Jambo Africa Online’s Senior Editorial Correspondent, FRANCOIS FOUCHE, gives us news titbits from around the world that impact on Africa’s economies.
Small African countries are growing faster than their larger peers when it comes to being more economically free, a new report shows
‘Economic Freedom of the World: 2021’, a report published by Free Market Foundation, a think tank, in conjunction with Canada’s Fraser Institute, lists the continent’s small nations as being amongst the world’s top countries when it comes to affording their citizenry higher levels of personal choices, greater access to markets and clearly defined and enforced property rights.
Mauritius (11), Seychelles (43) and Botswana (45) are the top African countries in the report, offering the most robust policies and institutions in support of economic freedom.
“Where people are free to pursue their own opportunities and make their own choices, they lead more prosperous, happier and healthier lives,” says Fred McMahon, Research Chair in Economic Freedom at the Fraser Institute.
Uganda (58), Rwanda (64), Zambia (80) and Gambia (82) have also been ranked among the world’s most economically free jurisdictions.
Mauritius topped scores in all key metrics, from the size of government (7.9) to the legal system to property rights (6.9). Access to sound money (9.5), freedom to trade internationally (8.5) and regulation of credit, labour and business (8.0) all ranked high on the country’s scorecard.
The majority of the small countries mentioned also recorded high scores when it came to providing people with access to sound money – aided by self-correcting mechanisms to cushion consumer purchasing power against sudden appreciation and depreciation of the currency.
Mauritius, Uganda and Gambia were tied when it came to access to sound money, at 9.5, with Zambia closing the group with a score of 9.1.
The continent’s economic “giants” of Nigeria and South Africa were mid-rankers, at position 84, while Kenya finished 86th out of 165 countries and territories in the world.
Nigeria (3.7) and Kenya (5.0) suffered from low scores on legal systems and property rights.
In North Africa, Morocco (102), Egypt (149) and Algeria (162) ranked lower in the global list, recording equally low scores across key metrics.
Egypt recorded low scores in legal systems and property rights (3.6), size of government (5.4) and regulation of credit, labour and business (5.4). Algeria scored the least (2.5) on giving its people the freedom to trade internationally.
“Economic freedom increases upward income mobility and, of the ten pillars of social mobility, economic freedom is highly related to four: education quality, lifelong learning, technology access, and inclusive institutions,” according to researchers of the report.
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Global debt reaches a record $226 trillion
Policymakers must strike the right balance in the face of high debt and rising inflation.
In 2020, the IMF observed the largest one-year debt surge since World War II, with global debt rising to $226 trillion as the world was hit by a global health crisis and a deep recession. Debt was already elevated going into the crisis, but now governments must navigate a world of record-high public and private debt levels, new virus mutations, and rising inflation.
Global debt rose by 28 percentage points to 256 percent of GDP, in 2020, according to the latest update of the IMF’s Global Debt Database.
Borrowing by governments accounted for slightly more than half of the increase, as the global public debt ratio jumped to a record 99 percent of GDP. Private debt from non-financial corporations and households also reached new highs.
The debt surge amplifies vulnerabilities, especially as financing conditions tighten.
Debt increases are particularly striking in advanced economies, where public debt rose from around 70 percent of GDP, in 2007, to 124 percent of GDP, in 2020. Private debt, on the other hand, rose at a more moderate pace from 164 to 178 percent of GDP, in the same period.
Public debt now accounts for almost 40 percent of total global debt, the highest share since the mid-1960s. The accumulation of public debt since 2007 is largely attributable to the two major economic crises governments have faced—first the global financial crisis, and then the COVID-19 pandemic.
The great financing divide
Debt dynamics, however, differ markedly across countries. Advanced economies and China accounted for more than 90 percent of the $28 trillion debt surge in 2020. These countries were able to expand public and private debt during the pandemic, thanks to low interest rates, the actions of central banks (including large purchases of government debt), and well-developed financial markets. But most developing economies are on the opposite side of the financing divide, facing limited access to funding and often higher borrowing rates.
Looking at overall trends, we see two distinct developments.
In advanced economies, fiscal deficits soared as countries saw revenues collapse due to the recession and put in place sweeping fiscal measures as COVID-19 spread. Public debt rose 19 percentage points of GDP, in 2020, an increase like that seen during the global financial crisis, over two years: 2008 and 2009. Private debt, however, jumped by 14 percentage points of GDP in 2020, almost twice as much as during the global financial crisis, reflecting the different nature of the two crises. During the pandemic, governments and central banks supported further borrowing by the private sector to help protect lives and livelihoods. Whereas during the global financial crisis, the challenge was to contain the damage from excessively leveraged private sector.
Emerging markets and low-income developing countries faced much tighter financing constraints, but with large disparities across countries. China alone accounted for 26 percent of the global debt surge. Emerging markets (excluding China) and low-income countries accounted for small shares of the rise in global debt, around $1–$1.2 trillion each, mainly due to higher public debt.
Nevertheless, both emerging markets and low-income countries are also facing elevated debt ratios driven by the large fall in nominal GDP in 2020. Public debt in emerging markets reached record highs, while in low-income countries it rose to levels not seen since the early 2000s, when many were benefiting from debt relief initiatives.
