Economic Growth: Africa Walking the Tightrope

Published on 22nd June 2009

Looking back at the last year in Africa, we note that many positive results have been achieved which are often at risk of being overlooked. Enormous challenges remain, however, if African countries are to meet their MDG-based targets, particularly in light of the global economic downturn.

 

Economic Growth

 

The last year has seen a consolidation of positive economic trends throughout the continent. A large number of African countries have recorded high rates of growth in per capita income and investments in the continent have continued to flow, even as the economic turbulence began to reduce global growth and demand for Sub-Saharan Africa’s exports in the second half of 2008. However, since early 2009, capital inflows have come under growing pressure as global liquidity tightened, exchange rates and capital markets became more volatile (thereby increasing the perceived risk of investing in local-currency-denominated assets), and investors have become more concerned about

an increase in political and macroeconomic risks and the liquidity of their assets.

 

Global financial market turbulence has further increased investor preference for highly liquid and perceived high-quality assets, which has begun to take a toll on Africa’s emerging stock markets. The crisis has also reversed the dramatic increase in energy and food prices that had such a profound and mixed impact on many African countries over the last year. With the price of a barrel of oil, for example, having halved since late 2008, those countries exporting oil now face enormous income shortfalls, while those needing to import it have seen their purchasing power increased.

 

Crisis-related second-round dynamics, such as the sudden drop in commodity prices are beginning to impact on national revenues, terms of trade, inflation and general developmental prospects, some of them positively, many of them negatively.

 

These developments originate from outside the African continent and mask the significant structural improvements made over the last year. Many African countries have worked hard to achieve macroeconomic stability (maintaining stable and low inflation and debt sustainability), pursue sound economic policies, and reinforce their institutions. They have undertaken to mainstream trade into national development strategies, promote exports, enhance competitiveness and promote inter-regional trade. They have set out strategies for the development of infrastructure covering water, energy, transport and ICT. They have called for the promotion of the private sector, including building financial markets and improving regulatory frameworks. They have increased their revenue mobilization and broadened their tax base achieving an overall current account surplus of 2.7 percent in 2007 and 2008. Finally, they have worked hard to improve business conditions on the continent.

 

According to the World Bank’s Doing Business Report 2009, African governments have implemented more business- friendly reforms over the last year than in any previous year covered. Four African countries feature among the top ten reformers in the report, which also found that twenty-eight countries had implemented a total of fifty-eight reforms that made it easier to start a business. Improvements have also been made in commercial law, property rights and investor protection.

 

Development partners have contributed to this success by helping to promote investment, to improve the business environment, and to develop financial markets through initiatives like the Enhanced Private Sector Assistance (EPSA) for Africa, the Foreign Investment Advisory Service of the International Finance Corporation, the NEPAD/OECD.

 

The World Bank reports that African governments have implemented more business- friendly reforms over the last year than in any previous year covered. Four African countries feature among the top ten reformers.

 

While the business climate in Africa has improved substantially over the last year, the cost of doing business in Africa is still the highest in the world. Entrepreneurs in Africa continue to face greater regulatory and administrative burdens, and less protection of property and investor rights, than entrepreneurs in any other region. They also continue to struggle with inadequate infrastructure which in many areas of the continent restricts their

entrepreneurial potential to a bare minimum (Centre for Global Development, March 2009). The World Bank, for example, estimates the infrastructure constraint on doing business reduces the productivity of Africa’s firms by as much as 40%.

 

The lack of sufficient and reliable transport and energy infrastructure not only reduces business-efficiency, it also limits the volume of regional and international trade and hampers regional integration. The Africa Infrastructure Country Diagnostic reports that for most countries the negative impact of deficient infrastructure is at least as large as that associated with crime, red tape, corruption, and financial market constraints (AICD, 2009). Despite the obvious need for progress in this sector, persistent financing constraints mean that Africa continues to lag behind other regions, particularly in the area of sanitation, electricity and rural road access (AfDB, 2009).

 

However, the last year has also seen some important steps forward. The AU, for example, dedicated its summit in January 2009 to infrastructure development, and donors, including non-DAC donors such as India and China, who have been stepping up their support. The World Bank has recently created an Infrastructure Recovery and Assets Platform (INFRA) which will provide $45 billion in infrastructure lending over the next three years and more than $1.2 billion were pledged to the North-South Corridor at a conference in Lusaka in April 2009. Going forward, infrastructure will continue to receive enhanced and sustained support from key multilaterals, following successful replenishments of the International Development Assistance, the African Development Fund, and the European Development Fund. The EU-Africa Infrastructure Trust Fund, launched in 2007, is also receiving considerable financial pledges from a growing number of EU member states (EU Commission, April 2009).

 

Addressing the infrastructure challenge is made more difficult by the current economic crisis. Previous crises have shown that infrastructure is among the expenditure categories cut most severely by governments under financial stress. Such responses come at great developmental cost as subsequent rehabilitation of facilities is exponentially more costly than regular maintenance, while inadequate infrastructure slows economic recovery and poverty reduction. Making sure that vital spending is maintained without sacrificing macroeconomic and fiscal prudence is one of the great challenges for African policy-makers in the year to come.

 

From An Agenda for Progress at a Time of Global Crisis: A Call for African Leadership Annual Report of the Africa Progress Panel 2009


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