An address by Daniel Mminele,
Deputy Governor of the South African Reserve Bank,
at the 5th Business Management Conference
of the College of Law and Management Studies
of the University of KwaZulu-Natal
University of KwaZulu-Natal, Durban
23 August 2018
Economic and policy challenges in Africa
Ladies and gentlemen, good morning.
Allow me to thank you for the opportunity to address this conference that explores a
very important issue facing the economies of Africa today: 'The role of urbanisation,
and how the cities of the future will be structured and managed amid economic and
policy challenges in Africa'. Of course, the growth and future of African cities is
interdependent with the economic evolution of the continent in the next few decades,
and how policies will shape that economic outlook.
the continent's
I therefore propose to discuss the external and internal challenges that
economy faces as it strives to move to a stronger, more inclusive pace of growth, and
- -
how policy in particular monetary policy can assist in that respect. Finally, I will
look at whether the South African experience can inform future choices of the other
countries in sub-Saharan Africa.
Africa's performance in
the global context
The 2000s was a rather good period for the continent. After several decades when it
had generally failed to 'catch up' with the more advanced regions and therefore
converge towards the technological frontier, sub-Saharan Africa outpaced the world
economy and other emerging regions, save East Asia and the Pacific.1 According to
the region's economy
data published by the International Monetary Fund (IMF), grew
by an annual average of 5.7% versus 3.9% for the world economy and 6.1% for
emerging markets during that period.
Furthermore, economic growth became more diversified. The services sector in
particular contributed strongly to the overall expansion, including retail, financial
services and telecommunications.
More generally, the private sector played a growing role in driving investment in
productive capacities, while the sources of international financing became increasingly
diverse too. Importantly, what some analysts described as 'a continent on the mend'
proved fairly resilient to the global financial crisis of 2008-09, even if this was (in part)
due to the relatively loose linkages of African countries to the world's major financial
centres. In 2009, growth in sub-Saharan Africa slowed to 'only' 3.9% versus 2.8% for
the emerging world as a whole and a 0.2% contraction for the global economy.
As the present decade started, the region continued to grow strongly, helped by a
rebound in commodity prices and strong growth in China, which had over the previous
decade turned into Africa's
largest and fastest-growing trading partner. However, this
pace of growth hit a 'snag' in 2016, when real gross domestic product (GDP) increased
by a mere 1.4%, thus decoupling from emerging-market and global norms. The
on some of the continent's
negative impact from the 2014-15 collapse in oil prices
major oil exporters played an important part. However, the deceleration was relatively
broad-based2 and exposed several underlying fragilities that had accumulated in
earlier years, including the rise in external or fiscal account constraints.
Where do we stand now?
Economic growth has recovered since the abrupt deceleration of 2016, and major
international institutions now forecast a moderate pickup into 2019. For example,
the World Bank, in its June 2018 Global Economic Prospects, projects real GDP
growth of 3.5% next year, after 3.1% in the current year and 2.6% in 2017. However,
this gradual pace of expansion still falls short of what the continent experienced, on
average, in the previous decade. Furthermore, economists agree that, with per capita
GDP growth rising by only about 1% a year, it will not make a major dent in poverty
and inequality.
The imbalances that have built up over the past decade have not disappeared. The
region's current account
deficit, which had peaked at an elevated 6% of GDP in 2015,
narrowed to 2.6% last year. However, the IMF expects that it will widen moderately
again this year and the next, to around 3% of GDP. Furthermore, this aggregate hides
the disparate performances across countries. The recovery in Brent crude prices has
helped to alleviate the external pressures for oil exporters, but in countries whose
strong growth has been heavily dependent on import-intensive public infrastructure
investment, current account deficits remain high and, in many cases, are rising.
In any event, external debt (expressed as a share of GDP) for sub-Saharan Africa as
a whole is rising, with the servicing cost of that debt representing a growing chunk of
-
export earnings a clear sign that there is no room for complacency.
'Twin deficits' have become the norm across the region over the past decade. Sub-
Saharan Africa's government balance was in surplus, on average, between 2004 and
2008, but the region posted a deficit in excess of 4.0% of GDP from 2015 to 2017.
Admittedly, most of the countries have now taken steps towards fiscal consolidation,
and official forecasters expect a narrowing of that public deficit. Nonetheless, public-
debt ratios are projected to continue rising in 2018, and the IMF has recently
highlighted the concerning rising trend in debt-servicing costs as a percentage of
national budgets. There are indications already that public deficits are, in some cases,
starting to 'crowd out' financing for private-sector projects.
