CHAPTER II DEVELOPMENTS IN 2005
- International Monetary Fund. African Dept.
- Published Date:
- November 2005
An easing of output growth among some oil producers is expected to lower real GDP growth in SSA during 2005 from the eight-year high in 2004 (Table 2.1). After exceptionally strong increases in oil production in Chad and Equatorial Guinea during 2004, output growth rates in these countries have eased this year; output in Nigeria is expected to grow by only 3.9 percent in 2005, down from the 6.0 percent it registered in 2004. Nonetheless, performance continues to be encouraging across a broad range of SSA countries, with real GDP growth in non-oil-producing countries expected to remain at 4.5 percent in 2005. Excluding South Africa and Nigeria, average output is expected to increase by 5.0 percent in 2005, and average per capita real GDP in the region to rise by 2.6 percent.1 Real growth in SSA, however, does not yet match the levels witnessed in other developing country regions. Moreover, growth in five countries (Central African Republic, Comoros, Côte d’Ivoire, Gabon, and Zimbabwe) has remained below 3 percent in each of the past four years, and GDP per capita is continuing to decline.
|(Annual growth, in percent)|
|Of which: Oil producers||3.8||8.1||8.2||4.7||8.1|
|Real non-oil GDP||4.0||3.4||4.9||4.7||5.0|
|Consumer prices (average)||12.1||13.4||9.4||9.9||8.3|
|Of which: Oil producers||18.7||17.0||12.7||11.8||6.2|
|Per capita GDP||1.4||2.1||3.4||2.6||3.4|
|(Percent of GDP unless otherwise noted)|
|Exports of goods and services||32.6||33.8||35.9||38.5||40.2|
|Imports of goods and services||33.2||33.7||34.7||36.6||36.3|
|Gross domestic saving||15.3||17.7||19.8||20.1||21.4|
|Gross domestic investment||16.5||18.3||18.8||18.7||18.8|
|Fiscal balance (including grants)||−2.8||−2.2||−0.4||0.5||2.3|
|Of which: Grants||1.1||1.1||1.0||1.1||0.9|
|Current account (including grants)||−3.5||−2.8||−1.9||−0.7||0.8|
|Of which: Oil producers||−9.0||−3.8||2.3||7.7||12.2|
|Terms of trade (percent change)||1.0||0.9||2.6||5.1||2.9|
|Of which: Oil producers||3.6||0.5||11.5||23.4||7.8|
|Advanced country import growth (in percent)||2.6||4.1||8.7||5.3||5.9|
|Oil price (U.S. dollars per barrel)||25.0||28.9||37.8||54.2||61.8|
|Real GDP growth in other regions|
|Commonwealth of Independent States||5.3||7.9||8.4||6.0||5.7|
Despite the impact of continued high oil prices, output growth is expected to be above 5 percent in more than one-third of the non-oil-producing countries in SSA in 2005. Ethiopia, Mozambique, and Sierra Leone are expected to see growth in excess of 7 percent, and recent strong performance is being maintained in the Democratic Republic of Congo, Ghana, Tanzania, and Uganda. This suggests that, with their continued adoption of sound policy frame-works,2 a number of SSA countries have sustained growth accelerations. In South Africa, strong consumer and investor confidence suggests that GDP growth will increase to about 4.3 percent in 2005. The economic recovery continues in a number of postconflict countries. Burundi’s rebound in economic activity has continued into 2005, and the strong growth in the Democratic Republic of Congo has persisted. In two countries in the region (Seychelles and Zimbabwe), output is expected to decline further in 2005, and in Lesotho growth is projected to fall to 0.8 percent following the removal of textile quotas and a decline in agricultural output (see below).
The improved growth trend across the region is helping to reduce poverty. The evidence suggests that the higher growth rates of GDP per capita experienced by SSA in recent years have been strongly correlated with poverty reduction (Box 2.1). Although the increased provision of critical social services is important, investment in infrastructure, which may have a more immediate effect on real GDP growth, also benefits the poor by raising productivity in the rural and agricultural sectors. Studies confirm a productive role for various types of infrastructure in low-income countries. Canning and Bennathan (2000) found high rates of response of output to infrastructure, but also strong complementarities between different components of capital spending. Studies also find a tendency for public investment to “crowd in” private investment in SSA.3 The level of infrastructure development in SSA lags behind that in other low-income countries, and much of the region trails far behind Mauritius, the regional leader (Calderon and Serven, 2004).
