This year’s African Economic Outlook 2019 from the African Development Bank (AfDB) says Ethiopia will generate USD one billion by 2020 from energy exports. It also states that normalization with Eritrea should bring prosperity to the region.
The outlook shows that the continent’s general economic performance continues to improve. The Gross Domestic Product reached an estimated 3.5 percent in 2018, about the same as in 2017 and up from 2.1 percent in 2016. Africa’s GDP growth is projected to accelerate to 4.0 percent in 2019 and 4.1 percent in 2020.
The AfDB outlook says even that growth is not fast enough to address persistent fiscal and current account deficits and unsustainable debt, while it also describes several risks in the macroeconomic forecast including the US tension with its trading partners.
“A further escalation of trade tensions between the United States and its main trading partners would reduce world economic growth, with repercussions for Africa,” the annual outlook stated.
“These tensions, together with the strengthening of the US dollar, have increased the volatility of some commodity prices and pressured the currencies of emerging countries. If global demand slows, commodity prices could drop, reducing GDP growth and adversely affecting trade and fiscal balances for Africa’s commodity exporters,” it added.
As the trade tensions between the United States and its major trading partners escalate, the World Trade Organization estimates that growth in global trade volume could decline from 4.4 percent to 3.9 percent in 2018 and to 3.7 percent in 2019.
African countries’ size, openness to, and trade intensity with the United States and China are significant. More than 60 percent of Africa’s exports go to the United States, China, and Europe, and more than 70 percent of Africa’s imports originate from these countries.
It stated that a decline in demand for Africa’s exports due to a slowdown in the global economy prompted by tariffs is an important channel that could affect Africa. “But despite the modest negative effects, Africa could – with the right policy responses – turn the increasing trade tensions into an opportunity to improve competitiveness and deepen intraregional integration,” it argued. “One way is to take advantage of the dislocation and trade diversion caused by the tensions to become the new supplier of goods previously supplied, for example, by China to the United States. Capturing even a small portion of the dislocation from increasing trade protectionism could benefit Africa,” it added.
The other risk stated in the outlook is costs of external financing that could further increase if interest rates in advanced countries rise faster than assumed, while extreme weather conditions due to climate change is another economic challenge for the continent.
“Political instability and security problems in some areas could weaken economies,” the report added further risk for the poorest continent in the world.
The report also states that debt levels are rising, but there is no systemic risk of debt crisis in 2017, Africa’s gross government debt–to-GDP ratio reached 53 percent, with considerable heterogeneity across countries.
Inflationary pressures have eased, Africa’s average inflation fell from 12.6 percent in 2017 to 10.9 percent in 2018 and is projected to further decline to 8.1 percent in 2020.
The 2019 Outlook shows that macroeconomic and employment outcomes are better when industry leads growth.
New research for this Outlook shows that five trade policy actions could bring Africa’s total gains to 4.5 percent of its GDP, or USD 134 billion a year. First is eliminating all of today’s applied bilateral tariffs in Africa. Second is keeping rules of origin simple, flexible, and transparent. Removing all nontariff barriers on goods and services trade on a most-favored-nation basis, and implementing the World Trade Organization’s Trade Facilitation Agreement to reduce the time it takes to cross borders and the transaction costs tied to nontariff measures stated as third and fourth points. Fifth is negotiating with other developing countries to reduce by half their tariffs and nontariff barriers on a most-favored-nation basis.
The 2019 Outlook also looks at the gains possible from regional public goods, such as synchronizing financial governance frameworks, pooling power, opening skies to competition, and opening borders to free movements of people, goods, and services.
The AfDB Outlook indicated that in 2019, 40 percent of African countries are projected to see growth of at least 5 percent. The challenge is to achieve a higher growth path that is inclusive and pro-employment.
The average current account deficit is projected to decline from 5.4 percent in 2016 to 3 percent in 2020, and the average fiscal deficit is projected to decline from 7 percent to 3.7 percent.
It stated that North Africa leads the growth recovery, but East Africa remains the most dynamic region of Africa’s projected 4 percent growth in 2019, North Africa is expected to account for 1.6 percentage points, or 40 percent.
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.
Regarding Ethiopia, the outlook stated that investment investments in renewable energy will generate up to USD 1 billion in exports by 2020. “Political reforms and normalized relations with neighboring Eritrea should boost prosperity and stabilize the region,” it added.
Political reforms implemented in the last few months led to stabilization of the Ethiopian economy and restored overall calm in the country. “The reforms focused mainly on institutionalizing democracy and rule of law and expanding the political space. But these achievements are not without risks. There are disruptions of economic activities in some parts of the country, displacements of people in large numbers, and skirmishes that could affect overall economic performance in the short to the medium term,” it added.
“Private sector development faces limited financial access, foreign currency shortages, and a costly and weak business regulatory environment. Frequent droughts driven by climate change have major fiscal and humanitarian consequences,” it says.
A public debt–to-GDP ratio of 61.8 percent at the end of June 2018 in Ethiopia, which is primarily is browed from China, remains at high risk of debt distress, according to a 2018 debt sustainability analysis.