APRIL 2011 | VOLUME 3 62865 An analysis of issues shaping Africa’s economic future u GDP growth in Sub-Saharan Africa is back on track u Rising commodity prices u Exports rebound but remain highly concentrated in one or two commodities AFRICA’S PULSE TEAM: Punam Chuhan-Pole (Team Leader), Vijdan Korman, Manka Angwafo & Mapi Buitano With contributions from AFTSN, AFTSP, ARD & DECPG This document was produced by the Office of the Chief Economist for the Africa region Summary u The global economic recovery is continuing, led by robust domestic demand in developing countries. But global prospects are exposed to numerous risks. u African countries are back on a path of strong growth, with the region’s GDP projected to expand by 5.3 percent in 2011—above the pre-crisis trend rate. u The upward trend in energy and non-energy commodity prices has imparted a net favorable terms of trade shock to many African countries, but the situation could change if oil prices ratchet up sharply. u Rising food and fuel prices are fueling inflation pressures, putting more people at risk of hunger and presenting a challenge to macroeconomic management. u High food prices and volatility are likely to persist. u Exports are rising, but African economies continue to rely heavily on commodity exports. I. Recent global economic trends and prospects u Emerging capacity constraints and a tightening of macroeconomic policies are expected to slow developing country growth to 6 percent in 2011 from 7 percent in 2010. u After rebounding sharply in 2010, GDP growth in Sub-Saharan Africa is expected to further strengthen in 2011 and 2012. GLOBAL OUTLOOK Led by strong domestic demand in developing countries, real global GDP is estimated to have expanded by 3.9 percent in 2010. Supported by countercyclical measures, resurgence in international trade, increased financial flows, and higher commodity prices, developing countries grew by 7 percent in 2010, outperforming high income countries—which grew at 2.8 percent. The recovery in the United States and the Euro Area FIGURE 1 Growth rates by region In % has strengthened, but economies remain characterized Global GDP is 10 by high unemployment and spare capacity, especially expected to slow 9 down in 2011. in the construction sectors. Ongoing fiscal and 8 Sub-Saharan household consolidation will continue to serve as a 7 Africa’s growth 6 drag on growth in many high-income economies. rates will continue 5 For developing countries, growth is projected to to rise. 4 slow due to emerging capacity constraints and a 3 tightening of macro policy. Hence, global GDP is 2 expected to slow down to 3.3 percent in 2011 before 1 picking up to 3.6 percent in 2012 as the drag on 0 East Asia Europe and Latin America Middle East and South Asia Sub-Saharan Central Asia North Africa Africa activity from restructuring in high-income countries 2010 2011 2012e eases somewhat, and productive capacity is added Source: Development Prospects Group, World Bank in developing countries. Indeed, GDP growth in low- 2 > A F R I C A’ S P U L S E and middle-income countries is projected to fall from 7 percent in 2010 to 6 percent in 2011, before picking up to 6.1 percent in 2012. Global prospects, however, continue to be exposed to a number of important risks, a confluence of which could dent the economic recovery. First, the dramatic political changes that have swept parts of the Middle East and North Africa will likely have limited direct effects on global growth, given the small size of the economies affected thus far. But if the crisis-related increase in oil prices is sustained, it could shave between 0.2 to 0.4 percent from global growth. Contagion to a major oil producer could be much more serious. Second, the March earthquake and tsunami in Japan have impeded the country’s economic growth in the very short term, and supply-chain disruptions could have an impact on partner countries. But the global impacts are likely to be transitory, and the country’s GDP growth is expected to pick up as reconstruction efforts move forward. Third, the sovereign debt issue in Europe remains unresolved, and concerns persist over whether countries with high debt ratios will be able to undertake fiscal tightening and needed structural reforms. And finally, debt concerns and uptick in inflation (fueled by food and fuel prices) are pushing up interest rates in high- income countries, which will be a negative for growth in both high-income and developing countries. OUTLOOK FOR SUB-SAHARAN AFRICA Growth in Sub-Saharan Africa rebounded sharply in 2010, supported by both the global recovery and developments on the domestic front: output is estimated to have expanded by 4.7 percent in 2010—up from the 1.7 percent in 2009—just shy of its 5 percent pre-crisis (2000-2008) average growth. Slower growth in the region’s largest economy, South Africa (2.8 percent), dragged down overall regional growth in 2010. Excluding South Africa, GDP growth in Sub-Saharan Africa for 2010 is estimated at 5.8 percent, up from 3.8 percent in 2009, and above its pre-crisis average growth of 5.6 percent. Continuation of the global recovery and strengthening domestic demand—particularly in South Africa—are Africa’s growth rate to FIGURE 2 expected to boost Sub-Saharan Africa’s economic rebound to pre-crisis average in 2011 GDP is performance in 2011 and 2012 with GDP growth 8 projected to projected at 5.3 percent and 5.5 percent, respectively. 7 Projection grow by 5.3 6 percent in 2011. Excluding South Africa, growth is expected to reach 6.4 5 Excluding South percent in 2011 before settling at a 6.2 percent in 2012, 4 Africa, growth placing Sub-Saharan Africa (excluding South Africa) 3 is expected 2 SSA ex. South Africa SSA to reach 6.4 among the fastest growing developing regions. 1 percent. 