Output growth has eased during 2005 in several oil-producing countries, but it still remains strong by historical standards.4 Although oil and gas production is expected to remain constant in Nigeria during 2005, oil output growth continues to be driven by the new fields in Angola, Chad, and the Republic of Congo. Real GDP growth in Nigeria is expected to pick up to 4.9 percent in 2006 as a major offshore oil field and expansions of Nigeria’s liquefied natural gas plant come onstream.
Economic performance in SSA has been affected by poor harvests in the Sahel region and in several countries in eastern and southern Africa in 2004. As a result, food production shortfalls are expected this year in Burundi, Chad, Malawi, Mali, Mozambique, Niger, and Swaziland. The combination of drought conditions and the incidence of HIV/AIDS has led to a drop in agricultural production in Lesotho, whereas the decline in Zimbabwe is due mainly to disruptions related to the changes in land tenure and possible drought. In some countries, high prevalence rates of HIV/AIDS have further complicated the economic outlook.5 The Food and Agriculture Organization has identified 20 SSA countries in need of food assistance in 2005.
The recurrence of food shortages in SSA reflects the cumulative effect of adverse shocks in fragile environments, aggravated in some cases by conflict and political turmoil. Although last year’s locust infestation and drought in the Sahel have not returned on the same scale, they damaged the already precarious semiarid land. The threat of locust infestation remains high for Chad, Mali, and Niger.6 Food shortages in Niger are particularly severe. After a slow initial response to the food crisis, the international community has stepped up its assistance to Niger. The government has taken steps to deal with the immediate food needs and other effects of the drought. Looking ahead, the government and the international community need to focus on improving Niger’s irrigation system, which is key to reducing the country’s vulnerability to adverse weather. In addition to addressing the current food shortages, Niger will need seeds to ensure that planting for next year’s harvest can proceed on schedule. The rainfall in 2005 has so far been adequate, increasing the prospect for a rebound in agricultural production. Countries in southern Africa have also suffered from several years of low rainfall, and, besides the impact of AIDS on the agricultural labor force (as noted above), analysts point to disruptions in the markets for seed and fertilizer as contributing to the crisis.
Box 2.1.Pro-Poor Growth in Africa1
The impact of growth on poverty has been explored in a number of recent country studies. These studies conclude that growth is strongly correlated with poverty reduction: on average, countries with more rapid growth experience a greater reduction in poverty, especially over the long term.2
The elasticity of poverty with respect to growth—that is, the percentage change in head-count poverty for a 1 percent change in growth—has been estimated at–1.7, on average. This estimate is derived using national data from growth episodes of 12 developing countries between the early 1990s and early 2000s. Ghana, Senegal, and Uganda have elasticities of–1, whereas for Burkina Faso it is equal to–2. This variation is attributable to differences in changes in inequality in accounting for poverty reduction. For example, a decomposition of poverty outcomes shows that if inequality had not increased in Uganda during 1992–2002, the headcount poverty rate would have been 8 percentage points lower than it actually was. Nonetheless, because growth was so strong, headcount poverty still fell by 18 percentage points over this period. On the other hand, Burkina Faso’s headcount poverty level dropped by nearly 5 percentage points more than it would have as a result of growth alone in 1994–2003, because inequality also fell. The World Bank’s dollar per day data, covering a longer period (1981–2001) and more countries, also show considerable country variation in poverty reduction (see figure, left panel).
There is no tendency for inequality to increase with growth. The right panel of the figure below, showing income growth and changes in the Gini coefficient (the standard measure of inequality) for countries in SSA, suggests that there is no systematic relationship between the two variables.
Case studies have identified three related drivers of pro-poor growth: growth in agriculture and rural areas; broad-based enhancement of productive capacity, through investment in infrastructure; and aid inflows. This is because the poor depend on agriculture for their livelihood, aid supplements resources for the provision of critical social services, and investment in infrastructure enhances the productive potential of the economy. However, infrastructure investments have been neglected in many countries in SSA.
Growth and Changes in Poverty and Inequality for Sub-Saharan Africa, 1981–2001
Sources: IMF staff calculations; and World Bank Global Poverty Monitoring database.
Note: Each observation is constructed from changes between two household surveys. The intervals differ in length and number across countries. Growth is calculated from the household survey measure of mean income or consumption. These data may differ from the national data.
