TWN Info Service on Finance and Development (May10/04)
29 May 2010
Third World Network

African economies to grow by 4.8% this year
Published in SUNS #6925 dated 18 May 2010

Geneva, 17 May (Kanaga Raja) -- The African economies are projected to grow at an average rate of 4.8% in 2010, up from 2.4% in 2009.

However, the expected economic growth rate falls short of the 7% pace required for achieving the Millennium Development Goals. In addition, the expected GDP growth rate is also not likely to be accompanied by increased job creation.

This means that unemployment and vulnerable employment as well as working poverty in Africa are likely to increase in 2010.

These are the main findings of the "Economic Report on Africa 2010", a joint publication of the United Nations Economic Commission for Africa (UN-ECA) and the African Union Commission (AUC).

According to the report, the challenge facing African countries in the short and long term is to find ways of solving the triple problems of slow growth, high and rising unemployment and increasing poverty in a time of global economic crisis.

The report also says that while the global crisis poses a severe development challenge to Africa, it also provides a unique opportunity for African countries to pursue policies which will enable them not only to recover from the recession but also to lay the foundation to transform their economies for sustainable long-term growth that generates employment and rapidly reduces poverty.

The expected increase in economic growth will be driven by both domestic and international factors, including increased demand for and prices of African exports, rising private capital inflows, increased ODA (official development assistance) inflows and remittances as well as the continued stimulus of fiscal and monetary policies in many African countries.

It is also expected that African countries will continue to maintain a stable macroeconomic environment, improved economic management and political stability.

These are the same drivers of growth that have left economic performance in Africa vulnerable to volatility in world commodity markets in the past.

On the positive side, says the report, Africa has a large and growing labour force and underutilized capacity that can be employed to increase output. This labour force is increasingly educated, young and innovative.

The slack in economic activity means that African governments can pursue policies to put these unemployed resources to work without igniting inflation, if this is done with care. These policies can also lay the foundation for structural transformation and long-term, sustainable high-employment-generating economic growth and poverty reduction.

According to UN-ECA, as a result of the global economic recession, Africa's economic growth continued to slow in 2009 to 2.4%, down from 4.9% in 2008. In spite of the fall in world commodity prices, primary commodity exports continue to be the major driver of growth in Africa.

Although oil and other commodity prices fell generally in the early part of 2009, they rebounded in the second half of 2009 and remained high. Thus, oil-exporting African countries grew at 3.8% compared to an average of 0.9% for non-oil African economies in 2009.

There were considerable regional variations in growth in 2009 across African regions and countries. Growth was highest in West Africa at 5.5%, followed by East Africa at 4.3%, North Africa at 3.6%, and Central Africa at 1.8%, while Southern Africa posted a negative growth rate of 1.1%.

Economic activity in Africa, as a whole, expanded by 2.4% in 2009, and Africa's GDP is projected to grow by 4.8% in 2010.

According to the report, the expected economic rebound will be driven by both domestic and international factors. The recovery in the global economy is set to push up demand and prices of African exports of goods, in particular minerals and hydrocarbons, and services such as tourism, thus leading to stronger export earnings.

In addition to increased exports, private flows, in particular FDI (foreign direct investment) and portfolio investment, are likely to increase, although gradually, therefore maintaining the momentum that started in late 2009.

[Meanwhile, the so-called "Greek" crisis and the euro "bailout" and the attendant fiscal tightening and austerity measures in several of the Euro-zone countries, one of the major markets for Africa, could however have a negative effect on African exports.]

According to the report, in the Euro area, the fall in activity reached 4.1% compared with a positive growth rate in 2008 of about 0.9%. Growth in the Euro area is expected to remain low in 2010 compared to other developed countries as both domestic demand and exports are expected to remain weak.

Inflation in Africa is expected to further ease in 2010, largely reflecting significant price moderation in countries that recorded two-digit inflation rates in recent years. However, a number of countries are expected to witness moderate acceleration in price increases.

The report notes that while the outlook for 2010 and beyond foresees a relatively strong rebound in economic activity, there are several risks. Some of these risks stem in large part from the structural weaknesses of African economies, in particular their continued high dependence on exports of primary commodities and low value-added products that are inherently subject to significant demand and price fluctuations.

