Shedding its long-standing "basket case" label, Africa is now one of the fastest growing regions in the world, behind only Asia and the Middle East, with a projected overall growth rate of more than 4 percent in 2010, and a GDP just under $1.5 trillion, according to a new analysis from the African Development Bank (AfDB).
Growth in 2009 was lower than the pre-crisis growth rate of 6 percent, reflecting the impact of the global economic crisis.
According to AfDB estimates, almost all African countries are expected to experience higher growth in 2010 than in 2009, with the highest average growth in eastern African countries.
"If the world economy and world trade continue to recover, and oil and non-oil commodity prices remain close to current levels, the outlook for continuing growth in 2010 is extremely promising, progressing towards the almost 6 percent rate of the pre-crisis period," says Léonce Ndikumana, PhD, an economist and AfDB's Director of Research.
"With an increasing number of investors willing to take advantage of countless opportunities in Africa and a fast-growing middle class, the contemporary African landscape is not dissimilar from that of Asia a few decades ago."
The new analysis shows that both the growth rate and the impact of the global economic downturn have been uneven.
Some of Africa's frontier emerging markets such as Ghana are even completely re-writing their economic trajectories. Ghana's past wealth lay in gold and cocoa -- commodities that have remained in high demand, and which have helped shield the economy from the worst of the current recent global recession.
Expansionary budget policies ahead of the 2008 elections raised inflation and eroded its hard-earned international reserve position following years of structural adjustment and macroeconomic discipline underpinned by political stability. A slump in foreign exchange inflows due to the global financial crisis further weakened the country's prospects.
However, with tighter budget policies, Ghana's currency recovered its strength, and inflation began to fall. If the country uses its new-found oil wealth wisely, it is very likely to join the ranks of Africa's middle-income countries within ten years.
2010 growth forecast
Prospects are for a gradual recovery in all African regions although the recession will leave its mark. Eastern Africa, which had best weathered the global crisis, is likely to achieve again the highest average growth in 2010/2011 with above 6 percent. Not only have the region's fundamental drivers of economic growth (agriculture, services, strong macroeconomic fundamentals) remained quite robust even despite the challenges posed by the global crisis, but also East Africa's economic drivers are increasingly relying on the development of domestic demand.
In North Africa and West Africa, average growth is expected to amount to around 5 percent, and in Central Africa growth will be slightly above 4 percent during the forecasting period. The Southern African region, which has been most hit in 2009, will recover more slowly than the other regions, with average growth of almost 4 percent during 2010/2011.
African Countries Hit Hard
In a few countries, growth is, however, expected to remain too low to noticeably lift per capita GDP, and in a couple of countries, GDP per capita is likely to continue to decline. Countries hardest hit by the economic crisis are a varied group, but center around resource exporters and open middle-income economies.
The recession will most leave its mark on the southern African region, which has been hardest hit by the global economic crisis. Much of southern Africa's problem can be attributed to the collapse of commodity prices and the fall of export volumes. Some of the worst hit economies were resource-rich Botswana, Angola, and South Africa. The contraction in South Africa, in particular, had large negative effects on the rest of the countries in the sub-region via declines in employment, exports, remittances, FDI and fiscal revenues.
AfDB Eased Economic Shocks, especially supporting the Private Sector
Throughout the economic crisis, AfDB has played a catalytic role, helping countries with financing and mobilizing financing from outside sources.
Especially important, though, were the AfDB's efforts to support the private sector with lines of credit, lending for specific projects, and guarantees. Both direct lending and the guarantees helped alleviate the widespread shortage of credit and financing.
" Public sector lending continues to be important, but we want to support the private sector to broaden the base for growth in Africa," say AfDB economists. "In the past the emphasis has been on the public sector, but that is not sufficient to reach and sustain high growth rates. Support for the private sector creates income and jobs."
AfDB responded to the intensity of the crisis and its financial impact with four main initiatives:
- A $1.5 Billion Emergency Liquidity Fund;
- A two-phase Trade Finance Initiative comprised of $500 million in lines of credit to support trade finance by African banks and a $500 million investment in the Global Trade Liquidity Program (GTLP), which increased the share of GTLP resources targeted for Africa.
- A Framework for Accelerated Resource Transfer of African Development Fund Resources to eligible countries.
- Enhanced policy advisory support.
