AfDB: why Nigeria, South Africa, others must not limit competition Featured

Written by  Feb 07, 2019

The annual Africa Economic Outlook of the African Development Bank (AfDB), tagged “Regional Integration for Africa’s Economic Prosperity”, highlights economic prospects and projections for the continent and its 54 countries. Excerpts:

Africa’s economic growth continues to strengthen, reaching an estimated 3.5 percent in 2018, about the same as in 2017 and up 1.4 percentage points from the 2.1 percent in 2016. East Africa led with GDP growth estimated at 5.7 percent in 2018, followed by North Africa at 4.9 percent, West Africa at 3.3 percent, Central Africa at 2.2 percent, and Southern Africa at 1.2 percent.

In the medium term, growth is projected to accelerate to 4 percent in 2019 and 4.1 percent in 2020. And though lower than China’s and India’s growth, Africa’s is projected to be higher than that of other emerging and developing countries. But it is insufficient to make a dent in unemployment and poverty.

Of Africa’s projected 4 percent growth in 2019, North Africa is expected to account for 1.6 percentage points, or 40 percent. But average GDP growth in North Africa is erratic because of Libya’s rapidly changing economic circumstances.

East Africa, the fastest growing region, is projected to achieve growth of 5.9 percent in 2019 and 6.1 percent in 2020. Between 2010 and 2018, growth averaged almost 6 percent, with Djibouti, Ethiopia, Rwanda, and Tanzania recording above-average rates. But in several countries, notably Burundi and Comoros, growth remains weak due to political uncertainty.

Growth in Central Africa is gradually recovering but remains below the average for Africa as a whole. It is supported by recovering commodity prices and higher agricultural output.

Growth in Southern Africa is expected to remain moderate in 2019 and 2020 after a modest recovery in 2017 and 2018. Southern Africa’s subdued growth is due mainly to South Africa’s weak development, which affects neighboring countries.

Macroeconomic Performance and Prospects

Africa’s economic growth continues to strengthen, reaching an estimated 3.5 percent in 2018. This is about the same rate achieved in 2017 and up 1.4 percentage points from the 2.1 percent in 2016. In the medium term, growth is projected to accelerate to 4 percent in 2019 and 4.1 percent in 2020. And though lower than China’s and India’s growth, Africa’s growth is projected to be higher than that of other emerging and developing countries.

Improved economic growth across Africa has been broad, with variation across economies and regions. Non-resource-rich countries—supported by higher agricultural production, increasing consumer demand, and rising public investment—are growing fastest (Senegal, 7 percent; Rwanda, 7.2 percent; Côte d’Ivoire, 7.4 percent). Major commodity-exporting countries saw a mild uptick or a decline (Angola, –0.7 percent), while Nigeria and South Africa, the two largest countries, are pulling down Africa’s average growth.

The positive growth outlook is clouded by downside risks. Externally, risks from uncertainty in escalating global trade tensions, normalization of interest rates in advanced economies, and uncertainty in global commodity prices could dampen growth. Domestically, risks from increasing vulnerability to debt distress in some countries, security and migration concerns, and uncertainties associated with elections and political transition could weigh on growth.

Growth remains insufficient to address the structural challenges of persistent current and fiscal deficits and debt vulnerability. One way to accelerate growth in the medium to long term and overcome the structural challenges is to shift imports to intermediate and capital goods and away from nondurable consumption goods. For African countries, a 10 percentage point increase in the share of capital goods in total imports could, five years later, reduce the share of primary goods by 4 percentage points, amplifying the effectiveness of diversification rooted in transferring technology and accumulating capital.

Vigorous public finance policy interventions are needed in tax mobilization, tax reform, and expenditure consolidation to ensure debt sustainability. Policymakers need to adopt countercyclical policy measures to stabilise inflation and reduce growth volatility. Macroprudential policies should be used to reduce vulnerability to capital flow reversal and shift inflows toward more-productive sectors. For a sample of African countries, a 1 percent increase in public savings (by reducing the budget deficit) is correlated with a 0.7 percent improvement in the current account balance.

For countries in a monetary union, well-functioning, cross-country fiscal institutions and rules are needed to help members respond to asymmetric shocks. Debt and deficit policies should be consistent across the union and carefully monitored by a credible central authority. And the financial and banking sector should be under careful supervision by a unionwide independent institution.

Jobs, Growth, and Firm Dynamism

Africa’s labor force is projected to be nearly 40 percent larger by 2030. If current trends continue, only half of new labor force entrants will find employment, and most of the jobs will be in the informal sector. This implies that close to 100 million young people could be without jobs.

The rapid growth achieved in Africa in the past two decades has not been proemployment. Analysis of growth episodes reveals better employment outcomes when the growth episodes were led by manufacturing, suggesting that industrialization is a robust pathway to rapid job creation.

African economies have prematurely deindustrialized as the reallocation of labor has tilted toward services, limiting the growth potential of the manufacturing sector. To dodge the informality trap and chronic unemployment, Africa needs to industrialise.

Key factors impeding industrialization, particularly manufacturing growth, are limited firm dynamism. Firm growth and survival are held back by corruption, an unconducive regulatory environment, and inadequate infrastructure.

