For the third consecutive year, Africa achieved a positive and increasing current account surplus (from 2.3 per cent of GDP in 2005 to 3.6 per cent in 2006 – from $18.4 billion to $33.1 billion), thanks to higher commodity export revenue, especially from oil. Africa’s average balance of payments position largely reflects developments in resource-rich countries. With the exception of Sudan, all oil-exporting countries had current account surpluses, while only two non-oil economies (Morocco and Namibia) had current account surpluses. Namibia is a mineral-rich country and Morocco has a more diversified export sector as well as significant mineral wealth.
Also, workers’ remittances and tourism receipts are important in explaining current account surpluses in Morocco in recent years (Bank Al-Maghrib 2005). Eighteen of the 39 non-oil economies with adequate data experienced deterioration in the current account position in 2006, up from 11 economies in 2005.
Oil-exporting countries have recorded increasing trade surpluses, while their oilimporting counterparts experienced deepening trade deficits (figure 2.6). The trade surplus for oil exporters as a group more than doubled from 2002 to 2006 (from 16 per cent of GDP to 37 per cent) while oil importers as a group saw their trade deficit deteriorate from -4 per cent of GDP to -11 per cent of GDP. Deterioration of the trade deficit was even more pronounced for land-locked countries. The continuing rise in oil prices raises serious concerns about current account sustainability among oil importers and the associated effects on overall economic performance and macroeconomic stability.
Exchange rates and the impact of commodity booms In 2006, 35 African currencies appreciated against the US dollar, although the rates of appreciation remained moderate (less than 5 per cent). The Zambian kwacha continued to record the highest rate of appreciation (23 per cent) for the second year in a row because of the high copper price, and growing investor confidence, especially after the country’s qualification for debt relief (UNECA 2006b). Large volumes of speculative capital inflows targeting government securities have also played a significant role in the appreciation of the Zambian kwacha.
Exchange rate appreciation was also notable for the Sudanese dinar (12.5 per cent)
and the Angolan kwanza (8.5 per cent) owing to higher oil revenue and FDI flows.
On the other side, the Zimbabwean dollar had the largest depreciation (87 per cent)
followed by the Malawian kwacha (13 per cent). Zimbabwe and Malawi experienced a decline in exports and increased food imports because of slow recovery from the drought of 2005.
While exchange rates have been stable for most countries, high commodity dependence exposes African economies to terms-of-trade fluctuations and to extreme exchange rate volatility. The majority of African counties are dependent on oil and minerals and on a limited range of agricultural commodities such as tea, coffee and cocoa. Thus, fluctuations in commodity markets have a significant impact on the exchange rates in these countries.
The case of South Africa provides a clear illustration of the close relationship between commodity (gold) price and the real effective exchange rate (REER) (figure 2.7).
Indeed, evidence confirms that variations in the gold price are a major determinant of changes in the REER of the rand (Stokke 2006). The effects of gold price fluctuation have compounded the effects of other factors, namely trade policy, short-and long-term capital flows, and productivity growth (Aron et al. 2000).
Many African countries have accumulated substantial foreign currency reserves in recent years, mostly from higher oil revenues and aid inflows. For example, Algeria had total reserves, excluding gold, of $66.1 billion (the equivalent of 32 months of imports) in 2006 compared to $56.3 billion (34.5 months of imports) in 2005, while Morocco had $17.7 billion (10.1 months of imports) in 2006 and $16.2 billion (10.3 months of imports) in 2005.
Accumulation of reserves is motivated by the desire to hedge against external shocks.
However, excessive foreign exchange reserve hoarding takes away resources that would otherwise be used to boost domestic economic activity. A better approach is to adopt a comprehensive strategy for prudential regulation and capital controls that can minimize exchange risks while allowing the country to benefit from increased export revenue and FDI inflows. The types of controls to implement should be country-specific (Pollin et al. 2006). Interventions will have to rely on a set of indicators for early warning signals that monitor movements in foreign exchange, the exchange rate, the structure of external debt, and other financial risk indicators. The ultimate goal is to allow African countries to utilize these resources to increase private and public investment so as to accelerate growth.
External debt remains high and private capital flows insufficient The hope that Africa’s external debt would be significantly reduced under the HIPC Initiative and that economic reforms would stimulate private capital inflows has been very slow to materialize. Africa’s total external debt stock stood at $244 billion in 2006 compared with $289 billion in 2005 (IMF 2006b). Although the debt stock declined considerably relative to GDP (from 35.9 per cent in 2005 to 26.2 per cent in 2006), total debt service obligations remained almost unchanged (4.2 per cent of GDP in 2005 and 4.1 per cent in 2006) because of higher interest rates. The debt burden seriously constrains spending on public investment and ultimately retards growth and employment generation.
The continent has benefited from substantial inflows of external financing in the form of ODA (including debt relief ), which should boost economic growth in the coming years. The MDRI announced at the G-8 summit in Gleneagles in 2005 provided much needed relief for 13 SSA countries. However, it is clear that this debt-relief package is not enough and that more external funding will be needed to help African countries increase growth rates and achieve meaningful reduction in poverty.
Increased external flows are particularly important in view of the fact that both gross domestic savings (GDS) and gross domestic investment (GDI) rates in Africa are still low (table 2.4). In fact they were lower in 1998-2006 (19.7 and 20.2 per cent of GDP, respectively) than in the 1974-1985 pre-reform era, (24.5 and 25.4 per cent of GDP, respectively). Most importantly, actual GDI remains far below the level (34.2 per cent of GDP) considered necessary for Africa to half poverty by 2015 (UNECA 1999). The low level and poor quality of investment contribute to the inability of most African countries to achieve and sustain high growth rates over the medium term (Berthelemy and Soderling 2001).
To learn more about this author, visit United Nations Economic Commission for Africa's Website.
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