African Economic Report 1998

I. The African Economy in 1997
1. Africa’s economic performance in 1997 demonstrated once again the fragility of the recovery and underscored the predominance of exogenous factors in the determination of the outturn. ECA preliminary estimates show that regional output increased by 2.9 per cent in 1997 compared to 4 per cent in 1996 and 2.7 per cent of 1995. Despite the considerable reduction in the overall rate of growth, per capita income increased by a mere 0.1 per cent.

2. This average, however, masks a large variation in growth across the continent. Table 1 classifies countries on the basis of the GDP growth they achieved in 1997. Overall GDP growth in 1997 ranged between a low of -8.7 per cent and a high of 12.7 per cent. Nearly 60 per cent of the African countries (31 out of 53) registered rates of economic growth in excess of their population growth rates, resulting in increased per capita incomes. About half of these countries posted annual economic growth rates of more than 5 per cent; the threshold required for sustained poverty-reduction growth in Africa. Of these countries, sevenposted growth rates in excess of 6 per cent. Only three countries had negative growth in 1997 compared to two in 1996, six in 1995 and twelve in 1994.

Table 1.1: Frequency Distribution of African Countries According to Growth Performance

Source: Statistical Appendix 3.

The economic growth of the thirteen African oil-exporting countries whose combined GDP accounts for 51.1 per cent of the regional GDP, decelerated from 4.2 per cent in 1996 to 3.6 per cent in 1997. The slowdown was prompted by declining oil prices and the effect of negative factors on the agriculture sector. Crude oil prices declined by 10 per cent in 1997 from an average of US$ 22.1 to US$ 20.0 per barrel. To compensate for the shortfall in their foreign exchange earnings, these countries -- and more so the non-OPEC producers -- increased their output from 368.42 million tons in 1996 to 378.40 million tons in 1997, an increase of 2.7 per cent. Growth in the non-oil exporting countries declined from 3.7 per cent in 1996 to 2.3 per cent in 1997. For the least developed countries, the 1996 momentum was not sustained as GDP growth decreased from 4.9 per cent to 2.4 per cent in 1997.

Table 1.2: Recent Economic Performance Indicators of Africa, 1993-1997 (Percentage Growth Rates or otherwise as indicated)

Source: ECA Secretariat
• Percentage changes over previous year
  

I.A.1. Growth of Agricultural Output

10. The strong recovery of agricultural output in 1996 was not sustained in 1997. For the African region as a whole, agricultural production growth decelerated to 1.7 per cent in 1997, after bumper crops had raised output by a record 5.2 per cent in 1996. This was essentially due to weather conditions that affected production in major producer nations. The production of the major export commodities fell in 1997 below their 1996 levels and this decline was particularly noticeable in the case of cocoa and coffee.

11. In the food sub-sector, regional production in 1997 was adversely affected by the erratic changes in weather conditions, mainly because most countries depend overwhelmingly on rain-fed agriculture. Civil strife also played a significant part in accentuating the region's food-supply difficulties. According to data from the United Nations Food and Agricultural Organization (FAO), cereal production fell by about 10.5 per cent from 126 million metric tons in 1996 to 113 million metric tons in 1997. Fruits, jute and vegetable production was slightly lower than in 1996, while the production of pulses increased.

12. Due to poor performance, difficulties are emerging in the eastern and north-eastern parts of the region. In Tanzania, for example, the 1997 cereal crop declined by one-third. In Rwanda and Burundi, although production has been recovering, it remained well below pre-crisis level. In Ethiopia and Eritrea food production fell drastically. Stocks were exhausted in an effort to make up for the shortfall and this required an urgent call for assistance to the international community to contain an impending disaster.

Table 1.3: Performance of Food Crops in Africa, 1994-1997 (Million Tons)

Source: FAOSTAT Database

13. In West Africa, the performance of agriculture was mixed, but the already precarious food situation in some countries such as Sierra Leone continued to deteriorate as a result of the negative impact of civil strife. Improvement was achieved in Liberia following the conclusion of the civil war and the installation of the democratically elected government.

14. The generally negative or poor record of 1997 points to serious gaps in food supply for the majority of African countries. Again this is likely to lead to a sharp decline in the stock-to-utilisation ratio in 1998, pushing it below the minimum level necessary to safeguard regional food security. Of the 31 countries projected by the FAO to face critical food deficits, 20 are located in Africa. The replenishment of stocks might be suspended by low-income countries and the resumption of such efforts will require sizeable improvements in production techniques and increases in actual production in the coming year otherwise these countries will revert to long-term dependence on food aid.

15. Among the subregions, the most drastic falls in cereal production were recorded in North Africa, where production declined by 50-60 per cent in Algeria, Morocco and Tunisia, and by about 30 per cent n the subregion as a whole. Performance was poor in Central Africa and mixed in West, East and Southern Africa.

16. Shortfalls in the production of cereals and other food crops triggered an increase in food prices and required significantly larger imports, particularly wheat. Preliminary estimates by the FAO put the 1997/1998 wheat imports by African countries at a record 21 millions tons, with imports by Algeria, Egypt, Morocco and Tunisia forecast to exceed 14 million tons.

17. Major commercial crops did not do well in 1997, again as a result of adverse weather conditions. The cocoa bean harvest declined by 9 per cent. Most of the shortfall came from Côte d'Ivoire, which reported climatic disruptions during the planting and harvesting seasons. Similarly, tea and sugar production declined by 7.8 per cent and 0.48 per cent respectively, in 1997. The region's negative tea output resulted mainly from a poor harvest in Kenya.

18. The production of green coffee was much lower in 1997 than in 1996 in Kenya, Madagascar, Rwanda, Tanzania and Uganda as well as in Côte d'Ivoire. Ethiopia managed to increase production by some 7.8 per cent, but the prevailing adverse conditions in Kenya and Uganda resulted in a 21- and 25.8-per cent fall in the two countries respectively. In consequence, the regional output of coffee fell by 7 per cent from about 1.2 million metric tons in 1996 to about 1.1 million metric tons in 1997. The generic decline in commercial-crop production was equally evident in other crops, with total seed cotton production declining by 1.4 per cent.

I.A.2. Growth in the Industrial Sector

19. The output of the industrial sector (broadly defined to include non-agricultural commodity production) increased by 3.3 per cent in 1997, well below the 1996 rate of 5.4 per cent, due mainly to the slowdown in the mining subsector (3.3 per cent in 1997 as against 6.5 per cent in 1996). Manufacturing industries maintained their growth rate of 2.5 per cent. The booming industrial activities in 1997 as in the previous years, were construction (5.4 per cent) and energy and water (3.1 per cent).

20. Performance indicators of the African mining industry in 1997 were similar to those for 1996 despite the surge in investment. The production results of the 15 main minerals representing over 90 per cent of the sector's total output show that, with few exceptions, output either declined or stagnated in 1997. The overall mining-production index (excluding oil) remained virtually unchanged in 1997, increasing marginally by 0.6 per cent over 1996.

21. In Ghana, gold production in the first half of 1997 increased by 10 per cent at the Ashanti Goldfield at Obuasi, the country's largest. Despite this early surge in output, production was estimated to have remained unchanged at 44.4 tons for 1997 due to considerable slowdown during the second half of the year.

22. In South Africa, most mines continued to face significant productivity problems associated with working conditions, dwindling reserves and slender profit margins. Output in the sector fell by 0.5 per cent in the first quarter of 1997. Gold production was particularly affected due to the declining quality and quantity of the ore milled. Production in 1997 was estimated at 484 tons, down from 495 tons in 1996. The increase in copper production in Zambia was overshadowed by a steep decline in production in the Democratic Republic of Congo.

