Regional Economy

Regional Economy Paper

GDP growth in Sub-Saharan Africa is projected to rise to about 6Ð... percent in 2007, driven mainly by rising oil production in a number of countries. Even in oil-importing countries, growth should remain steady at about 5 percent. Inflation for the region is projected to remain unchanged at about 7 percent; three-quarters of the countries are expected to record single-digit inflation. These are among the key findings of the April 2007 IMF Regional Economic Outlook for Sub-Saharan Africa.

For the third consecutive year, economic growth in Sub-Saharan Africa remained strong at 5.4 percent in 2006 slightly lower than the 6 percent recorded in 2005. Because of constraints faced in expanding oil production, growth in oil exporting countries declined to 5.6 percent in 2006 from 7.9 percent in 2005. By comparison, growth in oil-importing countries at 5.3 percent was almost unchanged from 2005: nearly half of them recorded growth of 5 percent or more, supported by strong demand for -commodity exports, a good agricultural season, and rising investment.

The higher growth trend in Sub-Saharan Africa is attributable both to positive external developments, such as foreign demand and high commodity prices, and strong domestic investment and productivity gains. Sound economic policies in most countries have also played an important role in supporting these outcomes. Still, much more needs to be done to achieve the Millennium Development Goals (MDGs). While increased aid flows is necessary for greater progress in meeting the MDGs, the scaling up of aid promised at the Gleneagles summit has not yet materialized.

There have been other positive developments. First, oil-producing countries in Sub-Saharan Africa have benefited from large windfall profits in recent years and, in contrast to previous

commodity price booms, they have saved a significant part of their additional revenue. The challenge for public policy and policymakers is to create the necessary space for higher and effective public spending.

Second, the recent commodity boom and rapid growth in Asia has improved Sub-Saharan Africa's export prospects, providing an opportunity to reverse the long-term decline in the region's share in world trade. Commercial exchanges with Asia, particularly China, have expanded dramatically, although European Union countries and the United States still account for 2Ð... times the export shares of Asia.

And finally, recent improved macroeconomic performance and debt relief have altered many countries' medium term debt outlook. As a result domestic debt markets have become more active and, in a number of countries, foreign portfolio investors have shown active interest.

Risks to Outlook and Key Challenges

Although the outlook is positive, near-term risks remain important. An unanticipated sharp decline in global demand would hurt growth in the region. Growth and inflation could also be adversely affected by further increases in oil prices and a larger-than-expected fall in non-fuel commodity prices. Many countries in the region remain vulnerable to droughts and other natural disasters; others struggle with the high prevalence rates of HIV/AIDS. And there are still political and security risks in a number of countries in the region.

The Regional Outlook also examines some of the challenges noted above and suggests some policy approaches. Faced with historically high prices and finite resources, oil producers must now deal with the complexities of managing their resources so as to improve living standards

and make decisive progress toward the MDGs. The Regional Outlook suggests that with higher resource levels and increasing spending pressures, strengthening governance becomes even more critical, particularly in public financial management (PFM) systems, to ensure that resources are used efficiently and transparently within a longer term framework consistent with fiscal sustainability. Unless properly managed, scaling up spending risks putting substantial upward pressure on prices and the real exchange rate. The risk can be mitigated by policies that ease absorptive capacity, such as liberalizing trade, reducing the costs of doing business, and making labor markets more flexible.

While there has been a diversification of export destinations, exports remain concentrated in oil and other commodities and exports of manufactures are confined to a few countries and product categories. The Regional Outlook notes that most countries have neither managed to achieve a labor-intensive manufacturing export surge nor to move up the value chain of their commodity-based exports. This is largely due to lack of infrastructure and the costs of doing business. Experience from other parts of the world shows that trade could be an important engine of growth. Tackling structural impediments to growth and trade in valued-added industries linked to agriculture and commodities is therefore important for Sub-Saharan Africa to realize its growth potential. (International, 2007)

The recent boom in developing country commerce between Africa and Asia epitomizes the explosion of South-South trade. These trade flows are driven by the burgeoning middle classes in Asia's emerging economic giants--China and India--whose appetite for Africa's commodities is growing, and by rising economic growth in sub-Saharan Africa (SSA), which is increasing the demand for Asian manufactured goods.

These trends are fostering trade that is qualitatively different from Africa's traditional North-South commerce with the European Union (EU) and the United States, in which trade flows have been stimulated largely by preferential arrangements. The strengthening South-South complementarities between the two developing regions suggest that the trade we are observing is likely to be sustainable.

As the global marketplace becomes increasingly integrated, much is at stake for the economic welfare of millions of people in SSA. This article explores the evolution of Africa-Asia trade, as well as its developmental, commercial, and policy implications.

Africa in the global context

Over the past decade, many SSA countries have made significant economic progress. During 1996-2005, 34 percent of the continent's population resided in countries where growth was 4.5 percent or higher--and these were non-oil-producing countries. That there is an emerging class of African economic "success stories," especially outside of the oil producers, is surprisingly little known.

Even so, SSA's trade record remains poor--in no small part because of the continent's