Inflationary pressures in the SSA region have increased slightly in the wake of higher oil prices and poor harvests in some countries (Figure 2.1). However, these pressures have generally remained under control, and average broad money growth in the region as a whole has continued its steady decline. Average inflation in the region picked up slightly because of significantly higher inflation in the Democratic Republic of Congo, Guinea, and Burundi. In South Africa, inflation has bottomed out and is expected to increase in 2005, staying within the South African Reserve Bank’s target range of 3–6 percent. Thirty countries in SSA are expected to achieve inflation rates in single digits during 2005, up from 28 countries in 2004. The Gambia is expected to reduce inflation from 14 percent in 2004 to 5 percent this year. Only Angola, the Democratic Republic of Congo, Guinea, and Zimbabwe are projecting inflation above 20 percent. Inflation in the CFA franc countries has increased during 2005 from the low levels in 2004, when the CFA franc appreciated against the dollar; however, on average, inflation in the franc zone is expected to remain below 3 percent.
Figure 2.1.Inflation, 2000–061
Source: IMF, African Department database.
1 Shaded area indicates projections.
Aid Flows and Revenues
Many SSA countries continue to attract foreign assistance, including debt relief. Although aid flows to Africa have been increasing since the Monterrey conference of 2002, only a small share of the incremental aid has been provided in the form of program and project assistance (Box 2.2). Excluding South Africa and Nigeria, official grants as a share of GDP are projected to increase to 3.2 percent of GDP in 2005, from 3.1 percent in 2004. The average external debt burden continued to decline as a share of GDP as more countries receive debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative.7 Among countries that have reached the HIPC Initiative completion point, grants are projected to increase to 5 percent of GDP on average. Eleven countries in the region are expected to receive grants in excess of 7 percent of GDP in 2005. Government revenue as a share of GDP is projected to increase in 23 oil-importing countries, in many cases reflecting their ongoing implementation of tax reform programs. These developments would allow overall government expenditure to increase as a share of GDP in 20 non-oil-producing countries, and revenues above 15 percent of GDP in three-fourths of SSA countries.
The current account surpluses of oil producers are projected to increase significantly in 2005. Their average external current account surplus (including grants) is expected to increase to 7.7 percent of GDP in 2005 from 2.3 percent in 2004, reflecting a strengthening of external positions of all oil-producing countries.
With higher revenues, oil-producing countries have strengthened their fiscal positions. Their overall fiscal surplus is likely to increase strongly from 4.3 percent in 2004 to 7.9 percent in 2005. In Nigeria, despite the liberalization of the downstream petroleum market at end-2003, the pass-through of higher petroleum prices has been limited following widespread strikes in protest against high prices. Nonetheless, Nigeria’s fiscal surplus is expected to increase by 2.3 percentage points to 10 percent of GDP (Box 2.3). In Angola, the prices of domestic oil products have not been adjusted since early 2005. The size of the non-oil fiscal deficit varies across the oil producers—from 5.8 percent of non-oil GDP in Cameroon in 2004 to 57.6 percent in Angola—reflecting differences in trends in public expenditures and in the share of non-oil GDP. For oil producers overall, however, it is projected to increase in 2005, to 29.4 percent of non-oil GDP from 25.6 percent in 2004.8 Oil-producing countries need to continue to smooth the spending response to higher prices and operate their fiscal policy with a long-term perspective. The scope for “rent seeking” associated with an oil windfall adds urgency to the need to improve fiscal transparency and to ensure the quality of existing and additional public expenditures. The momentum in some countries (for example, Cameroon, Republic of Congo, and Nigeria) toward enhancing the transparency of their oil operations should be maintained and similar initiatives adopted by other oil producers in the region, including through a commitment to adhere to the principles of the Extractive Industries Transparency Initiative.
Box 2.2.Aid Inflows to Africa
Recent reports (by the UN Millennium Project and the Commission for Africa) have noted that low domestic savings as well as insufficient private foreign investment would make it difficult for SSA to achieve the MDGs by 2015.1 A significant and sustained increase in the volume of official development assistance (ODA) is therefore required to build up human capital, infrastructure, and productive and export capacity and to “crowd in” private capital by improving the investment climate. In addition, both new and existing aid flows would need to be used more effectively.
