Low Commodity Prices Continue to Impede Growth

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Economic activity in Sub-Saharan Africa slowed in 2015, with GDP growth averaging 3.0 percent, down from 4.5 percent in 2014. This means that the pace of expansion decelerated to the lows last seen in 2009.


Going beyond the regional aggregate, there was considerable variation in growth performance across countries. The impact of the decline in commodity prices has been most severe for oil exporters, in part because oil prices fell the most. Average growth in oil-exporting countries is estimated to have slowed from 5.4 percent in 2014 to 2.9 percent in 2015 (figure 1.4).

In Nigeria, the region’s largest oil exporter, growth more than halved to 2.8 percent from 6.3 percent in 2014.Growth fell sharply in Equatorial Guinea and the Republic of Congo. In several instances, adverse domestic developments exacerbated the direct impact of declining commodity prices. In Nigeria, electricity shortages, political uncertainty, and security threats depressed activity in the non-oil sector, keeping overall growth low (figure 1.5).Political tensions and security threats intensified in several other oil exporters, with conflict (South Sudan) and Boko Haram insurgencies (Cameroon and Chad) diverting resources from development goals.

Activity weakened significantly in non-energy mineral exporting countries, including Botswana, Guinea, Liberia, Sierra Leone, South Africa, and Zambia. These countries benefited less from lower oil prices due to sharp declines in AFRICA’S PULSE the price of metals, including copper, diamonds, iron ore, and platinum, their main commodity exports. The adverse impact of low metal prices was further compounded by domestic problems.

 A severe drought in the Southern Africa region (Botswana, South Africa, and Zambia) curtailed agricultural production and hydroelectricity generation there. In South Africa, the real value added by the electricity, gas, and water sector declined sharply, constraining activity in the manufacturing and mining sectors (figure 1.6).In addition, a political crisis kept business confidence low and put pressures on the currency. At 1.3 percent, the pace of economic activity remained sub-par in South Africa, and per capita GDP declined for the second consecutive year. In Guinea, Liberia, and Sierra Leone, the Ebola crisis began to recede around the turn of the year, but the economic impact of the crisis lingered. In Sierra Leone, output contracted by a fifth, as low commodity prices led to the closure of iron ore mining operations.

In comparison, the slowdown has been less pronounced in most oil-importing countries. In Mozambique, delayed investment in the liquefied natural gas sector as a result of weak commodity prices weighed on GDP growth. In Uganda, a large depreciation of the currency spurred a tightening of monetary conditions that dampened economic confidence and domestic demand. Nevertheless, compared with the SSA average, growth has remained robust in these countries, helped in part by lower oil prices. Among net oil importers, Ethiopia and Rwanda continued to post solid growth, supported by public infrastructure investment, private consumption, and a growing services sector. Elsewhere, growth remained buoyant in Kenya, amid improving economic stability; Tanzania registered strong growth, underpinned by expansion in construction and services sectors. Despite terrorist attacks in some member countries (Burkina Faso, Mali), the West African
Economic and Monetary Union continued to experience strong growth in 2015, helped in part by favorable agricultural developments. Cote d’Ivoire saw broad-based growth, supported by a favorable policy environment, rising investment, and increased consumer spending. In Burundi, a severe political crisis contributed to a contraction of output.

Amid the low commodity prices, capital flows to the region eased from their record level in 2014, led by a decline in cross-border bank lending, as European banks have increasingly deleveraged and oriented their lending activities toward developing Asia (figure 1.7).Eurobond issuance also softened. Sovereign bond issuance in 2015 totaled US$9.2 billion, compared with US$12.9 billion in 2014.Several countries tapped the international bond market in 2015, including maiden issuances from Angola and Cameroon. However, reflecting in part expectations about the U.S. Federal Reserve interest rate hike that materialized toward the end of 2015, SSA Eurobond issuance became increasingly expensive.
 
