African Economic Outlook 2018 - EN (1)

African Economic Outlook 2018 The opinions expressed and arguments employed herein do not necessarily reflect the official views of the African Development Bank, its Boards of Directors, or the countries they represent. This document, as well as any data and maps included, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries, and to the name of any territory, city, or area. ISBN 978-9938-882-43-8 (print) ISBN 978-9938-882-46-9 (electronic) Cover design by the African Development Bank based on images from Shutterstock.com © African Development Bank 2018 You may copy, download, or print this material for your own use, and you may include excerpts from this publication in your own documents, presentations, blogs, websites, and teaching materials, as long as the African Development Bank is suitably acknowledged as the source and copyright owner. FOREWORD African economies have been resilient and gaining momentum. Real output growth is estimated to have increased 3.6 percent in 2017 and to accelerate to 4.1 percent in 2018 and 2019. Overall, the recovery of growth has been faster than envisaged, especially among non-resource–intensive economies. The world economy is also in better shape, with faster growth and buoyant capital markets. And with more than $100 trillion in assets managed by institutional investors and commercial banks globally and searching for good returns, African countries have an array of options, beyond domestic resources and foreign aid, to support their investments. But challenges remain, especially for the structural transformations that would create more jobs and reduce poverty by deepening investment in agriculture and developing agricultural value chains to spur modern manufacturing and services. Economic diversification is thus key to solving the continent’s problems, especially in the context of a challenging demographic structure. A first priority for African governments is to encourage a shift toward labor-absorbing growth paths. A second is to invest in human capital, particularly in the entrepreneurial skills of youth, to facilitate the transition to higher-productivity modern sectors. Continued prudent macroeconomic efforts are needed to create the incentives and business environment for the private sector to play its role. Macroeconomic policy should aim at ensuring external competitiveness to avoid real exchange rate overvaluations and get the full benefits of trade,  improve fiscal revenue, and rationalize public expenditure. To achieve these goals, the macroeconomic framework must blend real exchange rate flexibility, domestic revenue mobilization, and judicious demand management. Also needed are massive investments in infrastructure, this year’s special theme. To take advantage of the great potential for infrastructure development, governments will have to put in place effective institutional arrangements to manage the complex tasks of project planning, design, coordination, implementation, and regulation. They should also focus on the soft side of infrastructure development­ —­ o n tackling the big policy and regulatory issues, on training the teams assembling the financing packages, and on conducting constant research to keep up with the knowledge frontier. New work by the Bank reveals that Africa’s infrastructure requirements run to $130– 170 billion a year. That’s far higher than the long-accepted figure of $93 billion a year. But African countries do not need to solve all their infrastructure problems before they can sustain inclusive growth. They should focus on how best to use their scarce infrastructure budgets to achieve the highest economic and social returns. As the Outlook concludes, infrastructure projects are among the most profitable investments any society can make. When productive, they contribute to and sustain a country’s economic growth. They thus provide the financial resources to do everything else. Akinwumi A. Adesina, President African Development Bank Group iii CONTENTS Forewordiii Acknowledgementsix About this year’s Economic Outlook xi Highlightsxiii Part I Macroeconomic developments and structural change 1 Chapter 1 Africa’s macroeconomic performance and prospects 3 African economies have been resilient to negative shocks 4 External shocks have exacerbated macroeconomic imbalances 13 Domestic savings, tax revenues, and debt dynamics 19 Conclusions and policy implications 27 Annex 1.1 30 Notes32 References32 Chapter 2 Growth, jobs, and poverty in Africa 33 Growth dynamics: Accelerations, spikes, recoveries and failed take-offs 34 The growth–jobs–poverty nexus 40 Lessons from the growth-jobs-poverty nexus 50 Recommended policy measures 53 Notes57 References58  v Part II Financing infrastructure: strategies and instruments 61 Chapter 3 Africa’s infrastructure: Great potential but little impact on inclusive growth 63 Infrastructure is critical for sustainable growth and inclusive development 65 The low infrastructure stock in Africa reflects the low development of many countries on the continent66 Factors explaining the low infrastructure provision in Africa 76 Infrastructure finance in Africa declined in recent years 82 National governments remain the main sources of infrastructure finance in Africa 84 Falling commitments in 2016 are substantially due to a large reduction of $14.5 billion in reported Chinese funding and a $4.9 billion reduction in private sector investment 85 Greater financing of high-quality infrastructure would contribute to global public goods and address some of the world’s biggest challenges 87 Annex 3.1 Africa’s investment needs: A Note on methodology 90 Notes92 References93 Chapter 4 Financing Africa’s infrastructure: New strategies, mechanisms, and instruments95 A global pact to finance infrastructure in Africa and stimulate industrialization would generate major global dividends 96 A new approach for infrastructure finance in Africa: From “infrastructure deficits” to strategic targeting 97 Attracting infrastructure finance to Africa: Reducing risks 99 Potential new funding sources for African infrastructure 102 Attracting institutional investors 103 Private participation in infrastructure financing in Africa 103 Possible new financing mechanisms to support African infrastructure 106 Financial institutions 109 Policy recommendations 110 Annex 4.1 Joint MDB Statement of Ambitions for Crowding in Private Finance 120 Notes122 References123 Country notes 125 Boxes 1.1 1.2 1.3 1.4 2.1 2.2 Effects of commodity