The increase in aid flows to the region in the new millennium represents a reversal in trends observed in the late 1990s. After falling by 7 percent a year in the late 1990s, aid flows to the SSA region grew in real terms by 14 percent a year, on average, in the first three years of the new century. During these three years, per capita aid to the region rose by $10 in real terms to regain the level of the early 1990s, although it is still lower than per capita aid in the 1980s, when aid to the region was about $34 per capita in constant 2002 prices. In 2003, sub-Saharan Africa was the largest regional recipient of foreign assistance, with per capita ODA equaling about $30 in constant 2002 prices, compared with an average per capita allocation of about $12 for developing countries as a whole.
However, aid in the form of project and program assistance constitutes a relatively small part of the increase of total aid to sub-Saharan Africa. Debt forgiveness has accounted for a significant share of the additional aid flows to SSA since the launch of the enhanced HIPC Initiative. Of the 28 countries granted assistance under the enhanced HIPC Initiative between 2000 and August 2005, 23 are in Africa. During 2000–03, debt forgiveness accounted for 17 percent of the total aid disbursed to this region, on average. Although, in absolute terms, program assistance and project aid have increased, their shares in total aid commitments to the region have declined by almost 10 percentage points since the early 1990s, thus indicating that program and project assistance have grown at a slower pace than total aid.
Harmonization of donor practices and alignment of aid flows with the priorities of recipient countries can enhance aid effectiveness. National ownership and leadership of development plans is crucial for the aid to be effective. However, about 20 percent of aid to SSA is still tied. Furthermore, the volatility of aid disbursements and the consequent unpredictability of flows make it difficult for recipient governments to formulate medium-term plans. On a more encouraging note, grants have constituted 80 percent or more of the aid inflows to SSA in the new millennium. The share of technical cooperation grants (that are seen as more donor-driven than budget support grants, for instance), albeit high at 21 percent, is lower in the region than in developing countries as a whole.
Several new initiatives are seeking to channel more resources to Africa and to make their use more effective. At the G-8 summit in July 2005, donors pledged to double ODA to Africa to $50 billion annually by 2010 in line with the calls made by the UN Millennium Project and the Commission for Africa. For their part, recipient countries face challenges in instituting the necessary policy reforms and strengthening governance and public expenditure management systems to effectively absorb the rising aid flows and maximize their impact on poverty.1 For details, see Gupta, Pattillo, and Wagh (2005, forthcoming).
In most of the oil-producing countries, inflation remains under control. In those countries that are part of the CFA franc zone, with the exception of Equatorial Guinea, inflation is projected to remain at or below 3 percent. Among the countries with floating exchange rates, inflation has been edging up in Nigeria and São Tomé and Príncipe in 2005, but is projected to fall to 22 percent in Angola. Prudent monetary policy, fiscal tightening, and structural reforms, such as trade liberalization, are crucial for SSA’s oil-producing countries to help contain any emerging inflationary pressures.
Real non-oil GDP growth in the oil-producing countries is projected to slow in 2005. After exceptionally strong non-oil growth in Equatorial Guinea and Nigeria in 2004, non-oil sector growth rates in these countries have eased this year. Still, however, projected non-oil output growth is higher in the oil-producing countries (5.4 percent) than in the non-oil-producing countries (4.6 percent). Among oil producers, while those countries in a monetary union have seen a real depreciation in the first five months of 2005, Angola, Nigeria, and São Tomé and Príncipe have all observed a real appreciation. Reserve cover for this group is expected to increase from 4.9 to 5.8 months of imports during 2005. Accumulating foreign exchange reserves can be an appropriate response by these countries to contain pressure for real exchange rate appreciation and to allow the economy to adjust gradually to what may be permanently higher oil prices. An accumulation of reserves should generally be accompanied by a buildup of net government assets with the central bank. The extent to which spending can and should be expanded over time depends on the circumstances of individual countries, with the choice of projects in both the social sector and infrastructure depending on the social rate of return.
For oil-importing countries, the task of dealing with the macroeconomic consequences of higher oil prices has become increasingly challenging as the year progresses. Oil prices are projected to be significantly higher, on average, in the second half of 2005 than in the first half, suggesting that policy challenges for SSA oil importers will be greater.
