Egypt, Nigeria and S. Africa - Africa's big economies - struggle to stay on course. But there's good news

Macroeconomic crises in Africa are "largely caused by internal policy blunders", and not even so much by external forces. That means they are fixable

AFRICA’s three largest economies are navigating rough seas, as slow growth, rising debt and currency crises batter them from all sides. 

But they are putting on a brave face, and there is good news – the troubles are mostly fixable, with just a little policy tinkering, if the sentiments of a leading economist are anything to go by.

Egypt has been suffering from a dollar crunch that has slowed economic growth, hindered investment and made it difficult for foreigners to expatriate funds, as well as driving down the value of the local currency to record levels on the black market.

Authorities finally responded this week after holding out for several months – the central bank devalued the Egyptian pound by the highest margin since 2003, and promised to adopt more flexible exchange rate policies to boost Egypt’s debt and equity markets.

The key interest rate was raised by the most since at least 2006, and investors are seeing the moves as a welcome – if belated – response to tackle to black market for dollars and attract more investors to Egyptian assets.

In Nigeria, the troubles continue: Nigerian Trade and Investment Minister Okechukwu Enelamah and central bank Governor Godwin Emefiele say they are “discussing ways” to ensure supplies of foreign exchange to manufacturers in the country as the plunge in oil prices constricts dollar inflows.

Sell dollars directly

The Manufacturers’ Association of Nigeria proposed to the central bank in February that it sell dollars directly to the industry group’s members at weekly auctions, bypassing commercial lenders. The plan is an attempt to counter a shortage of foreign exchange and to save jobs, Ali Madugu, a vice president of the association, said in a March 3 interview with Bloomberg.

Nigeria derives about two-thirds of government revenue from oil, whose prices on the global markets slumped to a 12-year-low this year. Authorities have severely rationed dollars and brought interbank foreign-exchange trading to a halt since February last year in a bid to prevent the naira falling further. 

The measures have all but pegged the currency at 197-199 per dollar. As dollars have become more scarce, the black-market exchange rate has plummeted, reaching 324 per dollar on Tuesday, according to Lagos-based Everdon Bureau de Change.

And the volatility continues in South Africa: South Africa’s central bank raised its benchmark interest rate for a second time this year in a decision that split the Monetary Policy Committee and as a political crisis engulfing the country hurts the currency.

Political tensions heightened this week after the Finance Minister Pravin Gordhan accused the police of making “threatening” statements against him, causing the rand to plunge further – it has already fallen 13% in the past six months. The country’s Reserve Bank continues to tightening policy even as the economy’s outlook deteriorates and credit-rating companies threaten to downgrade the nation’s debt to junk.

But there’s some good news, even as the gloomy news on Africa’s three largest economies doesn’t seem to let up.

Internal blunders

“Macroeconomic crises in Africa are largely caused by internal policy blunders, and not even so much by commodity fluctuations or what’s happening in the global economy,” says Carlos Lopes, executive secretary of the UN’s Economic Commission for Africa (UNECA).

That means that the problems are fixable, with the right approach, said Lopes, speaking at the just-concluded African Transformation Forum in Kigali, Rwanda.

During his budget speech, Finance Minister Pravin Gordhan said South Africa can’t avoid a credit-rating downgrade with good fiscal numbers alone.

“There was a time when ratings agencies would take their matrix and tick the boxes to say ‘fiscally you look sound’,” Gordhan said at a post-budget briefing in Johannesburg a fortnight ago. “In the last six years the goalposts have shifted” and now include fiscal stability, indebtedness, where growth is going to come from and the political economy, he said.

“It doesn’t matter if it’s too little too late, let’s give it our best shot,” Gordhan said on whether the measures in the budget were enough to avert a downgrade. “If it was too late, at least the people will say we tried.”

One good place to start, in reducing exposure to export – and thus currency – volatility is by boosting intra-African trade.

Speaking at the Kigali conference on a panel covering trade and regional integration, Richard Sezibera, Secretary- general of the East African Community, argued that “trade facilitation should be anchored into economic transformation.” 

Economies of scale

Africa’s domestic markets are simply too small to enable the local industry to achieve economies of scale. The continent has by far the lowest level of inter-regional trade, of any other region, at less than 13%, while the cost of trade among African countries is higher than the cost of trade with nations outside the region.

According to Sezibera, a lot of work has gone into implementing policies for intra-EAC trade – in Rwanda’s case it has grown from 10% to 26% in less than a decade – fast, but “not fast enough”. 

Despite an intense focus on tariffs in existing debates, Richard Newfarmer, country representative at the International Growth Centre, argued that the real issue is the “nitty gritty barriers to intra-regional trade”, such as reducing the number of procedures and documents to fill.

This kind of trade facilitation is five times more important to expanding exports than negotiating tariffs, said Newfarmer at the Kigali conference. The progress in East Africa has been dramatic over the last 10 years: trade costs have fallen, waiting time in the port of Mombasa has gone down from 13.5 days to 5.8 days and transit times from Kenya have been halved from four to two days. But trade costs remain stubbornly high.

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