Africa’s performance over the year 2017: A Q4 summary by ICAEW Economic Insight
East Africa is forecast to show very strong real GDP growth of 5.9% over the full year 2017. The biggest contributor to this expansion was Ethiopia (accounting for a full 2% of regional GDP growth), with its stellar performance of 7.1%. Another 1.7% of the increase in regional output will result from Kenya’s strong performance: 4.6% growth.
Both regional powerhouses had some political problems in the year, without which their economic performances would have been better still. In Kenya, opposition candidate Raila Odinga challenged his loss in the August presidential election in court and the Supreme Court ordered that the election be run again. It was in October, but Mr Odinga boycotted the event. Uncertainty lingers, which has delayed some investment decisions, while protest activity has hampered business. In Ethiopia, overall economic dynamism resulting from large-scale investment and modernisation continues apace, but severe forex liquidity constraints will weigh on economic activity going forward.
Should Mr Raila Odinga of the National Super Alliance (Nasa) come to power, policy making and implementation will be affected by the fact that the Jubilee party has majorities in both the National Assembly and Senate and will more than likely use their advantage to stifle any policies that run contrary to their own goals.
Ghana has struggled to contain fiscal spending in recent years, with the budget deficit as a percentage of GDP averaging 8.2% a year during the 2010-14 period. Weak State finances contributed to a widening current account deficit, a weaker currency, high levels of inflation and an increase in tax rates. These factors dragged real GDP growth down to just 4% in 2014.
Fortunately, the International Monetary Fund (IMF) approved a three-year arrangement under the Extended Credit Facility (ECF) programme for Ghana in April 2015. The ECF programme aims to achieve a sizeable and front-loaded fiscal adjustment to restore debt sustainability. Ghana performed especially well in 2015, and exceeded consolidation targets: the fiscal deficit narrowed from 9.3% of GDP in 2014 to 7% of GDP that year. That said, 2016 proved more challenging and Ghana once again recorded substantial fiscal slippages in an election year, with the deficit widening to 8.8% of GDP, against a target equal to 5% of GDP.
Ghana’s continued participation in the ECF programme has been characterised by significant uncertainty ever since the New Patriotic Party (NPP) took the reins by defeating the National Democratic Congress (NDC) in the 2016 elections. The substantial fiscal slippages uncovered by the NPP raised concern that Ghana’s failure to hit its targets could see the Fund disqualify the country from further participation in the programme. Market watchers were also initially concerned that the NPP’s strategy of reducing taxes to boost private sector activity might be interpreted by the multilateral organisation as not being aggressive enough.
The IMF proved to be lenient even though Accra deviated from programme objectives when it ran a wider than budgeted deficit in the lead-up to the elections, and planned for a larger shortfall in the 2017 fiscal budget (6.5% of GDP for 2017) ,than originally targeted under the ECF programme (3.5% of GDP).
President Akufo-Addo announced in July that authorities will only adhere to the original arrangement which implies that IMF support would end in March 2018. In August, however, the IMF released a statement highlighting that authorities had in fact agreed to extend Ghana’s participation in the programme by one year.
Ghana has realised some progress in addressing fiscal imbalances in recent years. The rate at which debt is being accumulated has slowed, and preliminary figures suggest that Accra is maintaining a tight fiscal stance. Despite weak revenue performance, authorities managed to cut spending which contributed to a fiscal deficit (cash basis) of just 3% of GDP during 2017 H1, compared to a budgeted deficit of 3.5% of GDP for this period.
On September 1st, the Supreme Court of Kenya became the first on the continent to annul a presidential election citing irregularities and illegalities by the Independent Electoral and Boundaries Commission (IEBC). Blame for the irregularities was placed squarely on the commissionand fresh elections must now be held within 60 days of the court’s decision. The initially announced date of October 17 was challenged and a new date eventually set for October 26th.
The news of the Supreme Court’s ruling came as a shock as international observers from the African Union (AU), European Union (EU), Commonwealth, and the Carter Centre had largely praised the polls, although with some reservations. Furthermore, no presidential election has ever been annulled in Africa.
The security implications of the court’s decision are still unclear. On the one hand, it reduces the risk of a backlash from opposition supporters who would have likely protested against the upholding of the results, while at the same time it increases tensions in the run-up to fresh elections as Mr Uhuru Kenyatta’s supporters are angered by the ruling. Overall, we tend to consider the ruling risk-neutral in the short term, however this may change closer to the new vote.
Turnout is likely to be higher than on August 8 as supporters from both sides endeavour to cement their candidate as the legitimate winner. In this report, therefore, we consider the steps that the newly elected government needs to take to revive the economy following the vote.
A start would be to rethink the regulatory cap on commercial interest rates, which has starved small and medium enterprises of funding. Reining in expenditure, in order to ensure government debt does not get out of hand, would improve the economy’s future prospects. As things stand, the budget deficit as a proportion of GDP is forecast to widen again from this year before it narrows, mostly thanks to economic growth. The newly elected government would also need to lead the charge against corruption – something that was sorely lacking in the past.
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