… Revises economic forecast to 3.4% in 2023
The African Development Bank (AfDB) has revised its short- to medium-term macroeconomic forecast for Africa for the years 2023 and 2024 downward to 3.4 per cent and 3.8 per cent, respectively, from the earlier estimates of 4.0 per cent and 4.3 per cent.
The revised forecasts take into account the ongoing global economic slowdown, triggered by the impact of Russia’s invasion of Ukraine, the persistent long-term effects of COVID-19, geopolitical tensions and conflicts, climate shocks, and limited fiscal space for African governments to adequately respond to shocks and sustain post-pandemic economic recovery gains.
The 2023 Africa’s Macroeconomic Performance and Outlook (MEO) update is the latest publication from the AfDB, which provides an updated assessment of the current economic situation in Africa and the region’s outlook for the coming years. The update follows the AfDB’s 2023 Africa Economic Outlook, published in May, which provided a broad overview of the economic situation in Africa and the key challenges and opportunities facing the continent.
According to the MEO update, while global inflation is starting to ease, it remains a major challenge for Africa and is weighing heavily on the continent’s economic performance. The average inflation rate for Africa is now expected to reach 18.5 per cent in 2023 and 17.1 per cent in 2024. This is significantly higher than the global average inflation rate, which is projected to be around 5.9 per cent and 3.1 per cent in 2023 and 2024, respectively.
The upward revision of inflation rates for Africa represents a significant increase from the previous estimates. The increase is largely due to factors such as supply shocks in agriculture, depreciation of local currencies, rising commodity prices, and fiscal dominance in some African countries. The elevated inflation rates have reduced the purchasing power of Africans, putting a strain on their living standards and increasing the risk of further increases in poverty levels.
The update also shows that several factors are contributing to the continued rise in inflation rates in Africa. Supply shocks in agriculture, such as droughts and floods, have led to a decline in food production and an increase in food prices. In addition, many African countries have seen a depreciation of their local currencies, which has made imported goods more expensive. Meanwhile, high global commodity prices, such as oil and gas, have also put upward pressure on inflation. Finally, some African countries have continued to engage in fiscal dominance, whereby the government borrows heavily from the central bank to finance its activities.
Over the medium- to long-term,the MEO update highlights the need for African governments to make significant investments in human capital and physical infrastructure. This, it stated, will be critical to boosting productivity, achieving higher economic growth, and creating opportunities for more inclusive and sustainable development.
Among the update’s findings, slow global economic growth is seen to have negatively affected demand for African exports, and this trend is expected to continue for a longer period than previously anticipated. One reason for this is the projected economic slowdown in advanced economies, which are important markets for African exports. Another reason is the sluggish growth in China, which has traditionally been a major source of demand for African commodities. These factors are expected to continue to put downward pressure on global growth, which will have a significant impact on Africa’s economic prospects.
“This has placed additional strain on African countries, especially those dependent on the Chinese market for commodity exports. Stronger policy support in China could bolster global economic recovery and trigger positive spillovers to African countries for which China remains a major trading partner. These factors can help moderate adverse risks to the economic outlook,” the report notes.
On the downside, the 2023 MEO update observed that several downside risks could further dampen Africa’s economic outlook. These include the potential for more severe climate shocks, such as droughts and floods, which could disrupt food production and increase food insecurity. Additionally, geopolitical tensions, particularly in the Middle East and with respect to Russia’s invasion of Ukraine, could lead to disruptions in global trade and foreign investment flows. This could in turn trigger another round of tightening in global financial conditions, which could put additional downward pressure on African currencies, increase debt-service costs, and exacerbate the continent’s existing funding challenges.
Riding the waves of local and global shocks
The MEO update points out that coordinated fiscal and monetary policies, along with reduced fiscal dominance, will be crucial to rebuilding buffers against external shocks. In addition, targeted and sequenced investments to address supply-side constraints, such as structural weaknesses, are needed to reverse the current economic downturn and put African economies on a higher and more sustainable growth path.
Some key areas of focus for these investments include digitalization, education, health, and infrastructure. Other measures to improve the business environment, such as strengthening property rights, increasing transparency, and reducing corruption, will also be critical to spurring economic growth.
The report recommends that African countries take steps to reduce inflationary pressures in a sustainable manner. This can be achieved by removing barriers that prevent domestic supply from responding to higher international commodity prices and boosting labour productivity through targeted investments in infrastructure and human capital. Furthermore, the report calls for efforts to tackle impediments to increased domestic resource mobilisation to help address the current funding gap.
The report highlights that these efforts will require strong leadership and the political will to implement reforms, which will be critical to boosting Africa’s long-term economic resilience.
Kevin Urama, the African Development Bank Group’s chief economist and vice president, noted that the challenging global economic environment and multiple shocks continue to shape the macroeconomic performance of Africa. He pointed out that entrenched inflationary pressures threaten to undo the macroeconomic gains made since the easing of pandemic risks, while continued depreciation of domestic currencies in many African countries has increased the cost of debt service.
In addition to its analysis of the challenges facing Africa, the Bank Group also expressed its commitment to supporting African countries in navigating these challenges and regaining economic growth momentum. Urama stated that the Bank will continue to provide technical assistance and policy advice to African countries, as well as financial support through concessional loans and grants.