Africa’s quarterly economic performance and outlook: January–March 2020

Africa’s quarterly economic performance and outlook

January–March 2020

Key highlights from the first quarter of 2020

In the first quarter of 2020, African economies grew by an average of 3.2 per cent, albeit with significant variation across countries and subregions.

Economic activity in the second quarter is projected to contract by 1.6 per cent, owing to the adverse impact of the COVID-19 pandemic.

Fiscal consolidation was underway, driven by a mix of fiscal policy changes that have increased revenues and a decline in government spending, with North Africa making the largest gains through fiscal consolidation over the period.

Monetary policy was eased to support economic growth as inflation declined. However, room for further easing is limited given the downside risks that are envisaged.

External buffers remained weak, reflecting the worsening of current account deficits, decreasing capital inflows and declining foreign reserves, which have exerted pressure on exchange rates.

Governments need to use calibrated macroeconomic policy measures to ensure monetary policy efficiency and resilience to financial and external shocks to better cushion their economies against the intensifying economic impact of the COVID-19 pandemic and to boost economic recovery.

African countries remain vulnerable to both domestic and external shocks such as the COVID-19 pandemic, lower commodity prices, locust invasions, political uncertainties and armed conflicts that could weigh on growth.

Given that interest rates are close to their targets in most African countries, the margin for using monetary policy to stimulate growth is limited.

Along with weaker fiscal and external buffers, African economies require a comprehensive package of macroeconomic policy responses to strengthen their health systems, mitigate the economic impact of the COVID-19 pandemic and stimulate the economic recovery that is needed to achieve the Sustainable Development Goals.

In the light of prevailing constrained financing options, the international development community needs to support the economic policy responses undertaken by African countries to address the COVID-19 crisis.

I. Overall growth performance

1. The year 2019 ended with subdued GDP growth across many developing, emerging and developed economies, with average global growth reaching 2.6 per cent, down from 3.1 per

Summary

The present quarterly report provides an analysis of the recent performance and the prospects

of African economies based on their growth during the quarter, along with their fiscal, monetary

and exchange rate policy and performance. The report also proposes policy recommendations

to assist African countries in achieving macroeconomic stability and economic growth. It is

important to note that, unless otherwise stated, the report does not significantly take into

consideration the impact of the COVID-19 pandemic. The report on the second quarter of 2020

will focus on the impact of the pandemic.

cent in 2018 (United Nations, 2020). This relatively low level of growth was attributed to the lower levels of trade and domestic investment, which weighed on growth. For Africa as a whole, growth stood at 2.9 per cent in 2019, with significant variation across countries and subregions. The macroeconomic outlook for 2020 is characterized by low commodity prices, structural weaknesses in some large economies and the outbreak of COVID-19, which started in China – a major trade partner of many African countries. Given that the effects of these factors have exacerbated the socioeconomic impact of the COVID-19 crisis, Africa’s growth is expected to fall to 1.8 per cent in 2020 in a best-case scenario, or contract by up to 2.6 per cent in a worst-case scenario (see the box below).

2. Despite the challenges arising from a weak and uncertain global economic environment, African economies have recorded positive growth rates. The continent’s overall economic activity is estimated to have increased by an average of 3.3 percent in the first quarter of 2020, and is expected to slow down slightly in the second quarter owing to the effects of COVID-19 (figure I).

First quarter growth was dominated by increases in both private and public consumption, while net exports remain subdued. At the subregional level, economic growth is expected to remain robust in East Africa (figure I). The subregion grew by 6 per cent in the first quarter, which was

much higher than the continental average, and remained the fastest growing subregion in Africa.

Key drivers of economic growth in East Africa include higher domestic demand and increased public investment. Despite the negative effect of COVID-19 on demand and lower global growth, the subregion’s growth rate is expected to remain positive, at 1.5 per cent in the second quarter owing to lower oil prices, which are expected to benefit most of the oil-importing countries in the subregion.

3. Similarly, growth in North Africa also slightly increased, from 3.4 per cent in the fourth quarter of 2019 to 3.6 per cent in the first quarter of 2020, owing to higher domestic demand. That was largely driven by the growth performance of Egypt, thanks to its easing balance of payments and the recovery of domestic demand. Growth in Algeria and Morocco increased slightly, by 2.30 and 3.02 per cent, respectively, in the first quarter of 2020, compared to 2.0 and 2.8 per cent in the fourth quarter of 2019. The disruption in oil production in Libya due to the conflict between rival political groups slowed down growth from 5.2 per cent in the fourth quarter to 4.5 per cent in the first quarter.