prices on Africa’s growth The costs and benefits of monetary unions Increasing tax revenue in Lagos through sensible reforms Financing Africa’s current account balance Preparing African workers for the Fourth Industrial Revolution Does poverty hamper growth­—­or boost it? 12 18 23 26 49 51 vi C ontents 2.3 3.1 3.2 3.3 3.4 3.5 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 China’s three lessons for Africa The challenging empirics of infrastructure and growth Infrastructure stocks, needs, and gaps: A practical lexicon Infrastructure needs: From $93 billion a year to $130–$170 billion Presidential Infrastructure Coordinating Committee terms of reference Employment, industrialization, and the Sustainable Development Goals A Global Structural Transformation Fund Project development funds for African infrastructure African countries have borrowed at rates below those in eurozone economies African institutional investors Increased local and international partnerships in Africa Public-private partnerships in African infrastructure Mozambique: Using subsidies to strengthen bankability PPP­—­do’s and don’ts The Africa50 Infrastructure Fund: A one-stop shop for infrastructure development Attracting private sector financing for infrastructure in India The N4 Maputo Corridor Toll Road 52 68 69 70 78 88 97 101 102 104 105 105 108 114 115 116 118 Figures 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 1.16 Real GDP growth in Africa, 2009–19 Real per capita GDP growth in Africa, 2009–19 Components of GDP in Africa, 2009–16 Sectoral composition of GDP in Africa, 2000–16 Sectoral employment shares in Africa and other world regions GDP growth in selected countries in Africa, 2017 Real GDP growth in selected subregions of Africa, 2009–19 Median inflation rates in Africa and selected country groups, 2009–19 Median and average inflation rates in CFA franc countries, 2009–19 Median inflation rates in Africa and other regions, 2009–19 Fiscal and current account balances in Africa, 2009–19 Terms of trade of oil exporters and nonexporters in Africa, 2000–16 Percent change in nominal exchange rates in selected countries, 2015–16 and 2016–17 Tax and nontax revenue in Africa as a percent of GDP, 2006–14 Relationship between tax revenues/domestic savings and per capita income Government revenue, government expenditure, and concessional debt in Africa, as a percent of GDP, 2008–15 1.17 Total, external, and domestic debt in Africa 1.18 External debt as a percent of GDP in African countries before and after the Heavily Indebted Poor Countries (HIPC) Initiative 2.1 Growth rates in African countries with and without accelerations, 1960–2014 2.2 Growth dynamics in African countries that experienced growth accelerations 2.3 Elasticity of employment with respect to GDP in selected African countries, 2000–14 2.4 Employment and GDP growth in selected African countries 2.5 Sectoral productivity and employment growth in Africa, 2000–10 2.6 Selected labor market indicators for African countries, 2016 2.7 Structure of employment in selected African countries 3.1 Inequality of opportunity and infrastructure development in selected African countries 3.2 Africa Infrastructure Index 2018 C ontents  5 5 6 7 8 10 11 14 14 15 15 16 17 20 22 23 25 28 35 36 42 43 44 45 46 67 72 vii 3.3 3.4 3.5 3.6 3.7 3.8 Gross fixed capital formation per capita in selected global regions, 1960–2015 Electricity and water access in African countries compared with that in China and India Access to electricity and GDP per capita, 2014 Internet penetration in selected regions of the world Infrastructure financing gaps to 2040 and investment needs to 2030 in selected regions How much should the world invest in infrastructure? 73 74 75 75 80 81 Infographics 3.1 3.2 Overall commitments to Africa’s infrastructure from all reported sources fell to $62.5 billion in 2016, the lowest in five years Funding for infrastructure relies heavily on external funding, which roughly matches the funding by national governments 85 86 Tables 1.1 1.2 1.3 A1.1 A1.2 Decomposition of annual growth in labor productivity in selected countries in Africa Elasticity of government revenues to tax rates in Africa Intended use of selected sovereign bond issues in selected African countries Macroeconomic developments in Africa, 2013–19 Decision and completion points for African countries under the Heavily Indebted Poor Countries (HIPC) Initiative 2.1 Growth accelerations and crisis episodes in selected African countries 2.2 Average annual growth of GDP per capita during growth spikes 2.3 Contribution to growth of sectoral reallocation of labor 2.4 Conditions of employment in Egypt, Mali, South Africa, and Zambia 2.5 Projected population trends, 2013–63 2.6 Effect of growth accelerations on poverty 2.7 Effect of growth accelerations on inequality 3.1 Selected evidence on the growth benefits of infrastructure development 3.2 Preliminary figures on investment needs ($ billions) 3.3 Infrastructure access data for selected global regions 3.4 Impact of unreliable infrastructure services on the productive sector 3.5 Trends in infrastructure finance in Africa, by source ($ billion) 3.6 Infrastructure disbursements of $62.5 billion by sector in Africa, 2016 3.7 Infrastructure disbursements in Africa by region, 2016 3.8 Projected increase in production and employment in G20 countries due to industrialization in Africa and least developed countries ($ millions) A3.1 Three high-end scenarios 4.1 Project examples in Africa 4.2 Assets and appetites of potentially investing in African infrastructure 4.3 PPP risks and risk allocation by infrastructure type A4.1 Private finance mobilization by MDBs: All countries of operation A4.2 Private finance mobilization by MDBs: Low- and middle-income countries 9 21 26 30 31 37 38 40 47 48 50 51 67 70 76 76 82 83 83 89 91 107 109 117 120 121 viii C ontents ACKNOWLEDGEMENTS The African Economic Outlook (AEO) 2018 was prepared under the supervision of Celestin Monga (Vice President, Economic Governance and Knowledge Management, ECVP). Front office staff of the ECVP Complex, Amah Ezanin Marie-Aude Koffi, Vivianus Ngong, and Davina Osei, provided critical support. Abebe Shimeles (Acting Director, Macroeconomic Policy, Forecasting and Research department, ECMR) coordinated the preparation of the report with a team consisting of Amadou Boly (Task Manager), John Anyanwu, Zorobabel T. Bicaba, El-Hadj M. Bah, Jacob Oduor, Anthony Simpasa, Audrey Chouchane, Charlotte Karagueuzian, Andinet Woldemichael, and