Economic growth in Sub- Saharan Africa remains low
Economic growth in Sub- Saharan Africa remains low

Economic growth in Sub- Saharan Africa remains low: But the slowdown may be bottoming out

Economic growth slowed to 3.6 per cent in 2022, from 4.1 per cent in 2021, an upward revision of 0.3 percentage point from the October 2022 Africa’s Pulse forecast. 

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This upgrade reflects a more positive performance of the global economy in the last quarter of 2022, which included the resilience of the US economy, thanks to recent policy measures and declining inflation; lower than expected gas prices in Europe; and the expectation of a rapid growth recovery in China as the country unwinds its zero-COVID policy.

Notwithstanding recent improvements, economic activity in the region is projected to further slowdown to 3.1 per cent in 2023, a 0.4 percentage point downward revision compared to the October 2022 Africa’s Pulse forecast. 

The persistent sluggishness of the global economy, declining yet high inflation rates, and challenging global and domestic financial conditions amid high levels of debt explain the downgrade. 

Growth is estimated to pick up to 3.7 and 3.9 per cent in 2024 and 2025, respectively—thus signaling that the slowdown in growth should be bottoming out this year. 

A rebound of global growth later this year, easing of austerity measures, and more accommodative monetary policy amid falling inflation are the main factors contributing to the increased growth along the forecast horizon.

Growth conditions, however, remain insufficient to reduce extreme poverty and boost shared prosperity in the medium to long term. The estimated per capita income growth in Sub- Saharan Africa of 1.0 and 0.6 per cent in 2022 and 2023, respectively, is inadequate to have a significant impact on the twin goals. 

The low growth elasticity of poverty and the global pandemic further contributed to the slow pace of poverty reduction in the region. Sub- Saharan Africa’s poverty headcount ratio is projected at 34 per cent in 2023, compared to the COVID-19 peak of 35.3 per cent in 2020. 

Investment growth 

Sub-Saharan Africa faces a myriad of challenges to regain its growth momentum. One of these challenges is to overcome the protracted slowdown of growth of investment in the region.

Investment growth in Sub-Saharan Africa fell from 6.8 per cent in 2010–13 to 1.6 per cent in 2021, with a sharper slowdown in AFE than AFW.

Amid the economic fallout of the pandemic and the war in Ukraine, investment growth is expected to remain modest and below the average growth rate of investment over the past two decades, not only in Sub-Saharan Africa, but also in other emerging markets and less developed economies.

The sharp deceleration of investment growth has been broad-based across the sub regions, resource abundant and resource scarce countries, and types of investors (public, private, and foreign). 

Oil abundant countries in the region have experienced the largest and more persistent downswing in investment, as opposed to non-resource abundant countries, which exhibit a more subdued decline in investment. Rates of public, private and foreign investment growth have remained below their long-term averages for most years in the past decade. 

While domestic private investment showed a modest decline over time, foreign direct investment experienced a contraction during 2016–21.

By contrast, remittances remained resilient to the various shocks over the past decade—including the pandemic

Slower investment growth in Sub-Saharan Africa is holding back long-term growth of output and per capita income, as well as progress toward achievement of the Sustainable Development Goals. 

Inflation

Inflation appears to have peaked but remains persistently high and above target and will continue to weigh on economic activity.

Consumer price inflation in Sub-Saharan Africa accelerated sharply and hit a 14-year record high in 2022 (9.2 per cent), fueled by rising food and energy prices as well as weaker currencies.

Domestic food prices have remained high despite the gradual decline in world food prices. Weaker currencies and higher input costs (transport fuels and fertilizers) explain the stickiness of food prices. 

Climate shocks, especially in the Horn of Africa, add inflationary pressures from the supply side. The number of countries with two-digit average annual rates of inflation increased from 9 in 2021 to 21 in 2022. 

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A slowdown in aggregate demand, declining commodity prices, and the effects of the monetary policy tightening across the continent will lower inflation in the region to 7.5 per cent in 2023, and further to 5.0 per cent in 2024. 

Additionally, the number of countries with two-digit inflation is expected to drop to 12 in 2023.

Although headline inflation appears to have peaked in the past year, inflation is set to remain high and above central bank target bands for all countries with an explicit nominal anchor in 2023.

