The African Development Bank (AfDB) Group, last week launched the African Economic Outlook 2023 during its 2023 Annual Meetings at Sharm El Sheikh, highlights of which included that the continent achieved an average growth rate of 3.8% in 2022. The African economy, Dr. Akinwumi Adesina, President of the group noted, could grow by an average of 4.1% between this year and 2024, despite challenges such as climate change, inflation driven by high energy prices, commodities, and disruption of supply chains due to the raging Russia-Ukraine war, in spite of which African economies have demonstrated remarkable resilience.
A statement by the group on Tuesday, May 30, 2023, quoted Adesina, while welcoming all to the launch of AfDB’s flagship report, explained that the continent achieved an average growth rate of 3.8% in 2022, noting that the 2023-2024 average projected growth surpasses the global average of 3.4% in 2022.
The world, he said, is facing multiple challenges, including climate change, inflation driven by higher prices of energy, commodities, and disruption of supply chains due to the ongoing Russia-Ukraine war. And the tightening of monetary policies in the US and Europe has led to rising interest rates that are compounding debt service payments for African countries.
African economies, he however added, are moving in the right direction. Five of the six pre-pandemic top-performing economies are set to be back in the league of the world’s 10 fastest-growing economies in 2023–2024, as shown by the approximately 20% rebound in external financial inflows to Africa—including foreign direct and portfolio investment, official development assistance, and remittances, reaching USD 216.5bn (or 7.5% of GDP) in 2021. This is up from US$179.9bn (or 7.4% of GDP) in 2020 during the peak of the Covid-19 pandemic.
The rising global interest rates, the report lamented further, have had negative effects on portfolio investments in Africa, with the outflow of portfolio investments increasing from US$8.1bn in 2020 to US$27.5bn in 2021.
Thankfully, it stressed, “remittances continue to help boost recovery, as this increased across several countries due to better than expected economic recovery in migrant destination countries. Remittances increased from USD 84 billion in 2020 to USD 95.6 billion in 2021.”
African oil exporting nations, the statement noted, have experienced a boost in growth as global oil prices have remained high, even as resource-intensive countries experienced a deceleration of growth because of their lack of diversification and the lower prices of commodities, especially minerals due to weak global growth. Non-resource-intensive countries with more diversification experienced higher growth, it added.
However, it warned that all countries face challenges from high inflation globally, while the contractionary monetary policies in the developed countries, especially the US and the EU have led to rising interest rates that are causing rapid increases in debt service costs, with stronger dollar leading to devaluation of currencies, driving up imported inflation and capital flight by portfolio investors.
The report shows that 25 African countries that are either in high risk or in debt distress saw highest increases in debt service payments. The longer the global monetary policy of raising interest rates, the higher debt vulnerabilities countries will face. This is especially critical, it noted, as the debt service payments due in 2023–2025 will rise from US$22.2bn to US$26.7bn, which could lead to more debt distress.
Another major challenge for the continent, the AfDB stressed, is the high level of domestic debt that needs to be restructured, explained that short-tenored debts, and the high coupon rates they incur further complicates debt vulnerabilities for many countries. The report makes it clear that domestic debt restructuring will be equally important in the future.
As African central banks also raise interest rates, the weakened demand for financial services could increase the risks to financial stability, unless banks are supported with capital and liquidity buffers.
The report identified as critical the need to ensure a coordinated debt treatment between official and private creditors and ensure that the G20 Common Framework works for African countries.
Other policy recommendations include industrial policies to accelerate diversification of economies, and expansion of regional trade to lower exposure to global volatilities, adding that Africa is being short-changed by climate finance, as it will need between US$235bn and US$250bn annually through 2030 to meet investments under its Nationally Determined Contributions. Yet, Africa received just about $30bn in climate finance.
The report recommended several ways to attract private climate financing, including green bonds, debt-for-nature swaps, green banks, blended finance, and carbon markets, stressing the need for Africa to do a lot more if it must attract a significantly higher share of global green bonds, up from just 0.2% of the US$2.2tr of cumulative global green bonds issued up to 2022.
The report shows clearly that Africa can accelerate its development by optimizing its natural capital, estimated at US$6.2tr in 2018, even as the continent is not getting the best out of its natural resources, because of poor valuation, degradation, illicit capital flows and losses from royalties and taxes.