23. The oil sector continued to pursue dynamic development in 1997. The favourable conditions under which African countries offer concessions to the oil companies, coupled with low exploration and production costs, due to technological developments, have continued to attract investment to the continent. Important new oil discoveries were reported, particularly in Algeria, Angola, Egypt and Equatorial Guinea, and exploration and drilling activities have been booming across the continent.

24. Crude oil production in Africa increased from 368.4 million tons in 1996 to 378.4 million tons in 1997. Production from members of the Organization of Petroleum Exporting Countries (OPEC) increased marginally to 252.10 million tons, 2.8 per cent more than in 1996, due to the quota system imposed on member countries by the organization. Production from non-OPEC oil-producing countries rose to 126.30 million tons in 1997 from 123.24 millions tons in 1996.

Table 1.4: Crude Oil Production in Africa, 1993-1997 (Millions of tons)

25. In 1997, the manufacturing industry maintained its previous year's growth at 2.5 per cent. The sector continues to be constrained by a host of structural and demand constraints. With the exception of the North African countries, where capacity utilization and expansion remained buoyant, performance remained subdued in the rest of the continent. In South Africa where the industrial infrastructure is most advanced, depressed demand entailed capacity under-utilization.

26. The services sector continued to grow at a higher rate than commodity production, increasing by 4 per cent in 1997. The liberalization of financial services and trade is the main factor driving its growth. The high rate of expansion of the sector had a positive spillover effect on the demand for and subsequent growth in energy, water and construction activities which, as pointed out earlier, are booming.

27. While the formal services are growing at high rate, this may not accurately reflect the actual size and dynamics of the sector since it may not capture the informal services, which seem to be growing much faster than the formal ones.

I.A.3. Savings and Investment

28. Gross domestic investment has remained very low compared to the volume required to accelerate the rate of economic growth as well as in comparison with the high-performing areas in Southeast Asia. In the last two years, the volume of investment as a proportion of GDP stabilized at 21 per cent, a considerable improvement over the 19 per cent of the 1990-1995 period. One major reason behind the low volume of investment is the low mobilization of resources from both domestic and external sources.

29. Table 1.5 contains statistics on the volume of saving and investment as well as the resource gap as a proportion of GDP from 1975 to 1997.

30. First, gross domestic savings (GDS) defined as GDP less total consumption expenditure has been consistently declining. In 1975-84, African countries saved a quarter of their GDP, but this fell to 20 per cent during the second half of the 1980s and to 16 per cent for the 1990-97 period. Compared to the 1975-1984 period, gross domestic savings in Africa declined by 34 per cent during the first half of the 1990s. The fall was most severe for the North African countries, where it amounted to 45 per cent (from 34 per cent to 19 per cent of GDP) while for Sub-Saharan Africa, the fall was around 25 per cent. The decline in saving was relatively harsh for the SSA countries, excluding the two dominant economies of Nigeria and South Africa. Starting from a low base of 15 per cent of GDP or 63 per cent of the regional GDS in the 1974-84 period, it declined by 28 percent to 11 per cent in 1990-97.

Table 1.5: Savings and Investment in Africa 1975-97:periodical average (as % of GDP)

Source: IMF, World Economic Outlook, May 1997

31. Gross national savings (GNS), defined as the sum of GDS, net factor income and net private and public transfers from abroad, tells an even more daunting story. Between 1975-84 and 1990-97, GNS declined by 42 per cent for Africa as a whole, by 50 per cent for North Africa and by 39 per cent for SSA. GNS in SSA excluding South Africa and Nigeria fell by 60 per cent.

32. During the same period, the net transfer of resources from Africa averaged 3.9 per cent of GDP per annum. Net transfers abroad as the difference between gross domestic savings and gross national savings increased from 3.3 per cent of GDP in 1975-84 to an annual average of 4.6 per cent during the mid-1980s and then decreased to 3.8 per cent in 1990-1997.

33. The decline in GNS has had important repercussions on gross investment in Africa in two major respects. The first is the negative impact of declining GNS on investment. The correspondence and correlation between the proportion of GDP saved and invested and between the latter and GDP is very robust. Hence, as GNS declined so did the volume of investment and growth. The second is the increased dependence of these countries on external resources.

34. Between 1975 and 1997, the resource gap (defined as the difference between GDI and GNS) averaged 5.9 per cent of GDP per annum. In the North African countries, the difference between the two parameters increased from 0.6 per cent of GDP in 1975-84 to 10 per cent of GDP in 1985-89, before decreasing to 9 per cent during the first half of the 1990s. The corresponding figures for the SSA countries were 5, 4 and 6 per cent of GDP respectively. If South Africa and Nigeria are excluded from the SSA aggregates, these figures become 8, 4 and 5 per cent of GDP. These statistics strongly suggest that African countries need to redouble their efforts to increase the volume of investable resources they are to mobilise from domestic as well as external sources.

I.A.4. External Sector

35. Positive developments in the external sector contrasted with the negative impact of agriculture on the region's economic performance in 1997. The value of exports increased by 5.9 per cent due to an 8.0 per cent growth in volume and a 2.1-per cent decrease in unit prices. Imports continued their upward trend at a rate of 7.6 per cent of which 6.3 per cent resulted from an increase in volume and 1.3 per cent from higher prices. The terms of trade declined marginally by about 0.5 per cent.

Table 1.6: Balance of Payments 1995-1997 (US$ Billions)

Source: Compiled from IMF's, WEO, IFS, and DOT.

36. The volume of oil exports increased as a result of growth in production, particularly by the non-OPEC countries. Other minerals maintained their previous year's volume of exports. Despite unfavourable weather conditions and the decline in the output of agricultural exportables, export volume increased as a result of a depletion of stock held over from previous years.

37. The trade balance remained positive at US$8.3 billion in 1997, comprising a surplus of US$32.9 billion for the oil exporters and a deficit of US$24.6 billion for the non-oil countries.

38. Despite the region's positive trade balance, the current account deficit increased from US$8.6 billion in 1996 to US$9.5 billion in 1997. The persistent current account deficit is due mainly to the balance of services, made up of interest payments on the external debt, trade-related financial services (banking and insurance) and transport (mainly shipping) services.

I.A.5. The Debt Burden Remains Unsustainable

39. The external debt of African countries rose from US$340 billion in 1996 to US$349 billion in 1997, an increase of nearly 3 per cent. The debt service amounted to US$33 billion, up from US$ 31 billion in 1996, absorbing 21.3 per cent of earnings from the export of goods and services.

Table 1.7: External Debt and Debt Related Statistics (billion of US$ and percentage)

Source: World Bank, National Sources.

40. There is a general consensus that the debt overhang continues to be a major obstacle to recovery and to the sustainability of high economic growth, particularly in the highly indebted poor countries. The difficulties in meeting debt- service obligations are reflected in the accumulation of arrears and the strong demand for their rescheduling.

41. Uganda and Burkina Faso are to become beneficiaries of the HIPC initiative in 1998. Accordingly, the debt stock is expected to be reduced by 15-20 per cent. For example, Uganda is expected to receive assistance equivalent to US$ 340 million (in April 1998 US dollars), which represents a 20percent reduction of its debt. Côte d'Ivoire and Mozambique are also expected to be beneficiaries.

42. The alleviation of the debt burden remains a major item on the agenda of the African policymakers and their development partners for at least two reasons. Firstly, recent empirical evidence suggests that the burden of the debt overhang deters investment or causes investors to opt to wait, due to the increased uncertainty and risk of committing huge investments. Secondly, HIPCs (Heavily Indebted Poor Countries), most of which are in SSA, have continued to find it increasingly difficult to meet their external debt-service obligations. The HIPC Initiative is a welcome development as it is expected to reduce the burden of the 32 poorest highly indebted African countries.