Thouraya Triki. AfDB Statistics Department provided the underlying data on the outlook and projections under the guidance of Charles Lufumpa, Director of Statistics Department. Louis Kouakou led the Statistics team, which included Anouar Chaouch, Mbiya H.K. Kadisha, Soumaila Karambiri, Stephane Regis Hauhouot, Slaheddine Saidi, Nirina Letsara, and Guy Desire Lakpa on infrastructure data issues. Several internal consultants (Adams Adama, Betty Y. Camara, Chuku Chucku, Charlotte Karagueuzian, Linguere M. Mbaye, Tiguene Nabassaga, and Zackary Seogo) and interns (Amandine Nakumuryango and Kebba Jammeh) provided key inputs. Administrative assistance was provided by Veronique Aka, Patience Gogo, Eve A. Kra, and Abiana Nelson. The following external consultants and researchers contributed to different chapters: Ahmadou Aly Mbaye and Ameth Saloum Ndiaye (University Cheikh Anta Diop); Stevan  Lee (Oxford Policy Management) on Chapter 1; Jean-Claude Berthelemy (University Paris 1 Panthéon Sorbonne) on Chapter 2; Haroon Borat (University of Cape Town) and Morne Oosthuizen (University of Cape Town) on Chapter 2; and David Stiggers (Consultant) and Cledan Mandri-Perrott (World Bank Group) on Chapter 3. Very constructive comments and reviews on Chapter 1 were provided by the late Calestous Juma (Harvard University), Christopher Adams (University of Oxford), David L. Bevan (University of Oxford), and Willi Leibfritz on Chapter 1; Calestous Juma (Harvard University) and Augustin Fosu (University of Ghana) on Chapter 2; and Shem Simuyemba (African Development Bank), Jean Kizito Kabanguka (African Development Bank), and Lufeyo Banda (African Development Bank) on Chapter 3. Ferdinand Bakoup, Acting Director, Country Economics Department, worked with the Lead Economists (Assitan Diarra-Thioune, Stefan Muller, Abraham Mwenda, and James Wahomé) and AfDB Country Economists (see table) to prepare the country notes. Amadou Boly ensured overall coordination. This work benefited from contributions by consultants in selected countries (Gerard Adonis, Pascual Afugu, Efrem Tesfai Biedemariam, Benjamin Camara, Prosper Chitambara, Mohamed El Dahshan, Salome Kimani, Michel Matamona, Cassandro Mendes, Dickson Malunda, Jean Pascal Nkou, Jorge Retana De La Peza, Alieu Saho, Engy Salah, Klaus Schade, Mohamed Djounaid Soilihi, Kabbashi M. Suliman, A ­ lmadjir Tassiou); and were reviewed ix by an internal team consisting of Amandine Nakumuryango, Eric Kéré, Thouraya Triki, Kebba Jammeh, Linguere M. Mbaye, Adams Adama, Chuku Chuku, Mark Eghan, Audrey Chouchane, Tiguene Nabassaga, Betty Camara, and El Hadj Bah. The authors of country notes are listed in the table below. Laetitia Yattien-­ A miguet and Justin Kaba­ sele contributed to the design of the cover. Country Country economists/ authors Algeria Hervé LOHOUES Tarik BENBAHMED Angola Joel MUZIMA Benin Linguere M’BAYE Botswana Burkina Faso Editing, translation, and layout were by a team from Communications Development Incorporated led by Bruce Ross-Larson, and including Jonathan Aspin, Joe Brinley, Joe Caponio, Meta de Coquereaumont, Mike Crumplar, Mary Fisk, Susan Graham, Christopher Trott, and Elaine Wilson, with design support from Debra Naylor and translation support from Jean-Paul Dailly and a team at JPD Systems. Country Country economists/ authors Madagascar Tankien DAYO Malawi Peter Engbo RASMUSSEN Mali Abdoulaye KONATE Hamaciré DICKO George J. HONDE Mauritania Marcellin NDONG NTAH Facinet SYLLA Mauritius Ndoli KALUMIYA Burundi Thierry KANGOYE Morocco Cabo Verde Adalbert NSHIMYUMUREMYI Kaouther ABDERRAHIM-BEN SALAH Vincent CASTEL Cameroon Richard Antonin DOFFONSOU Mozambique Andre ALMEIDA SANTOS Central African Republic Kalidou DIALLO Namibia Andre ALMEIDA SANTOS Chad Claude N’KODIA Niger Facinet SYLLA Comoros Alassane DIABATE Nigeria Jacob ODUOR Audrey CHOUCHANE-VERDIER Congo Republic Adamon Mukasa NDUNGU Rwanda Edward Batte SENNOGA Côte d’Ivoire Zorobabel BICABA Dem. Rep. of Congo Jean Marie Vianney DABIRE São Tomé and Príncipe Flavio SOARES DA GAMA Djibouti Guy Blaise NKAMLEU Senegal Toussaint HOUENINVO Khadidiatou GASSAMA Egypt Hervé LOHOUES Seychelles Tilahun TEMESGEN Equatorial Guinea Dominique PUTHOD Sierra Leone Jamal ZAYID Eritrea Nyende MAGIDU Somalia Ethiopia Admit Wondifraw ZERIHUN Edward Batte SENNOGA Richard WALKER Salome KIMANI South Africa Wolassa Lawisso KUMO Gabon Dominique PUTHOD South Sudan Guy Blaise NKAMLEU Gambia Adalbert NSHIMYUMUREMYI Sudan Suwareh DARBO Ghana Eline OKUDZETO Swaziland Guinea Olivier MANLAN George J. HONDE Guinea-Bissau Toussaint HOUENINVO Khadidiatou GASSAMA Tanzania Prosper CHARLE Chidodzie EMENUGA Kenya Walter ODERO Zerihun ALEMU Togo Carpophore NTAGUNGURIA Tunisia Philippe TRAPE Uganda Alexis RWABIZAMBUGA Vera Kintu OLING Zambia Peter Engbo RASMUSSEN Zimbabwe Joel MUZIMA Lesotho Edirisa NSEERA Liberia Patrick HETTINGER Libya Kaouther ABDERRAHIM-BEN SALAH x A cknowledgements ABOUT THIS YEAR’S ECONOMIC OUTLOOK T he African Economic Outlook bridges a critical knowledge gap on the diverse socioeconomic realities of African economies through regular, rigorous, and comparative analysis. It provides short-to-medium term forecasts on the evolution of key macroeconomic indicators for all 54 regional member countries, as well as analysis on the state of socioeconomic challenges and progress made in each country. It represents African Development Bank staff economists’ analyses of African economic development during the previous year and near term. It has become the main flagship report for the African Development Bank, as well as reference material for those interested in Africa’s development, including researchers, investors, civil society organizations, and development partners. Given a rapidly changing Africa and international economic order, we have revamped the Outlook to enhance its policy relevance while ensuring that it serves the Bank’s operations well. Three main changes are evident. First, to increase the AEO’s timeliness, we are moving to an earlier release date so that the Bank, as a leading African institution, would be among the first to provide headline numbers on Africa’s macroeconomic performance and outlook. We plan to launch the AEO in midJanuary of every year. Second, to facilitate advocacy and policy dialogue, the 2018 AEO is being shortened to a maximum of four chapters and 54 Country Notes, totaling about 175 pages, down from more than 300 pages in previous years. Third, we are producing Regional Economic Outlooks for Africa’s five subregions. These self-contained, independent reports focus on priority areas of concern for each subregion and provide analysis of the economic and social landscape. They also highlight issues of pressing current interest.  