What does Africa's economic past teach us about its future?

Technology Eye | Feb. 10, 2016

Like most years, 2015 was an eventful one for the African continent, with many significant political, economic and social events taking place.

The most important that come to mind are; the landmark victory of President Muhammadu Buhari over Goodluck Jonathan in Nigeria’s March elections; the historic visit by President Obama to Kenya and Ethiopia in July; the October 2015 #FeesMustFall# campaign in South Africa that made the government retract their proposed fee increase in tertiary institutions; the October victory of John Magafuli in Tanzania’s Presidential elections and his immediate drastic austerity policies; and the December change of three finance ministers in South Africa in just four days, which rattled the markets and resulted in huge capital outflows and a near collapse of the South African currency.

Last year was an annus horribilis for several economies in Africa for the following reasons. Firstly, many currencies such as the Nigerian Naira, the South African Rand, the Zambian Kwacha, Angolan Kwanza, the East African Shilling, the Ghanaian Cedi, and the Mozambican Metical depreciated by over 40% vis-à-vis the US dollar. Secondly, the prices of almost all major commodities dropped significantly; iron ore dropped by 60%, crude oil by 55%, natural gas by 40%, coal by 35%, copper by 38%, and gold by 34%. Revenues from commodities account for over 80% of total foreign exchange and government revenues in several African economies and the price plunges have had massive negative impacts on these economies.

Nigeria, Angola, Algeria, and Equatorial Guinea - Africa’s biggest crude oil producers - have seen a significant dip in revenues as a result of the fall in the price of crude oil; Zambia and the Democratic Republic of Congo (DRC) have been negatively affected by the fall in the price of copper; Ghana, South Africa, Mali and Burkina Faso by the drop in the price of gold; and South Africa by the fall in the prices of iron ore, platinum, manganese, and so on.

Thirdly, the slowdown in the Chinese economy has negatively affected economies in Africa. China is Africa’s biggest trading partner (with total trade valued at $220 billion in 2014), a major financial partner and one of the biggest buyers of Africa’s commodities. As such, the decline in Chinese economic growth rate, which averaged 10% over the past decades, as well as the change in its economic model from an export-led to a consumption-led economy and consequently reduced demand for commodities, have put a damper on Africa’s economic growth.

As a result of these economic woes, Africa’s Gross Domestic Product (GDP) will grow by just about 3.75%, below the 5% average of the last decade, and is expected to grow slightly higher in 2016-at 4.25%. The following graph shows the trend in Africa’s GDP growth rate from 2006 to 2015.

Source: AfDB/AUC/UNECA African Statistical Yearbook - 2015, 2014, 2013 Editions

It should be noted that the economic events mentioned above have affected economies in Africa very differently, and this has resulted in varying growth rates across the continent. The following graph shows the economies that achieved GDP growth rates above 6% and those that barely managed to grow by 3-3.5% and below. Cote d’Ivoire, Ethiopia, Mozambique, Tanzania, Rwanda, Kenya are in the former group meanwhile Angola, Nigeria, Ghana, Botswana, South Africa, Congo and Equatorial Guinea are in the latter.

Source: IMF World Economic Outlook, October 2015

The most striking feature of the high growth economies, which can be referred to as the “2015 winners” is that, with the exception of Côte d’Ivoire, which exports cocoa and coffee, these economies are not producers and/or exporters of commodities (especially metals), and particularly, they are net oil importers.

Oil subsidies represent about a third of total government expenditures in most African economies, including even net oil exporters, and so the significant plunge in the international price of crude oil, from about $110 around March 2014 to just less than $45 today was a blessing to net oil importers. The allocations for oil subsidies therefore reduced significantly and these savings were channeled to other important sectors of the economy, particularly the infrastructure sector, thus resulting in higher economic growth rates.

Conversely, major oil exporters such as Nigeria and Angola did not generate any savings from the fall in the price of oil to allow them to reallocate. Major commodity exporters such as South Africa, Botswana and Ghana were also severely affected. These economies, which can be referred to as the “2015 losers” instead experienced; wider fiscal deficits as was the case in Nigeria, where it almost doubled from 2% of GDP in 2014 to 3.9% of GDP in 2015, in South Africa where the deficit currently stands at 4.1% of GDP, and in Ghana where it currently stands at 6% of GDP; wider current account and external trade deficits; significant currency depreciations as was the case for the South African Rand (which lost over 50% of its value and in early December went below the R15 per US dollar mark), the Nigerian Naira (which lost over 30% of its value and traded at about N220 per US dollar), the Ghanaian cedi (which lost over 40% of its value and traded at about 4.2 to the US dollar, while Angola’s kwanza lost over 22% of its value, trading at about 132kwanza to the US dollar.

The contrasting economic growth rates between the 2015 winners and losers offers some lessons for African economic policy in 2016 and beyond. The first and most important lesson is that commodity exports are not the only catalyst for economic growth in Africa, as is argued by some. As can be seen from the 6% plus economic growth rates in Ethiopia, Rwanda, Côte d’Ivoire, Mozambique and Tanzania (all non-commodity exporters and more importantly, net oil importers), economic prosperity can be achieved through sound economic policies, particularly through targeted investments especially in the infrastructure sector, and not only through the exports of commodities.

African countries are therefore called upon to increase the infrastructure investment components of their capital investment budgets. Although the debt levels have been rising in several countries as a result of increased infrastructure spending, their present levels are still sustainable. Moreover, it is not harmful for countries to borrow heavily to finance infrastructure projects, which have several long term economic benefits.

The second lesson is that major oil and commodity exporters need to diversify/transform their economies and for those that have already begun, there is a need to diversify even further. This will allow them to cushion such exogenous shocks as the drastic fall in the prices of principal revenue earners. Some countries are already making some strides, with the creation of industrial parks, mostly for the local transformation of textile products. Such is the case with the Bole Lamin Export Processing Zone (EPZ) -created by the Ethiopian government in 2013.

Also, in September 2011, the Government of Gabon - in partnership with the agro-industrial giant OIam -created an industrial park at Nkok primarily for the processing of locally sourced timber at the cost of $200 million. Located on a 126 hectare surface area 27km east of Libreville, Nkok is the largest free trade area in the whole of Central and West Africa. And then in June 2015, the government of Gabon officially opened the Comilog Metalworking Complex in the Eastern town of Moanda for the processing of manganese ore.

The third lesson is that regional integration, both at a continental level and at a sub-regional level, is beneficial to Africa. This is most obvious in East Africa, particularly in the East African Community (EAC), which comprises Burundi, Kenya, Rwanda, Tanzania and Uganda. Several infrastructure, and particularly transport infrastructure projects in that sub-region have led to a significant drop in transport costs as well as travel times, especially to landlocked countries such as Burundi, Uganda, Ethiopia, South Sudan and Rwanda.

In this regard, goods now take just three or four days from the Port of Mombasa (Africa’s second largest port, after Durban) to Kampala and Kigali down from 18 days and 20 days respectively. The Continental Free Trade Agreement (CFTA) signed in Sharm-el-Sheikh in June 2015, regrouping the EAC, the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA), and representing a total GDP of $1.5 trillion and combined population of 600 million (roughly 60% of Africa’s GDP and total population) will usher in even more benefits.

The fourth and final lesson is that now is the best time for African economies to eliminate oil subsidies, which represent a significant proportion of government expenditures. Cancelling these subsidies will free up much needed finance that can then be channeled to other productive uses such as agricultural transformation, the creation of industrial parks and infrastructure investments.

SOURCE: World Economic Forum

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