While Africa shared in last year’s global economic upswing, a growing array of risks threatens to derail the region’s progress in 2022. The crucial question is whether the world’s leading central banks can pursue price stability without choking off the incipient global recovery.
Cairo – Despite the many lingering negative effects of the COVID-19 pandemic, the world economy bounced back in 2021, recording one of the strongest and most synchronized post-recession recoveries in decades. But while Africa shared in this upswing, an increasing array of risks threaten to derail the region’s economic progress in 2022.
The global economy grew by 5.9% last year, and in January the International Monetary Fund forecast 4.4% growth in 2022. Africa rebounded well in 2021 from its first recession in a quarter-century, with aggregate output increasing by 5.1%. The IMF predicts regional GDP growth of 3.9% in 2022. In a sign of post-crisis normalization, tourism-dependent economies are likely to be Africa’s fastest growing in 2022.
The island states of Cabo Verde, Mauritius, and the Seychelles are each expected to grow by more than 6%; the Seychelles forecasts Africa-leading 7.7% growth. The resilience of these economies highlights the extent to which COVID-19 vaccine rollouts are powering the post-crisis recovery. About 81% and 76% of the populations of the Seychelles and Mauritius, respectively, are now fully vaccinated, far above the African average of around 15%.
Many other factors supported Africa’s rebound in the post-containment phase of the pandemic. These include favorable commodity terms of trade, easing global financial conditions, and strengthening global demand boosted by vigorous growth in the European Union, China, India, and the United States – the markets for more than 55% of Africa’s exports. In addition, several African frontier economies returned to international capital markets in 2021 and issued sovereign bonds worth more than $19.6 billion. Most of these issues were oversubscribed, reflecting global investors’ increasing confidence in the continent’s growth prospects.
But despite the synchronized global recovery, per capita income growth in most countries is not expected to return to its pre-pandemic trend before 2023. Worse, the balance of global risks to current baseline forecasts is tilted to the downside – with potentially damaging consequences for Africa.
For starters, the Russia-Ukraine conflict has caused oil and food prices to spike further, creating strong headwinds for African countries that are large net importers of these commodities. The Russian invasion, and the sweeping Western-led sanctions it triggered, will therefore likely exacerbate the inflationary pressures arising from pandemic-related supply-chain disruptions and persistent supply-demand imbalances. It will also push more people into poverty and raise income inequality, because food-price inflation tends to hit low-income households harder.
Unfortunately, COVID-19 vaccine inequity and the hoarding of doses by rich countries are perpetuating the pandemic and allowing new variants of the virus to emerge, especially in poorer countries with low vaccination rates. Although Omicron seems to be causing lower rates of hospitalization and death than earlier variants, governments are still responding to its arrival by reactivating precautionary containment measures as the lockdown in Shanghai illustrates. This has contributed to inflationary pressures – especially in the US, where a tight labor market has sustained buoyant nominal wage growth.
Policymakers must urgently address the problem of beggar-thy-neighbor pandemic strategies, and act swiftly to enhance global cooperation and encourage geographical diversification of vaccine production and output of other lifesaving medical supplies. But today’s growing risks to economic growth require governments to bolster international cooperation even further. In particular, ending the US-China trade war would reduce the impact of tariffs on trade costs and further alleviate inflationary pressures, which have received a major boost from the Ukraine crisis.
Anticipated sharp interest-rate increases by major central banks in response to rising inflation constitute another major downside risk. For African countries, this is magnified by onerous “perception premiums,” which have long undermined macroeconomic stability and impeded growth on the continent. These premiums reflect the perennially overinflated risks assigned to Africa, irrespective of global economic conditions, the continent’s improving macroeconomic fundamentals, or individual countries’ growth prospects. The resulting increase in funding costs and constrained access to capital could thus undermine the fragile recovery in a region with limited fiscal space for public investment.
Aggressive interest-rate hikes, in addition to central banks’ turbocharged tapering of bond-buying programs, could lead to a sharp deterioration in global investor sentiment and trigger massive capital outflows from Africa. The resulting currency depreciations would raise external debt-service costs, further strain public finances, and fuel inflation.
Sovereign-debt distress would then emerge as a real and present danger. In the most vulnerable countries, the expiration of temporary relief measures such as the G20 Debt Service Suspension Initiative would necessitate allocating further scarce resources to service external debt in an environment of rising interest rates and eurobond yields.
Weaker growth in Africa’s main trading partners also could jeopardize the region’s economic outlook. Africa’s growth forecast hinges largely on China, which has been the rising tide lifting all African commodity-exporting boats and where easier financing conditions and fiscal stimulus will sustain investment and drive global demand. But with heightening geopolitical tensions disrupting trade and worsening supply-chain bottlenecks, the recovery in China and other leading economies may moderate more than expected, undermining African growth.
Finally, rising security challenges are jeopardizing Africa’s economic prospects. Military spending has become one of the fastest-growing items in government budgets across the continent. Further increases in a context of sharpening geopolitical tensions and return of a cold war could exacerbate fiscal deficits and reduce the ability of more vulnerable governments to respond to crises.
A worsening security environment will deter private capital and divert resources away from productive investments, including in infrastructure. Sustaining the growth of these investments is critical if Africa is to capitalize on the competitiveness and productivity gains that the new African Continental Free Trade Area (AfCFTA) should deliver.
The AfCFTA’s launch last year was an important milestone on the path toward diversifying Africa’s sources of growth and trade. Ultimately, the agreement will enable Africa to benefit from the accelerated reordering of global supply chains, so that its economies become more resilient to future global shocks.
But, as systemically important central banks pivot toward inflation-fighting mode, the most immediate imperative is to pursue price stability without derailing the incipient global recovery, which has been caught in the crossfire in Ukraine. Achieving the right balance is perhaps even more important for developing countries in Africa and elsewhere.
Hippolyte Fofack is Chief Economist and Director of Research at the African Export-Import Bank (Afreximbank). The text wad adapted from Project-Syndicate