The 2016 slowdown in the region's economies was
compounded by a broad-based
depreciation in most of its free-floating currencies, which triggered faster inflation and
forced central banks to raise rates, sometimes aggressively. Thankfully, such negative
forces largely reversed in 2017: in an environment of rising global investor appetite for
risk, recovering commodity prices and softness in the United States (US) dollar, most
of the liquid, tradable African currencies either stabilised or recovered against the
dollar. This improved performance, helped in some cases by a shift to a tight monetary
- -
stance in particular, in the large oil exporters like Angola and Nigeria allowed a
broad-based decline in inflation rates.
In fact, in most of the largest economies of the continent, inflation in the early part of
2018 has been close to central banks' targets, or
within such targets, when the central
bank targets an inflation range as opposed to an inflation point. This has allowed
-
several central banks to reduce interest rates in the past year or so in some cases
by a moderate amount (Angola, Kenya), and in others more substantially (Ghana,
Mozambique, Tanzania, Uganda, Zambia). It is encouraging to note that many in the
latter group of countries had in earlier years been forced to hike aggressively to combat
inflation pressures; this policy tightening thus appears to have borne fruit.
The ongoing challenges of development
Several factors point to a moderately improved short-term growth, inflation and
monetary outlook for sub-Saharan Africa. Nonetheless, as I have mentioned earlier,
the growth levels projected for the next year or two remain insufficient to engineer a
serious reduction in poverty as well as the other social or economic ills that typically
accompany it, such as crime, malnutrition and illiteracy. The strong growth over 2000-
2014 did help to alleviate both the incidence and the depth of poverty. For example,
statistics compiled by the World Bank show that the percentage of people living below
US$1.9 a day fell from 58% in 1999 to 42% in 2013, the latest year for which data are
available. Nonetheless, this indicator has not declined near as fast anywhere else, and
-
remains well above the similar indices for Latin America, South Asia and East Asia
even though, in the last-mentioned, poverty incidence was higher than in sub-Saharan
Africa back in 1990.
This unfavourable comparison highlights the urgent need for sub-Saharan Africa to
-
restart the 'high growth spells' which had characterised the pre-2015 period yet
which, according to IMF research, tended to be shorter in duration and more
vulnerable to an eventual crash than in other regions.3 According to that same
research, both exogenous and internal factors influence the shift to a higher growth
path and the duration of these growth spells. These factors include global financial
conditions, changes in the terms of trade, low inflation, flexible exchange rates, and
policy stability, including prudent fiscal management and well-managed debt
dynamics.
I would therefore like to dwell for a moment on the external environment that sub-
Saharan Africa is likely to face in the coming years, as well as on the role that domestic
policies can play in fostering renewed development.
However, before I move on to these topics, allow me to highlight the importance of
-
economic growth for African cities for this is, after all, the subject of this conference,
and the economic implications of and for urbanisation need to be better understood.
Many economists point out the long-term benefits of urbanisation for economic growth:
by living in a large city, individuals can access the type of job opportunities, and can
participate in such business networks, that are not available in a rural setting, or much
less so. Economies of scale are also generally understood to be larger in urban areas.
Hence, it may not come as a surprise that, in most countries, a higher degree of
development generally coincides with a higher share of the population living in large
conurbations.
However, those of us who frequently travel to African cities are also appalled at the
problems that seem to come with the continent's fast rate of
urbanisation, namely the
prevalence of slums, poor sanitation, squalor, traffic congestion, and high levels of
insecurity. Why does this happen? An exhaustive study published by the World Bank
Africa's cities suffer from
last year offers some explanations.4 According to the authors,
-
poor spatial organisation that raises the costs of both living and doing business and,
as a consequence, businesses remain 'trapped' in low-value-added, non-tradable
economic activities. In a word, African cities are not 'economically dense' and hence
fail to benefit from those regional or global growth opportunities which, in other
continents, become available to new urban dwellers.
How can these problems be remedied? If, as the report's authors suggest,
they can
be traced to poor spatial organisation, lack of proper urban infrastructure and
excessive costs, it would appear that those policies which encourage higher
investment in both physical capital (including public infrastructure) and human capital,
which lower the costs and risks associated with doing business, and which allow
economies of scale should take priority. Facilitating access to networks, in particular
information technology (IT) networks (including the roll-out of broadband access to
individual homes and small businesses), will need to receive special attention.
While all layers of government will have to be involved in the reforms that facilitate the
economic growth of cities, it is the municipal authorities that should be at the forefront
of spatial development, the provision of infrastructure, and educational or social
cohesion programmes. This stresses the need for African municipalities to create the
-
necessary fiscal space for the provision of such services and highlights, in turn, the
crucial role that both fiscal and monetary policy can play in facilitating economic and
urban development, which I will elaborate on shortly. While not the focus of our
interaction today, we should not neglect the development challenges that rural areas
face, which also deserve attention. Appropriately designed and targeted policies for
rural development are similarly important.