Difficult balancing act
The large increase in debt was justified by the need to protect people’s lives, preserve jobs, and avoid a wave of bankruptcies. If governments had not taken action, the social and economic consequences would have been devastating.
But the debt surge amplifies vulnerabilities, especially as financing conditions tighten. High debt levels constrain, in most cases, the ability of governments to support the recovery and the capacity of the private sector to invest in the medium term.
A crucial challenge is to strike the right mix of fiscal and monetary policies in an environment of high debt and rising inflation. Fiscal and monetary policies fortunately complemented each other during the worst of the pandemic. Central bank actions, especially in advanced economies, pushed interest rates down to their limit and made it easier for governments to borrow.
Monetary policy is now appropriately shifting focus to rising inflation and inflation expectations. While an increase in inflation, and nominal GDP, helps reduce debt ratios in some cases, this is unlikely to sustain a significant decline in debt. As central banks raise interest rates to prevent persistently high inflation, borrowing costs rise. In many emerging markets, policy rates have already increased and further rises are expected. Central banks are also planning to reduce their large purchases of government debt and other assets in advanced economies—but how this reduction is carried out will have implications for the economic recovery and fiscal policy.
As interest rates rise, fiscal policy will need to adjust, especially in countries with higher debt vulnerabilities. As history shows, fiscal support will become less effective when interest rates respond—that is, higher spending (or lower taxes) will have less impact on economic activity and employment and could fuel inflation pressures. Debt sustainability concerns are likely to intensify.
The risks will be magnified if global interest rates rise faster than expected and growth falters. A significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms. If the public and private sectors are forced to deleverage simultaneously, growth prospects will suffer.
The uncertain outlook and heightened vulnerabilities make it critical to achieve the right balance between policy flexibility, nimble adjustment to changing circumstances, and commitment to credible and sustainable medium-term fiscal plans. Such a strategy would both reduce debt vulnerabilities and facilitate the work of central banks to contain inflation.
Targeted fiscal support will play a crucial role to protect the vulnerable (see the October 2021 Fiscal Monitor).
Some countries—especially those with high gross financing needs (rollover risks) or exposure to exchange rate volatility—may need to adjust faster to preserve market confidence and prevent more disruptive fiscal distress. The pandemic and the global financing divide demand strong, effective international cooperation and support to developing countries.
This article first appeared here.
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Global Shipping Costs Are Moderating, But Pressures Remain
Shipping costs soared over the past year as consumers unleashed pent-up savings to buy new merchandise while the pandemic continued to snarl the world’s supply chains.
Container rates have more than quadrupled since the start of the pandemic, with some of the biggest gains concentrated in the first three quarters of last year.
Lockdowns, labour shortages, and strains on logistics networks led to shipping-cost increases and significantly lengthened delivery times, though those pressures are easing.
The IMF Chart of the Week shows how global container rates began to pull back from their record in September 2021 and have since declined by 16%, mostly due to falling rates for trans-Pacific eastbound routes, the main sea link from China to the United States.
The drop indicates that strong goods demand is diminishing after the traditional peak shipping season, which is typically from August to October.
In addition, the US recently ordered some ports to expand operating hours and boost efficiency to reduce congestion and ease supply bottlenecks.
Although rates have subsided, they may remain elevated through the end of the year. Some underlying supply constraints do not have immediate fixes: backlogs and port delays, labour shortages in related occupations, supply chain disruptions moving inland, and shipping industry challenges such as the slow capacity growth and consolidation that concentrated the market power of a few carriers. On the other side, if the pandemic is controlled in the future, the demand for tradable goods might gradually decline as some service-providing sectors, such as travel and hospitality, recover.
Higher shipping costs and goods shortages are expected to boost merchandise prices. The United Nations Conference on Trade and Development (UNCTAD) projects that if freight rates remain elevated through 2023, global import price levels and consumer price levels could rise by 10.6% and 1.5%, respectively. This impact would be disproportionately larger for small, developing islands which heavily rely on imports that arrive by sea.
Higher freight rates will also result in larger increases in the final price of low-value-added products. Smaller developing economies that export many of these goods could become less competitive and face difficulties with their economic recoveries.
Moreover, the final prices of products that are highly integrated into global value chains such as electronics and computers will also be more affected by higher freight rates.
Returning to pre-pandemic shipping rates will require greater investment in infrastructure, digitalization in the freight industry, and implementation of trade facilitation measures.
This article first appeared here.
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America’s struggle with inflation
Another month, another unwelcome milestone.
Recent data showed that American consumer prices rose by 7% in December, compared with a year earlier.
That’s the fastest increase since June 1982, when inflation was 7.1%.
More worrying, price pressures have recently broadened out from consumer goods such as cars and televisions to wages and rents. That has reinforced expectations that the Federal Reserve will act decisively to curb inflation.
That will not be good for the ZAR.
The US Fed is still pumping money into the financial system through bond purchases, although at a reduced pace since November.
If the US Fed raise interest rates as soon as March, such a sharp turn for monetary policy from easing to tightening brings risks, as underlined by the stockmarket sell-off of the past week, but that may be a necessary price to pay to quell inflation… so it is tough times ahead for the global economy.
Source: https://www.economist.com
