Economy of Africa. Hidden potential and real growth

The African region is currently one of the most promising in terms of development potential and economic growth. Five African countries entered the top 10 fastest-growing economies in the world in 2023. Investors in the African region have a wide range of promising sectors to choose from. Despite the challenges, growth rates across all regions of Africa remained positive last year and will remain stable over the next two years.

Countries need to solve many problems, including combating inflation and excessive debt burdens, carrying out structural reforms, and expanding intra-African trade. Risks remain beyond the control of most governments and could have a serious impact on countries with tense political environments.

Africa — dynamically developing continent

On the eve of the Russia summit — Africa and the Economic and Humanitarian Forum Russia — Africa (held on July 27-28, 2023 in St. Petersburg), Russian President Vladimir Putin recalled the importance of maintaining and strengthening ties with African countries, he pointed to the increasing authority on the world stage of both individual states and the continent as a whole. He outlined the priority of a non-discriminatory cooperation agenda and stated that the potential for trade and economic cooperation between Russia and African countries is much higher than the current trade turnover of $18 billion by the end of 2022.

Despite the active development of various deposits in recent years, there remains a high potential for investment in the production of both hydrocarbons and metals, including rare earths. In addition to local deposits, Africa contains up to 40% of the world's gold reserves and up to 90% of chromium and platinum reserves. It also contains the largest reserves of cobalt, diamonds and uranium on the planet. The Democratic Republic of Congo, for example, accounts for about 70% of global cobalt production. South Africa, Madagascar, Malawi, Kenya, Namibia, Mozambique, Tanzania, Zambia and Burundi have significant reserves of neodymium, praseodymium and dysprosium. And 35% of the world's bauxite reserves are concentrated in Guinea. In addition, agricultural potential has not been realized, although Africa accounts for 65% of the world's arable land and about 10% of domestic renewable fresh water.

Africa's average real GDP growth rate fell to 3.8% in 2022 due to the coronavirus pandemic and geopolitical turmoil. But at the same time, 53 of 54 countries showed growth, and its stability remains in all five regions of the continent in the medium term. Average growth rates in 2023 and 2024 are expected to be around 4%.

The main risks remain a sharp rise in food and energy prices, increased costs of servicing domestic debt, tightening global financial conditions and climate change, which could threaten domestic food supplies and change the political course in countries where this year elections.

The continent's largest economies are Nigeria, South Africa and Egypt, but their growth potential in the coming years is limited, while Africa's smaller economies are coming to the fore in terms of development rates. In the coming years, they will remain the main driving force in the region. According to the forecast of the African Development Bank, in 2023–2024 the five fastest growing economies in Africa — Rwanda, Ivory Coast, Benin, Ethiopia and Tanzania — will grow by an average of more than 5.5% and regain their position among the 10 fastest growing economies in the world.

A number of other African countries are also projected to grow by more than 5.5% between 2023 and 2024. These are the Democratic Republic of the Congo, Gambia, Mozambique, Niger, Senegal and Togo. At the same time, the growth rates of countries such as Nigeria, South Africa, Egypt, Algeria, Morocco and Kenya will be stable, but close to the growth rates of the world economy, that is, on average they will not exceed 2-3%.

The economies of African regions are developing steadily

Sustainable growth continued in 2022 in all regions of Africa, according to the African Development Bank forecast, the trend will continue in 2023-2024, only in the south of the continent the economic growth rate will not exceed 2% this year and will remain under pressure next year.

Central Africa

Thanks to favorable commodity prices, growth was the fastest on the continent at 4.7%, up from 3.6% in 2021, according to the African Development Bank.

South Africa

This region recorded the steepest decline in growth, to about 2.5% in 2022 from 4.3% in 2021. The slowdown reflects subdued growth in South Africa as higher interest rates, weak domestic demand and rolling power outages weigh on the economy.

West Africa

Growth slowed to 3.6% in 2022 from 4.4% in 2021 due to slower growth in Ivory Coast and Nigeria, the region's two largest economies. Nigeria's 2023 economy, while battered by the coronavirus pandemic, insecurity and lower oil production despite higher global oil prices, could benefit from continued efforts to restore security in the troubled oil-producing region.

North Africa

The growth rate fell to 4.3% in 2022 from 5.4% in 2021 due to a sharp decline in Libya's economy and drought in Morocco. Growth is forecast to stabilize at 4.3% in 2023, supported by expected strong recoveries in these two countries and robust growth elsewhere in the region.

