Friday, April 24, 2015

Africa and commodity prices: No longer the kiss of death


In 2014, commodity prices tumbled. Many economists feared the worst for Africa. For decades the continent has been worryingly dependent on commodities to power economic growth. When prices crashed, economies would go into a tailspin. This time around, though, things seem different. The continent is holding up well.

The map (on the left) looks at how forecasts from the International Monetary Fund for African growth in 2015-16 have changed in the past year. Compared to what it was predicting in April 2014, the IMF now expects slower economic growth in most African economies. For instance, the IMF now expects Nigeria to grow by 10% over the next two years, whereas in April 2014 it had predicted growth of 14%. Thus growth expectations have fallen by 4 percentage points, as the map's colouring shows.

Some countries, especially those that are still very dependent on commodities, have seen bigger downgrades. But overall the situation is positive. Only two countries, Sierra Leone (a commodity-dependent economy which has also been hit by Ebola) and Equatorial Guinea (an oil-soaked kleptocracy), will see their economies contract over the next two years. Other African economies, meanwhile, have been upgraded. Lower oil prices are a boon for Kenya, which is a big importer of the fuel. And the Kenyan government is also embarking on big fuel-hungry rail and energy projects.

What explains Africa’s solid performance? We discussed this in detail at the beginning of this year, but a few things stick out. Manufacturing output in the continent is expanding as quickly as the rest of the economy. Growth is even faster in services, which expanded at an average rate of 2.6% per person across Africa between 1996 and 2011. Tourism, in particular, has boomed: the number of foreign visitors doubled and receipts tripled between 2000 and 2012. All this means that even if income from commodity production slips, other parts of the economy can take up the slack.

Better fiscal policy also plays a role. Until a few years ago, nearly all African economies spent freely when their economies were hot, only to rein in spending when things cooled down. That is the opposite of what most economists would advise a finance minister to do. But in recent years, according to a report from the World Bank published in January, fiscal policies in many African countries have become more sensible. These days a fair number of African economies save money during the good times, in order to spend it in the bad ones.

Even so, the casual observer should not be fooled. Africa is still too dependent on commodities. And its politicians need to do more to reduce their countries' reliance on the sector for economic growth. But things are a lot better than they used to be.

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