Global, Regional and Local: 2004 has been a good year for Africa

Rising to the challenge
Sound economic policies, stable currencies and strong commodity prices have all combined to make 2004 a successful year for Africa. Of course, in some countries, the domestic economic or political situation has led to considerable difficulties this year, whether it be the problems in Sudan, the decision by multilateral agencies to suspend lending to Côte d'Ivoire or sluggish growth in Kenya. Yet, despite these issues, for the continent as a whole, the economic picture has been favourable. The big issue is whether the successes seen over the last year can be sustained.

Three key words come to mind: local, regional and global. Prospects ahead depend on a combination of factors. There is the need for further progress at the local level, with countries pursuing sound domestic policies. Regionally there is still much that Africa can do, given that many countries face similar issues and problems that need to be overcome. Not least amongst these is the need for economic diversification, aimed at sustaining growth, raising living standards and reducing poverty. And finally, there is the global environment, which will play a key role in Africa's success not only in 2005 but in the years ahead. And this is perhaps one of the most uncertain areas ahead.

Global
Let's take the global picture. On the positive front, there is a strong willingness for the most industrialised countries to help Africa. This is most evident in the UK driven Commission for Africa. Although this is set to coincide with the UK's joint presidency of both the Group of Seven largest industrialised countries (G7) and of the European Union (EU) in the second half of 2005, the reality of international diplomacy means that all the issues effectively have to be in place before the end of this year so that agreement can be reached by the end of 2005. Poverty reduction is key. As too should be further steps to help African countries with debt relief

As welcome as this is, the issue of whether African countries can have freer access to markets in Europe appears unlikely to figure. Aid is important, but so too is trade.

Whilst Europe fiddles, Asia is coming to Africa's help. In a recent report, we analysed the dramatic increase in Asian-African trade. And this is two-way. There is increased demand from Africa for imported manufactured goods. This reflects the growth of the African region and is a trend likely to continue. And there has been huge growth in exports from Africa to Asia, linked to that region's demand for commodities. This strong demand, plus the high level of many commodity prices has been a huge boost to the African economy. Asian demand for commodities is now even higher than before the Asian crisis of 1997. The key link in this is China. For example, last year, China accounted for 20% of global demand for copper, 21% for zinc and 24% for tin. African trade with Europe is still very significant, but the strongest growth is seen in trade with Asia.

Whilst these global factors are positive, there are some vital global issues that Africa needs to be wary of in 2005. Not least of these, is the path of the world economy and global trade. There are considerable risks, with the US and China holding the key. Huge global imbalances and an over-leveraged financial sector point to significant uncertainties ahead. In recent years the world economy has displayed remarkable resilience in the face of economic, financial and terrorist shocks. But in the process the world has been overly dependent on both the US and China. Now, more than before, policy success in both economies will be crucial, both for the world economy and for Africa's ability to grow steadily. Having enjoyed a pre-election boom, we expect the US to witness a post-election slowdown. Meanwhile, gradual and targeted tightening of policy in China is aimed at avoiding over-heating and moving the economy to a soft-landing. 2005 looks set to be a slower pace for world growth than in 2004, how much softer depends on US and Chinese policy actions.

Regional
What then of Africa? Regional factors will play a big role. In sub-Saharan Africa, the increasing regional integration between the economic power house of South Africa and other countries is key. In November a revision to national accounts is likely to confirm that South Africa has been growing at a slightly stronger pace than previous data had shown. And this year, strong domestic demand has compensated for the impact of the strong rand on sluggish export performance. Increased linkages between South Africa and the rest of the sub-Saharan region are inevitable, in trade and in investment flows.

Regionally there is the need to continue with the success seen in moving away from state-led economic systems, to permitting the market mechanism to grow. Over extended state sectors are being reduced, fiscal positions are improving and, along with sounder monetary policies, the result has been a general reduction in inflation and in interest rates. Many countries have enjoyed relative currency stability. And it is important that these policies are sustained, so currency stability proves more than a temporary phenomenon, and the region can benefit. There is a strong need across the region to allow small and medium-sized sectors to grow.

One of the sessions at the annual IMF/World Bank meetings in Washington this October is the building of sound and efficient banking systems in Africa. To quote from The World Bank, "Following the strategy adopted by many African countries to reform and modernise their banking systems, noticeable changes are being witnessed in the legal/regulatory, institutional and policy environment. This has created a more organised banking sector, highly sensitised about risk and risk mitigating approaches and tools." Clearly this is a vital area, where sharing of regional best practices is important. There is also the need for governments and the financial sector to work together, so issues can be addressed, not least in countries like Nigeria where proposed capital requirements on banks have led to some concerns. As the financial sector across the continent strengthens, foreign banks have an important role to play, particularly in bringing best practice.

Local
Finally, what of the local issues? The policy response in different countries to high oil prices is important. Although sub-Saharan Africa is a net oil exporter this overall picture masks a vast difference across countries. Nigeria and Angola are large exporters, but for many countries, they are oil-importers. Increased production in Nigeria should help that economy. But for the importers, the policy response needs close monitoring; the worry being that some countries are reintroducing domestic fuel subsidies, which could become a big burden if oil prices stay high. For now this is not yet threatening hard won progress on fiscal policies.

Overall, the global, regional and local outlook suggests that the economic cycle in 2005 may be more challenging but Africa is making progress on a number of key underlying structural issues.

For further information please see our recently released African Quarterly report.