The additional import costs attributable to the higher oil prices vary with the countries’ dependence on oil imports. For the first six months of 2005, the impact of the higher price on the net oil import bill in local currency is expected to be more than 1 percent of annual GDP in 4 countries (Ghana, Sierra Leone, Swaziland, and Zimbabwe) and less than 0.5 percent of GDP in 10 countries. Projections of full-year effects in 2005 suggest that the impact is expected to reach more than 2 percent of GDP in 12 countries, compared with 4 countries in 2004 (see the Appendix, Table A1). Nominal exchange rate changes have also influenced the magnitude of the direct impact on the oil import bill from higher dollar oil prices. The effect has been magnified in countries where the nominal exchange rate depreciated against the dollar in the first half of the year and dampened in countries where the exchange rate appreciated (Figure 2.2). The rising energy intensity of SSA has also exacerbated the impact of higher oil prices (Figure 2.3). In general, economic growth is associated with a fall in energy intensity (Energy Information Administration, 2005). This is, in part, because the new capital stock is more energy efficient than the older one.9 Rising energy intensity makes it imperative to ensure full pass-through of oil price changes and to eliminate subsidies, with the exception of those specifically earmarked for assisting the poor.10 Moreover, oil importers should contain emerging fiscal pressures by cutting nonpriority spending and strengthening their revenue base and, where possible, allowing flexibility in the exchange rate.
Box 2.3.Nigeria: A Strengthened Framework for Macroeconomic Management
The Nigerian authorities have made commendable progress in improving economic policymaking since a new government took office at the beginning of President Obasanjo’s second term in the summer of 2003. Nigeria’s macroeconomic policies have been consistent with the objectives of achieving macroeconomic stability and reducing the economy’s vulnerability to oil price shocks. Most important, all three tiers of government (federal, state, and local) participate in an oil-price-based fiscal rule, by which fiscal spending is constrained and windfall oil revenue from prices above a conservative budget reference price is set aside in blocked accounts at the Central Bank of Nigeria.
Despite this recent progress, Nigeria continues to feel the effects of more than two decades of economic mismanagement, neglect of infrastructure and social service provision, and disregard for market-based institutions. Social indicators for Nigeria continue to compare unfavorably with those of other SSA countries; nearly 60 percent of its population lives in poverty; and its infrastructure and public utilities rank among the worst in the world. Corruption, lack of infrastructure, and weak public institutions are the major obstacles to higher growth and improvements in social welfare.
The Nigerian reform program, the National Economic Empowerment and Development Strategy (NEEDS), was formulated in early 2004. It focuses on achieving rapid and sustainable growth and poverty reduction by establishing macroeconomic stability and implementing an ambitious structural reform agenda. This includes improvements in governance, enhancements of public service delivery, strengthening of the financial system, unification of the foreign exchange markets, and liberalization of the trade regime. The medium-term outlook hinges on the government’s ability to consolidate the progress it has made so far.
Preliminary official data suggest that GDP grew by about 6 percent in 2004, largely as a result of higher growth in the non-oil economy, in particular agriculture, and some areas within manufacturing and services. Over the medium term, non-oil growth is projected to continue at about 5 percent a year, while oil and gas production would remain constant in 2005 and increase by 8 percent in 2006 with the coming onstream of a major offshore oil field.
As Nigeria’s economic reforms have strengthened, its discussions with its creditors on debt relief have progressed. In an ad hoc meeting in June 2005, the creditors agreed in principle to provide debt relief. The agreement envisages a phased approach, in which Nigeria would clear its arrears in full, receive a debt write-off up to Naples terms, and buy back the remainder of its debt. The agreement is conditional on a favorable review of its macroeconomic and structural policies supported by the IMF under a nonfinancial arrangement. The recent policy dialogue between Nigeria and the IMF has evolved under the intensified surveillance framework that was endorsed by the IMF’s Executive Board in July 2004.
Figure 2.2.Selected African Countries: Nominal Exchange Rates1
Source: IMF, Information Notice System.
1 U.S. dollar per national currency.
Figure 2.3.Energy Intensity: Total Primary Energy Consumption Per U.S. Dollar of GDP
Source: Energy Information Administration, U.S. Department of Energy.
Note: The data are the average for 21 countries in Asia and 35 countries in sub-Saharan Africa. The latter average excludes Cape Verde, Comoros, The Gambia, Rwanda, and Zambia.
The average external current account deficit, including grants, of oil-importing countries is projected to increase from 3.5 percent of GDP in 2004 to 4.3 percent in 2005. In two-thirds of the oil importers, the current account deficit is projected to increase, with particularly large increases forecast in Guinea-Bissau, Lesotho, Mozambique, Rwanda, and Seychelles. In South Africa, the economy continues to grow at a brisk pace, with strong domestic demand suggesting a further widening of the external current account deficit in 2005 by 0.5 percentage point to 3.7 percent of GDP. Nonetheless, in the first half of 2005, in about half of the oil-importing countries, the worsening of the external current account is expected to be less than the increase in the oil bill (Figure 2.4). In some countries, the impact is being fully or partially mitigated by rising prices of commodity exports, and pressures on the external current account are being alleviated partially by exchange rate adjustment and ongoing fiscal consolidation.