I.A.6. The HIPC Initiative: An Update

43. The HIPC Initiative is a framework developed in September 1996 by the Bretton Woods Institutions (IMF and the World Bank) to address the external debt problems of the heavily indebted poor countries (41 eligible nations), nearly 85 per cent of which (34 countries) are in Africa. The initiative has been developed around the following criteria:

1. eligibility will be limited to IDA-only and ESAF- eligible countries that have established a strong track record of performance under adjustment programmes supported by the IMF and the World Bank and that are not expected to achieve a sustainable external-debt situation after the full use of traditional debt-relief mechanisms.
2. eligibility will be based on a debt-sustainability analysis (DSA), which would follow key steps. The first stage of the initiative builds on the existing three-year track record needed to qualify for a stock-of-debt operation from Paris Club creditors. During this stage, the country establishes the required good track record of policy implementation and makes full use of the traditional debt-relief mechanism. As the country completes the first stage and reaches the decision point, the executive boards of the IMF and the World Bank will decide its eligibility for the initiative on the basis of a comprehensive DSA agreed jointly by the Bretton-Woods staff and the country's authorities. The assessment will indicate whether the debt-relief mechanisms will be sufficient for the country to reach a sustainable level of debt by the completion point.
3. the country will need to meet performance criteria during the second stage to receive support under the initiative. These criteria will include macroeconomic indicators, progress on key structural and social reforms; and
4. all relevant creditors will be expected to participate. Paris Club creditors have indicated a willingness to provide debt reduction in NPV terms of up to 80 per cent, on a case-by-case basis, with a flow rescheduling during the second stage, and a stock-of-debt operation (equivalent to NPV debt reduction of up to 80 per cent on eligible debt) at the completion point. Other non-multilateral creditors will be expected to provide debt relief on terms at least comparable with the Paris Club

44. Four African countries (Benin, Burkina Faso, Mali and Uganda) have agreed on stock-of-debt operations on Naples terms with Paris Club creditors and can be considered to have established the first three-year track record required under the initiative. The staff of the Bretton Woods institutions have been working on DSAs with the country authorities. On April 22 and 23, 1997, the executive boards of the World Bank and the IMF approved Uganda's eligibility for assistance under the HIPC initiative. They agreed to an NPV debt-to-exports target of 202 per cent and set April 1998 as completion point. Moreover, the executive boards of the World Bank and the IMF agreed on April 24, 1997 to consider on a case-by-case basis an NPV debt-to-exports target below 200 per cent at the completion point of open economies, provided that the country concerned meet two criteria at the decision point: an export-to-GDP ratio of at least 40 per cent and a minimum threshold of fiscal revenue in relation to GDP of 20 per cent. For countries meeting these thresholds, the NPV debt-to-exports target will be set at a level that achieves a 280 per cent ratio of the NPV of debt to revenue at the completion point. Cote d'Ivoire would potentially benefit from such treatment.

45. Recent analysis of the multilateral debt initiative for HIPCs suggests that the debt burden faced by the African HIPCs has strongly and negatively affected economic growth since the second half of the 1980s, threatened the sustainability of reforms, and prevented the development of a capable and functional state, due to the fiscal crisis that ensued. However, a comparison of three groupings -- unstainable HIPCs, possibly stressed HIPCs and non-HIPCs -- reveals the following features in the 1990s:

• external debt burden (stock of external debt to GDP and to exports, debt- service ratios to exports and to fiscal revenue) is much higher in HIPCs than in non-HIPCs;

• External debt-based HIPCs are also the most indebted in terms of documented debt;

• HIPCs as a group have higher fiscal-deficit ratios and lower public and aggregate investment ratios;

• the set of "unsustainable" HIPCs is found to be much larger (2-4 times) than indicated by the Breton Woods institutions' classification;

• a comparison of the sustainability ratios to the thresholds set by the multilateral debt initiative (based on the above-mentioned debt-to-exports and debt service-to-exports ratios) suggests that the initiative appears adequate as a framework for addressing the HIPCs' external-debt problem;

• despite the adequacy of the guidelines, the multilateral debt initiative may, in effect, end up being inadequate for propelling Africa onto the minimum growth path (about 5 per cent annually) required to reverse its current economic decline.

46. Recognizing the fact that this initiative is not a panacea for all the economic problems of the African HIPCs, it is fair to conclude from the above findings that the implementation of this initiative appears to be conservative, not only compared to other approaches, but also with regard to broader development for Africa.

I.B. Subregional Growth Performance

47. In 1997, all Africa's subregions recorded lower growth rates than in 1996. Growth was lowest in Southern Africa (2.4 per cent) and North Africa (2.8 per cent) and highest in Central Africa (3.8 per cent) followed by West Africa (3.7 per cent) and East Africa (3.5 per cent). The largest decline was in North Africa (from 4.4 per cent to 2.8 per cent, a fall of 36 per cent) followed by Southern Africa, where growth in 1997 was 80 per cent of what it was in 1996.

Table 1.8: Subregional Growth Rates (% p.a.) 1993-97*

Source: ECA Secretariat

* Weighted Average

48. The major factor behind the steep decline in Southern and North Africa was unfavourable weather, which drastically reduced agricultural output.

49. In Southern Africa, the subregional economic performance is dominated by that of the Republic of South Africa where GDP growth declined from 2.5 per cent in 1996 to 2 per cent in 1997. In Zambia, Zimbabwe and Malawi, GDP growth in 1997 was half of what it was in 1996. On the other hand, Mozambique, Botswana and Swaziland enjoyed higher growth rates than in 1996 at 6 per cent, 5 per cent and 6.3 per cent respectively.

 

50. Two factors account for the deceleration of economic growth in 1997 - the weather and world prices. While the unfavourable weather condition caused by El Nino devastated crops, the countries of the Southern subregion suffered extensive drought, unlike their neighbours in East Africa (See BOX III). This was exacerbated by the falling price of gold, although copper prices remained at their 1996 levels.

51. In North Africa, with the exception of the Sudan, where output increased by nearly 10 per cent, all the countries of the subregion experienced a conspicuous economic decline. The manufacturing sector registered mixed performances across the subregion with steep increases in Morocco, Tunisia and Egypt, marginal recovery in the Sudan and marked declines in Algeria and Libyan Arab Jamahiriya.

52. The performance of the manufacturing sector has been affected by outturns in the external environment as well as domestic developments. The Libyan Arab Jamahiriyan Arab Jamahirya and the Sudan operate under an unfavourable external environment which has constrained orderly access to inputs and inhibited outlets to markets because of sanctions. The Sudan is making headway in mending its relationship with the IMF by paying its arrears. Morocco, Tunisia and Egypt are taking advantage of their proximity to markets in Europe and the Middle East and are diversifying fast and expanding their industrial base.

53. In West Africa the marginal decline in GDP reflects the slowdown in the larger economies of the subregion (Côte d'Ivoire, Ghana and Nigeria) while the smaller economies, particularly those of Benin, Burkina Faso and Mali, posted respectable growth. In Liberia, the economy is on the road to recovery following the end of the civil war and the election of a new government. Agricultural production in some of the subregion's countries, particularly Nigeria, Senegal, Gambia and Mauritania, declined significantly.

54. Industrial performance in the West African subregion was subdued. Declining prices for oil and gold spilled over to the manufacturing sector constraining its ability to acquire inputs, while competition from imports continued to put pressure on domestic producers. Capacity utilization in the manufacturing industries has remained very low, averaging 40 per cent, although the mining industries are expanding fast. In Cote d'Ivoire, oil has graduated to the status of the second most important source of foreign exchange.

