African Development Bank
This year’s African Economic Outlook examines recent macroeconomic development and structural changes in Africa, and outlines the 2018 prospects (Part I). It then focuses on the need to develop Africa’s infrastructure, and recommends new strategies and innovative financing instruments for countries to consider, depending on their level of development and specific circumstances (Part II).
African economies have been resilient: Real output is up, reflecting generally good macroeconomic policies, progress in structural reforms (especially in infrastructure development), and generally sensible policy frameworks
Global and domestic shocks in 2016 slowed the pace of growth in Africa, but signs of recovery were already manifest in 2017. Real output growth is estimated to have increased 3.6 percent in 2017, up from 2.2 percent in 2016, and to accelerate to 4.1 percent in 2018 and 2019. Overall, the recovery in growth has been faster than envisaged, especially among Non-resource–intensive-e economies, underscoring Africa’s resilience.
The recovery in growth could mark a turning point in s21net commodity-exporting countries, among which the protracted decline in export prices shrunk export revenues and exacerbated macroeconomic imbalances.
Economic fundamentals and resilience improved in a number of African countries. In some, domestic resource mobilization now exceeds that of some Asian and Latin America peers. But it is still insufficient to meet the high level of financing to scale up infrastructure and human capital.
Many African economies are more resilient and better placed to cope with harsh external conditions than before. But the end of the commodity price super-cycle has cut earnings from primary exports in many countries, undermining planned investments. Weaker external conditions have exposed fiscal vulnerabilities in natural resource–dependent economies as well as several others.
Although domestic revenue mobilization improved substantially in recent decades, tax-to-GDP ratios
are still low in most African countries. Revenue regimes have to better capture more gains from
growth and structural change as economies formalize and become more urbanized. With external official development assistance sharply lower, and greater appetite for debt to finance infrastructure and social sectors, many African governments have turned to international capital markets to meet their financing needs. The result: A build-up of debt, much on commercial terms. Despite the increase, debt levels for most countries have not yet breached the traditional threshold indicators. They have actually declined
in nine African countries— sometimes mechanically because of the rebasing of gross domestic product—and remained stable in others.
Dollar interest rates are expected to edge up and bond spreads widen, increasing the risk of
sudden halts in private capital flows. Major investments in infrastructure, financed principally by external borrowing, have raised concerns about a currency and maturity mismatch in debt service,
as revenue streams accrue predominantly in local currencies and debt obligations mature before
these streams begin. With the notable exception of the CFA franc used by 14 African countries, which is pegged at a fixed exchange rate against the euro, most African currencies have lost about 20–40 percent of their value against the dollar since the beginning of 2015. But the resulting competitive currency depreciation will not necessarily translate into a strong price advantage in export markets.
Structural change is taking place but at very low pace. Structural reforms, sound macroeconomic
conditions, and buoyant domestic demand are sustaining the growth momentum in resource-intensive economies. Recent empirical work shows that Africa’s recent growth and poverty reduction
has been associated with a decline in the share of the labor force in agriculture— especially
since the early 2000s, and most pronounced for rural females.
This decline has been accompanied by an increase in the productivity of the labor force, as it has moved from low productivity agriculture to higher productivity services and manufacturing.
The employment share in manufacturing is not expanding rapidly. In most of the low-income African countries, the employment share in manufacturing has not peaked and is still expanding, albeit from very low levels.
African countries should strengthen their economic resilience and dynamism to lift their economies to a new growth equilibrium driven by innovation and productivity rather than by natural resources. Macroeconomic policy strategy should aim at ensuring external competitiveness to avoid
real exchange rate overvaluation and take the full benefits of trade, improve fiscal revenue, and rationalize public expenditure. To achieve these goals, the macroeconomic framework must blend real exchange rate flexibility, domestic revenue mobilization, and judicious demand management.
In the medium term, the most important area of fiscal policy is tax reform. Widening the tax base
(eliminating many exemptions and leakages) rather than hiking already high marginal tax rates will be
indispensable for boosting tax revenues. None of these fiscal policy options is straightforward. All
of them have difficult distributional and welfare consequences— and all are intensely political.
