East African states can buck growing trend of an economic slowdown across the globe

Friday January 31 2020

trade war

A number of factors account for the gloomy global outlook. Among these are trade tensions between the US and its major trading partners, China and the EU. SHUTTERSTOCK 

ALOYSIUS UCHE ORDU
By ALOYSIUS UCHE ORDU
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In her maiden speech titled Decelerating Growth Calls for Accelerating Action, presented on October 8, 2019, IMF managing director Kristalina Georgieva, said that with slower growth expected in about 90 per cent of the world in 2019, “the global economy is now in a synchronised slowdown.”

The fragile outlook was highlighted in the World Bank’s January 2020 Global Economic Prospects—Slow Growth, Policy Challenges.

Why is this happening? And, how is East Africa fairing in this new dispensation?

A number of factors account for the gloomy global outlook. Among these are trade tensions between the US and its major trading partners, China and the EU.

Uncertainties remain as the EU-UK Brexit trade talks commence. The US-Iran standoff has escalated geopolitical tensions in the Middle East. Nearer home, the situation in the Horn, the Sahel and the Ebola outbreak in the Democratic Republic of Congo continue as old certainties.

As a consequence, the World Bank forecast global economic growth of 2.5 per cent in 2020 and 2.6 per cent in 2021. For sub-Saharan Africa, the report forecast 2.9 per cent and 3.2 per cent, respectively, as worsening global headwinds have compounded weaknesses in several African economies. Evidently, the shine has come off the “Africa rising” narrative.

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For Africa’s powerhouses, Nigeria and South Africa, growth remains well below potential.

In the case of Nigeria, the report notes that the outlook remains subdued, with growth averaging 2.1 per cent in 2020-2021, reflecting uncertainty about the direction of government policies and the macroeconomic framework. With Nigeria’s population growing at around 3.0 per cent, income per head has declined and poverty has increased.

South Africa’s growth is projected at 0.9 per cent in 2020 and 1.4 per cent in 2021, as the electricity sector inhibits domestic growth and weak external demand hinders exports.

Angola is another struggling juggernaut with growth rates of 1.5 per cent in 2020 and 2.7 per cent in 2021. In contrast, East Africa is a bright spot on the continent’s firmament.

Except for Burundi, others will grow significantly: Ethiopia 6.3 per cent, Kenya 5.9 per cent, Rwanda eight per cent, Tanzania 5.9 per cent and Uganda 6.2 per cent, on average during 2020-2021. These are among the world’s fastest growing countries.

With these impressive growth rates, EAC countries are bucking the trend compared with the continent’s big economies and the rest of the world. It is however, not the time to declare victory.

There are persistent gathering clouds on the horizon. For example, further deceleration of the EAC’s principal trading partners—China, EU and the US—could weaken commodity prices, reduce export revenues and constrain investment inflows. And, many EAC countries will hold elections in 2020/2021.

Election years raise political temperatures, emphasising the need for caution.

Here are two actions that merit attention for sustained growth. First, EAC needs to deepen the integration process to serve as the region’s growth engine. This requires opening its fast-growing markets to each other. It is not the time for prohibitive tariffs on fellow members, nor time for border closures that dampen regional economic activity.

One can imagine the positive effects of the EAC’s single market, which eliminated virtually all barriers to trade—tariff and non-tariff. The outcome is likely to raise the GDP of member states many fold and translate to increased well-being for every child, woman and man in East Africa.

Second, EAC countries need to improve tax revenue collection, now averaging around 17 per cent of GDP. This is below the potential for these countries. Indeed, IMF’s “tax capacity” models suggest a potential increase in revenue by about three–five per cent of GDP. This increase exceeds the amount that these countries will receive in external aid.

Meanwhile, concessional aid is dwindling. Yet, population is exploding, unemployment is high especially among the youth and inequality is pervasive. More tax revenue is needed to address these challenges.

To close the infrastructure financing gap and invest in human capital—education, skills training and health services—requires more tax revenue. To reduce dependence on commodity exports, reduce debt, and to spur faster economic growth requires more tax revenue.

Unlike their counterparts in the industrialised countries, African policy makers’ room to manoeuvre to counter the prevailing global downturn is rather limited.

On the monetary policy front, central bankers do not have the wherewithal, of the US Federal Reserve Bank and the European Central Bank, to basically flood the financial system with cheap money to boost economic growth.

For the countries of East Africa, the key question is not what to do in these turbulent times?

It’s whether the EAC has the political will to deepen economic integration and to relentlessly boosting tax revenues to create jobs and boost growth at a time of heightened global downturn.

Aloysius Uche Ordu is the managing partner, Omapu Associates LLC. He is a former vice president of AfDB and a former director of World Bank.

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