Africa: Rising Food, Oil Prices Threaten Growth – World Bank

The World Bank is warning that in spite of the high economic growth expected in Sub Saharan Africa in the coming years, rising global food prices and the escalating price of crude oil on the world market pose a major risk to Sub-Saharan Africa economies.

According to the Bank, excluding South Africa, Sub Saharan Africa is one of the fastest growing developing regions, supported by the global recovery, a growing domestic middle income class with discretionary income to spend, and rising business confidence. GDP in the region is also expected to remain strong over the medium term, expanding by 5 percent in 2011 and about 5.7 percent in both 2012 and 2013.

“However, rising food prices represent a downside risk,” it warned in its Global Economic Prospects June 2011 Update launched simultaneously in Ghana, South Africa and Tanzania last Tuesday.

The Bank noted that local food prices, which rose by 7.3 percent in the 12 months ending February 2011are accelerating and it is expected to rise further in 2011-even as international prices stabilize.

Another issue of concern is the rise in oil prices. As of April 2011, crude oil prices had risen by 38 percent compared to a year earlier.

The result of these price hikes on Sub Saharan African countries, the bank said, is mixed, as the region comprises both net oil exporters and importers.

“If oil prices are to persist at high levels through 2011, oil exporters in the region will see an improvement in their current account and fiscal balances. Indeed, given the predominance of oil in the economy of Sub-Saharan Africa oil exporters – in both Angola and Congo – the oil sector accounts for over 90 percent of exports and over 60 percent of GDP- should oil prices remain at their February levels current account balances could improve as much as 7 percent.

This development, the bank however warned, could also pose a macroeconomic challenge, since if not well managed; could lead to the “Dutch Disease” effect, thereby making it more difficult to diversify the economy.

The downside risk to oil importers in the region, it noted, are however greater. With countries facing an increased oil import bill, and given that oil imports are about 18 percent of total merchandise imports among Sub Saharan Africa oil importers, this could lead to a deterioration in the current account to GDP ratio by 0.5 percent(excluding South Africa) if the February level of prices are sustained. “However, were prices to increase further, by an additional $50 from their February highs, current account balances would deteriorate even further by as much as 3.5 percent of GDP,” the report noted.

Fiscal balances, it added, could deteriorate depending on the degree of petroleum subsidies provided by government.

Another potential risk it identified is the several political elections expected to be held during the year, in at least a third of the countries in the region. “Though the past decade has seen an increasing number of smooth transitions of power in many countries in the region, there still remains a number of instances where political developments, leading to elections and in the aftermath, have been a deterrent to economic activity. It particularly mentioned Madagascar, Comoros, Cote d’Ivoire and Guinea as countries which were affected by political crises last year. “Hence the evolution of the political cycle over the forecast horizon will be consequential to the individual country growth outcomes. So far, six presidential elections have been held in the year, none of which created disruption to economic activity.

Andrew Burns, Manager, Global Monitoring in launching the report called on developing countries to shift focus from crisis fighting to policies that will sustain growth.

He said as they put the financial crisis behind them, they need to tackle country specific challenges such as achieving balanced growth through structural reforms, coping with inflationary pressures and dealing with high commodity prices.

Mr Burns projected that as developing countries reach full capacity, growth will slow from 7.3 percent in 2010 to around 6.3 percent each year from 2011-2013. “High income countries will see growth slow from 2.7 percent in 2010 to 2.2 in 2011 before picking up to 2.7 percent in 2012 and 2013.

Allen Dennis, Senior Economist with the World Bank noted that net private capital inflows in Sub Saharan Africa increased from $35.8billion in 2009 to an estimated $41.1 billion in 2010 are projected to rise to $48.6billion in 2011.

The leading destination of Foreign Direct Investment Inflows, in value terms, is to the capital intensive mining sector. “Indeed, higher commodity prices and the global competition to secure supplies of commodities have spurred investments globally in the natural resource sector. Sub Saharan Africa, a region with a high proportion of known mineral resources with great potential for further development is benefitting from this trend,” he said.

This, it said, has been facilitated by improvements to regulatory regimes in some countries. Capital raisings by African resource companies are reported to have increased by 240 percent compared to 2009.

Much exploratory activity has been ongoing in several countries during 2011, with new discoveries and production coming on stream.