African Countries Show Positive Growth But Region Still Lags Behind Rest Of The World

WASHINGTON, April 6, 2005 — Sub-Saharan Africa grew by an estimated 3.8 percent in 2004, with virtually all countries reporting positive growth. Growth in the region is projected to pick up in 2005 to 4.1 percent as the benefits from past reforms and a more peaceful environment play out in expanded economic activity, says a new World Bank report.

According to Global Development Finance (GDF) 2005, relatively high metals and minerals prices will contribute to good performance in many countries, notably South Africa, while continued upward pressure on oil prices will benefit regional oil exporters such as Nigeria. The transition to peace in a number of countries is improving growth prospects, with Ethiopia and Sierra Leone expected to perform particularly well.

The projected upturn in Europe, the region's main trading partner, should also stimulate growth, while rising exports to China will play an increasing role. However, the report cautions that despite substantially improved performance, per capita GDP growth in the region will lag the rest of the world by significant margin, implying a further widening of income gaps.

"The results from 2004 are encouraging. Historically, economic growth in Africa has been insufficient, inadequately shared, and short-lived. The fact that a number of African countries are registering relatively healthy growth rates underscores the potential for an acceleration of economic growth throughout the continent," said Gobind Nankani, the World Bank's Vice President for Sub-Saharan Africa. He added that it is crucial that countries build in strategies enabling poor people to participate in, and contribute to, continued economic expansion.

Global Development Finance estimates a global economic growth of 3.8 percent in 2004-the highest in four years-but projects a deceleration of growth to 3.1 percent in 2005, as a result of expected increases in U.S. interest rates, fiscal tightening and the effects of the 25-percent real effective appreciation of the Euro. The report tracks developing countries' growth at 6.6 percent in 2004 -the fastest in 30 years-but expects growth to moderate to 5.7 percent in 2005.

In particular, the report identifies as risks to the current favorable climate a sharp depreciation of the U.S. dollar which could result in major capital losses for developing countries with large dollar reserves, and higher global interest rates that could contribute to wider emerging-market bond spreads.

Net private capital flows, including debt and equity to developing countries, increased by $51 billion to $301.3 billion in 2004. Of this, net foreign direct investment (FDI) totaled $165.5 billion, up by $13.7 billion in 2004.

FDI inflows to developing countries increased during 2004, partly offsetting the decline during the previous two years. While the concentration of FDI flows remains high (five emerging market economies account for 60 percent of FDI and 88 percent of the increase), the share flowing to low income countries reached 11 percent, the highest in 15 years. Among other things, the increase reflects strong gains in the oil and gas sectors of a few African countries (Angola, Chad, Equatorial Guinea, and Sudan).

FDI outflows from developing countries rose to an estimated $40 billion in 2004, up from $16 billion in 2002; these outflows are coming, for the most part, from the same countries receiving the bulk of private capital inflows, namely Brazil, China, Mexico and Russia.

For low-income countries, risks from the current global environment are linked less to the evolution of interest rates and exchange rates (since they have only limited access anyway) and more to the possible impact on aid flows (from both bilateral and multilateral sources) and other financing sources. While the challenge of generating sufficient ODA to help these countries reach the Millennium Development Goals (MDGs) remains large, there are some encouraging signs of progress, as a number of donors have increased their commitment levels and ODA flows have turned upwards. But there remain concerns about the increase in 'net' flows, and whether adequate flows are being directed towards crucial regions, such as Africa. ODA levels remain well below those reached in the early 1990s.

The report points out that Sub-Saharan Africa has received 60 percent of the increases in ODA disbursements during the past five years. However, with most of these funds allocated to post-conflict situations, the increase in development aid has been small. In addition, some of the increases have taken the form of contributions to debt reduction and technical assistance, and thus have translated into new funds for African countries to invest in development.

The GDF 2005 also highlights growing evidence that non-aid flows are becoming more important financing sources for poor countries—from rapid expansion in FDI outlined above, to grants from NGOs, which rose by $5 billion between 1990 and 2003, up from 10 to 17 percent of official development aid. Workers' remittance flows also rose, from $116 billion in 2003 to $125.8 billion in 2004. More broadly, South-South linkages are emerging as a key factor in poorer countries - in terms of FDI, remittances, and even development assistance. Such flows cannot and should not substitute for sustained and targeted official aid, they nonetheless highlight the growing options and opportunities open to low-income countries.

While alternative financing sources are important, Global Development Finance 2005 notes that industrialized country governments continue to play the leading role in mobilizing the external resources on which developing countries are depending to achieve the MDGs.