Diversification key to safeguarding African economies

Diversification key to safeguarding African economies

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Seven years after the global financial crisis, African prospects have improved
Seven years after the global financial crisis, African prospects have improved
Seven years after the global financial crisis, African prospects have improved

African countries are starting to diversify sources of growth away from commodities. Although times are challenging, the regional outlook remains bright with growth above the world average, says a new report by world leading professional organisation, ICAEW.

The report shows that, seven years after the global financial crisis, African prospects have improved but the story is a mixed one. Underlying figures point to a relatively strong year globally – with the major economic boost from lower oil and commodity prices. These are acting as a shot in the arm for global consumers by lowering household living costs, as well as giving central banks room to keep interest rates low without worrying about inflation.

However, this is also creating challenges for some African countries, especially commodity-exporting ones. Danae Kyriakopoulou, ICAEW economic adviser said, ‘These price falls are creating both winners and losers as the economic balance of power shifts from commodity exporters to importers. For some individual oil and commodity-exporting economies, including a number of African countries, the fall in prices is reducing profits and associated tax revenues. It is also reducing spending power as the same volume of exports can now buy fewer imports. This risks making economies less attractive to investors as those sectors become less profitable.’

With the BRICS (Brazil, Russia, India and China) as a whole buying 44 percent of Africa’s exports, the report highlights that an economic slowdown in those five major emerging economies poses the most significant external downside risk to Africa’s economic outlook. Slowing growth in the BRICS has pushed oil prices on a downward path for the biggest part of this year, creating challenges for Africa’s oil-exporting economies.

However, oil prices are likely to pick up in the future. Danae said, ‘There is good news for commodity exporters. The oversupply that was pushing prices down will slowly start becoming eroded once high-cost producers are forced out of the market. On the demand side, cheap oil today reduces incentives for oil consumers to switch to alternative energy sources. These two factors suggest oil prices should start rising as the global economic recovery strengthens, boosting growth and spending power in oil-exporting economies. It is important to bear in mind, though, that this is only a buffer and does not signal the end of the need for economic diversification.’

The story is similar for other commodities. IMF figures suggest that, between 2013 and 2015, metals prices will

African economies need to diversify their exports away from commodities
African economies need to diversify their exports away from commodities

have fallen by a quarter and food and beverage prices will have fallen by almost a fifth. Agricultural raw materials, such as timber, cotton and wool, are also expected to see their prices decline but by a lesser extent.

The success story for Africa is in broadening and diversifying economies away from commodity exports. Despite a 20.3 percent decline in commodity prices expected for 2015, growth is forecast to decelerate only slightly to 3.6 percent from 2014’s 4 percent. Looking ahead, there is even a suggestion the trend will go into reverse, with sub-Saharan Africa’s economic performance strengthening in the years up to 2020, despite softening commodity price inflation.

Michael Armstrong, ICAEW regional director for the Middle East, Africa and South Asia said, ‘This report shows African economies need to diversify their exports away from commodities. While this will create short-term challenges, it will also mean new opportunities for Africa’s economies. We are already seeing the link between commodity prices and economic performance in Africa weakening. Manufacturing and services are growing in importance in place of more traditional sectors like agriculture and extractive industries. Tourism is also growing particularly fast.’

Armstrong added, ‘These new avenues for Africa to create a number of opportunities. However, this will means a real need for workers to be professionally qualified with the requisite knowledge, skills and experience.’

 

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