xi THEMATIC COVERAGE OF PREVIOUS EDITIONS xii Edition Thematic title 2003 Privatization 2004 Energy Supply and Demand 2005 Financing of Small and Medium-sized Enterprise (SME) Development 2006 Promoting and Financing Transport Infrastructure 2007 Access to Drinking Water and Sanitation in Africa 2008 Technical and Vocational Training 2009 Information and Communication Technology across Africa 2010 Public Resource Mobilization and Aid 2011 Africa and its Emerging Partners 2012 Promoting Youth Employment 2013 Structural Transformation and Natural Resources 2014 Global Value Chains and Africa’s Industrialization 2015 Regional Development and Spatial Inclusion 2016 Sustainable Cities and Structural Transformation 2017 Entrepreneurship and Industrial Development A bout this year ’ s E conomic O utlook HIGHLIGHTS T his year’s African Economic Outlook examines recent macroeconomic development and structural changes in Africa, and outlines the 2018 prospects (Part I). It then focuses on the need to develop Africa’s infrastructure, and recommends new strategies and innovative financing instruments for countries to consider, depending on their level of development and specific circumstances (Part II). PART I: MACROECONOMIC DEVELOPMENTS AND STRUCTURAL CHANGE African economies have been resilient: Real output is up, reflecting generally good macroeconomic policies, progress in structural reforms (especially in infrastructure development), and generally sensible policy frameworks Global and domestic shocks in 2016 slowed the pace of growth in Africa, but signs of recovery were already manifest in 2017. Real output growth is estimated to have increased 3.6 percent in 2017, up from 2.2 percent in 2016, and to accelerate to 4.1 percent in 2018 and 2019. Overall, the recovery in growth has been faster than envisaged, especially among non-resource–intensive economies, underscoring Africa’s resilience. The recovery in growth could mark a turning point in net commodity-exporting countries, among which the protracted decline in export prices shrunk export revenues and exacerbated macroeconomic imbalances. Economic fundamentals and resilience improved in a number of African countries. In some, domestic resource mobilization now exceeds that of some Asian and Latin America peers. But it is still insufficient to meet the high level of financing to scale up infrastructure and human capital. Many African economies are more resilient and better placed to cope with harsh external conditions than before. But the end of the commodity price super-cycle has cut earnings from primary exports in many countries, undermining planned investments. Weaker external conditions have exposed fiscal vulnerabilities in natural resource–dependent economies as well as several others.  xiii African countries should strengthen their economic resilience and dynamism to lift their economies to a new growth equilibrium driven by innovation and productivity Although domestic revenue mobilization improved substantially in recent decades, tax-to-GDP ratios are still low in most African countries. Revenue regimes have to better capture more gains from growth and structural change as economies formalize and become more urbanized. With external official development assistance sharply lower, and greater appetite for debt to finance infrastructure and social sectors, many African governments have turned to international capital markets to meet their financing needs. The result: A build-up of debt, much on commercial terms. Despite the increase, debt levels for most countries have not yet breached the traditional threshold indicators. They have actually declined in nine African countries­—­sometimes mechanically because of the rebasing of gross domestic product­—­and remained stable in others. Dollar interest rates are expected to edge up and bond spreads widen, increasing the risk of sudden halts in private capital flows. Major investments in infrastructure, financed principally by external borrowing, have raised concerns about a currency and maturity mismatch in debt service, as revenue streams accrue predominantly in local currencies and debt obligations mature before these streams begin. With the notable exception of the CFA franc used by 14 African countries, which is pegged at a fixed exchange rate against the euro, most African currencies have lost about 20–40 percent of their value against the dollar since the beginning of 2015. But the resulting competitive currency depreciation will not necessarily translate into a strong price advantage in export markets. Structural change is taking place but at very low pace. Structural reforms, sound macroeconomic conditions, and buoyant domestic demand are sustaining the growth momentum in resource-intensive economies. Recent empirical work shows that Africa’s recent growth and poverty reduction has been associated with a decline in the share of the labor force in agriculture­—­especially since the early 2000s, and most pronounced for rural females. This decline has been accompanied by an increase in the productivity of the labor force, as it has moved from low productivity agriculture to higher productivity services and manufacturing. The employment share in manufacturing is not expanding rapidly. In most of the low-income African countries, the employment share in manufacturing has not peaked and is still expanding, albeit from very low levels. African countries should strengthen their economic resilience and dynamism to lift their economies to a new growth equilibrium driven by innovation and productivity rather than by natural resources. Macroeconomic policy strategy should aim at ensuring external competitiveness to avoid real exchange rate overvaluation and take the full benefits of trade, improve fiscal revenue, and rationalize public expenditure. To achieve these goals, the macroeconomic framework must blend real exchange rate flexibility, domestic revenue mobilization, and judicious demand management. In the medium term, the most important area of fiscal policy is tax reform. Widening the tax base (eliminating many exemptions and leakages) rather than hiking already high marginal tax rates will be indispensable for boosting tax revenues. None of these fiscal policy options is straightforward. All of them have difficult