ADB predicts Nigeria, Africa’s downturn to last 3 years

The head of the African Development Bank, Nigeria’s Akinwumi Adesina, says the continent’s economic downturn could last as long as another three years and urges governments in the region to boost tax revenue and steer clear of international borrowing as the region grapples with its worst economic slump in more than a decade.

Only yesterday, BusinessDay authoritatively reported that Nigeria’s Q2 GDP will be worse than expected, showing that the economy shrank by a massive 2% confirming that Africa’s once largest economy is indeed facing her  first recession in more than two decades.

Adesina told the Financial Times that he expected the downturn in Africa, which was triggered by the slump in commodity prices and the slowdown in China, to last for up to another three years.

Africa was facing a debt “challenge” rather than crisis, he said, but warned that “there has to be a lot more fiscal consolidation.”

During the commodities boom, Africa was home to many of the world’s fastest expanding economies. But growth in resource-dependent nations has stalled with Nigeria, Africa’s top oil producer and most populous country, sliding into its first recession in more than two decades.

The International Monetary Fund (IMF) forecasts that sub-Saharan Africa’s gross domestic product will grow at 1.6 per cent this year, a sharp decline from 3.5 per cent in 2015, and well below the average of 5-7 per cent over the past decade.

Many nations are struggling with dwindling revenues, rising debt and wide budget deficits in the low growth environment after taking on foreign debt during the boom years.
Zambia, Ghana and Mozambique were among a raft of African states that took advantage of low global interest rates and high commodity prices to issue billions of dollars of debt as international investors hunted for yield.

African governments sold $12bn of eurobonds last year, compared with about $26.5bn between 2006 and 2014, according to the African Development Bank. The weakness of many African currencies has meant debt service costs have soared in local currency terms, while several commodity producers are battling foreign currency shortages.

Adesina, who took over as the bank’s president in September last year, said that expanding the tax base and improving the efficiency of tax administration would be the easiest ways to boost public finances.

He said the tax-to-GDP ratio in sub-Saharan Africa was about 14.5 per cent, compared with more than 30 per cent for most developed nations.

“So a lot more needs to be done to expand the tax base in Africa. Today it’s about $500bn a year [for the region], which is much better than it used to be, but we need to expand that.”

The former Nigerian minister of agriculture and rural development said not only was it risky for governments to borrow overseas because many African currencies are weakening and the US Federal Reserve appears set to raise interest rates again this year, but also unnecessary.

“Instead of African countries running off to raise a lot of eurobonds, I think there’s huge amounts of capital available more locally that we must tap for Africa’s development,” he said.
He added that borrowing should only be undertaken to finance projects that enhance economic growth.

Adesina said African pension funds had a pool of $334bn, sovereign wealth funds $164bn and there was some $56bn of foreign direct investment looking for bankable projects.

However, he acknowledged that “there’s a lot of work that needs to be done to unlock that capital,” particularly in improving legal and regulatory environments.

The African Development Bank — which has taken an increasingly prominent role in providing budget support to governments and financing infrastructure projects — intends to invest $12bn over the next five years in energy projects.

Power generation should be a priority for African governments, said Adesina.

“For me, without energy Africa is going nowhere,” he said. “You can’t have industries without energy and you can’t have growth without industries.”

Providing jobs for young people should be another urgent policy goal, Adesina warned, describing youth unemployment as the “number one problem for Africa today”.

The International Labour Organisation said last year that long-term youth unemployment in sub-Saharan Africa in 2014 was 48 per cent.

“Our growing population should be a positive if it’s well harnessed but it’s right now looking like a time bomb because of the high level of unemployment among the youth,”  Adesina said. “It could heighten social, political and economic fragility for the continent.

“Young people, the future of Africa are jumping on rickety boats to get to Europe just because the growth process has not been conducive to great jobs in Africa.”

From FT