Figure 2.4.Oil Importers: Projected Oil Impact and Changes in the Current Account, 20051
Sources: IMF, African Department database, World Economic Outlook, and staff estimates.
1January–June 2005. Based on projected half-year figures for the current account balances and oil import values and actual half-year figures for petroleum prices (the average oil price for January–June 2005 was $48.45 a barrel).
The average fiscal deficit, including grants, in oil-importing countries is projected to increase from 2.2 percent in 2004 to 2.6 percent in 2005. This increase reflects the ongoing efforts in many countries to expand public expenditure programs (for example, in Ethiopia and Tanzania), financed by higher foreign assistance and debt relief. Thus, in 19 oil-importing countries, the fiscal deficit is expected to increase during 2005. In the other 14 oil importers, however, the fiscal balance is expected to strengthen, often supported by higher ratios of revenue to GDP. Oil price increases have been fully passed on to consumers in two-thirds of oil-importing countries,11 although nine oil importers pass through only a part of the price increases to consumers, and the Central African Republic and Seychelles do not pass through the increases. In South Africa, the budget deficit is projected at 1.9 percent of GDP in 2005, reflecting a moderately expansionary fiscal stance.
The strengthening of the U.S. dollar against the euro during the first half of 2005 has led to a modest depreciation of the effective exchange rates in the CFA franc zone. The real effective exchange rates of the West Africa Economic and Monetary Union (WAEMU)—where the currencies are pegged to the euro—mostly fell in the first six months of 2005, and their reserve coverage is expected to increase to about 4.4 months of imports, on average, by the end of the year. The nominal effective depreciation of countries in monetary unions in the first half of 2005 contrasts with the appreciation observed during 2004. Most oil importers operating a conventional peg or an independent float saw a depreciation of their effective exchange rate in the first six months of 2005 (Figure 2.5). Conversely, most of the oil-importing countries operating a managed floating exchange rate regime have seen their effective exchange rates appreciate in the first half of 2005, after the strong depreciation of 2004. Their reserves are expected to decline slightly in terms of imports by end-2005. In Kenya, a particularly strong appreciation of the exchange rate in the first half of the year reflected, in part, strong tourism receipts as bookings moved away from countries affected by the tsunami of December 2004. Among those oil importers in which the impact of higher oil prices in 2005 is expected to be in excess of 2 percent of GDP, reserve coverage is projected to fall over the year in Ethiopia, Kenya, Madagascar, Sierra Leone, Swaziland, and Togo.
Figure 2.5.Oil Importers: Nominal Effective Exchange Rates, September 2004–June 2005
Central African Republic
Source: IMF, Information Notice System.
Developments in the Cotton and Textile Markets
Developments in the cotton and textile markets have further worsened the terms of trade in some non-oil-producing countries and hurt their growth prospects. Twenty-four countries in SSA account for about 6 percent of world output, with countries in the CFA franc zone contributing about two-thirds of the region’s production. Oversupply of cotton has caused world prices to remain low, owing in part to continued production subsidies in high- and middle-income countries. The removal of textile quotas has reduced the competitiveness of African exports in industrial countries. Preference erosion, however, is not confined to textiles (other commodities are sugar and tobacco, for example) and has been a key issue for African countries in the Doha Round of trade negotiations (Box 2.4).
World cotton prices recovered somewhat in the first half of 2005 from the trough at the end of 2004 but remain well below their average over recent years (Figure 2.6). The International Cotton Advisory Committee has forecast that world cotton output will decline somewhat, while consumption will increase moderately in 2006/07. This should help world cotton prices to recover further.
Figure 2.6.Monthly World Cotton Price
Source: Thomson Datastream.
Cotton production for the 2004/05 season reached a record high in francophone Africa, greatly mitigating the negative impact of low world prices on export earnings. The good harvest reflects the effects of record-high guaranteed producer prices set in mid-2004 before world prices began to decline. Consequently, cotton farmers in the region fared well in the 2004/05 season, while cotton ginning companies bore the brunt of the impact. Government responses in the region’s main cotton-producing countries have varied. Mali, for example, cut noncore spending (such as untargeted subsidies and transfers) to finance projected budgetary subsidies for the cotton sector amounting to 1 percent of GDP.12 The authorities are now seeking additional donor assistance. In Burkina Faso, government involvement has been minimal, and financial losses will be covered by ginning companies in which farmers own shares. In Benin, losses are being shared by the government and ginning companies. In general, producer prices for 2005/06 in the region will be lower than for the previous season, which will help reduce, if not eliminate, financial losses in 2006 while providing some income protection for cotton farmers.