East Africa

The growth rate slowed to 4.2% in 2022 from 5.1% in 2021. However, they are projected to recover to average pre-pandemic levels above 5% in 2023 and 2024. Although East Africa's production structure is relatively diversified, countries in the region are largely net importers of primary commodities. As such, they bear the brunt of high global prices in addition to recurring climate shocks and instability, especially in the Horn of Africa.

Intra-African associations and international cooperation

Given the enormous development potential within the continent, there are a large number of different unions and associations in Africa. The largest of them is the African Union, which unites all African states with the exception of several countries whose membership was suspended due to coups d'etat there. Separately, it is worth highlighting the African Economic Union, within the framework of which free trade zones, customs unions between countries and a single market are created, the Bank of Central African States operates, serving six states of the region as a central bank.

To solve regional problems, African countries unite in local unions, such as, for example, the Sanai Cooperation Group, the Arab Maghreb Union, the Mano River Union, the Rand Zone and others.

There are also several large formats within the framework of interaction with states outside Africa. These could be separate partnerships, such as the Union for the Mediterranean, which is the ideological successor to the Euro-Mediterranean Partnership, which includes only a few North African countries. The largest formats of interaction were summits and forums: the African Union summit — European Union, Forum of China-Africa Cooperation, Russia Summit — Africa and the economic forum of the same name, the US summit — Africa and a number of smaller ones.

Top 10 most promising countries

Ethiopia

In 2022, real GDP growth fell to 5.3%, while inflation rose to 34%. This is due to internal conflict, drought and rising commodity prices. The fiscal deficit widened to 4.2% of GDP in 2022, and the current account deficit rose to 4% of GDP in 2022. The banking sector is stable, but the share of non-performing loans is higher than the required level. International reserves fell to about 1 month of import coverage in 2022, and government and government-guaranteed debt fell to 50.1% of GDP in 2022.

GDP is projected to grow by 6.2% in 2023 and 6.5% in 2024, driven by industry, private consumption and investment. A recovery in tourism and the likelihood of more sectors being liberalized are expected to improve growth prospects. Inflation is forecast to fall to 30.7% in 2023 and to 21.8% in 2024.

The budget deficit will increase to 2.9% in 2023 and 2.3% in 2024. This is due to the expected increase in government revenues, thanks to improved domestic resource mobilization, implementation of the fiscal consolidation strategy and a renewed influx of donors. The current account deficit is expected to narrow to 3.2-3.3% of GDP in 2023-24 as exports of goods and services and foreign direct investment increase and capital imports continue to decline.

The risks remain the same: ethnic conflicts in different parts of the country, drought, debt vulnerability and geopolitical tensions in other countries.

Tanzania

In 2022, real GDP growth slowed to 4.7% due to rising food and fuel prices. Accommodative monetary policy was wound down in June 2022 to contain inflationary pressures. Despite this, inflation was 4.3%. Exchange rates remained stable thanks to strong gold exports and tourism revenues. The budget deficit fell to 3.4% of GDP and was financed by external and internal borrowings. Public debt remains strong and has stabilized at 40.9% in 2022. The current account deficit widened to 5.7% of GDP due to rising import costs, and was financed mainly by external commercial debt. International reserves fell to 4.7 months of import coverage in December 2022, reflecting tightening external financing conditions.

Real GDP will grow by 5.2% in 2023 and 6% in 2024. This growth will be driven by investment in large-scale infrastructure projects, which will lead to higher wages and increased consumer demand. In addition, the agricultural sector will benefit from cheaper credit, which will further increase consumer activity.

Inflation will rise to 4.8% in 2023 due to higher food and energy prices, before falling to 4.2% in 2024 due to improved agricultural performance. The budget deficit will increase to 3.5% of GDP in 2023 and 2024 due to increased infrastructure spending, which will be financed through domestic and external borrowing. The current account deficit is expected to narrow to 4.4% of GDP in 2023 and 3.9% in 2024 due to increased merchandise exports and tourism revenues. It is expected that it will be financed mainly through external loans.

Tanzania's unemployment rate will remain low thanks to the implementation of major infrastructure projects and government support for the agricultural sector. The projected unemployment rate for 2023 is just 2.3% of the total labor force.

However, there are potential problems on the horizon. It is highly likely that the Bank of Tanzania will increase its discount rate in the near future, which will make debt servicing more expensive. This adjustment, coupled with the less favorable outlook for the Tanzanian shilling, may pose some headwinds to the overall outlook.

Despite these challenges, consumer spending is expected to rise in Tanzania. In 2023, real household spending will increase by 4% year on year, driven by rising wages, low unemployment and falling inflation. This growth will take total household expenditure to Tsh 52.87 trillion in 2023, up from Tsh 50.8 trillion in 2022.

