The African Development Bank (ADB) Group has released a report on the continent’s economic outlook. The report provides a clear picture of how the continent is fairing economically and the challenges it is dealing with. The report indicated that China’s economic performance offered hope to African countries that sustained high economic growth rates could be achieved and millions of people could be lifted out of poverty, adding that “the continent has experienced the highest economic growth in the last two decades, with the rate of GDP growth averaging about five per cent annually in the past six years, and is expected to reach six per cent in 2007. Growth has been more broad-based, with non-oil exporters growing as fast as the oil exporters.
The report indicates that economic activity in Africa rose by nearly 5.5 per cent in 2006, and is expected to remain high, at 5.9 and 5.7 per cent in 2007 and 2008, respectively. Oil-exporting countries, however, are outpacing others by a substantial margin. Moreover, some countries continue to face serious problems including the humanitarian catastrophe in the Darfur region of Sudan, the economic collapse in Zimbabwe, conflicts and political unrest in Ethiopia, Côte d’Ivoire, Somalia, and security problems in the oil-rich delta region of Nigeria, which are likely to dampen their growth prospects. The outlook for much of Africa continues, however, to be highly favorable.
The continued global expansion, although slowing, continues to sustain demand for oil and other industrial raw materials at relatively high prices. At the same time, a significant increase in official development assistance (ODA) to Africa, driven largely by debt relief and emergency assistance, and improving macroeconomic stability have all contributed to this positive economic outlook. In addition, increased oil and mineral production in Southern and Central Africa and some improvements in the security situation have boosted growth. Inflation, however, has returned to double-digit numbers in net oil-importing countries, mainly due to increasing oil prices.
Current account balances have improved in many countries, with the largest gains for oil and metal ore exporters, while some countries were adversely affected by higher import bills and lower prices for some agricultural products, especially cocoa and cotton. The windfall gains from commodity prices have improved public finances, notably in net oil-exporting countries. These gains will need to be managed carefully with a sizeable proportion used for investment in transport and other infrastructure and in human resource development to lay the basis for sustained economic growth once the current commodity boom has run its course. The challenge for net oil-importing countries, the report says, is altogether different. While GDP growth is expected to remain buoyant in 2007 and 2008, inflation is now running at double-digit levels, mainly due to a more complete pass-through to consumers of oil price increases, and reducing inflation to single-digit levels may have adverse consequences for growth. Moreover, the GDP growth forecasts in the report are associated with increases in current account deficits that result from sustained higher oil prices even while the boom in non-oil commodity prices appears largely to have run its course. The forecasts, therefore, assume that the additional funds required to finance the deficits will be forthcoming.
Another challenge is the widening of the large imbalances in the global economy. The report also indicates that should these imbalances unwind in a disorderly fashion, with sharp sudden movements in exchange rates, there could be a precipitous decline in world output and this could hurt demand for African exports. After a significant decline throughout much of the last decade, aid levels have increased in recent years and Africa is the continent that has benefited the most. However, it remains to be seen whether the amount of aid will continue to increase, once the temporary surge in debt relief and emergency aid has passed.
Libya
Libya is a hydrocarbon rich country, but has one of the least diversified economies in the Maghreb region and among the oil producing countries. It has a long legacy of central economic management and excessive reliance on the public sector, and started its transition to a market economy in 2002, after 10 years of international economic sanctions. Since then, Libya has made efforts to liberalize its economy and foreign trade, achieving increasing economic growth while maintaining macroeconomic stability.
In 2006, economic conditions continued to be satisfactory. Real GDP grew about 5½ per cent, reflecting an increase of 4½ per cent in the value added of the hydrocarbon sector, and a buoyant non-oil economy (6 percent) boosted by increased government spending and the liberalization of the trade, service, and tourism sectors. However, preliminary end-year data indicate that annual Consumer Price Index (CPI) inflation accelerated in the last quarter reaching 7.2 per cent (year on year) in December. Based on preliminary data, the consolidated government operations registered a record overall cash surplus of about 39 per cent of GDP, owing to a substantial increase (of 25 per cent) in hydrocarbon revenues.
Non-oil revenue performance grew even faster at 33 per cent, partly owing to the reform of tax and customs administration currently underway. Government spending grew about 12 percent, owing to a marked increase in the wage bill, reflecting new hiring in the regions, and increases in wages for some categories of civil servants; and an improved execution of the development budget. Development spending increased to about 17 per cent of GDP, concentrated on infrastructure and construction (42 per cent), social sectors (32 per cent), and hydrocarbons (19 per cent).
On the external side, the current account surplus is estimated to have reached about 48½ per cent of GDP, reflecting the growth of hydrocarbon exports resulting from higher export prices and volumes. Import growth was robust (18 per cent) reflecting rising domestic demand, including increased government spending. Gross international reserves reached the equivalent of 29 months of 2007 imports of goods and services, and the Real Effective Exchange Rate (REER) based on the official CPI remained stable. In 2006, structural reform continued with the implementation of a wide range of measures covering fiscal management and taxation, banking and payments systems, trade, and the business environment.
