Risks and policy challenges for African economies

This forecast for Africa for 2011 and 2012 rests on several assumptions, which may turn out to be too optimistic or too pessimistic. It has been assumed that the recovery of the world economy and world trade will be sustained and that prices of oil and non-oil commodities will remain high, although at somewhat lower levels than during the first quarter of 2011.

However, there are both upside and downside risks to this forecast. On the upside, the global recovery may be stronger than expected as confidence recovers in many parts of the world. A stronger growth of global demand would also boost Africa´s growth. With the recent events in the global economy following the earthquake and nuclear crisis in Japan, however, the upside risk may be small.

On the downside, the global recovery could be weaker than assumed here. If oil prices persist at high levels of USD 110 to USD 120, global growth would be restrained. The hike in oil prices is shifting wealth from oil-importing countries to oil-exporting countries, raising global savings in the oil-exporting countries (as oil exporters have generally a higher savings rate than oil importers), increasing headline inflation and reducing real demand. If monetary policies of oil-importing countries are tightened in response to higher headline inflation, global growth would be further reduced.

Besides these external risks, upside and downside risks also exist within Africa. Most importantly is how countries will cope with social discontent and political tensions, which have flared up in several countries. It is currently unclear how fast peace will be restored in Libya.

Furthermore, in countries with relatively large agricultural sectors, aggregate output also depends on agricultural production and thus also on weather conditions. The technical assumption of normal weather may turn out to be too optimistic or too pessimistic.

Finally, given the high food and energy prices and also the large number of forthcoming national elections, further social and political unrest could emerge in several African countries.

African policy makers must be aware of these global and domestic risks. Economic and social stability need to be sustained, or, where they are disrupted, be quickly restored. Policy requirements are to pursue prudent macro policies and at the same time implement appropriate measures to cope with higher commodity prices.

In resource-rich countries, part of windfall profits should be put into sovereign wealth funds in order to be prepared when prices fall again or resources will be depleted. Given the high food prices, governments, which have the necessary resources, should protect vulnerable groups from hunger by providing targeted and cost-effective support, while refraining from costly food and fuel subsidies to the general public. Furthermore, business conditions for farmers should be further improved so that they are able to increase investment and productivity in response to higher agricultural prices.