55. The decline in GDP growth in Central Africa was due mainly to the political instability and civil unrest. In Burundi and the Republic of Congo, GDP declined as a result of sanctions and civil war respectively, while in the Democratic Republic of Congo positive growth was achieved despite the recent upheaval. The Central African Republic, Angola and Equatorial Guinea continued to enjoy high GDP growth.

56. In East Africa GDP growth declined from 4.2 per cent in 1996 to 3.9 per cent in 1997. The favourable weather that spearheaded the strong recovery in 1996 was followed by inauspicious weather that caused an economic slowdown. The heavy, untimely rainfall during the third and last quarter of the year destroyed crops and damaged transport and communication infrastructure in Somalia, Kenya and Uganda.

57. However, the negative impact of the slowdown in agriculture was tempered by manufacturing industries and even more by the vibrancy of the services sector.

I.C. Policy Development in 1997

58. As is probably well known, the major thrust of economic policymaking on the continent has been informed for the last decade or so by the core policy content of adjustment programmes (of the type supported by the IMF and the World Bank).

59. The comprehensive programme of reform being carried out is geared to bring about economic growth by improving revenue performance, rationalizing and improving the efficiency of the taxation system, improving and reorganizing public administration, developing and improving the financial sector as well as strengthening bank supervision, encouraging private sector development and working towards sustainable agricultural development.

60. These and other adjustment measures are expected to improve and strengthen a country's balance of payments position and enhance its growth. As of 31 December 1997, there were 22 African countries with active extended Structural Adjustment Facility (ESAF) agreements with the IMF. The main policies pursued in 1997 and during the "medium-term strategy " to achieve macroeconomic objectives remained those belonging to the core set of reform policies and they included the following: financial policies (fiscal and monetary), structural reforms and social policies.

61. Policy Objectives:- Almost all 22 countries had enhancing real GDP growth, reducing the inflation rate, increasing gross official international reserves and reducing the current-account deficit as their objectives. The countries involved include Burkina Faso, [targets: increase GDP growth to more than 6%, decrease inflation to 3% and contain the current-account deficit to 10.5% of GDP]; Cameroon [5%, 2%, 2%]; Guinea [5%, 5%, 8%]; Guinea-Bissau [5%, 10%, 18%]; Mali [6%, 3.5%, 11.1%]; Malawi [5%, 8%, 7.6%]; Madagascar [3%, 7%, 7.2%]; Mozambique [6%, 14%]; Niger [4.5%, 3%, 11.1%]; Senegal [4.5%, 2.5%, 6.7%]; Sierra Leone [1.5%, 2%, 4.5%]; Tanzania [4.7%, 13%, 14.4%] and Uganda [7.5%, 5%, 7%]).

62. Financial policies: In order to achieve the above objectives, countries set themselves the target of consolidating fiscal /monetary policy during 1997 and in the medium term. To this end, governments implemented a tight monetary policy and adopted a cautious expenditure policy. Countries committed to these reforms include Burkina Faso, Cameroon, Guinea-Bissau, Guinea, Morocco, Niger, Mozambique, Tanzania, Senegal and Uganda. Some countries such as Burkina Faso and Guinea-Bissau, plan to continue tightening domestic credit to curb the inflation expected in the medium term.

63. Tax reforms: On the revenue side, countries are introducing reforms to their taxation systems. A number of countries such as Burkina Faso, Cameroon, Madagascar and Tanzania have introduced Value Added Tax (VAT). Guinea-Bissau is reforming the general tax system by introducing external-tariff reforms, reducing export taxes and revising excise taxes especially on petroleum, while Rwanda plans to broaden the tax base.

64. Structural reforms: Other than the main structural reforms of the financial sector and tax system mentioned above, the structural reforms under the programme have focused mainly on the following: taking measures to promote privatization; removing obstacles to private sector development; reforming the agricultural sector and encouraging sustainable agricultural development; export diversification; enhancing the role of the private sector in agriculture, fisheries and forestry; (Guinea-Bissau); improving and streamlining the civil service (Guinea-Bissau, Niger); increasing the efficiency of the energy sector; rationalizing legal requirements for foreign and domestic investment (Sierra Leone). Except where countries are mentioned as special cases, those listed below have adopted most of the structural reforms mentioned above. (Burkina Faso, Cameroon, Guinea, Guinea-Bissau, Madagascar, Malawi, Mali, Mozambique, Niger, Senegal, Sierra Leone, Tanzania and Uganda). A number of other non-ESAF countries are reported to have pursued the above structural reform policies. These include Botswana, Egypt, Morocco, Nigeria, Rwanda and Tunisia, which is also involved in labour-market reforms.

65. Social Sector: Almost all countries that have developed programmes targeting social needs have focused on combating poverty by increasing social sector spending to improve the supply of basic health services through the provision of preventive health care and expanding primary education (Burkina Faso, Guinea, Niger, Mali, Mozambique, Rwanda, Sierra Leone and Senegal). Senegal and Burkina Faso have put special emphasis on the female population in both cases. Senegal also has policies aimed at reducing the rate of population growth.

66. Despite the abovementioned general thrust of economic policy in 1997, and due to internal conflict situations on the continent, at least two countries are reported to have had special features distinguishing their economic policy. These are:

1. Sierra Leone: During the next five years Sierra Leone with the support of many donors will be implementing resettlement, rehabilitation and reconstruction programmes. As an initial step the country is undertaking a two-year 'Quick Action Programme' designed to resettle people displaced by war, reconstruct the basic social and economic infrastructure and demobilize ex-combatants.
2. Rwanda: Rwanda is also in the process of rebuilding after the conflict. It has managed to resettle about 2.5 million refugees who returned from neighbouring countries. It has also been reported that considerable progress has been made in repairing the social and economic infrastructure and in rebuilding key economic institutions. Rwanda also implemented a reduction in military expenditure.

 II. The Social Situation in 1997

67. The year 1997 witnessed a further exacerbation of some of Africa's perennial problems. Slightly more than 350 million people (More than half the population of Sub-Saharan Africa) continue to live in poverty. Malnutrition and hunger, disease, ill health and lack of shelter are widespread. A sizeable number of adult Africans are not productively employed and as such, they are unable to meet their basic needs. Millions of lives have been lost and families disintegrated through armed conflicts. The refugee problem has become more complicated and the number of people involved is high. Also, in many African countries a crisis of governance encompassing such well-known shortcomings as the near absence of democratic structures and popular participation persists. Access to social services, particularly education and health, continues to be a reason for concern, while the employment situation remains precarious.

II.A. Governance and Conflict Resolution

68. As is well known, good governance is an important prerequisite for long-term socioeconomic development. In 1997, the African continent continued its struggle to institute the practice of good governance in the form of a democratisation drive that started in the mid-1980s and has gained greater momentum in the 1990s. However, the struggle for good governance is still plagued by a number of uncertainties.

69. African countries where the struggle for good governance continued in 1997 include Algeria, Liberia, Kenya and Morocco. In Algeria, for example, elections for provincial and municipal councils, which had been suspended since the banning of the Front Islamique du Salut (FIS) in 1992, took place in October 1997. Unfortunately, the elections in Algeria have not halted the protracted civil war which has claimed thousands of lives in that country. After eight years of civil war, democratic elections were finally held in July 1997 in Liberia. In Kenya, elections contested by more than 15 parties took place in December 1997. Morocco held legislative elections in November 1997. In the current arrangement, the upper house will have the power to dismiss the government, but other details such as the relationship between the upper and the lower houses have yet to be worked out. The transition to democratic government in Nigeria started in December 1997, following an initial period of political uncertainty after the 1992 elections were annulled. The process is supposed to culminate in presidential elections in October 1998.

