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From Africa Recovery, Vol.12#4 (April 1999), page 16

Africa's growth slowed in 1998

Falling commodity prices and Asian crisis among main causes

By Henk-Jan Brinkman and Carl Gray*

While seven countries recorded per capita GDP growth rates of 3 per cent or higher in 1998, growth slowed in the majority of African countries. Mainly external factors such as slower growth of the world economy, declining commodity prices and, to a lesser extent, the contagion effects of the Asian financial crisis, were blamed for the slowdown. The El Niño weather pattern adversely impacted eastern and southern Africa, while civil strife and political turmoil disrupted economic activity in a number of countries.

At 2.6 per cent in 1998, average GDP growth for all Africa was down by a negligible 0.1 percentage point from the 1997 figure. But annual output needs to grow by at least 2.6 per cent in Africa to prevent a deterioration in output per person. And although 1998 marked the fourth consecutive year that GDP per capita did not fall -- a trend not seen since the late 1970s -- GDP growth fell far short of the 8 per cent annual rate prescribed by the World Bank to significantly reduce poverty levels in the region.

Continued vulnerability

Last year's economic performance highlights the continued vulnerability of Africa in several areas. For example, many African economies are held back by the lack of diversification and the high price volatility of primary commodities, which still account for 70 per cent of total African exports. And because the agricultural sector tends to account for a large portion of GDP, bad weather takes an especially harsh toll.

On a brighter note, most countries maintained prudent monetary and fiscal policies and deepened structural reforms. Inflation continued to slow in most countries, mainly due to generally good food harvests and lower import prices for food, fuel and manufactured goods. At 10.8 per cent, all-Africa inflation reached its lowest average rate since 1973.

Because Africa is not yet well integrated into global financial markets, it has been somewhat insulated from the most severe effects of the Asian financial crisis. Nevertheless, African economies have been hit by shrinking export volumes and lower export prices.

African economies rely heavily on revenues from trade with countries outside the region -- nearly 90 per cent of African trade is with the rest of the world. Total African export revenues fell by nearly $14 bn in 1998, to just over $112 bn -- an 11 per cent drop from the 1997 level -- mainly due to price declines. But because import prices fell as well, the drop in the terms of trade (export prices against import prices) for Africa as a whole was not as steep as the fall in export prices.

The oil-producing countries were hit hardest, as oil prices dropped over 30 per cent last year. Generally, lower revenues from fuel exports caused trade and budget deficits to expand (or surpluses to narrow in the fuel-exporting countries). As the effect of lower oil prices filtered through the economies, GDP growth slowed in most fuel-exporting countries in 1998. Indeed, only a few countries -- Algeria, Angola, Republic of Congo, Equatorial Guinea -- increased oil output. Yet, two oil-producing countries -- Cameroon and Egypt -- succeeded in sustaining GDP growth at about 5 per cent in 1998, helped by foreign investment inflows.

Falling prices and weak demand for non-fuel primary commodities also depressed export revenues, despite higher export volumes in certain cases. In addition, mining output declined in some countries as a result of insecurity as well as previously inadequate investment in upgrading and modernization of plant, while agricultural output suffered from adverse weather. Copper export receipts dropped in Zambia by more than 20 per cent in 1998 because of lower prices and volumes. Lower oil and non-oil commodity prices might also divert foreign direct investment (FDI) from energy and mining -- the destination of much new FDI in recent years.

Steep Asian currency devaluations, together with global markets characterized by excess supply and reduced demand, have intensified competition for export markets. Kenya, Mauritius and Zimbabwe, with relatively large manufacturing sectors, faced increased competition from low-cost Asian exports in their own and in third-country markets. Mauritius, however, turned threat into opportunity by further streamlining its export-processing zone operations to boost productivity.

South Africa has borne the brunt of the direct financial contagion effects of the Asian crisis, although foreign investment to Egypt also slowed in 1998. With South Africa's relatively ample foreign exchange reserves (at more than $18 bn) providing a safety cushion, the smaller capital inflow did not trigger a currency crisis.

In 1997, the South African economy, Africa's largest, was one of the first outside East Asia to feel the financial crisis, though its impact was relatively small that year and the country continued to receive record levels of portfolio investment. Between May and August 1998, however, the South African currency came under speculative attack. Despite generally good macroeconomic fundamentals and a sound banking system, a small current account deficit left South Africa vulnerable. Authorities had few options but to raise interest rates, despite slow GDP growth and high unemployment. The business confidence index dipped in August 1998 to its lowest level since 1986 and GDP growth is estimated as barely positive in 1998. Decelerating economic growth and the fall of the South African currency also triggered exchange rate devaluations, higher inflation rates, increased competition and slower output growth in neighboring countries.