distributional and welfare consequences­—­and all are intensely political. Policy makers need to ensure that fiscal policy does not undercut the growth-promoting effects of public investment, reversing the inroads made in poverty reduction, health, and education across the continent. None of these fiscal choices is straightforward. Intensely political, all have difficult distributional and welfare consequences. Decisions should be made taking into account country-specific circumstances and development priorities. Development projects and programs in the pipeline should thus be balanced against other needs. Recurrent expenditures have to be kept in check, mainly by preventing growth of the public sector wage bill. Real exchange rate depreciations might be viewed as helpful tools, but given the strengthening of the U.S. dollar against many African currencies, competitive depreciations may not necessarily translate into a strong price advantage in export markets. Africa needs more development financing. But the build-up of debt should be consistent with country development needs and capacities to service the loans without compromising fundamentals for future growth. Debt must be deployed xiv H ighlights in productive investments that yield income streams for self-financing and grow the economy, in order to build capacity for increased domestic resource mobilization that can wean countries from foreign debt and prevent potential debt distress. Expenditure-reducing measures will have to bear a large share of the burden of restoring external balance. The infrastructure–investment drive across Africa, financed largely by external borrowing, needs careful analysis to ensure that revenue streams (generated in local currencies) are strong enough to meet the debt obligations when they fall due. Jobless growth? Employment growth is only half of output growth Sustained growth should create jobs, which drive poverty reduction and make growth more inclusive. But Africa’s recent high growth rates have not been accompanied by high job growth rates. Between 2000 and 2008, employment grew at an annual average of 2.8 percent, roughly half the rate of economic growth. Only five countries­ —­A lgeria, Burundi, Botswana, Cameroon, and Morocco­—­experienced employment growth of more than 4 percent. Between 2009 and 2014, annual employment growth increased to an average of 3.1 percent despite slower economic growth. But this figure was still 1.4 percentage points below average economic growth. Slow job growth has primarily affected women and youth (ages 15–24). Africa is estimated to have had 226 million youth in 2015, a figure projected to increase 42 percent, to 321 million by 2030. The lack of job growth has retarded poverty reduction. Although the proportion of poor people in Africa declined from 56 percent in 1990 to 43 percent in 2012, the number of poor people increased. Inequality also increased, with the Gini coefficient rising from 0.52 in 1993 to 0.56 in 2008 (the latest figure available). Africa will become the youngest and most populous continent in the next few decades. Its labor force will rise from 620 million in 2013 to nearly 2 billion in 2063. A “demographic dividend” might provide a great opportunity for Africa­—­and the rest of the H ighlights  world, which is expected to experience significant labor shortages. But technological advances could reduce its value. In the face of rapidly growing populations and heightened risks of social unrest or discontent, jobless growth is the most serious concern for African policy makers. The urgency of implementing reforms for attracting foreign direct investment in industries with strong competitive potential and thus allowing the private sector to create enough “good jobs” cannot be overstated. Quite a number of the continent’s success stories (growth spikes not followed by crises) can serve as a source of inspiration for African policymakers and suggest ways to avoid failed takeoffs. The experiences of countries such as Mauritius, Ethiopia, and Rwanda provide useful lessons for the entire continent. Successful take-offs require productivity growth. Labor force reallocations from the traditional, subsistence, low-productivity sectors to the modern high-productivity sectors must be a key part of African growth accelerations. They require not only the creation of jobs in modern agriculture, industry, and services, but also policies that empower the poor and the low-skilled workers so that they can take advantage of the new opportunities that arise with structural transformation. A first priority for African governments is to encourage a shift toward labor-absorbing growth paths. They should put in place programs and policies aimed at modernizing the agricultural sector, which employs most of the population and is typically the main step toward industrialization. A second priority is to invest in human capital, particularly in the entrepreneurial skills of youth, to facilitate the transition to higher-productivity modern sectors. Quite a number of the continent’s success stories can serve as a source of inspiration for African policymakers and suggest ways to avoid failed take-offs PART II: FINANCING INFRASTRUCTURE: STRATEGIES AND INSTRUMENTS Africa’s infrastructure needs­—­$130–$170 billion a year­—­leave a financing gap of as much as $108 billion. But with better strategies, sustained xv The excess savings in many advanced countries could be channeled into financing profitable infrastructure projects in Africa and inclusive growth can still be achieved in the context of a large infrastructure gap. Africa must industrialize to end poverty and to generate employment for the 12 million young people who join its labor force every year. One of the key factors retarding industrialization has been the insufficient stock of productive infrastructure in power, water, and transport services that would allow firms to thrive in industries with strong comparative advantages. New estimates by the African Development Bank suggest that the continent’s infrastructure needs amount to $130– 170 billion a year, with a financing gap in the range of $68–$108 billion. With such a large infrastructure gap, and urgent needs in health, education, administrative capacity, and security, Africa has to attract private capital to accelerate the building of critical infrastructure needed to unleash its potential. But African countries do not need to wait until all financing gaps are filled before they transform their