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Africa: Economic Outlook

AfricaFocus Bulletin
Apr 13, 2008 (080413)
(Reposted from sources cited below)

Editor's Note

This is the season for economic reports, and, as usual, the message is mixed. The Economic Commission for Africa (ECA) and the International Monetary Fund (IMF) cite 2007 growth rates of 5.8% for Africa and 6.5% for sub-Saharan Africa, respectively. Both note, nevertheless, that few African countries are on track to halve poverty by 2015. The IMF predictably proposes a privatesector emphasis in response, while the ECA lays out a wider range of actions.

The World Bank and the Food and Agriculture are stressing the structural crisis caused by rising food prices, and propose some new remedies, both immediate and medium-term..

This AfricaFocus Bulletin includes excerpts from reports on Africa's economic outlook released by the UN Economic Commission for Africa (UNECA) and the International Monetary Fund (IMF).

Another AfricaFocus Bulletin sent out today contains a press release from the World Bank on the food price surge and the Bank's response, excerpts from a speech by World Bank President Robert Zoellick, and a report on new Food and Agriculture Organization proposals for changes in food security operations and planning.

For previous AfricaFocus Bulletins on economic issues see http://www.africafocus.org/econexp.php

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Many thanks to those of you who have recently sent in a voluntary subscription payment to support AfricaFocus Bulletin. If you have been intending to do so, now is a good time. Help AfricaFocus reach more people with reliable information on Africa. Send in a check or pay on-line with Google Checkout or Paypal. See http://www.africafocus.org/support.php for details.

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Economic Report on Africa 2008

Economic Commission for Africa
http://www.uneca.org/era2008

April 2008

Overview

Developments in the World Economy and Implications for Africa

In 2007, world economic growth slowed to 3.7 per cent from 3.9 per cent in 2006. High prices for oil and other inputs combined with some turbulence in financial markets have contributed to this slowdown. ...Africa has maintained the strong growth momentum of the last few years and achieved a 5.8 per cent growth rate in 2007, up from 5.7 per cent in 2006 and 5.2 per cent in 2005. For 2008, world growth is projected to be around 3.4 per cent.

...

One if the important developments in the world economy that is of high relevance for Africa is the rapid increase in South-South trade and capital flows. Foreign Direct Investment (FDI) from the South increased from just 5 per cent of world outward flows in 1990 to 17 per cent in 2005. FDI to Africa is increasingly coming from Asia, especially China, India and the Gulf States. At the same time, FDI flows within Africa increased substantially in 2006, mainly originating in South and North Africa. These flows are concentrated in the natural resource and services sectors.

The intensification of ties with Asia in terms of aid, trade and FDI holds both benefits and challenges for Africa. African exports to China have more than quadrupled between 2000 and 2005 to $19.5 billion. Asian growth expands export markets for African and creates new opportunities for employment creation in local and foreign firms. However, African manufacturing firms confront the risk of losing local markets if they are not able to compete with imports from Asia.

...

The continent also needs to promote high-quality growth that is broadly shared in terms of generating decent employment, poverty reduction and achievement of the Millennium Development Goals (MDGs). The recorded real per capita income growth rate (0.3 per cent during 1990-2002 and 3.0 per cent per cent in 2003-2007) is insufficient for Africa to make any significant progress towards achieving the MDGs. Its ability to accelerate and sustain high-quality growth hinges crucially on successful diversification of the sources of growth and mobilization of domestic and external financial resources, used to increase domestic demand in general and investment demand in particular.

Fiscal sustainability is a major concern, especially for oil-importing countries

The average fiscal position of Africa, which shows a budget surplus of 2.4 per cent of Gross Domestic Product (GDP) in 2007, is mainly a reflection of developments in the 13 oil-exporting countries that maintained an average fiscal surplus of 5.3 per cent of GDP in 2007 and 6.1 per cent in 2006. For the oil-importing African economies, the average budget deficit increased slightly from –1.1 per cent of GDP in 2006 to –1.2 per cent in 2007. The largest budget-deficit countries are generally exposed to recurrent internal shocks (e.g. rainfall irregularities and political conflicts) and also external shocks (e.g. agricultural commodity markets).

... Given the important adverse effects of expenditure reduction on growth and social development, it is critical that donors and the international development community at large should scale-up financial support to oil-importing African countries, especially in the form of grants and debt relief.

Inflationary pressure is intensifying due to high oil prices

High oil prices pose a major threat to Africa regarding the control of inflation in both oil-exporting and oil-importing countries. Africa seems to be more exposed to this threat than other developing regions. On average, inflation has been contained at around 7 per cent over the last 5 years, but Africa's inflation has generally been greater than that of Latin America and the Caribbean, East and South Asia and the average for developing countries....

Whereas high oil prices push production costs up for oil-importing countries causing prices to increase, rising oil revenues fuel rapid increases in domestic demand that cause prices to rise in oil-exporting countries (overheating). Intensifying inflationary pressure is a major concern for the poor, who lack adequate safety nets, as high inflation rates always have stronger impact on the price of basic consumer goods. ...

