Faced with the current situation in Africa, the former Minister of Economy and Finance in Tunisia, Hakim Ben Hammouda, suggests how to relaunch and stabilise the continent’s economy in order to preserve the social contract.
After years of crisis and a lost decade in the 1990s, our continent had found the path to strong growth. From being a hopeless continent, Africa became the hope for the future of the world during the boom years of African growth.
However, this context has changed radically over the last two years under the effects of two exogenous shocks of rare violence: the health crisis and the war in Ukraine.
These two shocks have led to four major crises: the weakening of growth, the deterioration of major macroeconomic balances, greater financial vulnerability and an unprecedented social crisis that has put pressure on a social contract that was losing momentum.
Africa is now facing a historic moment that requires immediate responses to put the continent back on a path of inclusive and sustainable growth. The responsibility of African governments, economic and finance ministers and central bank governors is to define the development strategies and economic policies to address the two shocks and the four major crises that have resulted.
These responses must address the following five challenges: macroeconomic stabilisation, growth recovery, structural transformation, integration, and defence of the social contract.
The first major concern of African governments would be to address the drift of major macroeconomic balances. It is by stopping this drift that we can reduce financial vulnerability and limit recourse to international debt. We need to increase the efficiency of the tax system in order to address leakages and increase the revenues of African countries. From this perspective, the digitalisation of tax administrations is a key objective to which African countries must devote the necessary resources.
The African debt creates a great vulnerability for African countries. I suggest creating transparent public debt management agencies capable of adopting less traditional and more dynamic policies that can reduce the debt burden
There are limitations to the initiatives put in place by the G20 and the international community . African countries must mobilise with the African Union for a bolder initiative to limit the burden of debt and ongoing repayments. This initiative should not be limited to the least developed countries but should also concern the intermediate countries which are also affected by debt vulnerability.
Economic recovery must be part of the rescue package to help African countries cope with major shocks and crises. This is especially necessary to prevent macroeconomic stabilisation from turning into austerity that could reinforce economic crises and disenchantment.
The policy of recovery leads us to emphasize the need to mobilize resources to initiate a new growth path, which are estimated by the AfDB at US$ 432 billion for the period 2020-2022.
The mobilisation of these resources requires several actions, including strong coordination between monetary and budgetary policies in order to leave room for public investment despite the need to fight inflation. The development of the internal financial market will play its role as a dynamic source of financing. There is also the need to demand an increase in official development assistance to help African countries cope with the difficulties.
Resource mobilisation raises the key issue of rating agencies, particularly the three major agencies that dominate the market, Moody’s, Fitch and Standard & Poor’s. A growing number of African countries are using these agencies. From one country in 1994, we now have 32 countries. However, the assessments and ratings do not take into consideration the specificity of the development dynamics on the continent.
The methodologies of these agencies have been widely criticised for not taking into consideration the specificities of African economies and more particularly their future growth potential. The often low ratings of African countries have major consequences on African sovereign risk and lead to a significant increase in the costs of capital market exit and debt.
These difficulties of the discussions between the African countries and the rating agencies are at the origin of the demand expressed by African countries to set up a rating agency capable of taking into account the specificities of African economies. This agency could be based on the significant peer review experience of the APRM and the experience accumulated by African institutions in sovereign risk assessment, notably the African Development Bank.
Poor progress in transformation is at the root of the fragility of African economies and low growth potential.A consensus has been reached among major African institutions on the importance of helping African countries to develop their diversification strategies. At the same time, the globalisation crisis has opened up important opportunities for African countries to benefit from regionalisation and attempts to create regional value chains to develop their diversification strategies.
Regional integration has enabled regions of the developing world to withstand exogenous shocks, particularly in Asia. Africa has succeeded in constituting the largest integration zone in the world. It is important that this project succeeds and that African institutions focus on implementation and on strengthening trade within this integration zone.
Rebuilding the social contract
The various crises have caused the post-independence social contract to falter. The reconstruction of this contract will be crucial to ensure the stability of African countries and to strengthen the construction of democracy.
These recommendations are based on an assessment of what Africa is like in the summer of 2022.
The two “shocks” of Covid-19 and Ukraine, causing a slowdown in growth and even a recession in 2020, have led to a major shift in the major macroeconomic balances and the return of inflation. They have also had negative effects on the sovereign debt of African countries with difficulties in accessing external financing.
The effects of these two shocks were not limited to macroeconomic aspects but also affected structural aspects with a drop in investments, including those from abroad.
And beyond the economic and financial consequences, these events will increase poverty and marginality and set back the continent’s progress towards achieving the SDGs (Sustainable Development Goals).
The growth recorded since then has not been able to reduce the weakness of African economies and its structural transformation. This vulnerability of our economies gives exogenous effects and shocks from outside a greater amplitude and much more marked destabilising effects.
