Strong GDP growth in Africa has masked disappointing productivity, according to The Institute of Chartered Accountants in England and Wales (ICAEW’s) latest Economic Insight: Africa Quarter 2 report.
Uganda in particular has seen a lower economic activity than anticipated during the past one year, primarily as a result of the sharp decline in commodity prices, which negatively affected export earnings.
Over the last 15 years, trade and investment have buffered the continent against the global financial crisis. However, according to theICAEW, this has hidden low productivity figures – despite much greater potential for economic ‘catch up’.
According to the 2016-2017 Uganda national budget, the lower growth of Uganda’s economy arose from the drastic fall in international commodity prices of exports such as coffee, tea, minerals; the decline in private sector credit growth as a result of high interest rates, which have constrained domestic activity; and the strengthening of the US Dollar as a result of the recovery in the US economy which led to depreciation of Uganda’s shilling causing domestic inflation.
The ICAEW report notes that from the year 2000 to 2015, the average GDP growth across Africa was 4.8% per annum, a full 2.3 percentage points faster than the global average during the 1990s.
This is only marginally slower than the ASEAN region, which grew by an average 5.6% per annum and around 0.2 percentage points faster than the Middle East region.
Michael Armstrong, Regional Director at ICAEW Middle East, Africa and South Asia said “Matching the performance of some other emerging market regions might, at face value, seem respectable enough. But the truth is that Africa is starting from a much lower level of economic development than these economies.”
African economies should be in a position to improve productivity in the agriculture sector, thanks to low cost labour and climate. However, so far progress has been disappointing.
The ICAEW report notes that the East African region has especially been s back by inflation. The recent El Niño rains caused major fluctuations in food prices across the southern half of the continent, with greater than usual rainfall in Tanzania and Kenya.
On the other hand, southern countries suffered from severe drought. Ethiopia has been particularly hard hit by adverse weather conditions, with the worst drought in around 30 years pushing food inflation to a peak of 16.2% year on year in October 2015 and easing only gradually in the first half of 2016.
“Poor agricultural output had an additional inflationary effect in some countries especially as agricultural goods constitute a large proportion of East African exports. This, combined with weaker exports, undermined currencies in the region, further fueling inflationary pressure,” added Armstrong.
In Uganda for instance Tea prices have dropped from US Dollar cents 403.03 per Kg in July 2015 to US Dollar cents 237.99 per Kg in April 2016 while Copper from US$ 5,456.75 per tonne to US$ 4,872.74 per tonne.
The ICAEW report further states that in an attempt to limit the acceleration in price growth, Central Banks across the region adopted tighter monetary policies, with some countries like Kenya and Uganda aggressively raising interest rates.
This was also mentioned in the 2016-17 Uganda’s national budget that stated that commercial bank lending rates have remained high largely due to the limited availability of long term capital, resulting in the mismatch between the commercial bank financing products and the nature of the investments being undertaken.