. Although tax revenues and spending efficiency have improved, domestic resource mobilization has generally remained well short of potential. For instance, 16 African countries were classified as being in debt distress or at high risk of debt distress at the end of 2018.


Debt in Africa has risen steadily in recent years after having declined and stabilized under the Heavily Indebted Poor Countries Initiative, and the Multilateral Debt Relief Initiative. Africa’s public debt represented 58 per cent of GDP in 2017, up from 36 per cent in 2008. The drivers of the rise in debt include low commodity prices, higher infrastructure spending, depreciating exchange rates, rising costs of foreign currency borrowing and greater defence and security spending. The report said there is, however, significant heterogeneity across countries and regions. At the end of 2017, the government debt-to-GDP ratio was below 40 per cent for 16 of 52 countries with data and above 100 per cent for six.


According to ADB, to ensure a high social return on debt-financed public investment, it is important to strengthen the debt-investment link. In this regard, the Bank’s multidimensional approach to mitigating the risk of debt distress in Africa will include tapping new sources of funding to lower the cost of debt; engaging in policy dialogue to raise awareness of debt sustainability at the highest political level; laying the foundation for efficient use of existing resources to limit recourse to additional debt; strengthening country capability to manage debt; supporting efficient and productive use of debt; and building fiscal capacity for increased domestic resource mobilization.


ADB further indicated that Africa has the world’s fastest growing population. The continent’s young labor force is projected to grow at an average rate of 2.75 per cent a year between 2016 and 2030, so an inclusive and pro-employment growth path is crucial to creating enough jobs. In addition, the adverse impacts of climate change, now pronounced, are projected to become even starker by 2050, undermining Africa’s agricultural performance and water and energy security.


These challenges, ADB stressed that call for significant investment and external funding, involving the private sector, particularly in regional infrastructure development and financing. The continent faces a large annual gap of between USD 68 billion and 108 billion in meeting its infrastructure investment needs, estimated at USD 130 to 170 billion a year. African countries must therefore fast-track economic transformation and structural reforms and continue to tap into identified opportunities.


Fostering regional integration would increase trade and economic cooperation and enhance the delivery of regional public goods, according to African Development Bank. The bank said this will also enable countries to move up the ladder through socialization and reverse external imbalances. The African Continental Free Trade Agreement, upon entry force, will contribute to the creation of the world’s biggest free trade area in terms of the number countries involved, and will be an important driver of sustained economic growth.


In line with its High 5 priorities, the Africa Development Bank is ideally placed to enhance social and economic inclusiveness in Regional Member Countries through infrastructure development, agro-industrialization, and improved access to finance and support for regional integration. As a knowledge institution with an overview of Africa, the bank helps to produce and manage knowledge, build capacity and provide sound policy advice to member countries’ decision-makers. It also aims at boosting blended finance for attracting private investment at scale. In this context, the results of the first Africa Investment Forum, organized by the bank in Johannesburg in November 2018, exceeded expectations, resulting in 49 deals totalling 38.7 Billion US Dollars.

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