Tanzania faces the highest exposure to economic troubles in the Eurozone and slower growth in China, while Uganda and Rwanda are the least exposed among East African states, a new report indicates.
The report titled, “Shock Watch Bulletin: Monitoring the impact of the Eurozone crisis, China/India Slowdown, and energy price shocks on lower-income countries,” published by the London-based Overseas Development Institute, notes that Uganda and Rwanda bear low exposure to external risks due to limited trade with Eurozone economies and the “Asian tigers.”
Fairly healthy reserves and external debt portfolios also influenced Uganda and Rwanda’s positive rating.
Considerable exports of precious metals like gold and diamond to European markets and high revenues from tourism are a big contributor to Tanzania’s economy but could harm its growth prospects at a time of economic decline in Europe.
This combined with rising trade with China, backed by mineral products, has rendered Tanzania most prone to external economic and financial shocks, the report shows.
Tanzania’s exports rose by 13 per cent to $7.99 billion in 2011, with gold receipts increasing by 30.4 per cent to gross $2.33 billion during the same period, statistics from the Bank of Tanzania indicate.
External trade and financial risks highlighted in the report also raise questions about the role of risk monitoring tools in the region’s financial and trade sectors.
Kenya and Burundi’s economies bear intermediate exposure to external shocks, an assessment that shows uncertainty over the effect of falling growth in the Eurozone.
While Kenya’s current account deficit surged to more than 10 per cent of gross domestic product in 2011, Burundi’s huge dependence on aid leaves the small economy sharply compromised by Eurozone troubles.
The report cites lower growth forecasts in China and India during 2013 as steep challenges for growth in many low income countries. China’s economy grew by 7.8 per cent last year, a figure that fell short of projections by 0.3 per cent and also reflects falling demand for various raw materials.
China accounts for 50 per cent of global demand for metals and recent indicators of reduced manufacturing activity could spell trouble for many African commodity exporters.
A projected drop in India’s economic growth could similarly affect demand for minerals supplied by African economies.
While risk monitoring tools in the region’s banking industry have helped minimise the impact of the global financial crisis on local banks, through tighter surveillance of derivatives trading and foreign assets, appropriate tools for tracking trade and industrial related risks are seemingly non-existent.
Amid growth risks tied to trade flows, some economists believe wider diversification of trade opportunities within the Common Market for Eastern and Southern Africa (Comesa) can mitigate short term shocks to export revenues.
“Tanzania exports many precious metals like tanzanite to Europe and earns a lot from tourism as well. This scope of products makes it hard to diversify its economy towards the Comesa market and has deeply exposed it to the Eurozone area,” said Lawrence Othieno, a research fellow at the Economic Policy Research Centre, Makerere University.
“Kenya by contrast has exploited the regional market through exports of manufactured goods. But persistent hurdles like the absence of a national airline make it difficult for Uganda to maximise trade opportunities in the Comesa region,” said Mr Othieno.
Declining growth in foreign credit flows that mainly originate from European banks also poses financial risks to economies like Tanzania.
An upsurge in new projects pegged to the mining sector reportedly attracted substantial credit from foreign banks but the report raises pessimism about growth trends.
Cross border bank lending between developed and developing countries fell from an average of 7.8 per cent every quarter before the global financial crisis to 1.8 per cent last year, the report notes.
Nevertheless, Ugandan regulators are playing down the potential trade and financial risks facing the economy.