The annual African Economic Outlook report highlights economic prospects and projections for the continent as a whole and for each of the 54 countries.
The report examines recent macroeconomic developments and the outlook in Africa, focusing on the implications of external imbalances for growth and the financial and monetary challenges of integration. It next discusses employment creation through the analysis of firm dynamism. It then explores the economics of regional integration in Africa and the policies that can make it deliver economic prosperity.
AfDB experts say that regional integration is now more pertinent than ever in continuing the continent’s economic growth.
Africa’s economic growth continues to strengthen, reaching an estimated 3.5 percent in 2018, about the same as in 2017 and up 1.4 percentage points from the 2.1 percent in 2016. East Africa led with GDP growth estimated at 5.7 percent in 2018, followed by North Africa at 4.9 percent, West Africa at 3.3 percent, Central Africa at 2.2 percent, and Southern Africa at 1.2 percent.
In the medium term, growth is projected to accelerate to 4 percent in 2019 and 4.1 percent in 2020. And though lower than China’s and India’s growth, Africa’s is projected to be higher than that of other emerging and developing countries. But it is insufficient to make a dent in unemployment and poverty.
Of Africa’s projected 4 percent growth in 2019, North Africa is expected to account for 1.6 percentage points, or 40 percent. But average GDP growth in North Africa is erratic because of Libya’s rapidly changing economic circumstances.
East Africa, the fastest growing region, is projected to achieve growth of 5.9 percent in 2019 and 6.1 percent in 2020. Between 2010 and 2018, growth averaged almost 6 percent, with Djibouti, Ethiopia, Rwanda, and Tanzania recording above-average rates. But in several countries, notably Burundi and Comoros, growth remains weak due to political uncertainty.
Growth in Central Africa is gradually recovering but remains below the average for Africa as a whole. It is supported by recovering commodity prices and higher agricultural output.
Growth in Southern Africa is expected to remain moderate in 2019 and 2020 after a modest recovery in 2017 and 2018. Southern Africa’s subdued growth is due mainly to South Africa’s weak development, which affects neighboring countries.
Macroeconomic Performance and Prospects
1. Africa’s economic growth continues to strengthen, reaching an estimated 3.5 percent in 2018. This is about the same rate achieved in 2017 and up 1.4 percentage points from the 2.1 percent in 2016. In the medium term, growth is projected to accelerate to 4 percent in 2019 and 4.1 percent in 2020. And though lower than China’s and India’s growth, Africa’s growth is projected to be higher than that of other emerging and developing countries.
2. Improved economic growth across Africa has been broad, with variation across economies and regions. Non-resource-rich countries—supported by higher agricultural production, increasing consumer demand, and rising public investment—are growing fastest (Senegal, 7 percent; Rwanda, 7.2 percent; Côte d’Ivoire, 7.4 percent). Major commodity-exporting countries saw a mild uptick or a decline (Angola, –0.7 percent), while Nigeria and South Africa, the two largest countries, are pulling down Africa’s average growth.
3. The positive growth outlook is clouded by downside risks. Externally, risks from uncertainty in escalating global trade tensions, normalization of interest rates in advanced economies, and uncertainty in global commodity prices could dampen growth. Domestically, risks from increasing vulnerability to debt distress in some countries, security and migration concerns, and uncertainties associated with elections and political transition could weigh on growth.
4. Growth remains insufficient to address the structural challenges of persistent current and fiscal deficits and debt vulnerability. One way to accelerate growth in the medium to long term and overcome the structural challenges is to shift imports to intermediate and capital goods and away from nondurable consumption goods. For African countries, a 10 percentage point increase in the share of capital goods in total imports could, five years later, reduce the share of primary goods by 4 percentage points, amplifying the effectiveness of diversification rooted in transferring technology and accumulating capital.
5. Vigorous public finance policy interventions are needed in tax mobilization, tax reform, and expenditure consolidation to ensure debt sustainability. Policymakers need to adopt countercyclical policy measures to stabilize inflation and reduce growth volatility. Macroprudential policies should be used to reduce vulnerability to capital flow reversal and shift inflows toward more-productive sectors. For a sample of African countries, a 1 percent increase in public savings (by reducing the budget deficit) is correlated with a 0.7 percent improvement in the current account balance.