Oil-exporting countries must direct a sizeable proportion of oil revenues to finance domestic investment. This will help them to build productive capacity instead of fuelling government and private consumption. Such consumption creates excess demand while the economy still does not have the capacity to respond. ...

The need to reduce external debt and increase non-debt generating resources

To alleviate financing constraints, Africa needs to reduce external debt and mobilize more domestic and external non-debt-generating resources. Despite debt relief initiatives, Africa's external debt remains high and unchanged, at about $255 billion in 2006 and 2007. While official debt declined considerably with the debt relief initiatives, from $205.7 billion in 1999 to $144.5 billion in 2007, the debt owed to banks and other private creditors rose from $92.4 billion in 1999 to $110.2 billion in 2007.

As domestic resource mobilization is insufficient for Africa to finance the investment needed for achieving the MDGs, African countries continue to rely on external capital inflows (mainly Official Development Assistance (ODA), FDI and remittances) to fill the resource gap in the near future. However, FDI inflows tend to go mainly to resource-rich countries to finance investment in extractive industry, whereas more ODA flows are directed to financing development in non-oil economies. The international community is urged to meet its commitments to scale-up aid to Africa under various initiatives such as the Multilateral Debt Relief Initiative (MDRI). ...

Economic growth recovery in Africa has not yet translated into meaningful social development and inclusion of vulnerable groups Growth in Africa has not yet led to substantial employment generation, particularly in the formal sector. ...

Prospects for 2008: brighter outlook despite risks

Real economic growth in Africa is projected to slightly improve to 6.2 per cent in 2008 compared with 5.8 per cent in 2007. It is expected that the slowdown in the US economy will not have a substantial effect on Africa and that robust commodity demand and prices will continue with high growth in Asia and no significant drop in growth in Europe. ...

Development Challenges for Africa in 2007

... Currently, few countries in the region are on track to meeting the MDGs. However, there have been positive developments in recent years that give hope that the challenge of meeting the MDGs on the continent is not insurmountable. Progress requires scaling-up of efforts both at national and international levels. ...

Acceleration of progress towards the MDGs is constrained by a number of important challenges that require the concerted efforts of African governments and their development partners. These challenges include climate change, infrastructure bottlenecks and rising inequality. Climate change poses a major threat to Africa's future and is likely to have a significant impact on biodiversity and to increase the vulnerability of poor people to natural disasters. The poor state of infrastructure in Africa is a major impediment to domestic market and regional integration, to equitable access to social services, and to growth. Expansion of infrastructure has positive growth effects that would help the continent accelerate progress towards the MDGs.

Evidence suggests that income inequality is rising in African countries, with the continent ranking second to Latin America as the region with the most unequal distribution of income. Rising inequality constrains growth while reducing the gains from growth for the poor, thus undermining progress towards poverty reduction.

...

Post-Monterrey economic performance has improved but remains insufficient to finance the MDGs

Since the dawn of the new millennium, several promises have been made by Africa's development partners as part of an overall effort to scale-up resources for development in the continent. The Monterrey Consensus, the World Summit Outcome, the Paris Declaration and the G-8 Gleneagles Declaration capture the main commitments in this area. These commitments were all driven by the need to accelerate progress towards meeting the MDGs.

Midway between the adoption of the MDGs and the 2015 target date, the available evidence indicates that the vast majority of African countries will not meet the goals if current financing trends continue. Consequently, the international community has now focused attention on how to scale-up financing for the continent. It has been acknowledged that implementation of the commitments in the Monterrey Consensus is critical to achieving this objective. ...

  • In the area of domestic resource mobilization, there has been a modest increase in domestic savings, although it has not led to an increase in investment. This observation from macroeconomic data is consistent with findings from the ECA Survey of African Policymakers on the Monterrey Consensus, which shows that mobilization of domestic resources for development has been rather modest. ...

...

  • Some progress has also been made in the mobilization of international resources for development. Net FDI flows to the continent increased from an average of $11.9 billion in the pre-Monterrey period (1998-2001) to $18.1 billion in the postMonterrey period (2002-2005). However, FDI continues to be concentrated in the extractive sector and in a few countries.

...

  • There has also been an increase in remittances. African countries need to adopt a coherent and comprehensive policy aimed at attracting such Diaspora capital to complement domestic resources and external aid. African countries also have to harness the potential of remittances for development and improve access to financial services to make it easier and more cost efficient for people to use the banking system and other formal channels to receive remittances from abroad.

To increase their shares of investment from global FDI flows, African countries need to develop not only better infrastructure but must also improve investment climate. In addition, they need to be selective in the type of investment they seek to attract. Most needed are FDI flows into sectors with high-value added, high potential for employment creation, and environment- friendly impact. Efforts should also be made to give non-discriminatory treatment to domestic investors in the drive to attract private capital flows.

