AFRICAN CURRENT MACROECONOMIC ENVIRONMENT AND ITS

PROSPECTS IN 2019&2020

(& ALSO MEDIUM TERM ISSUES FROM ‘THE HISTORICAL ORIGINS OF AFRICAN ECONOMIC
CRISIS: FROM COLONIALISM TO CHINA’ 2019 BOOK OF MINE)

(PRESENTATION AT AFREXIM BOARD & BANK MANAGEMENT RETREAT, KAMPALA, UGANDA,

SEPT 19-21, 2019)

BY
Alemayehu Geda
Department of Economics,
Addis Ababa University
 OUTOINE OF THE PRESENTATION
I. Short-run Macroeconomic Issues
• Growth, The Current Macroeconomic Environment
&The Prospect for 2019 and 2020
II. Long/Medium-run Macroeconomic Issues
• [These are Deeper Issues form my Book of 2019]
• The Emerging Pattern of Trade (Focus on China)
• The Emerging Pattern of Finance, FDI (Focus on China)

III. Conclusion: Challenges and Opportunities

• (Focusing on the Changing Pattern of African Trade &
Finance towards Chania and the Emerging South)
 I. Growth, The Current
Macroeconomic Environment
and Prospects for 2019 & 2020
A. Prospects of African Growth
 Aggregate growth is set to pick up from 3 percent in 2018 to 3.5 percent
in 2019 and stabilize at slightly below 4 percent over the medium term—
 About half of the region’s countries, mostly non-resource-intensive, are
expected to grow at 5 percent or more
 However, the remaining countries, comprising mostly resource-intensive
countries are expected to fall behind. And as these countries—including
Nigeria and South Africa—are home to more than two-thirds of the
region’s total population their continental effect is strong.
 External and domestic related issues for growth prospects.
 The global expansion is losing momentum, including in key trading
partners such as China and the euro area; trade tensions remain
elevated; global financial conditions are volatile and have tightened
somewhat relative to October 2018; and commodity prices are expected
to remain low. – African macro outcomes’re strictly linked to comm price
 On the domestic front, climate shocks are likely to impact agricultural
output in southern Africa, while policy uncertainty is Weighing on growth
prospects in several countries.
African Macroeconomic Outlook in Figures, 2019-
2020 (IMF, REO)
African Macroeconomic Outlook in Figures,
2019-2020… Cont’d
IMF & AfDB Growth Data and Forecast
Comparison
 B. Domestic Macro Prospects and Debt
 Debt vulnerabilities remain elevated in some countries. Weaknesses in
public balance sheets are also weighing on countries’ external
positions, with reserve buffers below levels typically considered
adequate in more than half of the countries in the region.
 • At the same time, high nonperforming loans continue to put a strain
on financial systems, while weaknesses in public financial
management systems are manifesting themselves in large domestic
arrears with potential effects on growth and domestic financial
systems.
 The familiar challenge of finding ways to address human and physical
capital investment needs is being complicated by declining fiscal space
and a less supportive external environment.
 Central to resolving this challenge is building fiscal space, enhancing
resilience to shocks, and fostering an environment conducive to
sustained, high and inclusive growth.
African Macroeconomic Outlook in … Cont’d
African Macroeconomic Outlook in … Cont’d
 African Macroeconomic Outlook…
 Recent comprehensive evaluation of the Africa debt by Michael Atingo-
Ego (AERC, 2019) shows : Cont’d
 the existence of systematic optimism bias in past Debt Sustainbility
Analysis (DSA) resulting from optimistic macro-economic projections
that underpin the DSAs. As a result, the DSAs projected higher debt
carrying capacities which in most cases led to a faster pace of debt
accumulation during this period.
 Moreover, the average interest rates on new debt commitments were
rising faster relative to GDP growth rates (as composition of the debt
changing) while the necessary fiscal adjustment to counter this
development remained insufficient. As a result, the overall risk of debt
distress in the region has deteriorated in the last decade.
African Macroeconomic Outlook in Figures, 2019-
2020… Cont’d
African Macroeconomic Outlook in Figures, 2019-
2020…
Another Cont’d
recent (2019) AERC paper by Devarajn et al (WB) Share the same
fear as that of Michael Atingo-Ego about African Debt. Here is the Summary 
Commodity Price Trend and Forecast, 2019 and
beyond…
 Commodity Price Trend and Forecast, 2019 and
beyond…
The Second one deflated by MUVI
 The Risk to the Macroeconomic Outlook from the
Global
 Intensification of the Economy
China-US & Briexit tensions beyond
what is considered slow growth in the region significantly.
Growth-at-risk analysis indicates that heightened trade
tensions along with increased trade policy uncertainty in the
USA, slower growth in China, lower commodity prices, and
tighter global financial conditions could lower growth in SSA
2 percentage points in 2019 and 1½ percentage points in
2020 (Figure 1.18). So, in summary, [IMF, REO, 2019]
II. Deeper/Structural Macro Issues
(From my 2019 Book)
Deeper Macro
DeeperIssues from
Issues from My Book My Book

Africa’s Economic Crisis , What caused it?

