AfDB forecasts faster recovery for African economies
Tuesday January 24 2023
African Development Bank (AfDB) says the continent’s economies are expected to grow faster than global projections this year, but budget and trade deficits will continue to weigh down most of the countries as risks persist.
In its Africa’s Macroeconomic Performance and Outlook report released Thursday, the AfDB said the continent’s GDP growth rate decelerated to 3.8 percent in 2022. It is expected to improve to four percent this year, the report said.
The improvement, which will see the continent’s growth rate outpace global projections of 2.7 percent, “reflects continuing policy support in Africa and global efforts to mitigate the impact of external shocks and rising uncertainty,” the continental lender said.
AfDB president Akinwumi Adesina said that this recovery and resilience of the continent’s economies, however, come with “cautious optimism” as there are several headwinds still facing the globe’s emerging markets.
“Global financial conditions have tightened and are projected to remain restrictive in the near term, compounded by increased volatility in global financial markets and persistent disruptions in global supply chains,” Dr Adesina said. But high interest rates in the global scope remains the highest risk to African economies in the near term.
Extreme weather events
Losses and damages resulting from extreme weather events such as drought, cyclones, and floods, also continue to pose a significant threat to economic recovery on the continent.
Other risks, based on the outlook, include dependence on commodity exports, regional conflicts in “key hotspots like Burkina Faso, Democratic Republic of Congo, Ethiopia, Mali, and Mozambique”; and political risks due to upcoming elections in a number of countries.
Also, many countries on the continent are projected to continue experiencing relatively high inflation rates and negative fiscal and current account balances.
On average, headline inflation is expected to ease to about 13.5 percent in Africa, down from 13.8 percent last year, but as many as 11 countries will still record double-digit inflation, with Zimbabwe recording the highest at 120.4 percent and Sudan 78.7 percent.
Although East Africa was the most affected by inflation in 2022, with an average rate of 25.3 percent, it is expected to record a much lower price increase rate of approximately 5.4 percent in 2023.
Also, while the continent’s average trade deficit is expected to stabilise at about 1.6 percent of GDP in 2023, many countries on the continent will still record trade deficits above five percent.
In the EAC, Rwanda and Burundi are projected to have the highest deficits, at 10.8 and 11.3 percent of GDP. Uganda, Kenya and Tanzania will record negative trade balances of 8, 5.2, and 3.5 percent respectively.
Fiscal deficits are also expected to continue narrowing down across the continent, thanks to “fiscal consolidation measures by several countries,” improved revenues from exports due to rising commodity prices, and the recovery of tourism on the continent.
Kenya and Rwanda are projected to have the highest fiscal deficits of 6.7 and 6.6 percent of GDP respectively. Burundi, Rwanda and Tanzania will also record above average budget deficits of 4.8, 4, and 3.1 percent respectively.
AfDB has suggested a series of fiscal and monetary policy interventions to stabilise economies and hasten recovery from the turbulence witnessed in the last two years.
“Bold policy actions are needed to address the effects of rising inflation and subdued growth,” the financier said in the report.
Aggressive monetary policy
Among the policy recommendation it made is “timely and aggressive monetary policy tightening in countries with acute inflation and cautious tightening in countries where inflationary pressures are low,” a move which the International Monetary Fund has also suggested.
Other recommendations include boosting intra-Africa trade, reforming tax administration regimes, reducing budget deficits, cushioning the most vulnerable in societies, and managing foreign exchange reserves to reduce exchange rate volatilities.
“The bank reiterates its call for accelerating implementation of structural reforms to enhance government-enabled private sector industrialization in key sectors,” Dr Adesina said.