Advances in Trade, Policies and Regulatory Environment Have Been Key in Growth of Africa

Africa’s growth in recent years has been helped by advances in trade, policies, the regulatory environment and regional integration.

As the world evolves into a single highly interconnected global market, prosperity no longer depends just on a country’s productivity but also on its strategic choice of trading partners, export products and policies. Trade within Africa and its commercial relations with the rest of the world are changing quickly.

However, the widespread and uneven impact of commodity price shocks and criticism of the global trade system increase uncertainty about the future. Countries need to make the best use of globalization by further diversifying their trade away from resources, and increasing trade within Africa. Economic and political changes in China and the United States will have varying effects on Africa’s trade, but to counter risks, the continent must carry out structural and regulatory reforms, improve policy and investment climate, deepen regional integration and maintain its commitment to reform.

Africa’s regional economic communities are instrumental to strengthening economies and building resilience against global shocks. Increased political commitment, therefore, especially at national level, is needed to actualize regional integration agreements. The proposed Continental Free Trade Area could yield large gains from trade and bolster other development objectives.

For many economies, oil and mineral exports are dominant if not sole source of revenue to finance development and expenditure. Over-dependence on oil revenues held back meaningful development initiatives in non-oil sectors. The strong link can be seen in the fiscal and external positions of countries reliant on the oil sector.

In 2015, Africa’s oil exporters experienced a much deeper deterioration in their fiscal deficit to 7.4 percent, relative to 4.2 percent for their net-importing counterparts. Africa’s trade has seen a protracted underperformance since the beginning of recent global commodity price shocks.

In overall terms, the continent’s current account balance decreased from an average surplus of 5.8 percent of gross domestic product (GDP) between 2005 and 2009 to an estimated deficit of 6.4 percent in 2016. The outlook remains weak while commodity prices stay low. Since 2012, weak demand in key markets for Africa’s oil and gas along with a decline in commodity prices caused a large contraction in export earnings.

In 2015, Africa’s oil exports shrunk by 41 percent over the previous year, the biggest fall since 2000. Many African resource exporters had limited options to fill the large finance gap created by lost oil revenues. Agriculture provides jobs for more than 60 percent of the continent’s workforce, yet it accounts for less than a quarter of total exports.

With more light manufacturing and processing of its primary produce, Africa could significantly lower its import bills. The continent’s merchandise imports are mainly manufactured goods and transport equipment. Years of reliance on the production and export of primary commodities kept the continent away from exploring ways to produce goods it currently imports. This has led to swelling bills for food and less sophisticated manufactured products. Except for 2015, imports of food and non-machinery manufactured goods have risen since 2000. Light manufacturing could help Africa reduce its imports from outside the continent and increase intra-African trade with countries that have agricultural production and processing capacity.

With the growing population in Africa, forecasts show that the annual food import bill could reach USD 110 billion by 2025 unless domestic production is scaled up. This year, as was the case in previous three years, drought is affecting over 17 million people, mainly in the Horn of Africa. There is, however, great potential for agricultural production and agro-processing industries to make the continent food self-sufficient particularly by enhancing regional trade corridors to ensure that food surpluses in one region balance the deficits in another through better linkages between production, distribution and consumption hubs.

The decline in oil and metal commodity prices serves as an incentive for African countries to diversify into agriculture, and the largest economies are making strategic choices of transforming the agriculture sectors in order to reduce dependency on food imports. These policy shifts, particularly in oil-exporting countries, should pay off in the medium-to-long-term.