 In sum: Regarding the cause of the African Economic
crisis (from 1980s-Today): Neoclassical/IFIs say policy
failure while Structuralist say Structural: Structural
Meaning
 ECA1989/Structural: deficiencies in basic economic and social
infrastructure (especially physical capital), research capability,
technological know-how and human resource development,
compounded by problems of socio-political organization.
 The dominance of the IFIs based policy making in Africa
for the last 3 decades: SAPS/PRSP/Implicit Austurity led
to the neglect of policy for structural transformation.
(Why: power, resource, outlet and aid ideology;)
 Deeper Issues from My Book
 Growth, Finance and Poverty reduction are primarily
commodity cycle dependent (Next slide)
 Structural transformation is central for high quality
growth, poverty reduction and resilient economy.
But, this is constrained by
 Historical legacy with the West before
 Because of China & Emerging South today
 The pattern of Trade & Finance is changing from the West to East
 Chinese Trade is dominating and a challenge for Africa and Afrexim
bank that need to be leveraged
 Finance Chinese Exim bank is more important that Chinese FDI
 They have a strategy and we don’t ? Does Afreixm bank has one?
Growth and the Macroeconomy in Africa is dependent on
commodity price cycle
 A.
. The Emerging Pattern of Trade
 Economic Dimensions and Impacts of the China-Africa
Engagement
 Beginning the early 2000’s, Africa saw a significant improvement in its
international commodity prices. As a result, for the first time in 100 years,
Africa's terms of trade began an upward trend since 2002, reversing the
century old downward trend. The latter, in turn, resulted in robust growth of
the continent (Arebach and Page, 2008; Geda, 2018) heralded the "rising
Africa" discourse,
 to a significant degree, this is the result of Africa's intensified economic
engagement with China and the emerging South whose surging demand for
commodities improved Africa's export earnings.
 This, combined with low cost imports of manufactured goods that are coming
from China and the emerging South (see Kaplinski, 2006), led to the improved
terms of trade of Africa that accelerated the continent's growth that averaged
above 5 percent per annum since 2002 & till 2013.
 This pattern persisted until the year 2013/14, when the global commodity
prices began to decline, partly due to the slowdown in the economy of China
and the world at large, leading to a fall in growth to about 3 percent per annum
in 2013-2015 as shown in Geda (2019).
 The Emerging Pattern of Trade….
 Notwithstanding this, trade balance of Africa with BRICX has
continuously deteriorated since 2003, with the record African deficit
of US$27.7 billion recorded in 2012 (see Next slide).
 The total balanced trade masks a sharp deterioration in Africa’s
“non-Mineral fuels” trade balance with BRICX.
 When mineral fuels are excluded, the trade deficit would rise from a deficit of
$6.7 billion in 1995 to a higher deficit of $87.96 billion in 2011 [this for China
being 35 billion ]
 Generally China followed by India is the most important trading
partner for Africa. Emerging economies such as Turkey, Malaysia,
Republic of Korea, Thailand and the Russian Federation, which
export very little to Africa follows these.
 In 2017 -20% of Africa exports (& Imports) are to/from China & 70% of Exports
are primary commodities (fuel, minerals..) imports Mfg. goods
 [Imports 2017: 49.6% from Europe; 8.1% from USA; 43.3% China]
 The Pattern of Trade… Cont’d
 Figure 3b: Total Trade Balance excluding Mineral fuel, lubricants and related materials exports
of Africa with the Emerging Economies (In Billions of USD, 1995-2011)

