Africa’s growth set to fall in 2015

The World Bank says growth in Sub-Saharan Africa is expected to fall in 2015 to four per cent from 4.5 in 2014, owing to the continued fall in oil prices and other commodities.

The growth rate would be below Africa’s peak growth rates of 6.4 per cent in 2002 to 2008.

According to Africa’s Pulse, a twice-yearly world bank analysis of issues shaping Africa’s economic prospects, terms of trade are declining among most countries in the region as a result of the fall in prices of oil and other commodities; a trend which would present headwinds for commodity exporters and gains for importers.

Mr Francisco Ferreira, Chief Economist for Africa and Team Lead for the Africa’s Pulse project, told journalists via a video conference: “We see an average decline in terms-of-trade for Africa of about 18 per cent, that is to say that the price of what Africa imports relative to what it exports will be 18 per cent higher and that’s of course a loss in purchasing power for the region.”

He noted that the trend would have implications for growth and less diversified oil exporting countries such as Angola and the Republic of Congo would stand to lose the more while other commodity exporters like the Democratic Republic of Congo and Mauritania would also suffer from the lower prices of their main traded commodity.

On the other hand, net oil importers like Kenya and Senegal would see modest gains owing to cheaper energy prices.

“The fiscal implications will also be quite serious as it will also impact government budgets. Some of the region’s largest oil exporters derive between 50 and 70 per cent of their fiscal revenues from oil, so decline of more than 50 per cent clearly has implications,” he stated.

He said there would also be implications for the current account balances for oil exporters such as Nigeria, Chad, Angola and Equatorial Guinea, where often oil accounts for as much as 90 per cent and in some cases even more than 90 per cent of total exports.

“Clearly these are challenging times,” he said, noting that while Africa’s growth in the two decades had been driven by good policies and both domestic and foreign investment, it has also benefited from a good external environment with abundant liquidity which provided substantial capital inflows as well as rising commodity prices.

However, this commodity super cycle appears to be ending and the prices have been in sustained decline for a number of years now, he said.

“The tone is that of sobriety, of no room for complacency. Africa can continue to rise, it has shown over the last 20 years that it can find its own successful path to growth but the global setting within which it is developing are certainly becoming more challenging,” he said.

Punam Chuhan-Pole, World Bank Lead Economist for Africa and co-author of Africa’s Pulse, noted that the effect of the declines in commodity prices on sub-Saharan Africa is significant because the region is a net exporter of primary commodities like oil, gold, natural gas, iron ore, copper, and cocoa, all of which has seen significant price declines.

She noted that despite the efforts to diversify its export base, diversification has been very limited and trade continues to be concentrated in primary commodities.

“The second main message that comes out of the Pulse the declines in commodity prices are affecting different countries differently in terms of their macroeconomic outcomes, in terms of current account balances, exchange rates, inflation, and fiscal balance,” she noted, saying oil exporters are hit the most also because oil provides a large amount of their fiscal revenues.

Thus for oil exporters in Africa, currencies have come under pressure, there has been widening of current account balances among others.

They are therefore beginning to adjust their budgets; lowering subsidies and in some case removing them and also lowering the oil price assumptions in their budgets.

Angola for instance has lowered from $ 80 to $40 dollars per barrel and Nigeria from an earlier forecast of $65 to $52 per barrel, translating into cuts in expenditure and less support for aggregate demand, she said.

The report noted that although the low oil prices are helping to contain inflationary pressures in some countries by providing support to real incomes for oil-importing countries, others like Nigeria and Ghana had not seen lower inflation.

Nigeria is experiencing price pressure from the Naira devaluation and election-relation stimulus while Ghana continued to battle double-digit inflation, at 16.5 per cent in February.

Sovereign spreads for Ghana has also remained high, well above the peak of the 2013 taper tantrum.

According to the report, the agreement reached with the IMF in Ghana would help stabilize the cedi, which has already depreciated by 19 per cent this year but the high inflation and fiscal consolidation would weigh on growth.

Also debt-to -GDP ratios for countries with increased bond market access such as Ethiopia, Cote d’Ivoire have picked up in recent years.

Though others like Ghana more exposed, overall debt burdens remained manageable however weakening currencies in some of these countries meant that the local currency cost of servicing foreign-denominated debt is rising.

The Pulse, however, shows some ray of light at the end of the tunnel for African countries, projecting a gradual increase in growth in the region, starting 2016 as commodity prices partially recover and/or economies become more diversified.

Growth is expected to rise to 4.5 per cent in 2016 and 4.7 per cent in 2017, underpinned by investments in infrastructure and healthy private sector consumption buoyed by the low oil prices.

“Activity in the non-oil sector is projected to strengthen, boosted by rising government spending. External demand is also expected to be supportive of growth in the region in 2016- 2017, owing to stronger economic prospects in high-income economies,” the report stated.

“This projected growth will, however, be constrained by risk factors including those presented by conflict and increase in a new generation of violence against civilians by political militants and extremist groups such as Boko Haram in Nigeria and Al-Shabab in Kenya, Ebola and the risk of reversals as well weaknesses in healthcare systems highlighted by the epidemic and external risk factors like slower-than-expected output in China.

“Further declines in price of metals and oil, sudden adjustment of market expectations to the upcoming tightening of monetary policy in the US as well as some policy challenges from policy response to the term-of-trade shock on economic activity would weigh on growth.”

It expressed the need for policy makers to prioritise the reduction of conflicts, promoting stability and helping countries escape cycles of conflict and instability by reforming and improving security, addressing land issues and creating greater openness in public matters, among others, strengthening healthcare system to prevent the outbreak of communicable diseases by improving surveillance and investment in healthcare workers at each skill level.

“Beyond macro-economic policies, there is urgent need across the region for deep structural reforms to ignite and sustain rapid productivity growth across all sectors, but especially prioritising agriculture and diversification of rural economies.”