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Economic planning for uncertain times – Donald Kaberuka

By Donald Kaberuka - President African Development Bank
Posted on Saturday, 4 February 2012 15:20

Business confidence in Europe’s leading economies is at its lowest level since 2000. The eurozone economy is forecast to grow by less than 1.6 per cent in 2011. The prospects for 2012 are even bleaker, with growth forecast at barely above 1 per cent. The Greek debt crisis is only partly resolved.

There is no question that stagnation in the US and Europe will affect us here in Africa. We estimate that a 1 per cent drop in GDP growth among the Organisation for Economic Cooperation and Development countries translates into something close to a 0.5 per cent decrease in Africa’s growth and a 10 per cent decrease in Africa’s export earnings.

Let’s not forget that Europe is Africa’s largest trading partner. For example, North Africa earns about 60 per cent of its export revenues from the European Union. Many African countries still dependent on aid will suffer a sharp drop in inflows. Those countries run average deficits before official development assistance of around 8 per cent of GDP. For some conflict-affected countries, the figure is much higher. Finding ways to plug this financing gap will become a critical policy priority.

So for these countries and others, two issues will be critical – greater aid effectiveness and much more robust revenue mobilisation. African countries have made considerable progress in building more efficient taxation systems, but they need to do more. Strengthening domestic capital markets while stimulating domestic savings through improved financial services remains a work in progress.

A new and more immediate concern is the scourge of double-digit inflation. Across East Africa, inflation has doubled or tripled over the past year. In Uganda, food prices have escalated by more than 50 per cent during the same period. In other countries, rising global energy and food prices have caused imported inflation.

This is a time of renewed instability in the global economy that could have a profound impact on Africa. It is important for Africa to identify policy measures to respond to this new landscape

We must remain vigilant to prevent a further weakening of macroeconomic management through unsustainable subsidies or other market-distorting mechanisms.

While, on the whole, I remain optimistic about Africa’s ability to withstand the current global turmoil and concerned at the impact of the current situation, today the buffers are weaker and social demands higher at a time when public finances are fragile. We can take heart, nonetheless, from encouraging growth forecasts of 5 per cent for 2011 and 5.8 per cent for 2012. Africa is the only developing region expected to perform stronger in 2012 than in 2011.

The development of trade linkages with Brazil, Russia, India and China (BRICs) is critical to Africa’s resilience. African exports to the BRICs in 2009 were worth $114bn – four times more than at the start of the decade. They account for 32.4 per cent of Africa’s total exports, up from 21.7 per cent in 2000. The BRICs also accounted for more than 10 per cent of FDI from 2005 to 2010 – a key source of infrastructure finance and technology transfer. Nonetheless, as the global crisis pummels industrial demand, it is logical to expect lower commodity demand as some BRICs grow more slowly than in recent years.

We also must deepen economic integration. Trade within Africa grew from $48bn in 2005 to $76bn in 2009, particularly in Southern and Eastern Africa, yet regional trade is just a fraction of the potential.

African countries have enjoyed a bonanza of revenue from natural resources. While this revenue will remain volatile, over the longer term there are two possible scenarios. The first is one where there is continuing Asian growth, which sustains strong demand – part of ‘the new normal’, as some have put it. The second scenario is one where commodity prices steadily ease as BRIC growth rates start to slow down.

Either way, this is a moment of opportunity for Africa. These are non-renewable resources that may last for no more than a generation. Managing these revenue flows wisely is an enormous responsibility for the politicians of today and tomorrow.

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