Since the global financial crisis of 2007-2008, Inflation in the MEA region has become a critical area of focus. Understanding its underlying causes is essential, as it influences everything from daily living costs to broader economic stability [caption id="attachment_4327" align="aligncenter" width="900"] Africa and the Middle East region have been facing some of the highest inflation rates in 2017[/caption] What is inflation? Inflation occurs when prices rise, and a currency becomes worth less than it was before. When a country’s currency loses value, its exchange rate weakens compared to others directly affecting its purchasing power both within the country and in international trade. High inflation can be caused by an increased demand for goods in conjunction with a lack of supply. Basic economic theory tells us that when more people want the same good, its price increases. Inflation can also be triggered when the value of your currency decreases. This can be caused by governments increasing the total money supply (sometimes known as printing too much money) or by a devaluation in a net importer country. As prices increase, if wages don’t keep up, workers lose their purchasing power ultimately reducing their standard of living. If inflation becomes too high, especially for an extended period, it can create major repercussions on the econometric-social structure of a nation, eliminating the middle class. [2] In a perfect storm of economic disaster, a nation might significantly face both factors at the same time. This would lead to a monetary phenomenon known as hyperinflation. Hyperinflation In 1956, Phillip Cagan, an economist working at America’s National Bureau of Economic Research, described hyperinflation as a period in which prices rise by more than 50% per month; often resulting in a revolution, war or political transition. The first recorded episode of such happening occurred between 1795 and 1796, in revolutionary France. [3] As of 2017, African and Middle Eastern countries tend to have the highest average inflation rates across the world; 7 out of the highest 10 inflation rates were from countries located on the African continent and the Middle East region. South Sudan is the highest inflation in the region with 111.4% annual inflation, then the Democratic Republic of the Congo (50%), Libya (35%), Egypt (29.7%), Angola (23.3%), Yemen (23%) and Sudan (21%). [4] Reasons of high inflation in those regions can be summed up in the following points: Global food prices falling Africa has always been called the food basket of the world since many of its economies have a high dependence on exporting raw materials and food. On the other hand, food prices (according to the US dollar)have been steadily falling since 2011 and are well below the crises levels found in 2007 and 2008. A lack of foreign currency in these nations caused inflation through the unmet need for currencies to import. Droughts In the 2015 and 2016 harvesting seasons, southern and eastern Africa faced one of the worst droughts seen in 50 years, severely cutting the supply of food and triggering inflation in their respective countries. Wars and conflicts Wars in countries such as Syria, Libya, Yemen, South Sudan and Nigeria, have created devastating effects on these respective countries. Massive currency depreciation makes the country’s exports cheaper for their neighboring countries to import, diminishing the local supply nationwide.[5] Poor government execution The central bank is the main institution combating inflation. In an attempt to minimize the business cycle volatility and fluctuations, there are a few methods used to target inflation. Tactics used when attempting to stabilize the currency - Increasing interest rates - Increasing reserve requirements - Calling in debts that are owed to the government However, poor government executions paired with bad economic conditions have lead governments to seek safe haven in short-sighted actions; affecting inflation in return for having monetary liquidity. For instance, Uganda, Zimbabwe and Somalia have been overprinting money to cover their debt causing huge currency devaluation. In late July of 2008, a Zimbabwean dollar was worth 688 trillion times less than it was in August 2006 after printing so much money to fund budget deficits which propelled inflation rates to skyrocket. Since 2009, Zimbabwean currency has no value and most transactions today are conducted in U.S. dollars or South African Rand.[6] South Sudan In the past year, economic performance has continued to deteriorate in South of Sudan because of the civil war, the sharp fall in oil production, the collapse of global oil prices, unemployment and a decline in agriculture production. This has meant that the government is unable to raise the resources required to finance peace-related costs. [caption id="attachment_4328" align="alignright" width="1024"] The South Sudanese pound is the official currency of the Republic of South Sudan. It is subdivided into 100 piasters.