70. On the other hand, African countries where the drive towards democratic governance was threatened by uncertainty in 1997 include Rwanda, Burundi, the Republic of Congo, Somalia, the Sudan, Sierra Leone and Uganda. In the Great Lakes Region, for instance, the tumultuous political situation continued to cause great concern, despite the repatriation of over a million refugees to Rwanda in 1996/1997, and an estimated 161,000 to Burundi. Several months of civil war in the Republic of Congo culminated in the overthrow of the democratically elected president by the military. In parts of Sudan, Somalia and Uganda, the situation remains extremely precarious as fighting continues, due to myriad unresolved socio-political issues. In Sierra Leone, a fierce struggle for power in which a democratically elected government was overthrown, resulted in a complete disruption of normal life and an exodus of refugees. Likewise, Zambia witnessed an attempt to overthrow its democratically elected government.

71. The cost of lack of good governance, in terms of lost economic productivity, the destruction of physical and social infrastructure, refugees, environmental degradation and sheer human suffering, is incalculable. For instance, UNHCR statistics indicate that in 1997 there were slightly more than 13 million refugees worldwide, including over 4 million in Africa. A disproportionate number were concentrated in the Horn of Africa, which accounted for over 1 million refugees. The problem of internal displacement is even more colossal. The number of displaced people, estimated at 20 million, is unprecedented in recent history and represents a challenge to humanity. An important dimension of civil wars and internal conflicts is the fact that in the past, the major casualties were soldiers. Today, however, a preponderant number of civil war victims are civilians, estimated at over 85 per cent of those affected. Moreover, an overwhelming proportion of these civilians are women and children.

72. The organization of African Unity (OAU) is the primary institution charged with the responsibility of conflict resolution on the continent. In 1997, within the framework of "The OAU Mechanism for Conflict Prevention, Management and Resolution," the OAU, which had been involved in peace brokering, along with ECOWAS, sent 15 observers from various member states and the OAU General Secretariat to observe the conduct of the election in Liberia . The OAU also observed the Algerian elections that took place in 1997. In the same year the organization was also involved in peacemaking in Rwanda, Burundi, the Republic of Congo, Zaire (now the Democratic Republic of Congo), Sierra Leone, Somalia, Comoros, Liberia and Central African Republic.

73. In its effort to promote good governance in the region, the ECA established the African Centre for Civil Society (ACCS) in 1997. The primary objectives of the Centre are: enhancing cooperation between African governments and civil society organizations by encouraging governments to institute a regulatory environment conducive to the growth of indigenous NGOs and the broadening of their economic, political, and social activity through the work of the ACCS; strengthening the organizational, managerial and programmatic capacity of civil society organizations; and building civil society's capacity to develop innovative techniques for the prevention of conflict, for the strengthening of peaceful, pluralistic democracy and for the peaceful resolution of disputes. In launching the Centre, the Executive Secretary of the ECA noted that "good governance is not a luxury - it is a vital necessity for development. Enhancing or strengthening the African states' capability is high on the Commission's list of priorities and part of that process involves strengthening its partners in development - the private sector and the civil society - in order to effect and sustain Africa's political and economic transformation"

II.B. Access to Education

74. The progressive expansion of education and the improvement in its range and quality have been at the centre of the development concerns of African countries since independence. Beyond literacy per se, desirable as it may be, the development of education and human resources is regarded as a precondition for enhancing the pace of economic growth and development. Indeed, it is education and technical know-how which determine the frontiers of transformation of societies and shape the configuration of the overall competitive capabilities of nations, in particular in contemporary world trade. This is why most countries have striven to match their growth-environment rates with their rates of population increase.

75. To date, however, access to education at all levels continues to be limited in Africa and, indeed, literacy rates at 61 per cent in the early 1990s were far below those of Latin America and the Caribbean (87 per cent) and East Asia and the Pacific (86 per cent). Worse still, the population of primary school age is increasing at an average annual rate of 3.3 per cent, while enrolment is rising by only 2.2 per cent. Enrolment at the tertiary level is also disturbingly low - just over half a million in 1993. These and similar worrying trends prompted many African countries to engage in a diagnosis of the status of their educational systems and adopt appropriate measures at the national level.

76. A major development in the field of education was the proclamation of a Decade for Education in Africa (1997-2006), established by Resolution AHG/Res.251 (XXXII) of the Assembly of Heads of State and Government of the OAU and adopted in June 1996, to "remove obstacles impeding progress towards Education for All". The launching of this Decade is expected to provide further impetus for the implementation of the decisions of the major international conferences in field of social development, within the African context. The components and action plans for the implementation of this Decade are currently being developed under the aegis of the OAU. The complete scheme is expected to focus on: access to education for all; quality and relevance of education; education for peace; tolerance and mutual understanding; and the mobilization of the required material, human, technical and financial resources. A Pan-African Ministerial Conference will overview the implementation of this Decade. The complete scheme was expected to be submitted for adoption to the 34th Session of the Assembly of Heads of State and Government in June 1998 in Ouagadougou, Burkina Faso.

77. The overriding objective of the Decade is to reposition Africa in the new knowledge-intensive world society. To achieve this, African countries would need to invest more, and more effectively, in human-resources development, anchored on broader and higher-quality education. The major human-development priorities in Africa should include the earnest spreading of primary and basic education; increasing access to secondary and higher education and reforming curricula in order to increase the relevance of education to African development. Additionally, African countries should pay more attention to informal education in order to fully exploit the potential of these cheaper delivery systems to reach a wider range of learners across the continent.

II.C. Access to Health Care

78. Access to health care is generally poor in Africa, a situation which has been accentuated by the economic crisis that engulfed the continent since mid-1980s. The per capita distribution of facilities has dropped drastically, institutions have weakened, and the rising cost of services following economic liberalization has priced them beyond the means of the poor. A rapidly increasing population, high rates of urbanization and the escalating threats to public health have also widened the gap between the supply of and demand for health services. Health infrastructure remains underfunded and poorly managed.

79. It is currently estimated that 90 per cent of deaths worldwide that are traceable to malaria have occurred in Africa. Of the 23 million people living with HIV/AIDS epidemic in the world, nearly two-thirds, almost 14 million persons, live in Sub-Saharan Africa. It has been reported that 50 per cent or more of all beds in medical institutions in Central and East Africa are being occupied by AIDs patients.

80. Africa also includes the greatest number of countries with the lowest access to safe drinking water, adequate sanitation and health services. The low health and nutritional standards have strapped Africa to its 1960s levels of life expectancy. Only four countries, Algeria, Botswana, Cape Verde and Mauritius, have recorded levels above the targets in the WHO's Strategy for Health for All by the Year 2000.

II.D. Employment Situation

81. Employment figures tend to be incomplete and unreliable in most African countries. Available evidence suggests that productive employment has not kept pace with the increased labour supply. The average labour force is growing at about 3 per cent per annum and there are declining or stagnating levels of wage employment, real wages are decreasing while working and living conditions are deteriorating. Recent data for most countries estimate urban unemployment at around 20 – 30 per cent, underemployment at about 25 – 50 per cent, youthful unemployment at about 25 – 40 per cent and women’s unemployment at twice the national average.

82. Recent evidence in the ILO's World Employment Report 1996/1997 shows that direct information, based on establishment surveys covering only part of the total employment, employment growth in 1986-1997 has been negative in five of the 13 countries covered (Cote d'Ivoire, Ghana, Zambia, the Central African Republic and South Africa) and significantly below the labour-force growth in another three (Burundi, Sierra Leone and Zimbabwe). Mauritius and Botswana were notable exceptions: their employment increased significantly.