Yields were substantially higher than in previous issuances, reaching 10.75 percent for Ghana (October 2015), above the 9.5 percent obtained by Angola (November 2015).At the start of 2016, concerns about growth in China and emerging markets more broadly, and monetary policy tightening in the United States led to a further tightening of external financial conditions for emerging and developing economies, prompting many countries in the region to delay plans to tap the international bond market. Sovereign bond spreads rose in the region, especially among oil exporters, and remain well above Taper Tantrum levels.

External positions weakened across the region. The current account deficit widened sharply in oil exporters, especially in Angola and the Republic of Congo in Nigeria, the current account balance was pushed into a relatively smaller deficit, from a surplus in 2014.The current account deficit widened across several non-energy exporters (Ethiopia, Mozambique, Namibia, and Niger) as well, in part because exports continued to suffer in these countries, but also because of stronger import growth on the back of large public investment projects. However, in many of these countries, the current account deficit has remained well funded by FDI. External public debt levels have increased across the region, with the median estimated at 30.1 percent of GDP, up from 23.9 percent of GDP in 2014.On aggregate, external debt levels increased moderately in oil-exporting countries, contained in part by Nigeria’s low level of public external debt.

At the country level, Angola, Gabon, and the Republic of Congo experienced a large increase in the external debt ratio. Other countries where external debt levels rose significantly in 2015 includes Ghana, Kenya, Mozambique, Tanzania, and Zambia. Several of these countries (Ghana, Kenya, and Zambia) have tapped the international bond market. The rising external debt levels leave several countries (Malawi, Mozambique, and the Republic of Congo) vulnerable to the risk that future currency depreciation could pressure debt servicing costs.

In many cases, the deterioration in the current account deficit led to falling reserves and substantial currency depreciations (figure 1.9).Reserve levels fell across the region, most markedly among oil exporters and in countries defending fixed exchange rates (Angola, Burundi, Nigeria, and Rwanda).Most of the region’s currencies sustained large depreciations against the U.S. dollar.

 The Ghanaian cedi, Mozambican metical, and Zambia kwacha, in particular, weakened considerably. Most currencies stabilized during March 2016 as commodity prices rebounded and the U.S. Federal Reserve signaled a decrease in the number of rate hikes this year. The pass-through of nominal exchange rate depreciation, compounded by the impact of drought on the food supply and the removal of fuel subsidies, contributed to a rise in inflation in several countries.

Headline inflation increased sharply in Angola, Nigeria, and South Africa, exceeding the central banks’ targets, and was in double digits in Ghana and Zambia (figure 1.10).Core inflation also edged upward.

However, in some oil-importing countries (Kenya, Tanzania, and Uganda) inflation eased, reflecting strong external disinflationary pressures from lower food and oil prices. In Kenya, inflation fell within the central bank’s target as the shilling stabilized. Inflation has also remained low in the CFA franc zone countries where the currency has remained relatively stable thanks to its peg to the euro.

Monetary authorities in countries with a flexible exchange rate regime responded to the pressures on exchange rates by letting currencies depreciate more (Mozambique, Tanzania, and Uganda), and by tightening monetary policy through an increase in reserve requirements and policy rates (South Africa and Uganda) to contain inflationary pressures. South Africa’s central bank has hiked interest rates by a cumulative 75 basis points since the start of the year, and a cumulative 1.25 percentage points since mid-2015, as the inflation outlook deteriorated (figure 1.11).In some countries (Angola, Burundi, and Nigeria), the monetary authorities have introduced administrative measures in a bid to support their currency.

While the foreign exchange controls that the Central Bank of Nigeria imposed have helped to stabilize the official exchange rate, the parallel market exchange rate depreciated sharply against the U.S.dollar. This has driven inflation higher, stifled private sector demand, and contributed to a slowdown in the non-oil sector and a decline in international reserves. In March, against the backdrop of a sharp increase in core inflation, the Central Bank of Nigeria decided to hike its key policy rate, but left the foreign exchange restrictions in place. However, the widening spread between the official and market exchange rates suggests a continuing unmet demand for foreign currency in the country.