Africa´s recovery in 2010 and into 2011 has been largely driven by export volumes and commodity prices. In 2010 real exports increased by 3.1% after a decline of 2.5% in 2009. Exports are likely to remain an important engine of growth, but domestic demand is also  strengthening in many countries. Several resource-rich countries, such as Botswana, Algeria, Chad, Gabon and Nigeria, use the additional government revenues from natural resources to finance government spending on infrastructure investment and public consumption. Countries also sometimes use the additional revenues to support private households, thus boosting domestic demand. In several countries, such as Cameroon, Kenya, South Africa, Senegal and Tanzania, domestic demand is expected to drive growth to a large extent. However, the high food and fuel prices are constraining real private consumption in many countries. Furthermore, remittances to Africa are expected not to increase in 2011 as the recent political events in Libya and Côte d’Ivoire are seriously affecting workers´ remittances to neighbouring countries.2 (see Figure 1.5).

Figure 1.5: Migrant remittances to Africa

Source: African Development Bank.

Estimates for 2010 and forecasts for 2011 and 2012.

http://dx.doi.org/10.1787/888932403192statlink

On the supply side, Africa´s economic expansion is boosted by a few sectors, which vary, however, due to the different characteristics of the countries. In resource-rich countries, the mining sector has again become the main driver of growth, and in some countries new oil fields are coming on stream. In countries using higher export earnings to finance infrastructure investment, the construction sector is growing quickly.

In many African countries, the agricultural sector dominates economic activity. This sector’s share in GDP is 40% or above in Burundi, Central African Republic, Republic of Congo, Ethiopia, Guinea Bissau, Niger, Liberia, Sierra Leone and Togo, and between 20% and 40% in Benin, Burkina Faso, Cameroon, Chad, Côte d´Ivoire, Guinea, Ghana, Kenya, Madagascar, Malawi, Mozambique, Nigeria, Tanzania, Sudan, Uganda and Zambia. In most of Africa, the agricultural sector has performed relatively well in 2010 due to favourable weather conditions. This also helped to mitigate the adverse effect from higher global food prices. But in several countries, agricultural production suffered, notably in Tunisia due to drought, and in Benin and Uganda due to floods. With the assumption of normal weather conditions, Africa´s agricultural production is expected to further expand and contribute to GDP growth. However, agriculture remains highly vulnerable to the vagaries of nature.

The service sector is also an important contributor to African growth. In several countries, such as in South Africa (related to the soccer world cup), Botswana, Mauritius, Morocco, Seychelles, Tanzania, Egypt and Tunisia, tourism regained momentum in 2010. In Egypt and Tunisia, tourism will, however, decline in 2011 due to the recent political events and related security concerns.

Other services, such as trade, transport, financial services and real estate, are also supporting growth. Furthermore, the diffusion of new technologies, such as mobile phones and computers, continues to boost the quantity and quality of services. While in most African countries access to information and communications technologies (ICT) services is very low, many countries are now promoting the diffusion of ICT, which helps to raise Africa´s growth potential (AEO, 2009).

When compared to developing countries in Asia, Africa´s manufacturing sectors continue to lag behind. In many African countries, the share of manufacturing in GDP amounts to only around 10% or less. Manufacturing sectors are larger (with GDP shares between 15% and 20%), such as in Cameroon, Côte d´Ivoire, Egypt, Lesotho, Madagascar, Mauritius, Morocco, Namibia, South Africa, Tunisia and Zimbabwe. There are a number of reasons for the relatively weak industrial activity in Africa. Infrastructure bottlenecks, unreliable power supply and red tape continue to be major constraints in many countries. Africa´s manufacturing firms are also facing fierce import competition, notably from emerging countries such as China. Furthermore, in resource-rich countries, the competitiveness of non-mining sectors is weakened if commodity exports drive up the real exchange rate relative to that of their competitors (an effect known as Dutch-disease).

