A slowdown in China and falling commodity prices highlight the need for increased competitiveness across the continent, a challenge governments are meeting head on
With a sharp drop in commodity prices and a slowdown in China’s economy, global economists have been expressing increasing concern about Africa’s development prospects in the short-term and medium-term future. In sub-Saharan Africa, economic expansion has slowed significantly and is now forecast at 3.75% this year and 4.5% in 2016, compared to 5% in 2014, according to the International Monetary Fund (IMF). The IMF blames the economic headwinds not only on the aforementioned commodities rout, but also on the tightening of financial conditions globally, while crediting a “much improved business and macroeconomic environment” for helping to stabilize the economic environment across the continent.
Economies that are heavily dependent on petroleum, such as Nigeria and Angola, or metals exporters like Guinea, South Africa, Sierra Leone and Zambia, face the greatest challenge, even as a pickup in private consumption and ongoing infrastructure investment support low-income and more diversified economies including the Democratic Republic of Congo, Mozambique, Ethiopia, Tanzania and the Côte d’Ivoire. Across the continent, growth is still faster than many other regions of the world, and opportunities abound for governments and the private sector to position themselves for the future.
“On the fiscal policy front, for the region’s oil exporters, the sharp and seemingly enduring decline in oil prices makes adjustment unavoidable, and while some had space to draw on buffers or borrow to smooth the adjustment, that space is becoming increasingly limited. For most other countries, fiscal policy needs to strike an appropriate balance between debt sustainability considerations, on the one hand, and addressing development needs on the other,” says Antoinette Sayeh, Director of the IMF’s African Department.
“In this environment, efforts to diversify growth away from extractive industries take on renewed importance,” Ms. Sayeh continues. “The rapid growth of the last decade has masked deteriorating trends in competitiveness, especially among commodity exporters. To nurture new sources of growth and create sufficient jobs for the region’s growing population of young people, policy actions need to be geared toward boosting competitiveness, via progress on the business environment, infrastructure, and education. It will also be essential to build on recent progress and continue to strengthen domestic revenue mobilization as much-needed additional resources to finance investments in the region’s future. Finally, reducing inequalities, through carefully designed fiscal and financial sector policies and the removal of gender-based legal restrictions, could deliver significant growth dividends.
While public sector support to development will play a key role going forward, it will not be enough to finance a sustainable and inclusive development by 2030, says Romain Schneider, the European Union Minister for Development Cooperation and Humanitarian Affairs. “Africa’s economic development requires strong institutions that guarantee the rule of law and a business climate suitable for the needs of small- and medium-sized enterprises,” Mr. Schneider said on Africa Day 2015. Overall the goal should be for Africa to create value-added exports, transforming the exportation of raw materials to the processing and delivery of products on the African and global market, according to Mr. Schneider. “Supporting the local value chain is therefore essential to create capital gains and wealth,” he continued, mentioning the potential for rural development through a holistic approach by supporting the food sector value chain, from production to marketing and training. While local banks will play a decisive role in Africa’s development, the size of the required investments mean that governments and private sector companies must turn to global capital markets and international institutions in order to close infrastructure gaps, especially in the critical area of electricity generation. Faced with a challenging macroeconomic environment, many of Africa’s leaders have taken on this task with greater urgency.
The private sector and government are coming up with inventive ways to leverage infrastructure projects for long-term public benefit. “We use a business Model referred to as the BOOT system. Build, Own, Operate, Transfer,” says Stephanie Baaklini, CEO of Kudumba Investments in the Republic of Mozambique. “Our port infrastructure contract with the government is for a period of 20 years for each site, after which the Mozambican Government will be in a position to take ownership of the project including revenue streams. This will enable them to continue with maintenance and upgrades as well as new developments going forward. Infrastructures are the basis for the installation of the non-intrusive inspection equipment; right now we’re operating in ports and airports in Maputo, Beira and Nacala. We have also just completed construction of our fist land boarder site, which is situated at Ressano Garcia on the border with South Africa.”
Kudumba works closely with the Mozambican government to create world-class transport standards. “First we build the infrastructures and then we provide the non-intrusive inspection equipment,” Ms. Baaklini explains. “Some of which are x-ray equipment more commonly referred to as scanners, which enable the client to non-intrusively and quickly search cars, trucks and cargo to ensure that the cargo is in accordance with the declaration. They are also able to identify drugs and other hazardous materials and contraband. We’re talking about high-tech equipment that needs regular maintenance and people with appropriate training to operate it. We have training centers in Maputo, Nacala and Beira and are capable of training 500 people per annum. Essentially we train people from customs, police, airports and any other government institution upon request.”
Similarly, in Egypt, executives in major corporations are working with the government to help build an environment that is conducive to business and job growth. “The world is eager to see Egypt back on the right track,” says Magdi Kassabgui, Chairman of the Board of Reliance Egypt. “We see the government’s appetite to boost the economy. It is obvious that there is a political will to reform and plenty of economic reform policies have been discussed. I believe that both the government and the private sector have some responsibility when it comes to achieving and executing these projects. The government has the major responsibility to set the right policies, to facilitate the execution of the programs and to reduce the amount of time spent in bureaucratic formalities. The private sector has the obligation to commit to being part of Egypt’s economic growth and to be responsible for bringing the right investment, the right projects, and to respond to the political will of the government.”
Given the current climate of cooperation, Mr. Kassabgui sees the possibility opening up for increased capital flows. “Things can only get better. There is a political will, so we need to see plenty of foreign direct investment coming into the country over the next few years. Bureaucracy used to be a major obstacle in the past. The good thing is that we can see that the government is hiring capable people who are able and willing to make decisions. This issue will take its time to be solved. What we have seen for decades cannot disappear overnight; it has to go through a certain process. But I believe that we are on the right track.”
The expansion of the Suez Canal, an $8.2 billion project launched in August 2015, should give an additional boost to economic activity in the country, Mr. Kassabgui says. “I believe this project is putting Egypt on a totally different path. We will definitely see a larger volume of commodities being traded; we will see more logistics projects coming in, and more infrastructure projects in the area. Reliance is present and active in several sectors. We are into ready-mix concrete. We are proud that Reliance was the first ready-mix concrete company to install a plant in the Suez Canal. We are also into aggregates, so we do believe that we will supply many companies in the sector. But most importantly, Reliance is a logistics company, so we will definitely be eager to invest in intermediate warehousing and logistics hubs, and to create further added value in our current activities in the Suez Canal.
This project opens doors to so many job opportunities, and is good for the demand of construction materials. We believe that logistics is an activity that can grow not only in the Suez Canal region, but all over the country. Egypt is a country that has been blessed with natural resources and with a strategic geographical location. Egypt meets all the criteria needed to be one of the most important logistics hubs worldwide. It is unique, being positioned between the Mediterranean and the Red Sea, and having the Suez Canal. With Egypt’s growing population, there definitely is the opportunity to create added value in those areas.”
With a newfound stability, and cooperation among private and public sector stakeholders, Mr. Kassabgui hopes to see the fortunes of Egypt’s youth change for the better. “The future of Egypt lies in young Egyptians -- who need to be given a chance -- and in SMEs, which could eventually become big multinationals. There currently is a political will to change, which focuses on two different aspects. Firstly, the importance given to the development of SMEs, by identifying their importance and increasing support. Secondly, the need to give young Egyptians a chance to play an important role in the economy and in politics. It is important to encourage people to create their own small enterprises.” •