II. SOUTHERN AFRICAN ECONOMY

Overview

Economic performance in Southern Africa improved in 2000 as compared to 1999, even though many of the countries experienced difficulties with their balance of payments as a result of higher oil prices, for which most countries are net importers. In addition, negative growth rate recorded in Zimbabwe, which is estimated at -4.2 per cent, greatly affected average gross domestic product (GDP) growth rate of the subregion. As a result, preliminary data for the11 Southern African countries served by the Centre indicate that aggregate output grew by 3.3 per cent in 2000, compared to 3.4 per cent in 1999. Growth rate of real GDP per capita was on the decline in most countries in 2000. In Lesotho, for example, real GDP per capita declined from US$410 in 1999 to US$383 in 2000, while the corresponding figures for Namibia and Swaziland are US$1,645 and US$1,269 in 2000 as compared to US$1,714 and US$1,318 in 1999, respectively.

Most countries that managed to achieve higher growth rates in 2000 also registered an increase in foreign direct investment (FDI), which injected additional resources to the national economy. All countries, except Zimbabwe, managed to achieve a positive, albeit lower, GDP growth rates in 2000 compared to 1999. Investors have been encouraged partly by the deepening of structural reforms and subsequent improvement in macroeconomic environment in most of the countries, coupled with the improvements in governance and democracy.

Related to the latter, it is worth noting that over the last two years, six general elections were held within the subregion in Botswana, Malawi, Mozambique, Namibia, South Africa and Zimbabwe. Most of these returned to the status quo they did so, in many cases, with large majority. In Mozambique, for example, despite the devastating floods early in 2000, the country remained attractive to overseas investors. FDI inflows to the country are estimated to have reach US$334 million, a five-fold increase in just two years.

In Zambia, the introduction of fresh investment, new technology and improved management in the copper mines since privatization in February 2000, began to reverse the decline in copper production. Though real increase in copper production was not significant in year 2000, new investment in the mining sector, together with expected increase in copper prices, should help the economy to grow by at least 5 per cent in 2001, as compared to the estimate of 3.5 per cent in 2000.

Low aggregate GDP growth rate in other countries was the consequence of unattractive economic environment, particularly in Zimbabwe, Lesotho and Malawi. The negative growth rate recorded in Zimbabwe, for example, was due to discontinued FDI inflows to the country arising from the political uncertainties after the occupation of farms in April 2000. This has contributed to depressed earnings from commercial agriculture and related industries to about 40 per cent.

Despite the overall progress in 2000, GDP growth rates remained below the sustainability target of 6 per cent in most countries, the growth target of 6 per cent defined in the United Nations New Agenda for Development in Africa (UN-NADAF) as the minimum required for sustainable economic development. Only two countries (i.e. Mauritius and Mozambique) succeeded in surpassing the GDP growth requirement of 6.2 per cent for reducing poverty by half in 2015, the target which was agreed to in 1995 at the World Summit for Social Development. This implies that the region still not fully benefiting from its abundant natural resources and economic potentials. Figure III gives GDP growth rates in Southern Africa for the period 1998-2000 and estimates for 2001.

Figure III
Southern Africa GDP Rates, 1998-2001

Many of the factors that have accounted for the weak economic performance in Southern Africa over the years were still once again at work in 2000, though to different extent and with varying intensities in individual countries. One underlying cause for the low economic performance continued to be the failure to diversify the narrow production and export base.

The region experienced heavy rains in January/February 2000 causing severe flooding in Southern Mozambique, Swaziland, Zimbabwe, northern and eastern South Africa as well as eastern and southern Botswana. These floods disrupted economic activities, which had a strong bearing on economic performance in the year 2000, particularly for Mozambique. Moreover, close to 700 people lost their lives in Mozambique, over 70 people in Zimbabwe, and 13 people in Botswana. In addition, Mozambique had close to 1 million people homeless while for Zimbabwe and Botswana, these figures stood at 20,000 and 106,776, respectively.

There were strong inflationary pressures in a number of countries in the sub-region in 2000. The most prominent cases were in Angola and Zimbabwe. In Angola, inflation was reported at 239.3 per cent, while in Zimbabwe inflation reached levels estimated at 59.6 per cent. At the same time, there were significant reductions in inflationary pressures between 1999 and 2000 in Malawi and Mauritius. Reductions in inflation pressures were from 44.8 to 28.4 per cent, in the case of Malawi and from 6.9 to 4.6 per cent, in the case of Mauritius. The lowering of inflationary pressures was primarily a result of greater fiscal and monetary discipline, including the curtailment of salary increases, which contributed to a sharp reduction in budget deficits.

