Africa: Economic Report, 2

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Africa: Economic Report, 2
Date distributed (ymd): 980805
Document reposted by APIC

Region: Continent-Wide
Issue Areas: +economy/development+
Summary Contents:
This posting and the previous one contain substantive excerpts from the Economic Commission for Africa's
African Economic Report - 1998, with analysis and data for calendar year 1997. The full report,
as well as additional documents from the Addis-Ababa-based international agency, can be found
on the ECA web site (http://www.un.org/depts/eca).

28. Gross domestic investment has remained very low compared to the volume required to accelerate the rate of economic growth as well as in comparison with the high-performing areas in Southeast Asia. In the last two years, the volume of investment as a proportion of GDP stabilized at 21 per cent, a considerable improvement over the 19 per cent of the 1990-1995 period. One major reason behind the low volume of investment is the low mobilization of resources from both domestic and external sources. ...

29. Table 1.5 contains statistics on the volume of saving and investment as well as the resource gap as a proportion of GDP from 1975 to 1997.

30. First, gross domestic savings (GDS) defined as GDP less total consumption expenditure has been consistently declining. In 1975-84, African countries saved a quarter of their GDP, but this fell to 20 per cent during the second half of the 1980s and to 16 per cent for the 1990-97 period. Compared to the 1975-1984 period, gross domestic savings in Africa declined by 34 per cent during the first half of the 1990s. The fall was most severe for the North African countries, where it amounted to 45 per cent (from 34 per cent to 19 per cent of GDP) while for Sub-Saharan Africa, the fall was around 25 per cent. The decline in saving was relatively harsh for the SSA countries, excluding the two dominant economies of Nigeria and South Africa. Starting from a low base of 15 per cent of GDP or 63 per cent of the regional GDS in the 1974-84 period, it declined by 28 percent to 11 per cent in 1990-97.

Indicator	1975-84	1985-89	1990-97
Gross Domestic Savings (GDS)
Africa	24.5	19.9	16.2
North Africa	34.1	23	18.8
Sub-Saharan Africa (SSA)	21.3	18.2	15.9
SSA excluding South Africa and Nigeria	15.3	13.4	11.1
Gross National Savings (GNS)
Africa	21.2	15.3	12.4
North Africa	31.1	19.1	15.7
SSA	17.9	13.3	11
SSA excluding South Africa and Nigeria	12.1	8.4	4.9
Resource Transfer (GDS – GNS) Abroad
Africa	3.3	4.6	3.8
North Africa	3	3.9	3.1
SSA	3.4	4.9	4.9
SSA excluding South Africa and Nigeria	3.2	5	6.2
Gross Domestic Investment (GDI)
Africa	25.4	21.6	19.3
North Africa	31.7	28.7	24.6
SSA	22.9	17.7	17.3
SSA excluding South Africa and Nigeria	19.9	17.3	16.9
Resource Balance
Africa	-4.2	-6.3	-6.9
North Africa	-0.6	-9.6	8.9
SSA	-5	-4.4	-5.9
SSA excluding South Africa and Nigeria	7.8	4	5.9

31. Gross national savings (GNS), defined as the sum of GDS, net factor income and net private and public transfers from abroad, tells an even more daunting story. Between 1975-84 and 1990-97, GNS declined by 42 per cent for Africa as a whole, by 50 per cent for North Africa and by 39 per cent for SSA. GNS in SSA excluding South Africa and Nigeria fell by 60 per cent.

32. During the same period, the net transfer of resources from Africa averaged 3.9 per cent of GDP per annum. Net transfers abroad as the difference between gross domestic savings and gross national savings increased from 3.3 per cent of GDP in 1975-84 to an annual average of 4.6 per cent during the mid-1980s and then decreased to 3.8 per cent in 1990-1997.

33. The decline in GNS has had important repercussions on gross investment in Africa in two major respects. The first is the negative impact of declining GNS on investment. The correspondence and correlation between the proportion of GDP saved and invested and between the latter and GDP is very robust. Hence, as GNS declined so did the volume of investment and growth. The second is the increased dependence of these countries on external resources.

