These are extracts from the Economic Outlook 2021 publication by the African Development Bank.
Economic Outlook: Nigeria
President Buhari of Nigeria
Recent macroeconomic and financial developments
Nigeria’s economy entered a recession in 2020, reversing three years of recovery, due to fall in crude oil prices on account of falling global demand and containment measures to fight the spread of COVID–19. The containment measures mainly affected aviation, tourism, hospitality, restaurants, manufacturing, and trade. Contraction in these sectors offset demand-driven expansion in financial and information and communications technology sectors. Overall real GDP is estimated by the Bank to have shrunk by 3% in 2020, although mitigating measures in the Economic Sustainability Programme (ESP) prevented the decline from being much worse. Inflation rose to 12.8% in 2020 from 11.4% in 2019, fueled by higher food prices due to constraints on domestic supplies and the pass-through effects of an exchange rate premium that widened to about 24%. The removal of fuel subsidies and an increase in electricity tariffs added further to inflationary pressures. The Central Bank of Nigeria cut the policy rate by 100 basis points to 11.5% to shore up a flagging economy. The fiscal deficit, financed mostly by domestic and foreign borrowing, widened to 5.2% in 2020 from 4.3% in 2019, reflecting pandemic-related spending pressures and revenue shortfalls. Total public debt stood at $85.9 billion (25% of GDP) on 30 June 2020, 2.4% higher than a year earlier. Domestic debt represented 63% of total debt, and external debt, 37%. High debt service payments, estimated at more than half of federally collected revenues, pose a major fiscal risk to Nigeria. The current account position was expected to remain in deficit at 3.7% of GDP, weighed down by the fall in oil receipts and weak external financial flows.
Outlook and risks
The economy is projected to grow by 1.5% in 2021 and 2.9% in 2022, based on an expected recovery in crude oil prices and production. Stimulus measures outlined in the ESP and the Finance Act of 2020 could boost nonoil revenues. Improved revenues can narrow the fiscal deficit to 4.6% and the current account deficit to 2.3% of GDP in 2021 as global economic conditions improve. Reopening borders will increase access to inputs, easing pressure on domestic prices and inflation, projected at 11.4% in 2021. Downside risks include reduced fiscal space, should oil prices remain depressed. In addition, flooding and rising insecurity could hamper agricultural production. Further depletion in foreign reserves from $35 billion (7.6 months of import cover) could lead to sharp exchange rate depreciation and inflationary pressures. A potential relapse in COVID–19 cases could exacerbate these risks. High unemployment (27%), poverty (40%) and growing inequality remain a major challenge in Nigeria.
Financing issues and options
Nigeria’s public debt is relatively sustainable at 25% of GDP. But debt service payments are high, and the country’s ability to attract external private financial flows is hurt by macroeconomic imbalances and policy uncertainty. During the first half of 2020, Nigeria received $7.1 billion in foreign investment. This was half the amount it received in the corresponding period of 2019. Nigeria’s financing requirements require improved domestic revenue collection. Currently, nonoil revenue collections are equivalent to 4% of GDP. The revenue yield in 2020 from an increase in the value-added tax rate to 7.5% from 5% was less than projected because of subdued economic activity. Broadening the tax base could strengthen Nigeria’s fiscal buffers, if structural reforms to enhance compliance are supported and illicit financial flows are tackled. Remittances and sharia-compliant sukuk bonds also offer potential financing options. In 2019, remittances totaled $23.8 billion (5.3% of GDP), but the effect of the COVID– 19 pandemic in key source markets could reduce this figure. The third issuance of sukuk bonds of 150 billion naira ($395 million) in June 2020 attracted 669.1 billion naira, of which 162.5 billion naira was allotted to finance 44 critical road projects. Use of foreign reserves as a financing option in the medium term is impaired by lower oil receipts, the main source of foreign exchange.
Economic Outlook: South Africa
President Ramaphosa of South Africa
Recent macroeconomic and financial developments
South Africa’s real GDP growth was 0.2% in 2019. The pandemic and the containment measures to curb the spread of the virus further damaged the economy. Real GDP contracted by 8.2% in 2020, the result of a decline in construction, transport and communication, manufacturing, and mining. On the demand side, all components declined, with the largest contraction, 32.4%, recorded in investment. The Reserve Bank of South Africa cut the policy rate by a cumulative 300 basis points in 2020, from 6.5% to 3.5%, to support businesses and households affected by the pandemic. Inflation was estimated to decline to 3.4% in 2020, within the reserve bank target of 3%–6%. The budget deficit was estimated to widen significantly to more than 14% of GDP, mainly due to spending pressures to contain the economic impact of the pandemic. The country will, however, record its first current account surplus in 2020, estimated at about 1% of GDP, because of the high price of the gold it exports, a low bill for fuel imports, and increased agricultural exports. Despite the pandemic, the South African banking sector remains sound, with a capital ratio of 16.3%, which is above the 10% regulatory requirement. Domestic credit to private sector reached $280 billion in November 2020, an increase of 3.5% from December 2019, when it was 139% of GDP. Lingering economic weaknesses prompted the three major credit rating agencies to downgrade South Africa’s local and foreign currency credit rating to subinvestment grade. Nevertheless, real private investment expanded by 33.2% in the third quarter of 2020. Social indicators are likely to remain weak due to the severity of the pandemic and legacy issues of low human development. About 2.6 million people have lost their jobs since March 2020, bringing the unemployment rate to 30.8% in September 2020 from 23.3% in December 2019.
