“African economies vulnerable to external shocks in 2019,” says Albert Zeufack, World Bank Chief Economist for Africa

Africa’s economy is recovering slowly, but problems in the advanced economies and China could create headwinds for the continent in 2019,  the World Bank’s chief economist for Africa, Albert Zeufack, says in this interview with Taku Dzimwasha.

What is your overall outlook for Africa in 2019?

The region’s economic recovery is in progress but at a slower pace than expected. The external environment facing Sub-Saharan Africa has become more challenging. Growth in the region is projected to increase from 2.7% in 2018 to 3.3% in 2019. To accelerate and sustain an inclusive growth momentum, policymakers must continue to focus on investments that foster human capital, reduce resource misallocation and boost productivity. Policymakers in the region must equip themselves to manage new risks arising from changes in the composition of capital flows and debt.

OPEC has cut its global demand forecast for oil next year, how will this affect growth in exporters such as Nigeria and Angola?

The fact that OPEC has cut its global demand forecast for oil next year implies that there are also likely demand forces for a reduced price of oil. In Angola, conditions were already weak as oil production failed to respond positively to prices increasing before October due to maturing oil fields. The economy will be affected further negatively, as their FX reserves continue falling. To mitigate the effects of oil prices, the government is implementing a series of reforms to boost the non-oil economy and is preparing a set of reforms within the oil industry. In Nigeria, the impact of falling oil prices may be more subdued given that the non-oil economy is picking up. In terms of the economic structure, the economy of Nigeria is more diversified than that of Angola. Having said this, the fall in oil prices will hit government revenues as well as FX supply.

Have commodity exporters such as Nigeria done enough to diversify their economies?

Crude petroleum in Nigeria represents about 10% of GDP whereas it is about 75% of total exports. The country needs to: (a) diversify its sources of foreign exchange and thus diversify its export basket, (b) implement policies to boost productivity in both the informal and formal sectors. Diversification requires to have in place an enabling environment for its own success. A number of key drivers are necessary – including investment, trade and industrial policies; a dynamic growth performance; macroeconomic stability; a competitive exchange rate; good governance; and absence of conflict and corruption. Given the volatile nature of its current growth process, largely linked to the oil sector, Nigeria would benefit from policies to promote diversification and long-term inclusive growth. Spatial integration and sub-national specialisation are important in this regard. They are key for creating a nationally integrated market for goods and products as well as attracting much-needed private investment, which in turn could enhance productivity through scale and specialisation. To tap the spatial drivers of development, policymakers need to focus on investments that reinforce agglomeration and economies of scale (i.e., around clusters and urban nodes); optimise the backward and forward linkages between rural areas and the major urban markets; and address structural and land management issues in major urban nodes and along major growth corridors to remove or alleviate barriers that undermine the growth potential.

Should we be concerned about debt levels in Africa?

Public debt remained high and continued to rise in some countries, reflecting the recent surge in eurobond issuances. The vulnerability to weaker currencies and rising interest rates associated with the increased reliance on foreign-currency debt may put the region’s public debt sustainability further at risk.

As countries have gained access to international capital markets and non-resident participation in domestic debt markets has expanded, non-concessional debt has increased. The share of foreign currency-denominated public debt rose to 60% of total debt in 2017, an increase of about two-fifths from 2010-13.

Do you foresee the emerging market rout continuing into next year?

Risks to global economic expansion have increased. Financial conditions in advanced economies could worsen abruptly, perhaps due to a more drastic fall in equity markets, and global trade tensions could escalate. This would create further headwinds for emerging market economies, especially those with significant imbalances, high external financing needs and limited room for policy support. Slower-than-expected growth in China, which has strong trade and investment links with countries in sub-Saharan Africa, would adversely affect the region through lower export demand and investment. Faster-than-expected US monetary policy tightening could result in sharp reductions in capital inflows, higher financing costs, and rapid exchange rate depreciations, especially in countries with weaker fundamentals or higher political risks. Sharp currency depreciations would make the servicing of foreign currency denominated debt more challenging for many countries in the region.

How can African nations tackle low productivity and maximise the population dividend?

To accelerate and sustain an inclusive growth momentum, policymakers must continue to focus on investments that foster human capital, reduce resource misallocation and boost productivity. Labour productivity differences between Sub-Saharan Africa and more advanced economies have remained large. More recently, the story of misallocation (inefficiencies in the use of technologies) has become relatively more important than undercapitalisation (low capital stock) in driving these productivity differences. These inefficiencies in resource allocation across agricultural farms and manufacturing firms in sub-Saharan Africa are linked to human capital misallocation. Policies and institutions distort the allocation of talent by delivering inefficient occupational choices (which either leads to more informality or a slower structural transformation process) and affecting producers’ decisions to invest in new technologies or methods of production as well as their decisions to enter or exit the industry. Application of digital technologies to sectors such as agriculture provides unrivalled opportunities for an acceleration of growth in the country.

How can Africa better integrate itself into the global economy?

Lower tariffs, better access to credit for the private sector, a more conducive business climate, and investment in human capital are found to support more intense trade flows and better insertion in global value chains. Governments have control over these policies, and are being implemented in countries across the region. Sound macroeconomic policies, improving economic institutions, and a growing labor supply would help sustain these efforts. Additionally, efforts have been made to increase intra-regional trade. So far, 49 out of 55 countries have signed the African Continental Free Trade Area (AfCFTA). The AfCFTA will enter into force once 22 member states have deposited their instruments of ratification. The United Nations Economic Commission for Africa estimates the AfCFTA will increase intra-African trade from the current 10-16% to about 52% by 2022.