African states need new economic models amid external shocks

Monday November 27 2023

AfDB’s Chief Economist Prof Kevin Urama (2nd R) and other African economists launch a report in Addis Ababa, Ethiopia. PHOTO | POOL


Regional blocs such as the East African Community (EAC)are facing pressure to upend their tools of analysing the performance of their economies in the wake of serious losses from the unpredictable patterns of climate change.

And experts warn that these uncertainties, including geopolitical incidents such as the Russian invasion of Ukraine and the Israel-Hamas war, mean central banks and treasuries must adjust their projections for a firm understanding of the real losses or gains.

A new report by the African Development Bank (AfDB) and its affiliate African Development Institute says African countries need to adjust their tools of assessing the economy.

Assessing the performance of economies helps planners understand each country’s output, interest rates, inflation and exchange rates as well as available balance of payments as cumulative assessment of determining economic growth.

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The report, Benchmark Macroeconomic Models for Effective Policy Management in Africa, says some countries such as Kenya, Rwanda and Uganda already run on some kind of models that help their central banks project the flow of the economies.


But these models are externally designed, mostly by the International Monetary Fund, and “they are unable to capture the unique structures of many African economies fully and, to some extent, do not adequately address the needs of the policy makers.”

Economists need to improve the collection and management of macroeconomic data, and to build sustainable human and institutional capacity in Ministries of Finance and Economic Planning to develop, besides customising models suitable for local needs, it says.

Some of those local needs are hardly locally caused, however, such as impact of climate change or wars in distant places such as Ukraine or Gaza, which have a direct impact on local wealth.

Anthony Simpasa, division manager for macroeconomics policy, forecasting and research at the AfDB, says regional economies now have a double task of deciding how local factors such as political changes and inevitable climate changes actually add costs to the economy.

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“The current models are devoid of a structure that incorporates the challenge of climate change,” Dr Simpasa told journalists after the launch of the report in Addis Ababa on the sidelines of the Africa Economic Conference.

“We need to incorporate issues of climate change to be able to see where opportunities lie and the costs of climate change on our economies and how we can mitigate or adapt to prevent huge losses on our economies and ensure that we derive maximum benefits from environmental and social aspects from climate change.”

Each of the countries in the East African Community has faced a heavy toll of climate change.

Rwanda had deadly landslides last year, South Sudan had floods and malaria, Kenya and Somalia are facing heavy floods from El-Nino while Uganda, Kenya and Somalia had drought last year.

In the Horn of Africa, a situational report by Oxfam showed that dozens of people had been killed by flooding in Kenya, Ethiopia and Somalia, just months after the region faced the worst drought in four decades. These countries will need at least $4.1 billion before the end of the year, according to Oxfam.

“East Africa is the epicentre of climate change despite contributing very little to the greenhouse emissions. We are going from one disaster to the next as climatic shocks become more frequent and intense,” said Fati N’Zi-Hassane, Oxfam in Africa Director on Tuesday.

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“The situation remains critical and demands the rich nations to cut their emissions and pay their fair share in humanitarian and climate financing.”

Climate change is affecting livelihoods, seeing livestock die, crops submerged and infrastructure critical for the population destroyed, forcing governments to redirect crucial funds to repairs.

“Climate change to the extent that it affects poverty, displacement of people in the case of floods and the costs of that displacement including on infrastructure should be captured in our models so that we can prepare for adaptation,” Simpasa told a news conference.

Climate change is just one factor as countries in the region also face pressure amid energy transitions, good governance, accountability, climate change, debt sustainability as well as pandemics like Covid-19 pandemics. Yet policy makers have been “blind dating” on their development plans, according to Prof Kevin Urama, chief economist and vice-president for economic governance and knowledge management at AfDB.

“While some argue that economic development is often a gamble, it has become evident that having sound models that are embedded in national realities improves probability of winning the gamble,” he said during the launch of the report.

“In fact, one could say, that on several critical subjects of economic and public policy, some countries are blind dating with development; planning without data which does not help our economies.”

External models developed by the IMF or World Bank aren’t necessarily bad, he argued, but they need to be a template rather than a finished product in developing local policies that reflect the social, political, cultural, and environmental realities of their respective nations.

Once those models work, countries can also look at the overall impact of external forces or on their blocs.