Unfavorable global financial conditions 

The fiscal deficit in the region widened to 5.2 per cent in 2022. Persistent fiscal deficits compounded by sluggish growth resulted in an increase in the (median) public debt-to-GDP ratio to 57 per cent in 2022. 

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The war in Ukraine halted the fiscal consolidation process of many countries in the region that started in the aftermath of the pandemic.

A significant drop in official development assistance and restricted access to external borrowing also contribute to the worsening of fiscal outcomes. 

In response to increased food and fuel prices, policy makers resorted to measures that limit or reduce the pass-through on inflation, such as subsidies, temporary waivers of tariffs and levies, and income support mechanisms for the most vulnerable. 

This sets back fiscal consolidation as budget deficits in the region remain high and create additional pressure on the budget, especially for governments with almost depleted fiscal space. 

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Consolidation efforts to bring down debt are projected to resume this year and lower the fiscal deficit to 4.3 per cent in 2023 and further to 3 per cent in 2024–25.

Public debt in Sub-Saharan Africa has more than tripled since 2010, with a sharp increase prior to the onset of the COVID-19 crisis. 

The surge in public debt has been accompanied by a shift in its composition toward domestic debt—particularly, to meet pandemic-related financing needs. 

Domestic debt accounted for nearly half of outstanding public debt by the end of 2021.

As non-concessional debt increased and nontraditional creditors held a larger share of outstanding debt in the region, public debt service increased significantly over the past decade. 

The ratios of total public debt service to exports and revenue reached 28 and 41 percent, respectively. Debt distress risks remain high: the number of countries in the region at high risk of external debt distress or in debt distress was 22 as of December 2022. 

Deepening structural reforms to foster inclusive growth

Structural reforms should bolster private investment and improve the long-term competitiveness of African businesses. 

Market reforms that curtail structural and regulatory barriers to private sector participation in goods and services markets are essential. 

Trade and foreign investment policies are critical to improve participation in international markets and enhance access to intermediate inputs. 

These reforms can be complemented by strengthening institutions that enforce competition laws—including independent competition agencies and sound procurement systems. 

For public investment, boosting efficiency is critical amid scarcer resources to finance its expansion. 

Strengthening the credibility of multi-year budgeting and improving the governance of investment projects (including their appraisal and selection).

Attracting foreign investment and getting the most from it is an integral part of the region’s growth strategy. 

Advances in the region’s three I’s—infrastructure, institutions, and incentives—are critical to stimulate the entry of foreign capital.

Expanding and upgrading the transportation system (including roads, airports, and ports), enhancing access to a reliable and affordable supply of electricity, and increasing the efficient use of existing infrastructure are key to boost economic integration in the region. 

Improving institutions includes strengthening investment and export promotion agencies and modernizing customs and border control procedures.

Maintaining competitive real exchange rates; implementing regulatory frameworks that foster transparency, competition, and innovation; and designing trade policies that reduce anti- export bias can provide the right incentives to foreign investors.

Leveraging resource wealth during the low carbon transition

Harnessing the potential of natural resources provides an opportunity to improve the fiscal and debt sustainability of African countries.

This hinges on getting policies right and learning the lessons from past boom-bust cycles. 

Avoiding the “resource” curse, in which countries can find themselves in debt distress or facing low growth even before the production of resources begins, means tempering the pressure to borrow and spend ahead of revenues.

Discoveries have been found to unleash powerful forces that can shape policy but leave countries exposed if they are not prepared for declining prices. 

Maximising the government revenues captured from oil, gas, and mining offers the potential for a double dividend for people and the planet, by increasing fiscal space and removing implicit production subsidies. 

Natural resources (oil, gas, and minerals) offer a huge economic opportunity for African economies during the low carbon transition.

Global decarbonisation creates significant uncertainty, but it also opens up new ways to leverage countries’ resource wealth to spur economic transformation. 

On the one hand, the global low carbon transition will eventually lead to significant declines in demand for Africa’s oil, gas and coal resources.

The timing and scale remain uncertain, however. Such a major shift away from oil and gas may take years or even decades. 

On the other hand, there may be a marked increase in the demand for the minerals required for the clean energy transition, such as lithium, cobalt, copper, platinum, and manganese, many of which are abundant across Africa and used for batteries, electric vehicles, and other technologies. 

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