34. Between 1975 and 1997, the resource gap (defined as the difference between GDI and GNS) averaged 5.9 per cent of GDP per annum. In the North African countries, the difference between the two parameters increased from 0.6 per cent of GDP in 1975-84 to 10 per cent of GDP in 1985-89, before decreasing to 9 per cent during the first half of the 1990s. The corresponding figures for the SSA countries were 5, 4 and 6 per cent of GDP respectively. If South Africa and Nigeria are excluded from the SSA aggregates, these figures become 8, 4 and 5 per cent of GDP. These statistics strongly suggest that African countries need to redouble their efforts to increase the volume of investable resources they are to mobilise from domestic as well as external sources.

35. Positive developments in the external sector contrasted with the negative impact of agriculture on the region's economic performance in 1997. The value of exports increased by 5.9 per cent due to an 8.0 per cent growth in volume and a 2.1-per cent decrease in unit prices. Imports continued their upward trend at a rate of 7.6 per cent of which 6.3 per cent resulted from an increase in volume and 1.3 per cent from higher prices. The terms of trade declined marginally by about 0.5 per cent.

36. The volume of oil exports increased as a result of growth in production, particularly by the non-OPEC countries. Other minerals maintained their previous year's volume of exports. Despite unfavourable weather conditions and the decline in the output of agricultural exportables, export volume increased as a result of a depletion of stock held over from previous years.

37. The trade balance remained positive at US$8.3 billion in 1997, comprising a surplus of US$32.9 billion for the oil exporters and a deficit of US$24.6 billion for the non-oil countries.

38. Despite the region's positive trade balance, the current account deficit increased from US$8.6 billion in 1996 to US$9.5 billion in 1997. The persistent current account deficit is due mainly to the balance of services, made up of interest payments on the external debt, trade-related financial services (banking and insurance) and transport (mainly shipping) services.

39. The external debt of African countries rose from US$340 billion in 1996 to US$349 billion in 1997, an increase of nearly 3 per cent. The debt service amounted to US$33 billion, up from US$ 31 billion in 1996, absorbing 21.3 per cent of earnings from the export of goods and services.

40. There is a general consensus that the debt overhang continues to be a major obstacle to recovery and to the sustainability of high economic growth, particularly in the highly indebted poor countries. The difficulties in meeting debt-service obligations are reflected in the accumulation of arrears and the strong demand for their rescheduling.

47. In 1997, all Africa's subregions recorded lower growth rates than in 1996. Growth was lowest in Southern Africa (2.4 per cent) and North Africa (2.8 per cent) and highest in Central Africa (3.8 per cent) followed by West Africa (3.7 per cent) and East Africa (3.5 per cent). The largest decline was in North Africa (from 4.4 per cent to 2.8 per cent, a fall of 36 per cent) followed by Southern Africa, where growth in 1997 was 80 per cent of what it was in 1996.

Sub Region	1993	1994	1995	1996	1997
North Africa	0.5	1.8	1.8	4.4	2.8
West Africa	0.5	2.5	3.4	4.2	3.7
Central Africa	-9.2	-1.3	5	4.4	3.8
Eastern Africa	2.4	4.5	4.9	4.3	3.5
Southern Africa	1.5	2.5	2.5	3	2.4
Africa	0	2	2.7	4	2.9

58. As is probably well known, the major thrust of economic policymaking on the continent has been informed for the last decade or so by the core policy content of adjustment programmes (of the type supported by the IMF and the World Bank).

59. The comprehensive programme of reform being carried out is geared to bring about economic growth by improving revenue performance, rationalizing and improving the efficiency of the taxation system, improving and reorganizing public administration, developing and improving the financial sector as well as strengthening bank supervision, encouraging private sector development and working towards sustainable agricultural development.

60. These and other adjustment measures are expected to improve and strengthen a country's balance of payments position and enhance its growth. As of 31 December 1997, there were 22 African countries with active extended Structural Adjustment Facility (ESAF) agreements with the IMF. The main policies pursued in 1997 and during the "medium-term strategy " to achieve macroeconomic objectives remained those belonging to the core set of reform policies and they included the following: financial policies (fiscal and monetary), structural reforms and social policies.

93. In the foreseeable future, the major determinants of the African economic performance will continue to be based on the outturn of the two exogenous factors - weather conditions and development - in the external economic environment. In addition to this, the pursuit of strong economic reforms will continue to be an important domestic determinant of performance.