The government will continue in its efforts to encourage foreign companies to invest in Libya, but will be noticeably successful only in the hydrocarbons sector. In part this will reflect its determination to require foreign businesses in the country to hire more Libyan workers. It will also attempt to promote activity in the private sector, both by encouraging public-sector employees to set up their own businesses and by forcing foreign companies to form joint ventures with local firms. However, the reluctance of regime insiders to dilute their dominant role in the economy will stymie progress.
Efforts to liberalize trade and improve the business environment continued. In particular, the authorities halved the consumption tax on imported goods produced locally; abolished all remaining state import monopolies except those on petroleum products and weaponry; reduced the list of import bans for religious, health, and ecological reasons to 10 products; opened 51 offices across the country to expedite approval of business permits; lowered the floor on Foreign Direct Investment (FDI) in the non-oil sector from $50 million to $1.5 million; and established a negative list for non-oil FDI limited to retail trade, wholesale trade, and importation.
Following its withdrawal from the Heavily Indebted Poor Countries (HIPC) Initiative, Libya has developed its own debt relief plan. Rescheduling agreements were reached with a number of HIPC countries including Uganda, Tanzania, Benin, and negotiations with Nicaragua are ongoing. Libya’s favourable medium-term financial outlook reflects the projected continuation of high hydrocarbon prices. However, they considered that the authorities’ ability to maintain economic and financial stability could be undermined by the loosening of fiscal conditions in the 2007 budget. A prudent fiscal policy is key to ensuring macroeconomic stability.
Morocco
Macroeconomic conditions continue to strengthen and the outlook is favourable, with increased private sector confidence in the Moroccan economy. A bumper crop and continued strong activity in services and construction are ushering in a recovery, following a slowdown in growth in 2005 caused by unfavourable weather conditions.
The external current account is expected to record its sixth consecutive surplus. Strong tourism receipts, workers’ remittances and the recovery of textile exports is likely to offset the upsurge in the energy bill. External reserves, at more than US$18 billion, continue to exceed the total stock of public external debt.
Average growth has reached 5.4 per cent per year since 2001, 3.4 percentage points higher than in the 1990s, reflecting the ongoing diversification of the non-agricultural sector, and its increased resilience to shocks. As a result, real per-capita income is on the rise and the unemployment rate has started to decline. However, bad crop years still impact the overall economic performance, as evidenced by the growth deceleration in 2007. The current account is expected to record its seventh consecutive surplus in 2007, thanks to strong remittances and tourism receipts.
Inflation increased to 3.3 per cent in 2006, reflecting strong domestic demand conditions and robust money growth. It subsequently slowed down during the first months of 2007 following the two-stage tightening of the monetary policy stance in 2006, also suggesting that the deceleration in overall growth may be dampening domestic demand pressures. However, money growth remains robust, driven by a pickup in credit to the economy and external inflows, and asset prices have been increasing. In this context, the central bank’s prudent monetary stance remains appropriate.
The IMF staff noted that inflation slowed in the first half of 2007. As the future path of inflation is subject to risks, it calls for continued vigilance on the part of the central bank. In particular, the rapid growth of credit to the private sector, the surge in foreign direct investment, and soaring asset prices could offset the dampening effect of this year’s poor harvest on domestic demand and inflation. Resurgence of inflation would warrant a further tightening of monetary policy.
Financial sector vulnerabilities have abated, with a drop in nonperforming loans and an increase in provisioning. The recent increase in credit to the private sector demonstrates the success of the authorities’ efforts to enhance financial intermediation. Important progress has also been achieved in the area of financial supervision. In particular, starting from June 2007, banks are required to comply with Basel II prudential requirements.
Increased foreign direct investment is also boosting reserves, which reached US$21 billion at end-May 2007, significantly higher than the stock of public external debt. In spite of a good export performance in 2006, trade in goods and services continues to result in a deficit. There are no indications that the exchange rate of the dirham is misaligned. Morocco’s remarkable economic progress in recent years, demonstrates the benefits of broad-based structural reforms. GDP growth has moved onto a higher trajectory, inflation has been contained, foreign direct investment has increased, and poverty and unemployment have been reduced significantly.
Looking ahead, Morocco will need to sustain and possibly improve upon its strong performance to bring per capita income closer to that of emerging-market countries of the Organization for Economic Cooperation and Development (OECD) and further reduce unemployment and poverty. The IMF Executive Board has commended the authorities for the recent improvement in the fiscal position, which has played a key role in buttressing private sector confidence. It is important that fiscal policy remains geared toward medium-term fiscal consolidation.
