Africa - when a continent can’t control its own economic future

A multitude of states on the African continent have unexpectedly found themselves simultaneously facing multiple severe exogenous shocks.

Eritrean dockmen prepare to unload one of the first Ukrainian grain shipments allowed under the Black Sea Grain Initiative. (BBC)

Russia’s invasion of Ukraine, the war in Israel, a strong dollar, rising fuel prices, a surge in interest rates on international markets, weakening domestic currencies, to name a few, have dramatically propelled domestic inflation, and increased food prices on the continent. This has also slowed growth, and led to economic stagnation all over Africa. The downgrades of over 27 African countries by rating agencies on the African continent, also means the economic outlook of economies large and small, MICs and fragile states, now seems precarious. 

This hasn’t been a good last few years for Africa. From 2020 onwards, the COVID-19 pandemic, and the unprecedented rise of the dollar against major unpegged African currencies, were two significant exogenous shocks for the continent. But, there are other exogenous shocks as well, or their associated consequences, that have also introduced new economic challenges. 

COVID-19 dried up tourism revenues in countries like South Africa, Kenya and Egypt, that are all still struggling to rebound. The increasing price of staples and oil, the increased cost of servicing foreign debt a byproduct of the rising dollar, higher interest rates in advanced economies making financing more costly and harder to obtain, and a wave of downgrades by rating agencies making borrowing on international markets more expensive, are all challenging Africa’s recent development gains, and its future prosperity. 

For several African countries, all of these exogenous shocks, and their after shocks, are becoming one dagger after another in what is already a collective crisis. Not only have these exogenous shocks led to economic slowdowns across the African continent, there also seems to be no significant relief in sight. 

What Africa is witnessing as a collective is the erosion of living standards, mounting domestic and external foreign debt, and ever growing macroeconomic imbalances. Prices for food on the African continent, now account on average for near to 50 percent of consumer spending. If you spend half your income on food alone, this means there is little disposable income left to spend on any form of non-essentials after factoring in the price of electricity, water, gasoline, housing, and education. This spells doom for the private sector in a wide range of sectors. 

Additionally, the rising cost of wheat imports is causing irreparable economic harm to various African nations. For example, Egypt, imports a staggering 88 percent of its wheat from abroad. And, it isn’t just the escalating price of grains that are hurting import dependent African nations. A more expensive dollar means that the cost of all imports, especially the needs of domestic manufacturers, are also an emerging economic threat. 

Approximately 60 percent of industries raw materials and intermediate inputs, in Africa’s largest manufacturing nations, are imports. If the domestic currencies of these nations continue to depreciate against the dollar, everything they produce for the domestic market, or for export, will become more expensive. This is why three major African nations, with a large industrial base, saw their non-oil exports remain flat, or decline, in the last two fiscal years, even with significant local currency devaluations.

Together, a litany of exogenous factors have not only stymied growth and development, but they have ravaged Africa’s middle class, and pushed more of the poor closer, or below the poverty line. This is especially true in rural areas in both MICs and fragile states alike, raising serious concerns. Food insecurity is now not just a norm in several African fragile states, increasing rural poverty is pushing tens of millions of Africans back below the poverty line. 

In the coming year, don’t expect much improvement either. Based on 2024 projections, several African countries dependent on oil imports, will have to bear $23 billion in additional import costs. This will be a calamitous exogenous shock for several African oil dependent nations. Of course, African oil-import dependent fragile states will be the hardest hit. But, you can expect that the fiscal balances of African MICs, and fragile states, will simultaneously deteriorate in 2024, if oil prices escalate, as is forecast. 

The exogenous shocks hampering Africa’s stability also seem far from over. Even the supply chain problems stemming from COVID-19 still plague the continent. And, these exogenous shocks will make an already delicate fiscal balancing act that much more difficult. This is in part because external debt financing has become much more expensive for a series of African nations whose currencies plummeted from 2020 onwards.

So, what are African Minister’s of Finance and Central Bank Governors to do? After all, the distress they are seeing from inflation to debt financing, all have their roots in exogenous shocks. This is a complicated question. 

What is certain, this is the time for African nations to unite to solve the problems of exogenous shocks as a collective. Going at it alone is no longer an option, except for maybe Africa’s largest oil exporters. 

This is also the time for African nations to have their best trained, and most experienced economists, at the helm of economic decision making. Generalists, or political appointees, in the positions of seasoned experienced economists, will struggle to craft anti-inflationary policies that will prove to be more than unpopular. 

At the very least, indigenous issues of capacity are better addressed now, before severe economic challenges become that much more difficult to navigate because of ineptitude.