94. Under different assumptions, the growth of the African economy is forecast to rebound to between 4.0 per cent and 5.0 per cent in 1998 with a mean projection of 4.5 per cent. The lower and upper ceilings are based on the possible outcome of the two major determinants. The higher projection is based on the assumption that conducive weather conditions will prevail and export prices will improve. The lower ceiling of 4.0 per cent would obtain if either of these two conditions fail to materialize i.e. agricultural output or world prices or both are unfavourable.

95. Given the 7- to 10-year El Nino-related cycle, weather conditions are expected to be more favourable in 1998 than in 1997 and, therefore, a considerable turnaround in agricultural output -- expected to grow by 7 per cent -- is assumed.

96. Developments in the external sector are derived on the basis of a possible outturn of three major factors of importance to African economies.

97. The first and most important is world prices for Africa's exports and imports. In addition to the global supply and demand (the usual determinants of world prices), one must factor in the possible effect of the currency crisis in East and Southeast Asian countries which, in recent years, have become important trading partners for Africa as well as major competitors on the world market.

98. The depreciation of the currencies of these countries may slow their growth, in which case global demand for some of the major export items of interest to Africa may decline. The most important export products that may feel the impact of this development are oil, gold and industrial minerals such as copper. The Asian slowdown as well as the increased output from the huge investment in the production of these commodities in Africa and elsewhere are expected to push their prices downward.

99. Beverage prices are expected to decline from the third quarter of the year, while stabilising in the meantime at the 1997 fourth-quarter prices. In addition to the bumper crop expected from the more conducive weather conditions, the depreciated Asian currencies are likely to exert downward pressure on coffee, tea cocoa and timber prices.

100. On the other hand, it is assumed that the prices of importables will stabilize at their 1996 levels, although they could decline as a result of the depreciation of the Asian currencies.

101. The second major external factor impinging on Africa's economic performance is the debt overhang. That the excessive debt burden has been an important factor behind the low volume of investment is acknowledged by African countries as well as the international community at large. Although the HIPC Initiative is a welcome development, it needs to be placed on a fast track to entail an effective and observable outcome. The assumptions here are that debt-relief measures will obtain and that the volume of foreign exchange required will exceed the 1997 figure of US$ 33 billion.

102. The third important external component is the inflow of resources. While the expected positive development on the debt front would contribute to a reduction of the drain on foreign exchange, it is deemed insufficient to boost investment, particularly in the non-oil exporting countries. It is expected that net transfers from bilateral and multilateral sources will at least maintain their 1997 level.

103. On the domestic front, the higher-growth scenario assumes that African governments will continue to implement vigorously macroeconomic management reforms which emphasize reducing the rate of inflation, reducing the budget deficits, eliminating current-account and balance-of-payments deficits, efficiently managing the external debt and meeting debt-servicing obligations, etc. These medium-term measures have to be complemented by long-term programmes that place emphasis on the reduction or eradication of mass poverty, meeting the basic health, housing, educational and social needs of the population, reducing income inequality, raising the standards of living and per capita income of the citizens, protecting the environment and promoting diversified, self-reliant and sustainable development.

104. The overarching policy challenge facing African governments in the foreseeable future is the reduction and eventual eradication of poverty. Towards this end policymakers in Africa face the challenge of developing modalities that would make it possible to attain high and sustainable growth, expand employment, and achieve equitable income distribution in an environment of stable prices and a sustainable balance-of-payments position.

105. This is a daunting task. According to current estimates, close to 50 per cent of the population live in absolute poverty. This percentage is expected to increase at the beginning of the next millennium and to prevent that, African countries will need at least to match their GDP-growth and population-increase rates. Assuming that the labour force increases at the same rate as the population --2.9 per cent per annum -- they would need to create 17 million new jobs each year to stabilise the unemployment rate at the current level, which is already unacceptably high.

106. During the past decade and a half, African countries have gone through the phase of adjusting their economies with the support of the IMF and the World Bank. An authoritative and candid evaluation of the ESAF programmes shows that the results were disappointing compared to the programme targets and to the performance of non-ESAF countries (see Box II).

107. In the coming years, African policymakers, in partnership with their development partners, would need to create an environment and operational modalities capable of inducing and sustaining a high rate of growth so as to stabilise their countries' economies and reduce poverty at home while generating capacity to live up to their obligations abroad. This challenge offers opportunities to the African policymakers to cooperate among themselves, develop mechanisms and institutions to mobilize foreign direct investment and improve their economies and societies, bringing them to a higher plane by upgrading their governance.

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