East African economies are forecast to grow at a higher rate than continental peers, but global shocks and political uncertainties could threaten the momentum, The East African reports.
A new report by the African Development Bank (AfDB) shows that the region has improved from last year’s performance of 4.4 percent to 5.1 percent this year, with the prospect of reaching 5.8 percent in 2024.
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The AfDB report, which focuses on "Mobilising Private Sector Financing for Climate Change and Green Growth”, shows the region’s growth will be largely driven by growth in Uganda, Ethiopia, Kenya, Djibouti and Tanzania, in that order.
Rwanda is projected to be the top performer in the region, in both the short- and medium-term outlook.
Rwanda has been one of the top performers in Africa, despite its real GDP growth slowing down from 10.9 percent in 2021 to 8.2 percent in 2022.
Kigali’s growth momentum is expected to be sustained by improvements in institutional performance supported by policies to enhance investments and build resilience across the sectors.
Drivers of growth
On the supply side, the services sector was the main contributor to real GDP growth in East Africa between 2015 and 2022, driven by household consumption on the demand side.
"In 2022, the services sector’s contribution to economic growth outpaced that of agriculture and industry,” the report says.
The services sector contributed 2.0 percentage points to GDP growth. However, this was lower than 2.5 percentage points on average from 2015 to 2021.
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In comparison, agriculture contributed 1.1 percent to GDP growth in East Africa while industry contributed 1.0 percent.
The services sector’s contribution to growth was attributed to East Africa’s many natural and cultural attractions that draw tourists, creating a demand for services such as accommodation, food and entertainment.
Also, as more people move to urban areas, there is greater demand for services such as transportation, communication and retail.
Green growth
This year, the report is focused on the imperatives for green growth and the role of private sector financing.
"Despite contributing less than four percent to the total global carbon emissions, African countries face significant climate financing challenges to respond to mitigation and adaptation requirements emerging from climate change effects,” said Nnenna Nwabufo, AfDB director-general for the East Africa Regional Development Office.
"It is obvious that at least 50 percent of climate financing will have to be sourced from the private sector. The good news is that natural capital accounts for over 40 percent of the region’s wealth and we need to harness this to finance climate change and green growth.”
But the EA region faces several external and domestic downside risks that could affect the positive outlook.
In 2020, East Africa could only cover 11 percent of its estimated annual climate financing needs of $67.2 billion, highlighting the significant financing gap challenges for green growth.
The report indicates that the region continues to post the highest inflation rates in Africa in the medium term due to global shocks and internal conflicts.
"The high average inflation rate in East Africa in 2022 was largely due to the hyperinflation in Sudan (139.0 percent), galloping inflation in South Sudan (43.5 percent), and high inflation in Ethiopia (26.6 percent),” the report says.
"In Ethiopia, the high inflation rate in 2022 was primarily driven by high global food and oil prices and the Tigray War, which threw the country into turmoil.,” says the report.
"The domestic conflict in Tigray exerted pressure on the central government finances, widened the current account deficit, and exacerbated capital flight from foreign investors, and thereby dwindled foreign exchange reserves.”
It links the conflict in Sudan as a threat to the projected growth rates.
The rise in global food and energy prices in 2022, attributed to Russia’s invasion of Ukraine, has had profound effects on economies, increasing the cost of living and constraining fiscal space.
"What appeared to be a promising post-Covid-19 economic recovery is now overshadowed by new shocks and vulnerabilities,” said Prof Njuguna Ndung’u, Kenya’s Cabinet Secretary for the National Treasury and Economic Planning.
External risks include a global economic slowdown, rising commodity prices, persistence of Russia’s invasion of Ukraine, international trade policies, tightening of global financial conditions and exchange rate depreciation.