East Africa defies odds, tops economic growth in Africa

Monday March 19 2018

Chinese-built electric train in Addis Ababa.

Chinese-built electric train in Addis Ababa. Continued investment in public infrastructure will bolster Ethiopia’s growth. FILE PHOTO | AFP 

By ALLAN OLINGO
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East Africa recorded the continent’s best economic performance in 2017, with a GDP growth of 5.9 per cent — above the continental average of 3.6 per cent.

This growth was achieved in a year that saw the region’s economic fortunes dip, as several companies keen to lower costs and post profits turned to staff cuts.

The year also saw a high cost and slowdown of credit, reduced spending power, higher cost of living and non-performing loans, pushing firms to rethink their strategy and cut costs, with employees becoming the easy targets.

According to the 2018 African Development Bank East African Economic Outlook report released on Wednesday, East Africa’s growth was driven by Rwanda, Ethiopia and Kenya. While real GDP grew at an estimated 5.9 per cent, there were considerable country variations.

“In the fastest growing economies, growth resulted from strong domestic private consumption, public investment in infrastructure, growth in light manufacturing and growth in agriculture, particularly during periods of good rainfall.

“Some commodity-dependent economies, notably South Sudan, have suffered from weak commodity prices coupled with fragility and insecurity,” the report notes.

Projection

Growth is forecast to continue over the next two years, reaching 6.2 per cent in 2019, with the main contributors being Ethiopia, Tanzania, Rwanda and Kenya, in that order.

“Although growth in Ethiopia is projected to slow down, other countries are expected to continue to register strong growth,” the report notes.

“For most countries, recovery from drought in 2017 was expected to shore up agriculture. In Ethiopia, continued investment in public infrastructure will further bolster growth, as will service sector expansion, and strong private consumption in Rwanda.”

In South Sudan, continued economic contraction will counteract the region’s overall growth. Since the onset of the current civil war in 2013, South Sudan’s economy has contracted by an average 6.8 per cent a year, making it the worst performing in the region.

On Friday, President Salva Kiir named Salvatore Garang Mabiordit, a former undersecretary in the Finance Ministry, to head it, after sacking Stephen Dhieu Dau. Mr Mabiordit is the fifth finance minister since the oil-rich nation achieved independence in 2011.

“We have lost the value of our currency. This is a challenge that is ahead of you and you must see how to get us out of this,” President Kiir told Mr Garang at his swearing-in ceremony.

Although South Sudan accounts for less than 1 per cent of the region’s GDP, the severity of its economic contraction has reduced regional average economic growth AfDB said in its outlook.

Agriculture contribution

In terms of sectors, the region’s economic growth has historically been driven by agriculture due to its major contribution to GDP and employment in most countries. Agriculture’s leading role has persisted, contributing 41 per cent of East Africa’s average real GDP growth last year.

“This is particularly so in Ethiopia, Rwanda and Tanzania, where the agricultural sector contributed remarkably to GDP growth. If that pattern persists, East Africa may experience textbook growth in light manufacturing, urbanisation and non-agricultural employment,” the reports says.

From the demand side, household consumption is the main driver of growth. In Ethiopia for example, it contributes about 80 per cent and in Kenya, about 88 per cent.

Public investment, generally in infrastructure, mineral exploration and construction was also an important driver for growth. In Ethiopia for instance, public investments contributed about 33 per cent of growth.

The three EAC countries are expected to drive the region’s growth in 2018 with the enhanced regional integration through the regional bloc and the Common Market for Eastern and Southern Africa (Comesa) and potential exploitation of the oil and gas discoveries in Uganda, Kenya, Tanzania and Ethiopia.

In Rwanda, projected improvements in global demand, ongoing efforts to promote and diversify exports and tariff reductions provide opportunity for growth.

However, the sporadic violent political protests in Ethiopia are likely to restrain investment and economic growth in the near term. Ethiopia faces a possible foreign exchange shortage that has been lingering for almost a decade.

Business in Tanzania

Tanzania, the report says, risks slower growth from uncertainty in the business environment and a recent reduction in foreign and domestic investment, particularly in the extractives sectors following regulatory changes and several high-profile disputes with international investors.

Countries with substantial rain-fed agriculture such as Ethiopia, Rwanda and Tanzania depend on favourable weather and on global markets, and this could affect their growth as was witnessed in Kenya where the 2016/17 harvests were hit by prolonged drought.

Kenya’s inflation rate was at a five-year high days before last year’s August general election as biting drought pushed up the cost of maize.

During both the August polls and a repeat presidential election in October, the country had food security concerns that saw the government step in and import grains that were sold to citizens at subsidised prices.

The country has experienced food shortages for the better part of the year, forcing the government to look outside to replenish its food stocks.

“However, state fragility and insecurity constrained growth in South Sudan and to some degree in Burundi and Somalia. Risks arise from fragile states’ inability to provide infrastructure (power, transport, water and ICT); an unstable macroeconomic framework; reduced productive capacity; and diminished human, physical, social, and financial capital.

Regional spillover effects in neighbouring countries are major risks. These challenges, constraining investment and growth, damaged East Africa’s performance in 2017, and may do so again in 2018,” AfDB warns.