[/caption] Food insecurity and hyperinflation remain challenging. A famine was declared in February 2017 [7]. The annual Consumer Price Index (CPI) increased in the Juba and Wau regions, by 143% and 109% respectively, from September 2016 to September 2017 [8]. The Bank of South Sudan was overprinting money to cover the deficits associated with wardriving inflation to peak at 550% in September 2016. As a direct cause of inflation, when printing money slowed in recent months, inflation decelerated to 102% on September 2017. Congo The Democratic Republic of the Congo (DRC), the largest country in Francophone Africa, is still recovering from a series of conflicts that occurred in the 1990s causing a lasting economic and social tumble. [caption id="attachment_4330" align="aligncenter" width="800"] The franc is the currency of the Democratic Republic of the Congo. It is subdivided into 100 centimes.[/caption] A decline in prices and a decreasing global demand for raw materials exported by the country, (particularly copper and cobalt; which account for 80% of its export revenue) caused the GDP growth to fall to its lowest since 2001 to 2.4% in 2016. This shock affected the external accounts and caused the Congolese franc to drop by 31% against the dollar in 2016; fueling inflation to 24%. [9] Persistently low commodity prices and high government deficits in 2017, exacerbated the franc hitting inflation to 50%. Adding further pressure on inflation, in August 2017 the government banned imports of carbonated drinks, cement, iron and sugar. Headline inflation increased from 67.5% year-on-year in July to 70.8% year-on-year in August. [10] With the government doubling its base interest rate, recovery of commodity prices and the mining output; Congo’s central bank expects inflation in 2018 to fall to about 28%. Zimbabwe 2008... and again in 2017 In 2008, Zimbabwe suffered one of the most interesting, which happened to be the second most severe, episodes of hyperinflation in recorded history. Zimbabwe’s annual inflation rate, which peaked in November 2008, reached 89.7 sextillions (10^23) %. At this point, prices were doubling every 24.7 hours. [caption id="attachment_4331" align="alignright" width="813"] Zimbabwe's Hyperinflation as of June 2016[/caption] At the peak of Zimbabwe’s hyperinflation episode in November 2008, Zimbabweans refused to use the Zimbabwe dollar. The government gave up and decided to dollarize the economy and accept the US dollar as the unit of account for government finance. In January 2009, Zimbabweans were allowed to use the US dollar, the euro, and the South African Rand. However, teachers and civil servants were still being paid in Zimbabwean dollars & prices in shops and restaurants were still in Zimbabwean dollars. The black market thrived in this period, with hyperinflation, anyone who held a Zimbabwean dollar struggled to change it immediately or else would lose all of what they had. Again in 2016, the central bank printed so-called bond notes, in which they said carry a value equal to the dollars, surging the money supply up 36% in 2017. The notes were sold on the underground market. The Zimbabwe National Statistical Agency (Zimstat) said this means prices, as measured by the all of the items included in the consumer price index (CPI), increased by an average of 3.52% in the 12 months leading up to January 2018. [11] Shahd Ezzat, Business Research Analyst at Infomineo. [1] https://www.thebalance.com/what-causes-a-high-rate-of-inflation-357608 [2] https://www.forbes.com/sites/mikepatton/2014/05/09/the-three-countries-with-the-highest-inflation/#7ef155fe172e [3] https://www.economist.com/blogs/economist-explains/2018/02/economist-explains-5 [4]IMF Database [5] https://www.africaresearchinstitute.org/newsite/blog/silent-crisis-food-price-inflation-africa/ [6] https://www.thebalance.com/what-causes-a-high-rate-of-inflation-357608 [7] http://blogs.worldbank.org/africacan/taming-the-tides-of-high-inflation-in-south-sudan [8] http://www.africabusinessradio.com/2018/01/conflict-and-hyperinflation-in-south-sudan-causes-and-solutions/ [9] http://www.worldbank.org/en/country/drc/overview [10] https://home.kpmg.com/content/dam/kpmg/za/pdf/2017/12/DRC-2017H2.pdf [11] https://www.herald.co.zw/annual-inflation-rate-up-352-percent/
At the heart of Africa's economic transformation, the African Continental Free Trade Area (AfCFTA), signed by leaders from 44 African nations at the African Union Summit in Kigali, Rwanda, from March 17th to 21st, 2018, stands as a monumental pact. This ambitious agreement aims to unify Africa into the world’s largest single market, promising to revolutionize the Africa Trade Area by enhancing intra-continental trade and economic prosperity. (1) The pact aims to boost intra-African trade by making Africa a single market of 1.2 billion people and a cumulative GDP over $3.4 trillion. The UN Economic Commission for Africa (UNECA) estimates that the implementation of the agreement could increase intra-African trade by 52% by 2022 (compared with trade levels in 2010) and double the share of intra-African trade (currently around 13% of Africa’s exports) by the start of the next decade. (2) (8) Among the AU member states that did not sign the pact are the continent’s two largest economies - Nigeria and South