Afreximbank: Risks to Africa’s Growth Outlook

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After showing resilience during the COVID-19 pandemic and in the face of rising geopolitical tensions, Africa’s growth is expected to accelerate further in the near term.

But the balance of risks to the baseline forecasts for African growth is tilted to the downside. We remain in a challenging global environment, to which inflationary pressures — exacerbated by the Ukraine crisis, as oil-importing countries contend with steeper prices — have added another twist to pandemicrelated uncertainty and supply chain problems.

Tightening global financial conditions in response to a large inflation overshoot have become a major hazard that could generate disproportionate increases in risk spread, as well as capital flow reversals and heighten stagflationary risks.

The supply chain disruptions and persistent supply-demand imbalances that are fuelling inflation and have lately been compounded by geopolitical tensions were rooted first and foremost in the enduring effects of the pandemic.

While significant progress has been made in understanding the dynamics of COVID-19 and effective treatments have been discovered, vaccine inequality and hoarding by rich countries are perpetuating the pandemic and allowing new variants to emerge, especially in countries with low vaccination rates.

Although hospitalisations and deaths associated with the Omicron variant are lower compared to its antecedents, governments still reactivated precautionary containment measures.

That renewal of travel bans, lockdowns and self-imposed risk aversion behaviour all contributed to inflationary pressures, especially in the US, where the tight labour market has sustained buoyant nominal wage growth.

Overcoming dangerous beggar-thyneighbour policies remains a major challenge that policymakers must address if we are to lessen this virus-spread uncertainty.

Swift measures must be taken to enhance global co-operation and diversify the sources of production of vaccines and other lifesaving medical resources. Doing so will help equalise access to vaccines for developing countries, including in Africa.

Otherwise, the pandemic will continue to stoke inflationary pressures and hasten the tightening of global financial conditions with monetary authorities resorting to larger rate increases at a time. But strengthening international co-operation must go even further in these extremely difficult circumstances.

Ending the trade war would reduce the impact of tariffs on trade costs and further alleviate inflationary pressures. The new cycle of a sharp increase in interest rates by systemically important central banks is another major downside risk.

For African countries, this is magnified by onerous perception premiums, which have long undermined the quest for macroeconomic stability and impeded growth.

These premiums — the overinflated risks perennially assigned to Africa, irrespective of global economic conditions, the region’s improving macroeconomic fundamentals or individual nations’ growth prospects — raise funding costs, constrain access to capital and could undermine the fragile recovery in a region where the fiscal space for public investment is already very limited.

Aggressive interest rate hikes, in addition to the turbocharged tapering of bondbuying programmes, are intimately related to other risks to Africa’s outlook. They could engender a sharp deterioration of global investor sentiment and trigger massive capital flow reversals in a flight to quality.

The attendant currency depreciation would raise the costs of servicing external debt, further straining the external and fiscal balances, and enflame inflationary pressures, especially in a region where greater exchange-rate passthrough has been one of the most important transmission channels.

In a self-fulfilling prophecy, sovereign debt distress would then emerge as a real and present danger, especially in the most vulnerable countries where the expiration of temporary relief measures — such as the G20 Debt Service Suspension Initiative and IMF Catastrophe Containment and Relief Trust — would necessitate the allocation of more already-scarce resources for external debt servicing.

The growth dynamics of Africa’s main trading partners remain key to the region’s economic outlook. Under the baseline scenario, Africa’s forecast growth hinges largely on China, where easing financing conditions and fiscal stimulus measures will sustain investment growth and drive demand for commodities.

However, it is possible that the recovery in China and other leading economies will moderate further than expected in 2022, especially if the negative spillovers from the Ukraine crisis persist.

If this occurs, it could affect global demand and undermine African growth, as well as countries’ capacity to respond effectively to macroeconomic management challenges associated with heightening global volatility, most notably currency gyrations and widening fiscal and current account deficits.

Simultaneously, the increasing rate of conflict intensity sustained by heightening geopolitical tensions threatens to compound the risks to the region’s economic outlook. Military spending has become one of the fastest-growing items in government budgets across Africa, especially in conflict-affected countries.

Further increases in military outlays could aggravate the deterioration of fiscal deficits and undermine the ability of more vulnerable governments to respond to various crises, ranging from the postpandemic fallout to climate-related risks such as extreme weather events and soaring food prices to fallout from the pandemic, including rising poverty and income inequality as well as increasing costs of external debt servicing.

If the security environment continues to decay, it will weigh heavily on Africa’s growth outlook by deterring private capital and diverting scarce resources away from productive investments, including infrastructure. Sustaining the growth of these investments is critical if we are to capitalise on the competitiveness and productivity gains associated with the AfCFTA.

As governments across the region draw on a wide range of instruments and policies — including external and internal adjustments, as well as support from multilateral and development finance institutions — to navigate myriad shortterm risks, they mustn’t lose sight of the long-term benefits of security and structural reforms.

Such measures are essential if countries are to put themselves on the path of robust, inclusive growth and fiscal and debt sustainability.82 Realising the AfCFTA, which entered into force last year, was an important milestone on the path towards the diversification of sources of growth and trade in Africa for enhanced macroeconomic stability.

The convergence of countries across the region towards the harmonised rules of origin later this year will help cement the agreement as a gamechanger for African industrialisation.

Ultimately, it will enable the region to capitalise on the accelerated reordering of global supply chains for greater resilience, building back better post-pandemic.

But in the immediate short term, the most important challenge — as systemically important central banks pivot towards inflation-fighting mode — is to effectively pursue the price stability objective without derailing the incipient global recovery, which has been caught in the crossfire in Ukraine.

At this critical juncture of heightening global volatility and geopolitical tensions, that balancing act is crucially important for all, and perhaps even more for developing countries where the post-containment growth rebound has been constrained by the smaller size of government support and access to vaccines.

This is an extract from the Africa 2022 Growth Prospects report authored by Hippolyte Fofack at the Afrieximbank

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