Africa's Economy: Good Boom, Bad Timing

Africa has picked a really bad time to launch its economic boom, says one finance minister resignedly.

In Washington for the World Bank and International Monetary Fund annual meetings on 23-25 September, he had just heard the Bank’s Chief Economist for Africa, Shantayanan Devarajan, talk about the continent’s ‘robust growth’. The Bank puts this at about 4.8% on average in 2011, with the IMF projecting it at 5.2%. Of the world’s 15 fastest-growing economies, Devarajan explained, 10 were from Africa, including Ghana, where the start of oil and gas export should produce gross domestic product growth of over 13% this year.

Then the finance minister went to hear Bank President Robert Zoellick describe how the economic travails of the United States and the Eurozone (some US$7.6 trillion wiped off equity markets so far, say Bank economists) were spreading to developing economies, including Africa’s ‘frontier markets’. Now a greater risk loomed, he argued: the drop in markets and confidence could mean that big developing countries – such as China, India and Brazil – would cut back their investment plans and their consumers would cut spending.

Asian demand for agricultural commodities and minerals cannot yet compensate Africa for the slowdown in Western demand, despite a shift of global purchasing power from West to East. So a double-dip recession in the USA or a worsening crisis in the Eurozone triggered by a Greek default would quickly, if indirectly, weaken African economies. Some 37% of Africa’s non-oil exports go to the European Union. Faltering growth in North America and Europe will cut export earnings, remittances, private capital flows and aid to Africa. Economists reckon that a 1% fall in Western growth rates translates into a similar fall in African economies.

Few economists at the Washington meetings were certain Western economies would this year repeat the 2008 crash but many advised developing economies to prepare for more pummelling of markets and state treasuries. Even in Africa’s best-managed economies, with low budget deficits, there is far less room to manoeuvre now than there was in 2008. African consumer prices rose on average by 10% in the year to May 2011, up from 7.5% a year earlier. Some countries are seeing sharper price rises, creating political problems.

For example, Kenya’s economy has rebounded quite strongly since the political crisis of 2007-08 and the global crisis in the same period but the government has run fiscal deficits of 5-6% a year and now has a debt-to-GDP ratio of over 50%. With elections next year, the governing coalition parties want to raise money and don’t want the blame for austerity measures. With a regional drought, spiralling food prices and a plummeting currency, something will have to give. Some suspect that politicians playing the foreign exchange markets are pushing down the shilling’s value.

Kenya’s difficulties are repeated in Ethiopia and Uganda where inflation is rising and political discontent growing. African finance ministers do not expect much relief from outside. They recognise that sentiment in rich Western countries has moved against aid and that private capital – which makes up most flows to Africa – is likely to be more selective. Of the African fiscal deficits during the 2008 crisis, some 80% were financed from domestic resources, Shanta Devarajan noted.

At least that helped to develop banking systems and financial sectors, as well as send governments on a tax collection campaign. The same is happening now, with tax authorities getting tougher on corporate profits and royalties, particularly in the oil and mining sectors. Global food prices are now 26% higher than a year ago and the price of rice – an ‘essential commodity’ for many African middle classes and therefore politically sensitive – went up by 5% in August alone.

Sharply rising food prices have prompted more debate about how developing-country governments can reduce risk. The World Bank helps countries to set up financial market insurance and other risk management strategies, such as crop insurance. Senior officials at the United Nations Conference on Trade and Development says these are largely ineffectual and instead want tighter regulation of the role that financial investors and speculators play in commodity markets, as well as restrictions on banks that have inside information about commodity market movements.

Prospects for such regulation look poor, given entrenched opposition from banks and Western governments. French calls for a Financial Transactions Tax are gathering broader support, though, with Britain and the USA among the main opponents. In Washington, several African governments, including Congo-Kinshasa and Liberia, mooted tough tax regimes for mining and oil companies. The Bank’s Vice-President for Africa, Obiageli Ezekwesili, said the push for more accountability in natural resource revenue was a basic minimum of reform, which has led to a review of tax and royalty payments and how countries could maximise ‘the value of their endowment’. The Bank helps countries to set up sovereign wealth funds to better manage revenue and, in some cases, pays for expert advisers to assist governments negotiating fiscal terms with international oil and mining companies.

Amid the gloom, the Bank’s Chief Economist Justin Yifu Lin put a positive spin for Africa. The rapid wage increases in China and India would push labour-intensive manufacturers to relocate to countries with low wages. ‘Labour-abundant countries should grasp that opportunity to diversify their economies,’ he said. ‘There are opportunities for African countries to grow as dynamically as the East Asian countries, not only for a short period of time – it can be 10, 20 or 30 years.’ Coming from a man who was founding director of the China Centre for Economic Research during a period of exponential agricultural and industrial growth, Lin’s views carry weight.