Fuelled by strong agricultural output that benefited from favorable weather conditions, growth in North and West Africa was relatively robust compared to the rest of the continent. Agricultural production in Algeria and Morocco recovered from the drought-affected harvests of 1997, and agricultural growth was similarly strong in Madagascar, Malawi, Mauritius and several other countries. In West Africa, cotton output has been expanding for a number of years in several countries, and in 1998, revenues generally held steady or increased despite lower prices.

In several countries in East and Southern Africa, however, agricultural output fell due to adverse weather, as did output in manufacturing sectors linked to the agricultural sector. At the same time, inflation rates and food imports rose in these economies. Agricultural production in Kenya, Rwanda, Tanzania and Uganda, seriously affected by the El Niño weather conditions in late 1997 and early 1998, recovered in the second half of 1998 but not by enough to offset the poor performance earlier that year. Similarly, agricultural output in Ethiopia recovered from the effects of poor rainfall, but food production shortfalls necessitated substantial inflows of food aid. Some countries in Southern Africa fell victim to drought and had to step up food imports. In Zimbabwe, an unexpected shortfall in food production led to severe shortages, substantial price increases and civil disturbances.

Bad weather had consequences for some non-agricultural sectors. Low rainfall in Ghana in late 1997 and early 1998 lowered production of hydroelectricity, which hampered economic activities not only in Ghana, but also in Benin and Togo, to which Ghana exports power.

Civil strife and cross-border conflicts

Political turmoil, civil strife and border conflicts in several countries in Central, East and West Africa again hampered development by diverting scarce resources to the military.

Perhaps the most dramatic development was the outbreak of civil war in August 1998 in the Democratic Republic of Congo. This conflict has severely disrupted economic activity and prospects for economic reform. Plans to strengthen the monetary and banking system were shelved as uncertainty and skyrocketing inflation undermined the new currency introduced in July 1998. Foreign donors suspended financial and technical assistance for economic rehabilitation. Costs spread throughout the region as eight countries, at least, were drawn into the conflict.

The border dispute between Ethiopia and Eritrea that erupted in armed conflict in May 1998 was similarly disruptive to economic activity. Both countries have also increasingly redirected scarce resources to defense and security-related activities. Once thriving cross-border trade between the two countries came to a halt as the borders were sealed after the conflict erupted. Ethiopia shifted its sea-borne trade from the ports in Eritrea to the port of Djibouti, thereby depriving Eritrea of one of its main sources of foreign revenue.

The civil war in the Democratic Republic of Congo (DRC), as well as a brief armed conflict in Lesotho, threatened to undermine the successes that the Southern African Development Community (SADC) had achieved in recent years in promoting social and economic development in the region. In the DRC conflict, the mutual defense agreements of SADC were invoked, thereby expanding the peacekeeping role of the organization.

Similarly, the Economic Community of West African States (ECOWAS) has been preoccupied with the conflicts in Guinea-Bissau, which erupted in mid-1998, and Sierra Leone. Still, it managed to introduce travellers' cheques as a step toward monetary union.

Last year, growth of Nigeria's economy, Africa's second largest, was constrained by political uncertainty, civil unrest, low oil prices and energy shortages. But the government of General Abdulsalami Abubakar has demonstrated a new commitment to reform by accelerating privatization, reorganizing the oil sector to ease fuel shortages, investigating misuse of public funds and eliminating the dual exchange rate. Renewed assistance from the international community and debt relief could follow, though many political uncertainties remain.

Towards reconstruction

The situation in Sierra Leone remains unstable despite the reinstatement in early 1998 of the democratically elected president, who had been removed from power in May 1997. Continuing civil strife in the countryside and the capital has hampered economic activities.

Economic indicators only partly capture the impact of such conflicts. Angola's GDP, for example, has continued to grow during the country's civil disturbance because the important oil sector is relatively isolated. Other indicators present a more comprehensive picture. For example, there are about 1.3 million internally displaced people in Angola and the under-five mortality rate of children is about 30 per cent. And in Sudan, the long-running civil war combined with inadequate rainfall led to widespread hunger and starvation in 1998, necessitating substantial emergency food assistance. In Somalia as well, adverse weather and continued strife caused serious food shortages.

In contrast, post-conflict developments have been encouraging in a number of countries. Economic activity is recovering in the Republic of Congo after a civil war in 1997 caused widespread destruction of infrastructure and a decline in the non-oil economy. In Liberia, the government launched a $433 mn reconstruction programme and hopes to attract foreign investment to exploit its mineral resources. In Burundi, Mozambique and Rwanda, GDP growth was fueled partly by a revival of farming activities after civil disturbances. Mozambique and Rwanda each achieved growth rates of 10 per cent in 1998. Mozambique's performance also reflects substantial inflows of FDI for large-scale projects in infrastructure, construction and industry.

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