AFD zlecaf africa economic growth

After a -1.3% recession in 2020, growth in Africa returned in 2021 (+3.7%) and should settle at 3.8% in 2022, according to the International Monetary Fund (IMF). The resumption of capital inflows, the return of funds from the diaspora, as well as an increase in energy demand and rising prices for oil (+59%) and non-ferrous metals (+50%) benefited African economies, without eliminating the economic shock of 2020.

While government support measures such as those deployed by international donors and bilateral partners have contributed to Africa’s recovery, the resources allocated to global recovery plans partly explain the reported growth gaps. While “advanced economies have allocated, on average, almost 7.2% of their respective GDP to post-COVID-19 recovery, African states have been able to support their economies by only 2.6% of GDP” (African Economy 2022 ; French Development Agency; Attractions, ed. Opening ; February 2022). Finallyglobal growth was about twice that of Africa in 2021.

On the continent, differences in height are due to very different factors. The economies of the Sahel, the Gulf of Guinea and East Africa were the most dynamic at the continental level in 2021, while South Africa and the Indian Ocean, which recorded a significant decline, are struggling to recover. In particular, producing countries have been fully affected by the pandemic. Angola, Algeria and South Africa, which account for a quarter of Africa’s GDP, have not returned to their pre-crisis growth levels.

Recovery correlates with degree of economic diversification

Following a 6.4% decline in 2020 followed by a 5% recovery in 2021, growth in South Africa, driven in particular by the mining sector, should be capped at 2.2% in 2022, according to the IMF. Vice versaEgypt, which benefited from the reforms carried out between 2016 and 2019, has shown some resilience thanks to the recovery of foreign exchange reserves and, in particular, the return of the confidence of the international community. “Egypt won a $5.2 billion IMF program; and $2.8 billion in emergency financing., which made it possible to catalyze other donors. She was able to cope with the withdrawal of capital by mobilizing new sources of financing and turned to the market from February 2021,” analysis by Cécile Valadier, Deputy Director of AFD’s Economic Diagnostics and Public Policy Department. The Egyptians also received remittances from migrants (particularly from the Persian Gulf countries), on the one hand, while the state made significant expenditures to support households and businesses, on the other. This combination of factors allowed the country of the pharaohs to show some resilience in the face of the crisis.

On the other hand, countries that depend mainly on the tourism sector are among the African economies hardest hit by the crisis. “In 2021, countries where tourism is a significant contributor to GDP do not actually have return to the pre-crisis situation, because the restrictions continued partially, air traffic was still disrupted, and oil prices started to rise again (…) In 2020, the Seychelles recorded a decline of almost 13%, while Mauritius recorded a decline of about 15%. explains Cecile Valadier. A slight improvement is expected in tourist countries with a gradual return of international travelers. However, according to the IMF, a return to normal life is expected no earlier than 2023.

Impact of the crisis on financial flows

The return to growth in Africa continues to be driven by a number of challenges, such as the evolving health situation, the implementation of plans to support the national economy, and climate, political or security threats. Mobilizing international funding will also be critical to resuming growth in Africa.

“According to the IMF, Africa’s additional financing needs between 2021 and 2025 are estimated at nearly $285 billion. Capital inflows are increasing, but they remain lower than before the crisis, and monetary tightening in advanced economies will weigh on the financing environment of African economies.” clarifies Cecile Valadier.

In recent years, cuts in bilateral funding have already taken a toll on African economies. Funds from China have increased from $75 billion in 2016 to $4 billion in 2019, according to Boston University’s Center for Global Development Policy. Given the relative underfunding of African economies, the crisis caused a massive outflow of capital. In March 2020, capital flight was estimated at $95 billion, according to the Institute of International Finance. At the same time, foreign direct investment (FDI) declined by 42%, from $1.5 trillion in 2019 to $859 billion in 2020.

The Role of Zlecaf in Resuming Growth

“In the late 1990s, African economies opened up at the same time as global value chains developed. By betting on the segmentation of production, Africa believed that it had finally found its integration model, engaging at lower cost in various sectors of goods and services without having to master the production chain from A to Z. Unfortunately, this prospect was not realized, since high prices on natural resources encourage economies to remain exporters of natural resources, rather than develop the sector of processed goods”, Julien Gourdon, senior economist at AFD, says. We are now seeing that regional trade is more focused on these processed goods, however, regional integration remains very weak on the continent because trade rules had to be harmonized first and far beyond tariff barriers, existing regional agreements. Hence the hope aroused by this Zlecaf agreement, which goes beyond mere tariff concessions.” he adds.

Trade liberalization on the continent has not been accompanied by the expected African regional integration. Inland trade accounts for only 15.5% of Africa’s total trade, compared to 60% in Asia, 68% in Europe and 54% in the Americas, according to Cnuced. “The pandemic has shown that it is essential to improve trade facilitation on the continent and facilitate trade by streamlining and simplifying the technical and legal procedures applicable to goods entering or leaving the country for sale in international markets, explains Julien Gourdon.

Improving the content of exchanges to create more added value through the creation of value chains must also be accompanied by capacity building to ensure the success of Zlecaf. “It is not enough to have a cheap labor force to compete with the countries of the East”, clarifies Julien Gourdon.

Diversification of the economy, development of regional value chains, strengthening of infrastructure and capacity, harmonization and facilitation of trade rules are among the main challenges that African countries will have to overcome in order to ensure the success of the intercontinental market. Nevertheless, the expected benefits are commensurate with the difficulties to be overcome. The World Bank estimates that the Zlecaf trade agreement could increase regional income by 7%, lift 30 million people out of poverty by 2035 and raise wages by about 10%, and increase inland exports by 81%.