6. For countries in a monetary union, well-functioning, cross-country fiscal institutions and rules are needed to help members respond to asymmetric shocks. Debt and deficit policies should be consistent across the union and carefully monitored by a credible central authority. And the financial and banking sector should be under careful supervision by a unionwide independent institution.
Jobs, Growth, and Firm Dynamism
1. Africa’s labor force is projected to be nearly 40 percent larger by 2030. If current trends continue, only half of new labor force entrants will find employment, and most of the jobs will be in the informal sector. This implies that close to 100 million young people could be without jobs.
2. The rapid growth achieved in Africa in the past two decades has not been proemployment. Analysis of growth episodes reveals better employment outcomes when the growth episodes were led by manufacturing, suggesting that industrialization is a robust pathway to rapid job creation.
3. African economies have prematurely deindustrialized as the reallocation of labor has tilted toward services, limiting the growth potential of the manufacturing sector. To dodge the informality trap and chronic unemployment, Africa needs to industrialize.
4. Key factors impeding industrialization, particularly manufacturing growth, are limited firm dynamism. Firm growth and survival are held back by corruption, an unconducive regulatory environment, and inadequate infrastructure.
5. Estimates from Enterprise Surveys show that 1.3–3 million jobs are lost every year due to administrative hurdles, corruption, inadequate infrastructure, poor tax administration, and other red tape. This figure is close to 20 percent of the new entrants to the labor force every year.
6. Small and medium firms have had very little chance of growing into large firms. Such stunting, coupled with low firm survival rates, has stifled manufacturing activity in most African countries.
7. Reviving Africa’s industrialization requires a commitment to improve the climate that supports firm growth. Industrial policies could benefit from assessing production knowledge and identifying competitive products to inform the design of robust national and subnational industrial strategies.
Integration for Africa’s Economic Prosperity
1. The Continental Free Trade Agreement (CFTA) can offer substantial gains for all African countries as new and timely analytics show.
2. Night light data suggest that barriers to trade from border impediments have fallen over the past 20 years.
3.Eliminating today’s applied bilateral tariffs would increase intra-Africa trade by up to 15 percent, but only if rules of origin are simple and transparent.
4. To move to systemwide rules of origin and avoid product-specific rules of origin, regional economic community (REC) member countries should move to a single value added rule— say, 40 percent of value added from within the REC—with a more lenient threshold for less developed countries. They should also exempt shipment sizes below $1,000.
Removing nontariff barriers with countries outside Africa could increase trade and boost the continent’s tariff revenues by up to $15 billion.
5. The World Trade Organization’s Trade Facilitation Agreement (TFA) is expected to reduce trading costs by 14–18 percent and increase world trade by 0.5 percent, with developing and especially least developed countries benefiting the most. It is also likely to reduce the time needed to import goods by a day and a half and the time needed to export goods by almost two days.
6. Implementing the TFA would increase the gains to about 4.5 percent of Africa’s GDP, or an additional $31 billion, bringing the total real income gains to $134 billion. (A 0.2 percent tariff on imports from high-income countries could bring in $850 million to finance trade facilitation projects.)
7. Bold reforms, especially at the institutional level, can synchronize financial governance frameworks across Africa and remove any remaining legal restrictions to cross-border financial flows and transactions. To harmonize payment systems, RECs should pursue stronger technological advances that facilitate movement of funds across borders.
8. Electricity markets in Africa have developed vertically within national boundaries rather than horizontally across countries. Trade in electricity would bring many benefits, especially to small countries, if the hard infrastructure is at scale and functioning—and if soft infrastructure (logistics) is trustworthy.
9. Africa’s infrastructure financing needs are estimated to be $130–$170 billion a year. But total commitments came to just $63 billion in 2016, representing a financing gap of approximately $67–$107 billion a year. To close Africa’s infrastructure deficit, RECs could consider regional infrastructure bonds, while countries could further mobilize domestic resources and provide incentives for the private sector to join public–private partnership operations for regional public infrastructure.