83. Most African countries have formulated or are in the process of formulating employment policies. At a meeting of African Employment Planners held in Pretoria, South Africa, in January 1997, most countries indicated that they were creating a favourable environment for employment by undertaking institutional reforms, promoting small-scale enterprises, modernizing agriculture, developing and supporting the informal sector and mainstreaming vulnerable groups. In the process of formulating employment policies, countries have undertaken studies to assess the extent and nature of unemployment and underemployment.

84. The advent of globalization has also posed challenges to the employment situation in Africa as competitive edges are determined increasingly by the intensity of knowledge and the skills applied to production. Hence the danger of marginalization, particularly in the light of the contentious issues of trade and labour standards to be considered within the context of the Uruguay Round agreements. African countries fear that the social clause will be used as a non-tariff barrier.

II.E. Poverty Reduction: An Example

85. Tunisia has made significant progress in reducing poverty over the last two decades. The challenge of poverty reduction was backed by a strong political commitment and relied on growth-enhancing policies and specific instruments targeting the poor.

86. Tunisia has recorded impressive rates of growth and almost doubled per capita GDP during the last quarter-century. During this period, population growth was reduced to less than 2% per annum, infrastructural investment expanded and human-capacity development broadened and deepened so much so that the source of growth has been transformed from the traditional sector of agriculture to the non-traditional sectors of manufacturing and services. A conspicuous impact of the high, sustained growth is a drastic reduction of unemployment.

87. In addition to employment generating growth, the Tunisian authorities have relied on targeted instruments such as food subsidies, direct-transfer programmes and unemployment benefits. The revamping of food subsidies in Tunisia provides an example of 'good practice' in effectively targeting food subsidies to the poorest segment of the society.

88. Until the mid-1980s, Tunisia had a universal food-price subsidy, in which the leakages to the nonpoor far exceeded acknowledged benefits to the poor. Although eliminating the subsidy was not politically feasible, it was found to be unsustainable and therefore required substantive revision.

89. To this end, the government pursued a two-pronged policy. First, controls and constraints on the marketing of food by the private sector were eliminated to encourage the marketing of high-quality unsubsidized products that appeal to high-income consumers as an alternative to their subsidized counterparts. This policy increased the supply and availability of "superior" goods as a method of keeping the nonpoor away from subsidized commodities.

90. The second component of food "differentiation" entailed the identification of a specific package consumed by the poor, derived from household surveys to which subsidies were applied. This step clearly distinguished "inferior" goods so that their consumption was limited to the poor and was unappealing to the tastes of the "rich".

91. The result is that the cost of subsidising food has been halved from 4 per cent to 2 per cent of GDP. Tunisians now enjoy the highest (above the recommended minimum) and stablest per capita calorie intake on the continent.

92. Three key messages emerge from the foregoing overview of Tunisia's successful experience and good practice in food price subsides to reduce poverty. First, the design and implementation of an economic reform programme in tandem with a social programme significantly alter its outcome in favour of the poor, and particularly the poorest stratum of the society, who are often inadequately served by some safety nets. Second, the commitment of the political leadership, innovative design and administrative procedures to stimulate programme access among the very poor ultimately determine the success of the pro-poor programme, its acceptance, continuity and subsequent improvements. Third, finetuning a programme in targeting the poor ensures its sustainability. In other words, targeting, within the boundaries of political feasibility and programme monitoring, is critical to the success of poverty-reduction programmes.

 III. Medium-Term Outlook and Policy Challenges

III.A. Medium-Term Outlook

93. In the foreseeable future, the major determinants of the African economic performance will continue to be based on the outturn of the two exogenous factors - weather conditions and development - in the external economic environment. In addition to this, the pursuit of strong economic reforms will continue to be an important domestic determinant of performance.

94. Under different assumptions, the growth of the African economy is forecast to rebound to between 4.0 per cent and 5.0 per cent in 1998 with a mean projection of 4.5 per cent. The lower and upper ceilings are based on the possible outcome of the two major determinants. The higher projection is based on the assumption that conducive weather conditions will prevail and export prices will improve. The lower ceiling of 4.0 per cent would obtain if either of these two conditions fail to materialize i.e. agricultural output or world prices or both are unfavourable.

95. Given the 7- to 10-year El Nino-related cycle, weather conditions are expected to be more favourable in 1998 than in 1997 and, therefore, a considerable turnaround in agricultural output -- expected to grow by 7 per cent -- is assumed.

96. Developments in the external sector are derived on the basis of a possible outturn of three major factors of importance to African economies.

97. The first and most important is world prices for Africa's exports and imports. In addition to the global supply and demand (the usual determinants of world prices), one must factor in the possible effect of the currency crisis in East and Southeast Asian countries which, in recent years, have become important trading partners for Africa as well as major competitors on the world market.

98. The depreciation of the currencies of these countries may slow their growth, in which case global demand for some of the major export items of interest to Africa may decline. The most important export products that may feel the impact of this development are oil, gold and industrial minerals such as copper. The Asian slowdown as well as the increased output from the huge investment in the production of these commodities in Africa and elsewhere are expected to push their prices downward.

99. Beverage prices are expected to decline from the third quarter of the year, while stabilising in the meantime at the 1997 fourth-quarter prices. In addition to the bumper crop expected from the more conducive weather conditions, the depreciated Asian currencies are likely to exert downward pressure on coffee, tea cocoa and timber prices.

100. On the other hand, it is assumed that the prices of importables will stabilize at their 1996 levels, although they could decline as a result of the depreciation of the Asian currencies.

101. The second major external factor impinging on Africa's economic performance is the debt overhang. That the excessive debt burden has been an important factor behind the low volume of investment is acknowledged by African countries as well as the international community at large. Although the HIPC Initiative is a welcome development, it needs to be placed on a fast track to entail an effective and observable outcome. The assumptions here are that debt-relief measures will obtain and that the volume of foreign exchange required will exceed the 1997 figure of US$ 33 billion .

102. The third important external component is the inflow of resources. While the expected positive development on the debt front would contribute to a reduction of the drain on foreign exchange, it is deemed insufficient to boost investment, particularly in the non-oil exporting countries. It is expected that net transfers from bilateral and multilateral sources will at least maintain their 1997 level.

103. On the domestic front, the higher-growth scenario assumes that African governments will continue to implement vigorously macroeconomic management reforms which emphasize reducing the rate of inflation, reducing the budget deficits, eliminating current-account and balance-of-payments deficits, efficiently managing the external debt and meeting debt-servicing obligations, etc. These medium-term measures have to be complemented by long-term programmes that place emphasis on the reduction or eradication of mass poverty, meeting the basic health, housing, educational and social needs of the population, reducing income inequality, raising the standards of living and per capita income of the citizens, protecting the environment and promoting diversified, self-reliant and sustainable development.

III.B. Evaluation of ESAF in Africa

104. The overarching policy challenge facing African governments in the foreseeable future is the reduction and eventual eradication of poverty. Towards this end policymakers in Africa face the challenge of developing modalities that would make it possible to attain high and sustainable growth, expand employment, and achieve equitable income distribution in an environment of stable prices and a sustainable balance-of-payments position.

105. This is a daunting task. According to current estimates, close to 50 per cent of the population live in absolute poverty. This percentage is expected to increase at the beginning of the next millennium and to prevent that, African countries will need at least to match their GDP-growth and population-increase rates. Assuming that the labour force increases at the same rate as the population --2.9 per cent per annum -- they would need to create 17 million new jobs each year to stabilise the unemployment rate at the current level, which is already unacceptably high.