Beyond its structural challenges, the turn that Africa must take is made even more complex by three important issues.
The first concerns the major political and military turbulence that is indicative of growing global disorder and the inability of the international community to establish and define a new global governance that is open to and conducive to greater participation by developing countries, particularly Africa. This global disorder will bring great turbulence and will fuel destabilisation. This turbulence will make it difficult for the continent to return to inclusive and dynamic growth.
The second challenge is linked to the crisis of globalisation and attempts to build a post-global world. The project of globalisation has been a response to the crisis of the nation state and the welfare system since the late 1970s. This project has succeeded over more than four decades in accelerating global growth, expanding world trade and the movement of capital and investment around the planet. Globalisation has also paved the way for the emergence of new economic powers from the developing world, particularly from Asia, Latin America and Africa. Accelerated development in these countries has lifted millions of people out of poverty and into a decent life.
However, recent years have shown the fragility of this project with the multiplication of financial, social and climatic crises. The health crisis and the difficulties in managing global value chains with the confinements and closures of borders have finally called this project into question and opened the page for the search for a new global organisation of economic activities.
The third issue concerns the effects of the various crises and exogenous shocks that have led to a deterioration of the social situation in all African countries, with rising unemployment, social marginality and a sharp deterioration of basic social services, including education and health. These crises have undermined the efforts made by African countries to achieve the MDGs and, above all, have further weakened the post-independence African social contract. They have led to increased insecurity and political instability. From now on, these crises will result in the questioning of democratic regimes and the return of military and populist authoritarianism. This instability will only reinforce the difficulty of building shared and plural projects and visions.
The difficulty of our task today and that of African institutions is to find responses to crises and the consequences of external shocks in an unstable and uncertain world.
Yet, despite the difficulty of this task, I remain optimistic about our ability to meet the challenges and put in place public policies capable of giving people hope. This optimism is not the result of an abstract philosophical and political conviction, but is the result of the great potential that the continent has and which, on the day it is allowed to express itself, will enable us to open a new page in African history. A well-educated youth that is sought after by the major global companies, a middle class that continues to grow and that makes Africa one of the largest markets of the future, a development of digitalization that is faster than in some developed countries and that will be one of the foundations of the world to come, are all essential assets in the definition of a new collective African experience.
African leaders, African institutions and elites have a huge responsibility today and must define a new social contract and a new way of living together. This quest for a new project must be guided by three major principles:
– The audacity to get off the beaten track and to show great collective intelligence in defining new projects and new public policies,
– Solidarity between generations, between African countries and between social strata to carry the project of a new African liberation,
– International cooperation, which must be renewed in order to make the emergence and transformation of the continent a common global good.
The IMF said that the exposure of African countries to exogenous shocks is not uniform and depends on several factors including the depth of trade links with the global economy, the degree of integration with international financial markets and the existence of room for manoeuvre to cope with international shocks, particularly the level of international reserves.
The degree of exposure shows that oil exporting countries are the most sensitive because of the importance of trade links and intermediate countries because of their integration with international financial flows. At this level, the poor countries are less sensitive to global factors because of their lower integration into international flows.
Moreover, the tightening of monetary policy and a 25 percentage point increase in US long rates would result in a 0.25 percentage point decline in African growth in the first year. At the same time, an average 10% rise in oil prices would cause growth to fall by 0.5 percentage points.
These indications are quite significant for the magnitude of the effects of exogenous shocks on African economies.
Moreover, with the crisis in Ukraine, Africa has suffered from rising energy and non-energy prices, destabilization of supply chains, and disruptions in financial markets, the AfDB recalls.
This turbulence and the volatility of international markets will have an impact on the continent. Russia and Ukraine are major players in the global agri-food, oil and gas markets. As a result, commodity prices have risen rapidly to record levels. In April 2022, world wheat and maize prices were 72.5% and 21.9% higher than in April 2021. While oil-exporting and other commodity-exporting countries have benefited from this increase in world market prices, this volatility has hit African countries hard and has led to a resurgence of inflation after years of lull. In addition, these developments have led to severe food supply difficulties, affecting the food security of many African countries and increasing poverty.
A slowdown in growth
After a rebound in 2021, when African growth reached 6.9%, forecasts for 2022 show a sharp deceleration in growth, which is not expected to exceed 3.9% and will be lower than global growth for the first time. This decline in growth is at the origin of a decrease in Africa’s share of world GDP, which will be 4.7% in 2022, the lowest share since 2002, according to OECD calculations.
This sharp decline in growth is also explained by the vulnerabilities linked to the tightening of monetary policy in the major developed countries, which will have negative effects on African debt and on the countries’ ability to access financing.