0 The economic recovery in Africa is broad-based, albeit 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 with variation in growth performance. Over a quarter Source: Development Prospects Group, World Bank (28 percent) of countries in the region achieved growth rates above 6 percent, with several countries rivaling growth rates in fast growing developing countries such as China, India and Brazil. Overall, 60 percent of countries in the region achieved growth rates of above 4 percent in 2010, and in only about 5 percent of economies were growth rates below 2 percent. Oil exporters grew by 5.9 percent, thanks to the sharp rebound in oil prices in 2010. Metal and mineral exporters also experienced strong growth rates (6.5 percent), propelled by a rise in prices of these commodities. Even among predominantly agricultural exporters, excluding fragile countries, growth rates were well above 5 percent. However, in countries where conflicts flared up, economic activity was dampened, keeping growth rates much lower than the regional average. A F R I C A’ S P U L S E > 3 FIGURE 3, 4 Fast growing countries in 2010 More than No. of Congo, Republic countries China a quarter of 16 India African countries Ethiopia 14 Botswana achieved growth Mozambique 12 Nigeria rates of 6 percent 10 Brazil and more in Tanzania 8 Malawi 2011. Ghana 6 Rwanda 4 Zambia Uganda 2 Seychelles Real GDP Russia growth (%) 0 Growth < 2% Growth 2-4% Growth 4-6% Growth 6-8% Growth >8% 0 2 4 6 8 10 12 SSA Oil Exporters SSA Oil Importers Source: Development Prospects Group, World Bank On a sub-regional basis, the strongest growth was FIGURE 5 Growth rates by export category recorded in West Africa (6.5 percent), led by Nigeria’s Growth In % robust growth performance. This was followed 9 was broad- 8 closely by East Africa (6.4 percent), with solid growth based, led by resource-rich 7 performances in Ethiopia, Rwanda and Tanzania posting countries, with 6 solid growth performance—the latter two economies agricultural 5 benefitted from increased regional integration efforts exporting 4 among members of the East African Community. countries not 3 far behind. 2 Though the Republic of Congo was the fastest growing 2003 2004 2005 2006 2007 2008 2009 2010 economy in Sub-Saharan Africa in 2010, thanks to new Source: Development Prospects Group, World Bank oil that came on stream in 2010, its performance was in contrast to that of other countries in the Central African region. Overall, growth in Central Africa was estimated at 4.9 percent. Slower growth in Angola and relatively low growth in South Africa pulled the sub-regional growth in Southern Africa to under 3 percent. FACTORS DRIVING THE REGION’S PERFORMANCE Economic performance in Africa was spurred by a recovery in exports and strong domestic demand. The rebound in the global economy revived exports, providing an impetus to growth in 2010. Export values, which had fallen to some 51 percent of their pre-crisis August 2008 levels by January 2009, had almost fully recovered by November 2010, reaching 93 percent of that level and still rising. Much of this increase was due to a rise in commodity prices. With respect to terms of terms of trade changes, the biggest gainers were metal, mineral and oil exporters (the Republic of Congo, Mauritania, Gabon, Angola, and Zambia). Some exporters of industrial agricultural raw materials such as cotton (e.g., Benin and Mali) were also big winners. Compared to a year earlier, the terms of trade changes in both January and February 2011 continued to favor exporters of oil, metals and minerals, and industrial agricultural products such as cotton. Notwithstanding the increase in export revenues, net exports were negative in 2010. The recovery in the global economy also revived foreign direct investment to Sub-Saharan Africa. Foreign direct investment flows to the region increased by 6 percent to $32 billion in 2010, just shy of the pre-crisis peak of $34 billion in 2008. This favorable trend is expected to continue: The World Bank forecasts foreign direct investment flows to the region to reach a record $40.8 billion in 2011. Though much of the value of foreign direct investment flows to the region goes to the extractive industry sector, the non-extractive industry sector is attracting the most number of projects. 4 > A F R I C A’ S P U L S E Much of the 2010 growth increase in Sub-Saharan Africa came from improved domestic demand conditions, which contributed 5.4 percentage points to GDP growth. The strength of domestic demand is observed in a number of sectors. For instance, the demand for telecommunications services, which has been strong over the past few years, continued the trend increase in 2010. In Ghana, mobile penetration increased from 63.6 percent to 68.4 percent between January and August of last year. Similarly in Nigeria, GSM mobile operators added 8.5 million new lines over the same period. The dynamism in the sector is also promoting investment spending. In June 2010, Bharti Airtel, an Indian company, completed the acquisition of Zain’s mobile operations in Africa for $10.7 billion, one of the largest global acquisitions of the year. Several countries, including the Republic of Congo, Ghana, Liberia, Malawi, and Mozambique, provided licenses in 2010 to new entrants to the telecommunications sector, increasing domestic competition in this sector. Government spending, particularly on sorely needed infrastructure, is also driving growth in a number of African countries. Some of countries are raising funds both internally and externally. For example, Kenya auctioned an infrastructure bond worth 31.6 billion shillings in August 2010 and the country is likely to increase borrowing in 2011. In January 2011, Nigeria successfully raised $500 million through the issuance of its Terms of trade changes as a share of GDP (%) FIGURE 6, 7 first-ever bond on international Congo, Rep. Mauritania capital markets. Other African Gabon Angola Zambia Nigeria countries such as Tanzania, Benin Mali Guinea Cote d'Ivoire Uganda, and Zambia have Mozambique Sudan Chad expressed interest in raising Cameroon Burkina Faso Uganda Guinea-Bissau funds in global capital markets Tanzania, United Rep. Ghana Swaziland Niger as well. South Africa Zimbabwe Central African Republic Togo Burundi The agriculture sector, the Gambia, The Ethiopia Botswana Rwanda largest employer in many African Senegal Malawi Mauritius Namibia economies, and the sector Madagascar Eritrea Lesotho with the greatest potential for Comoros Sierra Leone Cape Verde Kenya poverty reduction, also provided Seychelles -10 -5 0 5 10 15 20 support to growth in several countries in 2010. Favorable Annualized monthly terms of trade changes in 2011, as a share of GDP (%) weather conditions for Eastern Sudan Madagascar and Southern Africa, coupled Lesotho Kenya with government farm support- Guinea-Bissau Gambia, The programs in some countries (e.g. Mauritania Burkina Faso Malawi), contributed to good Cameroon harvest and overall economic Ethiopia Eritrea output in 2010. Indeed, even Cape Verde Feb 2011 Jan 2011 Comoros amidst the global food price Mali Zambia