Africa. Botswana, Lesotho, Namibia, Zambia, Burundi, Eritrea, Benin, Sierra Leone and Guinea Bissau are the other member countries which did not sign the pact. (1) (3) (4) Under the CFTA, governments commit to removing tariffs on 90% of goods produced within the continent. The next step for the governments is to ratify the CFTA in their countries within the next 6 months. (1) Objectives of the Continental Free Trade Area Establish a single continental market for goods and services, with free movement of business professionals and investments, accelerating the establishment of the Continental Customs Union and the African customs union. (5) Expand intra-African trade through better harmonization and coordination of trade liberalization and facilitation across Regional Economic Communities (RECs) and across Africa.(5) Resolve the challenges of multiple and overlapping memberships and expedite the integration processes.(5) Enhance competitiveness at the industry and enterprise level by exploiting opportunities for scale production, continental market access and better reallocation of resources. (5) Potential Benefits & Relevant Implications According to a research paper published by the United Nations Conference on Trade and Development (UNCTAD) in February 2018, the CFTA offers many opportunities for sustainable development and economic growth in the African economies. However, not all countries will benefit to the same extent, and the gain of welfare benefits also implicates relevant costs and commitments. (6) Most of the benefits of further trade integration (i.e. welfare benefits from lower import prices, production efficiency and increase in outputs, higher value-added jobs and exports, technological specialization, etc.) will materialize in the long term, while most of the associated costs of adjustment and integration (i.e. loss in trade tariff revenue, local SME’s vanishing in front of stronger competition, adjusting unemployment, required investment in infrastructure, political and regulatory reforms, etc.) will be incurred in the short term. (6) Using the Global Trade Analysis Project (GTAP) computable general equilibrium (CGE) model, UNCTAD has estimated the quantitative effects of the CFTA according to 2 long-term scenarios: a full Free Trade Agreement (FTA) and Special Product Categorization (SPC). (6) A full Free Trade Agreement (FTA) eliminating all tariffs in the CFTA could generate welfare gains of US$ 16.1 billion, at the cost of US$ 4.1 billion in trade revenue losses (representing 9.1% of current tariff revenues). GDP and employment are expected to grow by 0.97% and 1.17% respectively. Intra-African trade growth is estimated at 33% and the continent's trade deficit is expected to drop by 50.9%. (6) Special Product Categorization (SPC) permanently exempts sensitive products from liberalization. In a scenario in which the sector with the highest current tariff revenue would be exempted from liberalization, UNCTAD simulations estimate a welfare gain of US$ 10.7 billion in the long term. Tariff revenue losses are expected at US$ 3.2 billion (representing 7.2% of current tariff revenues). GDP and employment growth are expected to grow by 0.66% and 0.82% respectively. Intra-African trade is expected to grow by 24%, while, Africa's trade deficit only shrinks by 3.8%. (6) UNCTAD also estimates the employment effect of the agreement by sub-sector (Figure 4). The agriculture sector is extremely relevant for the African economies since it employed about 53% of the continent’s labor force in 2016. Governments are worried about possible adverse impacts of the CFTA on the agriculture sector's economic growth, which would massively affect employment across the continent. Even though the largest employment growth rates are found in manufacturing and services sectors, agriculture sub-sectors are also expected to grow (see Figure 4).(6) Costs & Commitments Despite the many benefits this agreement will render, not all the countries are expected to benefit equally from the free trade agreement. While expected average GDP growth is around 1%, some countries are expected to grow over 3%, while some others are expected to contract (Figure 5). Figure 6 shows that, under the SPC scenario, fewer countries suffer tariff revenue losses above 20% compared to the full FTA scenario. (6) It is vital that African countries commit to continue improving their institutional capacities to efficiently tax and redistribute the gains from the CFTA. This includes integrating and harmonizing regulatory measures, eliminating non-tariff barriers to trade and investment, and facilitating the entry into the formal economy. (6) (8) Another key factor to fully exploit the potential benefits of the CFTA is infrastructure. Addressing Africa’s physical infrastructure gap will require $93 billion per year worth of public and private investment. (8) Even though African exports to the world are undiversified and mostly composed of raw materials, Intra-Africa exports (exports between African countries) contain more value-added products. (7) Manufactured goods represented 43% of intra-Africa exports during 2012-2016, while only representing 20% of exports