East Africa’s robust growth to continue into 2018 and 2019

The regional GDP growth rates have however not translated into improved living standards for the masses. Poverty, inequality, and unemployment remain high.

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Ms Nnena Nwabufo, deputy director general Eastern Regional Development and Business Delivery (RDGE) office unveils the East Africa Economic Outlook 2018 report at AfDB offices, Nairobi.

BY DAVID WANJALA

A combination of factors including strong domestic private consumption, public investment in infrastructure, growth in light manufacturing, and agriculture are tipped to propel East Africa’s GDP growth, as per the Eastern Africa Economic Outlook 2018 by the African Development Bank (AFDB).

According to the report launched last month in Nairobi, average real GDP for the region in 2017 grew at an estimated 5.9%, but with considered country variations with Ethiopia leading the pack growing at above 8%. However, countries embroiled in civil conflict and insecurity, especially Burundi and South Sudan grew much more slowly.

Speaking during the launch at the AFDB Nairobi offices, Ms Nnena Nwabufo, deputy director general Eastern Regional Development and Business Delivery (RDGE) office said that in spite of Eastern Africa’s challenges, the region’s prospects are bright.

“The Report forecasts favorable near to medium term prospects on account of the following opportunities among others; strong political commitment and existence of regional champions of integration; a vibrant and growing private sector that is supportive of enhanced regional integration; recent discovery of hydro carbon resources in the region, which has the potential to generate billion of dollars for funding infrastructure and social economic development and opportunities for value addition in upstream and downstream activities and a high potential and drive for technological innovative solutions like financial technology,” she said.

Things are looking up for the region over the near term with 2018 and 2019 expected to post growth rates of 5.9% and 6.1% respectively. Ethiopia, the reports says, will steer other six countries to lead in the region’s growth in the coming two years with 10.9% growth rate. The other countries include Djibouti with 6.8%, Tanzania, 6.5%, Rwanda, 6.2%, Kenya, 5% and Uganda, 4.8.

The region’s positive outlook is based on various opportunities including continued public investment in industrial and support infrastructure, continued foreign direct investment inflows in infrastructure and manufacturing, sustained rebound of agriculture from 2017 drought and continuing strong domestic demand from a growing middle-class and rapid urbanization.

The other opportunities giving the East African (EA) region the positive outlook include enhanced regional integration through East African Community (EAC) and Common Market for Eastern and Southern Africa (COMESA), endowment of commercially viable natural resources including oil, natural gas, geothermal and solar, continued improvements in global demand as evidenced by commodity prices recovery, ICT development as evidenced by fin-tech revolution in Kenya and the region’s underexploited potential in agribusiness, light manufacturing and tourism.

There are however, some down-side risks to the projected E.A strong economic performance and the report by AFDB singles mainly the fragile and insecure situation saying the region is home to seven conflict and post-conflict states with serious regional spill-over effects. The other risks include political uncertainty and insecurity in some leading countries, investment and economic policy uncertainty especially regarding extractive sector, adverse environmental shocks and rising risk debt distress due to increased commercial borrowing of dollar debt.

The report also highlighted the problem of persistent macroeconomic imbalances, though in varying degrees across countries, as affecting the macroeconomic stability of the region fingering high government consumption and capital, especially infrastructure expenditure and relatively weak revenue collection as the major causes.

Still on macroeconomics, the report highlights persistent current account deficits, which it says are driven by high consumption and investment spending, depressed export commodity pricing and adverse terms of trade changes. Countries, the report decries, have financed current account deficits from commercial borrowing, remittances, aid and foreign direct investments.

The thorny issue of rising debt and the consequences of the same were also delved into with the outlook reporting increased country external debt ratios of 21.2% – 39.6% of GDP in 2016. This, the report says, has led to rise in debt distress risks for a number of countries resulting in downgrading of credit ratings of some countries. Speaking at the launch that was held at AFDB’s Nairobi headquarters, the deputy director however said borrowing is not bad if what is borrowed is wisely invested and government is supported in its development agenda by the private sector

“It is good if government borrows to invest in infrastructure, in areas that drive economic growth. However, we’ve reached a point where the government cannot do this alone. We need to find a way to bring in the private sector. If we say that the cost of the debt is rising and the government cannot borrow where do we get the money to take Africa to the next level?” she posed.

The African pension funds for instance, Ms Nwabufo said, are sitting on billions of dollars which are most of the times being invested outside Africa that if Africa had bankable projects, they can through the private equity funds place the money into the projects. The government, she said, should set up public private partnership platforms where this money can be invested.

Agreeing with the sentiments of the Ms Nwafubo, Dr Abraham Mwenda, RDGE lead economist said that Africa cannot grow without borrowing but stressed the need for public private sector partnership and improved revenue collection

“There is the dire need to address infrastructure, transport, energy ICT, water and sanitation. Therefore African countries need to put forward strategies to diversify sources of finance and this calls for innovation and strong public private sector partnerships,” he said

The regional GDP growth rates have however not translated into improved living standards for the masses of E.A. The report says poverty, inequality, and unemployment remain high.

“Poverty remains high as population living at $1.90 a day PPP ranges between 17.7% and 60.4% with the exception of Seychelles (1.1%). The structural transformation has been low as industry contributes about 18% to GDP compared to 54.5% and 27.5% for services and agriculture” the report says.

The report however recommends various policies for which the region, depending on country context must adopt to promote the macroeconomic stability. These include strengthening formulation and implementation of sound fiscal, monetary, foreign exchange and financial policies, improving national planning, budgeting, net foreign reserves and debt management to reduce risk of debt distress, improving domestic resource management through rigorous collection of taxes and well targeted subsidies and strengthening public institutional and human capacity to formulate sound policies, knowledge, advisory services and technical assistance and deliver quality social services.

The report recommends for the region to address binding hard economic infrastructure constraints including industrial infrastructure like special economic zones, industrial parks and soft infrastructure, accelerate diversification of and attract more private funds for infrastructure projects, improve risk management and improve access to finance for underserved sectors, address skills gaps via TVET programs and capitalize on growing domestic and regional markets and global value-chains.

The report decried manufacturing as continuing to contribute limited role in economic transformation of the region with its value add averaging only 7.5% of the GDP for seven countries studied.

The region can however unlock diversification of its manufacturing sector through implementing certain policies and interventions according to the report. These include stable exchange rates, removing barriers to business investment and trade and high quality but affordable energy and ICT and improving access to financial services for example risky financial capital for growth –venture funds among others.

The study looked at seven countries in the East African region including Burundi, Ethiopia, Kenya, Rwanda, Seychelles, Tanzania, and Uganda.