surge in 2010, good harvests Nigeria moderated food price increases Cote d'Ivoire Botswana in the region for much of the Benin Angola year. However, in recent months Gabon Congo, Rep. spikes in food prices have begun -1 0 1 2 3 4 5(%) showing through higher headline Source: Development Prospects Group, World Bank inflation figures. A F R I C A’ S P U L S E > 5 RISKS TO ECONOMIC PROSPECTS Rising food and fuel prices present a risk to macroeconomic stability. Global food prices, which have risen some 39 percent (World Bank’s food price index) year-on-year in March 2011, are beginning to impact domestic food prices in Africa. Global prices (year on year in March 2011) were up by 83 percent for maize, 66 percent for wheat, 72 percent for Sorghum and 42 percent for palm oil. But for most African countries the food price increases were moderate for much of 2010, and in a few countries prices actually declined, thanks to favorable harvests, the local nature of food markets in many countries in the region, and the availability of alternate staples (e.g. cassava) that can substitute for higher-priced internationally-traded food. Nonetheless, since November 2010 there has been an up tick in the headline consumer price inflation levels with increases in prices of the food basket helping to drive this increase. Higher oil prices—as of March 2011, crude oil prices had risen by 37 percent compared to a year ago—are adding to inflationary pressure as well. The median inflation rate for African countries rose to 4.5 percent in December 2010 from a 10-year low of 3.1 percent in August 2010, though it remains below the ten year (2000-2010) median of 5.4 percent. The distribution differs across the region. For example, the increase in food and fuel prices pushed the inflation rate in Kenya to nearly 10 percent in March 2011, double the end-2010 level. In Ghana, price pressures resumed in early 2011, pushing inflation to 9.2 percent in February (from 8.6 percent year-on-year in December 2010), as petroleum prices were increased by 30 percent to reflect global price increases and imported food prices also rose. In Cape Verde, average yearly inflation is expected to double to around 4.4 percent in 2011. Using the latest available information, some 24 percent of countries in the region have inflation rates ranging between 5 and 10 percent and another 25 percent are experiencing inflation levels above 10 percent, including Ethiopia, Nigeria, Sierra Leone, Guinea, and Mozambique. Only about thirteen countries are projected to have inflation rates below 5 percent in 2011, down from twenty four in 2010.1 The persistence of food price increases could have deleterious consequences, including a deterioration of the current and fiscal account balances of net food importing countries in the region, as well as higher levels of poverty and malnutrition, with the possibility of unrest in some countries—all of which will have implications for growth prospects in the region. If current forecasts of drought conditions in parts of Southern and Eastern Africa are realized, this will serve to cut back on agriculture output and accentuate the rise in food prices. In some countries the impact of the drought could go beyond their effect on food prices and potentially affect hydroelectric generation, exacerbating power supply constraints. Sharply higher oil prices present another risk to macroeconomic stability. If elevated prices are to persist through 2011, net oil exporters would see extra revenues generated in their external and fiscal accounts. For example, oil-dependent economies such as Angola and the Republic Congo, where the oil sector accounts for over 90 percent of exports and over 60 percent of GDP, would see an improvement in their current account balance of some 7 percent of their GDP. On the other hand, large resource revenue inflows could discourage diversification of these economies—i.e., “Dutch Disease”— and these revenues need to be appropriately managed. The downside risks to oil importers in the region are much greater. With countries facing an increased oil import bill, and given that oil imports are about 18 percent of the total merchandise imports of Sub Saharan Africa oil importers, there could be a deterioration of the current account to GDP ratio by about 0.5 percent (excluding South Africa), if the February level of prices are sustained. The fiscal balances could also deteriorate if governments provide petroleum subsidies. Depending on the exchange rate regime, depreciation of the nominal exchange rate could result, thereby bringing a further bout of inflationary pressures. Further, higher prices which are an important input to production, could trigger higher inflation levels through cost-push effects. Higher inflation levels are also likely to prompt monetary tightening, which could 1 Country Reports, Economic Intelligence Unit 6 > A F R I C A’ S P U L S E limit credit expansion and economic activity. For instance, Kenya’s BOX 1 Central Bank raised its key interest rate by 25 basis points in March, Potential impact of recent events on the first rise since June 2008, on account of rising inflation and the Africa’s growth prospects depreciation of the shilling to a six-and-half year low. According to Japan earthquake and tsunami World Bank estimates, if the current high oil prices were to go even The very short-term economic effects of the massive earthquake higher, increasing by an additional $50/bbl this could shave 0.3 to and tsunami that struck Japan this March are not yet known. The main channels through which the economic effects would be 1 percentage points of GDP growth in Africa. translated are trade, private cross-border flows and aid. The effect through the trade channel is not likely to derail growth prospects The focus of policies should be on maintaining macroeconomic of the region. Japan’s share of African countries’ exports has been stability and protecting the most vulnerable from food price declining in recent years: from about 6.5 percent in 2003 to 3.6 shocks. Many countries implemented countercyclical measures percent in 2009. However, for individual countries this share differs widely, with South Africa having the highest share (9% in 2009). in the wake of the financial crisis, but this time around some Besides the low overall share, much of the exports to Japan are countries might have relatively less fiscal space to undertake for mineral fuels and minerals, which are in