By BERNA NAMATA
In Summary
Triggers
- Scouring international debt markets as well as negotiating for concessionary loans from friendly countries due to huge recurrent expenditures, a narrow tax base and poorly developed capital markets.
- Increased global integration also makes the region more vulnerable. Rising global economic and financial ties have been a boon for the region but vulnerabilities to external shocks have increased.
- Increase in foreign direct investment.
- A less supportive external sector for many sub-Saharan African countries as growth declines in emerging markets.
Slowing growth and deflationary pressures in
emerging markets including China and other major developed economies
could derail expected robust economic growth in East Africa in the
coming year.
In its latest Regional Economic Outlook for
Sub-Saharan Africa released last week, the International Monetary Fund
projects that strong growth in the majority of sub-Saharan Africa’s
economies underpinned by a robust regional expansion in 2014 and 2015.
In East Africa, real gross domestic product (GDP)
growth is expected to pick up across the region led by Tanzania with a
real GDP growth of 7.2 per cent in 2015, followed by Rwanda with 6.7 per
cent and Kenya with 6.2 per cent respectively, according to the report.
Uganda is projected at 6.3 per cent next year while Burundi is trailing
with 4.8 per cent next year.
On average, the economic projections for this year
are higher than registered last year, whereby Tanzania led the growth
with 7.0 per cent, followed by Uganda with 5.8 per cent, Rwanda with 4.7
per cent, Kenya with 4.6 per cent and Burundi with 4.5 per cent.
Overall real GDP for sub-Saharan Africa is projected to expand from 5 per cent to 5.75 per cent in 2015.
Overall real GDP for sub-Saharan Africa is projected to expand from 5 per cent to 5.75 per cent in 2015.
However, this overall positive outlook could be
undermined by an expected slowdown in emerging markets, particularly the
ongoing rebalancing of Chinese demand towards private consumption.
These trends could soften global demand for key
sub-Saharan exports, including commodities, according to the Fund. This
is because during the past decade, growing links with emerging markets
have not only supported the region’s expansion and economic
diversification but have also increased its vulnerability to external
shocks.
“Overall, slower global growth is of course less
than helpful for sub-Saharan Africa. Still, it is important to note that
what we are seeing is lower global growth than what was expected
earlier in the year. But in relation to last year, it is not a slowdown.
There should not be any extra drag for sub-Saharan Africa from this
forecast. Nonetheless, a global environment that is not robust also
means that growth in sub-Saharan Africa will not be much higher,” said
Abebe Selassie, IMF African department deputy director said.
Mr Selassie observed that the situation in large emerging markets like China, Brazil, and India also poses risks to the region.
“I think slower growth in these countries is
probably the bigger source of concern for policy makers in the region.
We have seen considerable softness in commodity prices related to this,
even as export volumes remain strong,” he said.
But in recent years, a number of emerging
economies have begun to play a growing role in financing of
infrastructure in the region. In addition, regional states have resorted
to scouring international debt markets as well as negotiating for
concessionary loans from friendly countries — with a focus on China,
Japan, Brazil and India — due to huge recurrent expenditures, a narrow
tax base and poorly developed capital markets.
The above combined with an increase in foreign
direct investment makes the region vulnerable should the ongoing
slowdown in emerging markets continue.
Even increased global integration makes the region
more vulnerable. While rising global economic and financial ties have
been a boon for the region, vulnerabilities to external shocks have
increased according to the IMF report. As a result of these
strengthening ties, many sub-Saharan African economies increasingly move
in sync with other economies outside the region, especially China and
also Europe, which remains an important trading partner.
For instance, in East Africa, Kenya is currently a
major exporter of cut flowers and vegetables to the European Union.
Kenya exports flowers to the EU worth Ksh46.3 billion ($537 million) and
vegetables worth more than Ksh26.5 billion ($307 million) annually. The
EU takes about 40 per cent of Kenya’s fresh produce exports.
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The report notes that lower or higher growth in either advanced
or emerging markets translates over time about one to one into lower or
higher growth in sub-Saharan Africa.
“This means as growth slows down in emerging
markets and only gradually strengthens in advanced economies, especially
Europe, the external sector is likely to be less supportive for many
sub-Saharan African countries,” the report cautions.
For instance, globally, commodity prices are
projected to decline further in 2014 as aggregate demand in China is
expected to fall. In addition, there are signs of better agricultural
production except for coffee expected to decrease particularly in
Brazil, the biggest producer.
Non fuel commodity prices are expected to continue
falling in 2014 — down 1.7 per cent, from a drop of 1.2 per cent in
2013, whereas metal prices are projected to further drop in 2014 by 6.8
per cent, from a decline of 3.5 per cent and 14.3 per cent in 2013 and
2012 respectively, figures from National Bank of Rwanda show.
This week, China announced that its GDP had
increased by 7.3 per cent in the third quarter, the lowest quarterly
growth since the depths of the financial crisis in 2009, compared with
7.5 per cent in the previous quarter, adding to concerns that it could
become a drag on global growth.
One factor that could affect some sub-Saharan
African economies much more abruptly would be a reversal in the market
sentiment, according to the report.
A market reversal could happen especially if trade
partner growth and demand for regional exports weakens more than
expected, or if investments become more sensitive to domestic
vulnerabilities, according to the report.
“In such an environment countries where
significant external financing needs have been increasingly filled by
tapping international markets could find it difficult to continue in
that way. Funding conditions would likely deteriorate with potential
renewed pressures on external reserves and exchange rates forcing an
immediate fiscal policy adjustment including public investment
cutbacks,” the IMF report cautions.
“The demand boost from investment would be
reduced, along with the positive supply effects over the longer term.
This, in turn, would lower growth expectations and could further reduce
investors’ appetite,” the report says.
Infrastructure deficit
The report also underscores the need for countries
in the region to expand their infrastructure, where the existing gap
could potentially undermine growth prospects.
“The challenge for countries like Kenya, Tanzania,
Uganda, Rwanda and Ethiopia is to sustain this economic growth further.
This will require addressing potential bottlenecks to growth. A good
example of potential bottlenecks is infrastructure. There is a
significant shortage of electricity in the region. Roads and ports are
also congested in many cases. Addressing this is going to be very
important going forward,” Mr Selassie said.
But the report points out that the major obstacle
to addressing the continent’s infrastructure deficit does not generally
appear to be a lack of financing, but rather capacity constraints in
developing and implementing projects.
“Countries should seek to make the most of new
financing instruments and flows by improving their absorptive capacity
and removing remaining regulatory constraints, while controlling fiscal
risks and maintaining debt sustainability,” the report says.
The report recommends that countries strengthen
their public financial management capacity by upgrading their ability to
plan, execute, and monitor public investment
There is also a need for strengthening their project appraisal
procedures, and adopting a medium-term budgetary framework that includes
adequate provisions for the cost of operation and maintenance. This is
in addition to exploring public-private partnerships that can be an
effective tool to upgrade infrastructure.
This, however, needs to be underpinned by an
appropriate institutional and legal framework, and to be carefully
monitored to minimise fiscal risks, according to the report.
The report also warns that tightening financial
conditions — stemming from a faster-than-expected normalisation of US
monetary policy, adverse geopolitical developments, or a worsening of
the countries’ fundamentals — could also result in lower and more
expensive access to external funding and a scaling down of foreign
direct investment.
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