However, the outlook for the second quarter and the rest of 2020 is bleak owing to the impact of the COVID-19 outbreak that has already started having a toll on export demand, tourism receipts and oil revenues, together with the 30 per cent fall in oil

Figure I: Growth performance of Africa by subregion, fourth quarter of 2019 to second

quarter of 2020

-4 -2 0 2 4 6 8

Africa Central Africa East Africa North Africa Southern Africa West Africa

2019-Q4 2020-Q1 2020-Q2 Source: ECA calculations (2020).

Abbreviations: Q1, first quarter; Q2, second quarter; Q4, fourth quarter.

prices (from $63.6 in January to $32.9 per barrel in March 2020) and overall lower global growth.

4. Owing to higher domestic demand, growth in West Africa remained stable in the first quarter of 2020, at 3.5 per cent. Although growth in Nigeria slightly increased (from 2.1 per cent in the fourth quarter to 2.3 per cent in the first quarter), the outlook for the second quarter of 2020 is pessimistic given the weak macroeconomic environment, including high inflation, multiple exchange rate windows and subdued non-oil revenues, all of which are projected to weigh on growth. It should be noted that the effect of COVID-19 will worsen growth performance in Nigeria, in view of the huge loss in oil revenue, which is expected to lead to currency depreciation and rising inflation.

Furthermore, in response to the COVID-19 crisis and lower oil prices, Nigeria is revising its budget, which could have a negative impact on its economic growth. In contrast, Ghana’s economic performance has remained strong, growing at 6 per cent in the first quarter of 2020, supported by higher private consumption and government expenditure. However, its growth is projected to slow down in the second quarter owing to the impact of the COVID-19 crisis.

5. The economic situation in Central Africa is challenging, despite a marginal growth increase to 2.9 per cent in the first quarter of 2020, 0.2 percentage points higher than its level in the fourth quarter of 2019. That increase was due to rising oil production in the first quarter. Nevertheless, growth in the second quarter of 2020 is expected to fall by 1.6 per cent, owing to demand contraction and the huge fall in oil prices. Growth in Cameroon was resilient in the first quarter owing to growth

in exports, which was buoyed by new projects in the gas sector. Similar performance was registered in the Central African Republic (4.8 per cent), Chad (5.5 per cent) and Gabon (2.8 per cent).

6. Many countries in Southern Africa are experiencing subdued growth as a result of high unemployment, energy challenges and a weak macroeconomic climate. Consequently, the subregion is estimated to grow by 0.9 per cent in the first quarter of 2020, from 0.2 per cent in the fourth quarter of 2019. South Africa, the subregion’s largest economy, is in recession, contracting by 1.4 and 0.5 per cent in the fourth quarter and the first quarter, respectively. The country’s growth remains below its potential, and prospects for recovery remain bleak as a result of uncertainty and constrained public finances, as well as the adverse effects of the COVID-19 pandemic. The economy of Zimbabwe is still in crisis, with unbridled inflation and minimal prospects for recovery in the short term. In contrast, 5 per cent growth in Malawi in the first quarter was buoyed by increased investment brought by an improved business climate and increased access to finance.

II. Growth outlook amid the COVID-19 pandemic

7. As the adverse impact of the COVID-19 pandemic materializes, the overall level of economic activity of the continent in the second quarter of 2020 is projected to shrink by 1.6 per cent, reflecting weaker external demand, a significant decline in oil prices, and the economic impact of the pandemic (see the box below).

III. Fiscal and debt performance

8. Africa’s fiscal deficit as a percentage of aggregate GDP declined from 6.4 per cent in 2015 to 2.8 per cent in 2018. Despite a slight uptick to 3.0 per cent in 2019, a decline of 2.8 per cent has been forecast for 2020. That trend can be attributed

mainly to fiscal consolidation in North Africa, where fiscal deficits fell from 14 per cent in 2015 to 1.2 per cent in 2018. In a similar fashion, fiscal deficits in Central Africa declined from 9 per cent in 2015 to 0.6 per cent in 2018. Nonetheless, the COVID-19 crisis is expected to reverse that trend as tax revenues decline and governments implement fiscal stimulus strategies to counter the effects of the crisis.