African growth is still marked by the influence of the pandemic and the emergence of new variants, causing major disruptions in businesses and production chains. In addition, the continuing effects of the pandemic in Africa are also explained by the low vaccination rate, which stood at around 15.3% in March 2022, well below the global average of 60%.
The pandemic has had a devastating impact on African businesses. A World Bank survey in eight African countries found that 18% of businesses had to temporarily or permanently shut down in the years 2020 and 2021. According to the AfDB, the closures range from 5.2% in Mozambique to 65.8% in Chad, and depending on the sector, the hotel and service sectors have been more affected than the manufacturing sector.
African growth is also affected by climate change and Africa is the continent that has experienced the most climate shocks in the world. For example, in 2019, five African countries were among the countries most affected by climate change in the world. Between 2020 and 2021, Africa was affected by 131 extreme weather disasters including 99 floods, 16 storms, 14 periods of intense drought and two forest fires.
Political instability has combined with the effects of exogenous shocks to significantly slow African growth. After several years of democratic stability, Africa has entered a phase of great instability with the multiplication of coups d’état.
Deterioration of the major balances
External shocks are causing a deterioration in the major macroeconomic balances in Africa. The budget deficit is forecast to be around 4%, but is expected to deepen as growth weakens. The acceleration of the deficit is explained by the recovery and rescue policies for businesses and support for the most disadvantaged social strata implemented in most African countries to cope with the effects of the pandemic.
For the current account deficit, the average deficit is forecast to be around 2% for the year 2022.
African countries will also experience an acceleration of inflation to around 13.5% in 2022. Several factors have contributed to this acceleration of inflation, some of which are imported, linked to the rise in international prices of cereals and oil, but also the depreciation of the exchange rate and the rise in local prices due to shortages and difficulties in distribution chains.
The deterioration of the major macroeconomic balances will lead to a sharp increase in financing needs and a high level of vulnerability due to the increase in debt.
Financial vulnerability and debt crisis
The great turbulence and external shocks experienced by the continent have increased the financial needs and debt burden that has become a major factor of vulnerability for many African countries. This vulnerability is not limited to the least developed countries but also affects intermediate countries.
The debt-to-GDP ratio in 2022 is around 70%, which is significantly higher than before the pandemic. 23 African countries in February 2022 were considered over-indebted. Alongside the increase in debt, debt service has also risen significantly from 3.1% to 4% of GDP between 2019 and 2020.
This increase is the result of an upward trend that Africa has been experiencing in recent years, with the result that African debt levels are now the highest since 2002. After declining during the 2000s due to strong economic growth and cancellations under the HIPC initiative, African debt will start to rise again, reaching 28% of GDP in 2008 before reaching 56% of GDP in 2019.
The increase in African debt, in parallel with the significant needs of public finances linked to exogenous shocks, is also explained by the depreciation of exchange rates, the increase in interest rates following the downgrading of sovereign ratings by rating agencies and the rapid change in its profile.
It should be noted that creditors of African countries have played a crucial role in the upward trend in debt. In addition to the traditional bilateral creditors and members of the Paris Club, new non-member creditors, including China, have joined the group. There is also the rise of private creditors following the exit of African countries from the international markets and their share has increased from 4% to 11% of GDP between 2010 and 2020.
It should be mentioned that without certain initiatives taken by the international community, the situation would have been even more dangerous and vulnerability even greater. In this regard, the temporary relief from debt service payments and the liquidity provided by the international community helped to reduce the impact of debt repayments during the pandemic.
The G20 Common Framework (ISSD) for Temporary Suspension of Debt Service, which came into effect in May 2020 and has been extended to December 2021, has enabled the 38 beneficiary African countries to reduce their debt repayment burden by $13 billion.
A few months later, the IMF’s decision to make a general SDR allocation of $650 billion on 23 August 2021 provided African countries with new resources to meet their financing needs. Calculated on the basis of their IMF quotas, African countries were able to access $33.2 billion, which represents only 5% of their total SDR allocation.
While these initiatives have helped ease the cash flow pressures on African countries, they are far from providing them with the financing they need.
A setback to progress on the SDGs
Economic turmoil and exogenous shocks have led to a deepening social crisis. Declining growth and periods of confinement following the pandemic and rising food prices have pushed 30 million Africans into extreme poverty and 22 million Africans have lost their jobs in the year 2020, the AfDB notes. This trend will continue over the next few years and it is estimated that 1.8 and 2.1 million Africans could fall into extreme poverty in 2022 and 2023 respectively.
The effects of the crisis will also affect social infrastructure, including education and health systems.
Thus, the two exogenous shocks of rare violence have caused four major crises, including the weakening of growth, the deterioration of major macroeconomic balances, greater financial vulnerability and an unprecedented social crisis that has put pressure on a social contract that is losing momentum.
These are the challenges to which African countries must respond.