From Africa Recovery, Vol.12#2 (November 1998), page 12

Africa the fastest growing world region, IMF says

Amid the stampede of bankers and investors fleeing emerging markets in Asia and Latin America, Africa's economies were generally cushioned from the early effects of the international economic slowdown and credit crunch. But the current global financial crisis, widely considered as the worst in 50 years, is cutting more deeply into projected demand for commodities and hopes of African growth.

The International Monetary Fund's World Economic Outlook projects African gross domestic product (GDP) growth at 3.7 per cent this year, making Africa the fastest growing region in the world. The IMF projects growth in Asia at 1.8 per cent this year, while the Americas are forecast to grow at 2.8 per cent.

The Fund's downward revision of earlier projections suggests that commodity price increases, rather than successful changes in economic policy powered much of Africa's higher growth performance over the past five years. Nevertheless, IMF and World Bank economists insist that the growth has been stronger in "reforming" countries than "non-reform" countries and that the subsequent dips in GDP growth will be less severe among the reformers.

Overall, the IMF projects average consumer price inflation in Africa at 7.7 per cent this year, less than a fifth of the rate in 1994. Reflecting the global credit crunch, the IMF projects that net private capital flows to Africa this year will slump from last year's recorded level of $14 bn to $6.4 bn, before bouncing back to a projected $13.4 bn in 1999. This would push Africa's share of private capital flows to all developing regions from 9.7 per cent this year to 11.5 per cent in 1999. Bank and Fund officials say this reflects perceptions that compared to other emerging markets, Africa has become "relatively less risky."

The Fund's aggregate statistics emphasize a few major areas of concern, including the need for Africa's two largest economies, Nigeria and South Africa, to grow faster. Both of them face formidable obstacles: Nigeria has to counter the downward pressure of weaker oil prices and South Africa has to combat the effects of capital outflows, currency depreciation and lower commodity demand.

Another key concern is the African franc zone, where growth remains robust. After 1 January 1999, the CFA franc will be pegged to the single European currency -- the Euro -- rather than just the French franc. While IMF economists are still upbeat about franc zone countries maintaining their current pace of GDP growth under the new arrangements, several commercial banks forecast difficulties resulting from the CFA link to a "hard" Euro.

With France's GDP growth projected at 4 per cent and the French franc appreciating against the dollar in the current business cycle, some banks think the CFA franc may be linked at too high an exchange rate with the new Euro. The effects of this could put a brake on growth in Africa, as rival commodity producers in Asia benefit from more flexible exchange rate policies. While the CFA's linkage to the Euro may promote low inflation and fiscal rectitude in the zone's countries, this cannot compensate for the lack of exchange rate flexibility and constraints on economic growth, as world commodity demand remains weak.

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