East African economy has done well, but risks will be its downfall

Friday May 11 2018

Bidco detergent factory in Thika, Kiambu County

Bidco detergent factory in Thika, Kiambu County in Kenya. A weak manufacturing sector — which is key to achieving growth targets — has made the regional economy less resilient. PHOTO | MARY WAMBUI | NMG 

By ANDREW MOLD
More by this Author

While the global economy has fluctuated in recent years — between pessimism and euphoria, with booming stock markets, accelerating growth but also fears over new trade wars and great political uncertainty — Eastern Africa has continued to maintain an impressive performance.

The region has sustained an average annual growth rate in excess of six per cent between 2012 and 2017 — more than double the global average.

The economic progress is also reflected in the social domain — people in the region generally live longer and healthier lives, receive better education and enjoy an improved quality of life compared with just a generation ago.

As stressed at the annual Mo Ibrahim Foundation governance meeting in Kigali from April 27-29, the positive results are largely attributable to increased state capacity, as governments have rebuilt their institutions after the “lost decades” of the 1980s and 1990s. Where state action and policy has been most effective, improvements have generally been largest.

Yet the challenges for the region are still daunting. Regardless of the economic improvements, the region is still one of the poorest in the world, with an average per capita income of just $740.

The region is also extremely vulnerable to climate change. For example, afflicted by severe drought economic growth tumbled in a number of countries in 2016. Meanwhile, job creation and poverty reduction have not kept pace with a rapidly growing population and workforce.

The region also has to contend with a large informal sector and some of the fastest rates of urbanisation in the world.

There is, then, a real risk of the region entering into a new period of slower growth and economic instability if these challenges are not addressed.

Structural issues

In our recent report Macroeconomic and Social Developments in Eastern Africa 2018, we argue that several structural issues should be tackled in order to unlock the full growth potential of the region.

First, the private sector in the region is relatively weak. The reasons for this are complex, but in our report we single out a leading constraint — the lack of access to credit, as a result of the poor performance of the banking sector in terms of providing long term affordable finance to businesses.

Some policy action is required to address this perennial problem, in terms of creating a financial system that is fit-for-purpose.

Second, while the prospects for economic growth are greatly improved by the necessary investments in infrastructure, increased public expenditure has also started to stretch budgets, with a number of countries experiencing rising debt levels.

For example, Kenya’s public debt is now close to 60 per cent of GDP. While the push towards better provision of infrastructure clearly needs to be maintained, it should be done in a financially sustainable way.

Third, a weak manufacturing sector has made the regional economy less resilient. Compared with the rapid expansion of the services sector, the development of the manufacturing sector has been lagging behind.

In order to achieve ambitious national developmental and growth targets without engendering constant foreign exchange shortages and balance of payments problems, a more rapid expansion of the manufacturing sector is crucial.

The sector facilitates faster productivity growth, job creation and helps tackle the tradeable goods deficits that characterise the regional economies.

Lastly, East African trading relations have been complicated by a number of new developments. The proposed Economic Partnership Agreement between the European Union and the EAC potentially offers a more permanent and stable basis for access to the European market, but has also raised concerns about how it could constrain policy space in the design and implementation of industrial policy.

Controversies have similarly surrounded the African Growth and Opportunity Act (Agoa) with the US. Only Kenya has managed to export significant quantities of goods under the provisions of the agreement.

The US recently announced suspension of Rwanda from Agoa because of Kigali’s insistence on applying the “mitumba ban” on second-hand clothing, in an effort to reinvigorate the local textile and clothing industry. Yet it simply serves to highlight Agoa’s limitations — Rwanda currently exports just $2 million under Agoa.

Against such a backdrop, it seems pertinent to insist on pursuing the intra-African agenda more vigorously. Already for the EAC member states, 40 per cent of their exports are destined for other parts of Africa — more than double the amount that goes to the EU.

The historic signing of the African Continental Free Trade Area agreement in Kigali in March provides hope that we can consolidate the creation of a truly integrated market across the continent. In the face of persistent global uncertainties, this would be one of the best things we could do to make our economies more resilient.

Andrew Mold is the acting director, sub-regional office for Eastern Africa of the United Nations Economic Commission for Africa