Economic Growth

The economic index that suggests a change in fortunes for Africa

Men queue to buy bread at a bakery in Cairo, Egypt  March 9, 2017. REUTERS/Mohamed Abd El Ghany - RTS1265T

Egyptians are dealing with rapidly rising inflation Image: REUTERS/Mohamed Abd El Ghany

Christie Viljoen
Manager, economist, KPMG
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The Africa Rising narrative tells the story of fast-growing African economies as a result of a boom in commodity prices; favourable demographic changes; the development of the manufacturing and services economies; a fast-growing middle class; the continent’s enthusiasm for technology; as well as more favourable political and security conditions. This results in several African countries being consistently among the world’s fastest growing economies.

However, while strong growth and an improvement in living conditions for millions of Africans were observed before, during and after the global financial crisis, conditions deteriorated between 2014 and 2016, and in the early part of 2017. Weaker global growth and a slump in commodity prices eroded economic growth in many countries, resulting in rising unemployment. Slower economies translated into weaker exchange rates which, in turn, resulted in higher consumer price inflation. We need a composite metric to quantify this deterioration in economic conditions.

Image: KPMG South Africa Economics

The Economic Misery Index used here was developed by Professor Steve Hanke of the Washington-based Cato Institute. This is calculated by adding the unemployment rate, consumer price inflation and interest rates of a country, and then subtracting the real change in GDP per capita. The resulting index captures three factors that people would like to see less of, unemployment, inflation and interest rates; and one that they desire more of, higher real GDP per capita.

In order to ensure comparability, real GDP per capita was calculated in US dollar terms – the accepted norm for cross-border comparisons. Historical data from 2009-2016, and forecasts for 2017-2020 for all variables were obtained from the Business Monitor International (BMI) Research Data Tool. Data is available for 25 African countries accounting for almost two thirds of the continent’s population and three quarters of GDP. As this article is focussed on people’s economic conditions, regional aggregates are weighted by population.

Decline and fall

On aggregate, Africa experienced improving economic conditions, i.e. declining economic misery, during the 2010-2014 period. With the exception of politically-troubled North Africa, all other regions experienced improving economic conditions for their people. Out of the 25 countries included in this study, 18 recorded improvements between 2009 and 2014 – the exceptions being Cape Verde, Egypt, Equatorial Guinea, Gambia, Libya, Malawi and Morocco.

The 2010-2014 period witnessed global economic growth averaging 3.2% per annum. This supported investment into and exports from Africa. According to data from the International Trade Centre, the continent’s export revenues increased from $325 billion in 2009 to $665 billion in 2012 – an increase of more than 100% – before moderating to a still-high $563 billion in 2014. This helped the African economy grow by an average of 3.6% per annum during 2010-2014.

However, according to the World Bank, emerging market and developing economies experienced notably lower growth during 2015-2016, with a tentative recovery expected in 2017. Africa’s commodity exporters were particularly negatively affected by slower economic growth. Based on the World Bank’s classification of commodity importers and exporters, 15 out of the 21 exporters included in this study will witness a net increase in their Economic Misery Index between 2014 and 2017 – the exceptions being Botswana, Burundi, Kenya, Libya, Malawi and Tanzania.

North Africa’s misery echoes 2011

North Africa has experienced an increase in its aggregate Economic Misery Index during 2014-2017. In fact, the expected reading for 2017 will be higher than the politically-challenged period of 2011-2012. The biggest contributor to this upward trend is Egypt – the continent’s third-largest economy, whose population of 95 million people are dealing with fast rising inflation and interest rates. The Central Bank of Egypt eased currency controls in 2016 in order to address an overvalued exchange rate that had for years undermined the economy’s competitiveness and depleted international reserves.

However, it is also Egypt driving the positive outlook for economic conditions in North Africa over the period 2018-2020. While the Economic Misery Index readings calculated for Algeria and Morocco will be little changed, Egypt is expected to see a declining inflation trend and a rise in real GDP per capita growth. The reforms, implemented last year in a bid to secure $12 billion in funding from the International Monetary Fund, are expected by some analysts to signal the beginning of an economic recovery for the country. The Egyptian economy has been struggling since the Arab Spring.

West Africa hinged to oil price

Due to data limitations, the aggregate Economic Misery Index for West Africa is basically the reading calculated for Nigeria. The country has Africa’s largest population, though its size is not known with any degree of certainty. Nigeria’s Economic Misery Index climbed notably during 2016, as the country recorded an economic recession, and inflation climbed to an 11-year high in January 2017. This resulted in oil-exporting West Africa having the highest regional Economic Misery Index during 2017.

