More intra-regional trade can protect African economies from external shocks, says IMF's Nord

The International Monetary Fund (IMF) last week launched its flagship report on the Africa Regional Economic Outlook, in Kigali, cutting growth prospects for the continent in 2015 to 3.75 percent but predicted a slight improvement next year to 4.25 percent; Mr. Roger Nord is the IMF’s Deputy Director for the African Department and he explained, in an exclusive interview with The New Times’ Kenneth Agutamba, what countries need to do to circumvent these emerging challenges. Below are the excerpts: The IMF’s regional economic outlook released last week comes on the heels of the World Bank’s own Africa’s Pulse analysis which slashed growth prospects from 4.7 per cent to 3.7 per cent this year; in your view, what are the scariest threats to African growth prospects? The International Monetary Fund’s growth projections for Africa in 2015 is of 3.75 per cent increasing only slightly next year to 4.25 per cent which is indeed significantly lower than we had anticipated before. That’s mainly because of two main reasons; one is the radically lower commodity prices especially oil whose value dropped by 50 percent but also other items such as copper, iron ore, coal, all of which have seen their prices fall significantly between 40 percent and sometimes 60 per cent. Second factor is the tighter financial conditions in the global markets; spreads on Euro-bonds, the limited availability of financing, all these have become tighter and these do have an effect on growth in Sub-Saharan Africa. Everyone seems to be attributing Africa’s growth slowdown to the drop in commodity prices for reasons you have just explained, but there are minority voices suggesting that it’s the value chains created such as job creation that we should focus on, yes, growth is slower but do you believe countries will still be able to create jobs for their young jobless youths? Yes, I do. That’s because the lower commodity prices being talked about are not affecting all countries the same way; for instance, countries such as Angola, Nigeria and Zambia are heavily affected because they are mainly commodity exporters. But other countries particularly here in East Africa are not that affected for instance by oil prices, since they’re predominantly net-importers which actually gives their economies fiscal advantage. This, coupled with the benefits of regional integration will ensure that economies here continue to perform strongly and create the much needed jobs. Talking about East Africa, what do you see as the main factors that have been driving growth in this region and are there potential threats that could derail that growth? I think the strong growth seen over the last twenty years in most Sub-Saharan countries including East Africa is to a large part linked to sound economic policies and stronger institutions; these have created the right environment that has boosted savings, investments, both public and private, and now looking ahead, our report asks a question; can the strong economic growth in the last ten, fifteen to twenty years be sustained in future? Yes, it’s possible. But it also requires certain things to be done and one of them is to improve domestic resource mobilsation. There is a need to broaden the net for local revenue resources; broader local revenues add more resources for countries to spend on priority areas such as in the social sector that we point at in our report. There’s also a need to strengthen competiveness of the economies. Long term growth of East African economies will depend on their competitiveness in the global economy. The final factor we emphasize in our report is the need for countries to reduce inequalities and make growth more inclusive. Much of our research and from other institutions has indicated that reducing inequality can be good for growth. We estimate that if Sub-Saharan Africa reduced inequalities in income and, in particular gender, to the levels prevailing in Asia, growth rates in the region can be raised by about one percentage point per year, which is quite significant. Let’s put all these factors in Rwanda’s perspective; what’s your assessment of the country’s economy right now and how can government navigate away from the risks in the global economy right now? Our assessment of the Rwandan economy right now is that growth will continue to be strong, and will probably exceed our growth expectations for 2015 by reaching close to 7 per cent because it has continued to attract investment in construction but also in other areas, and that has been very good for the economy. Now looking ahead, there are some dark clouds on the horizon, in particular, the fact that Rwanda is a mineral exporter but global mineral prices have drastically declined because demand in some of the markets where they go such as China, are experiencing slowdown in growth. So right now those clouds are on the horizon and we can’t rule out that these will become darker making things more difficult in 2016. Roger Nord, the IMFs Deputy Director for the African Department. Look at the global economy as a twin-engine Boeing with US and China, being the engines driving global growth; yet at the moment, the economies of these two countries are undergoing very significant developments with a strengthening dollar coupled with an impending move to raise interest rates in USA; and in China, a weakening Yuan in an economy slowing down from a sprint to a light jog. What is the likely impact of these realities on Africa and East Africa, in particular? Of course the United States and China are the two largest economies in the world; clearly, if they faced difficulties, the global economy would take the hit. Fortunately, we are not in that situation yet, not quite. China, in the view of the IMF will grow in the range of 6.5 percent and 7 per cent, this year-that’s slower than in the past years but it’s still a very healthy growth rate. Also note that there’s some shift in the pattern of China’s growth, a move away from investment towards domestic consumption; this has slightly depressed global commodity prices. However, if China succeeds in strengthening domestic consumer spending, it will be a good thing for fast growing economies in Africa which are becoming more competitive in manufacturing and services and China will become a market not just for raw materials. In the United States, meanwhile, the world economy is awaiting the eventual rise in interest rates, it has not yet happened but there’s some uncertainty which I think has made financial markets somewhat nervous. I think over the course of 2016, some of this uncertainty will be lifted which I hope will be a good thing for financial markets as well. Listening to you speak, one notices that African economies are overly prone to external shocks emanating from developed economies; but it’s also true that they (African countries) have the capacity to build self-contained economies, if they could only invest more in intra-Africa trade, what is your take on this? I absolutely agree with you. More trade among African economies would be great for Africa. The good news is that over the last twenty years, say from 1990 to 2010 or a little more recent than that, intra-Africa trade has grown from about 7 per cent to around 15 per cent. But 15 per cent remains relatively low and there’s obviously a need for more efforts. What can be done to boost these volumes? Regional integration has a critical role to play and here, the East African Community is ahead of the other parts of Africa. From the common market protocol to the customs union protocol and the prospects of a monetary union in the next ten years and infrastructure projects on the northern and central corridors will boost and are already boosting trade across the regional borders by making it simple for traders and goods to move and transact among each other. Clearly, in East Africa, the countries are on the right track. With global mineral prices down and darker clouds still looming on the horizon, what kind of advice would you give to countries like Rwanda, in order to keep their foreign exchange earnings flowing? I think there’s a need to, more than ever, develop new sources of foreign exchange through diversification but to do that, the economy needs to become more competitive. But one obstacle for competitiveness in Rwanda, and elsewhere, is the absence of sufficient and well priced electricity to attract investment in light industries. Fortunately, Rwanda has a number of energy projects in the pipeline which will go a long way to address this competitive challenge. This will help boost Rwanda’s capacity to attract more investment in manufacturing. Rwanda also has a very strong service sector, several hotels are under construction, the convention centre is expected to be finally completed in 2016 and these will not only boost tourism but also business travelers who will bring in more foreign exchange. In a nutshell, my advice is, develop new sources of foreign exchange to compensate the loss of foreign exchange in minerals and other commodities hurt by price declines. That should be the key objective for Rwanda’s economy in coming few years. editorial@newtimes.co.rw

News

More intra-regional trade can protect African economies from external shocks, says IMF's Nord