economic structures. Africa now collects about $500 billion in tax revenue every year, $50 billion in foreign aid, $60 billion in remittances, and $60 billion in FDI inflows. More than $100 trillion is managed by institutional investors and commercial banks globally. African countries seeking financial resources now have a wide variety of options, well beyond foreign aid. Also in the picture are sovereign wealth funds and market finance. The global economy would benefit enormously from Africa’s industrialization and the building of productive infrastructure in the continent The excess savings in many advanced countries could be channeled into financing profitable infrastructure projects in Africa. A small fraction of the excess global savings and low-yield resources would be enough to plug Africa’s financing gap and finance productive and profitable infrastructure. Increased production of capital and consumer goods in G20 economies and in Africa would also put into motion several multiplier effects, generating further demand for intermediate inputs, augmenting incomes, and increasing employment. All that would generate 7.5 million jobs in the G20 economies. Increasing the share of manufacturing in GDP in Africa (and other LDCs) could boost investment in the G20 by about $485 billion and household consumption by about $1.4 trillion. The impact of African (and other LDC) industrialization on G20 economies would also be large. Direct exports of capital and consumption goods would increase by more than $92 billion. And the indirect effects associated with this increase in exports­—­given the domestic linkages between G20 exporters and other domestic producers­—­would increase G20 production by $132 billion. All that would generate 7.5 million jobs in the G20 economies. It would boost aggregate demand, create employment in poor and rich countries alike, and move the world toward peace and prosperity. That this mutually profitable global transaction is not taking place is one of the biggest paradoxes of current times. Under ideal political circumstances, a mutually profitable global pact to finance Africa’s infrastructure would be established so that Africa and the world could reap such win-win benefits. A realistic assessment of global governance and political economy issues in advanced economies suggest that Africa should not wait for the international community to understand the potential global benefits of its industrialization or to finance the continent’s $130–170 billion infrastructure gap. Instead, the continent should adopt a more pragmatic approach to infrastructure financing. Focusing primarily on new models of financing, African countries can jump directly into the global economy by building well-targeted infrastructure to support competitive industries and sectors in industrial parks and export-processing zones linked to global markets. By attracting foreign investment and firms, even the poorest African countries can improve their trade logistics, increase the knowledge and skills of local entrepreneurs, gain the confidence of international buyers, and gradually make local firms competitive. Infrastructure projects are among the most profitable investments any society can make. When productive, they contribute to and sustain a country’s economic growth, and therefore provide the financial resources to do everything else. But many governments try to do too much at the same time and end up not actually doing much. x vi H ighlights Or they give priority to the wrong industries and sectors and devote their limited financial, administrative, and human resources to activities that are not competitive and cannot generate enough payoffs to sustain development. Universal access to high-quality infrastructure can only be a long-term goal. Trying to achieve it with limited resources has led governments to spend too much on too many projects with low economic returns and little impetus for industrial growth and employment creation. However, African countries do not need to solve all their infrastructure problems before they can achieve sustained and inclusive growth. Instead, they should focus on how to best use their scarce infrastructure budget to achieve the highest economic and social returns. Targeting sectors and locations is therefore a key policy recommendation Fortunately, the current global financial conditions are favorable and likely to remain so in the medium term, and new instruments are being developed to mitigate the higher risks facing investors in many African countries. It should be acknowledged that private financing of infrastructure will likely remain a small share of global spending on infrastructure, estimated at 5–10 percent. Governments can optimize the use of existing infrastructure to reduce inefficiency and waste, and prioritize investments into projects with the highest economic and social returns. Effective institutional arrangements are thus essential for effective management of the complex tasks of project planning, design, coordination, development, implementation, and regulation. To improve efficiency, governments should also focus on the soft side of infrastructure development­—­on policy and regulatory issues, on education and training of the teams involved in infrastructure financing, and on constant research to keep up with new knowledge. African countries should better leverage public funds and infrastructure investments, while encouraging private sector participation. But the different stages of development of African countries mean that the policy approaches need to be country specific. Some new financing H ighlights  mechanisms could be implemented in all African countries, taking into account the specific economic circumstances and the productive structures of national economies. Infrastructure debt has not yet been widely considered a major asset class by investors in Africa. But some countries on the continent are using a wide range of financing mechanisms to support investments in infrastructure, and the successful new approaches should be scaled up. Creating an “infrastructure asset” class to attract institutional investors and the enhanced use of guarantees by government or development finance institutions can lower perceived private sector risk and crowd in funding. Project puttable bonds are designed to mobilize pension and life insurance funds as well as sovereign funds for PPPs in emerging economies. They would finance long-term investment funds from the beginning to the closing