How Africa can win from the omnicrisis

Patrick Smith
By Patrick Smith
Editor-in-Chief of The Africa Report.

Posted on Monday, 13 June 2022 17:04, updated on Tuesday, 14 June 2022 04:17

Adria Fruitos for The Africa Report.

Beyond planning national economic recoveries as they exited the pandemic, policymakers were also focusing on ways to maximise the value of the African Continental Free Trade Area to diversify regional economies and break free of the dependence on unprocessed commodity exports.

Enthusiasts for the AfCFTA, such as the chief economist of Afreximbank, Hippolyte Fofack, argue that the free-trade area would boost foreign investment in the region by a quarter and propel many economies to move from their roots in natural-resource exploitation towards labour-intensive manufacturing.

That has been interrupted by the collateral damage from Russia’s war on Ukraine. There is a blockade on Ukraine’s grain and seed exports, but there are also the three-way costs of the West’s sanctions on Russia: they hit President Vladimir Putin’s government and his business allies, but implementing them also cost the United States and European powers.

Biblical realities

Less prominent in the West’s considerations seem to be the effects on other economies, such as those in Africa and Asia, where food and fuel prices are also soaring.

As this biblical combination of pestilence, war, and famine plays out, climate change is bringing droughts and floods to ever wider areas of the global South. It is also melting the polar ice caps of Greenland and Antarctica, raising sea levels to threaten many small island states’ cities.

Some remediation on climate change is beginning to happen, although far too slowly, according to Carlos Lopes, who is on a UN expert group to push businesses, investors and city authorities to step up their ambitions to reduce carbon emissions and hit the target of limiting global warming to 1.5°C compared to pre-industrial levels.

Radical changes are coming in the structure of the US and Chinese economies and their investment patterns, says Lopes, as these countries transition away from fossil fuels. The question is, on what timescale, he adds, and what damage is wrought due to climate change in the meantime?

Climate change realities

UN Secretary-General António Guterres has been trying to convey the urgency of a crisis that too many people have consigned to the middle distance. The UN’s member states now confront the reality that its scientists have been forecasting for decades: that climate change is contributing to – and sometimes driving – instability, war and mass starvation.

Our societies, even the richest and most technically sophisticated are doing a poor job at protecting people from the effects of climate change, let alone taking serious action to forestall it. Guterres has given the starkest of warnings: the spectre of a global food shortage that could last for years.

Wheat prices are up by around 60% since the beginning of the year. The World Bank says that 10 million people are pushed into poverty for each percentage-point increase in food prices. Food accounts for almost half of monthly spending in households in many developing economies.

The spiralling cost of staples such as wheat, barley and maize means that as many as 1.6 billion people could go hungry this year, up from 440 million last year. Nearly 250 million are on the brink of starvation.

East Africa is being ravaged by the worst drought in 40 years. Cereal production across northern Kenya and southern Somalia halved this year. Cattle, goats and camel herds have been decimated.

Those snapshots fit in with the wider contours of the international economic crisis and its consequences. We now have more than 100 million people – the highest on record according to the UN High Commission for Refugees – fleeing across borders from violent conflict. And we have several hundred million people fleeing from weakening economies.

The slowdown in emerging markets predated Russia’s war. Starting with the US Federal Reserve and the Bank of England, Western central banks are raising interest rates to try to choke off inflation in the wake of the pandemic. That will also raise the cost of borrowing for African economies and put pressure on their national currencies. With public debt averaging around 70% of GDP across Africa’s economies, against a backdrop of slow growth, the cost of debt servicing could trigger a financial crisis, if not contagion, in the region.

Economists such as Lopes and Fofack argue that the response of the G20 to the deepening debt crisis facing developing economies falls far short of requirements. Some campaigners are demanding a widespread restructuring of the official and the commercial debt – something like a more liberal version of the IMF/World Bank’s Heavily Indebted Poor Country Initiative. But many African governments are wary of such a plan due to the damage it would do to their credit ratings and access to finance.

There is repositioning and restructuring of Western economies in the aftermath of the pandemic – and the shortcomings that it exposed in their production and distribution systems. Initially, that restructuring has hit Africa, as Western companies drew in their horns and their banks restricted credit lines. Many of their partners, African-based companies and banks cut their operations or closed them down completely.

A golden opportunity?

The economic demon that the Western central banks are trying to kill is sluggish growth and galloping prices. But their strategy of raising interest rates is damaging emerging markets. In the short term, that is bad news for those African economies whose growth is linked to China’s demand for their commodities.

But, in the medium term, there could be new opportunities for African companies, according to Beijing-based Justin Lin, a former director of the World Bank. Based on demography, natural resources and the free-trade area, Lin suggests that there could be a wave of manufacturing investment in Africa, so long as power and transport logistics problems are addressed.

Lopes concurs that Africa could navigate a way into the new global supply chains – and suggests that policymakers should keep an eye on those Western companies seeking to relocate about 20% of their manufacturing operations outside of China. With its proximity to European and US markets, Africa could present itself as a very viable alternative, says Lopes. It would also be a critical step on the road to the thoroughgoing economic restructuring that he advocates.

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