Over the medium term, cotton-dependent countries will need to continue to pursue efficiency-enhancing reforms. First, cotton growers need to raise their yields to levels prevailing in other major cotton-producing regions of the world. Second, developing cross-border trade in seed cotton would increase competition and lower seed costs, while strengthening producers’ associations would facilitate input supply and technical and extension services. A step-up in assistance by the international community would allow African countries to adjust to lower cotton prices and improve competitiveness. Donor support for some cotton-dependent countries would also allow them to make adjustments in the cotton sector without cutting critical social spending. Looking forward, however, the United States and the European Union (EU) should play a leadership role in removing world cotton subsidies. This would boost world cotton prices, benefiting both African farmers and U.S. and EU taxpayers.
African exports of textiles have not fared well since the removal of the remaining textile quotas on January 1, 2005. Greater China (the mainland, Hong Kong SAR, and Macao SAR) has captured much of the increase in U.S. imports since the beginning of 2005 (Table 2.2).13 By contrast, the performance of African exporters has been relatively weak; among them, Kenya, Madagascar, and Swaziland increased their exports modestly during January–April 2005, but at rates significantly below their 2004 growth rates (Table 2.3). All other countries registered negative growth (including Lesotho, the largest African textile exporter); for Mauritius, South Africa, and Zimbabwe, this outcome represents a further deterioration from their 2004 performance.
|(January-April) 2004||(January-April) 2005||Percentage Change|
|China/Hong Kong SAR/Macao SAR||5,632||7,697||36.7|
|Rest of world||2,617||2,617||—|
|Millions of Dollars||Percentage Change|
As a result of SSA’s declining exports, employment in the garment sector has contracted significantly in some countries. In Lesotho, for example, about 10,000 workers, or 20 percent of the total garment workforce, have lost jobs since late 2004, when some foreign investors began to pull out of the country. Some of these workers, however, have since been reemployed on an informal basis at reduced wages. In Mauritius, garment employment fell by 3 percent (1,534 workers) in the first quarter of 2005, bringing the total loss of employment in the garment sector to 14 percent over the 12 months to March 2005.14 The future impact of the quota removal on African exports and employment is difficult to predict.15
While U.S. and EU restrictions on Chinese exports may give African countries more time to adjust, they also pose some challenges. First, U.S. and EU restrictions are likely to reduce China’s import demand for cotton, including from African countries, though China will likely remain an expanding market for Africa. Second, such restrictions could divert some Chinese exports to developing countries, including to Africa.
Box 2.4.Africa’s Preference Erosion and the Doha Round
Multilateral liberalization in the Doha Round is likely to lead to significant preference erosion for a small number of African countries (that is, Lesotho, Malawi, and Mauritius).1 The estimated impact of preference erosion is, however, often overstated, because of the failure to take account of the underutilization of preferences and export increases in sectors not affected by preference erosion. Moreover, preference erosion usually represents a permanent shock occurring over a long period of time and can be anticipated.
African countries have directed their efforts to gaining market access in industrial countries to compensate them for the potential losses from preference erosion. What is overlooked is that, over the past two and a half decades, African countries have become increasingly dependent on other developing countries for trade, despite ever-expanding trade preferences they have received in industrial countries (see figure). In 2004, although industrial countries as a group remained Africa’s dominant trading partner, 30 percent of Africa’s exports went to other developing countries, and more than 40 percent of its imports came from these countries. Liberalization in developing countries will lead to little preference erosion because no major preferences for Africa are in place in these countries. Moreover, trade barriers against African exports (especially those against manufactures) remain significantly higher in developing countries than in industrial countries, and, hence, the potential market access gains are larger.
In addition, Africa should be able to reap large gains by reducing its own trade barriers and introducing complementary domestic reforms. Despite significant progress over the past decades, Africa’s average applied tariffs remain significantly higher than those in other developing regions.2
Africa’s Exports by Destination
Source: IMF, Direction of Trade Statistics.
