The world is bracing for the next recession. Post-pandemic, global supply chain disruptions persist, and conflict in Ukraine has decimated a key source of fertilisers, energy, and staple diet produce, such as wheat. Together with rising inflation and the cost of living, this has put substantial pressure on the global economy. A recession now seems inevitable. But some examples from Africa suggest that while the continent may slow down, it may not dig as deep into the recessionary trough as other, more developed, markets.
The positive case
Economic green shoots are evident across the continent. For example, Benin’s cotton production is soaring, and it is set to become one of the biggest producers in the world; the majority of the world’s platinum group metals (PGMs) – critical for renewable energy technologies and catalytic converters responsible for reducing car emissions – are in the ground beneath Southern Africa; and through the much-heralded leadership of Hakainde Hichilema, Zambia has halted its spiralling debt, and is now set to grow above 4% over the medium term. In the meantime Ghana’s cocoa trade is booming. With further plans for greater processing of cocoa to be done in-country, the West African nation could seize even more potential from this widely desired and lucrative little bean.
Furthermore, global investors are eying up climate-related opportunities in Africa, most notably in energy, agriculture and water – three resources the world could never go without. This provides further evidence that there are some regions that are well placed to buttress against the worst effects of a global recession; they may even continue on a growth trajectory, albeit a little slower.
The negative case
But before we get carried away with enthusiasm for these positive signs, it is also impossible to ignore the fact that there are persistent challenges that continue to limit the continent’s potential. For example, in a recent Henley Business School webinar, MD Ramesh, group chief executive officer of TGI Agribusiness, pointed out that while agriculture is a success story, the continent still imports around $45bn worth of food. This is a large sum, made larger by the fact many African governments lack the capacity and reserves to continue paying for these imports in foreign currencies. This ratchets up the risks for food security in many countries.
And as the West, most notably the US and Europe, raise interest rates, the screws on the fiscus are being tightened still further. Speaking alongside Ramesh, Nosa Igbinadolor, special reports editor at Business Day, Nigeria’s leading financial newspaper, highlighted how the dollar has become stronger relative to local currencies, leading to increased importing costs, which in turn pushes up the costs of living.
“Inflation has ballooned in Nigeria”, Igbinadolor said, “and there are ongoing fears it could lead to social strife.”
Factors to tip the balance
The line between these two cases is thin, and a few key factors may help tip the balance one way or the other. Four areas in particular stand out.
First, Africa needs to sort out its debt problem. Approximately 80% of debt repayments go towards servicing interest, and cynical onlookers comment that the other 20% disappears to corruption. This has got to change. Effective governance and more responsible control over treasuries are required to manage the balance of what comes in versus what goes out. African economies are undoubtedly growing, at a faster rate than much of the rest of the world; but if the coffers are sieve-like, losing money to debt and corruption, then, even if revenue collection improves, internal development will never take off like it needs to.
Second, a free flow of currencies is crucial to the point above. For example, in Nigeria, local business is encouraged to bring in foreign currency – there are policies supporting this; but investors cannot easily get their money out – there are policies restricting this too. Thus, many potential investors are reluctant to invest it in the first place.
The dual exchange rate system – designed to stabilise revenue and reduce pressure on foreign reserves through multiple currency valuations – is partly to blame. It may have worked at one point in time, but now, as the gap between the official and the black market rate diverge alarmingly, Nigeria, and others, need to implement reforms to allow currencies to flow more freely in and out.
Third, to support that free flow of money, and to ensure it is allocated most efficiently, states may have to partner more effectively with private capital. Some governments in Africa are wary of private capital, especially if linked to foreign investors. It may be that they fear a loss of control, or it is a remnant from the legacy of colonialism – a rejection of foreign intervention; but for some reason, governments see investor money and private enterprise more as a competitor than as a collaborator.
Many African governments have, however, embraced Chinese investment, seen as an alternative to Western interference, to help speed up infrastructure development. But Ramesh points out three problems with this approach: 1) the Chinese can bring in low-quality companies with exploitative practices; 2) in some cases they’ve built low-quality infrastructure that doesn’t last; and, 3) the Chinese are seen as unscrupulous negotiators with African leaders – which means that rather than the investment helping to build and strengthen African economies, they can be left the poorer.
Finally, and perhaps most importantly, Africa needs to diversify beyond resource extraction with minimal processing. This is the best long-term defence against deep and prolonged recessions, as it not only hedges varied value offerings, but also creates value-added differentiators that make those offerings indispensable in the global market.
While many countries have already identified these fundamental reforms as critical, there is something of a lag in implementation. This would have to change. The stark truth is that without the political will and the business savvy to make these reforms a reality – and quickly – Africa’s green shoots will likely wither and die, and the coming global recession will engulf us all.
This article is based on a recent webinar hosted by the Dunning Africa Centre featuring expert panellists MD Ramesh and Nosa Igbinadolor. To join future conversations, go to: https://events.africa.dunningcentre.com/#Overview