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Economic Insight: Africa

The ICAEW Economic Insight: Africa, is a quarterly economic forecast for the region prepared directly for the finance profession.

Q3 summary

  • East Africa remains the strongest-growing region, with the commodity slump and policy issues impeding growth elsewhere
  • All regions are forecast to recover from the recent growth slump, however
  • Remittance income is a key foreign exchange earner in a number of countries, and will remain important in future

Focus: Africa

Economic diversification and investment-driven growth continue to make East Africa the region on the continent with the strongest economic growth, forecast at 6.3% for 2018. Ethiopia remains the region’s powerhouse, with growth forecast at 8.1%, and recent reforms under new Prime Minister Abiy Ahmed give reason to expect continued good news in future. Kenya’s strong growth (forecast at 5.4% in 2018) results from a services boom. While the economies are smaller, growth rates in Tanzania and Rwanda (both 6.7%) are extremely impressive. Perhaps surprisingly Uganda (discussed in more depth in a dedicated section in this report) receives more remittance income ($1.4bn in 2017) than Ethiopia ($816m) or South Africa ($837m).

In North Africa, very strong performances in Libya and Egypt help to drag overall GDP growth up. In Libya, continued improvements in oil production after the civil conflict are expected to result in GDP growth of 16.5% this year. In Egypt, structural and policy reforms have boosted manufacturing and investment while the tourism sector has continued to recover; GDP growth in 2018 is forecast at 5.3%. These two performances will boost the region’s growth to 1.8%, even if the picture in Morocco, Algeria and Tunisia is less rosy. Egypt is the second-biggest receiver of remittances on the continent after Nigeria, receiving 29% of total remittances flowing to the continent in 2017, mostly from the Gulf.

South Africa accounts for over 60% of the GDP of Southern Africa, so continued slow growth in the regional heavyweight (forecast at 1.5% for 2018) weighs on overall growth in the region. So does the forecast 1.5% growth in Angola, which accounts for another 18% of regional output, and the forecast 1.8% contraction in Zimbabwe will not help. Strong growth in Botswana and Zambia will be insufficient to make a difference.

Africa GDP growth by region, 2013-19

West and Central Africa is even more dependent on a single economy: Nigeria’s economy accounts for over three quarters of the region’s output. Accordingly, the relatively slow pace of growth there – forecast at 2.1% in 2018, owing to subdued non-oil economic activity – will constrain the region’s growth to 2.9%. In Ghana, by contrast, growth will hit 6.5% this year, as explained more fully in the dedicated country section below. Nigeria received $22bn in remittances in 2017, almost half of that from the US and United Kingdom.

In the franc zone, meanwhile, growth is forecast to attain an impressive 4.6%, dragged up by growth of 7.4% in the region’s biggest economy, Ivory Coast, where investment is driving rapid expansion.

Remittance inflows to Africa by destination, 2012-17

Focus: Ghana

The Ghanaian economy performed exceptionally well last year, with real GDP growth rising to 8.5% in 2017. That said, headwinds have mounted thus far this year. Growth slowed markedly from 8.1% y-o-y in Q4 to 6.8% y-o-y in Q1, ascribed to maintenance-related disruptions to oil output and especially weak agricultural performance. Regardless, the economy is still seen expanding by a robust 6.7% in 2018, with rising oil output remaining a key driver and consumer demand gaining more traction in line with lower inflation.

The disinflation trend persisted early in 2018. In July, consumer price inflation was 9.6% year-on-year, the fourth month in a row that it has fallen within the central bank’s 6% - 10% target range. Higher fuel costs are now exerting upward pressure on domestic prices, and the weak cedi exacerbates the situation. These upside inflation risks have prompted the central bank to put the brakes on its loosening cycle. Inflation is nonetheless forecast to decline from an average of 12.4% in 2017 to 10.2% in 2018.

As expected, fiscal revenues continued to under-perform during the first five months of the year. This prompted Accra to rein in spending to stick to deficit targets. During the mid-term budget review, authorities also announced certain reforms aimed at boosting revenues. More direct measures include new taxes on luxury vehicles and the introduction of an additional personal income tax band (35%) for individuals earning more than GH¢10,000 a month. These revenue-side reforms will not be sufficient to see Accra meet its 4.5% of GDP deficit target this year. Spending pressures have mounted as the new government attempts to make good on its election promises. The fiscal deficit is forecast to narrow to 5% of GDP in 2018.

Reserves have come under more pressure this year, falling to just under $6bn by the end of April. The recent Eurobond sale did not provide a significant boost, as a large proportion of the proceeds was used to redeem existing external obligations. Reserves will likely remain under pressure in Q3, but cocoa loan proceeds and IMF credit should provide some reprieve in Q4. Aside from higher interest rates in the US affecting capital flows, mounting current account pressures have also weighed on reserves to an extent – the current account deficit is seen widening slightly to 4.3% of GDP in 2018. Gold exports declined sharply at the start of the year as Accra intensifies its fight against illegal miners. Imports, meanwhile, have also started to rebound in line with strengthening consumer demand. The current transfers surplus also narrowed sharply at the start of the year, most likely owing to a decline in remittance inflows.