high demand globally. additional expenditures to ameliorate the effects of commodity Hence the impact on African countries is likely to be minimal. Using a worst case scenario, where, the growth in import demand from price increases. Prudent management of fiscal deficits will be Japan drops by some 30 percent, we estimate that this will shave off needed. Monetary policy will need to be vigilant to commodity only 0.2 percent from GDP growth in South Africa and 0.1 percent of prices feeding into wage pressures and inflationary expectations. GDP growth for the region. In addition, countries will also need to continue to undertake A second channel through which African countries could potentially be affected is through aid inflows. Japan remains a major bilateral measures to enhance competitiveness. donor to the region: between 2007-2009 Japan disbursed an average of $1.42 billion in aid a year to Africa. The share of this aid National elections are scheduled in at least a third of Sub-Saharan in GDP is significant for some countries, and a scaling back of aid African countries over the next two years. Though there has been disbursements could be a concern for these countries. an increase in the smooth transition of power in many countries in Political turmoil in the Middle East and North Africa region the region, there still remain a number of instances where political The recent turmoil in the Middle East and North Africa has not developments leading to the elections and in its aftermath have yet had a significant impact on Sub-Saharan Africa. Other than energy prices, there are several channels through which African been a deterrent to economic activity. For instance, growth countries could potentially be affected by events to their North. One prospects in Madagascar, Comoros, Côte d’Ivoire and Guinea were important channel is banking and finance. Financial links between severely dented by political unrests in 2010. Hence the evolution of the two regions have been growing in recent years, forged through the political cycle over the forecast horizon will be consequential the expanding operations of regional banks, sovereign wealth funds, and Islamic finance. Another important channel is remittances. As to individual country growth outcomes. African migrants are forced to flee the more severely affected Middle East and North African countries, a disruption of the remittance Political disruptions can spillover to neighboring countries as flows is very likely although exact data are not available. The data well. A case in point is Côte d’ Ivoire, where the UN estimates that we do have show that the 6 Gulf Cooperation Council (GCC) that around 150,000 Ivorian refugees have sought safe havens countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates—account for an estimated 9 percent of the $21 in border communities of Ghana, Liberia and Guinea, increasing billion in remittance flows to Sub-Saharan Africa, much lower than demand for food, access to clean water and basic health services. the estimated 27 percent of remittances to North Africa. Trade is not The provision of food, shelter and public services to these groups expected to be a significant channel as only 2-4 percent of African exports go to the Middle East and North Africa region, with UAE, is an additional pressure on governments, particularly in Liberia Saudi Arabia and Algeria accounting for 70 percent of these exports. and Guinea, as both countries are still recovering from crisis. The interruption of economic activity in Côte d’Ivoire also has direct implications through other channels such as trade and remittances. For example, remittance inflows to Togo could experience a modest decline, as remittances from Côte d’Ivoire represent 7 percent of the total.2 However, the suspension of economic activity in Côte d’Ivoire has led to an increase in port activity in Ghana and Togo, whose ports are now used by Ivorian traders. 2 World Bank staff estimates. A F R I C A’ S P U L S E > 7 II. Rising commodity prices u High and volatile global food prices are here to stay u Global food prices are beginning to impact African countries, although the pass through to domestic markets var- ies by region and staple u The surge in commodity prices is lifting Africa’s exports, but presents policy challenges FOOD PRICES 3 Global food prices have steadily risen since the second half of 2010. According to the World Bank’s Food Price Index, food prices rose by 39 percent from mid-2010 to March 2011. As in 2008, major grains have seen a sharp run-up in prices, albeit by different amounts. Wheat has posted the largest increase—66 percent for the year ending March 2011. Maize prices have risen by 83 percent. An exception is rice, which has decreased slightly by 2 percent, over the same period. Recently, rice prices have moved, but at a much slower pace than for other grains. FIGURE 8, 9 World commodity indexes (2000 – 2011) Global food 400 700 prices have Cocoa, cents/kg, current been on the 350 600 In current US$ (2000=100) Non-food agriculture Coffee, Arabica, cents/kg, current rise since the 300 Food 500 Cotton, A Index, cents/kg, current In current US$ second half Grains 250 400 Base Metals of 2010. 200 300 150 200 100 100 50 0 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2000Q1 2001Q2 2002Q3 2003Q4 2005Q1 2006Q2 2007Q3 2008Q4 2010Q1 Source: Development Data Group, World Bank Unlike 2008, the current increase in food prices is more broad-based. Thus, sugar and edible oils have also risen sharply, by 41 percent and 39 percent, respectively. The World Bank’s Agriculture Price Index was 11 percent above the 2008 peak. The increase in food prices is smaller when measured in major currencies other than the US dollar: commodity prices are denominated in US dollars, and the depreciation of the dollar against other currencies has meant higher prices denominated in dollars. Many factors are behind the upward trend in food prices. Some are transitory, but several are structural. Among temporary factors are weather-related supply shocks that affected wheat markets last year. Beginning in the middle-part of last year, global wheat production has been impacted by weather conditions (in Russia, EU, Canada, and Australia), which prompted export restrictions in Russia and Ukraine. Another potential short-term factor is the higher levels of financial investment in agricultural commodities—i.e., the financialization of commodity markets. Easy monetary policy in high- income countries is keeping interest rates extremely low and fueling yield-seeking flows to asset markets. These flows are impacting commodity markets as well. Rising fuel prices are also adding to the price of food, through higher fertilizer and transportation costs. 