East Africa's economy could be stronger and more resilient but for a weak manufacturing sector, according to the Macroeconomic and Social Development in Eastern Africa 2016 – 2017 report.
Compared with the service sector, whose expansion has been rapid, the manufacturing sector in the region has been lagging behind as evidenced by the stagnant or even declining share of the manufacturing value added over the past decade.
The report by the United Nations Economic Commission for Africa warns that an excessive dependence on service sector may not generate sufficient employment opportunities to sustain inclusive growth.
Some service sub-sectors like tourism in the region have shown considerable dynamism and job-creation potential, however.
Unlike Ethiopia, which has implemented an ambitious programme of export-oriented industrial parks, industrial policies in EAC countries have not managed to promote robust growth in the manufacturing sector.
“This partly explains why the economic performance has fallen short of their national growth targets,” notes the report.
According to the report, the economic performance of East Africa has been impressive over the past decade and a half. Yet economic growth moderated markedly in 2016 and 2017, with an average growth rate of 5.6 per cent compared with 6.8 per cent between 2012 and 2015.
Acting director of Uneca in Eastern Africa Andrew Mold said the economic growth in the region has been stimulated by investments in infrastructure and the dynamism of the services sector.
The region also achieved impressive results with respect to the Millennium Development Goals. For example, the poverty rate halved in Uganda and Ethiopia, while in Rwanda maternal mortality declined by 78 per cent.
Average incomes have also significantly improved. In the region, per capita income has doubled over the past decade, from $350 in 2006 to $740 in 2016.
However, growth has slowed down in recent years, mainly due to drought that has affected agricultural production. More than 30 million people are currently suffering severe food insecurity in East Africa.
“The stagnating or declining share of the manufacturing sector in GDP has been limiting progress towards economic transformation and job creation. Another impediment to growth is the cost of and poor access to credit for private sector development,” said Mr Mold.
The report says that growth would be stronger and more resilient if policies were made to bolster private-sector activity. But the key constraint to achieving this is the lack of access to credit in the region.
Sluggish credit growth
Although central banks have generally maintained an accommodative monetary policy in 2017, credit growth remains sluggish and the cost of borrowing often prohibitive.
“The interest rate caps introduced in Kenya in 2016 by the Central Bank, for example, were intended to address the problem and did bring down the lending rate and loans-deposit spread but its impact in terms of improving long-term access to credit is unclear,” noted Mr Mold.
The increased public expenditure has also started to stretch budgets with a number of countries experiencing rising debt levels in recent years. For example, Kenya’s public debt is projected to rise to around 55 per cent of GDP in 2017 compared with 44 per cent in 2013.
On structural current account deficits, the report says that the regional economies have to manage exchange rate fluctuations in a better way. Most countries in the region have now adopted either floating exchange rates or managed float.
“The pass-through of currency depreciations together with the spike in food prices due to severe drought condition exerted upward pressure on inflation over the 2014-2016 period,” says the report.
“Following the subsequent fall in the value of the US dollar and the easing effect of a prolonged dry season, both exchange rates and inflation pressures subsided in mid 2017.”
The report also indicates that the East African region is still underperforming in terms of exports as evidenced by the large trade deficits sustained by most countries.
The structure of trade also remains little changed compared with the situation a decade ago. Specifically, exports are still excessively concentrated on primary commodities leaving the region in the lower rungs of the global value chains and highly vulnerable to commodity price shocks.