This article first appeared in my weekly column with the Business Daily on May 22, 2016
The fact that the prices of commodities such as crude oil, iron ore, copper, aluminium and coffee have been in decline is not a secret. What seems to have been lost in the story however is how Africa is actually benefiting from this decline. The main story we’re hearing as Africans is that Africa is suffering from the commodities decline. The IMF makes the point that particularly hard hit are the region’s eight oil exporters (which together account for about half of the region’s GDP and include the largest producers, Nigeria and Angola) as falling export incomes emerge due to lower commodity prices. This results in sharp downward fiscal adjustments which limits government activity. The IMF goes on to say that among oil exporters, the sharp and seemingly durable decline in oil prices makes adjustment unavoidable, and while some had space to draw on buffers or borrow exist to smooth the adjustment, that space is becoming increasingly limited. This column agrees with much of this- but the positive elements of the commodity decline have not gotten nearly as much attention.
To be clear, there are positive consequences to the commodity decline for Africa. So although Africa has to be aware of the difficulties this dynamic raises, the positive elements also ought to be highlighted.
The first positive result of declining commodity prices is that Africa finally seems to be truly serious about building manufacturing capacity on the continent. Once again Africa has found itself at the short end of the stick; because commodities were booming for so long, there was no pressure on Africa to domesticate value addition and build up manufacturing activity on the continent. Africa, once again, in the 21st century, found itself in the very old position of having just largely exported raw commodities during the commodities boom and is now suffering. It is almost as though Africans told themselves, ‘ let’s ride this wave while it lasts’, and the continent did not make any serious re-orientation in terms of domesticating value addition. Now that boom has ended and clearly African economic growth still seems tethered to commodity prices perhaps to a greater extent than expected. Thus, we now see increased impetus on the continent and scrutiny directed towards the continent on building up manufacturing and value addition capacity. . This is good news for Africa because the value of building up manufacturing, especially export-oriented manufacturing has long been an important story in countries pulling populations out of poverty. This is a chance for the fundamental reorientation of Africa’s economy which is long overdue.
Bear in mind that given the fact that China will shed 85 million jobs at the bottom end of the manufacturing sector between now and 2030 the question becomes: where will they go? Africa finally seems to be saying ‘Africa!’. Those interested in the African economy driving development, now due to the commodities decline, are seeing manufacturing taking its rightful place in terms of the priorities of the continent.
Secondly, the commodities decline is very good news for East Africa. The region is minimally exposed to the commodities debacle. Yes there are new oil deposits that have been discovered in some of East Africa, but these have not been fully exploited yet so East Africa economies continue to grow in spite of the commodities decline. Let’s look at some figures based on average growth rate of about 3.4 percent for the global economy in 2016. Africa, for the first time in years is below the global average and is expected to grow at only 2.9- 3.2 percent this year, the slowest since 2001 according to some estimates. Compare this to East Africa where Kenya grew by 5.6 percent in 2015 and preliminary estimates suggest Tanzania registered 6.9 -7 percent GDP growth in 2015, Uganda around 5 percent, Rwanda was estimated to have grown at 6.9 percent in 2015 and Ethiopia at 6.3 percent a year between 2016-20. Please bear in mind getting data for some of these countries is difficult. But the point is that these are all well above the estimated African GDP growth rate of 2.9- 3.2 percent and the global growth rate. So the global community is alive to the fact that East Africa is really a bright spot and is a space where economies seem to be relatively unaffected by the commodities decline.
The message is simple: Africa should more fully exploit what it stands to gain from the commodities decline. There is plenty of good news therein.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my column with the Business Daily on August 30, 2015
There are a couple things happening in China right now that Africa should be looking at very keenly. We won’t talk about Black Monday here because what happens on the Chinese stock exchange does not necessarily directly speak to the impact China’s economy has on Africa. Let’s talk about what really matters for Kenya and the continent.
Firstly, the structure of the Chinese economy is changing; China has been undergoing a shift from heavy industry to services. In fact The Economist states China’s, ‘services sector supplanted manufacturing a couple of years ago as the biggest part of China’s economy, and that trend has only accelerated this year’. This has massive implications for Africa which has benefitted immensely from the commodity hunger from China, particularly for commodities from the extractives sector. How will Africa be affected? Well, while some countries such as Nigeria seem to be weaning their economy from an over-reliance on oil, other African countries such as South Sudan, Chad, Equatorial Guinea, DRC, Gabon and Angola still rely heavily on oil exports even for national budget formulation. Thus, Africa can expect continuing downward momentum from China in terms of a demand for such commodities and thus reduced revenues.
The wane in commodity demand from China is set to have a series of effects on African economies. For example, sovereign bond issues from oil-exporting African countries which still rely heavily on such exports for public revenue generation should be approached with caution not only because of waning demand but obviously also due to lowering oil prices. Investors should look at the overall export profile of a country before making a decision to invest. Further, countries such as Kenya and much of East Africa, which are set to become oil producers in the near future can expect oil ventures to be significantly less profitable than was the case a few years ago. Not only does demand from countries such as China seem to be waning, there is a decline in oil prices and a definite shift in much of EuroAmerica towards renewables. Such factors mean that the previous assumption that ‘oil= healthy revenue’ popular in the minds of many African governments is being challenged in an unprecedented manner. One need only look to Ghana to see the pitfalls that abound when a country overestimates projected revenue from oil sales.