Potentially, a more challenging external environment
First, though, let me discuss how the global outlook is likely to influence Africa's
economic and policy framework in the next few years.
At present, as I have indicated earlier, most official and private forecasters appear
confident of a moderate acceleration in economic growth in the coming two to three
years. However, several 'warning bells' suggest that the unusually benign environment
-
that the world faced in late 2017 with a combination of upside growth surprises in
most of the major economies, supportive global financial conditions, moderately rising
-
commodity prices, and low financial market volatility has already started to fade.
First, global economic growth is becoming less synchronised. While the US economy
registered strong growth of 4.1%5 in the second quarter of 2018, buoyed by fiscal
stimulus and a continued strong performance of the labour market, activity in the
eurozone and Japan failed to return to the surprisingly strong pace seen late last year,
despite the rebound from a poor, weather-affected first quarter. High-frequency
confidence indicators confirm that shift to a slower, albeit still-dynamic, pace of growth.
In the eurozone, the political risks which most market participants thought had faded
come back after this year's Italian
have, to some extent, election. In the United
Kingdom, the elevated uncertainties around the Brexit process seem to be weighing
on corporate investment decisions. In China, activity lost some momentum in the first
half of the year amid lesser fiscal support and tighter financial regulation, and while
Chinese authorities now seem more willing to relax the policy stance somewhat, the
potential conflict between ensuring a stable growth path and allowing highly leveraged
sectors to reduce debt will continue to pose some risks to growth in the years to come.
-
Second, growing trade tensions not just between the US and China, but also
between the former and other key trading partners such as the European Union,
-
Canada and Mexico have the potential to undermine global expansion. So far, it is
too early to tell whether the selected imposition of tariffs has had an impact on trade
flows. However, survey evidence already suggests that businesses are becoming
more circumspect in investing and hiring, especially in those sectors that rely on
international demand. And while sub-Saharan Africa is not directly involved in the
-
present trade conflicts in large part because it is not a strong direct competitor to US
manufacturing producers, and also because its countries do not run large bilateral
-
surpluses with the US the region would still be vulnerable to a structural shift in global
trade growth, as are most small economies with limited internal markets that rely in
part on exports for development. Greater restrictions to global trade would also limit
the ability of African countries to become more integrated in global value chains, and
-
hence gradually reduce their dependence on commodity exports which remains a
source of vulnerability.
Third, the current global financial conditions are not as loose as they were at the start
of the year. Following a strong performance in the latter part of 2017, most of the major
equity markets are down from their January 2018 peaks, and dividend yields have
increased. At the same time, while benchmark government bond yields remain quite
stable despite the higher US policy rates, investment-grade corporate bond spreads
in the US and some of the other advanced economies have widened from the early-
year levels, as have emerging-market sovereign spreads. While this move remains
muted for the time being, and while measures of market volatility like the widely
watched Chicago Board Options Exchange Volatility Index (VIX) index are still at low
levels, its impact on emerging-market financing is being compounded by US dollar
appreciation, with the US Federal Reserve's broad
trade-weighted dollar index up by
3.8% from the start of the year.
Tighter global financial conditions can be a particular challenge for those sub-Saharan
African countries which have relied on private offshore investors, and especially
Eurobond investors, to finance their 'twin deficits' in recent years. In 2017, following a
period of declining investor appetite for 'frontier markets', African Eurodollar bond
issuance rose to US$7.9 billion6, second only to the record of US$8.5 billion in 2014.
The trend gathered pace in the first seven months of 2018, with no fewer than six
African sovereigns tapping the market for a combined amount of US$13 billion.
However, sovereign Eurobond spreads have widened again since March 2018, and
while they remain relatively low by recent historical standards, African sovereigns may
find it harder, or at least more costly, to cover their external funding needs if global risk
aversion rises significantly further.
What should the policy response be?
It would therefore appear that sub-Saharan African countries cannot solely rely on
external dynamics to shift to a higher, more durable pace of growth. Domestic policies
will have to play an important part too. However, as I have already discussed, the room
for manoeuvre for fiscal policy has become very limited. While the debt-to-GDP ratios
have not reached crippling levels yet, countries in the region will want to avoid a repeat
of the over indebtedness of the 1970s and 1980s, which had forced many of them into
socially and economically painful adjustment programmes. It is more likely that the
challenges for fiscal policymakers in the coming years will be of a structural nature,
taxpayers'
such as broadening the tax base and improving compliance, reducing fiscal
revenue dependency on natural resources, and re-prioritizing expenditure away from
wasteful, inefficient interventions.
