1. Recent Economic Developments in Africa Louis Kasekende Chief Economist, African Development Bank Dublin, 25 May 2009

2. Main Messages 1.Africa not decoupled as previously thought although GDP is positive, per capita incomes are falling; growth drivers severely affected by the crisis 2.The recent growth deceleration largely due to external factors 3.Africa is in a much better position to manage the crisis than in previous periods due to better economic management 4...But long term development challenges remain

3. Outline of the Presentation I.Pattern of African Growth II.Explaining Recent Growth Acceleration III.The Impact of the Global Crisis IV.Transforming accelerations into sustainable dynamic growth

4. I. Pattern of African Growth

5. History: Booms and Busts a feature of African Growth Africa: Real Per Capita GDP growth (%) Episodic growth is typical of natural resource driven growth

6. Natural resources underpin most of the growth cycles in Africa External factors underpin growth accelerations and decelerations …driven by growth in global demand Africa and World GDP Growth (%) Real GDP Growth (%)

7. Explaining recent growth accelerations

8. Sustained growth period Recent growth acceleration was underpinned by: Strong global demand for Africas raw materials Large financial inflows Good macroeconomic management

9. Source: OECD Development Centre, based on World Bank, 2009 Hard commodities Soft Commodities Openness a key driver of recent growth acceleration

10. Oil exporters were growing faster than importers Source: African Economic Outlook 2008 Net Oil exporters: Algeria, Angola, Cameroon, Chad, Congo, Côte d'Ivoire, Congo DRC, Egypt, Equatorial Guinea, Gabon, Libya, Nigeria, Sudan 10

11. Higher financial inflows also a key growth driver Source: IMF Regional Economic Outlook, 2008 Foreign reserves (US$bn) Aid, esp. debt relief also made a difference Remittances (US$bn)

12. Africa benefitted from improved economic management which strengthened growth Payoffs from more than two decades of reforms Payoffs from more than two decades of reforms …leading to greater macroeconomic stability, despite the food price increases in 2008

13. Africa not decoupled: continent hit by the global crisis

14. Finan cial crisis Low external demand of Commodities Collapse of Financial Markets Global Down turn Fall in Global Demand Low external demand of Manufacturers goods Unemployment Financia l Risks Aversio n Fall in Exports of commodities and goods and services(volume) Fall in Remittances and Tourists arrivals Fall in Commodities prices Increase of sovereign spread Low FDI Trade finance restrictions Outflow of portfolio investment Fall in Bonds issuances Fall In imports Fall in reserve s Current Account and Budget Deficits Low investment Low Growth Poverty and social instability Impact on Africa

15. Severe macroeconomic impact (February forecast) * Excluding Zimbabwe ** Estimations for 20078and predictions for 2009/10 Source: OECD Development Centre / African Development Bank. 2008 Inflation Current Account Fiscal balance Twin deficit problem: the crisis will cause fiscal and current account balances to deteriorate significantly across the continent. Inflation will, however, stabilise as commodity prices fall, though food prices have remained high

16. Shortfall in Trade Taxes Fiscal balance

17. Real GDP Growth (%) Source: OECD Development Centre / African Development Bank. 2008 The crisis is taking a toll on Africas growth prospects April 08 projections Nov 08 projections Feb 09 projections May 09 projections

18. Oil Exporters Suffering from lack of diversification Source: OECD Development Centre / African Development Bank *: African Economic Outlook forecasts … and little room left for manoeuvre Many oil exporters did not take advantage of commodity windfalls to improve governance and diversify their economies Nevertheless, some oil exporters have performed well in terms of reducing external debt Taking a hit from the oil price fall..

19. Oil Importers Benefiting from low commodity prices & reforms Source: *: African Economic Outlook forecasts Oil-importing countries find it difficult preserving pre-crisis gains. Rising inflation and deteriorating macroeconomic balances. Good performers assets: Sustained growth; Prudent macroeconomic policies; Diversification; Decreasing poverty Challenges: Fiscal deficits; ODA dependency; widening trade deficit; climatic & price shocks Holding up against the crisis so far… …yet challenges rising

20. But the shock is not a disaster for Africa

21. Africa today is in a much better position to weather the crisis Committed macro management in many countries has brought inflation under control and improved fiscal balances Debt relief initiatives (HIPC & MDRI) have significantly reduced debt levels in many countries The commodity boom helped to improve terms of trade Business climate indicators are steadily improving, reflecting government efforts in nurturing private sector and enterprise Political conflicts are on the wane Africa today is much more resilient to exogenous shocks:

22. Growth set to recover in 2010 Sub-Saharan Africa Africa -Growth pause in 2009: Recovery in 2010 and beyond is promising. Net oil exporters (4.1%) Net oil importers (3.8%) -The challenge is for Africa to transform this acceleration into sustainable dynamic growth

