Zim needs to diversify away from commodities

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Amid falling commodity prices and persistently weak global growth, Sub-Saharan Africa (SSA)’s Gross Domestic Product (GDP) growth decelerated to an estimated 3% in 2015 from 4,5% in 2014, according to the latest World Bank projections. This slowdown translates into an increase in the region’s GDP per capita of less than 0,5%, last seen in 2009 following the global financial crisis and contrasts sharply with the robust 6,8% average annual GDP growth in SSA from 2003-2008. The sharp slowdown in economic activity in the region has serious implications for resource-rich Zimbabwe and highlights the urgent need to drive economic and investment reforms.

The Ritesh Anand Column

World Bank Africa acting chief economist Punam Chuhan-Pole

World Bank Africa acting chief economist Punam Chuhan-Pole

These latest figures are outlined in the World Bank’s new Africa’s Pulse, the twice-yearly analysis of economic trends and the latest data on the continent. The analysis shows that the slowdown comes amidst a sharp drop in global commodity prices, weak global growth that was underpinned by a slowing of growth in emerging markets, including China, and volatile financial markets.

According to the report, the fall in commodity prices represents a significant shock for SSA, as fuels, ore and metals account for more than 60% of the region’s exports. The impact is most evident in oil-exporting countries, where average growth is expected to fall sharply from 5,4% in 2014 to 2,9% in 2015.

Growth fell sharply in Nigeria, Congo and Equatorial Guinea. Activity also weakened significantly in non-energy mineral-exporting countries, including Botswana, Sierra Leone, South Africa, Zambia and Zimbabwe. In several commodity exporters, adverse domestic developments, such as electricity shortages, severe drought conditions, policy uncertainty and security threats, exacerbated the direct impact of declining commodity prices.

Amidst the doom and gloom, there were some bright spots, mostly among oil importers, where economic activity remained robust. Côte d’Ivoire saw broadbased growth, supported by a favourable policy environment, rising investment and increased consumer spending.

Ethiopia and Rwanda continued to post solid growth, supported by public infrastructure investment, private consumption and a growing services sector. Elsewhere, growth remained robust in Kenya, amid improving economic stability, Tanzania registered strong growth underpinned by expansion in construction and services sectors.

The report finds that the recent commodity price drops have deteriorated the region’s terms of trade in 2016 by an estimated 16%, with commodity exporters seeing large terms-of-trade losses. Around 12 countries, accounting for 36% of the region’s population and representing about half of its economic activity, are considered vulnerable in terms-of-trade losses that are expected to exceed 10%. Around 17 countries with more than 25% of SSA’s population, will experience terms-of-trade gains.

With commodity prices expected to remain low for longer amid a gradual pickup in global activity, the report forecasts that average growth in the region will remain subdued at 3,3% in 2016. For 2017–2018, growth is projected to average 4,5%.

The projected pickup in activity in 2017–2018 reflects a gradual improvement in the region’s largest economies — Angola, Nigeria and South Africa — as commodity prices stabilise and policies become more supportive of growth. The risks however remain to the downside as global growth remains vulnerable.

“With external conditions likely to remain less favourable than in the past, African countries need to accelerate the pace of structural reforms aimed at boosting competitiveness and diversification,” said Punam Chuhan-Pole, World Bank Africa acting chief economist and author of the report.

“In most countries this will mean improving the business climate, reducing the cost of cross-border trade, reforming the energy sector to ensure affordable, reliable and sustainable energy services and making the financial sector more inclusive.”

It is extremely critical that Zimbabwe pushes ahead with proposed economic and investment reforms in order to attract investment and weather the storm.

The rapid decline in oil and commodity prices has signaled an urgent need for economic diversification in Africa. I have often talked about the urgent need for African countries to diversify growth away from commodities.
According to the World Bank, cities in Africa are over-crowded, disconnected and costly for families and for companies. In order to build cities that work, policy-makers will need to direct attention toward the deeper structural problems that misallocate land, fragment development and limit productivity.

Key highlights of the report include:
Global growth has been weak, and the external environment facing SSA is expected to remain difficult in the near-term. Commodity prices are expected to remain low and volatile and external financing conditions are expected to tighten.

Key policy challenges to the region’s economies include adjusting to a new, lower level of commodity prices, addressing economic vulnerabilities and developing new sources of sustainable, inclusive growth.

Africa now has a narrow window of opportunity to harness the power of cities as engines of economic growth. But for urbanisation to bring the benefits that it should, governments should reform land markets and urban regulations to enable investment and development, and co-ordinate early infrastructure investments. Cities must offer services, amenities and housing for the poor and the middle class.

Successful urbanisation will also support Africa’s agricultural and rural transformation by effectively absorbing the labour being released by these sectors, by providing a market for agricultural produce and by financing further transformation and commercialisation.

For most countries in the region, the adjustment to the low commodity prices will need to include stronger efforts to strengthen domestic resource mobilisation to reduce overdependence on revenue from the resource sector.

Zimbabwe remains especially vulnerable following the collapse in commodity prices and the devastating effects of the El Nino weather phenomenon on agricultural production.

Clarification on the indigenisation policy announced this week by the President Robert Mugabe is welcome and a step in the right direction. While this still leaves some unanswered questions, hopefully the corresponding adjustment in the laws is forthcoming. More will need to be done to entice investors to risk their capital in Zimbabwe.

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