Related to these are the uncertain prospects of the global economy. A slower-than-expected recovery of the global economy or relapse into recession and/or eruption of another global financial crisis could have detrimental effects on African economies.

The occurrence of such events would weaken domestic financial markets, squeeze domestic credit and investment, reduce private and official flows to the continent, depress the demand for and prices of African exports, and decrease tourism receipts and remittances.

The report further notes that with increased spending needs and reduced revenues stemming from the slowdown in economic activity, many African countries experienced fiscal deficits in 2009; however, because of prudent fiscal policies in the past, many African countries had the fiscal space for counter-cyclical policies.

"In a departure from past practice, where monetary policy was geared strictly towards inflation targeting, there is evidence that monetary authorities in African countries supported expansionary fiscal policies with prudence in 2009."

According to the report, although global FDI inflows are likely to grow in 2010, the recovery will be modest. The total amount of FDI inflows is expected to increase to $1,219 billion in 2010, compared to $1,010.7 billion in 2009, down from $1,782.4 billion in 2008.

In 2008, ODA to Africa grew by 11% compared to 2007. However, ODA inflows to Africa in 2010 are expected to fall due to tighter budget conditions in many donor countries, collapse of major financial institutions in the advanced countries, severity of the credit crunch, declining surpluses in oil-exporting countries, and the drastic fall in the values of sovereign funds.

The expected decline in the flow of ODA also dampens prospects for achieving the Millennium Development Goals in poor countries in Africa and in other developing regions.

In Africa, says the report, unemployment remains high at around 7.6% in Sub-Saharan Africa (SSA) and 10% in North Africa in 2008. As a result of the global economic crisis, unemployment was estimated to rise in 2009 to an average of 8.2% in SSA and to 10.6% in North Africa. Estimated employment growth rate in 2009 ranged between 1.2% and 1.8% for North Africa and between 2.4% and -1.1% for SSA.

The global share of Africa's total trade (exports and imports) rose slightly from 2.8% in 2007 to around 3.2% in 2008. This increase was driven mainly by improved commodities prices that peaked in the middle of 2008 before the effects of the financial crisis started to affect trade.

In value terms, Africa exported $465 billion worth of merchandise and imported $558 billion worth in 2008, causing the region to break the one-trillion dollar mark for the first time in the case of merchandise trade.

The share of the continent's global exports reached 3.5%, compared to 3.1% the year before. Since the factors that have been driving trade expansion remained the same in 2008 as they were in 2007, the structure of trade did not change much. The 10 main exporters were resource-rich countries, particularly in oil.

Africa's trade has remained highly volatile and pro-cyclical and continues to be largely determined by global economic developments.

The report argues that the global economic crisis provides African countries with a unique opportunity to pursue policies that will not only counter the effects of the recession but also lay the foundation for structural transformation and rapid and sustainable growth based on diversified economies and, more important, rapidly develop large and labour-absorbing sectors of African economies in order to create jobs to employ the rapidly growing labour force.

This can be done through appropriate investment in infrastructure and human capital, renewed and creative efforts at domestic resource mobilization, factor market reforms, incentives to support private-sector employment and efforts to increase productivity and incomes in the informal sector.

In the short run, says the report, African countries should pursue expansionary counter-cyclical fiscal and monetary policies to finance investment in infrastructure, education and health care as a way to recover from the economic downturn. A large proportion of the projects in this package should focus on labour-intensive projects, such as rural roads and water projects.

Long-term strategies involve investment that will transform the structure of African economies from reliance on low-employment-generation natural resource extraction to high-employment labour-intensive manufacturing, agro-industry and service provision.

Moreover, African countries need to pay attention to policies that increase growth in total factor productivity.

These policies may include improved economic and political management as well as political stability, technology transfer and investment in research and development.

Finally, the report adds, Africa cannot continue to rely on the international community to finance its development agenda. It is therefore important for African countries to boost their efforts to increase the mobilization of domestic resources to finance African development through innovative programmes.

Increasing the savings rate to the levels attained by East Asian countries, will generate substantial revenue to finance development in Africa, it concludes. +