Resource-rich countries are trying to prevent excessive appreciation by intervening in foreign exchange markets and accumulating foreign reserves, a policy that has also been criticised. The accumulation of foreign exchange reserves - beyond levels needed to cover imports and to insure the country against speculative currency attacks and a slump in resource prices – cannot be an end in itself. But such „excess reserves“ may be the result of currency intervention to avoid excessive currency appreciation that could cause Dutch disease effects and harm non-resource exports. Rapid use of these reserves for financing social spending and consumption could lead to higher inflation and a real currency appreciation that the central bank intervention aimed at avoiding in the first place. However, the holding of high foreign reserves also entails costs as their real rate of return may be low. Excessive foreign reserves could instead be used to finance imports of capital goods and other spending, which helps to raise growth potential. Such use of foreign reserves would contain inflation and Dutch disease effects and  foster economic development. There are currently fiftteen Sovereign Wealth Funds (SWFs) in Africa, but these are generally small and and their main objective is to stabilize the economy. They could potentially play a bigger role for Africa´s development but this also requires that their fiscal transparency and corporate governance structure is further improved (Triki T. and I. Faye, 2011).

Several resource-rich countries are attempting to diversify their economies by stimulating non-mining sectors. Zambia, for example, is establishing economic zones, and Botswana is implementing an Economic Diversification Drive (EDD), which favours public procurement from local manufacturers and service providers.

In South Africa, manufacturing production was hit in 2009 by the global recession. Manufacturing production recovered in 2010, although it has not yet attained its pre-crisis level. South Africa´s industrial production continues to be hampered by structural constraints, such as infrastructure bottlenecks, a relatively weak growth of export markets in Europe and the strong rand exchange rate. Egypt’s manufacturing sector, which had also declined during the global recession, rebounded in 2010, driven by exports. Lesotho’s manufacturing sector, which textiles and clothing dominate, also declined in 2009 and recovered gradually in 2010. Since the peak in 2004, the textile and clothing sector has suffered significant job losses and continues to face fierce competition from Asian firms. In Namibia the main driver of growth in manufacturing is processing of fish and other food. This activity remained resilient during the global crisis and continued in 2010. In 2011 African manufacturing sectors are likely to further expand, driven by higher exports. However, structural impediments and foreign competition continue to constrain growth.

Box 1.2. Prospects for the international economy

The world economy has shown a remarkable recovery from the deep slump of 2009 (Figure 1.6). Expansionary policies in all major regions of the world helped this recovery. After declining by 0.5% in 2009, world output increased by 5% in 2010. The recovery of the global economy is likely to be sustained in 2011 and 2012, but at a more moderate pace. While higher food and fuel prices are likely to affect global consumption, the earthquake and tsunami in Japan will temporarily reduce global output. At the time of writing, the developments in Japan and their impact on the global economy are, however, still highly uncertain. With the assumption that the impact on the global economy will remain moderate, world output growth is expected to amount to around 4.5% in both 2011 and 2012. World trade (volume) is projected to increase by around 7% in 2011 and 2012, down from 12.4% in 2010.

European economies achieved average growth of 1.8% in 2010. In response to the sovereign debt crisis, which erupted in Greece (in the first months of 2010), in Ireland (in November) and in Portugal (in April 2011), international bailout packages were put together for these countries (EUR 110 billion, EUR 85 billion and EUR 80 billion respectively). Furthermore, a European Stability Mechanism (ESM) was launched as a permanent system to deal with debt crisis and to become effective after 2013.

In 2011, the ECB is expected to only moderately increase interest rates. As a first step it has lifted on the 7th of April ist main interest rate from 1% to 1.25%. European governments are withdrawing fiscal stimulus measures, cutting spending and – sometimes – raising taxes to reduce their historically high budget deficits.  This exit from expansionary policies all over Europe is likely to restrain short-term demand. It is expected that the 27 countries of the European Union growth will amount to around 2% in 2011 and 2012, after 1.8% in 2010 and ‑4.1% in 2009. Growth remains uneven across Europe. In several European countries, notably Greece, Ireland, Portugal and Spain, economic conditions will remain fragile.

