East Africa growth forecast to remain buoyant in 2018

Resurgence in agriculture, infrastructure and manufacturing is expected to lift East Africa’s economic performance in 2018, an outlook by the African Development Bank (AfDB) shows.

East Africa remains the fastest-growing sub region in Africa, with estimated growth of 5.6 per cent in 2017, up from 4.9 per cent in 2016.

Growth is expected to remain buoyant, reaching 5.9 per cent in 2018 and firming further to 6.1 per cent in 2019.

“Strong growth is widespread in the sub region, with many countries including Djibouti, Ethiopia, Kenya, Rwanda, Tanzania and Uganda growing five per cent or more” the bank says in its Africa Economic Outlook 2018.

Agriculture will rebound after poor harvests last year on improved rainfall, the bank said noting that inflation spiked to nearly 10 per cent in the region, fuelled by a rise in food prices especially in Kenya, where the effects of the early 2017 drought reduced the maize harvest, causing chronic shortages of the staple.

Median inflation

“Median inflation is projected to fall sharply in East Africa, partly as a result of an improved harvest” the report notes.

Consumerism and mega infrastructure projects are s also expected to bolster growth this year.

“Private consumption is the most important driver of growth in Comoros and Kenya while public investment in infrastructure has been instrumental in Djibouti and Ethiopia.

Construction will remain strong. In a few countries, continued expansion of services, including information and communications technology, will be key,” the report says.

“Manufacturing may increase the share of industry, particularly in Kenya and Tanzania,” it adds.

There are, however, numerous factors that could threaten the region’s growth.

In Kenya, for example, the uncertainty following the prolonged electioneering period is expected to continue hanging over the economy stifling private-sector activity.

The interest rate caps also remain a concern amid reported constraints in credit expansion, leading to reduced private sector investment.

Public consumption

“Continued high public consumption expenditure keeps the budget deficit at close to 10 per cent of gross domestic product (GDP), while the expected maturity of public debt could lead to debt distress” AfDB says.

In Tanzania, uncertainty in the business environment following changes in policies, regulations, and tax administration could weigh on private sentiment and slow growth and investment, particularly in the mining sector.

“Credit growth stalled, while non-performing loans rose to more than 10 per cent, which could further hinder private investment.

Although government development spending has increased considerably over the past two years, slow implementation of public infrastructure projects could limit growth” the bank notes.

Kenya

Economic Outlook

  1. Real GDP growth declined to an estimated 5% in 2017 from 5.8 per cent in 2016, due to subdued credit growth caused by caps on commercial banks’ lending rates, drought, and the prolonged political impasse over the presidential election.
  2. The half-year estimates show that the economy remained fairly resilient, growing 4.8 per cent. Services accounted for 82 per cent of that growth, and industry accounted for 17 per cent; agriculture’s poor performance continued.
  3. The economy is projected to rebound to GDP growth of 5.6 per cent in 2018 and 6.2 per cent in 2019.

 

Tailwinds

  • Kenya’s economy remains resilient due to its diversity. This is expected to continue as the country remains the leading regional hub for information and communication technology, financial, and transportation services.
  • Recent investment in rail and road and planned investment in a second runway at Jomo Kenyatta International Airport are potential growth drivers

 

Headwinds

  • Continued drought in 2016/17 hindered agricultural productivity and resulted in high inflation for food prices.
  • Prolonged political activities and the presidential election impasse hurt private-sector activity.
  • Although not conclusively assessed, interest rate caps have reportedly constrained credit expansion, leading to reduced private sector investment.
  • Major downside risks include weak exports, climate change, and youth unemployment
  • Exports account for less than 20 per cent of imports, leading to persistent trade deficits and foreign exchange shortages.

 

Ethiopia

Economic outlook

  • Services accounted for the largest share of GDP of 39.3 per cent in 2016/17, driven by trade, transport, and communications.
  • Although agriculture’s share of GDP stagnated at 36 per cent, the sector’s growth rate increased from 2.3 per cent in 2015/16 to 6.7 per cent in 2016/17 due to rising commodity prices, notably for coffee.

 

Tailwinds

  • The economic outlook is positive due to the sustained implementation of the government’s export-led industrialisation strategy and investors’ positive outlooks.
  • Industrialisation has been prioritised, notably through the development of industrial parks and other enablers, such as the 656 km Addis Ababa–Djibouti electric railway, to ease the cost of doing business.

 

Headwinds

  • Major downside risks include weak exports, climate change, and youth unemployment
  • Exports account for less than 20 per cent of imports, leading to persistent trade deficits and foreign exchange shortages.

 

Tanzania

Economic outlook

  • Economic growth has slowed since the last quarter of 2016, following real GDP growth of at least seven per cent between 2013 and 2016.
  • Growth in the first two quarters of 2017 averaged 6.8 per cent and was estimated at 6.5 per cent for the full year.
  • Construction, mining, transport, and communications were key growth drivers in 2017.
  • Growth is projected to remain robust at 6.7 per cent in 2018 and 6.9 per cent 2019, representing one of the best performances in East Africa

 

Tailwinds

  • The government has made considerable efforts to contain recurrent expenditure and inefficient spending, including reducing the public-sector payroll and nonpriority spending while increasing development spending.
  • The government also increased efforts to improve tax revenue administration by driving out corruption and tackling tax evasion in a bid to increase the fiscal space.

 

Headwinds

  • Uncertainty in the business environment following changes in policies, regulations, and tax administration could weigh on private sentiment and slow growth and investment, particularly in the mining sector.

 

Uganda

Economic outlook

  • Economic performance generally remained strong despite the recent slowdown in real GDP growth, which is projected to reach 5.9 per cent in 2018, up from 4.8 per cent in 2017 and 2.3 per cent in 2016.
  • The increase in economic growth in 2018 is expected to be driven mainly by public infrastructure investment; recovery in manufacturing and construction; and improvements in the services sector, particularly financial and banking, trade, transport, and information and communication technology services.

 

Tailwinds

  • The main tailwinds for the 2018 economic outlook include increased agricultural production due to better weather conditions; higher foreign direct investment (FDI) flows following the recent issuance of oil exploration licenses; and the expected decision by the government to invest in oil infrastructure development in early 2018.

 

Headwinds

  • Major external risks to economic performance include low commodity prices and demand for the country’s exports in major markets
  • Major internal risks include reduced domestic revenue mobilisation and higher public spending on contingencies, poor institutional capacity and governance, and weak public financial and investment management systems.

 

Source: Business Daily