Drought, politics push East African economies to modest growth

Monday May 21 2018

Boys sort out sorghum to dry out in the sun in

Boys sort out sorghum to dry out in the sun in Lifunga village in Siaya County, Kenya, on August 1, 2017. The region’s economy dropped in the past two years due to a sharp decline in agricultural performance in Kenya, Uganda and Rwanda. FILE PHOTO | NATION 

By CHRISTABEL LIGAMI
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Drought, a decline in commodity prices, political instability and civil conflicts have weakened East African economies in the past two years.

The Macroeconomic and Social Developments in Eastern Africa 2018 report prepared by the United Nations Economic Commission for Africa shows that the region’s economies dropped from an average growth rate of 6.65 per cent between 2012 and 2016 — higher than the African average of 3.4 per cent and the world average is 2.5 per cent — to 5.5 per cent due to a sharp decline in agricultural performance in Kenya, Uganda and Rwanda.

Severe recession

Ethiopia overtook Kenya as the largest economy after years of robust economic growth, despite its relatively low income per capita. The five largest economies, Ethiopia, Kenya, Tanzania, DR Congo and Uganda, account for around 88 per cent of the regional GDP.

While the GDP share of most countries remains largely stable, the share of South Sudan shrank drastically from around 9 per cent in 2011 to just 1 per cent in 2016, amid severe recession caused by political strife and a sharp fall in crude oil production.

On economic performance, Ethiopia, Rwanda and DR Congo experienced the fastest growth rates between 2012 and 2016.

Nevertheless, even in these cases, growth was moderated in 2016 due to lower agricultural production following an El Niño induced drought and declining commodity prices.

Tanzania and Kenya sustained solid growth in 2016, while the Ugandan economy lost momentum due to poor performance in agriculture and manufacturing.

Moderate growth

On the economic performance front in 2017, the most recent statistics suggest moderated growth compared with 2016. For example, Kenya’s economy expanded by 4.4 per cent in the third quarter of 2017, compared with 5.6 per cent in the third quarter of 2016.

In Tanzania, economic growth also fell to 7.8 per cent in the second quarter of 2017 from 8.5 per cent observed in 2016.

“While Eastern Africa is among the fastest growing regions in the world over the past decade, growth has been uneven and most countries are still not reaching their ambitious developmental targets,” says the report.

“To achieve middle-income status within the proposed timeframes, countries would need to grow significantly faster and, crucially, sustain that higher growth rate.”

Although the factors that determine growth vary from country to country, the report says there is consensus that countries that have sustained strong growth tend to have higher investment and savings, prudent fiscal policy with low deficits, as well as diversified exports and a healthy current account balance.

Reliance on foreign debt

And while the investment shares of many Eastern African countries are lower than countries of similar income levels elsewhere in Africa, Djibouti, Ethiopia, Tanzania, Rwanda and Uganda are all outliers, considering they spend more than 25 per cent of GDP on investment — the minimum investment rate for sustained high growth suggested by the Commission on Growth and Development.

“Continued high investment needs to be backed by high domestic savings, as there is a limit to external finance and the reliance on foreign borrowing could endanger macroeconomic stability. In this regard, the large gaps between investment and savings in Djibouti, Rwanda and Burundi warrant attention,” notes the report.

One question this report asks is whether the region is about to enter into a new dynamic, with slower growth rates and growing developmental challenges.

To avoid such a scenario, some constraints to growth would need to be addressed. These include the weak manufacturing sector which has rendered the regional economy less resilient, the need to continue improving the business environment.

Also, across the region, private sector development has been relatively lackluster and the prospects for economic diversification and industrial growth are greatly improved by investments in infrastructure.