Box: Potential impact of COVID-19 (2017-2020)

COVID-19 will have a significant negative impact on growth in Africa. The uncertainty around the disease and consequent policy measures, such as physical distancing and lockdowns, have led to a decline in demand for African products. That has been compounded by a decline in economic activity as the labour force remains at home and also as global manufacturing activities decline sharply. In 2020, Africa’s average GDP growth is expected to fall by a magnitude of 1.4 percentage points, from 3.2 to 1.8 per cent, in a best-case scenario, or could contract by up to 2.6 percentage points in a worst-case scenario.

Potential impact of COVID-19

3.2

1.8

0.1 2.9

-2.6 -3

-2 -1 0 1 2 3 4

2017 2018 2019 2020

Real GDP growth (%)

Baseline forecast Best-case scenario Mild-case scenario Worst-case scenario

Source: Estimates based on ECA calculations.

Furthermore, a substantial increase in total health spending is expected. African governments spend an average of 45 per cent of their total health expenditure on dealing with infectious diseases. Notwithstanding the current low prevalence of coronavirus on the continent, an increase in infections could cost governments between 0.10 and 0.43 per cent of GDP in additional spending. In absolute terms, based on 2020 GDP estimates, this value could range from $2.1 billion if the rate of infection were to reach 10 per cent, to approximately $10.6 billion if the rate of infection were to reach 50 per cent.

A decline in Africa’s aggregate GDP from the projected baseline level of 3.2 per cent in 2020, owing to the impact of COVID-19, could have a broad revenue-reducing effect. In a scenario where the global economy declines by 1.5 percentage points, a 50 per cent infection rate among the continent’s labour force would result in revenue losses of about $28 billion, or 0.80 per cent of GDP. A loss of that magnitude would undermine the fiscal consolidation efforts underway across the continent.

Nonetheless, the decline in total revenue would be offset by an increase in customs and import duties of about

$0.8 billion, with the increase likely attributable to inflation, as production inputs become more expensive and scarcer, which will cause the prices of imports to increase. Countries with the highest revenues from customs and import duties (as a percentage of GDP) include vulnerable countries such as Mali and Somalia, in addition to some commodity exporters that tend to import most of the goods and services that they consume, such as Botswana and Namibia.

A. Fiscal deficits decrease despite weak consolidation efforts

9. The fiscal deficit situation in North Africa has been improving, notwithstanding a slight rise being projected for 2020. Increased fiscal consolidation efforts in Algeria, Egypt and Libya, along with a slight increase in revenues and lower spending on goods, services, wages and capital expenditure in Algeria, contributed to lower fiscal deficits in the subregion (World Bank, 2019a).

In Egypt, the containment of growth in energy subsidies and civil servant wages, in addition to increased revenue collection (notably value-added taxes and income taxes), were driving factors. In Libya and Morocco, however, high levels of fixed expenditure on wages and subsidies constrained public finances despite higher oil revenues.

Notwithstanding the efforts made to contain fiscal deficits, the current COVID-19 crisis will adversely affect fiscal deficits, with a decline in revenues from tourism and transport, and increased expenditure on health and fiscal stimulus.

10. Fiscal deficits were projected to decline in West Africa in 2020 owing to expected improvements in fiscal consolidation in Nigeria and Senegal. Similar efforts in Côte d’Ivoire and Ghana have met with limited success because of continued revenue shortfalls and increased government spending (AfDB, 2019a; World Bank, 2019b). In Central Africa, fiscal deficits were expected to decline from an average of 55 per cent in 2019 to 51 per cent in 2020, mainly owing to improved debt management in the Central African Republic, the Congo and Sao Tome and Principe. However, the COVID-19 crisis may reverse that trend.

11. Before the COVID-19 crisis, fiscal deficits in East Africa were expected to trend upwards, from 2.9 per cent in 2019 to 3.4 per cent in 2020. However, fiscal consolidation has not been sustained in Ethiopia, Kenya or Rwanda, with fiscal deficits fluctuating during the period 2015−2018 and projected to worsen beyond 2019. A fall in revenue compared to expenditure (mainly in Kenya) and increased public sector investment in Rwanda to fund capital

investments are some of the factors responsible for the fiscal deficits fluctuations (World Bank, 2019b).

