Africa’s growth potential showing consistency

29th April 2016

Africa’s growth potential showing consistency

OLKARIA GEO THERMAL The largest geothermal power plant in the world is located in Kenya, Africa

Economic growth in Africa is expected to average over 4% in the next five years, according to accountancy and finance body the Institute of Chartered Accountants in England and Wales (ICAEW).

Its Economic Insight: Africa Q1 2016 report shows that the African economy is still heavily commodity-dependent. The growth points to good news for African economies, but the ICAEW warns that manufacturing still accounts for a small share of output and says the old model of exporting raw materials is becoming unsustainable.

“Africa is the most commodity-dependent continent on earth. Africa’s economies increasingly need to create a hospitable environment for companies in the manufacturing and services sectors to drive growth, as the old model of growth driven by exports of raw materials are outdated,” says ICAEW Middle East, Africa and South Asia regional director Michael Armstrong.

The report also shows that gross domestic product growth in Africa is projected to average 4.3% between 2015 and 2020. Nigeria, the largest economy on the continent, is expected to contribute significantly to Africa’s economic expansion – at an average real rate of 4.8% a year between 2015 and 2020, contributing over 25% to the continent’s forecast growth in this timeframe.

Further, the reports points out that, in Nigeria, crude oil accounts for roughly 80% of total exports. The sharp decline in global prices for the commodity adds severe pressure on the nation’s external and fiscal balances. The Central Bank of Nigeria (CBN) has introduced capital controls as part of an import-substitution strategy.

Meanwhile, Nigerian President Muhammadu Buhari has highlighted that the expansionary 2016 fiscal budget will prioritise interventions aimed at diversifying Nigeria’s economy, with agriculture and mining identified as strategically important industries. For the moment, however, the tight forex liquidity conditions associated with the CBN’s stance on the naira have already deterred foreign investment and foreigners will continue to tread cautiously until the naira is devalued.

In the East African region, Kenya’s economy should expand by around 6% during the 2017 to 2020 period. This is owing to its relatively diversified economy and comparatively low commodity dependence, connecting well with the country’s economic growth outlook.

The report highlights that Kenya is now ranked the seventh-highest producer of geothermal power globally after it recently unveiled the second phase of the Olkaria geothermal power plant owned by the Kenya Electricity Generating Company. Olkaria is now the biggest single turbine geothermal plant in the world.

“The East African region is embracing the use of renewable energy to leapfrog older power generation technologies, while also reducing the need to extend the national energy grid to remote villages,” explains Armstrong.

However, Kenya continues to face its own unique challenges. The country’s unwanted fiscal situation is the primary reason why both financial services company Standard & Poor’s and international ratings agency Fitch Ratings downgraded Kenya’s outlook from stable to negative in 2015.

The report points out that the Kenyan government has taken important steps towards fiscal consolidation by preparing a supplementary budget that plans to reduce both development and recurrent public spending in the current fiscal year.

“A clear plan for preventing fiscal slippage will be needed to underpin confidence in public finances and economic stability. The Kenyan government’s recognition of these economic concerns will be needed to address these issues and instil some confidence in the country’s economic outlook,” says financial advisory firm Oxford Economics macro consulting associate director Tom Rogers.

According to the report, the economic industry group of companies Innovation in Financial Services Technology has become a primary global investment opportunity. It has recorded rapid growth over the past five years as technological innovation allowed digitally active consumers to streamline and improve on traditional banking services.

“The online financial sector has really taken off in Africa, answering a need for quality financial services and tailor-made solutions to structural challenges, including frequent power disruptions and poor rural infrastructure,” concludes Rogers.