Cautious optimism as economies in East Africa rise from Covid slump

Saturday May 27 2023
Rwanda clothing company

Women work at a clothing company in Kigali, Rwanda. The country's economy is forecast to grow 7.8 percent in 2023. PHOTO | KRISTIN PALITZA | DPA


East African economies are forecast to grow in spite of global shocks, reflecting the diversified local sectors that have withstood external pressures.

A new report by the African Development Bank (AfDB) shows the region’s economies will grow by 5.1 percent this year, from 4.4 percent in 2022, and could rise to 5.8 percent in 2024.

The African Economic Outlook launched on May 24 on the sidelines of the AfDB Annual Meetings shows that since the Russian invasion of Ukraine last year, East African economies have eluded recession.

But the Democratic Republic of Congo and others across the region that earn significant revenues from extractives are likely to suffer more as global prices for the commodities continue to slump and the ability of usual markets to take in the goods slows.

Eastern Africa economies also faired better than their counterparts in the southern region that are suffering energy supply hiccups, the report shows.

If this trend continues and the region keeps investing in green energy, for instance, AfDB projects the economies could insulate themselves from further shocks.


Read: Fresh bid to market EA as a single tourist destination

“Our projection is that such economies will continue to show marked resilience in the coming years. But, overall, a positive outlook for that comes with cautious optimism. Because we still continue to have challenges in several macroeconomic fundamentals,” said Prof Kevin Urama, AfDB’s chief economist and vice-president for Economic Governance and Knowledge Management, at a press briefing in Sharm el Sheikh, Egypt.

He noted that consolidation of fiscal policy and monetary policy around the world was resulting in devaluation of currencies across several countries.

“This leads to consumer price inflation, which we project will rise for them to 15.1 percent by the end of this year,” said Urama.

The rates

Ethiopia and Rwanda are among the world’s 10 fastest-growing economies in 2023–24. Ethiopia, especially, is regenerating investor confidence as it rebuilds from the war in Tigray.

But the eruption of violence in neighbouring Sudan could pose a new burden of hosting refugees, forcing Addis Ababa to prioritise security investments.

Yet the figures on GDP neither tell the whole story nor a good one. AfDB chiefs this week argued against the anomaly in calculating the GDP of countries on the continent, especially since it ignores the unseen contribution of cleaning up pollution emitted by richer countries.

Read: Why EA countries need concessional funding

“The economies of Africa better move away from just using GDP. Nobody eats GDP,” said Dr Adesina Akinwumi, the AfDB president.
“And if you measure my GDP without looking at the contributions I am making in terms of carbon sequestration, for the world, you are not doing me any favours.”

Nonetheless, the AfDB argues that diversification, especially in agriculture and tourism, could save East African economies from shocks.

The report found that countries such as South Sudan, which entirely rely on oil revenues, profited from the sale by shoring up their current and fiscal accounts.

In the whole of East Africa, only Juba recovered its fiscal and current account balances, gaining 4.9 percent and 6.8 percent respectively over 2022 as oil prices have remained above the five-year trend.

Tourism-reliant countries like Kenya, Tanzania and Rwanda may face another decline in this sector as it is expected to drop from 4.9 percent to 4.4 percent “reflecting an abating base effect and growth slowdowns in important tourist source markets, especially Europe and North America.”

Currency weaknesses in some of Africa’s more globally integrated economies such as Kenya, Nigeria and South Africa are expected to persist in 2023, “largely due to potential capital outflows as investors search for safe assets in advanced economies.”
“If you depend on other currencies to trade, you are exposed to their policies, not yours,” said Prof Urama. “We need to do more in our currencies.”

Read: IMF revises global growth projections

With most countries now debt-ridden, that could add another load. For example, the regional economic growth is above the global average, but a slump from tightening financial conditions, supply chain uncertainties and the impact of extreme weather such as recent landslides, floods and drought in the region could force governments to spend on unplanned recovery programmes.
The AfDB says Africa is being shortchanged in climate change financing. Needing $35-$50 billion annually, Africa gets only $30 billion in climate finance, most of it is from public lenders.

“Nature does not argue with people. We need to be smart enough to know that climate resilience is not something we do for others. It is not a question of whether climate shocks will happen,” Prof Kevin Urama said. “It is not a question of if, we are seeing, already, a 20 percent growth in electric vehicles. This is the market for the future. Let’s take these global goals domesticate them in terms of how they apply to our economic needs.”

These and debt obligations mean the economies’ survival also means adopting greener investments. The report says countries in the region are facing heavier debt vulnerabilities continue due to rapid exchange rate depreciation. Yet economies need more money to invest in infrastructure.

“It is clear from this report that, even as we think about the restructuring of the external debt in Africa, we have to look at domestic debt, restructuring that is equally important,” said Dr Adesina.

“Growth in this group, estimated at 4 percent in 2022, is projected to strengthen to an average of 4.2 percent in 2023 and 2024. The oil output effect, notably in Libya and Nigeria, could also shore up economic growth as production improves following efforts to tackle insecurity,” the report says.