0
0 2 4 6 8 10 12 14 16 18
-10

-20

-30
-35.47
-40

-50

-60

-70

-80

-90 -87.96
-100

Brazil Russian Federation

India China
Malaysia Thailand
Turkey Republic of Korea
Emerging Economies Linear ( Emerging Economies)
 B. The Emerging Pattern of Finance & FDI
 As has been historically the case with the European powers (see
Alemayehu, 2018), Africa’s trade engagement with China is
bundled with Chinese finance &Aid
 Thus, the commodity trade is further strengthened through flows
of finance from China that includes FDI, aid and credit financing
[But aid is negligible].
 Pax-Arabica that follows the 1973 oil price hike for oil producers
(Ocampo, 1986; Alemayehu, 2002) and the USD 3.5 trillion
reserves of China (in 2013) – Pax-China – and the Chinese “loan
pushing” to Africa and the rest of the world are very similar.
 The only difference being the latter is pushed, not through
international banks as the days of Pax-Arabica, but rather through
the Exim bank of China, which is planning to handle 70-80 % of the
USD 100 billion that China is planning to provide to Africa until
2025 (AFP, 2013/with correction).
 The Pattern of Chinese Finance & FDI …
 Chinese FDI in Africa is not only very small but also located in a
meaningful way in the extractive sectors of a few resource rich
countries such as South Africa, Nigeria, Zambia, Algeria, DR
Congo, Sudan and Angola, in order of importance.
 These seven countries account for about 70% of the total stock of
Chinese FDI in the continent in 2010, the S. Africa’s share alone
being about 30%.
 FDI in the oil sector of Africa from the traditional partners (the OECD) is
even higher - at 85% (AEO, 2011).
 More specifically for China, its pattern of trade with Africa seems
to be bundled with its FDI in the continent as reflected in share of
total Chinese FDI to the mining sector (including oil and minerals)
 The top ten Chinese investment receiving African countries are
resource rich, and account for 76% of the stock of China's FDI
in Africa
Figure: BRICX FDI Flows to Africa (African Average, 2005-
2010, $56 billion per annum)

China share in
2017 5%
 The Pattern of Finance… Cont’d
 In general, FDI flows from China as well as the rest of the BRICX
to Africa are characterized by the following major features.
 First (a) these flows are largely motivated by the desire to secure sources of
energy and raw materials as well as to exploit preferential markets in the
third market
 A second (b) feature of such FDI flows and firms from China is the
proliferation of a number of small and medium size firms that usually come
with the big Chinese TNCs.
 Third (c), such FDI and related investment flows from BRICX to Africa do
not seem to be deterred by the nature of governance/ fragility of countries.
 Finally (d), FDI and other forms of investment flows from China are
interwoven with provision of infrastructure, tied concessional development
financing and trade, with no political conditionality attached to them.
 This strategy of 'bundling' trade, FDI and development finance
through the operation of Chinese TNCs and Exim banks is the sine
qua non of Africa’s economic engagement with China.
 The Pattern of Finance.. Chines Exim Bank
 To understand Chinese investment engagement, better focus on what I
call Chinese Quasi-FDI , not Chinese FDI using the standard“ traditional"
definition
 Although CEB doesn't offer geographically disaggregate picture of its credit
flows, according to Fitch Ratings (2012), a UK-based rating company, it
extended about USD 67.2 billion to SSA b/n 2001-2010. This is forecasted to
reach over US$105 by 2018 [see next Slide]
 There are three important features that distinguish these Chinese financing
from traditional financing schemes in the continent.
 First, the majority of these loans were infrastructure related and Chinese
firms are often the one that are building it, which invariably are directed
at facilitating the export of primary commodity from the continent
 Second, compared to concessional financing, the majority of countries in
the continent used to get from IFIs such as the IDA window of the WB this
financing scheme is very expensive.
 In fact, the terms of CEB engagement in Africa are invariably higher than even the terms
employed by Western commercial banks. [LIBOR + 3 ppp]
The Pattern of Finance.. Chines Exim Bank
The Pattern of Finance.. Chines Exim Bank
The Pattern of Finance… Cont’d
 Third, they are characterized by potential risk that included
indebtedness, vulnerability to global economic shocks and
political and strategic vulnerability of Africa to China
 Forth, if individual African countries exposure to CBE credit is
growing significantly, as has been the case in Ethiopia for
instance, it wouldn’t be surprising if this Africa’s strategic
vulnerability position is used by China to advance Chinese and
Chinese firms interest
 Finally, the CEB loan is also a vehicle for Chinese
Multinationals’ global strategy of expansion by helping them
to win and involve in various projects in the continent. The
sheer magnitude of CEB loans in the continent shows its
importance as an instrument of bundling trade, FDI and
Chinese government and its TNC’s operational interest in
Africa ( Over 105 billion today in my projection)
 The Pattern of Finance… Cont’d
 The possible quantifiable cost of CBE credit to Africa in 10
years is more than twice the amount of credit contracted – or
a return of about 7.2% per annum. This is without quantifying
the possible cost of tying the credit to Chinese global firms its
attendant problems (Next Slide)
 Since, we have assumed the minimum opportunity cost of the CBE
loan to Africa to be LIBOR plus 3%, the cost given in Table 3 is
understated.
 If instead, this 7.2% is taken as the minimum return, the cost of the
CEB loan to Africa in 10 years would have been 3.5 times the credit,
instead of the 2.2 times of the credit given in Table 3.
 Notwithstanding this, it has also the benefit of availing much needed
finance without any political/policy conditionality. It is also stimulating
the economy, providing infrastructure and offering market access and
price improvement opportunities for exports of Africa
 The Pattern of Finance… Cont’d
 Table 3: Possible Scenarios about the Cost and Benefits of
Chinese Finance in Africa (in Billion USD).
  2010
Total Chinese FDI to Africa, stock, 2010 USD 17.7 [3.2% total]
(3.2% of Africa's USD 554 billion total stock of FDI)
Chinese Exim Bank Loan to Africa (2001-2010) USD 67.2
Chinese FDI, stock 2010/ Chinese Exim Bank Loan in 2001-2010 (%) 26.3%
Memo: World Bank Financing in Africa during the same period USD 55
Implicit Costs/Loss in Borrowing from CEB compared to IDA/IFIs*  
a) Loss in terms of interest cost (compared to concessional IFS loan): {[LIBOR+3%]-0.7%} for 10 24.88 Bln
years, the maturity date of CBE loans
a) Loss in terms of grace period (return on investment): Must be above LIBOR+3% which CEB is 16.58 Bln
charging at the minimum for 7 [10-3] years, which is the grace period difference between IDA
and CEB credit

