Is Africa's Economy Slowing?
Recent IFPRI research has found that the global economic slowdown will be most felt in the world’s poorest countries, with an additional 38 million people potentially falling into poverty by 2030. According to the latest Africa’s Pulse report from the World Bank, this global slowdown has already had impacts in the region – economic growth in Africa south of the Sahara fell from 4.5 percent in 2014 to 3 percent in 2015 and is expected to fall even further to 1.6 percent in 2016. This would represent the lowest level of growth in over two decades.
What is driving this drastic turnaround? Falling international commodity prices and tighter overall financial conditions around the world have been exacerbated by domestic political uncertainties and negative weather events like widespread drought and flooding. Together, these conditions have resulted in overall weak regional economic performance.
The two largest economies in Africa south of the Sahara, Nigeria and South Africa, account for over half of the region’s output, and both have faced significant macroeconomic challenges since the beginning of 2016, according to the report. In Nigeria, falling oil exports and subsequent low oil revenues and a fall in manufacturing have pushed the country into a recession: in the second quarter of 2016, Nigeria’s GDP contracted by 2.1 percent. Similarly, in South Africa, drought and a decline in the mining sector led to a contraction of GDP in the first quarter of 2016; while GDP rebounded slightly in the second quarter, the recovery was weak by historical standards, the report cites.
Overall, the region’s oil-exporting countries have been hardest hit by economic troubles due to their dependence on the international sale of oil; these countries include Angola, Chad, Gabon, Equatorial Guinea, and South Sudan. In addition, the report finds that capital inflows into the region have slowed, meaning countries in Africa south of the Sahara are having more trouble accessing external financing. For example, in Nigeria, capital inflows fell by 55 percent in the first quarter of 2016. These declines are likely to put pressure on countries’ balance of payments, currencies, and inflation rates. While commodity-exporting countries could see a moderate pick-up in economic growth as they adjust to the new context of lower world commodity prices, this change is likely to be gradual; the report suggests that growth particularly in oil-exporting countries will remain weak for the next two years.
The report also highlights that the region’s economic situation is heterogeneous, however. While many countries are indeed facing deteriorating growth prospects, other countries have responded to the global economic slowdown with surprising resilience. The report creates a taxonomy of countries in the region to look at these divergent trends: “established” and “improved” economic performers are those countries that have proven resilient in the face of economic challenges, while “slipping” and “falling behind” performers have not. Around one-quarter of the region’s countries fall into the “established” and “improved” categories, accounting for 41 percent of the region’s population and around 21 percent of its total economic output. The report finds that these types of countries tend to have better macroeconomic policy frameworks (specifically for monetary policies), more diversified export structures, and more progressive business regulations, rule of law policies, and government effectiveness. “Established” performers include Ethiopia, Mali, Mozambique, Rwanda, and Tanzania, while “improved” performers include Benin, Cameroon, Côte d’Ivoire, the Democratic Republic of Congo, Kenya, Senegal, and Togo. The report finds that “established” and “improved” economies see more balanced contributions from the industry and agriculture sectors than “slipping” or “falling behind” countries, whose growth is being driven mainly by the services sector.
There are several important steps that are needed in many countries throughout the region to improve economic growth prospects, according to the report. Improvements to macroeconomic policies will be key in addressing fiscal challenges, improving domestic resource mobilization, and building adequate domestic buffers to withstand periods of global economic downturn. In addition, the region will need to increase its agricultural productivity. The report finds that agricultural output growth has largely resulted from expanding land under cultivation rather than increasing productivity gains; this trend is unsustainable in the long run and will need to be addressed.
However, the report also highlights that conditions are ripe for boosting Africa’s agricultural productivity and enhancing sustainable agricultural growth. As Africa’s population grows and becomes more urbanized, local demand for more and improved (i.e., more nutritious) food products is rising as well; this means increased demand incentives and import substitution potential, which could help regional markets grow rapidly. To tap into these opportunities, countries will need to increase their public investment in rural areas, including the strengthening of rural markets, the development and dissemination of improved agricultural technologies, the promotion of sustainable input use, and the expansion of access to reliable, transparent agricultural and market information. The report emphasizes that countries in Africa south of the Sahara should focus more on the quality of their spending and the efficiency of their resource use rather than just on the level of spending in the agricultural sector. For example, while many countries invest heavily in fertilizer subsidies, the report suggests that this money could be better spent through complementary investments such as agricultural extension programs, soil conservation training, and improved irrigation.
Finally, the region will need to make more agricultural spending decisions more transparent and inclusive in order to help bring stakeholders together and ensure that governments are taking reform commitments seriously.
By: Sara Gustafson, IFPRI