In addition, only a small fraction of African tariffs are bound. When they are, it is often at levels well above their applied rates, thus creating uncertainty over trade policy and increasing trading costs.
A recent World Bank study (Anderson, Martin, and van der Mensbrugghe, 2005) indicates that, under a possible Doha Round scenario, increased market access for merchandise exports in industrial countries alone would not bring substantial benefits to Africa as a whole. Even the much-demanded reductions of trade distortions in agriculture in the OECD countries are unlikely to bring substantial benefits. This is because existing preferences for Africa (such as those under the EU’s Everything But Arms Initiative) would be eroded, and rising world agricultural prices would lead to worsening terms of trade for Africa’s net food importers—at least in the short to medium term—even though, over time, higher world prices may turn some net food importers in Africa into net exporters. In contrast, the gains from multilateral liberalization are substantially larger if all developing (including African) countries significantly reduce their own trade barriers. Thus, Africa’s interests in the Doha Round lie in comprehensive and ambitious commitments by all countries to liberalize all sectors, including services. This suggests that African countries should look beyond trade preferences and focus on reciprocal liberalization. Special and differential treatment should be used to alleviate adjustment costs and enhance domestic efficiency, rather than to avoid liberalization. In support of Africa’s liberalization efforts, the international community needs to strengthen aid for trade by addressing Africa’s supply constraints through the enhanced Integrated Framework, integrating trade reforms in the poverty reduction strategies, and increasing assistance for national and regional projects.1 Based on Yang (2005).2 According to IMF data, the simple average of applied most-favored-nation (MFN) tariffs in Africa was 17.2 percent in 2004, compared with 12.1 percent in developing countries in Asia-Pacific, 9.7 percent in Europe, 12.2 percent in the Middle East and Central Asia, and 12.2 percent in the Western Hemisphere.
South Africa and Nigeria together represent over half of SSA’s GDP (see Statistical Appendix).
See IMF (2005, Chapter 4).
The oil-producing countries are Angola, Cameroon, Chad, the Republic of Congo, Côte d’Ivoire, Equatorial Guinea, Gabon, and Nigeria. In São Tomé and Príncipe, which is included as an oil producer in the Statistical Appendix tables for aggregation purposes, production is not expected to commence until about 2012, although oil signing bonuses start in 2005. Currently, therefore, São Tomé and Príncipe is a net oil importer.
The number of people living with HIV in Africa rose to about 25 million by end-2003. Evidence of the impact of HIV/AIDS on GDP or GDP per capita is mixed (Haacker, 2004).
About 2.2 million people in Mali (20 percent of the population) are at risk of experiencing food shortages or famine. During 2005 so far, the government has waived the value-added tax (VAT) on imported cereals to ease upward pressure on food prices. In 2004, agricultural production declined by 12 percent in Niger, resulting in widespread food shortages that have affected 2.5 million people (22 percent of the population). The government’s food relief program is costing an estimated CFAF 22 billion ($43 million, 1.2 percent of GDP) in 2005.
Thirteen countries in the region have now reached their completion points under the HIPC Initiative, including, during 2005, Rwanda and Zambia.
Simple average, excluding Equatorial Guinea.
Caution should be exercised in interpreting figures for energy intensity in SSA up to 2003. These figures do not reflect the impact of recent higher real GDP growth rates, higher oil prices, and the greater number of countries passing high oil prices through to consumers.
In SSA, it is difficult to transfer income directly to the poor because of weak governance and administrative capacity. Self-targeting through cross-subsidies may be the only option (see Gupta and others, 2000).
For example in Kenya, Tanzania, and Uganda.
A preliminary analysis carried out by IMF staff shows that the direct impact of falling international cotton prices on the poor in Mali was not expected to be significant in 2004.
Up-to-date information about the EU market is not available, although incomplete data show that African exports to the EU declined significantly in the first two months of 2005, compared with the same period of 2004. The discussions here therefore focus on the U.S. market.
Data on employment changes for other African countries are not available, but it seems that employment has not been affected as significantly as in Lesotho and Mauritius, both of which have a high dependence on garment exports.
Anecdotal evidence suggests that some foreign investment was withdrawn from Africa in late 2004 in anticipation of the quota removal, but the outflows may have since subsided because the United States began to reimpose quotas on Chinese exports under the safeguard mechanism stipulated in the agreement on China’s accession to the World Trade Organization. In addition, importers in the United States and the EU seem to have become more cautious about increasing their sourcing from China and other more competitive exporters.