The outlook for West Africa towards 2020 is, however, more favourable. The World Bank expects crude oil to rise from an average price of $48.75 a barrel during 2015-2016 to a mean of $62.60 a barrel in 2020. Nigeria’s Economic Misery Index is expected to drop sharply in coming years and is forecast to be below the regional averages for Central and Southern Africa by 2020. The Gambia is also anticipated to see a decline in its index reading over the next few years as the new government implements economic reforms.

Central Africa sees strong improvement in 2009-2014

Central Africa had the lowest, and therefore best, regional Economic Misery Index in 2014, following a sharp decline in the preceding five years. The Democratic Republic of the Congo (DRC) – the region’s largest economy – was able to significantly reduce its inflation and interest rates during 2009-2014 and the country’s economy expanded at a faster pace. Cameroon maintained low inflation and relatively stable interest rates during the 2010-2014 period due to benefits associated with being part of the Communauté Economique et Monétaire de l’Afrique Centrale (CEMAC).

Conditions in Central Africa again deteriorated in 2016, largely associated with a spike in interest rates in the DRC. The Banque Centrale du Congo hiked its lending rates by five percentage points to 7% in September 2016 – the first change in three years – to combat a sharp rise in inflation. The DRC and Equatorial Guinea are both expected to see declining Economic Misery Index readings towards 2020 while Cameroon, after a positive trend in recent years, will likely see a slight rise in its index reading. This is premised on a BMI forecast for slower real GDP per capita growth in the country during 2019-2020.

East Africa bucks the trend

East Africa recorded a decline in its Economic Misery index during 2013-2014 alongside those of the other regions. While the grouping’s index did not follow an upward trend in 2015-2016, there was some variance in country-specific experiences. Tanzania, with the largest population in East Africa, recorded a declining Economic Misery Index as inflation, interest rates and unemployment eased – with small changes in each indicator contributing to a larger index decline. In contrast, Uganda’s index climbed during 2015-2016 as the country’s inflation and interest rates increased, with the Uganda Bureau of Statistics linking this to a prolonged dry spell pushing food prices higher.

The East Africa region is expected to see a continued, slowly declining Economic Misery Index during 2018-2020 and maintain the lowest regional aggregate index. Nonetheless, while the outlook is positive for Burundi, Kenya, Rwanda and Uganda, economic misery is expected to edge higher in Tanzania towards 2020. The BMI forecasts a small rise in average consumer price inflation. The Bank of Tanzania expects inflation to remain on target over the medium term, though in February 2017 it highlighted risks of rising inflation, associated with unfavourable weather conditions and a possible rise in oil prices.

Southern Africa sees highest misery in 2016

Mineral-rich Southern Africa recorded a rise in its Economic Misery Index during 2013-2016 as eight out of the 10 countries included in this study recorded a net rise in their individual indices – the exceptions being Botswana and Mauritius. While South Africa, the region’s largest economy, was influential in this due to a deteriorating overall macroeconomic environment, worsening economic conditions in Angola and Zambia were also significant. Average annual inflation in these two countries jumped from less than 8% in 2014 to 28.2% and 18.2%, respectively, in 2016. This was due to the devastating effects of a two-year-long El Niño event that only ended in early 2016.

The outlook for 2017-2020 is more positive with an expected decline in Southern Africa’s aggregate Economic Misery Index over the period. While Botswana, Mauritius and Zimbabwe are projected to have a net increase in their individual index readings by 2020, the rest of the region is seen benefitting from improving weather conditions reducing food inflation and supporting economic growth. Substantial improvements are expected in Angola, in terms of inflation; as well as Mozambique and Zambia, in terms of real GDP per capita.

Forecasts for 2020 reflect actual historical readings

Admittedly, economic forecasts are often optimistic about the future, and the Africa Rising narrative is particularly optimistic about the African continent. However, the forecast regional Economic Misery Index readings in 2020 are definitely comparable to actual historical calculations, suggesting that these levels are possible. Out of the 25 countries in this study, 18 are expected to see an improvement in their individual index readings between now and 2020 – the exceptions being Botswana, Burundi, Cameroon, Cape Verde, Mauritius, Tanzania and Zimbabwe.

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