By Helmut Reisen of Shifting Wealth Consulting and former Head of Research at the OECD Development Centre
Three core factors have underpinned Africa’s good economic performance since the turn of the century: high commodity prices, high external financial flows, and improved policies and institutions. Now, China´s decline in investment and rebalanced growth is depressing commodity prices and producing headwinds for Africa. Such macroeconomic headwinds for net commodity exporters also imply that Africa’s second pillar of past performance — external financial inflows — have suffered as well.
To be sure, some African regions benefit from new backwinds. Lower commodity prices transition Africa’s centre of economic gravity from the continent’s resource-rich West to the East, towards less commodity-dependent economies. Investment finance could follow, reinforced by the peripheral outreach of China’s One Belt One Road Initiative, which includes East Africa for infrastructure finance. China’s new Silk Road Fund is targeting economies along Africa’s East coast. This suggests a shift away from securing natural resources towards more manufacturing hubs in Africa.
This shift highlights three unfolding dynamics in Africa.
First, trade dynamics are changing. China’s trade engagement with Africa has risen markedly since 2000. China has crowded out other trade partners in relative terms, except for India, which tripled in Africa’s export share. Export credit and development loans from large emerging market economies (EMEs), notably Brazil, China and India, have occupied a relatively important role as vehicles for financing trade with Africa. African countries best placed to export consumer goods to China, including agricultural products, will now benefit most from China’s lower but more balanced growth. China´s higher unit labour cost have eroded China’s external competitiveness in low-end manufactures. China could thus expand its current presence in Africa’s special economic zones, or encourage the creation of new ones. Such positive growth effects from foreign direct investment would increase as African countries reduce bottlenecks in infrastructure and energy supply.
Second, Africa’s ability to mobilise domestic resources is being undermined. The drop in commodity prices is unlikely to be symmetric or a zero-sum game. The recycling of large surpluses in the current account of oil exporters (including African) will not be paralleled by corresponding surpluses of oil importers. Trade tax revenues also may be affected by China´s rebalancing. Many countries in Africa rely on trade taxes (tariffs) to sustain government revenues, so collapsing commodity exports worsen fiscal positions. Unlike in non-resource-rich Africa, resource rents accounted for more than 80% of total government revenues in 2013, and 20% of GDP in oil-rich Algeria, Angola, Congo, Equatorial Guinea and Libya. Conversely, non-resource-rich countries broadened their tax base and raised revenue collection through direct and indirect taxes.
And third, financial flows to Africa may be harmed. Global foreign exchange reserves reached a peak of USD 12 trillion in mid-2014 from a total of USD 1.8 trillion in 2000. The fast accumulation of global economic imbalances over the 2000s brought about a significant shift in the world’s wealth in favour of emerging countries running surpluses. China alone stockpiled reserves from USD 170 billion in 2000 to USD 4 trillion in August 2014. Since mid-2014, both foreign exchange reserves and sovereign wealth fund assets in emerging economies have dropped as a result of lower commodity prices and lower gross capital inflows. Net sales of foreign reserves by China, the Russian Federation and Saudi Arabia accounted for most of the drop. From their peak, these three countries alone have lowered foreign exchange reserves by USD 1.5 trillion. And these countries have been prominent emerging investors in Africa. As a result of shrinking surpluses in their current account and dwindling reserves, the size of export buyer credits, resource-backed credit lines and hybrid financing mechanisms extended to Africa by China and other emerging market economies risk being cut back.
Despite those headwinds, Africa’s external capital flows have remained fairly stable overall, thanks to official bad-weather finance. Official bank credit disbursements to Africa, from bilateral and multilateral sources, almost have doubled since 2008. Important lenders for Africa’s infrastructure investment are the People’s Bank of China, the China Development Bank and the Export-Import Bank of China. In addition to established lenders such as the World Bank, the African Development Bank and the European Investment Bank, the New Development Bank, founded in 2014, is expected to complement existing public and private financial institutions and contribute significantly to Africa’s campaign to reach the United Nations’ Sustainable Development Goals.