12. Despite fiscal consolidation efforts in Southern Africa, fiscal deficits widened slightly in the subregion, from 4.5 per cent in 2017 to 5 per cent in 2018, mainly driven by the performance of Angola and Namibia. Reforms relating to public utilities, subsidies and privatization were the main drivers of fiscal consolidation in Angola (AfDB, 2019b; World Bank, 2019b). In Namibia, reductions in recurrent and capital expenditure constrained the fiscal deficit in the 2018/2019 fiscal year. In South Africa, despite a slowdown in fiscal consolidation efforts, macro objectives such as debt stabilization and reforms are expected to stabilize the economy in 2020.

B. Increasing debt levels in most subregions

As has been the case with fiscal deficits, the largest percentage increases have been in North Africa (from 63.9 per cent in 2015 to 94.7 per cent in 2018) and Central Africa (from 57.5 per cent in 2015 to 63.9 per cent in 2017). The rise in debt was driven by increased and rigid public investments, especially in strategic sectors such as construction, public works and hydraulics, along with the expansion of social housing programs (World Bank, 2019a). It was also due to large interest payments, high wage bills and low tax revenues.

14. In West Africa, debt increased from 49.8 per cent in 2015 to 57.9 per cent in 2018 and is projected to further increase to 59.2 per cent in 2019. Debt has been rising in the subregion’s larger economies, including Côte d’Ivoire, Ghana, Nigeria, Senegal and Togo, mainly owing to low revenues and increased spending, but is projected to fall in 2020 (World Bank, 2019b). In contrast, debt in Central Africa declined from 65.7 per cent in 2016 to 57.7 per cent in 2018; it is projected to further fall to 55 and 51 per cent in 2019 and 2020, respectively. Better debt management in countries such as the Central African Republic, the Congo

and Sao Tome and Principe has been the principal cause of that decline. However, the trend may be reversed in the wake of the COVID-19 pandemic, obstructing the efforts of those countries to achieve the Sustainable Development Goals.

15. Debt had been increasing steadily in East Africa, but was projected to decrease beginning in 2019. That trend had mainly been driven by high debt in Eritrea, Seychelles and South Sudan, each with debt levels of over 60 per cent, which consisted mainly of accumulated external debt.

In Southern Africa, debt rose from 57 per cent in 2018 to 59.6 per cent in 2019, mainly owing to increased financing of economic transformation projects and exchange rate depreciation. Angola, Malawi, Mauritius, Mozambique and Zambia had the highest debt levels in the subregion. In South Africa, weaker than expected revenue collection, increased spending to make higher education free of charge, poor performance by government enterprises and government intervention to minimize the impact of slow growth have helped to drive up debt levels (AfDB, 2019b; World Bank, 2019b).

C. Monetary policy eased in 2019 as inflation rates declined; however, the Covid-19 crisis could fuel inflationary pressures and limit efforts to boost economic recovery

16. In most countries across the continent, inflation declined or remained stable in 2019, thanks to good harvests and the relative stability

of global commodity prices (for example, those of fuels and food), which are important drivers of inflation dynamics in Africa. Inflation rates stood stable or decreased in many countries, with sharp declines in the Democratic Republic of the Congo, Egypt, Gabon, Ghana, Mauritius and Namibia. In contrast, inflation rose in a few countries, including Equatorial Guinea and Ethiopia. Inflation rates remained lower than usual among the members of the Central African Economic and Monetary Community (CEMAC) and the West African Economic and Monetary Union (WAEMU), with several WAEMU countries such as Côte d’Ivoire experiencing deflation. However, despite the stabilization of inflation, some African countries such as Ghana, Liberia, Nigeria, Sierra Leone, the Sudan and Zambia have been struggling with double-digit inflation rates due to macroeconomic imbalances. In the case of the Sudan, political turmoil that began in the fourth quarter of 2019 has also been a contributing factor.