The US economy also recovered in 2010, with growth of 2.8%, compensating the GDP decline in 2009 (‑2.6%). While output recovered, unemployment remained at a historically high level. Core consumer prices rose by less than 1%, keeping deflationary risks alive. The Federal Reserve responded by again buying government bonds and mortgage-backed securities (quantitative easing or QE 2). At the same time, the expansionary fiscal policy stance was extended. In 2011 the effects of the replenishment of stocks, which boosted demand in 2010, are subsiding. Additionally, capacity in real estate markets continues to depress the construction sector. High unemployment, households deleveraging debt levels and high oil prices weigh on consumer spending, but the strong performance of equity markets provides some support through wealth effects. The recovery of GDP from the deep 2009 recession continues to remain more subdued than the recoveries from earlier recessions with growth remaining close to 3% in both 2011 and 2012.

Japan´s economy also recovered from the deep recession with real GDP increasing by almost 4% in 2010, which was not enough to compensate for the decline of more than 6% in 2009. Growth was mainly driven by private consumption, which had been boosted by fiscal stimulus measures and by the revival of exports. Investment activity remained subdued. Japan was hit in March 2011 by a huge earthquake and tsunami, which caused many casualties, seriously damaged nuclear power plants and disrupted the whole economy. This event could also affect the economies of neighbouring countries and possibly the world economy. Prior to this catastrophe, growth in Japan was expected to amount to 1%-2% in 2011 and 2012. As production has been disrupted by the earthquake, GDP will probably decline in the first half of 2011 but later recover due to reconstruction activities, although the timing of this recovery and the overall effect on 2011 remains uncertain.

China´s economy weathered the global crisis very well, helped by large-scale fiscal expansion. In 2009 growth amounted to above 9% and accelerated in 2010 to above 10%. At the same time, inflationary pressures increased due to higher food prices, driven by supply bottlenecks both in China and abroad. Strong economic growth and high bank liquidity also fuelled inflationary pressures, notably in the real estate sector. The People´s Bank of China responded by raising reserve requirements and lifting interest rates. These measures and the more subdued external demand are expected to reduce growth to around 9.5% in both 2011 and 2012. In March 2011, China published its twelfth five-year plan (2011-2015), which aims at a more moderate growth of 7%. This plan also stresses a broader development objective, including environmental goals, more equal income distribution, and shifting the growth pattern from exports and investment growth more towards private consumption and from manufacturing more towards services. If successful, this strategy will have important implications not only for China, but also for its trading partners, including Africa.

India´s economy has also continued its impressive performance, with growth of above 10%% in 2010 (after 6.8% in 2009). Growth was mainly driven by domestic demand, notably private consumption and investment. Exports of services (mainly in software) also remained strong, while other exports contributed relatively little. As inflationary pressures were mounting, the Central Bank raised interest rates. The appreciating exchange rate has also helped to mitigate inflation. It is expected that growth will gradually slow down to around 8% in 2011 and 2012. But India is also facing bottlenecks that weigh on medium-term growth, such as in infrastructure (notably roads, electricity), shortage of skills and rigid labour markets.

Latin America´s economies recovered from their 2009 recession as countries benefited from the rebound of primary commodity prices. Brazil’s recovery was also driven by public consumption in the run-up to presidential elections. When inflationary pressures mounted, some countries responded by increasing interest rates. But this, together with generally favourable economic prospects, attracted capital imports, drove up exchange rates and reduced international competitiveness. Some countries responded by intervening in foreign exchange markets and restraining capital imports, for example by levying taxes, as in Brazil. Growth in Latin America is expected to weaken due to subdued import demand of industrial countries. In Brazil growth is expected to amount to 4.5% in 2011 and around 4% in 2012 after 7.5% in 2010 and ‑0.6% in 2009.

 

 

Figure 1.6: World economic growth

Source: African Development Bank, International Monetary Fund.

http://dx.doi.org/10.1787/888932403211statlink