Estimates from Enterprise Surveys show that 1.3–3 million jobs are lost every year due to administrative hurdles, corruption, inadequate infrastructure, poor tax administration, and other red tape. This figure is close to 20 percent of the new entrants to the labor force every year.

Small and medium firms have had very little chance of growing into large firms. Such stunting, coupled with low firm survival rates, has stifled manufacturing activity in most African countries.

Read also: Hamzat unveils infrastructural plans for Lagos
Reviving Africa’s industrialization requires a commitment to improve the climate that supports firm growth. Industrial policies could benefit from assessing production knowledge and identifying competitive products to inform the design of robust national and subnational industrial strategies.

Integration for Africa’s Economic Prosperity

The Continental Free Trade Agreement (CFTA) can offer substantial gains for all African countries as new and timely analytics show.

Night light data suggest that barriers to trade from border impediments have fallen over the past 20 years.

Eliminating today’s applied bilateral tariffs would increase intra-Africa trade by up to 15 percent, but only if rules of origin are simple and transparent.

To move to systemwide rules of origin and avoid product-specific rules of origin, regional economic community (REC) member countries should move to a single value added rule— say, 40 percent of value added from within the REC—with a more lenient threshold for less developed countries. They should also exempt shipment sizes below $1,000.

Removing nontariff barriers with countries outside Africa could increase trade and boost the continent’s tariff revenues by up to $15 billion.

The World Trade Organization’s Trade Facilitation Agreement (TFA) is expected to reduce trading costs by 14–18 percent and increase world trade by 0.5 percent, with developing and especially least developed countries benefiting the most. It is also likely to reduce the time needed to import goods by a day and a half and the time needed to export goods by almost two days.

Implementing the TFA would increase the gains to about 4.5 percent of Africa’s GDP, or an additional $31 billion, bringing the total real income gains to $134 billion. (A 0.2 percent tariff on imports from high-income countries could bring in $850 million to finance trade facilitation projects.)

Bold reforms, especially at the institutional level, can synchronize financial governance frameworks across Africa and remove any remaining legal restrictions to cross-border financial flows and transactions. To harmonize payment systems, RECs should pursue stronger technological advances that facilitate movement of funds across borders.

Electricity markets in Africa have developed vertically within national boundaries rather than horizontally across countries. Trade in electricity would bring many benefits, especially to small countries, if the hard infrastructure is at scale and functioning—and if soft infrastructure (logistics) is trustworthy.

Africa’s infrastructure financing needs are estimated to be $130–$170 billion a year. But total commitments came to just $63 billion in 2016, representing a financing gap of approximately $67–$107 billion a year. To close Africa’s infrastructure deficit, RECs could consider regional infrastructure bonds, while countries could further mobilize domestic resources and provide incentives for the private sector to join public–private partnership operations for regional public infrastructure.

Specific items for the integration agendas for Africa’s diverse economies

For landlocked economies—Botswana, Burkina Faso, Burundi, Central African Republic, Chad, Ethiopia, Lesotho, Malawi, Mali, Niger, South Sudan, eSwatini, Rwanda, Uganda, Zambia, and Zimbabwe.

  • Advance efforts for delegating regional public goods.
  • Continue to develop national multimodal rail, road, air, and pipeline networks.
  • Strengthen regional transport corridors. Under the Northern Corridor Transit and Transport Agreement, long-distance transport prices in 2011–15, despite large increases in traffic, came down 70 percent from Mombasa to Kampala and 30 percent from Mombasa to Kigali. By contrast, they rose along the Central Corridor by almost 80 percent from Dar to Kampala and by 36 percent from Dar to Kigali. The main difference was the better improvement of logistics in the Northern Corridor.
  • Revamp the transport regulatory frameworks. Landlocked countries in Africa, many of them low income, tend to engage more in intra-Africa trade than coastal or middle income countries. But an estimated 77 percent of their export value consists of transport costs, a high barrier to regional and international trade.
  • Push for improving the conventions and instruments that facilitate transit trade (beyond the stalled multilateral negotiations).

For coastal economies—Algeria, Angola, Benin, Cabo Verde, Cameroon, Comoros, Congo, Democratic Republic of Congo, Côte d’Ivoire, Djibouti, Egypt, Equatorial Guinea, Eritrea, Gabon, Gambia, Ghana, Guinea-Bissau, Kenya, Liberia, Libya, Madagascar, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Nigeria, São Tomé and Príncipe, Senegal, Sierra Leone, Somalia, South Africa, Sudan, Tanzania, Togo, and Tunisia.

Expand port facilities, including storage and customs administration, and increase the efficiency of handling vessel traffic and loading and unloading containers. The cost of African port facilities is estimated to be 40 percent above the global norm, and they have long container dwell times, delays in vessel traffic clearance, lengthy documentation processing, and low containers per crane hour (except South Africa). Ultimately, over 70 percent of delays in cargo delivery come from extra time in ports.

Increase the speed and reliability of rail and road networks by reducing congestion and delays at checkpoints, and diversions of trucks and rolling stock for maintenance.
Push for improving conventions and instruments beyond the stalled multilateral negotiations to facilitate transit trade.

For larger economies—Egypt, Morocco, Nigeria, and South Africa

Lead the move toward a customs union by accepting greater delegation of decision making to supranational authorities and resisting internal pressures to protect domestic producers and limit competition.

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