Outlook and risks
Real GDP growth is projected to rebound to 3.0% in 2021, but the pace of the recovery will slow to 1.6% in 2022 due to continued structural constraints such as unreliable electricity supply and job regulations. The inflation rate is projected at 4.2% in 2021 and is expected to stay within the reserve banks’ target range of 3%–6% for 2022. The current account surplus is expected to erode, since a recovery in oil prices could raise the import bill. Public debt could reach more than 90% of GDP in the medium term, with projections that it will stabilize at 95% in 2026. The 2020 Medium Term Budget Policy Statement (MTBPS) in October 2020 projected a significantly larger budget deficit and slower debt consolidation in the medium term. These projections will raise risks due to the high debt-service costs and deteriorating balance sheets of state-owned enterprises and the continued weaknesses of the financial position of municipalities.
Financing issues and options
The 2020 MTBPS proposed steps to reduce the public service wage bill and investment driven by state-owned companies in order to narrow the fiscal deficit and stabilize the debt-to-GDP ratio over a five-year period. The treasury expects to reduce the wage bill—the major driver of the fiscal deficit—by nearly $1.8 billion through 2023–24. The proposal has already raised the risk of widespread strikes by the 1.3 million public sector workers. Also, calls for debt guaranteed by the government to support higher levels of capital investment will be discouraged. This could push South African Airways into liquidation and the electric utility Eskom to adopt tariffs that reflects its costs, which would be efficient but unpopular. In 2020, the South Africa government committed itself to investment in public utilities through strong private sector participation. South Africa’s gross international reserves increased slightly from $52.4 billion at the end of March 2020, covering 6.9 months of imports, to $53.8 billion at the end of November 2020, covering 8.3 months of imports. This progress mainly reflects foreign borrowings received on behalf of the government from multilateral banks, including the African Development Bank, to cope with the pandemic crisis.
Egypt Economic Outlook: Egypt
President Al-Sisi of Egypt
Recent macroeconomic and financial developments
Egypt’s economic growth has been strong and resilient since the economic reforms initiated in 2016. It is one of the few African countries expected to record a positive growth in 2020, at 3.6%, despite the adverse impact of the COVID–19 pandemic. The economy grew at a slower rate than in 2019 (5.6%) but did not enter a recession, thanks to high domestic consumption. The tourism sector—which accounts for about 5.5% of GDP and 9.5% of employment—was shut down from mid-March to 1 July 2020. Despite pandemic-related expenditures and revenue shortfalls, the fiscal balance excluding the cost of government debt is expected to remain positive, at 0.5% of GDP. This fiscal buffer, a consequence of the fiscal consolidation reforms, helped keep the overall deficit broadly unchanged at 8% of GDP in 2020—compared with a 7.9% deficit in 2019 that benefited from a primary surplus of 2%. Public debt was estimated to increase to 90.6% of GDP in 2020 from 86.6% in 2019, reversing three years of continuous decline. During the first half of 2020, exports dropped by 6%, while imports fell 21%, which helped narrow the current account deficit to 3.1% of GDP in 2020 from 3.6% the year before. The smaller current account deficit also reflected the strength of remittances, estimated at 8% of GDP in 2020. Following the move to a flexible exchange rate regime in 2016, Egypt experienced a period of double-digit inflation, but inflationary pressures have been trending downward since the summer of 2017. In 2020, price pressures were muted, especially on food products, and inflation declined to 5.7%, from 13.9% in 2019, which allowed monetary policy to be accommodative. To stimulate economic activity, the bank of Egypt cut the overnight lending rate by 300 basis points on 16 March 2020, another 50 basis points on 24 September, and to 9.25% on 12 November.