3 This section draws on various sources: USDA monthly reports on Grain: World Markets and Trade; Development Committee Paper on “Responding to global food price volatility and its impact on food security.” April 2010 and FAO: Food Price Monitor. 8 > A F R I C A’ S P U L S E Among more permanent factors is a structural shift in demand. BOX 2 One is the demand from emerging market countries for higher- Recent rise in food prices: Is this time different? protein foods, which has increased demand for animal feed and Differences with 2008 alternative use of scare land (e.g., grazing of animals). Two is u More agricultural commodities are seeing price increases than in 2008. For higher demand for biofuels, as an alternative to non-renewable example, in 2008 major grains such as maize, rice, and wheat were driving sources of energy. This has diverted production of land for crops price increases. Now, edible oils, sugar, and raw materials are also rising supporting biofuels as well as greater amount of some crops— u Weather-related impacts are more of a contributing factor now such as corn—for production of biofuels instead of food. Three, u Unlike 2008, policy responses are not exacerbating shortages. In 2008 supply has relied more on increase in acreage under production many countries attempted to protect local grain markets from international price pass through by adopting ad hoc trade policies and interventions— than on increases in productivity. Agriculture productivity reducing import tariffs, imposing exports bans, establishing quotas. There is has slowed down and in some cases even stagnated or fallen. far less of it this time around. Production acreage has increased to meet demand, but in some Similarities with 2008 cases land used is less productive. This has translated into u Higher oil prices are impacting agricultural commodity prices higher prices. u Depreciation of the US dollar in 2008 contributed to higher prices of commodities as it is now These structural trends are likely to endure in the near and u Financial investment in agricultural commodity markets medium term, keeping food prices high. Source: Development Committee Paper. “Responding to global food price volatility and its impact on food security.” April 2011. FOOD PRICES HAVE BECOME MORE VOLATILE Empirical evidence suggests that food prices have become more volatile in recent years. Grain price variability around its mean increased between 2006-2010 relative to that in 1991-2005: variability of maize, sorghum and wheat prices was nearly twice as high in 2006-2010 compared to 2001-2005 and that of rice was higher as well. However, a recent study finds that analyzing short-term trends may not yield the same results as analyzing longer term trends.4 The authors conclude that price volatility does not appear to have an upward or downward trend over the long term. In addition, periods of increased price volatility are followed by periods of declining volatility. Wheat, rice, and maize prices between 2007-2011 World food price volatility coefficient of variation FIGURE 10, (unadjusted by trend) TABLE 1 Wheat Rice Maize Sorghum 1000 Wheat Rice Maize 1983-90 14.2% 17.6% 20.7% 19.3% Current Prices ( $/mt) 800 600 1991-95 15.5% 15.6% 11.4% 12.0% 400 1996-00 29.3% 19.3% 28.8% 26.3% 200 0 2001-05 15.7% 18.4% 11.7% 11.6% 2006-10 30.0% 32.8% 24.4% 22.8% Source: Development Data Group, World Bank Several supply-side factors are contributing to the recent increase in food price volatility.5 Notable amongst these is the shift in source or supply countries. Changing geographical distribution of production from traditional (United States, 4 Oscar Calvo-Gonzalez, Rashmi Shankar and Riccardo Trezzi, (2010), “Are Commodity Prices More Volatile Now?” 5 Development Committee paper “Responding to global food price volatility and its impact on food security.” April 2011. A F R I C A’ S P U L S E > 9 EU-27, Brazil & Argentina) exporters to newer export FIGURE 11 Wheat exports to Africa (2003 – 2009) regions, such as the Black Sea region (Kazakhstan, Africa is 350 90% Russia and Ukraine), is injecting some variability in importing less 300 80% supply. Newer exporter regions have less stable supply, wheat from 250 70% as these regions do not have natural conditions, In '000 USD traditional 200 60% exporters: 150 50% technologies and management practices comparable to United States, 100 40% the traditional exporters. African countries have seen a EU-27, Brazil & 50 30% shift in supply sources for wheat: reliance on traditional Argentina; while 0 20% 2003 2004 2005 2006 2007 2008 2009 its share of wheat wheat exporters has dropped to under 70 percent from Share of total wheat exports to Sub-Saharan Africa from traditional exporters imports from Black sea: Russia, Ukraine & Kazakhstan nearly 90 percent during 2003-2009. Baltic countries is Source: UN Comtrade database increasing. Another important factor is weather variability. The number of adverse weather events—droughts, FIGURE 12 Number of reported occurrences of droughts, floods and extreme temperature—is on the increase floods & extreme temperature worldwide and in Sub-Saharan Africa. Variability of The average number of weather, possibly associated with climate change, is 250 weather- impacting both the global and local supply of grain. 200 World Africa related natural Weather-induced uncertainty on the supply side is 150 disasters has 100 increasingly a concern. These supply-side factors will more than doubled in the 50 likely keep agricultural commodity prices volatile in the past decade. 