The power of trade in Africa

Africa’s terms of trade, the ratio of export prices to import prices, have improved markedly over the past decade. This improvement was driven mainly by development in resource-rich countries, which benefited from the international commodity price boom fuelled by the global economic recovery and high and resource-intensive growth in China.

BY KUDZAI GOREMUSANDU

Africa’s average (GDP-weighted) terms of trade reached a peak in 2008, rising 65% from its level in 2000. This positive trend was interrupted by the severe global recession in 2009, when commodity prices plummeted.

After commodity prices recovered, Africa’s terms of trade reached a second peak in 2012, over 80% higher than in 2000. In 2014 and 2015, oil and other commodity prices plummeted once more.

Earlier terms of trade gains were partially lost, although Africa’s average terms of trade level remained around 50% higher than in 2000.

Terms of trade changes differ significantly between African countries. Given their high dependence on oil and non-oil commodities, Africa’s resource-rich countries are particularly affected by the boom and bust of international commodity prices.

At the same time, oil importing countries suffered from the earlier boom in oil prices and now benefit from the lower prices. However, resource-rich countries have to cope with highly volatile terms of trade.

This is most notable for the terms of trade of Africa’s main oil exporting countries, which are highly correlated with the development of oil prices.

Measuring the volatility of terms of trade changes reveals very high volatility in oil-exporting countries such as Algeria, Angola, Democratic Republic of the Congo, Gabon, Libya, Nigeria and Sudan, as well as in Zambia, which depends heavily on copper exports.

In 2015, East Africa was again the continent’s fastest-growing region and is expected to continue its high growth path in 2016/17. The region benefits from large foreign direct investment (FDI) inflows, although there is some uncertainty about the actual development of these flows in 2015.

The region’s strong growth performance in 2015 was widespread with many countries achieving growth of more than 5% (Djibouti, Ethiopia, Kenya, Rwanda, Tanzania and Uganda) and expected to continue on a high growth path in 2016/17.

Sudan also performed better following the shock of the secession in 2011. Growth in these countries was often driven by services and construction including public investment programmes, but also partly by industry and — where weather conditions remained favourable (Sudan and Tanzania) — by agriculture.

Conversely, in South Sudan, the fall in oil prices and oil production and the political conflict had a strong negative impact on real GDP, which contracted in 2015. The future outlook depends in particular on the timely implementation of the latest Peace Agreement.

In Eritrea, the economy stagnated due to low export demand and difficult business and investment conditions, and in the Comoros the energy crisis continued to weigh on growth.

In Southern Africa, growth slowed down in 2015 and is expected to recover only in 2017. Weak international conditions including lower commodity prices, the drought and other factors, such as power shortages, dampened growth in the region in 2015.

South Africa continued its low growth trajectory and is expected to weaken further in 2016 before recovering in 2017.
Many factors, notably low commodity prices, weak export demand, and power shortages, strikes and the drought in agriculture, are depressing consumer and business confidence and production. As South Africa is an important export destination for neighbouring countries its, weakness affects the whole region.

In other countries in the region that depend even more on commodity exports, notably Angola (oil) and Zambia (copper) as well as Botswana (diamonds), growth also declined.

In Mozambique, growth moderated in 2015, but remained solid, and was boosted by higher production in agriculture and the power and extractive industries sectors. Despite a significant reduction in 2015, FDI also remained a major driver of Mozambique’s growth.

In North Africa, the macroeconomic situation remains uneven. In Libya, disruption in oil production and ongoing political conflicts and uncertainty led to another fall in real GDP.

Ending the fighting between rival militias and establishing a national government is key for an economic recovery. Tunisia achieved only modest growth in 2015 boosted by good harvests, while production in other sectors remained weak.

Mining and industry sectors were adversely affected by weak exports and tourism, which had recovered gradually, declined once again after terrorist attacks. In Algeria, growth remained steady thanks to a rebound in oil production. Morocco achieved the highest broad-based growth in the region supported on the demand side by private consumption and investment and on the production side by the construction sector and agriculture, which benefited from good weather conditions and past investment in irrigation.

Tourism was also adversely affected by security problems in the region, but to a much lower extent than in Tunisia. In Egypt, growth strengthened as the political scene stabilised and business sentiment improved. Higher wages and social spending supported consumption and investment also increased.

On the production side, the service sector boosted growth although tourism was again adversely affected by security concerns. Current plans for economic reforms and mega projects will, if fully implemented, further strengthen the economy.

lKudzai Goremusandu is a strategic and innovate business consultant. He offers consultancy services to local and international investors. Contact: kgoremusandu@gmail.com

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