Private investment returning
With recovery, Africa's rapid growth is expected to resume, spurred by the strong demand from global markets for African oil, minerals and agriculture products.
In addition, policy changes in many countries have created an environment favorable to both internal and foreign private investment.
While Africa's growth is contingent on a strong global economy, the AfDB sees signs that outside investment is resuming, especially in mining and minerals. Asian companies are taking advantage of the investment potential, especially Chinese, but also Korean and Indian investors.
"Investments from Asia, and those from China in particular, are quite significant," according to new analysis by the AfDB economists. "The robust economic growth in Asia can be expected to lead to increased Asian investments in Africa, in both natural resources and manufacturing. In fact, the rapid industrial upgrading taking place in Asia provides ample opportunities for Africa to attract efficiency-seeking and export-oriented FDI from Asian economies." Investment from the Middle East also is increasing, including in large-scale agriculture.
The AfDB hopes these emerging partnerships with new investors will serve as hedges against future shocks from the economies of the developed world and also will broaden Africa's export base.
They might also mitigate the risk if the global economy does not recover swiftly. Africa depends on US and European markets; anything that undermines the recovery of those markets affects demand for African commodities, which, in turn, would hamper African growth.
Besides investments from Asian countries and Africa's more traditional partners, other factors contributing to the continent's economic recovery and growth are:
- The rise of the middle class, defined as earning $200 or more a month. In the past, educated Africans became civil servants, but governments can't absorb the growing numbers of educated Africans, which has forced them to be more creative. Many are becoming entrepreneurs, creating money and jobs. They are driving the growth in the service sector, especially in telecommunications and banking. Furthermore, the fast growing middle class both broadens domestic markets and increases opportunities for investment by both local and foreign firms.
- Poverty in Africa declined from almost 60 percent in 1998 to less than 50 percent currently.
- As the labor force is moving away from public service, the service sector is doing a good job of absorbing more educated and more skilled workers. That, in turn is forcing education and training programs to adapt to produce people with skills needed to compete in an economy moving more to private than public.
- Regionalization is making it easier for labor to move back and forth between countries, which also contributes to economic growth. The new ease of movement alleviates labor pressures on individual countries, and also expands markets for goods and services.
- Despite financial pressures at home, most donor pledges for continuing aid to Africa have been honored. In addition, debt relief under the Heavily Indebted Poor Countries Initiative by the World Bank and IMF has reduced debt service costs; and financing from the AfDB and the World Bank has increased, which helped African countries cope with the crisis.
Persistent poverty affects growth prognosis
There are a few exceptions to Africa's overall optimistic prognosis, especially in some post-conflict regions still beset by crime and violence, where governments are fragile and the populations insecure. Though post-conflict counties have not necessarily been harder hit by the downturn than other countries, they face greater challenges because they have fewer fiscal resources to draw upon if recovery is delayed.
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Growth rates are low in several post-conflict countries, such as Burundi, Ivory Coast and Chad. The AfDB's Fragile States Facility offers some support for those economies and also provides humanitarian assistance through the Special Relief Fund.
In much of Africa, poverty is still widespread and unemployment is high. With no leverage, no resources, and no safety net, the poor have borne disproportionate hardships during the downturn, many of them as malnourished refugees repeatedly exposed to violence.
But that situation is improving, the analysis shows. Poverty in Africa declined from almost 60 percent in 1998 to less than 50 percent currently.
Despite economic growth, the decline has not been fast enough, and the analysis by the AfDB offers several explanations: income inequality; lack of adequate redistribution mechanisms to support those not in the work force; and concentration of growth in capital-intensive sections of the economy.
Perhaps even more important, for most countries the growth period has been too short to generate and sustain the increase in incomes and financial strength needed to alleviate poverty.
Investment in public services and education and creating employment are the best ways to transition out of poverty, but that requires sustained growth over a period of time.
The outlook for job creation, crucial to the effort to reduce poverty, is not clear. The UN Economic Commission for Africa placed the continent-wide unemployment rate at 8.2 percent in 2009, down only slightly from the 2004 rate of 8.5 percent.
Growth in a number of countries is attributed to income from oil and mineral resources, the analysis shows, but those sectors don't create many new jobs. And most countries have not put in place the mechanisms that would permit people to benefit from the growth. "Job creation is the best way to get people out of poverty," says Dr. Ndikumana.
