This year, economic activity in Sub-Saharan Africa, weakened by the decline in commodity prices and a less favorable global economic environment, is expected to increase at its lowest rate for over twenty years. This overall picture does, however, conceal a considerable disparity in economic paths in the region : countries which depend little on natural resource exports continue to show good results, in particular thanks to the reduction in their oil bill. In contrast, natural resource-exporting countries are going through a difficult period, especially oil-exporting countries, whose short-term prospects have deteriorated. That being said, Sub-Saharan Africa continues to hold huge growth potential. How can this potential be realized ? For the countries most affected by this economic slowdown, what public policies need to be developed to bring about an upturn in growth ?
High growth rates : commodities do not tell the whole story
For almost two decades, starting in the mid-1990s, Sub-Saharan Africa saw high growth rates, reaching an annual average of 5 to 6 % continentwide. Following the lost decade of the 1980s, during which per capita income plummeted, many countries seemed to have turned the page and entered into a new era of growth and development. Poverty rates had fallen and a number of social indicators – from child and maternal mortality rates to the level of education – had improved.
What can this good performance be put down to ? While the increase in primary commodity prices has certainly helped some countries, the acceleration of growth has been seen in a number of countries with different characteristics. It is actually the countries with no natural resources that have seen the fastest growth. For example, Ethiopia, Uganda, Mozambique and Rwanda have undergone significant expansion, despite the fact that they are not natural resource exporters. In fact, the good results would appear to be due to both favorable external conditions and sound national policies. Debt relief prepared the ground. Sound economic policies have brought inflation down, which has benefited the investments of both businesses and the poor, who are often the least able to protect themselves against price rises. The widening of the tax base has leveraged more resources to address social and infrastructure challenges. Finally, stronger and more active financial sectors have allocated sorely lacking credit to the rapidly expanding private sector. All these factors have boosted foreign and domestic investment, maintained economic growth, and created employment.
For further reading on iD4D, by the same author : “Africa rising : more than a natural resource story”.
A slowdown of economic growth
Growth in Sub-Saharan Africa is now set to experience a sharp slowdown and reach its lowest level for over 20 years. According to IMF forecasts, it should stand at 1.4 % in 2016 and only pick up moderately in 2017. The decline in commodity prices and ongoing rebalancing of the Chinese economy have far-reaching effects, particularly on African oil-exporting countries such as Nigeria and Angola.
A Tale of Two Africas
Two Africas exist side by side in a number of respects, in terms of economic growth. Oil-exporting countries and, to a lesser extent, mineral exporters are badly affected by the slowdown, while other countries continue to show good results.
Source : International Monetary Fund, Regional Economic Outlook for sub-Saharan Africa, October 2016.
Countries that are not dependent on natural resources – i.e. almost half of Sub-Saharan African countries – benefit from the decline in oil import prices. Furthermore, the improvement in the business climate and scaling up of investments in infrastructure continue to fuel strong growth. Countries such as Côte d’Ivoire, Ethiopia, Senegal and Tanzania still have growth rates of above 6 %.
Adapt to the present, invest for the future
So, what must Africa do to regain the momentum of the past 20 years and avoid falling back into a boom bust economic cycle ? Commodity exporters must inevitably adapt to new realities. Currencies need to be left to depreciate faced with the reversal of fortune of the main exports and the development of new competitive sectors needs to be promoted. Countries must also reduce public expenditure in order to adapt to the decline in revenues, while making significant efforts to broaden their tax base. In Nigeria, prior to the collapse of oil prices, the oil sector accounted for only 15 % of GDP, but oil revenues made up two-thirds of State revenues. Broadening the tax base in order to take better advantage of the non-oil sector would be a milestone towards protecting essential public expenditure.
For further reading on iD4D : “Africa : reduce uncertainty, redistribute and include”, by Makhtar Diop, World Bank Vice President for the Africa Region.
In the longer term, all African countries must invest in the future, by taking measures as of now to ensure there is robust and inclusive growth for the next 20 years. There are four main priority objectives :
- The broadening of the tax base continues to offer a wealth of opportunities, and not only in oil-exporting countries. A recent IMF study has shown that countries could consequently mobilize between 3 and 6 % of GDP from additional revenues on average. This would make them less dependent on foreign aid and unstable capital inflows.
- Urgent measures are required to increase Africa’s competitiveness. Infrastructure, especially in the energy sector, is far from being sufficient to promote the emergence of competitive companies at international level. The accelerated integration of Africa into global value chains must be a top priority.
- Economic growth must become more inclusive. Reducing inequalities, particularly between men and women, could add an extra percentage point to GDP every year in Sub-Saharan Africa.
- Africa must gear up to take advantage of the demographic dividend. From now until 2035, half of new labor market entrants will come from Sub-Saharan Africa. This young population can be an asset for economic development, especially in view of the the ageing of the population in the rest of the world. This advantage is not, however, a foregone conclusion. It will require both economic and social support measures to ensure that demographic trends are not a burden, but an advantage.
In short, yes, Africa is still rising. While the current slowdown poses a huge challenge, by managing to address it and taking measures to invest in the future, Africa can return to a strong and inclusive growth path capable of creating employment and raising living standards.
For further reading on iD4D : “Intra-country inequalities : what reforms for a more inclusive growth ?”, by Mario Pezzini, Director of the OECD Development Centre.
The opinions expressed on this blog are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.