Recent Economic Developments in Africa

1. Recent Economic Developments in Africa Louis Kasekende Chief Economist, African Development Bank Dublin, 25 May 2009

2. Main Messages • Africa not decoupled as previously thought • although GDP is positive, per capita incomes are falling; growth drivers severely affected by the crisis • The recent growth deceleration largely due to external factors • Africa is in a much better position to manage the crisis than in previous periods due to better economic management • ..But long term development challenges remain

3. Outline of the Presentation • Pattern of African Growth • Explaining Recent Growth Acceleration • The Impact of the Global Crisis • Transforming accelerations into sustainable dynamic growth

4. I. Pattern of African Growth

5. History: Booms and Busts a feature of African Growth Episodic growth is typical of natural resource driven growth Africa: Real Per Capita GDP growth (%)

6. External factors underpin growth accelerations and decelerations Natural resources underpin most of the growth cycles in Africa Real GDP Growth (%) Africa and World GDP Growth (%) …driven by growth in global demand

7. Explaining recent growth accelerations

8. Sustained growth period • Recent growth acceleration was underpinned by: • Strong global demand for Africa’s raw materials • Large financial inflows • Good macroeconomic management

9. Openness a key driver of recent growth acceleration Hard commodities Soft Commodities Source: OECD Development Centre, based on World Bank, 2009

10. Oil exporters were growing faster than importers Source: African Economic Outlook 2008 Net Oil exporters: Algeria, Angola, Cameroon, Chad, Congo, Côte d'Ivoire, Congo DRC, Egypt, Equatorial Guinea, Gabon, Libya, Nigeria, Sudan 10

11. Higher financial inflows also a key growth driver Remittances (US$bn) Source: IMF Regional Economic Outlook, 2008 Foreign reserves (US$bn) Aid, esp. debt relief also made a difference

12. Payoffs from more than two decades of reforms Africa benefitted from improved economic management which strengthened growth …leading to greater macroeconomic stability, despite the food price increases in 2008

13. Africa not decoupled: continent hit by the global crisis

14. Low external demand of Commodities Fall in Commodities prices Impact on Africa Fall in reserves Global Down turn Fall in Global Demand Low external demand of Manufacturers goods Fall in Exports of commodities and goods and services(volume) Current Account and Budget Deficits Unemployment Fall in Remittances and Tourists arrivals Low investment Collapse of Financial Markets Outflow of portfolio investment Increase of sovereignspread Financial crisis Financial Risks Aversion Fall in Bonds issuances Low Growth Low FDI Trade finance restrictions Poverty and social instability Fall In imports

15. Severe macroeconomic impact (February forecast) Fiscal balance • Twin deficit problem: the crisis will cause fiscal and current account balances to deteriorate significantly across the continent. • Inflation will, however, stabilise as commodity prices fall, though food prices have remained high Current Account Inflation Source: OECD Development Centre / African Development Bank. 2008 * ExcludingZimbabwe ** Estimations for 20078and predictions for 2009/10

16. Shortfall in Trade Taxes Fiscal balance

17. The crisis is taking a toll on Africa’s growth prospects Real GDP Growth (%) April 08 projections Nov 08 projections Feb 09 projections May 09 projections Source: OECD Development Centre / African Development Bank. 2008

18. Oil Exporters Suffering from lack of diversification …and little room left for manoeuvre Taking a hit from the oil price fall .. • Many oil exporters did not take advantage of commodity windfalls to improve governance and diversify their economies • Nevertheless, some oil exporters have performed well in terms of reducing external debt Source: OECD Development Centre / African Development Bank *: African Economic Outlook forecasts

19. Oil Importers Benefiting from low commodity prices & reforms …yet challenges rising Holding up against the crisis so far… • Oil-importing countries find it difficult preserving pre-crisis gains.Rising inflation and deteriorating macroeconomic balances. • Good performers’ assets: • Sustained growth; Prudent macroeconomic policies; Diversification; Decreasing poverty • Challenges: • Fiscal deficits; ODA dependency; widening trade deficit; climatic & price shocks Source: *: African Economic Outlook forecasts

20. But the shock is not a disaster for Africa

21. Africa today is in a much better position to weather the crisis Africa today is much more resilient to exogenous shocks: • Committed macro management in many countries has brought inflation under control and improved fiscal balances • Debt relief initiatives (HIPC & MDRI) have significantly reduced debt levels in many countries • The commodity boom helped to improve terms of trade • Business climate indicators are steadily improving, reflecting government efforts in nurturing private sector and enterprise • Political conflicts are on the wane