Policy makers need to ensure that fiscal policy does not undercut the growth-promoting effects
of public investment, reversing the inroads made in poverty reduction, health, and education across
the continent. None of these fiscal choices is straightforward. Intensely political, all have difficult distributional and welfare consequences.
Decisions should be made taking into account country-specific circumstances and development priorities. Development projects and programs in the pipeline should thus be balanced against other needs. Recurrent expenditures have to be kept in check, mainly by preventing growth of the public sector wage bill.
Real exchange rate depreciations might be viewed as helpful tools, but given the strengthening of the U.S. dollar against many African currencies, competitive depreciations may not necessarily translate into a strong price advantage in export markets.
Africa needs more development financing. But the build-up of debt should be consistent with
country development needs and capacities to service the loans without compromising fundamentals for future growth. Debt must be deployed in productive investments that yield income streams for self-financing and grow the economy, in order to build capacity for increased domestic resource mobilization that can wean countries from foreign debt and prevent potential debt distress.
Expenditure-reducing measures will have to bear a large share of the burden of restoring external balance.
The infrastructure–investment drive across Africa, financed largely by external borrowing,
needs careful analysis to ensure that revenue streams (generated in local currencies) are strong
enough to meet the debt obligations when they fall due.
Jobless growth? Employment growth is only half of output growth. Sustained growth should create jobs, which drive poverty reduction and make growth more inclusive. But Africa’s recent high growth rates have not been accompanied by high job growth rates. Between 2000 and 2008, employment grew at an annual average of 2.8 percent, roughly half the rate of economic growth. Only five countries— Algeria, Burundi, Botswana, Cameroon, and Morocco— experienced employment growth of more than 4 percent.
Between 2009 and 2014, annual employment growth increased to an average of 3.1 percent despite slower economic growth. But this figure was still 1.4 percentage points below average economic growth. Slow job growth has primarily affected women and youth (ages 15–24). Africa is estimated to have had 226 million youth in 2015, a figure projected to increase 42 percent, to 321 million by 2030.
The lack of job growth has retarded poverty reduction. Although the proportion of poor people
in Africa declined from 56 percent in 1990 to 43 percent in 2012, the number of poor people
increased. Inequality also increased, with the Gini coefficient rising from 0.52 in 1993 to 0.56 in 2008
(the latest figure available). Africa will become the youngest and most populous continent in the next few decades. Its labor force will rise from 620 million in 2013 to nearly 2 billion in 2063.
A “demographic dividend” might provide a great opportunity for Africa— and the rest of the world, which is expected to experience significant labor shortages. But technological advances
could reduce its value.
In the face of rapidly growing populations and heightened risks of social unrest or discontent,
jobless growth is the most serious concern for African policy makers. The urgency of implementing reforms for attracting foreign direct investment in industries with strong competitive potential and thus allowing the private sector to create enough“good jobs” cannot be overstated.
Quite a number of the continent’s success stories (growth spikes not followed by crises) can
serve as a source of inspiration for African policymakers and suggest ways to avoid failed takeoffs.
The experiences of countries such as Mauritius, Ethiopia, and Rwanda provide useful lessons
for the entire continent.
Successful take-offs require productivity growth. Labor force reallocations from the traditional, subsistence, low-productivity sectors to the modern high-productivity sectors must be
a key part of African growth accelerations. They require not only the creation of jobs in modern
agriculture, industry, and services, but also policies that empower the poor and the low-skilled
workers so that they can take advantage of the new opportunities that arise with structural
A first priority for African governments is to encourage a shift toward labor-absorbing growth
paths. They should put in place programs and policies aimed at modernizing the agricultural
sector, which employs most of the population and is typically the main step toward industrialization.
A second priority is to invest in human capital, particularly in the entrepreneurial skills of youth,
to facilitate the transition to higher-productivity modern sectors.