0 near term, suggesting that food price volatility is here 1960 1970 1980 1990 2000 2010 to stay. It is also important to note that volatility of local Source: www.emdat.be prices in many countries is greater than volatility in global markets. An upward trend in consumption has reduced the ability of existing food systems to cope with large short-term shocks. At the same time there are alternative demands for available land and water resources. Food price volatility has particularly adverse affects in low-income countries, impacting food security, farmer’s incomes and investment decisions. PASS THROUGH OF WORLD PRICE CHANGES TO LOCAL MARKETS IN AFRICA Even when international food prices are rising, local food prices may not mirror this. The recent world food price surges of 2008 and 2010 have reopened inquiry into the extent these pass through to domestic African food staple markets. Numerous factors can limit the speed and extent of measured pass through: high transport costs, successful national stabilization interventions, measurement issues where world price indicators are unrepresentative of the domestically traded commodity, sticky downward adjustments if a few traders dominate national imports of a commodity, and possible threshold effects with import levels determining policy regime adjustments. Empirical assessments, available mostly for east and southern African countries, uncover substantial heterogeneity on the extent of pass through across the main food import commodities and across countries. In one study that assessed 62 domestic price series for maize, rice and wheat in nine African countries, only 13 of the price series (4-8 years) showed a long-run relationship between domestic and world price for the same commodity.6 By commodity, price pass through is lowest for wheat; domestic rice price series across African countries more consistently reveal a statistical long-term relationship with world rice prices than is 6 Minot, Nicholas (2010). “Transmission of World Food Price Changes to African Markets and its Effect on Household Welfare”, January, paper prepared for a COMESA policy seminar. 10 > A F R I C A’ S P U L S E the case for maize. Focusing on maize trade over 2000- 2008 in Kenya, Uganda and Tanzania, a World Bank study Change in local retail prices FIGURE 13 for selected African countries concludes that only some consumption centers in these There is MAIZE considerable countries appear to be integrated with international maize heterogeneity markets and then only weakly and slowly.7 2.5 Jan 06 - June 08 in the pass 2 through of Trading patterns help explain these findings. Most 1.5 global prices June 08 - Dec 09 African countries are nearly self-sufficient in maize (with % change 1 to domestic Jan 10 - Dec 10 small and sporadic import need), while a significant markets by 0.5 portion of rice needs is usually imported. At the same commodity, 0 time, maize price formation in these countries is time period -0.5 and country. significantly impacted by changes in prices in other -1 DRC Malawi Zambia Kenya countries of East Africa. In particular the markets in Tanzania Ethiopia Nigeria World Kenya and Uganda are strongly integrated, while Tanzania is less integrated due to the use of export bans RICE and the larger distances between major producing areas 2.5 Jan 06 - June 08 (Southern Highlands) and consumer markets (Dar es 2 1.5 Salaam, Arusha and Nairobi), which raise transport costs. Jan 10 - Dec 10 % change 1 June 08 - Dec 09 Illustrative of country differences, the study by Minot 0.5 shows that Mozambique, Malawi and Ethiopia have 0 -0.5 a higher proportion (though still under 40%) of grain -1 staple domestic prices that are linked to world prices, -1.5 Benin Burkina Faso Cameroon Chad while Zambia, Uganda and Kenya had no statistically Madagascar Mali Senegal World related domestic and world prices. On threshold effects, intuition may be that price SORGHUM transmission would strengthen at higher levels of trade Jan 06 - June 08 2 flows. An exploration of maize imports to Zambia reveals just the opposite: price transmission was weakest when 1.5 8 imports were at their highest. This is because high imports 1 correspond to more acute domestic shortages when % change June 08 - Dec 09 Jan 10 - Dec 10 governments have stepped in to ensure imports and are 0.5 selling domestically at subsidized prices, squeezing out 0 private import activity; during periods of relatively low, unrestricted trade, Zambia (Lusaka) maize prices adjusted -0.5 quite quickly to world (South Africa) prices. -1 Benin Burkina Faso Chad Ethiopia Thus, the evidence suggests that world rice prices pass Mali Sudan World through most strongly to domestic African markets, wheat Source: Ratin.net/FAO: Giews database the least, with maize in between, and intermediated at the country level by policy stances and differences in land transport costs for imports. For maize, in particular white maize commonly consumed in Eastern and Southern Africa, regional developments often matter more than changes in world market prices. Examining the past decade we find, only in the rare case is the statistical relationship one of more than fifty percent pass through, even when allowing several months for adjustment. 7 World Bank (2009). EASTERN AFRICA: A STUDY OF THE REGIONAL MAIZE MARKET AND MARKETING COSTS, Report No. 49831, December 8 Myers, Robert J. and T. S. Jayne (2010). “Price Transmission under Multiple Regimes and Thresholds with an Application to Maize Markets in Southern Africa”, November. Gilbert, Christopher L. (2011). “Grains Price Pass-Through, 2005-09”, draft . A F R I C A’ S P U L S E > 11 As noted earlier, most African countries saw only a modest increase in food prices in 2010, in part due to favorable harvest. More recently, Eastern Africa is seeing an increase in main staple coarse grains driven by both local conditions— weak secondary harvests—and exposure of the region to high world price for maize. Cereal prices in West Africa are generally low and stable as are those in Southern Africa. FIGURE 14, 15 Maize: local prices and world prices (2006 – 2011) Rice: local prices and world prices (2006-2011) World rice prices 1800 1600 pass through 500 450 1400 most strongly to 400 1200 350 domestic African 1000 300 markets. 