Ivory Coast

Economic growth slowed to 6.7% in 2022. Key industries driving growth — mining and manufacturing industries, construction, trade, telecommunications, investment and consumption. Inflation rose to 5.2% in 2022 due to high food and transportation prices. The budget deficit rose to 6.8%, but the government subsidized oil prices and raised civil servants' wages. Debt risk remains moderate.

The current account deficit widened to 6.9% in 2022 due to worsening terms of trade. Lending to the economy grew 11.4% thanks to the momentum in economic activity despite higher interest rates on bank loans.

GDP is projected to grow by 6.7% in 2023 and 6.9% in 2024, driven by accelerated reforms and investments under the National Development Plan (NDP) for 2021-2025 and the start of gas and oil production Balein field, discovered in 2021–2022. Growth can be driven by several sectors (energy, construction, mining, agribusiness, trade, telecommunications and agriculture), as well as investment and consumption. Inflation is expected to fall to 3.7% in 2023 and 2.3% in 2024 due to increased local food supplies and continued struggles with high living costs. The budget deficit is projected to fall to 5.2% of GDP in 2023 and to 4.1%

in 2024 due to greater mobilization of domestic resources and better control over government spending. The current account deficit will increase to 5.9% of GDP in 2023 and to 5.7% of GDP in 2024.

The main risks are associated with the deterioration of the local political situation after the elections and the decline in prices for agricultural raw materials.

Democratic Republic of Congo

GDP grew 8.5% in 2022, driven by mining (up 20.8%) and services (up 3.2%), strong exports (up 23.8%) and investment (up 18% .6%), despite the global energy crisis. Inflation reached 9.1% due to high food and imported energy prices, and the budget deficit widened to 2.8% of GDP in 2022 due to exceptional security and election spending. However, debt risk remains moderate and private sector lending has more than doubled and international reserves have risen by 54%. But the current account deficit widened from 1% of GDP in 2021 to 6.4% in 2022.

Real GDP will grow by 7.3% in 2023 and 7.1% in 2024, driven by the mining sector, which will grow by 12% between 2023 and 2024. Investment in an agricultural transformation program can also boost economic growth. The central bank plans to implement contractionary monetary policy in 2023 to combat inflation, which will be 10.9% in 2023 but fall to 7% in 2024.

The budget deficit will fall to 2.5% of GDP in 2023 and to 2.2% in 2024, and the debt will stabilize at 23.5% of GDP between 2023 and 2024.

The current account deficit will decrease to 4% of GDP in 2023 and will be around 3.5% in 2024. Risks include global geopolitical uncertainty, falling commodity prices, high import inflation and security concerns in the east of the country.

Senegal

Real GDP growth fell to 4% in 2022 as major sectors of the economy, including primary and secondary, slowed. This was due to a poor agricultural season and sanctions imposed by the Economic Community of West African States on Mali, the largest buyer of Senegalese exports. Inflation reached a record 9.7% in 2022 due to rising food prices. The West African Central Bank revised its minimum liquidity injection rate to 3% and its marginal lending rate to 5%, helping to contain inflationary pressures. The government has increased energy subsidies and cut public investment. The budget deficit fell to 6.1% of GDP in 2022 thanks to a 23% increase in government revenue. However, government debt has risen to 75% in 2022 due to deficits caused by the coronavirus pandemic.

Sanctions on Mali and higher import costs will push the current account deficit to 17.5% of GDP in 2022. The poverty rate remained at around 37% in 2022 as growth was driven by the urban services sector, while the bulk of poor people live in rural areas and depend on agriculture.

Real GDP growth will be 6.1% in 2023 and 10.2% in 2024, driven by increased agricultural production and expected oil production.

Inflation will fall to 3.8% in 2023 and 2.3% in 2024 due to tighter monetary policy.

The fiscal deficit will fall to 5.8% of GDP in 2023 and 4.5% in 2024, driven by subsidy rationalization and higher domestic revenues.

Debt will fall below 70% of GDP in 2024 thanks to government deficit reduction and growth prospects. The current account deficit will fall below 10% of GDP in 2024 for the first time since 2020, following the start of hydrocarbon exports.

Benin

In 2022, the economy demonstrated resilience to the effects of crises, with a GDP growth rate of 6%, thanks to the primary, secondary and tertiary sectors. Inflation rose to 2.5% due to increased costs of basic products. The budget deficit remained high — 5.5% of GDP in 2022, up from 5.7% in 2021, due to loose fiscal policy. Outstanding government debt increased to 52.8% of GDP in 2022.