23. Some countries weathering the crisis Source: African Economic Outlook, 2009 Cost of the crisis: Oil exporters the most hit. More integrated economies also strongly affected Low-income / non-oil exporting countries are less affected. because: -- beverages (cocoa. tea. coffee) less affected by decline in global incomes. -- less integration to the world economy - 2 to- 3 % Zero to – 1.9 % - 3.1 to – 23 % Increased growth between 2008-09 Growth differential 2008 - 2009

24. Source: African Economic Outlook, 2008/09 Some regions are weathering the crisis

25. The China-India factor Source: OECD Development Centre, based on China Mofcom, 2009 Although China and India have not escaped the negative effects of the global crisis, growth remains robust. They continue as important sources of investment and trade for most of Africa. India China Source: OECD Development Centre, based on UNCTAD, Nepgen and Jansson 2009 Significant Chinese and Indian investments in African infrastructure, up to April 2008

26. But downside risks loom large

27. Some downside risks Deteriorating macroeconomic balances -difficult to stick to sustainability indicators - limited fiscal space for stimulus packages Tension between reform and control Creeping protectionism Interest in Africa may wane

28. Untenable targets on fiscal and debt sustainability indicators in the face of worsening macroeconomic balances. Limited fiscal space for fiscal stimulus packages Deteriorating Macroeconomic balances * Excluding Zimbabwe ** Estimations for 20078and predictions for 2009/10 Source: OECD Development Centre / African Development Bank. 2008

29. Tension between reform and control In the face of the crisis, some countries have imposed controls (sometimes temporary or limited) to stem sudden capital outflows. But the room that capital controls give to policy makers is limited: –Their later removal may be accompanied by large outflows. –Time-consistency problem: if investors view capital controls as a discretionary policy instrument, expectations of their imposition may encourage capital flight. Countries need to persevere with reforms

30. Risk of declining ODA Crisis related budgetary constraints in donor countries may cause them to cut back on ODA. –Previous crises in donor countries led them to also cut ODA budgets (Japan in 1990; Nordic countries after 1991)* –In the EU, although ODA is up, many countries cutting back on commitments to meet the EU time limits of achieving a target of 0.7% of GNI e.g. Ireland cut aid budget by 255 million since July 2008 Italy will cut back its aid by 1 billion by 2010 Good news: ODA trend for Africa is upward * See: Rooodman, D. (2008): History says Financial Crisis will Suppress Aid Global Development; and Frot, E. (2009): Aid and the Financial Crisis: Shall we expect Development Aid to Fall?

31. Other Downside Risks Prolonged crisis in developed countries may delay the recovery in Africa Corporate failures as a result of the economic crisis may lead to a banking or financial crisis in Africa Risk of aid dependency The transition of some countries to a middle income status may be delayed

32. Transforming growth acceleration into sustainable dynamic growth

33. Africa still faces many long-term development challenges High cost of doing business in Africa Management of natural resources Reforming the financial sector Large gaps in infrastructure and logistics, including ports, roads, energy, IT Lack of product and market diversification Poverty reduction remains on overarching development challenge

34. Putting Africa on a long-term growth trajectory Increase the level and productivity of investment –Infrastructure –Skills development (education and health) Pursue globalisation –Diversification (products and markets), including manufacturing Deepen economic and institutional reforms Invest in IT and R&D

35. Africa is lagging behind in infrastructure and logistics

36. Lack of diversification a major challenge Share of manufacture s in total exports Range (%) 2006Number of countries < 15Algeria, Angola, Burundi, Benin, Burkina Faso, Cameroon Cote dIvoire, Malawi, Mali, Mauritania, Mozambique, Niger, Sudan Zambia 14 16-30Egypt, Kenya, Tanzania, Uganda 4 31 and aboveCentral African Republic, Ghana, Madagascar, Morocco, Senegal, South Africa, Togo Tunisia, Zimbabwe 9

37. Invest in innovation, especially in ICT and R&D ICTs in Africa has proven to be an innovation frontier by combining state-of-art technologies with local customs and constraints through incremental innovations. However, there is still more to be done to deliver more and better value added services to the poorest population : Expensive inland high capacity networks require government support Governments have to ensure that wholesale price drops are passed on Policies on ICT and Innovation are not yet well integrated in broader development strategies: Donor targets, MDGs and PRSPs. With many fixed-line operators close to bankruptcy, governments must attract private investment and knowhow to the fixed-line sector by adapting convergent licensing regimes and setting symmetric regulation of termination charges.

38. Economic and Institutional Reforms Strengthen financial and banking sector reforms Public management and public expenditure reform Revenue reform

39. Embrace Globalisation Africa should pursue globalisation through: –Enhanced competitiveness –Reduction of barriers to trade –Investing in logistics –Fast-tracking regional integration

40. Thank you for your attention