Africa’s Terms of Trade Have Improved Steadily Over the Years

Africa’s terms of trade Africa’s terms of trade i.e. 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 fueled by the global economic recovery and high and resource-intensive growth in China.

Africa’s average GDP-weighted terms of trade reached a peak in 2008, rising 65 percent 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 percent 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 percent higher than in 2000 according to AEO estimates. Terms of trade changes differ significantly between individual 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.

Read: AU Looks to Self-funding With Introduction of Import Levy

The Standard Deviation i.e. the amount of variation from the mean of annual terms of trade changes in these countries was around 15 or higher between 2001 and 2014. In contrast, volatility was much lower (SD between 2 and around 5) in countries that depend less on commodities and/or are more diversified, such as Ethiopia, Kenya, Senegal, South Africa, Tanzania, Tunisia and Uganda. The earlier terms of trade boom improved economic prosperity. However, the recent fall in export prices relative to import prices has partly reversed earlier terms of trade gains.

The purchasing power of domestic output (“command GDP”) has declined relative to real GDP, but growth of real GDP has also reduced, as lower commodity prices tend to reduce investment and growth in the resource sector. Other sectors also suffer through their direct linkages with the resource sector or indirectly where governments respond to lower revenues by cutting spending. However, this negative effect on growth is mitigated where lower exchange rates enable other firms to export more and/or cope better with import competition.

It is important to also consider the magnitude and speed of terms of trade changes, both of which have risen markedly. While economic growth generally benefits from terms of trade gains, highly volatile shifts in terms of trade can lead to macroeconomic instability and reduce medium term growth (Awel, 2012). However, the adverse effects of terms of trade boom and busts on the economy can be mitigated if monetary and fiscal policies manage to contain inflation and build up savings during the boom period. This prevents overheating, limits the real appreciation of the exchange rate and also creates fiscal space, which is needed to counteract an economic downturn in the following terms of trade bust.

However, if policies are pro-cyclical and unable to contain inflation during the boom, large terms of trade changes will be more disruptive and policies will be less able to mitigate the adverse effects on the economy when the terms of trade deteriorate. (For more details about the recent policies of individual countries see the respective Country Notes.)