In December 2022, the risk of a debt crisis was moderate. The current account deficit rose to 4.9% of GDP in 2022 due to rapid growth in imports. Private bank loans account for only 15.2% of GDP in 2022. Poverty is still high and social protection programs are still being developed.

Real GDP growth will remain at 6.2% in 2023 and 6% in 2024. The main risks to the economy are fluctuations in world prices for cotton and oil, as well as climate change. Also, unfavorable economic developments in Nigeria and the deteriorating security situation in northern Benin could negatively impact economic prospects.

Inflation will increase to 2.9% in 2023 and to 2.2% in 2024 as global oil prices stabilize. Fiscal policy is likely to benefit from the International Monetary Fund's current program, which provides $638 million in funding. The budget deficit is expected to decrease slightly to 4.5% of GDP in 2023 and 4.1% in 2024.

The current account deficit will fall to 4.9% of GDP in 2023 and 4.4% in 2024 due to falling commodity prices.

Mozambique

In 2022, real GDP grew by 3.8%, but inflation also accelerated significantly, reaching 10.3%. The Bank of Mozambique raised its benchmark interest rate and the current account deficit widened to 39.1% of GDP. The budget deficit and debt fell slightly, and the poverty rate fell slightly to 64.2%.

GDP growth will increase to 5.1% in 2023 and 8.3% in 2024, driven by mining and agriculture, pushing per capita GDP growth from 2% in 2023 to 5.5% in 2024.

Inflation will fall to 8% in 2023 and return to the target of 7% in 2024.

The fiscal deficit will worsen slightly in 2023 to 4% of GDP, driven by the wage bill, and then narrow to a deficit of 3.6% of GDP in 2024.

The current account deficit will decline to 14 (13.3, 14.5)% in 2023, and then sharply increase to 35.9 (34.6, 34.5)% in 2024, taking into account liquefied liquid import projects natural gas. Potential risks include climate shocks and insurgency in northern Mozambique. Positive factors include a promising domestic LNG market, which is the basis for the electrification of the country and the creation of a green energy system as part of the so-called “just transition”, public investment in agricultural productivity and overall sub-regional growth, entailing greater use of Mozambique’s logistics corridors .

Niger

In 2022, real GDP grew by 7.2% thanks to strong performance in all sectors of the economy. Inflation exceeded the West African Economic and Monetary Union (WAEMU) target of 3% due to rising food prices and deteriorating international economic conditions. The budget deficit increased to 6.6% of GDP, which was financed mainly by external resources and grants. Government debt rose slightly to 51.2% in 2022, and the chronic current account deficit widened to 15.1% of GDP in 2022. This was driven by concessional loans and foreign direct investment, which grew significantly between 2017 and 2020.

Real GDP will grow by 6.7% in 2023 and 12.4% in 2024, with all sectors growing at least 5%. Consumption, higher oil investment and exports thanks to the new pipeline will contribute to GDP growth. Possible obstacles include security concerns, climate change and deteriorating international economic conditions.

Inflation will be kept below the target level of 3%.

Public finances are expected to consolidate, with government oil revenues expected to increase significantly, and the quality of government spending to improve under the new public finance reform strategy.

Public debt will remain stable, with most external borrowing on concessional terms. The current account and trade balance deficits are projected to decline. Social conditions are also expected to improve thanks to the economic recovery and resilience measures included in the new Economic and Social Development Plan 2022-2026.

Rwanda

GDP growth reached 10.9% in 2021, but fell to 8.2% in 2022 due to climate shocks and high energy, food and fertilizer prices. As a result, inflation rose from 0.8% to 17.7%, and the government raised the policy rate by 50 basis points to reduce rising inflation. To prevent rising costs of living, the government introduced subsidies for fertilizers and public transport. The fiscal deficit was 8.8% of GDP in 2022, and the current account deficit is estimated at 12.6% of GDP in 2022, up from 10.7% in 2021.

Real GDP growth will reach 6.5% in 2023 and 8% in 2024 due to the continued slow recovery in domestic agricultural production and a recovery in exports and conference tourism. Rwanda's economy grew by 9.2% in the first quarter of 2023. Recent floods, resulting in loss of life and infrastructure destruction, are expected to reduce this increase from the original forecast. Growth rates were supported by private consumption and the services sector, as well as an improvement in the labor market.

