A briefing from Andrew Walker

If you find IMF reports a bit daunting and are perplexed by African economics then try this briefing from Andrew Walker our economics correspondent. Andrew is in Tanzania covering the IMF conference and he knows how to make things clear . . .  PC

Africa’s economic performance has improved dramatically since the turn of the century. In the previous two decades, the economies of sub-Saharan Africa grew at average rate of 2.5 percent (1980s) and 2.3 per cent (the 90s). But with population growing at about three per cent, GDP per person was declining in real terms. Since 2001 sub-Saharan Africa has managed an average economic growth rate of over six per cent, while population increases have slowed. Will this very marked improvement be sustained? The international economic downturn is a serious threat. Although the immediate direct effects are not very strong, they may well be a more substantial impact in time.

The IMF is clearly worried. A year ago its growth forecast for the region in 2009 was 6.7 per cent. Now (as of January) it is between three and 3.5 per cent.

To get some perspective on how much difference this makes, suppose the population of the region continues to grow at 2.4 per cent (as it did in 2007). With economic growth of three per cent it would take 118 years to double GDP per capita, which is a very rough indicator of average living standards. But at six per cent economic growth it would take 20 years. At nine percent (the kind of performance China has achieved in recent years) it would take just 11 years.

Where does the threat to Africa’s economic performance come from? There is no evidence of much direct exposure to the toxic financial securities at the root of the credit crisis. But there are several indirect links:

1. Commodity Prices: The global downturn has undermined demand for many commodities. Several African countries are major exporters of industrial commodities such as oil (Nigeria and Angola) or copper (Zambia and DRC). Prices have fallen sharply in the last few months. Crude oil is down by about 70 per cent from its peak last July. Copper is down by about two thirds. These developments are however helpful for those countries that are net importers of these commodities.
2. Exports: Africa is not an exporting region on the scale of Asia, but trade has made an important contribution to the recent acceleration of economic growth. GDP and exports from sub-Saharan African countries (including trade within the region) have both increased by about two thirds since 1999. There’s little by way up-to-date hard data, but there are anecdotal reports from individual businesses that suggest that exports may be weakening. Industrial commodity exporters face lower prices and lower sales volumes.
3. Remittances: A significant source of funds for investment, for SS Africa, 19 billion dollars in 2007, up from eight billion in 2004. They are very important in a few countries –29 per cent of GDP in Lesotho (these are preliminary estimates for 2008). For Africa three quarters of remittances (again 2008) are from Western Europe or the US. There was eight per cent from the Gulf another eight per cent from other high income countries and another ten per cent from other developing countries – which probably explains the high figure for Lesotho – people sending money from South Africa. .

Again little recent hard data, but migrants overseas do look vulnerable to loss of employment in developed economies, especially those that work in construction. Tighter immigration policies may also affect remittances. The IMF expects the figures will show stagnation in the second half of last year (for low income countries overall) and a decline in 2009.

Foreign Direct Investment: FDI in Africa is significant and has increased sharply in recent years. In 2007 (most recent figures) sub-Saharan Africa got 31 billion dollars, 1.7 per cent of the global total, and more than 80 per cent up from two years earlier. It is not far short of what Africa gets in aid – nearly 39 billion dollars, also in 2007.

The downturn could well have an impact on FDI flows. Foreign businesses are making lower profits – or even losing money – so they are less likely to have funds to invest. It is harder to raise new money for investment in financial markets and volatile commodity prices may make them more reluctant to invest in Africa – much FDI is mineral and oil extraction.

Financial Effects: The good news is there is very little exposure among African banks to toxic financial securities and they have good supplies of funds for lending. However, the IMF reports that in countries that have had some degree of access to foreign financing– including Ghana, Nigeria and Uganda – there are signs of problems. And as the negative effects on other businesses rise, bank losses on loans are also likely to increase. More than half of banking business in many African countries is foreign owned. They could face funds being withdrawn by troubled parent companies.