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2.2 Sectoral performance IV: Economic Report on Africa 2007

Guest post by: United Nations Economic Commission for Africa

Article Overview: The services sector

2.2 Sectoral performance IV: Economic Report on Africa 2007

The services sector

The share of the services sector in Africa’s GDP in 2004 amounted to 49.0 per cent,
a slight decline on the previous year (table 2.7). The two potential drivers of growth
in the service sector are tourism and financial services, and these components are
discussed below.

The financial sector

While the financial sector is generally considered an important factor for growth, its
performance in the case of African countries has been less than satisfactory. Financial
systems remain largely underdeveloped both in terms of the size and range of financial
instruments and services offered. Most countries still do not have a functioning
capital market. Even where capital markets exist, they are very shallow and illiquid
(Ndikumana 2003). Except for South Africa, African capital markets are mainly
limited to equity markets with an underdeveloped bond market and virtually no
futures markets.

Despite the series of financial sector reforms that the countries have undertaken
since the 1980s, financial systems still exhibit substantial degrees of inefficiencies in
their functions of savings mobilization and allocations of resources into productive
activities (Senbet and Otchere 2006). It is worth noting that financial sector reforms
have resulted in a gradual move towards market-based interest rate determination
and curtailment of the government’s presence in the financial sector through privatization
of government-owned banks. While these are welcome developments, there
are many important challenges that African countries need to address to make the
financial sector a real engine of growth and employment creation.

One of the key manifestations of the inefficiency of financial systems in African
countries is the high interest rate spread, which is a symptom of lack of
competition and of inefficient management (resulting in high operating costs)
in the banking sector. In fact, contrary to expectations, interest rate spreads have
increased in the post-reform era (UNECA 2006b). Another important weakness
of financial systems in Africa is that credit allocation tends to be concentrated
into short-term and speculative activities. This is partly due to the lack of
stable long-term finance but also to the high risk aversion exhibited by banks.
The shortage of long-term lending constitutes an important constraint to private
investment expansion.

It is clear that African countries need to find ways of increasing access to finance
especially for the purpose of long-term investment for accelerated growth. This will
require achievement of higher levels of domestic savings mobilization and better
pooling of resources into long-term instruments. The development of a vibrant
bond market and creation and consolidation of long-term finance mechanisms such
as pension funds constitute key elements of a national strategy to deepen financial
systems in order to boost domestic investment and accelerate growth.

The tourism sector

Many developing countries now regard tourism as an important and integral part
of their economic development strategies. It is estimated that 808 million tourists
traveled world-wide in 2004 and generated about $682 billion. Africa received 41.3
million tourist arrivals, which represent only 5.1 per cent of global tourist trips. In
terms of receipts, Africa received 3.6 per cent (or $25.2 billion) of the $682 billion
world tourist receipts. Within Africa, the North Africa subregion registered the
highest market share of tourism activity on the continent in 2004 (38.2 per cent),
followed in descending order by Southern Africa (27.5 per cent), East Africa (22.7
per cent), West Africa (9.4 per cent) and Central Africa (2.2 per cent) (see tables
A2.3, A2.4 and A2.5).

In 2006, the top four countries in terms of tourism receipts are South Africa ($6.3
billion), Egypt ($6.1 billion), Morocco ($3.9 billion), and Tunisia ($1.9 billion).
The seven major destination countries with over a million arrivals in 2004 were
Egypt (7.7 million), South Africa (6.8 million), Tunisia (5.9 million), Morocco (5.4
million), Zimbabwe (1.8 million), Algeria (1.2 million) and Kenya (1.1 million).
Despite tourism’s growing importance as a source of foreign exchange earnings for
African countries, the industry remains underdeveloped mostly because of poor
tourism infrastructure (or weak capacity for accommodation), inadequate information
and marketing (measured by internet use) and high health risks (such as
malaria). Political and social instability also constitute major deterrents to tourism
in some African countries. In addition, the insufficiency of air transport between
Africa and the rest of the world and between African countries themselves continues to be a crucial constraint to tourism. Another key challenge faced is the negative
image of Africa portrayed by the media, often on the basis of exaggerated facts and
plain ignorance.

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Article Tags: Africa, Africa, African countries, capital market, financial instruments, financial sector, financial services, financial systems, interest rate, South Africa, South Africa, the financial sector



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