Africa Rising no more: Economic turmoil and shrinking opportunities put the continent at risk – Javier Blas

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In recent years, sub-Saharan Africa has faced a series of challenges, including political instability marked by numerous coup attempts, economic distress, and a dependence on commodities that has proven detrimental. The region’s GDP per capita peaked in 2014 but has since declined by more than 10%, while global GDP per capita has risen. These economic woes are contributing to social and political unrest, exacerbated by a young and urbanising population with access to social media. The funding squeeze resulting from rising US interest rates, a decline in Western aid, reduced Chinese investment, and a drop in foreign direct investment has added to the region’s economic woes. These issues, along with the legacy of past crises and climate change, present significant challenges that require global attention and solutions to ensure the well-being and stability of the continent.

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What Happened to Africa Rising? It’s Been Another Lost Decade

By Javier Blas

(Bloomberg Opinion) — The series of coups d’etat plaguing sub-Saharan Africa — at least nine attempts in three years — plus a continent-wide political malaise have prompted some soul searching. What’s gone wrong? Many have pondered a myriad of factors, from growing Russian influence to ongoing corruption. But those are symptoms, not causes, of what truly ails the continent: economic distress.

An utter dependence on commodities has proven harmful. Across the region, borrowing costs have risen to unaffordable levels; Chinese loans and direct foreign investment are drying up; and the legacy of the recent Covid  crisis persists. African finance ministers are having to make impossible choices between paying the salaries of civil servants, keeping schools and hospitals open or compensating foreign investors. People are fed up with governments failing to improve conditions. 

Mix this with a young and increasingly urban population that voraciously consumes social media, and you have an explosive cocktail. If anything, it’s surprising the continent isn’t suffering more social and political chaos. 

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The International Monetary Fund and the World Bank are scheduled to hold their annual meeting in Morocco next month, which would mark a return to the African continent for the first time in 50 years and an opportunity for global leaders to refocus on the region. It’s unclear, though, if plans will change due to devastation near Marrakech caused by last week’s deadly earthquake.

Measuring economic wellbeing across a continent as vast and diverse as Africa — 54 countries plus several territories whose independence is disputed — is tough. Generalizations and rough benchmarks are inevitable. The result is, obviously, imperfect. But despite its shortcomings, nothing beats looking at the region’s gross domestic product per capita as a measure of prosperity.

On that metric, the troubles are clear: Sub-Saharan Africa GDP per capita peaked in 2014 at $1,936 and has since fallen more than 10% to about $1,700 this year. In the same period, global GDP per capita has risen nearly 15%. 

Looking at sub-Saharan Africa through this economic glass reveals a harsh truth: The region’s social and political trouble is more a consequence than a cause. People no longer feel that they’re doing better, or that their children will. 

The risk of another decade of stagnating personal income is real, and it would be a dreadful outcome for the world’s poorest continent. Africa is particularly vulnerable because a large share of its population is already living below the poverty threshold, and its emerging working and middle classes are more fragile than elsewhere, floating in between making ends meet and penury.

As Mthuli Ncube, now the finance minister of Zimbabwe, said a few years ago, during his time as chief economist at the African Development Bank, middle-class status in Africa is not one-way, but rather a “revolving door.” For many, that door continues to turn, pushing families back into poverty.

The economic fortunes of Africa are closely linked with the commodity market. When the prices of oil, copper, cocoa and other raw materials are high, the continent tends to do well. The 1950s and 1960s, when many African nations won independence from European colonial powers, were a golden era. Europe and Asia needed African commodities for post-war reconstruction, and Africa enjoyed rapid economic growth.

But the continent’s reliance on commodities became a curse. Low prices, mismanagement, corruption, wars and the legacy of colonialism hampered Africa’s development throughout much of the 1980s and 1990s. By 2001, regional GDP per capita in sub-Saharan Africa was lower than it had been in 1981. It became the “hopeless continent” in the eyes of many investors.

Then starting in the early 2000s, China’s boom supercharged commodity markets, and the fortunes of the continent changed dramatically. As prices for oil, copper and corn soared from 2004 to 2014, regional GDP per capita more than doubled. Consultants and investors quickly ditched their “hopeless continent” cliche. A new one was minted: Africa rising.

The theme didn’t last long. For consumer companies, such as Nestlé SA and Unilever Plc, the bet on the continent’s nascent middle class was no sure thing.

The problem is, lifting GDP per capita can be a grueling fight against booming population growth. Over the last two decades, the size of the sub-Saharan population has doubled to 1.2 billion. With the population expanding at a rate of, at least, 2.5% per year, the region needs to grow its economy at a good speed just to stay still.

To get GDP per capita rising at, say, a healthy annual rate of 2.0%, its economic growth has to rise to nearly 5%. That’s within reach when the wind blows in the right direction, and indeed, that’s what happened in the early 2000s thanks to higher commodity prices. However, it’s all headwinds now. The World Bank put it succinctly earlier this year, saying that economic growth in Africa was “insufficient to reduce extreme poverty and boost shared prosperity in the medium to long term.”

With the West largely preoccupied with the Russian invasion of Ukraine and China increasingly looking inward, the economic troubles of Africa haven’t received enough attention. Washington DC appears uninterested: Donald Trump didn’t set foot in Africa at all during his time in the White House; President Joe Biden hasn’t travelled to the region either, except for a brief stop in Egypt in 2022 to attend a UN climate change summit.