a) Loss in terms of short maturity date (return on investment for lost maturity years: which is 105.69 Bln
LIBOR+3% at minimum for the years between IDA and CEB maturity date [for [40-10]=30
years])

Total Minimum Quantifiable Implicit Cost of CBE financing in Africa 147.55 Bln
As % of CBE loan contracted (219%)
a) Cost of tying the Aid to Chinese firms (quality, corruption; locking-in effect etc) Difficult to quantify

Benefits:  
Financing option; policy space, infrastructure, commodity price &tot improvement, and short Difficult to quantify
term growth
 Table : Possible Scenarios about the Cost and Benefits of
 . Chinese Finance in Africa (in Billion USD).
III. Conclusions: Challenges and
Opportunities
Challenges and Opportunities
 The major policy issue for Africa regarding its
engagement with China/BRICX economies, is whether
it has brought about, or will bring about, structural
transformation of the continent.
 Important questions include:
 How can the China-Africa economic partnership be leveraged
to enhance industrial upgrading and structural
transformation in Africa? with a bearing on development and
poverty reduction in the continent
 Indeed, recent poverty and growth studies in the
continent point out that structural transformation is
much more important and fundamental for poverty
reduction than simple per capita growth as such (Geda,
2019)
 Challenges and Opportunities… Cont’d
 This can also be inferred from the comparison of the record of
poverty alleviation in East Asia and Africa following a surge in growth
and structural transformation versus the growth experience in
Africa .
 McKay (2013) noted that between 1981 and 2008 the East Asian poverty level
declined by 63 percentage points (form 77 per cent to 14 per cent), while Africa
saw just 4 percentage points reduction both during the comparable period
(1981-2008), as well as during the period of its historically excellent growth
performance since independence, 2003-2013
 Economic Dimensions and Impacts of the China-Africa
Engagement
 Despite the strong growth achieved since the early 2000, underpinned by
deepening trade, structural transformation has remained elusive.
 This, however, is not surprising, given the continued dependence of Africa on
primary commodity to date, 2018)
 Of course, there are some notable changes in the nature of the China-Africa
economic relations in the recent past, with intensification of China-Africa
infrastructure investments and increasing manufacturing FDI from China to
Africa in some countries (notably Ethiopia).
Challenges and Opportunities… Cont’d
 Yet, has challenges:
 Locking-in Africa in primary commodity export sector: a
sector where the scope for technological development is
limited and generally characterized by deteriorating terms of
trade and volatility of prices;
 Poor quality growth: growth limited to a short run only with
no (or negative) effect in the long run; & less poverty effect
 There are also opportunities in the Sino-Africa
economic engagement:
 improvement in terms of trade since 2002 and Africa’s position in
global politics;
 infrastructure construction and financing development in the
continent; and
 the positive potential implications of the Chinese ‘rebalancing’
policy for manufacturing development in Africa.
 Challenges and Opportunities… Cont’d
However,
 The persistence of challenges, as opposed to opportunities in
the current engagement so far shows the lack of both human
and institutional capacity and the resulting lack of informed-
policy on the African side to be able to benefit from the China-
Africa current economic engagement.
 (ie. Have an African: continental/regional and country strategy, as
Chinese have one for Africa – avoid the race to bottom)
 Without such capacity and informed policy for strategic
engagement, Africa may not benefit from its current
engagement with China, indeed with any other trade partner, in
the long run.
 This also points to the challenge of coming up with an appropriate
continental/regional/country policy framework that could be
employed across all countries in Africa so as to ensure a positive
outcome from the current engagement of Africa with China
 The End

THANK YOU
[If needed, detailed
continual/Regional/country Specific Policies
direction are given in the rest of the slides