By ROSELINE ADEDAMO
(with reports from Pro share)
Africa’s Macroeconomic Performance And Prospects
Africa’s economic growth continues to strengthen, reaching an estimated 3.5 percent in 2018, about the same as in 2017 and up 1.4 percentage points from the 2.1 percent in 2016. East Africa led with GDP growth estimated at 5.7 percent in 2018, followed by North Africa at 4.9 percent, West Africa at 3.3 percent, Central Africa at 2.2 percent, and Southern Africa at 1.2 percent. In the medium term, growth is projected to accelerate to 4 percent in 2019 and 4.1 percent in 2020. And though lower than China’s and India’s growth, Africa’s is projected to be higher than that of other emerging and developing countries. But it is insufficient to make a dent in unemployment and poverty. Of Africa’s projected 4 percent growth in 2019, North Africa is expected to account for 1.6 percentage points, or 40 percent. But average GDP growth in North Africa is erratic because of Libya’s rapidly changing economic circumstances. East Africa, the fastest growing region, is projected to achieve growth of 5.9 percent in 2019 and 6.1 percent in 2020. Between 2010 and 2018, growth averaged almost 6 percent, with Djibouti, Ethiopia, Rwanda, and Tanzania recording above-average rates. But in several countries, notably Burundi and Comoros, growth remains weak due to political uncertainty. Growth in Central Africa is gradually recovering but remains below the average for Africa as a whole. It is supported by recovering commodity prices and higher agricultural output. Growth in Southern Africa is expected to remain moderate in 2019 and 2020 after a modest recovery in 2017 and 2018. Southern Africa’s subdued growth is due mainly to South Africa’s weak development, which affects neighboring countries.
The Drivers of Economic Growth Are Gradually Rebalancing
The drivers of Africa’s economic growth have been gradually rebalancing in recent years. Consumption’s contribution to real GDP growth declined from 55 percent in 2015 to 48 percent in 2018, while investment’s contribution increased from 14 percent to 48 percent. Net exports, historically a drag on economic growth, have had a positive contribution since 2014.
But despite the rebalancing trend, most of the top-growing countries still rely primarily on consumption as an engine of growth. Inflationary pressures have eased. Africa’s average inflation fell from 12.6 percent in 2017 to 10.9 percent in 2018 and is projected to further decline to 8.1 percent in 2020. Double-digit inflation occurs mostly in conflict-affected countries and countries that are not members of a currency union. Inflation is highest in South Sudan, at 188 percent, due to the lingering economic crisis. Inflation is lowest, at 2 percent or less, in members of the Central African Economic and Monetary Community and the West African Economic and Monetary Union and particularly in members of the CFA zone because of its link to the euro.
Fiscal positions are gradually improving
Between 2016 and 2018, several countries achieved fiscal consolidation by increasing tax revenue and, at times, lowering expenditures. Revenue increases were due partly to higher commodity prices and increased growth, but several countries also implemented tax reforms. Domestic resource mobilization has improved but falls short of the continent’s developmental needs. Although current account deficits have been deteriorating, total external financial inflows to Africa increased from $170.8 billion in 2016 to $193.7 billion in 2017, which represents a 0.7 percentage point increase in net financial inflows as a ratio of GDP (from 7.8 percent in 2016 to 8.5 percent in 2017). Remittances continue to gain momentum and dominate the other components of capital flows, at $69 billion in 2017, almost double the size of portfolio investments. Meanwhile, FDI inflows have shrunk from the 2008 peak of $58.1 billion to a 10-year low of $41.8 billion in 2017. Underlying factors include the global financial crisis and the recent rebalancing of portfolios due to rising interest rates among advanced economies. Official development assistance (ODA) to Africa peaked in 2013 at $52 billion and has since declined to $45 billion in 2017, with fragile states receiving more ODA as a percentage of GDP than nonfragile states. All regions saw ODA increase between 2005–10 and 2011–16; East Africa and West Africa remain the highest recipients.
Africa’s debt is rising, but there is no systemic risk of a debt crisis
By the end of 2017, the gross government debtto-GDP ratio reached 53 percent in Africa, but with significant heterogeneity across countries. Of 52 countries with data, 16 countries—among them Algeria, Botswana, Burkina Faso, and Mali —have a debt-to-GDP ratio below 40 percent; while 6 countries—Cabo Verde, Congo, Egypt, Eritrea, Mozambique, and Sudan—have a debtto-GDP ratio above 100 percent. The traditional approach to estimating debt sustainability classifies 16 countries in Africa at high risk of debt distress or in debt distress. Debt situations in some countries have thus become untenable, requiring urgent actions whose range and modalities depend on the precise diagnosis of the source of debt distress. Even so, while debt vulnerabilities have increased in some African countries, the continent as a whole is not exposed to a systemic risk of debt crisis.
External imbalances have implications for long-term growth
Africa’s external imbalances have worsened, measured by both the current account and the trade balance. The weighted average current account deficit was 4 percent of GDP at the end of 2017 (the median was 6.7 percent) and, despite recent improvement, has been deteriorating since the end of the 2000s. This could threaten external sustainability and require sharp adjustments in the future. Based on the balance-of-payments constraint theory (that external financing gaps must turn into surpluses in the long run to avoid external default or sharp consumption adjustments), Africa’s current external deficits may be justified if they sow the seeds for future surpluses. This will be the case as long as higher imports are consistently associated with rising capital formation, followed by an increased share of manufacturing and tradable industries in value added, an improved position in global value chains, and a gradual repayment of external liabilities.
Risks to the outlook
Clouding the macroeconomic forecasts for Africa are several risks. First, further escalation of trade tensions between the United States and its main trading partners would reduce world economic growth, with repercussions for Africa. These tensions, together with the strengthening of the US dollar, have increased the volatility of some commodity prices and pressured the currencies of emerging countries. If global demand slows, commodity prices could drop, reducing GDP growth and adversely affecting trade and fiscal balances for Africa’s commodity exporters. Second, costs of external financing could further increase if interest rates in advanced countries rise faster than assumed. Third, if African countries are again affected by extreme weather conditions due to climate change, as they have been in recent years, agricultural production and GDP growth could be lower than projected. Fourth, political instability and security problems in some areas could weaken economies. Countries that have improved their fiscal and external positions and that have low or moderate debt will probably be resilient to new external shocks. But those that have not rebuilt their fiscal buffers are unprepared for significant downside risks.