An IMF and World Bank meeting in October would be an important chance for global leaders to focus on issues plaguing the continent. There are multiple economic problems for policy makers to untangle, but they can be summarized in three large buckets.

First, there is the funding squeeze. Africa is, by far, the region worst hit by rising US interest rates. Since the Federal Reserve started tightening its monetary policy in March 2022, ending a decade and a half of easy money, the region has been unable to tap the international bond market. For Africa, which only started raising money from foreign investors in earnest in 2004–2005, the shift has come as a shock.

In the 10 years before 2023, sub-Saharan African nations issued, on average, nearly $10 billion a year in international bonds, injecting much-needed funds into their economies. Kenya, Rwanda, Mozambique and Angola issued their first-ever bonds in hard currency. The foreign debt market was particularly important after the global financial crisis of 2008–2009 and in 2020–2021 during the worst days of the pandemic. Each time growth weakened, the debt machine resolved the problem, providing countries with a short-term sugar rush.

The current funding squeeze aggravates a protracted trend that’s been years in the making: The level of public debt in sub-Saharan Africa has more than tripled since 2010. As a result, the interest burden is rising, in some cases rising to a fifth of the country’s revenue. That’s partly due to a greater reliance on expensive market-based funding, like loans from commodity trading houses and international bonds, coupled with a long-term decline in aid budgets from the West and China. On top of that, local currencies have depreciated against the US dollar sharply since mid-2022, further increasing the cost of servicing hard-currency bonds.

Unless US interest rates fall soon — something Fed officials recently said wouldn’t happen — the squeeze will get worse. Two countries, Zambia and Ghana, have already defaulted on their foreign debt. Many others facing a maturity wall in 2024, 2025 and 2026 will be forced to either refinance their bonds issuing new paper at yields well above 10%, or cut government spending to find the money to repay foreign investors.

“The debt problems are building,” says Gregory Smith, author of Where Credit is Due: How African Debt Can Be a Benefit Not a Burden. “We are not going to see a wave of defaults, but we have massive debt burdens that we can not easily resolve.” 

The second problem is another kind of funding squeeze, but from foreign aid, China and the private sector.

Before the international bond market opened up for African nations, Western donor money filled the gaps. Over the last few years, however, Western aid budgets have been trimmed due to pressing domestic needs. According to IMF estimates, official development aid, which was equal to nearly 4% of sub-Saharan Africa GDP in the early 2000s, has fallen to about 2.5% as of 2022. With the West spending heavily at home, subsidizing consumers through an energy crisis in Europe, and directing money abroad to support Ukraine against Russia, there’s very little sign that aid to Africa is about to rise again soon.

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For several years, the gap left by Western donors was filled by China, keen to widen its diplomatic footprint in the continent to secure commodity flows and infrastructure contracts for its domestic giants. But Beijing has retreated, too. From an all-time high of more than $28 billion in 2016 — when Chinese lending to Africa surpassed the combined aid to the region provided by the American, French, British and German governments — Beijing reduced its loans to a 16-year low of $1.9 billion in 2020. Since then, Chinese lending has largely flatlined. Angola, Kenya, Ethiopia, Zambia and Sudan, which benefited from the Chinese largesse, are among the worst hit.

Western and Chinese money isn’t the only source of cash that’s drying up. The private sector has also cut back. Foreign direct investment, a measure of long-term, cross-border investment in companies, plants and projects, plunged in sub-Saharan Africa to a 22-year low of $7.2 billion in 2022, according to data from the World Bank. FDI flows peaked at $45 billion in 2012 during the last days of the China-led commodity boom.

With less cash on hand, African countries are making hard choices, including reducing resources for critical long-term development such as health care — and in turn weakening the region’s growth potential. “If measures are not taken, this funding squeeze will hamper sub-Saharan’s efforts to build a skilled and educated population and to be the driving force of the global economy in years to come,” according to Abebe Aemro Selassie, the head of the IMF Africa department.

The third bucket of problems includes the continent’s commodity-led growth model, the legacy of past crises and the impact of climate change.

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The financing squeeze comes at a “most unfortunate time,” according to the IMF, as the region is facing elevated economic imbalances due to multiple legacy crises. The most recent is the Covid-19 pandemic, but the scars of civil conflict and colonialism are still present, too. And the economic fortunes of the region still remain closely linked to the commodity cycle, making Africa more vulnerable than others to a Chinese slowdown.

For now, commodity prices have recovered somewhat, with oil hovering at a nearly one-year high of $90 a barrel. But as Middle Eastern oil-producing countries have found, the purchasing power of a barrel of oil — or ton of copper or pound of coffee — isn’t what it used to be. After US and European inflation shot up to levels unseen in 30 years, commodity prices have lagged those of manufactured goods, weakening Africa’s terms of trade. 

It’s not all despair, however. The economic outlook for Africa isn’t what it was 10 years ago, but it’s a lot better than the dire predictions of the late 1990s. Inflation, even if elevated, remains under control; democracy, even if weak, is the norm; and public finances are, in most cases, in better shape than yesteryear. But the problems are real. 

At risk isn’t merely the prosperity of a region that would be home to more than 3.5 billion people by 2100 — about one-third of the global population by then. Without better living conditions — and that’s what GDP per capita is about — there’s no chance that democracy and freedom will be sustained or that nations will have the resources to adapt to climate change.

The West better start paying attention now, before it’s too late. 

–With assistance from Elaine He.

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