Inflation will decrease to 7.8% in 2023 and to 5.3% in 2024 due to a decrease in imported inflation. The fiscal deficit is planned to be reduced to 8% of GDP in 2023 and to 6.8% in 2024 thanks to ongoing fiscal consolidation and increased domestic revenues. The debt burden will remain a moderate risk. The current account deficit will narrow to 12.3% in 2023 and 11.4% in 2024 due to a temporary decline in capital imports, a recovery in tourism and strong remittances.

Rwanda remains a promising, albeit small, market. Nominal GDP is just under $10.5 billion, with steady growth projected at around 7.5% in 2024-25. It may be higher due to the effect of this year's low base if the country's authorities are able to solve infrastructure problems.

Togo

In 2022, real GDP growth fell to 5.5% from 6% in 2021. Inflation rose to 7.8% due to higher food and energy prices. The budget deficit widened to 8.4% thanks to measures to support purchasing power and security spending. The current account deficit widened to 3.7% due to higher costs of imported goods caused by supply chain disruptions during the COVID-19 pandemic. Credit to the private sector increased by 14.3% to 32.8% of GDP. The share of overdue loans decreased to 8.1%. Public debt fell to 55.9% thanks to debt management measures.

Real GDP will grow by 5.6% in 2023 and 6.1% in 2024 thanks to the government's road map to 2025 on infrastructure projects and economic, financial and structural reforms, including those aimed at increasing agricultural production and yield.

Inflation will fall to 4.8% in 2023 and to 3% in 2024 thanks to government support for purchasing power.

The current account deficit will amount to 5.1% of GDP in 2023 and will remain around this level in 2024 due to faster growth in imports. The budget deficit will fall to 6.6% of GDP in 2023 and 5.1% in 2024 due to ongoing public financial management reforms.

Possible obstacles include unfavorable fluctuations in world prices for phosphates and oil, repeated terrorist attacks in the northern regions of the country and the effects of climate change.

Gambia

In 2021, GDP grew by 4.3%, and in 2022 it is expected to grow by 4.4%. Inflation rose from 7.4% in 2021 to 9.6% in 2022. The discount rate was increased to 13%. The budget deficit is contained at 4.4% of GDP in 2022. Public debt has fallen to 80.8% in 2022, but the risk of a debt crisis remains high. The current account deficit widened to 13.1% of GDP in 2022. Gross international reserves fell to $420 million in 2022. The non-performing loan ratio rose to 4.2% in 2022. The poverty rate increased from 48.4% in 2019 to 53.4% in 2022.

GDP growth will remain below the level that existed before the coronavirus pandemic, amounting to 5.3% in 2023, and in 2024 — 5.8%. This will happen due to tightening international financial market conditions and climate change, which could weaken economic activity in agriculture, construction, energy and tourism. In addition, these factors may increase fiscal pressure and affect the debt structure.

The inflation rate is expected to be 11.5% in 2023, driven by high fuel and food prices and a depreciating exchange rate. However, inflation is expected to decline to 8.9% in 2024 due to the normalization of commodity prices. The Central Bank plans to tighten monetary policy to reduce inflationary pressure.

The budget deficit will fall from 2.9% of GDP in 2023 to 1.4% in 2024 thanks to limited spending and improved tax collection.

The current account will shrink from 13% of GDP in 2023 to 10.3% in 2024. This will happen thanks to the growth of tourism and the elimination of export disruptions.

African countries face many challenges:

• Uneven inflationary pressures make accommodative monetary policy necessary.
• Coordination with fiscal policy will further strengthen the leverage to ease inflationary pressures.
• Countries with high inflation will either have to cut budget spending or tighten monetary policy, which will inevitably entail a slowdown in economic growth and a decline in the standard of living of the population.
• The population's low standard of living and high poverty levels suggest a high sensitivity to increased pressure on incomes, which could lead to protest movements and changes in government, as has happened in the past.
• The predominant raw material export model of national economies makes African countries extremely dependent on fluctuations in world prices and global crises, while the correlation between government income and the income of citizens remains low.
• The resilience of economies can be enhanced by increasing intra-African trade, especially in manufactured goods, to protect economies from volatile commodity prices.
• It is necessary to accelerate structural reforms to build tax administration capacity.
• Investing in digitalization will provide an opportunity to increase the transparency of the public finance system and reduce illicit money flows.
• High levels of structural budget deficits and the accumulation of public debt in countries facing or already experiencing a high risk of debt crisis remain a serious problem.
• One of the few sources of external financing remains IMF loans and grants. Dependence on them forces governments to strive to meet criteria, including inflation targets, which worsen the stability and prospects of economies.