250 800 200 600 150 400 100 50 200 0 0 Nairobi : KE Kampala : UG Dar es salaam : TZ US - Gulf Kampala : UG Dar es salaam : TZ World Price Source: Ratin.net Dependency on food imports increases vulnerability to higher and more volatile global food prices. With limited fiscal space, macroeconomic vulnerabilities are exacerbated. West Africa, which has a higher share of cereal imports in food consumption, is likely to be more impacted by higher and more volatile global food prices. The share of food in household spending is nearly 50 percent in low-income countries, but with considerable variation across countries and income groups. The comparable share for middle-income countries is under 40 percent. A recent paper estimates the short-run poverty impact of the recent food price increase on developing countries. It finds that the spike in food prices between June and December 2010 increased the average poverty rate by 1.1 percentage points in low-income countries and 0.7 percentage points in middle-income countries.9 Overall, an additional 44 million people fell into extreme poverty (below $1.25 per day) in developing countries. For the seven African countries in the sample, the study finds that the largest impact was in Uganda and Malawi. In Uganda, higher prices of sugar, edible oils and FIGURE 16, 17 Food import to GDP ratio: change in averages Total imports (‘000 tonnes) in 2010 between 2000–2002 and 2007–2009 for select African countries Countries with high Guinea-Bissau 2500 dependency on Somalia 2000 Imports 2010 food imports are Zimbabwe Import requirement 2011 (estimate) 1500 more vulnerable Seychelles São Tomé & Principé to global food 1000 Mauritania price surges. Comoros 500 Dem. Rep. of the Congo 0 Mauritius Gambia Côte D'Ivoire Namibia 0 2 4 6 8 10 12 Source: UNCTAD Source: FAO/GIEWS database Note: For Mauritania, the 2011 import requirement is above 4 million tonnes. 9 Marco Ivanic, Will Martin and Hassan Zaman, 2011, “Estimating the short-run poverty impacts of the 2010-11 surge in food prices.” 12 > A F R I C A’ S P U L S E vegetables have pushed nearly 2 percent of the population—net Food price vulnerability FIGURE 18 buyers—into poverty and pulled Increasing food share in overall household expenditures For most low- 100 Mauritius income African nearly 0.8 percent of the population Congo 90 countries, out of poverty—as net sellers Net cereal imports as a share of cereal consumption Cape Verde 80 food makes up Gabon Botswana of maize benefited. In Malawi, Liberia between 40-60 Higher dependency on imports 70 Swaziland higher prices of wheat, sugar and Mauritania percent of total 60 Angola household oils pushed over 1 percent of the Namibia Senegal 50 expenditure, Lesotho Côte d'Ivoire population into poverty. while for middle- Gambia 40 Guinea-Bissau Cameroon Ghana income African Mozambique Appropriate measures to protect 30 Sudan Sierra Leone countries, DRC CAR Burundi Rwanda the most vulnerable from food price 20 Kenya Benin Guinea Zimbabwe food as a Nigeria Togo Madagascar percentage of shocks are needed. Social protection 10 South Africa Uganda Tanzania Niger Mali Zambia Ethiopia Burkina Faso total household systems vary by country priorities and Chad Malawi 0 10 15 20 25 30 35 40 45 50 55 60 65 70 expenditure is need. Findings from recent review Food Share of overall household expenditure (%) between 20-40 of several social safety net programs Middle income country percent. Low income country show that the scope and coverage Source: USDA/ FAOSTAT of these programs is too limited and that most interventions are fairly small BOX 3 in scale and designed as temporary Safety nets programs in Mali and Burkina Faso programs. Average spending for safety In Mali, about 27 percent of the population is food insecure and poverty incidence remains high at 47.5 percent nets is less than 1 percent of GDP and (in 2006). Empirical results show that a 25 percent increase in food prices—the average price of rice in the most of the financing comes from country increased by about 20 to 25 percent in 2008—led to an increase in poverty by 1.7 percent, equivalent to nearly 300,000 additional people falling into poverty. external and ad hoc resources. The most common programs are food- Existing social safety programs are not sufficient to constitute an appropriate response to poverty and vulnerability. In 2009, the government allocated 0.5 percent of GDP to social safety nets, below the average for based programs—subsidized food developing countries. sales, targeted food distributions, Food transfers are the main form of social safety nets in Mali. Free distribution of food rations and cereal banks nutrition programs, and school (subsidized sales of cereals to communities) are used to support poorer communities of the country. The feeding—and universal subsidies. effectiveness of these interventions remains largely unclear due to the lack of actual impact evaluation. However, lately a wave of large and Government food subsidies are expensive and regressive. The cost of the general food subsidy was about 27 percent of total social safety net spending in 2008. For 2008, the cost of this general subsidy was close to half small cash transfer programs have (48 percent) of all government-financed social safety nets. swept the continent. In Burkina Faso, about 20 percent of the population is food insecure and lives permanently in chronic poverty. In 2008, over 40 percent of the population lived under the poverty line. Burkina Faso has cash and near-cash transfers, food transfers, universal food and fuel subsidies and labor intensive public works and cash/food for COMMODITY PRICE work programs. SURGE AND EXPORTS Excluding universal subsidies for food and fuel, total spending on social safety net programs over 2005-09 period averaged about 0.6 percent of GDP. Food transfers are the main form of social safety net programs African countries mostly export in Burkina Faso, accounting for 69 percent of total social safety net programs spending and over 80 percent of all estimated social safety net programs beneficiaries in 2009. Four types of food transfers are currently in commodities and raw material such place: (i) targeted subsidized food sales, (ii) targeted free food distributions, (iii) nutrition programs, and (iv) as crude oil, food commodities, school feeding programs. industrial agricultural commodities, metals and minerals. Manufactured goods account for only one-third of the region’s total exports, and this share has barely changed over the last decade and a half. The recent surge in commodities—petroleum (37 percent year on year), metals (25 percent), coffee (77 percent) and cotton (150 percent)—is boosting export earnings. While the region benefits from such price booms, it also makes it’s economies quite vulnerable to global economic conditions and resulting price shocks. This vulnerability was observed in the aftermath of the global economic crisis. A F R I C A’ S P U L S E > 13 FIGURE 19, African merchandise exports TABLE 2 Percent Annual Change (%) 400 Period Volumn Value Value of exports 350 nearly tripled 300 1981-1990 -0.5 -1.2 $US in millions during the 250 1991-1995 2.6 2.3 commodity price 200 1995-2000 5.8 4.0 boom (2003 - 150 100 2000-2003 3.7 7.6 2008). 