High levels of external debt continued to exert a crushing burden on economic growth in most countries in the sub-region, where four of the countries are classified as severely indebted low-income countries. Aggregate data indicate total external debt at US$81.7 billion in 1998, the last year for which complete data is available. Debt servicing requirements in hard currency prevent many countries from making adequate investments in education and health care as well as from responding effectively to natural disasters and other emergencies.

However, the aggregate data on total external debt conceal a wide variation at country level. With the exception of Lesotho and Malawi, where external debt increased by 2.3 and 1.2 per cent, respectively, in 1998, most countries achieved an encouraging, albeit modest, decrease in the volume of their external debt. In Mauritius, for example, debt stock decreased by over 20 per cent while in Namibia the decrease was 12 per cent from US$146 million in 1997 to US$128 million in 1998. In the Republic of South Africa, the corresponding decrease was much more modest at 2 per cent. While Mozambique remained particularly dependent on external borrowing and development assistance, its external debt decreased by 2 per cent in 1998, which was mostly due to debt forgiveness rather than net payment. As a result of strict debt management policies and the avoidance of new borrowing by member States, there are indications that total outstanding debt of Southern African countries would decline further in 2001 if debt cancellation is effected.

Poverty, by all accounts, continued to be a major economic and social problem in the sub-region. The incidence of poverty, measured by a minimum level of consumption expenditure per head, remained remarkably high. The proportion of population living under conditions of poverty increased in both the rural areas, where the economy continued to decline, and in urban areas, where there was a lack of dynamism in fostering growth and job creation in the industrial and service sectors.

In Mozambique, for example, the first comprehensive household data report published by the government in 2000 indicates that the incidence of poverty country-wide is at 69.4 per cent, while in Malawi government estimates that 60 per cent of the population live below the poverty datum line. In Zambia, the percentage of people living in dire poverty was estimated to exceed 70 per cent in 2000.

Divergence in Performance at Country Level

Macroeconomic performance has been rather uneven among the countries oft he subregion, partly due to some structural differences in their economies and international community responsiveness to certain macroeconomic policies. In contrast to the slow growth and even decline in some countries, Mauritius and Mozambique registered economic growth rates above 7 per cent in 2000. The other countries exhibited lower, albeit positive growth rates, which with the exception of Lesotho, Malawi, Swaziland and Zimbabwe, were above 3 per cent. One country, Zimbabwe is estimated to have recorded a negative growth rate of more than 6 per cent in 2000.

Angola: Despite the effects of war there was a rebound in growth in 2000. GDP growth rate is estimated to have increased by 4.9 per cent compared to 2.7 per cent in 1999. Contributing to the strong growth of GDP was the increase in oil in terms of production and prices. Crude oil production is estimated to have increased by 20 per cent from 980 thousand barrels per day (b/d) in 1999 to more than 1million b/d in 2000. These resources, however, have been diverted towards government war efforts.

Botswana: Strong economic recovery in the non-mining sector, particularly in transport and communications, hotels and restaurants and general government contributed to a high rate of growth of 8.5 per cent in 1999. In 2000, preliminary economic indicators show, however, that GDP grew by only 5.5 per cent, owing to a fall in diamond production and the impact of drought on agriculture in mid-1999.

Lesotho: After the political unrest in September 1998, damaging effects from which were carried over to 1999, there have been some positive signs following government efforts to revive business environment and restore macroeconomic balance in the country. The privatization process, for example, was successful as the 70 per cent of Lesotho Telecom and the government's remaining holding in Vodacom were sold. Although GDP growth rate has been stagnant at 2 per cent in 1999 and 2000, preliminary figures for the year 2001 indicate a modest growth rate of 2.2 per cent.

Malawi: Policy orientation in 2000 emphasised strengthening fiscal discipline, increasing accountability, and accelerating liberalisation and privatisation. Performance in the tobacco sector, however, remained the main determinant of the economic growth. GDP growth rate was estimated at 2.5 per cent from 4.7 per cent in 1999, owing to poor tobacco prices. The Interim Poverty Reduction Strategy Paper (I-PRSP), which was published in August 2000, will continue to be the basis of government policies in the short- to -medium term.