22. Growth set to recover in 2010 • -Growth “pause” in 2009: Recovery in 2010 and beyond is promising. • Net oil exporters (4.1%) • Net oil importers (3.8%) • -The challenge is for Africa to transform this acceleration into sustainable dynamic growth Africa Sub-Saharan Africa

23. Some countries weathering the crisis Cost of the crisis: • Oil exporters the most hit. • More integrated economies also strongly affected • Low-income / non-oil exporting countries are less affected. because: • -- beverages (cocoa. tea. coffee) less affected by decline in global incomes. • -- less integration to the world economy Growth differential 2008 - 2009 - 3.1 to – 23 % - 2 to- 3 % Zero to – 1.9 % Increased growth between 2008-09 Source: African Economic Outlook, 2009

24. Some regions are weathering the crisis Source: African Economic Outlook, 2008/09

25. The China-India factor • Although China and India have not escaped the negative effects of the global crisis, growth remains robust. • They continue as important sources of investment and trade for most of Africa. Significant Chinese and Indian investments in African infrastructure, up to April 2008 India China Source: OECD Development Centre, based on China Mofcom, 2009 Source: OECD Development Centre, based on UNCTAD,Nepgen and Jansson2009

26. But downside risks loom large

27. Some downside risks • Deteriorating macroeconomic balances • -difficult to stick to sustainability indicators • - limited fiscal space for stimulus packages • Tension between reform and control • Creeping protectionism • Interest in Africa may wane

28. Deteriorating Macroeconomic balances Untenable targets on fiscal and debt sustainability indicators in the face of worsening macroeconomic balances . Limited fiscal space for fiscal stimulus packages Source: OECD Development Centre / African Development Bank. 2008 * ExcludingZimbabwe ** Estimations for 20078and predictions for 2009/10

29. Tension between reform and control • In the face of the crisis, some countries have imposed controls (sometimes temporary or limited) to stem sudden capital outflows. • But the room that capital controls give to policy makers is limited: • Their later removal may be accompanied by large outflows. • Time-consistency problem: if investors view capital controls as a discretionary policy instrument, expectations of their imposition may encourage capital flight. • Countries need to persevere with reforms

30. Risk of declining ODA • Crisis related budgetary constraints in donor countries may cause them to cut back on ODA. • Previous crises in donor countries led them to also cut ODA budgets (Japan in 1990; Nordic countries after 1991)* • In the EU, although ODA is up, many countries cutting back on commitments to meet the EU time limits of achieving a target of 0.7% of GNI • e.g. Ireland cut aid budget by €255 million since July 2008 • Italy will cut back its aid by €1 billion by 2010 • Good news: ODA trend for Africa is upward * See: Rooodman, D. (2008): History says Financial Crisis will Suppress Aid” Global Development; and Frot, E. (2009): “Aid and the Financial Crisis: Shall we expect Development Aid to Fall?”

31. Other Downside Risks • Prolonged crisis in developed countries may delay the recovery in Africa • Corporate failures as a result of the economic crisis may lead to a banking or financial crisis in Africa • Risk of aid dependency • The transition of some countries to a middle income status may be delayed

32. Transforming growth acceleration into sustainable dynamic growth

33. Africa still faces many long-term development challenges • High cost of doing business in Africa • Management of natural resources • Reforming the financial sector • Large gaps in infrastructure and logistics, including ports, roads, energy, IT • Lack of product and market diversification • Poverty reduction remains on overarching development challenge

34. Putting Africa on a long-term growth trajectory • Increase the level and productivity of investment • Infrastructure • Skills development (education and health) • Pursue globalisation • Diversification (products and markets), including manufacturing • Deepen economic and institutional reforms • Invest in IT and R&D

35. Africa is lagging behind in infrastructure and logistics

36. Lack of diversification a major challenge

37. Invest in innovation, especially in ICT and R&D ICTs in Africa has proven to be an innovation frontier by combining state-of-art technologies with local customs and constraints through incremental innovations. • However, there is still more to be done to deliver more and better value added services to the poorest population : • Expensive inland high capacity networks require government support • Governments have to ensure that wholesale price drops are passed on • Policies on ICT and Innovation are not yet well integrated in broader development strategies: Donor targets, MDGs and PRSPs. • With many fixed-line operators close to bankruptcy, governments must attract private investment and knowhow to the fixed-line sector by adapting convergent licensing regimes and setting symmetric regulation of termination charges.

38. Economic and Institutional Reforms • Strengthen financial and banking sector reforms • Public management and public expenditure reform • Revenue reform

39. Embrace Globalisation Africa should pursue globalisation through: • Enhanced competitiveness • Reduction of barriers to trade • Investing in logistics • Fast-tracking regional integration

40. Thank you for your attention