of a project, avoiding refinancing risk. Several entities­ —­ including MIGA, AfDB, GuarantCo, and institutions such as Nigeria’s InfraCredit­—­offer risk mitigation, credit enhancements, and guarantees to support financial arrangements, public–private partnerships, and access to local and international capital markets. To facilitate long-term finance, an MDB could provide a put option after the construction and ramp-up period and receive a guarantee premium. The MDB would then take the construction and early operational risk to facilitate financing, complemented by commercial loans, if appropriate. To buy debentures or convertible bonds to finance the initial phases of a project, an MDB could provide short-term, flexible loans to governments. The debentures would be issued by a privately owned special-purpose vehicle that builds and operates the infrastructure facility and finances the initial phase of the project. After construction and after some of the initial risks have subsided, the government would sell the debentures to investors in the market and use the proceeds to repay the MDB. Output-based long-term PPP agreements can support the delivery of basic service where policy concerns would justify public funding to complement or replace user fees. They reduce the burden on development to recover all costs through just connection and tariff costs. Some countries on the continent are using a wide range of financing mechanisms to support investments in infrastructure, and the successful new approaches should be scaled up x vii PART I MACROECONOMIC DEVELOPMENTS AND STRUCTURAL CHANGE  1 AFRICA’S MACROECONOMIC PERFORMANCE AND PROSPECTS 1 KEY MESSAGES T his chapter reviews Africa’s economic performance in 2017 and presents forecasts of GDP growth for 2018–19. It analyzes growth outcomes and discusses some of the macroeconomic shocks and vulnerabilities African countries face and how they have affected development financing. Several key findings and recommendations emerge from the analysis: • Growth in real output recovered in 2017. Many African economies are better placed to cope with harsh external conditions than they were in the past two decades. Global conditions have eased slightly since mid-2016, improving the outlook for Africa, but countries in the region still face major macroeconomic challenges. Commodity prices have recovered but not to precrisis levels, and demand for traditional and nontraditional exports from Africa remains modest. Although current account positions have improved, they are not sufficiently robust; dollar interest rates are expected to edge up, bidding up the cost of capital; and external debt ratios have begun to rise across the region. • The infrastructure investment drive in the region, financed largely by external borrowing, needs careful monitoring to ensure that revenue streams (generated in local currencies) are strong enough to meet the debt obligations when they fall due. Fiscal policy should not undercut the growth-promoting effects of the recent surge in public investment and reverse the inroads made in poverty reduction, health, and education across the continent. • In the short term, macroeconomic policy must blend real exchange rate flexibility and judicious demand management. Real exchange rate depreciations will be important, but given the strengthening of the U.S. dollar, competitive currency depreciations may not necessarily translate into a strong price advantage in export markets. Domestic demand management may have to bear a larger share of the burden in restoring external balance. Ongoing infrastructure projects will need to be completed and maintained, and projects in the pipeline balanced against other needs. Recurrent expenditures, including the public sector wage bill, should be watched carefully. • In the medium to long term, the most important area of fiscal policy is tax reform. Domestic revenue mobilization improved substantially in recent decades, but tax-to-GDP ratios are still below the 25 percent threshold deemed sufficient to scale up infrastructure spending. There is an urgent need for better revenue regimes­—­including progressive elimination of the vast array of exemptions and leakages that pepper tax systems­—­to capture the gains from growth and rapid structural change that some countries are experiencing. • None of these fiscal choices is straightforward. Intensely political, all have difficult distributional and welfare consequences. Adopting and implementing a coherent and equitable fiscal policy holds out the best prospects for sustained growth when external conditions improve.  3 Africa needs more development financing. But the build-up of debt should be consistent with countries’ development needs and capacities to service the loans 4 Regional and global shocks in 2016 slowed the pace of growth in Africa, but signs of recovery were already manifest in 2017. Real output growth is estimated to have increased 3.6 percent in 2017, up from 2.2 percent in 2016, and to accelerate to 4.1 percent in 2018 and 2019. There is significant heterogeneity across African countries. Some are performing remarkably well while others experience tepid growth. Structural transformation and productivity improvements are evident in some non-resource-dependent countries. Expanding this process across the continent is critical to sustain growth, create employment, and accelerate poverty reduction. The recovery in growth could mark a turning point in net commodity-exporting countries, among which the protracted decline in export prices shrunk export revenues and exacerbated macroeconomic imbalances. Although revenues declined and expenditures rose in these economies, inflation and current account positions for the continent as a whole improved in 2017, thanks to better exchange rate policies. Overall, the recovery in growth has been faster than envisaged, especially among non-resource-intensive economies, underscoring Africa’s resilience. Structural reforms, sound macroeconomic conditions, and buoyant domestic demand are sustaining the growth momentum in resource-intensive economies. African countries should strengthen this economic dynamism to lift their economies to a new growth equilibrium driven by innovation and productivity rather than by natural resources. Economic fundamentals and resilience to shocks improved in a number of African countries. In some, domestic resource mobilization now exceeds that of some Asian and Latin American countries at similar levels of