Mauritius: After the slight decline in GDP in 1999, due to adverse weather conditions associated with La Niña, the successor of El Niño oceanic current, the economy experienced a strong rebound in exports, while domestic demand remained robust and tourism activities increasing by 10 per cent. In 2000, agricultural production recovered from the drought-hit season of 1999 with output estimated to have grown by 34 per cent in 2000 with real GDP estimated to have increased by 8 per cent.

Mozambique: The devastating floods, which hit the country during the first quarter of 2000, have resulted in a reduced GDP growth rate. Real GDP growth rate is estimated to be 7.5 per cent in 2000 as compared to 10 per cent in 1999. Nevertheless, continued international support to the economy, coupled with government implementation of monetary and fiscal austerity measures, should continue to underpin macroeconomic stabilization and high rates of real GDP growth rate in 2001. In addition, the mining sector, which is believed to have considerable potential, is attracting foreign direct investment (FDI) associated with exploration activities. Furthermore, the conducive conditions for profitable and well-managed banking operations in the country have made the financial sector increasingly dynamic in recent years with newer banks, such as Banque Nationale de Paris (BNP) and Nedbank of South Africa, aggressively increasing their presence in the country.

Namibia: GDP is estimated to have increase by 3 per cent, following an increase in offshore diamond production, the resumption of precious metal production by the Tsumeb Corporation, continued growth in agriculture and fishing, as well as higher value added by the construction industry. With the three main mining vessels now fully operational, Namibia Mineral Corporation (Namco) is on course to expand its offshore diamond production from 1,600 carats in 2000 to 450,000 carats in 2001. This will in turn boost GDP growth rate to about 4.8 per cent in year 2001.

South Africa: The most advanced economy in Southern Africa began to recover from the disappointing growth rates recorded in 1998 and 1999. After two consecutive years of decline, GDP rebounded in 2000 and grew at 3.1 per cent compared to 1.9 per cent in 1999. In addition to the impressive growth of the tertiary sector (trade, banking, insurance and related services), various policy measures also played an important role in stimulating the economy, including sound macroeconomic policies, the recovery in financial assets values and the tax relief measures contained in the 2000/2001 budget. Furthermore, export recovery, particularly in the mining sector, as a result of stronger markets in both the European Union (EU) and Asia, also contributed to the recovery of the economy in 2000.

Swaziland: Although the country has not yet joined the free-trade area of the Common market for Eastern and Southern Africa (COMESA-FTA), the government relaxed import controls as part of its policy of trade liberalization. Preliminary estimates indicate a GDP growth rate of 3.9 per cent in year 2000, compared to 3.1 in 1999. This modest increase was attributed to the expansion in sugar production, which according to Swaziland Sugar Association, increased to 556,000 tonnes in 2000/2001, compared to 534,000 tonnes in 1999/2000.

Zambia: A combination of good rains, increased area under cultivation and improved farmer access to fertilizers made 1999/2000 a credible season. Rice production, for example, increased by 130 per cent to 89,700 tonnes. This contributed to improved GDP growth rate from 2.2 per cent in 1999 to 3.5 per cent in 2000. In addition, the falling food prices due to good maize harvest resulted in a marginal drop of the annualized inflation rate from 30 per cent in 1999 to 26 per cent in 2000.

Zimbabwe: The general elections of June 2000 were contentious, highly divisive and dissipated government efforts to improve the management of the economy. Economic performance was, therefore, adversely affected by lack of external financial support to government economic programs, coupled with weak tobacco and gold prices. The country's economy contracted significantly with GDP estimated to have fallen by nearly 6 per cent in 2000. In addition, political uncertainties following the occupation of farms in April 2000 significantly reduced tourism receipts, which also aggravated the decline of the economy.

Trade, Finance and Investment

The subregion enjoyed a fairly overall open investment and trade regime during the reporting period. While aggregate intra-subregional trade data is not available it is, however, believed that this trade is taking place and would have increased to high proportion, particularly following the launching of COMESA-FTA and the entry into effect of SADC Protocol on Trade in October and September 2000, respectively. It is anticipated that both developments will have a positive impact on trade among the member States and will build business confidence in the sub-region and beyond.

Within the context of SADC, Southern African member States were involved in intensive and complex negotiations on tariff reduction schedules, rules of origin, harmonization of customs and trade documentation, non-tariff barriers, sanitary and phytosanitary and other trade measures since January 1999. While not all details have been resolved, agreement was reached on a critical mass of the technical issues so that member States were able to ratify the Protocol, publish tariffs reduction and set a date for the start of the gradual liberalization of intra-subregional trade within the frameworks of both COMESA and SADC. Both institutions have worked closely to ensure harmony and coherence in trade regimes as the two organizations share some common memberships.