Remittance flows play an important role in terms of Ghana’s external accounts. According to the World Bank, remittance inflows amounted to $2.5bn in 2014: equal to roughly 18.6% of total exports that year. Remittance inflows subsequently declined to $2.2bn by 2017, equivalent to 15.8% of exports.

Ghana remittances and exports

Our forecasts – assuming emigrant population proportions in their respective destination countries remain constant at 2017 levels, emigration to these destinations grows at the same rate as the 20-35-year-old population in Ghana and considering host country GDP per capita growth forecasts – indicate that Ghana’s remittance inflows will rise to just below $2.8bn by 2020. Remittances’ ratio to total exports, meanwhile, will decline to 15.2% as Ghana’s exports rise sharply over the forecast period, driven mostly by higher oil production and prices.

Regardless, remittance inflows will remain an important source of foreign exchange inflows moving forward. Remittances inflows are forecast to rise to roughly $5bn by 2030, which represents a compound annual growth rate (CAGR) of 6.5% p.a. over the 2018-30 period. This robust growth is ascribed to the fact that Ghana’s young adult population is expected to expand rapidly over the forecast period, and this age cohort usually makes up for the bulk of emigrants. Also, while Ghana’s growth prospects remain favourable, significantly higher income levels in countries such as the US (Ghanaians’ preferred destination in 2017), will continue to incentivise emigration.

Focus: Uganda

Economic growth recovered markedly last year, and it looks as if Uganda has shrugged off the problems that dragged real GDP growth to a dismal 3% in 2016. Most other economic variables have also improved: forex reserves rose considerably; consumer price inflation remains low; FDI remains strong; public debt is considered sustainable; and fiscal balances have improved compared to three years ago. However, the vulnerabilities that make Uganda’s economic growth trajectory difficult to predict remain in place. The agricultural sector is very exposed to adverse weather patterns owing to the lack of infrastructure. The prominent role of agriculture in the economy means that these exogenous shocks have a significant impact on the rest of the economy. Agriculture accounts for a quarter of the country’s GDP and employs about 70% of the working population, so when farm workers take less money home, the whole economy feels the pinch.

Real GDP growth is expected at 5.9% this year, notably higher than the revised 2017 figure of 5.0%. The services and industrial sectors continue to drive economic expansion, but agricultural sector growth remains low. However, the medium-term growth outlook is still positive, and will be supported by infrastructure development in the fledgling domestic hydrocarbons sector, a recovery in credit extension, improved agricultural sector resilience, and the expansion of services. Real GDP growth is forecast to trend between 6% p.a. and 7% p.a. over the medium term.

The transfers account is expected to post a surplus of about 5.6% of GDP this year, supported by project aid and remittances inflows. This surplus will have a positive impact on current account balances. However, the import bill is expected to increase markedly this year due to higher global oil prices and a sustained increase in capital goods imports, while exports will be intermittently disrupted as agricultural exports, which represent a significant portion of Uganda’s export profile, struggle to record consistent growth. This will put significant pressure on the trade balance, resulting in a notable widening of the current account deficit: from 4.3% of GDP in 2017 to 5.7% in 2018, before breaching the 6% of GDP threshold in 2019.

Remittance inflows continue to play an important role in the Ugandan economy and contribute towards the welfare of households while adding to the country’s foreign exchange (forex) reserves. Data from the World Bank show that remittances to Uganda rose from $930m in 2012 to $1.4bn or 4.8% of GDP in 2017. This increase was due to rising inflows from the Middle East (up 63.8% in 2016), North America (up 34.4%) and Europe (up 29.1%). Specifically, the Ugandan Association of External Recruitment Agencies estimates that there are more than 65,000 Ugandans working in the Middle East, reflecting increased work opportunities and the government’s efforts to streamline labour employment guidelines for migrant workers destined to the region.

Uganda remittances inflows, 2008-17

The Ugandan diaspora is the most frequent sender of remittances of all African countries’ diasporas. The Bank of Uganda’s (BoU) Annual Personal Transfers Survey 2016 shows that Africa was the main host region for remitters, accounting for about 33.4% of all remitters, with most remitters working in South Africa, South Sudan, Kenya and Rwanda. The World Bank’s Bilateral Remittances Matrix shows that in 2016 remittance inflows from these African countries were as follows: South Africa $16m, South Sudan $202m, Kenya $57m and Rwanda $180m. Therefore, weak economic performance in these countries, especially South Africa in recent months, and political instability in South Sudan, pose significant downside risks to remittance inflows. Many migrant workers who had been active in South Sudan have returned to Uganda since the outbreak of civil war, resulting to a decline in remittances from the neighbouring country.

Nevertheless, to improve the inflow of remittances to Uganda, policies should focus on reducing the cost of remitting funds, especially within Africa. According to the Word Bank’s Remittance Prices Worldwide data, on average, remitting money across African corridors is costlier than for all other corridors – the average remittance cost to send remittances through money-transfer operators (MTO) is 6% of remitted funds when sending money from either Kenya or Tanzania to Uganda.

Economic Insight reports are produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide unparalleled ability to forecast economic trends.