development. But it is still insufficient to meet the high level of financing to scale up infrastructure and human capital. With external official development assistance per capita sharply lower, and an increased appetite for debt to finance infrastructure and social sectors, many African governments have turned to international capital markets to meet their financing needs. The result has been a build-up of debt, much of it on commercial terms. Despite the increase, levels for most countries have not yet breached the traditional threshold indicators. Debt levels have actually declined in nine African countries, and they have remained stable in others. Africa needs more development financing. But the build-up of debt should be consistent with countries’ development needs and capacities to service the loans without compromising fundamentals for future growth. Debt must be deployed in productive investments that yield income streams for self-financing and grow the economy, in order to build capacity for increased domestic resource mobilization that helps wean countries from foreign debt and prevents potential debt distress. The chapter is organized as follows. The next section looks at the performance of African economies. Section 2 discusses external shocks and macroeconomic imbalances. Section 3 examines domestic savings, tax revenues, and debt dynamics. The last section summarizes the chapter’s policy implications. AFRICAN ECONOMIES HAVE BEEN RESILIENT TO NEGATIVE SHOCKS After tepid annual growth of 2.2 percent in 2016, average real GDP rebounded, reaching 3.6 percent in 2017. It is projected to grow 4.1 percent a year in 2018 and 2019 (figure 1.1). No single factor accounts for this improvement. It reflects better global economic conditions; the recovery in commodity prices (mainly oil and metals); sustained domestic demand, partly met by import substitution; and improvements in agricultural production. Country-level variation is significant. Indeed, much of the downturn is linked to the recession in Nigeria, where output shrunk 1.5 percent in 2016, a result of low oil prices and policy challenges, including delays in exchange rate adjustments. The recovery in oil prices bolstered production in 2017. Coupled with strong performance in agriculture, it lifted the economy out of last year’s recession, but growth was still tepid, at 0.8 percent. Nigeria is set for a rebound, but is projected to be weaker than the average for the continent. Among the continent’s other large economies, South Africa was a drag on growth in 2016 A frica’ s macroeconomic performance and prospects FIGURE 1.1 Real GDP growth in Africa, 2009–19 Percent 12 Nigeria 10 8 Africa 6 4 2 Sub-Saharan Africa, excluding Nigeria North Africa, excluding Libya 0 –2 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (estimated) (projected) 2019 (projected) 2016 2017 2018 (estimated) (projected) 2019 (projected) Source: AfDB statistics. FIGURE 1.2 Real per capita GDP growth in Africa, 2009–19 Percent Debt must be deployed in productive investments that yield income streams for self-financing and grow the economy 10 Nigeria 5 0 Sub-Saharan Africa, excluding Nigeria North Africa, excluding Libya –5 2009 2010 2011 2012 2013 2014 2015 Source: AfDB statistics. (0.3 percent), while Egypt enjoyed above-average growth (4.3 percent). In North Africa excluding Libya, the 2016 downturn was milder than elsewhere, with growth slowing from 4.0 percent in 2015 to 3.4 percent in 2016 (Libya is excluded because the country’s extremely volatile growth distorts the picture, even though it accounts for less than 5 percent of Africa’s GDP). Growth rebounded to 3.6 percent in 2017 and is set to accelerate to 4.1 percent in 2018 and gain A frica’ s macroeconomic performance and prospects  5 Africa’s economic performance has been resilient against the background of a difficult external environment in recent years momentum in 2019 to 4.7 percent. Growth in Sub-­ Saharan Africa excluding Nigeria slowed from 3.8 percent in 2016 to 3.2 percent 2017. It is projected to increase to more than 4 percent a year in 2018 and 2019. Growth among net oil-importing countries grew at an average rate of 3.9 percent in 2017, up from 2.9 percent in 2016. Africa as a whole saw growth fall behind the global average in 2016; in 2017 it grew at about the same rate as the global economy. But because population growth is greater than in most other regions, per capita growth was below the world average. In North Africa excluding Libya, it rose by just 1.8 percent in 2017 and is projected to increase by just 2.3 percent and 2.9 percent in 2018 and 2019, respectively. In Sub-­Saharan Africa excluding Nigeria, per capita income rose by just 1.1 percent in 2017 and is projected to increase by just 1.5 percent in 2018 and a further 1.8 percent in 2019. In Nigeria per capita income fell 1.7 percent in 2017 but the contraction is projected to reduce to 0.6 percent in 2018 and narrow further to just 0.1 percent the following year. Global economic growth is estimated to rise from 3.1 percent in 2016 to 3.6 percent in 2017 and 3.7 percent in 2018.1 This growth may lead to higher commodity prices, which would benefit some African countries. Africa’s economic performance has been resilient against the background of a difficult external environment in recent years. The continent’s main exports are commodities. Commodity prices enjoyed a long boom, both before the 2008 crash and for many years after it. That boom has ended. The prices of many commodities fell to local lows at the start of 2016, and the value of many of Africa’s exports, including oil, gold, and coffee, declined between 2014 and 2016. The prices of oil and metals recovered significantly in 2016 and 2017, if well below the highs of 2010–14. The rise in prices boosts demand for (and in many cases production of) African commodity exports. GDP and all of its components rose GDP in Africa has grown in real terms every year since 2009­—­despite the hit to export earnings by the decline in commodity prices in 2013–15. Public and private investment grew every year between 2012 and 2016 (figure 1.3). Private investment slowed in 2015 but recovered in 2016. The real value of exports fell in 2013–15, recovering slightly in 2016. Weaker export earnings FIGURE 1.3 Components of GDP in Africa, 2009–16 2009 GDP = 100 150 100 50 0 –50 2009 2010 Private consumption Government consumption 2011 2012 Private investment Government investment 2013 2014 2015 2016 Exports Imports Source: AfD