But can monetary policy step in and provide support? Before attempting to answer this
-
question, I would first like to stress what monetary policy cannot do and that is: run
an overly stimulative stance for a prolonged period of time in the hope of engineering
a sustained pickup in growth. Such an approach would only result in excess demand,
and as it could not be met by the domestic supply of goods and services, it would only
generate inflation, external imbalances and, in the end, an economic crisis. Of course,
in recent quarters, lower inflation in many African countries has allowed central banks
to reduce interest rates. However, history shows that inflation can pick up quickly
the region's countries is rather high
again. In fact, the average volatility of inflation in
by international standards, owing in part to the large weight of volatile items like food
and fuel in consumer price index baskets.
This suggests that the central banks in the region need to further focus on reducing
both the volatility and the average level of inflation, the latter also remaining high by
global standards. Such an approach is likely to prove beneficial to long-term growth:
in the IMF report cited earlier, the authors estimate that a durable reduction in inflation
can increase the expected length of a 'growth spell' by up to 5.5 years. Intuitively, one
can understand how a greater anchoring of price expectations can reduce
uncertainties for decision-makers and savers alike, how it can reduce the risk premium
required by investors in both financial assets and the real economy, how it can help
develop financial instruments available for development, and how it can lead to more
stable employer-labour relations.
Looking at the South African experience
Can anything be learnt from the South African experience in that respect? Some of
-
the constraints I reflected on earlier of poor spatial development, inadequate
-
infrastructure provision, and barriers to entry for emerging entrepreneurs have
presented major challenges for South Africa and its major metropolitan areas. In fact,
in addition to the 'normal' issues faced by an emerging economy, our country has also
had to deal with the legacies of the apartheid system which had, for decades, and for
contributed to raising these constraints. South Africa's
political reasons, post-1994
democratically elected government thus had to place particular emphasis on the
alleviation of spatial and infrastructure constraints in the previously disadvantaged
areas.
South Africa has registered tangible progress in many areas, including electrification,
water and sanitation, mobile telephony or Internet access, health and literacy
improvement. To give a few examples, the share of households with access to
electricity rose from 64% in 1984 to 84% by 2016. Similarly, between 2000 and 2016,
cell phone subscriptions jumped from 18 to 147 per 100 people.
-
However, progress in these development indicators has slowed and in some cases
-
stalled over the past decade, as a structural slowdown in economic growth has
undermined private investment in future productive capacities and has reduced
(together with a sub-optimal allocation of resources) fiscal space for the roll-out of
better infrastructure, education and health facilities. One cannot deny that recent
economic growth in South Africa, which averaged only 1.5% over the past five years,
country's
is far too low to deal with the long-lasting problems of high unemployment,
poverty and inequality.
The answer to these growth challenges often lies in structural, long-term policy
approaches. Clearly, many of these are outside the remit of monetary policy.
Nonetheless, for the past few decades, the South African Reserve Bank (SARB) has
strived to ensure a more stable monetary and financial environment, so as to facilitate
the attainment of longer-term growth and development goals.
Following decades of high and volatile inflation, the adoption in the early 2000s of a 3-
6% inflation target has allowed, first, the sustained decline of consumer price gains
into single-digit territory, and then, over time, increased compliance with price stability
goals. Inflation expectations have also become better anchored over the years, albeit
at levels that are still uncomfortably close to the upper end of the target range.
Over time, not just inflation but also economic growth and, importantly, policy rates as
set by the SARB have become less volatile, while greater transparency of monetary-
- SARB's
policy decisions including, in recent times, the publication of the
-
macroeconomic projections has increased policy predictability. A more stable
monetary environment has also contributed to the soundness of the banking system,
the liquidity of financial markets, and the ability of government to lengthen the maturity
of its liabilities.
Conclusions
To conclude, let me say that the challenges being faced by the continent, and in
- and that policy answers cannot be deferred. Africa's
particular by its cities, are real
population is growing, and within the next few decades, a growing share of that
population will be migrating towards its already-large urban areas. Infrastructure,
education and network development needs will continue to grow.
The answer to these inevitable challenges does not just lie in betting on a strong global
Africa's
environment, even if increased integration into the world economy will bring
benefits. The answer also lies in an appropriate policy environment underpinned by
strong political will. And, perhaps more than ever, sound fiscal and monetary policies
form a crucial part of that framework.
Thank you.