  • Limited progress in promoting international trade as an engine of development

The share of exports in GDP increased from 29 per cent in the pre-Monterrey period to 33 per cent in the post-Monterrey period, but Africa's share in international trade remains low, and there has been little progress in improving its international trading environment. The findings from the survey show that, of all the areas of the Monterrey Consensus, African countries are most concerned about the lack of progress in international trade.

...

  • Aid quantity has improved but is still below the levels required to finance accelerated and sustained growth

Macroeconomic data indicate notable progress in terms of increasing aid quantity and improving aid effectiveness. Results from the Survey of African Policymakers on the Monterrey Consensus that was conducted by ECA in 2007 show that a substantial majority (76 per cent) of respondents somewhat or strongly agreed with the statement that there has been a significant reduction in the proportion of tied aid. Aid remains concentrated in a few countries, with emergency assistance and debt relief accounting for the bulk of aid flows.

Thus, African countries have not received the promised additional injection of resources for financing development. More disconcertingly, there is a wide gap between the actual aid flows and the donor commitments that were made. The quantity of aid is still below what is needed to ensure accelerated and sustained growth in the continent.

...

  • In the area of debt relief, significant progress has been made over the last two years, thanks to the implementation of the Heavily Indebted Poor Countries (HIPC) initiative and the MDRI. It is, therefore not surprising that African policymakers consider this to be the only area of the Monterrey Consensus where progress has been significant. Thanks to these debt relief initiatives, many of them now view their country's external debt situation as sustainable. ...

...

Conclusions

The first main conclusion of this Report is that African countries have recorded strong economic performance for the third consecutive year, with an average growth rate of 5.8 per cent. ...

The second is that despite high growth rates in recent years, this strong performance has not translated into meaningful gains in terms of social development. ...

The third is that persistently high oil prices remain an important challenge to growth and macroeconomic stability in the medium term. Increased energy costs are constraining investment and growth in many oil-importing African countries ... Oil-exporting countries on their part need to manage oil revenues to ensure diversification of the sources of growth ...

Fourth, African governments and partners need to establish strategies to ensure that economic growth benefits socially excluded groups, including women, youth, the aged, and people with disabilities. ... In the longer term, a more inclusive society will help countries remain politically and socially stable and enhance their growth potential.

Finally, the evidence on implementation of the Monterrey Consensus suggests that substantial progress has been made in the area of external debt relief. In contrast, very limited progress has been made in the other core areas of the Consensus. ...


Africa's Economic Expansion Faces Downside Risks

IMF Survey online

http://www.imf.org/external/np/sec/pr/2008/pr0886.htm

April 12,2008

Growth in sub-Saharan Africa (SSA) is expected to average about 6.5 percent again this year, driven by oil exporters, while inflation in 2008 is projected at about 8.5 percent, up from 7.25 in 2007.

Although the region's economic expansion is expected to continue, risks are tilted to the downside. The external environment has become less favorable - with growth slowing in advanced economies, higher oil prices, and unsettled global financial markets which could hurt growth in SSA. The IMF's Sub-Saharan Africa Regional Economic Outlook -Spring 2008 (REO) says that, in light of these risks, there is about a one-in-five chance that the region's growth will drop to less than 5 percent in 2008.

...

Growth prospects

Growth in SSA's oil exporters is expected to accelerate to about 10 percent this year, underpinned by production at oil facilities coming onstream in Nigeria and Angola and a new liquefied natural gas plant in Equatorial Guinea. Higher income and wealth are expected to be the main drivers of domestic demand in these countries.

In countries that are not oil exporters, the picture is mixed, with average growth a bit lower than last year. With the slowing of the global economy, growth in the middle-income countries is expected to register only about 4 percent this year and, in low-income countries, about 6 percent. The fragile countries, buoyed by a continued recovery in investment, should see growth pick up to 5 percent in 2008, up from 3.25 percent in 2007.

...

Looming risks

A pronounced global slowdown would weaken the prices of non-oil commodities and represent a large shock for SSA. Higher oil prices would reduce domestic demand, boost headline inflation, and worsen the current account and net foreign asset positions of net oil importers. Finally, less favorable financial conditions would reduce external financing and put the brakes on growth.

In addition to these external risks, SSA faces significant internal risks. Although the number of conflicts has declined in recent years, they still ravage the Darfur region of Sudan and the Horn of Africa. Moreover, conditions remain fragile in the Democratic Republic of Congo, and post-election violence in Kenya has taken a toll: ...

Medium-term challenges

The region's most pressing challenge over the medium term will be to accelerate growth and achieve the Millennium Development Goals. But, although more SSA countries are enjoying robust growth, only a few seem well positioned to halve poverty by 2015.

The spring 2008 REO focuses on the challenge of strengthening the private sector to spur investment in SSA. The region's future economic performance will hinge on the implementation of reforms that improve the investment climate, reduce the cost of doing business, and strengthen governance. A few countries have made encouraging progress on this front, with Kenya and Ghana leading the way on broad-based reforms, including easing business regulation, procedures for property administration, and licensing requirements. In southern Africa, Madagascar, Mauritius, and Mozambique have lifted regulatory obstacles that weighed heavily on the private sector. ...


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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