17. In 2019, stable and lower inflation rates led to the implementation of accommodative monetary policy. Policy rates were eased to support economic growth and to stabilize inflation. In most countries, central banks cut policy rates in the light of the global economic outlook and the weakening of domestic inflation pressures. Other countries remained cautious, however, preferring to monitor developments in lieu of taking decisive action. Central banks of the major African countries reduced their policy rates to varying degrees. In 2019, Egypt aggressively lowered its policy rate by Figure II: Change in monetary policy rates in 2019: percentage and number

1 3 2 1 1 1 1 1 1 1

-6 -4 -2 0 2 4

Democratic Republicof the Congo Egypt Angola Gambia, The Ghana Kenya Nigeria Rwanda South Africa Mauritius

Change MPR (percentage points) Frequency (Number)

Source: ECA calculations, based on the International Financial Statistics dataset (IMF, 2020).

450 basis points, compared to Angola, Nigeria and South Africa, which cut their policy rates by 100, 50 and 25 basis points, respectively (figure II). Interest rates were also sharply reduced in the Democratic Republic of the Congo and to a lesser extent in the Gambia, Ghana, Kenya, Mauritius and Rwanda.

However, some countries maintained their policy rates in the face of higher inflation (for example, Cabo Verde and Sierra Leone) or to improve their external positions (for example, the member countries of WAEMU, and Sao Tome and Principe).

18. The reductions in policy rates were mostly made in the first quarter of 2019. In contrast, few countries made such reductions in the fourth quarter of 2019, as inflation remained under its target level in those countries (figure III). Only the central banks of Egypt and Kenya cut their interest rates in the fourth quarter, by 100 and

50 basis points, respectively, which was less than the cuts made in the first two quarters by eight central banks. Accommodative monetary policy actions supported improvements in the financial conditions of households, businesses and governments. Declining nominal lending interest rates and treasury bill rates associated with narrowing credit spreads in some countries (for example, Angola, Egypt, Nigeria and South Africa) led to an expansion of credit in those economies.

19. However, monetary policy in Africa will face considerable challenges in the short-to-medium term owing to limited policy space for remaining accommodative in the light of underlying economic conditions and downside risks. While some countries, such as the Democratic Republic of the Congo, Egypt, the Gambia, Ghana and Mauritius, may have some room to reduce their Figure III: Changes in interest rates in selected countries, 2015−2019

5 10 15 20 25

2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4

Angola Egypt

Nigeria South Africa

(a) Lending interest rates, 2019 (Percent) Zambie

2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4

5 10 15 20 25

(b) Treasury Bill Rates, 2019 (Percent)

Egypt Nigeria South Africa

Source: International Financial Statistics dataset (IMF, 2020).

Abbreviations: Q1, first quarter; Q2, second quarter; Q3, third quarter; Q4, fourth quarter.

Figure IV: Quarterly inflation in selected countries

-4%

-2%

0%

2%

4%

6%

Mali Guinea Bissau Uganda South Africa Côte d'Ivoire Equatorial Guinea Rwanda Benin Nigeria Sierra Leone Ethiopia Zambia Angola

2019Q1 2020Q1 Change 2019Q1-2020Q1 (pp)

Source: ECA calculations, based on the International Financial Statistics dataset (IMF, 2020).

policy rates, the easing of monetary policy will likely not continue over a long period of time. In a number of African countries, in particular those with macroeconomic imbalances (such as Angola, Egypt, Ghana and Nigeria), rising inflation could prompt those countries to reverse their monetary policy stance (figure IV). The sudden tightening of monetary policy could have significant effects on financial conditions, fiscal consolidation and debt sustainability. Those effects will be exacerbated by the impact of the COVID-19 pandemic in the short- to-medium term.

D. Deteriorating terms of trade have reduced current account balances and put pressure on domestic revenues, thereby reducing the continent’s capacity to

finance the achievement of the Sustainable Development Goals

20. The external position of African economies weakened in 2019 owing to larger current account deficits and the increased strength of their currencies (figure V). Current account surpluses narrowed in most African economies, with an increase in the number of countries posting current account deficits, thereby increasing external imbalances and vulnerabilities. Current account surpluses narrowed sharply in oil- and mineral-exporting countries (for example, Angola, Botswana, Libya and Nigeria), while current account deficits widened in most of the commodity-dependent economies (for example Cameroon, Chad, Democratic Republic of the Congo, Egypt, Equatorial Guinea and Sudan),

reflecting the effect of lower-than-expected commodity prices (especially of oil, minerals and metals), deteriorating trade balances and declining external demand. In 2019, before stabilizing in the fourth quarter, commodity prices fell during the first three quarters of the year, owing to increased trade tensions and a sharp slowdown in manufacturing and goods trade, which weighed heavily on commodity demand. Deteriorating terms of trade, weakened trade balances (which were driven mainly by reduced demand for exports with a relatively slight contraction in imports), and weaker income balances significantly weighed on the current account deficits of African countries.