106. During the past decade and a half, African countries have gone through the phase of adjusting their economies with the support of the IMF and the World Bank. An authoritative and candid evaluation of the ESAF programmes shows that the results were disappointing compared to the programme targets and to the performance of non-ESAF countries, (see Box II).

107. In the coming years, African policymakers, in partnership with their development partners, would need to create an environment and operational modalities capable of inducing and sustaining a high rate of growth so as to stabilise their countries' economies and reduce poverty at home while generating capacity to live up to their obligations abroad. This challenge offers opportunities to the African policymakers to cooperate among themselves, develop mechanisms and institutions to mobilize foreign direct investment and improve their economies and societies, bringing them to a higher plane by upgrading their governance.

108. The aim of economic management is to improve the standard of living of the people. In an environment and circumstances of poverty there is no better and worthier challenge than improving the conditions of the poor. In this report, the Tunisia approach to reducing poverty is presented as an example of the many 'best practices' approaches employed by African countries.

III.C. Economic Integration and Globalization

109. Globalization and increased integration of the world's economies in recent years have renewed interest in regional integration in Africa for two reasons. First, Africa's trade accounts for only 2 per cent of world trade and by enhancing trade among themselves as well as diversifying and expanding their production base, African nations would increase trade with the developed and other developing countries and, in so doing, they would increase the continent's share of global trade and thereby reduce its marginalization in the world economy. Secondly, if trade is to serve as an engine of economic growth and socio-economic development, African countries need to broaden their production base on a complementary rather than competitive basis and improve their efficiency. One way of doing this is to exploit economies of scale, which is unachievable with the current fragmented market. Cognizant of these and other benefits of active regional and subregional integration arrangements, African governments have been investing resources and efforts in their revival and effective operationalization.

110. At the continental level, the most important event was the holding on 3 June 1997 in Harare, Zimbabwe, of the First Summit of the African Economic Community (AEC). Besides endorsing the recommendations of the first session of the Economic and Social Commission of the AEC, held in November 1996 in Abidjan, Côte d'Ivoire, the Summit adopted the Protocol on the Relationship between the AEC and the Regional Economic Communities (RECs) and invited both parties to sign this Protocol. The Summit also decided to discontinue the OAU Permanent Steering Committee, whose functions are now to be performed by the Economic and Social Commission. Finally, the Summit invited member states to identify the economic groupings that would serve as subregional pillars of the AEC in accordance with the provisions of the Abuja Treaty. This Summit was a milestone on the way to the actual operationalization of the AEC. In this regard, it is worth mentioning that a mission of the Joint OAU/ECA/ADB Secretariat visited the RECs in July/August 1997.

111. In compliance with the decision taken in June 1996 by the Seventh Consultative Meeting of the Chief Executives of the OAU, ECA and ADB, the mission was set up to:

• assess the needs of the RECs in terms of technical assistance, so that necessary steps could be taken to meet such needs, the aim being to put the RECs on a strong footing, enabling them to play their role as pillars of the AEC;
• identify areas where inter-subregional cooperation could be fostered, so as to create links between the RECs through joint programmes and the gradual harmonisation of their respective programmes;
• discuss modalities for the signing and implementation of the Protocol on the Relationship between the AEC and the RECs; and
• finally, examine the contribution the partners of the RECs (ECA/OAU-sponsored institutions, ECA Subregional Development Centres) are making or could make to the integration process.

112. The mission strongly suggested the need for vigorous action to achieve a greater degree of harmonization between the various subregional programmes. So far the economic groupings have each pursued the implementation of their respective programmes without attempting to build a bridge between themselves.

113. While some subregional groupings have been active, some have remained inactive. The Economic Community of Central African States (ECCAS) did not recover from almost five years of inactivity due to the inability of its member states to hold any meeting of its policy organs. However, at the ACP Summit in November 1997, a decision was made to revitalize the community. Moreover, the Central African Clearing House, a subsidiary organ of the ECCAS, was dissolved in view of the persistently low level of transactions referred to it by member states. Finally, armed conflicts, whether internal or involving neighbouring countries, impacted harmfully on the integration process in the subregion.

114. Despite these shortcomings in the ECCAS, some significant positive developments did take place in other groupings. The fiscal and customs reform initiated by the Central African Customs and Economic Union (UDEAC) is now being fully implemented. The main provisions of the reform concern excise, a common external tariff, the generalization of the preferential regime and the turnover tax levied on imports, which are being applied gradually by all member states. Intra-Union trade seems to have benefited from the introduction of this reform. In order to enhance the intra-UDEAC trade flows, the secretariat prepared for consideration by the 1997 Summit, inter alia, a decision on competition policy within the Union as well as on government practices affecting trade. As for the Central African Monetary and Economic Community (CEMAC), the ratification of its treaty has not yet been completed. Nevertheless, a Council for Macroeconomic Policy Convergence is already at work. Its present functions include: providing the ministries of finance with information on the world economic situation and the position of the subregion within this environment; facilitating the exchange of information on the economic and budgetary policies of member states; informing the ministries on budget forecasts and establishing mechanisms for monitoring and implementation.

115. In West Africa, the West African Monetary and Economic Union (UEMOA) vigorously pursued its integration programme as approved by the Summit of Heads of State in May 1996. This programme will result in the implementation of a common external tariff by 1 January 1998, thus achieving the customs union. Guinea Bissau joined the Union in May 1997 as its eighth member. For its part, ECOWAS organized in October 1997 a technical meeting on the introduction of traveller's cheques in the subregion. This organization is also pursuing its trade liberalization programme, in consultation with UEMOA so as to avoid major discrepancies between the two programmes.

116. In East Africa, the Intergovernmental Authority on Development (IGAD) and the East African Cooperation (EAC) initiated action to implement their respective work programmes. The activities of the former were, however, affected by armed conflicts within or between its member states.

117. The Southern African Development Community (SADC) is expanding. Since its summit of September 1997, the Democratic Republic of Congo and Seychelles have become members of SADC, whose total membership now stands at 14.

118. An attempt was made at the meeting of the Council of Ministers of the Common Market for Eastern and Southern Africa to persuade Mozambique and Lesotho not to leave this organization, which they intended to do so by 31 December 1997 on the expiry of the notice required by the treaty.

119. In order to be in a better position to interact with economic groupings, the ECA decided in May 1997 to streamline its presence at the subregional level. This rationalization resulted in a redefinition and a refocus of the mandate of the former MULPOCs, now called Subregional Development Centres (SRDCs), a new geographical distribution of these centres and the reformulation of their operational modalities.

III.D. Foreign Direct Investment

120. According to recent estimates, global (FDI) flows amounted to US$ 350 billion in 1996 (an increase of just under 10 per cent over the US$ 315 billion registered in 1995). Nearly 60 per cent of these inflows went to the developed countries, 37 per cent went to developing countries and slightly over 3 per cent went to Central and Eastern Europe (Table 2.1).

Table 3.1: FDI flows to Africa 1985-96 (US$ millions)

121. Regional Distribution of FDI. The US$ 129 billion for the developing countries was distributed in such a way that Africa attracted about US$ 5 billion or only 4 per cent of these inflows; its lowest share since the early 1980s. The average share for 1985-90 was more than 11 per cent of the total FDI flows to the developing countries. By contrast, FDI flows to Latin America increased significantly in 1996, by 52 per cent, to nearly US$ 39 billion, a record level. Similarly, inflows of FDI into South, East and Southeast Asia rose by 25 per cent in 1996 to a record US$ 81 billion, representing about two-thirds of all developing-country FDI inflows. It is worth noting that a few Asian countries were able to attract FDI flows equal to or exceeding those for the whole of Africa. Malaysia attracted US$ 5.3 billion, Indonesia recorded US$ 8 billion, US$ 9.4 billion went to Singapore and China received US$ 42.3 billion.