50 1992-2002 4.9 3.6 0 2003-2008 5.3 21.3 2009 -1.6 -24.5 Exports (US$ constant) Exports (US$ current) 2010 9.0 19.6 Source: Development Prospects Group, World Bank The last commodity boom and bust (2003-2008) affected FIGURE 20 Composition of African exports oil exporting and other African countries in similar ways. (In percent of total) Manufactured Each group’s exports of goods and services tripled (in goods account 1996 -99 average 2006 - 09 average US$72 billion US$254 billion nominal US dollars) between 2003 and 2008. In the for only one- 3% wake of the global crisis, oil exporters experienced a third of total 7% exports and the significantly larger shock to their exports than non-oil 8% 16% 12% share has not exporters—the former group’s exports dropped by 38 18% 30% increased much percent in 2009 compared to a 19 percent decline for all over the last 33% 36% 37% other African countries. The commodity price boom and decade and a bust also had large impact on government revenues in half. African countries, particularly oil exporters. Oil exporters’ Agricultural raw materials Manufactures vulnerability to price shocks and resulting boom-bust Food Ores and metals Fuel cycle is a significant risk which requires setting up Source: World Development Indicators, World Bank adequate mitigation policies. African economies rely heavily on one or two commodities. In 2009, 16 of 47 African economies FIGURE 21 Countries where a single commodity accounts for over half of total exports in 2008 earned over 50 percent of their export earnings from Sixteen African a single primary export. Oil exporters are particularly countries Angola rely heavily Chad dependent on a single product. Over half (55 percent) on a single Guinea-Bissau of African economies are heavily dependent on two Sudan commodity commodities for their export earnings. Some African Congo export. Nigeria oil exporters: Nigeria, Angola, and Sudan, benefited Equatorial Guinea from the oil price boom until mid-2008, but also Mali Gabon suffered from the later price decline—particularly São Tomé & Príncipe Angola and Sudan, which did not build adequate Zambia Seychelles stabilization buffers during the boom period. Thus, in Burkina Faso the aftermath of the global crisis, growth in this group Cameroon Malawi decelerated significantly. Similarly, countries relying on Guinea one or two non-oil primary commodities experienced 0 20 40 60 80 100 Share of top single primary commodity in total exports (%) large fluctuations in their economic activity. For example, Burkina Faso and Mali, both cotton exporters, Source: African Development Indicators, World Bank experienced a large export decline because of a 14 > A F R I C A’ S P U L S E softening of cotton prices and domestic production Africa: export concentration indicators FIGURE 22 shortfalls. Consequently, economic growth in these (2008) countries was impacted. Non-resource rich coastal 80% 20 African Concentration Ratio (0-100) Nonetheless, some countries have made progress 70% 60% 15 economies have toward diversification of exports. This is particularly 50% 40% 10 on average 17 true of non-resource rich coastal African economies 30% export products 20% 5 such as Kenya, Tanzania and South Africa. This group 10% that account for 0% 0 has, on average, 17 export products that account for Oil exporting Other resource- Other landlock Coastal 75 percent of countries rich countries countries countries total exports. 75 percent of total exports, a sharp contrast to the Average number of products accounting for over 75 percent of exports (Right hand side) group of oil exporters. Export product concentration ratio (Herfindahl-Hirschmann index). Left hand side Note: The Herfindahl-Hirschmann index, which varies between 0 and 1, measures Although product diversification has been limited, concentration of exports, with 1 means a single product being exported. Source: African Development Indicators; World Bank staff estimates African countries have made significant progress in diversifying markets for their exports. In the early 1990s, about three quarters of African exports were shipped to developed countries such as the Euro area, Destination of African exports FIGURE 23 United States and Japan. With the share of China, India (In percent of total) Emerging and other developing economies in Africa’s exports market 1990 - 94 average 2005 - 09 average rising rapidly, developed countries share had fallen US$36 billion US$239 billion countries are to about 50 percent in 2009. Africa’s exports to China increasingly 1% 12% becoming have increased nearly 30-fold—from $1.4 billion in 34% important 25% 1999 to $41 billion in 2008. Raw materials as a share of 45% trading partners 26% exports to China were 42 percent in the early 1990s; for Africa. 26% a decade and a half later the share had more than 24% doubled to 87 percent.8 Although Africa’s exports 3% 4% to all markets were hit hard by the economic crisis, China European Union Japan United States Other the increased share of China and other developing countries in total exports facilitated a quick rebound Source: Direction of Trade Statistics, IMF in exports in 2010. The recent surge in commodity prices has again positioned African economies to increase export earnings. Increased trade ties with developing countries, combined with large capital flows from these emerging markets into Africa (particularly from China), provide the region with an opportunity to sustain the strong rebound in economic growth. These new opportunities for development come with new challenges. As the large commodity price fluctuations of recent years proved, Africa’s vulnerability to shocks has increased, which will require specific efforts to increase resilience and build safety buffers. A number of African resource-rich countries have established stabilization mechanisms (such as specific saving funds or fiscal rules) to mitigate export and revenue volatility emanating from price fluctuations. However, further work is needed to strengthen these mechanisms. It is also important that windfall revenues should be spent on new and productive investments that can increase and sustain high growth over the medium term. 10 Xiao Ye, “A Path to Mutual Prosperity? The trade and investment between China and Africa.” Contributions were received from Allen Dennis (DECPG), Stephen D. Mink (AFTSN), Carlo Del Nino (AFTSP), Setareh Razmara (AFTSP) and Sergiy Zorya (ARD). A F R I C A’ S P U L S E > 15