to the rest of the world. Medium and high technology manufactures represented 25.4% of intra-African trade in 2015, but only accounted for 14.1% of Africa’s exports to developed countries and 13.7% of the continent’s exports to the world (Figure 2). (6) (8) [caption id="attachment_4274" align="aligncenter" width="577"] Figure Africa Continental Free Trade Area[/caption] As such, countries with large manufacturing bases and enabling physical and industrial infrastructure, such as South Africa, Kenya, Egypt, Morocco, and Ethiopia are in a better position to gain the expected benefits of the CFTA. (7) Agriculture will also benefit from the creation of a more viable African marketplace for food. Enhanced trade in agricultural products will also promote agro-processing and further sectoral linkages with manufacturing. (8) Even though the CFTA is a great step forward towards economic integration, there is still a long road ahead. African governments must commit to keep working so that the gains from the CFTA are distributed as fairly as possible, making sure no one is left behind, and ensuring that the CFTA becomes a catalyst for sustainable economic development for the continent as a whole. (8) Sources https://www.businessdailyafrica.com/news/Africa-leaders-ink-largest-free-market-treaty/539546-4351888-ubv411z/index.html https://www.aljazeera.com/news/2018/03/african-continental-free-trade-area-afcfta-180317191954318.html https://edition.cnn.com/2018/03/22/africa/african-trade-agreement-world/index.html https://www.reuters.com/article/us-africa-trade/nigeria-keen-to-ensure-africa-trade-bloc-good-for-itself-president-idUSKBN1GX29V https://au.int/en/ti/cfta/about http://unctad.org/en/PublicationsLibrary/ser-rp-2017d15_en.pdf https://www.moodys.com/research/Moodys-African-free-trade-deal-could-improve-regions-credit-profiles--PR_381153 https://www.weforum.org/agenda/2016/05/this-african-trade-deal-could-improve-lives-across-the-whole-continent/
Each episode MEA Pulse brings you on a journey to learn about the Middle East and Africa regional economy and business trends with a featured country pertinent to the topic. Hosting Ismail Berrada from Infomineo's Casablanca office, MEA Pulse Episode 4 is a discussion on the current state of Morocco's automotive sector and the factors that have contributed to foreign investment within the sector. Tune in to gain more insights on who the key investors in Morocco are and who they are serving, as well as how the government is working to encourage development within the sector. https://soundcloud.com/user-961934619/automotive-sector-in-morocco Tip for Our Podcast Audiences Cut to the chase by clicking on the MEA Pulse icons in the comment section to listen directly to the section that you are most interested in, or you can simply click on any of the following sections. Ismail's self-introduction Morocco's development in the sector Key players within the sector What automotive components is Morocco producing? How is the Moroccan government driving growth in the sector? What factors makes Morocco an attractive region for investment? Is Morocco an attractive region for non-European investors? What is the current state of the Moroccan automotive sector? Is there a risk that OEMs might shift to other regions to base their manufacturing? Can Morocco's performance in the aeronautic sector be compared with its performance in the automotive sector? Become a MEA Pulse Follower! To keep up with future episodes, don't forget to follow MEA Pulse on Soundcloud!
“Broadband can radically change the socio-economic prospects for the region and contribute to higher growth and shared prosperity.” - Carlo Maria Rossotto, World Bank ICT Regional Coordinator in the MENA region[1]. The majority of African countries have certainly been lagging behind in the economic development path. Public opinion usually agrees that this underdevelopment is due to reasons such as bureaucracy, illiteracy, and others. However, in the 21st century, a new variable was added to the development formula and it is often overlooked. Research about the relationship between economic development and internet speeds started to be noted in the beginning of the 2000s. A research conducted in 2011 by Ericsson and others concluded that “doubling the broadband speed for an economy increases GDP by 0.3%”[2]. Not only that, but it also claimed that additional growth can be yielded by additional doublings of speeds. Moreover, a report released by the World Bank and IFC claimed that there is a GDP increase of 1.3% for every 10% increase in high-speed internet connections[3]. "Broadband has the power to spur economic growth by creating efficiency for society, businesses and consumers. It opens up possibilities for more advanced online services, smarter utility services, telecommuting and telepresence." - Johan Wibergh, Head of Business Unit Networks, Ericsson. Researchers have many explanations as to link economic growth to higher internet speeds. For example, it was proved that the shift from slow dial-up connections to broadband had a positive effect on productivity and efficiency[4]. It can lead to expand businesses and