Africa1 has been severely hit by the global economic downturn—with per capita incomes declining an estimated 1 percent in 2009 after many years of rising living standards—but the worst may be over. Signs of recovery are emerging in trade and manufacturing. In addition, hurt as it was by the crisis, the region seems to have avoided the macroeconomic instability that accompanied previous slowdowns. Stronger pre-crisis positions—balanced or in-surplus budgets, current account surpluses, and lower debt levels—helped many countries absorb external shocks. However, the crisis reinforces a number of policy lessons the region can use to increase resilience.
Impact of the Crisis
The IMF and the Economist Intelligence Unit (EIU) estimate that GDP growth in Africa was only slightly more than 1 percent in 2009, well below the region’s 10 year average of 5.6 percent and further below its 2005–2007 average of 6.5 percent.
Growth varied across countries, with middle-income economies, including South Africa—the region’s largest economy—and Botswana, hit hardest. GDP of the middle-income countries is projected to contract by 2.4 percent in 2009 compared to growth of 4.1 percent in 2007–2008. South Africa, which has strong international financial and trade links, is experiencing a recession for the first time in nearly two decades, with GDP projected to have contracted by 1.8 percent in 2009 after growing 3.1 percent in 2008.
The crisis hit the region’s key drivers of growth, especially trade and capital inflows. Falling demand in advanced economies hurt exports.
Oil exporters were hit hard as well. Reflecting the collapse in oil and mineral prices in the first half of 2009, GDP growth in oil-exporters will slow from an average of 8.1 percent in 2007–2008 to less than 2 percent in 2009.
In contrast, in low-income countries—which are largely agriculture-based, have weak international financial links, and are oil- or mineral-importers—growth is expected to slow more moderately from 7.1 percent to 4.5 percent. Low-income economies benefited from the improvements in their terms of trade as oil and food prices moderated from the huge spike in the two years before the crisis.
The crisis hit the region’s key drivers of growth, especially trade and capital inflows. Falling demand in advanced economies, which purchase nearly 70 percent of African exports, caused exports to fall from the 2005–2007 average of 37.7 percent of GDP to 31 percent in 2009. During the first eight months of 2009, exports were, on average, down 40 percent from a year before.
Owing to the falls in export volumes and commodity prices, the region’s current account balance was an estimated – 3.1 percent of GDP in 2009, down from an average surplus of 1 percent in 2007–2008. Reflecting the countercyclical policies pursued by some countries, and the decline in government tax revenues, including trade taxes, the overall fiscal balance deteriorated from an average surplus of 2.3 percent of GDP in 2005–2008 to a deficit of 4.8 percent in 2009.
For the first time in a decade, average per capita income declined in 2009, and seven million additional people were estimated to be living under $1.25 a day as a result of the crisis.
Capital inflows were not spared either. Following five years of growth, FDI inflows to Africa—which reached a record $88 billion in 2008—plummeted by 67 percent (y/y) in the first quarter of 2009, partly reflecting the decline in global demand for commodities, a major attraction for FDI in these economies. FDI represents a significant share of gross fixed capital formation in the region, implying slowing growth if the decline persists.
Remittances were also hit hard in 2009, registering a nearly 3 percent contraction from an estimated $21 billion in 2008, compared to the 6.1 percent decline across developing countries. Still, according to the World Bank, countries that account for a high share of remittances to the region, such as Nigeria and Kenya, experienced higher growth or smaller declines in remittance flows than expected.
Despite the sharp slowdown in economic growth, Africa’s GDP will not contract in 2009. In addition, the region seems to have performed relatively better than during previous global slowdowns.
The crisis is also expected to set back efforts to alleviate poverty in Africa. For the first time in a decade, average per capita income declined in 2009, and some economies, mainly mineral-dependent ones, experienced significant job losses, with close to one million jobs shed in South Africa. For a region with many households just above the international poverty line, a small impact on income could mean a large increase in poverty. According to Ravallion (2009), seven million additional people were living under $1.25 a day in 2009 as a result of the crisis.
At a time when aid commitments are below target and an increase in aid is badly needed, the future for aid is also uncertain amid deteriorating fiscal conditions in donor countries.
Africa’s Resilience
Despite the sharp slowdown in economic growth, Africa’s GDP will not contract in 2009. In addition, the region seems to have performed relatively better than during the 1983 and 1992 global slowdowns, when Africa’s output decelerated by more than world GDP. GDP will contract in only eight countries in 2009, compared to contractions in one-third of the region’s 48 countries during the two previous slowdowns.
