African economies need to be structured to better withstand shocks

29th April 2021

African economies need to be structured to better withstand shocks

Raymond Obermeyer, Managing Director, SEW Eurodrive

By Raymond Obermeyer, Managing Director, SEW Eurodrive

The economic devastation of the Covid-19 pandemic saw Africa’s GDP fall by 2.1% last year. The African Development Bank expects that the continent’s GGDP will recovery by 3.4% in 2021, primarily as a result of high commodity prices and a recovery in the tourism sector.  

The bank recently released its ‘African Economic Outlook 2021’ report which points out that the impact of the pandemic varied in different countries. Those dependant on oil exports, tourism and resources were particularly hard hit by lockdowns imposed around the world. In a similar vein, each country – and region’s – prospects for recovery will vary depending on what sectors they are reliant on and how diversified their economy is. It is perhaps no surprise that Southern Africa – and South Africa in particular - took the biggest economic knock last year.

The pandemic has had far-reaching economic consequences on the continent. Approximately 30 million were pushed into extreme poverty while an additional 39 million will be pushed into a similar financial state this year, according to the African Development Bank. The rapidly increasing rate of widespread poverty requires that African governments take immediate action to implement bold steps to enable GDP growth and to ensure their economies are better structured in future to withstand economic shocks.

African economies urgently need to become more competitive and implement reforms to create a more business friendly environment if they hope to attract investment. The continent needs to lessen its reliance on imports from other regions and to achieve that each country needs to grow its manufacturing capacity. In theory, this is exactly what the African Continental Free Trade Area (AfCFTA) agreement aims to achieve.

The intention of AfCFTA is to create a liberalised market for goods and services which will boost intra-continental trade and reduce the continent’s reliance on primary goods exports. The initiative plans to remove some of the obstacles inhibiting intra-African trade such as weak productive capacities, limited economic diversification and either remove or reduce tariffs related to intra-African trade.

It’s an ambitious plan which ultimately has a vision of a borderless continent characterised by free-flowing trade and unrestricted movement of people and capital. Get it right and predictions are that intra-African trade will be boosted, more jobs will be created and less of the continent’s population will be living in extreme poverty. The World Bank estimates that AfCFTA could boost Africa’s income by 7% by 2035.

The reality, however, is that the aims of AfCFTA will be hard to achieve given typically autocratic leadership structures and high levels of looting and corruption in many African countries. Africa has a poor track record when it comes to property rights, human rights and enshrining democratic principles, all of which AfCFTA relies on. Many countries are highly dependent on the revenue received from import duties which will make them less eager to reduce or remove these duties. For AfCFTA to enjoy any degree of success each participating country will need to make it easier for businesses to operate in their country. This will require implementing the necessary policy reforms, address infrastructure needs and overhaul regulations relating to cross-border trade. Ultimately, it boils down to political will.

One of the biggest lessons emanating from 2020 was the consequence of disruptions to global supply chains. The Absa Manufacturing Survey revealed that these disruptions, including shortages of raw materials, continues to inhibit manufacturing supply chains. A noticeable trend resulting from these supply chain disruptions were increased incidences of local substitutes for imported products which is encouraging. Whether this trend remains evident post the pandemic remains to be seen.

There is no question that technology should be playing a pivotal role in Africa’s economic recovery. Not only does technology have the ability to ensure service delivery is more cost-effective, but it also has the potential to support African regional value chains. However, to harness the power of digital applications, requires that the continent makes a significant investment into its digital infrastructure and reduces the cost of data.

While the increase in the price of commodities will benefit the continent’s recovery in the short term, Africa needs to allow for greater local beneficiation in order to benefit from the resource life cycle as opposed to exporting raw materials and then importing finished goods back at a later stage.

A reliable and sustainable power supply will be key to Africa’s economic recovery, as will investments into infrastructure and a greater emphasis on public-private partnerships.