Africa's strong growth

Africa's strong growth

Oct 19th 2007
From the Economist Intelligence Unit ViewsWireAfrica's boom is not only because of pricey commodities

The US economy may be set to slow in 2008, but Africa’s protracted
economic boom is poised to accelerate from 6.1% in 2007 to 6.8% in
2008—the region's best performance since the early 1970s. That, at
least, is the forecast contained in the IMF's October 2007 World
Economic Outlook. “Sub-Saharan Africa is clearly enjoying its best
period of sustained growth since independence” it says, adding that
while oil exporters are growing the fastest “most others" are also
growing strongly and outperforming historic trends. In the decade to
1996 the African economy grew by 2.2% a year; in the ten years to 2006
annual growth averaged more than 5%, meaning that after two decades of
decline real incomes per head are now rising at over 2% annually. And
while the average gap with the rest of the developing world remains
very wide, African policymakers are increasingly confident that they
are creating a platform for sustained growth over the next decade,
during which time income gaps will start to narrow.
Beyond commodities

The IMF is at pains to stress that there is more to the African boom
than the upsurge in commodity prices. While regional growth did take
off in the wake of the commodity price boom, non-commodity exporters
are also growing faster than before partly because they have managed to
expand non-traditional manufacturing exports and diversify export
market destinations, especially in Asia, where the demand for
resource-based products is strong. That said, the IMF acknowledges that
the growth acceleration since 2002 reflects “largely the coming on
stream of new production facilities in the region's oil exporting
countries such as Angola and Nigeria”. In 2008, non-fuel commodity
prices are forecast to weaken while oil prices are set to show further
handsome gains. As a result the region's terms of trade will improve
again, providing strong base for continued above-average GDP growth in
2008.

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Most African countries are forecast to maintain “relatively high”
rates of growth while inflation will “generally moderate,” excluding
Zimbabwe where it forecasts average inflation accelerating from 1,017%
in 2006 to 16,170% this year. (There is no forecast for average
inflation for the country in 2008 but the year end figure is
projected--with pin point accuracy--at 137, 873.1%.) The most rapid
rates of growth are forecast to occur in oil exporters, and in
countries undertaking economic reform. Expansion in the continent's
largest economy, South Africa, will continue to be boosted by the
ongoing investment and construction boom as preparations for the 2010
football World Cup gather momentum. The region's second largest
economy, Nigeria, will benefit from higher oil prices—the IMF is
forecasting an oil price increase of 9.6%--and production.
Private capital flows in

The combination of more open economies in a benign external
environment, together with improved and more consistent policy reforms
to strengthen the business environment and official actions to reduce
debt burdens has allowed African countries to attract rising private
capital inflows as well as benefit from “some step-up” in aid inflows
and remittances. Foreign direct investment has been particularly strong
in resource-rich countries. A smaller number of countries have begun to
attract interest from private portfolio investors--the bulk of which go
to South Africa though other such as Ghana and Uganda are also enjoying
rising capital inflows.

Most African countries continue to run “significant” current-account
deficits and, oil exporters excluded, foreign reserves remain “quite
low”. As a result currency appreciation has been limited, though the
challenges of managing currency inflows are “most pressing” for oil
exporters. The Fund urges African oil producers to spend oil windfall
gains “in a prudent manner” ensuring that increase public spending is
accompanied by measures to improve the supply-side response in the
non-oil economy.
Over-egged?

Indeed, the IMF itself admits that the main risks to its upbeat
forecast are on the downside, and that past World Economic Outlook
forecasts have "systematically overestimated growth in Africa. For all
the Fund’s talk of economic and political reforms in Africa, the hard
fact remains that in a whole host of global league tables--the World
Bank’s Doing Business Report, Transparency International’s Corruption
Perceptions Report, The World Bank’s Governance Indicators, Indices of
Global Political and Economic Freedom and the World Economic Forum’s
Global Competitiveness Index--African countries, with a handful of
exceptions, cluster at or near the bottom. As the World Bank’s Doing
Business Report (2008) noted recently African countries are reforming
but others are doing so more rapidly, meaning that the region is not
improving its relative position. The IMF has repeated its call for
structural reforms—especially trade and investment openness,
transparency, education, and better governance—that will strengthen the
investment climate and foster growth driven by the private sector.
Making progress with this formidable (if familiar) agenda will be
crucial if Africa's recent economic achievements are to be sustained.

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