Stronger initial positions and relatively prudent macroeconomic policies before the crisis helped Africa. The region maintained a fiscal surplus of 1.2 percent of GDP and a current account surplus of 1.3 percent in the year before this crisis, compared to current account deficits of 6.4 percent and 2.7 percent in the years preceding the past slowdowns. As a result, many countries were able to increase fiscal and current account deficits or decrease surpluses in 2009 to help absorb external shocks, in contrast to much more limited action during past global slowdowns.
Stronger initial positions and relatively prudent macroeconomic policies before the crisis helped Africa. The region maintained a fiscal surplus of 1.2 percent of GDP and a current account surplus of 1.3 percent in the year before this crisis.
Foreign exchange reserves were also allowed to decline, enabling countries to finance imports even as foreign exchange inflows fell sharply. Reserves in the region could cover an average of 5.7 months of imports in 2007–2008, more than the ten-year average (from 1997 to 2007) of 4.3 months. Helped by the rebound in oil and commodity prices that began in the second quarter of 2009, reserves in the region are estimated to have stayed fairly high, able to cover 5.8 months of imports, with reserves of more than 7.9 months of imports in oil-exporting countries.
Signs of Recovery
According to recent data, Africa appears to be recovering, and South Africa has already emerged from recession, with 0.9 percent GDP growth in the third quarter (saar).
Although information on Africa’s economies is infrequent, data on trade and production suggest that economic activity bottomed out in the second quarter of 2009 and has been rising since. Amid general improvement in the global economy, exports have been growing strongly, reversing some of the rapid losses that began in the third quarter of 2008. In the three months to August, Africa’s exports were up 14 percent from the previous three months, following a rise of 8.5 percent in June and 7.3 percent in July, also from the previous three months. This contrasts sharply with a 26 percent decline in the first three months of 2009 from the preceding three months.
Manufacturing has also shown signs of improvement. In the three months to September, industrial production in Africa was up by 3.2 percent from the previous three months, equivalent to the average industrial production growth in developing countries. In South Africa, industrial production was up 2.7 percent over the same period and manufacturing improved further in November, with the Purchasing Manager’s Index (PMI) climbing above 50 (signaling an expansion in production) for the first time in nineteen months.
The region should diversify its export goods and destinations, exploring fast-growing and newly-emerged export markets but also diversifying in traditional markets, if it hopes to reduce the risk of external shocks in the future.
Looking ahead, prominent forecasts suggest the region’s recovery is likely to be slow, with prospects best for oil-exporters. The IMF and the EIU forecast regional GDP growth of more than 4 percent in 2010, still below the region’s ten-year average. The IMF foresees growth of 5.5 percent in oil-exporting countries, 5 percent in low-income countries, and 1.9 percent in middle-income ones in 2010. The World Bank expects South Africa’s GDP to expand by 2.6 percent in 2010, well below the 4.4 percent average growth of developing countries.
Old Policy Lessons Reaffirmed
Given how badly the crisis-induced decline in exports hit Africa, the region should diversify its export destinations and goods if it hopes to reduce the risk of external shocks in the future. Its export sector is still too dependent on highly volatile commodities (increasingly oil) and a few major economies. In this crisis, however, exports of manufactures were also severely hit. To reduce the external shocks associated with commodity production and trade, the region should explore fast-growing and newly-emerged export markets, which would offer rising demand for the region’s exports, and also diversify some in traditional markets.
In addition, Africa needs to exploit its labor cost advantage by improving its governance and business climate to further reduce the costs of doing business there. This would attract more foreign investment and encourage local entrepreneurs to invest domestically.
Africa also needs to promote intra-regional trade, which is currently hampered by trade costs. This highlights the need to strengthen regional infrastructure.
While domestic savings increased in the years prior to the crisis, domestic investment has remained almost unchanged, at around 22 percent of GDP. Measures to increase domestic investment would help Africa build domestic demand, further limiting its exposure to external shocks. Such measures could include improving and increasing the region’s infrastructure, especially the transportation, power, and communication sectors, as well as strengthening the ability of financial intermediaries to channel savings.
The crisis has also demonstrated the need for Africa to promote intra-regional trade, which would bolster economic growth by enlarging markets and reducing vulnerability to shocks. According to the United Nations Conference for Trade and Development (UNCTAD), Africa has consistently exhibited considerably lower rates of intra-regional trade than other regions. Trade among African countries is to a large extent hampered by trade costs, with econometric estimates2 finding that transport costs in Africa are 136 percent higher than in other regions. This further highlights the need to strengthen regional infrastructure, such as roads, railways, telecommunications, and regional airlines. In addition, trade policies should also facilitate and expand trade between African countries.
Shimelse Ali is an Economist in Carnegie’s International Economics Program.
1 Unless otherwise noted, “Africa” is used to refer to Sub-Saharan Africa.
2 Nuno Limao and Anthony Venables (2001) quoted in “Economic Development in Africa Report 2009,” UNCTAD.
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