services, empower local economies, and social inclusion. All these factors contribute to boosting the competitiveness of the economy. Internet speeds in Africa are very poor compared to the rest of the world. Data shows that 17 of the 30 countries with the slowest internet connections are located in Africa, 7 are in Asia, 6 in South America and 1 in Oceania. None of the top 30 countries are in Africa. To further identify the depth of this issue, a research conducted by Cable.co.uk showed that it takes about 18.5 hours to download a 7.5 GB file in Malawi, 14 hours in Egypt, and 18 minutes in Singapore (fastest internet in the world)[5]. The most promising African country when it comes to internet speed is Kenya. It has the fastest internet connections compared to its African neighbors with an average connection speed of 12.2 Mbps, having an impressive YoY change of 67% in 2017[6]. Not only that, but Kenya’s total available bandwidth jumped from 2028 Gbps end of 2016 to 2906 beginning of 2017, with a % change of 43.28%[7]. These impressive developments come as a result of implementing the National Broadband Strategy for Kenya (NBS) as part of Kenya’s Vision 2030 program, contributing to Kenya’s goal of becoming a knowledge-based economy by the year 2030. NBS aims to reach “broadband connectivity that is always on, and that delivers a minimum of 5 mbps to homes and businesses for high speed access to voice, data, video and application”[8]. It has 5 focus areas which are [9]: Infrastructure, Connectivity and Devices Content, Applications and Innovations Capacity Building and Awareness Policy, Legal and Regulatory Environment Financing and Investment "The strategy has enabled the government to roll out the National Optic Fibre Broadband Infrastructure that has linked all the counties to the Internet by fibre cable. Fibre cable ground installation and provision of 4G network coverage has contributed to the high speeds and efficiency in connectivity," - Joseph Mucheru, the Kenya's Cabinet Secretary in the Ministry of Information[10] This strategy has proved successful with extinguished growth in both start-up and e-commerce segments in Kenya[11], spurring massive economic and social benefits. Currently, Nairobi is considered as East Africa’s most vibrant technology hub and Kenya is internationally recognized as a pioneer in the mobile banking field (M-Pesa), boosting access to finance and financial inclusion for Kenyan citizens[12]. All in all, the Kenyan experience demonstrated that investment in internet speeds and penetration has many positive spillover effects on various aspects of the economy. Sahar ElDeeb, Analyst at Infomineo Sources [1] http://www.worldbank.org/en/news/press-release/2014/02/06/access-to-high-speed-internet-key-to-job-creation-social-inclusion-arab-world [2] https://www.ericsson.com/en/press-releases/2011/9/new-study-quantifies-the-impact-of-broadband-speed-on-gdp [3] http://www.infodev.org/articles/high-speed-internet-drives-economic-growth [4] https://www.itu.int/ITU-D/treg/broadband/ITU-BB-Reports_Impact-of-Broadband-on-the-Economy.pdf [5] https://www.cable.co.uk/media-centre/release/New-Worldwide-Broadband-Speed-League-Unveiled-UK-Ranks-31 [6] https://www.akamai.com/us/en/multimedia/documents/state-of-the-internet/q1-2017-state-of-the-internet-connectivity-report.pdf [7] http://www.ca.go.ke/images/downloads/STATISTICS/SECTOR%20STATISTICS%20REPORT%20Q3%20FY%202016-2017.pdf [8] http://www.ca.go.ke/images//downloads/PUBLICATIONS/NATIONAL%20BROADBAND%20STRATEGY/National%20Broadband%20Strategy.pdf [9] http://www.ca.go.ke/images//downloads/PUBLICATIONS/NATIONAL%20BROADBAND%20STRATEGY/National%20Broadband%20Strategy.pdf [10] http://allafrica.com/stories/201704050037.html [11] https://www.oxfordbusinessgroup.com/overview/expanding-usage-internet-penetration-growing-country-aims-maintain-its-status-technology-centre [12] https://www2.deloitte.com/content/dam/Deloitte/ke/Documents/tax/Economic%20Outlook%202016%20KE.pdf
Each episode MEA Pulse brings you on a journey to learn about the Middle East and Africa regional economy and business trends with a featured country pertinent to the topic. Hosting Antonio Pilogallo from Infomineo's Casablanca office, MEA Pulse Episode 3 is a discussion on the current state of Mozambique and the strategies that are currently in place to promote economical growth and development within the country. Tune in to gain more insights on what sectors are attracting foreign investors and what are the ongoing development projects within the country. https://soundcloud.com/user-961934619/podcast-on-mozambique/s-qJfd8 Tip for Our Podcast Audiences Cut to the chase by clicking on the MEA Pulse icons in the comment section to listen directly to the section that you are most interested in, or you can simply click on any of the following sections. Antonio's self-introduction Overview on the country The economy and main industries The Foreign investment Environment The Economic Development Prospects The Entrepreneurial Environment Business Research and Access to Information Become a MEA Pulse Follower! To keep up with future episodes, don't forget to follow MEA Pulse on Soundcloud!