By Njirani Muchra | The East African
The ability of East African economies to maintain their growth trajectory amid the slump in other parts of the continent could face a serious test in 2017.
In recent years, the region has been considered the bright spot in sub-Saharan Africa, recording an average economic growth of 4.9 per cent against a continental average of 1.5 per cent last year.
The impressive growth in East Africa is projected to be maintained, with the World Bank’s Global Economic Prospects 2017 report showing that Tanzania will post 7.1 per cent growth, Kenya and Rwanda 6 per cent, Uganda 5.6 per cent and Burundi 2.5 per cent.
But the economies are facing serious threats from the effects of drought, volatile elections, low commodity prices, pressure on trade, dwindling tax collections, weakening currencies and worries over a slump in foreign direct investment and cuts in development aid.
According to analysts, the prolonged economic growth that East African countries, with the exception of Burundi, have enjoyed will slow down unless governments find ways of navigating the strong headwinds.
Ken Gichinga, chief economist at Mentoria Consulting, said Kenya will have to contend with deteriorating financing conditions due to interest rate capping; Tanzania will need to overcome historical challenges of low revenue collection; and Uganda will need to stimulate the economy to counter the effects of dwindling agricultural production.
In addition to putting some 8 million people at risk of starvation, the prolonged drought is causing a surge in food prices, increasing inflationary pressures.
“A prolonged drought over the past year resulted in a surge in food prices, especially in East and Southern Africa. Higher food prices will be a significant driver of inflation in 2017,” states the Economic Insight: Africa report by the Institute of Chartered Accountants in England and Wales (ICAEW).
Investors on Hold
Elections in Kenya and Rwanda in August are expected to affect the entire region.
The often volatile elections in Kenya portend domestic risks that could moderate growth prospects. These include the possibility that investors could defer decisions until after the elections, while election-related expenditure could result in cutbacks in infrastructure spending.
“Economic growth in Kenya has historically been lower in election years owing to firms maintaining a more cautious stance. Similar events could transpire in 2017 attributable to election anxiety,” said Stanbic Bank regional economist Jibran Qureishi.
A cautious approach among investors could impact FDI flows in the region. Although East Africa recorded the highest share of FDI across Africa, achieving 26.3 per cent of total projects in 2016, this was still 2 per cent less than in 2015.
Although flows into East Africa have since rebounded, with forecasts showing an increase in net FDI of 9 per cent in 2016 and a further 10 per cent in 2017, much of this is going into the extractive sectors.
There is also concern that an anticipated cut in aid, particularly by the US government under the Donald Trump presidency, could further hamper efforts to sustain growth.
The ICAEW report says that the US is sub-Saharan Africa’s principal benefactor in terms of bilateral official development aid.
However, initial signs point to an expansionary fiscal stance under the Trump administration, and some spending cuts may be necessary to accommodate increased infrastructure expenditure.
“This raises the risk that the world’s largest economy could rein in development aid, adversely affecting dependent countries such as Ethiopia, Kenya, Tanzania, Nigeria and the Democratic Republic of Congo,” states the report.
Other concerns for East Africa’s economies are from pressures on trade and revenue collection.
As global trade continues to weaken, East Africa is also feeling the effects after containerised trade volumes decreased by 3 per cent in the first three quarters of 2016, according to the Maersk Group.