In the finance sector, there has been remarkable liberalization of exchange controls in the region as the economies adopted market oriented exchange rate regimes. The current account in all the Member States has been liberalized and there are no foreign exchange controls. However, there are variances with respect to the capital account. Countries such as Botswana, Mauritius and Zambia have completely liberalized their capital accounts, whereas other countries still maintain certain form of controls with benchmarks or thresholds below which there are no controls. It should be noted that for investments destined for the Southern Africa sub-region, the threshold is higher than that obtaining for investment destined for third countries.

Following harmonization of listing requirements and the regulations of stock exchanges in most Southern African member States, there has been an increase in activity on the various stock exchanges. There is now provision for cross or dual listing of companies on the stock exchanges in the region. This move is expected to attract more portfolio investment into the subregion.

In addition, capital markets continued to undergo significant developments in some countries in 2000. Harmonization of legal framework and listing requirements at Southern African level contributed to improved performance of stock exchanges in the sub-region. For example, the Mozambique Stock Market, the Bolsa de Valores de Moçambique (BVM), was opened in 1999 with the first listing being the beer producer, Cervejas de Moçambique (CDM). The listing of other privatized companies is expected to follow.

The investment climate in much of Southern Africa has improved dramatically since the mid-1990s as governments were active in trying to create a more attractive policy environment. All countries have loosened barriers to foreign investment and introduced a mix of investment incentives, which vary from country to country. Due to these changes, foreign investment into Southern Africa is looking rosier than it has for decades, although the response has not been concomitant to the efforts made. This can be linked to the perception held outside the region that investments are not safe in the region, citing conflicts going on in Angola and the land issue in Zimbabwe as examples.

Notwithstanding these conflicts, the investment climate has improved significantly in the other member States. Progress towards the improvement of the investment climate for domestic and foreign investors were particularly made in areas such as capital markets and tax reforms. Opportunities were also created in the areas of infrastructure development, privatization of state enterprises and joint management of natural resources. An example is the first trans-frontier game in Africa which combined Gemsbok National Park in Botswana and the Kalahari Gemsbok National Park in South Africa. There are similar initiatives between Mozambique, South Africa and Zimbabwe.

Policy Focus

The majority of the countries maintained macroeconomic stability in 2000. While policies varied from country to country, the overriding objective comprised two major elements: macroeconomic stability and supply-side reforms. Fiscal consolidation, as indicated by the reduction and control of inflation and the lowering of general government budget deficits, has been the centrepiece of macroeconomic stability measures. Concrete measures focused on better expenditure control programmes and revenue collection measures. The supply-side policies concentrated on the deregulation of product and factor markets, the privatization of state-owned assets and the supply of services, and the liberalization of international trade and capital markets. The underlying assumption has been that the smaller the role of the state, whether in the actual production of goods and services or in its attempt to intervene in the workings of the market economy, the better would be the economic performance of the private sector and of the economy as a whole. This "mainstream" policy framework has been the cornerstone of macro-economic policy stance in most countries since 1999.

Privatization continued to be another area of focus for economic reforms. The main goal was to cut waste, improve economic efficiency, stimulate the private sector, mobilize more foreign and domestic investment and revive economic growth. Although accepted as a major policy objective, privatization in Africa as a whole remains highly controversial and politically risky. In some countries, the process is fraught with many problems such as strikes against proposed sell-off of state enterprises as unions fear for job loses or reduced benefits. As a result, governments have tended to proceed more carefully with the privatization programs in order to avoid the charges of "Selling the family jewel for a song."

There is, therefore, an understandable reluctance on the part of many African countries, including those in Southern Africa, to dispose of public enterprises entirely to foreign investors at prices which are often seen as unfavourable. On the other hand, weak entrepreneurship, low domestic savings and small capital markets combine to preclude the participation of indigenous nationals in the privatization process. Furthermore, some governments want to proceed in a measured way, in order to avoid the pitfalls, conflicts and setbacks that marked many of the privatizations carried out in the late 1980s and early 1990s. This latter approach is becoming increasingly evident across the sub-region.

Over the past few years, telecommunication sector has become a major focus for privatization. Many Southern African countries realized that selling shares of their telecommunication enterprises to established foreign companies, the so-called strategic partners, was an easy way to gain access to new technologies and investment resources to modernize and expand their systems.