This was amid a deteriorating macroeconomic environment characterized by trade tensions, falling demand for manufacturing and global growth uncertainty. The overall contraction in national revenues had a negative impact on the ability of African countries to finance efforts to achieve the Sustainable Development Goals.

E. Current account fluctuations and currency depreciation led to external vulnerabilities in most countries

21. The currencies of most African countries depreciated, with high volatility in exchange rates, making it increasingly difficult to cushion against shocks to the current account that were caused by trade-related uncertainty and capital outflows.

In addition, country-specific factors, such as large fiscal deficits, declining foreign exchange reserves and lower capital inflows, also contributed to exchange rate fluctuations and hampered the Figure V: Evolution of current account balances, 2018–2019

-6.0 -3.0 0.0 3.0 6.0 9.0

Angola

Botswana Libya Nigeria

Madagascar Eswatini Congo

… narrowing and widening balances across countries

2018 2019

-50.0 -40.0 -30.0 -20.0 -10.0 0.0

Egypt Cameroon Comoros DRCongo Togo Burkina Faso Chad Benin Equatorial Guinea Mauritius Lesotho Senegal Rwanda Uganda Guinea-Bissau São Tomé and Principe Niger Somalia Sudan Burundi Mozambique

… widening deficits

2018 2019

Source: ECA calculations, based on the International Financial Statistics dataset (IMF, 2020).

adjustment of current accounts. Except for Egypt, South Africa and Tunisia, the nominal exchange rate fell by an average of 3 per cent in most African countries, with even greater depreciations in the currencies of Angola, Ethiopia, Ghana, Liberia and Zambia due to weakening macroeconomic fundamentals (figure VI(a)). With the exception of Egypt, the currencies of almost all oil, metal and mineral-exporting countries depreciated against the United States dollar.

22. Real effective exchange rates fell in most African countries, which enhanced their trade competitiveness. Significant declines were observed in Burundi, Côte d’Ivoire, South Africa and Zambia. However, significant appreciation occurred in the real effective exchange rates of the Democratic Republic of the Congo, Gabon, Lesotho, Nigeria, Sierra Leone and Uganda (figure

VI(b)). The real effective exchange rates for those countries are likely overvalued; hence, they may need to devalue their currencies in order to restore their external balances and trade competitiveness.

IV. Short-to-medium term risks and uncertainties

23. African countries remain vulnerable to both domestic and external shocks, a situation that has been exacerbated by the slowdown in the global economy. The COVID-19 pandemic is expected to have an adverse impact on Africa’s growth owing to declining export demand and capital inflows, along with losses in domestic productivity. Lower and more volatile commodity prices, in particular the huge decline in oil prices, will significantly lower the export earnings of major net oil and Figure VI: Percentage change in exchange rates in selected African countries in 2019

-40 -30 -20 -10 0 10

Angola Liberia Zambia Ghana Sierra Leone South Sudan Tunisia Eswatini Lesotho Namibia South Africa Madagascar Ethiopia Benin Comoros Burkina Faso Cameroon Central African Republic. Chad Congo Côte d'Ivoire Equatorial Guinea Gabon Guinea Bissau Mali Niger Senegal Togo Sao Tome and Príncipe Botswana Cabo Verde Mauritius Rwanda Mozambique Burundi Mauritania Morocco Libya Guinea Democratic Republic of Congo United Republic of Tanzania Seychelles Kenya Nigeria Uganda Egypt

(a) Nominal exchange rates, 2019 (percentage change, "+=appreciation")

Democratic Republic of the Congo

Nigeria

Sierra Leone Uganda

Morocco Central African Republic Gabon

Tunisia

Cameroon Equatorial Guinea

Ghana Togo

Lesotho

South Africa

Burundi

Côte d'Ivoire Zambia

-20 -10 0 10 20 30

-25 -20 -15 -10 -5 0 5

REER ("+ = appreciation")

Nominal exchange rate (vis-a-vis USD, "+=appreciation") (b) Nominal and Real effective exchange rates for selected countries, 2019 (percentage change)

Source: ECA calculations, based on the International Financial Statistics dataset (IMF, 2020).

commodity exporters in Africa (for example, Algeria, Angola, Congo, Egypt, Equatorial Guinea, Gabon, Libya and Nigeria), which could weigh heavily on their economic growth.

