There are growing signs of a sharp slowdown in growth across most of Africa. From the oil wells of Nigeria to the copper belt of Zambia the slump in commodity prices, driven by a slowdown in China, is negatively affecting a number of African countries. The slump in growth highlights the importance of diversification. Most African countries have failed to diversify their economies away from primary production.
Over the last two decades, the global commodities boom drove economic growth across many African countries. This period was an ideal opportunity for governments to accelerate policy reforms and diversify their economies. Some did but most rode the wave of commodity prices believing it would never end. As the great investor Warren Buffet says: “Only when the tide turns do you see who’s been swimming naked”.
The World Bank, in a report on Monday, projected that Africa’s growth will slump to just 3,7% this year, almost 1% below the 4,6% growth achieved last year. It’s also below the 4,5% growth rate that Africa had managed to maintain from 2009 to 2014 in the aftermath of the global financial crisis.
According to the report, Africa’s economic health is suffering not just from weakening commodity prices, but also from the Chinese slowdown and widespread electricity shortages in many African countries. The report is confirmation of a trend that has become increasingly visible across Africa this year, with currencies collapsing, oil wealth eroding, power outages spreading and mining companies announcing layoffs and shut downs.
Oil-rich Nigeria, the biggest African economy, announced that its year-on-year growth had fallen to 2,4% in the second quarter of this year, its slowest rate in a decade, while South Africa, the next biggest African economy, fell 1,3% during the same period.
The pain is being felt across Africa, but those countries that relied heavily on commodity exports and failed to diversify their economies are hurting even more. Among the worst-hit economies are the oil-exporting countries, including Angola, Nigeria, Equatorial Guinea and Republic of the Congo, as well as the mineral and metal producers such as Botswana and Mauritania.
Some countries like Zimbabwe, Zambia, South Africa and Ghana have been hit by severe electricity shortages further crippling their economies, while political turmoil is paralysing countries such as Burundi and South Sudan.
Some of Africa’s leading commodities — including copper, iron ore, oil, natural gas and coffee — have seen their prices decline by more than 25% since June 2014, says the report. The impact on African currencies has been even more dramatic. Over the last 15 months, the South African rand and Ghanaian cedi have declined by more than 25%, while Angola’s kwanza has slumped by 38%, the Ugandan shilling has declined by 45% and the Zambian kwacha has plunged over 80%.
It should be noted that the current slump is not affecting all African countries. A number of countries, including Tanzania, Mozambique, Ethiopia, Rwanda and Ivory Coast, are expected to grow by 7% or more from 2015 to 2017 driven by higher consumer spending and increased investment in energy, transport and resources.
Despite the slump this year, Africa’s growth rate should begin to revive next year, reaching 4,8% in 2017 as commodity prices make a slow recovery and electricity supplies begin to increase.
The chart highlights the critical need for diversification. Africa need to move away from primary production to value creation. Fuel accounts for just under 50% of total exports in Sub-Saharan Africa between 2010 and 2014, while manufacturing has declined from 27% (2000-2004) to 16% (2010-2014). Agricultural exports now account for less than 12% of total exports which is a shame given the continent’s vast arable and fertile land.
The need for fiscal discipline, policy reforms and diversification has never been so critical. The report also warns that many African countries are facing higher inflation and growing government debts. It says fiscal deficits are expanding because of rising wage bills and expanding military spending at a time when revenue is declining.
“The end of the commodity super-cycle poses an opportunity for African countries to reinvigorate their reform efforts and thereby transform their economies and diversify sources of growth. Implementing the right policies to boost agricultural productivity, and reduce electricity costs while expanding access, will improve competitiveness and support the growth of light manufacturing,” says Makhtar Diop, World Bank vice-president for Africa.
Unfortunately, Zimbabwe missed most of the commodities super-cycle over the last two decades and only caught the tail end of the super-cycle post-dollarisation in 2009. The slump in commodity prices combined with the weakness in the South African rand has led to a significant decline in exports.
Latest data from Zimstats, Zimbabwe’s exports to South Africa slumped by 37% in August 2015. Economic activity slumped with the IMF revising it’s growth target to 1,5%. I expect growth to be a lot lower, especially after the acute power shortages. Growth is likely to decline by 2-3% in 2015, for the first time since dollarisation.
Diversification is critical to the long-term success of Africa. Governments need to take this opportunity to fast-track policy reforms and strengthen their economies. The tide has turned and there is greater need for fiscal discipline and diversification away from primary production and focus on value-addition.
Commodity prices are volatile and do not continue an upward trend forever. The slump in commodity prices is a wake-up call for many African countries that relied heavily on commodity exports.