Secondly is the devaluation of the yuan; the recent devaluation should be perceived as a mixed bag for Africa. On one hand, for an import country like Kenya, the devaluation of the yuan is frankly a sigh of relief in what has been a very bleak import outlook in the context of the depreciating Kenya Shilling. A look at Kenya’s import profile reveals that, by far, Kenya’s largest share of imports come from Asia with China leading the way particularly in capital and consumer goods. Thus the yuan devaluation is one bright spot in what has seemed like an unending rise in import bills. The flip side of this equation however is that a weaker yuan may make African countries deepen an already deep reliance on Chinese imports making them more sensitive to volatility in the Chinese economy. However, the devaluation of the yuan is already being seen to put depreciating pressure on the Kenya Shilling which would make imports from other parts of the world more costly for the country. This is a reality Kenya simply cannot afford as it would exacerbate current account deficit pressure.
Finally, there is another shift occurring in the Chinese economy from being a predominantly export economy to one more reliant on domestic consumption. Wages have risen as millions of Chinese have reaped dividends from economic growth in which millions of Chinese were pulled out of poverty. Thus overall, Chinese have more disposable income to purchase finished goods. This shift from export reliance to local consumption seems to be part of an on-going overhaul that has perhaps been informed by the decline in exports from China after the Global Financial Crisis of 2008-09. It would be no surprise to surmise that China wants to buffer itself from the vulnerability of external demand. This, however, leaves Africa with a series of questions: Which country will now become the dominant absorber of African commodities? Can Africa manufacture goods of sufficient quality to appeal to the Chinese market? Where will commodity-reliant countries source alternative revenue now that this shift in China is happening? Further, who will be the next ‘world factory’? Africa?
Thus, there is good reason for Africa to keep an eye on China, if for nothing else, to see how Africa can make the most use of on-going shift in China’s economy.
Anzetse Were is a development economist; email: anzetsew@gmailcom
This article first appeared in my weekly column with the Business Daily on August 9, 2015
Africa has grown used to negative images being relayed all over the world through media houses, social media sites, documentaries and even Hollywood movies. These bloody Africans, the commentaries seem to say, why can’t they just get it together? Ebola, famine, corruption, civil wars, fleeing refugees…the list is endless.
So you can imagine the great delight and relief Africans are experiencing from the ‘Africa rising’ narrative painting us in a positive light. Africa is not all doom and gloom, not everyone is mired in disease and corruption. There are ‘African Lion economies’, the promise of prosperity on the continent and George Soros referring to Africa as one of the “few bright spots in the gloomy global economic horizon”.
While this change in narrative is welcome, it is important Africans look at it closely to determine whether it’s mere hype or rooted in robust truths.
There are several foci in the Africa rising narrative — robust economic growth, a growing middle class, better governance and relative political stability, and the demographic dividend of a large, youthful and fairly skilled labour pool. The focus here will be on the economic story. It is true that Africa is one the fastest growing regions in the world with an average annual growth rate of around five per cent. Over the last decade, six of the world’s 10 fastest-growing countries were African.
In eight of the last 10 years, Africa’s ‘Lion’ states have grown faster than some of the Asian tigers. The African middle class is one of the fastest growing in the world and domestic demand has continued to boost growth in many countries. A stable middle class of 126 million exists and will rise to more than 42 per cent of the population in the near future. Further, consumer spending is set to rise from $860 billion in 2008 to $1.4 trillion in 2020.
Even The Economist, one of the most cynical weeklies when it comes to Africa, states that while some argue African economic growth has been commodity-driven, the economic outlook for many African countries looks promising despite falling commodity prices reflecting the growing economic diversification away from dependence on commodities. Further, FDI is diversifying away from mineral resources into consumer goods and services; this may inform a structural shift of the African economy away from commodities to other sectors.
But let’s not get carried away: such rosy optimism has to be tempered with reality. First, more than 46 per cent of Africans live in poverty and our share of global poverty is due to balloon to 82 per cent by 2030. Many Africans are still poor, struggling to meet basic needs and Africa is set to continue being the poorest continent in the world in the foreseeable future.
Secondly, the statement about a growing middle-class has to be tempered with the reality that the common definition of middle class in Africa is people who spend the equivalent of $2-20 a day, an assessment based on the cost of living for Africans. But the truth is that many living on $2-4 a day are on the edge of poverty and can easily slip back into poverty—how many fall into this bracket?
Further, the high dependency ratios in Africa, partly attributed to the lack of a robust government-funded social security net, translates to higher spending on meeting basic needs of dependents on costs such as health, education and food. This squeezes out more discretionary spending and reduces actual, lived disposable income.
Finally, the commodities reliance question is a mixed bag and depends on the country being considered. Some countries are diversifying while others are not. In Angola, for example, the oil industry accounts for around 45 percent of the country’s GDP, 75 percent of government revenues and 90 percent of overall export earnings. On the other hand, Nigeria’s growth of 6.3% came mainly from non-oil sectors showing that the economy is diversifying. Either way, the good news is that most African governments are well aware of the vulnerabilities to which their economies are exposed in being commodity reliant and some have begun to take steps to diversify the economy and sophisticate export profiles. That said, it is important to note that overall African currencies were negatively affected during a period of turmoil in commodity markets in 2009 and earlier this year the World Bank revised Africa’s growth prospects downward because of fall in the prices of oil and other commodities. Thus, commodity prices will still inform the growth of Africa’s economy but the jury is still out on the extent of this influence.
The Africa Rising narrative is a welcome shift in the portrayal of the continent across the world but it should not create complacency in Africans or create the impression that Africa will prosper no matter what. Problems exist, work still needs to be done on the continent and Africans need to be engaged now more than ever to drive the continent continuously forward.
Ms Were is a development economist. email: email@example.com; twitter: @anzetse