Outlook and risks
Real GDP growth is expected to slow to 3% in 2021 because of continued weakness in net exports, mainly tourism receipts. Tourism earnings, which totaled 25% of exports in 2019, are likely to have declined in 2020 due to the closure of international airports and restrictions on local travel. The outlook for tourism in the short term remains weak. Overall, exports, which decreased in 2020, should remain subdued in 2021 due to the weak external environment, especially in Europe, which accounts for 35.5% of Egypt’s exports and is the main source of tourists. Similarly, private investment could remain subdued in 2021 but benefit from the improved investment climate over the medium term. Private consumption will remain the main growth driver. Egypt must maintain its reform momentum to dynamize the private sector and enhance inclusive growth. Monetary policy should remain accommodative in 2021, as inflation is expected to increase only moderately.
Financing issues and options
Liberalization of the capital account in 2016 attracted foreign investors to the domestic debt market. But the pandemic caused a significant reversal of capital flows, which put pressure on reserves and the current account. The pandemic also exacerbated Egypt’s already large refinancing needs, with 60% of the country’s public debt at a maturity of one year or less. To bridge the financing gap, Egypt accessed funding from COVID–19-related facilities. It received $8 billion from the International Monetary Fund ($2.8 billion from the coronavirus rapid financing initiative and $5.2 billion in a one-year stand-by arrangement). The African Development Bank provided $300 million, and the World Bank $450 million. On 21 May 2020, the country also tapped the international capital market, issuing a $5 billion bond, its largest issuance to date, that was largely oversubscribed. Credit facilities from international financial institutions and bond issuances boosted foreign exchange reserves to $40.06 billion at the end of 2020. External debt rose to 36% of GDP, but the new borrowing helped lengthen the average debt maturity. Total public debt is projected to increase to 90.6% of GDP in 2021 before steadily declining to 77.2% by 2025. Egypt must further lengthen the maturity of its debt and diversify its investor base to manage its refinancing risk and mitigate its rollover risk. Moreover, the country needs to continue implementing structural reforms to catalyze private sector development and enhance domestic resource mobilization.
Kenya Economic Outlook: Kenya
President Kenyatta of Kenya
Recent macroeconomic and financial developments
Kenya’s economy has been hurt by the COVID–19 pandemic. In 2020, GDP growth is expected to decelerate to 1.4% from 5.4% in 2019. Growth is supported by agriculture, while weaknesses in services and industry have had a dampening effect. Domestic demand is subdued while external demand has neither helped nor hurt growth. Expansionary fiscal, monetary, and financial policy measures were introduced to mitigate the impact of the pandemic on businesses and households. Inflation is expected to ease to 5.1% because of lower aggregate demand. The fiscal deficit is expected to widen to 8.3% of GDP—the result of revenue shortfalls and pandemic-related spending increases to deal with health issues and to mitigate the damage to household income and businesses. The current account deficit is expected to narrow to 5.4% of GDP, supported by a sharp reduction in the oil import bill. Foreign exchange reserves declined to $7.8 billion (4.8 months of import cover) at the end November 2020 from $8.96 billion (5.6 months of import cover) at the end November 2019. The local currency weakened by 8.9% to KSH 110 to the US dollar at the end November 2020 from KSH 101 to the dollar a year earlier. The financial sector was affected by spillover effects from major sectors; the capital market was the hardest hit. The Nairobi Securities Exchange share index fell 20% between 30 September 2019 and September 2020, and market capitalization fell 2% over the same period. The pandemic did serious social damage. Nearly 2 million people are estimated to have fallen into poverty, and nearly 900,000 lost their jobs.
Outlook and risks
The growth outlook is positive. The economy is projected to grow by 5.0% in 2021 and 5.9% in 2022. The rebound assumes that economic activity will normalize due to a full reopening of the economy, the Economic Recovery Strategy being successfully implemented, and Kenya capitalizing on an expected improvement in external liquidity and benefiting from initiatives to meet its external financing needs. The external initiatives could include debt refinancing, restructuring and debt service relief, and additional concessional loans. Inflation is projected to remain within the Central Bank of Kenya’s target range of 2.5% to 7.5%, and fiscal and current account deficits are forecast to narrow as a result of improved revenue collection and exports. Downside risks to the outlook could emanate from delays in the full reopening of the economy, failure to secure external financing to execute the budget, a slowdown in global growth, and disruptive social conditions during the run-up to the 2022 elections.
Financing issues and options
Public debt surged to 72% of GDP in 2020 from 61% in 2019, driven mainly by public investment in infrastructure, debt management–related challenges, and the COVID–19 crisis. Kenya is now in high risk of debt distress as determined by the International Monetary Fund. Addressing the emerging fiscal and debt vulnerability risks would require growth friendly reforms, soliciting external financial assistance, concessional credit, and debt refinancing and restructuring. The growth–friendly reforms could entail revenue-related steps to improve tax compliance, widening the tax net by reviewing the list of tax-exempt and zero-rated items, formalizing the informal sector, ensuring that public expenditures reach their intended targets, and deepening the domestic financial market to support private and public sector credit growth.