24. Adverse weather conditions such as droughts and floods pose significant risks, especially in East and Southern Africa. Such extreme climate-related shocks have reduced agricultural production and had an adverse impact on infrastructure in those subregions. Recent locust invasions in East Africa (in particular in Ethiopia, Kenya, South Sudan and Uganda) pose a significant threat to agricultural production and will adversely affect the growth prospects of those countries, as most of them depend on agriculture.

25. Several countries (for example, Burkina Faso, Central African Republic, Côte d’Ivoire, Ethiopia, Ghana, Guinea, Togo and United Republic of Tanzania) are expected to hold general elections in 2020, with concomitant increases in election- related government spending that will widen fiscal deficits and undermine fiscal consolidation efforts.

Furthermore, post-election political instability (such as that which recently occurred in Malawi) could also have a negative impact on growth.

26. In addition, the occurrence of terrorism (for example, in Kenya, Liberia, Nigeria, Somalia and Sudan), armed conflicts (for example, in Democratic Republic of the Congo and South Sudan) and social unrests (for example, in Ethiopia and the Sudan) could also be detrimental to Africa’s economic growth.

V. Policy

recommendations

27. Growth is projected to dip in the second quarter of 2020 and beyond owing to the impact of the COVID-19 crisis. Thus, the policy priority should be to address the health crisis and contain

the outbreak through expenditure to prevent the spread of the virus and mitigation of the impact of the crisis, along with ramping up health-system capacity. In response to the unprecedented health crisis, African countries should seek both technical and financial assistance from their development partners to strengthen their health systems and make them more resilient.

28. Fiscal, monetary and exchange rate policies should aim to cushion against intensifying pressures and consolidate macroeconomic adjustments. Persistent upward pressure on food prices is expected to drive overall inflation, hence leading to the tightening of interest rates and financial conditions. Disruptions in supply chains and declining external demand associated with a fall in commodity prices are likely to affect current account balances and reduce investment inflows and remittances. Fiscal deficits and lower foreign exchange reserves will continue to expose several countries to terms-of-trade shocks, increase external vulnerabilities and weigh on their economic growth.

29. Faced with weak fiscal and external buffers, African countries must implement comprehensive macroeconomic policy responses to strengthen their health systems, relieve the economic burden of the COVID-19 crisis and stimulate economic recovery to achieve the Sustainable Development Goals. Moreover, given the constrained financing options of African countries, the international development community needs to support the policy responses adopted by African countries to combat the COVID-19 pandemic. Failure to act decisively will exacerbate vulnerabilities and likely compromise economic recovery. For a detailed analysis and policy recommendations in that regard, see the report recently issued by the Economic Commission for Africa, entitled

“COVID-19 in Africa: protecting lives and economies”.

References

African Development Bank (2019a). Western Africa Economic Outlook 2019. Available at https://www.

afdb.org/en/documents/document/regional- economic-outlook-2019-west-africa-108624.

African Development Bank (2019b). Southern Africa Economic Outlook 2019. Available at https://www.

afdb.org/en/documents/regional-economic- outlook-2019-southern-africa.

Economic Commission for Africa (2020). COVID-19 in Africa: Protecting lives and economies. Available at https://www.uneca.org/publications/covid-19- africa-protecting-lives-and-economies.

International Monetary Fund (2020). International Financial Statistics dataset. Retrieved on 4 March 2020 from https://data.imf.org/?sk=4c514d48- b6ba-49ed-8ab9-52b0c1a0179b.

United Nations (2020). World Economic Situation and Prospects 2020. Available at https://www.

un.org/development/desa/dpad/publication/

world-economic-situation-and-prospects-2020/.

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worldbank.org/en/publication/macro-poverty- outlook/mpo_ssa#:~:text=The%20Macro%20 Poverty%20Outlook%20(MPO,Group%20and%20 International%20Monetary%20Fund.

World Bank (2019b). Macro Poverty Outlook:

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www.worldbank.org/en/publication/macro- poverty-outlook/mpo_mena.