122. Although Africa as a whole has not participated in the surge of FDI inflows compared with the other developing regions of the world, there are a number of countries in Africa that received significant amounts of FDI, surpassing major developing countries in Asia and Latin America. For example, Nigeria attracted most of the flows in Sub-Saharan Africa (SSA). It received about US$ 1.7 billion or 47 per cent of the total FDI for SSA in 1996, followed by Angola at US$ 290 million (8 per cent) and Ghana with US$ 250 million (7 per cent). North Africa also has a pattern of concentration, with Egypt topping the list at US$ 740 million, more than 45 per cent of the FDI flows to the subregion, followed by Morocco with US$ 400 million (nearly 25 per cent), while 23 per cent went to Tunisia in 1996. This means that more than 70 per cent of the overall FDI flows to Africa has been concentrated in West and North Africa.

123. Sectoral Distribution of FDI. While the extractive industries are important in North Africa (e.g., potash in Morocco, oil in Tunisia, Algeria and Egypt), there is relatively more diversification into manufacturing and services than in SSA (e.g., in electronics, cars, hotels, banking, insurance and telecommunication). As in the colonial era, FDI is concentrated in mining industries in Africa in general and SSA in particular. Several mining projects with foreign participation are planned or are already under way. For example, oil and diamonds in Angola; gold in Mali and the Tanzania; bauxite in Guinea and copper in Zambia (UNCTAD 1997).

124. It is evident, from the preceding paragraphs that the easing of civil unrest and prolonged conflicts in some African countries (e.g., Angola and Mozambique), liberalization and the opening up of state-owned mining enterprises to foreign investors, coupled with improved global mineral prices since 1994 are signs of an FDI revival in several African countries, especially in South Africa.

125. After a prolonged period of negative FDI inflows into the Republic of South

Africa, new FDI flows into the country reached over US$ 300 million annually in 1994-96, i.e., more than 6 per cent of the overall FDI flows to Africa. The ensuing increase in foreign investment (including portfolio equity investment) rose sharply between 1991 and 1996. With the exception of South Africa, portfolio equity flows to Africa in general, and SSA in particular, began recently and are of limited volume. Only Ghana, Morocco and Zimbabwe managed to increase portfolio equity flows significantly in the 1990s. Similarly, bond issues and bank- and trade- related finance are of recent origin and of limited volume in Africa. Although bond issues for 1995 are more than double the annual average for the period 1990-94, bank- and trade-related finance recorded negative balances for the two periods.

III.E. Business Environment in Africa

126. A recent assessment of the vast growth-regression literature devoted to the explanation of the slow growth of Africa, compared to other regions, identified four variables as having been of special significance in that regard. These factors are: lack of openness to trade, high-risk environments, low levels of social capital and poor infrastructure. For the four factors, a high correspondence is reported to exist between the use of aggregative evidence of slower growth and that of the micro- evidence of the behaviour of economic agents in explaining slow growth.

127. It has been observed that these problematic factors are, to a substantial extent, attributable to government behaviour. As a result, increasing research efforts have been made to explore the perception of private agents as regards the business environment in a number of countries. One such effort was undertaken in 1997 by the World Bank: a survey of 4,000 entrepreneurs from 69 countries (including 23 in Africa).

128. The survey instrument identified a list of 15 government-related obstacles to doing business in a country: regulations for starting a business, price controls, regulations on foreign trade, financing, labour regulations, foreign currency regulations, tax regulations and levels, infrastructure, policy instability, environmental safety regulations, inflation, general uncertainty about the cost of regulations, crime and theft, corruption and terrorism. Respondents were asked to rank the above factors on a scale of 1 (no obstacle to doing business) to 6 (very strong obstacle) with the restriction that a rating of 6 could not be given to more than 5 variables. Scores 3 and 4 were taken to reflect moderate obstacles.

129. Of the 3,685 returned questionnaires, 3,431 came from developing countries, including 1,288 from Sub-Saharan Africa. The countries were grouped by region. Eight African regions were identified:

Region 1: Middle East and North Africa: Morocco

Region 2: West Central Africa: Cote d'Ivoire, Ghana, Togo

Region 3: Middle-income Africa: Mauritius, South Africa;

Region 4: Western Africa: Guinea, Guinea-Bissau, Senegal

Region 5: Eastern Africa: Kenya, Tanzania, Uganda, Zambia

Region 6: Western and Central Africa: Benin, Mali, Nigeria

Region 7: Central Africa: Cameroon, Chad, Congo

Region 8: Southern Africa: Madagascar, Malawi, Mozambique, Zimbabwe

130. The overall results suggest that neither extreme (the absence of obstacles to doing business, on one hand, and very strong obstacles, on the other) exists in Africa. Table 3.2 summarizes the results in terms of the average scores for the 15 obstacles and confirms the above general finding. The exception of this general result is provided by region 8, where tax regulation was rated as a very strong obstacle.

Table 3.2. Ranking the average ratings of the obstacles in Africa from the highest to lowest.

Source: Brunetti A. et al. "How Business see Government", IFC, World Bank, Washington D.C., 1998. See Annex II

131. According to the ranking of the obstacles by each subregion, the following pattern could be observed: in all subregions, terrorism was identified as the lowest -ranking obstacle, while corruption was ranked as the biggest obstacle, followed by tax regulation and /or high taxes.

132. Thus, according to the summary results, the greatest obstacle is corruption. Next comes tax regulation, followed by inadequate supply of infrastructure, inflation, financing and crime and theft. Thus one can safely conclude that high priority must be given to eliminating corruption and regulating taxes in all African countries in order to help businesses flourish. This kind of survey is also a good indicator for governments to know about the problems and be able to set priorities for eliminating obstacles so as to enhance the smooth running of businesses.

Annexes

Annex AI: Pursuit of Exchange Rate Regimes

A.I.1. A major policy target of the reform programme of African countries has been to achieve a realistic exchange regime and rate. Overvaluation is deemed detrimental to exports while undervaluation undermines the competitiveness of domestic producers. A "sound" exchange-rate policy attempts to put the value of the domestic currency on a balanced path.

A.I.2. Despite the active exchange-rate policy of African countries, achieving an 'equilibrium' in the exchange rate remains a moving and unattainable target. Countries have seen the free fall of the external value of their currencies and suffered the consequences of its inflationary/deflationary impact on their economies.

A.I.3. The problem of attaining a realistic and sustainable exchange rate is vexing not only to policymakers but also to researchers. What exactly constitutes a sound exchange-rate regime is not something on which economists necessarily agree (fixed, floating, pegged etc.) and the determination of the appropriate level of the real exchange rate and the condition under which it is to be attained and sustained remains ill defined.

A.I.4 In its October 1997 issue of the World Economic Outlook, the IMF took up the issue of the choice of an appropriate exchange-rate regime. The following table summarizes the factors that need to be taken into consideration in the process of selecting an appropriate exchange-rate regime.

Table A.I.1 Considerations in the Choice of Exchange Rate Regimes

References

Boote, A.R. and Tugge K. (1997), Debt Relief for Low Income Countries, The HIPC Initiative;

IMF Pamphlet Series No.51, International Monetary Fund, Washington D.C.

Burnetti, A., Kisunko, G., G. Weder, B. (1998), How Businesses See Government: Responses from Private Sector Surveys in 69 Countries; International Finance Corporation, Discussion paper No. 33, The World Bank, Washington D.C.

Caiphas Chimhete, (1997), "Southern Africa Prepares for El-Nino-Induced Drought" Africa Information Centre, November.

Collier Paul and Jan William Cunning (1997), Explaining Economic Performance, WPS/97-2, Centre for the Study of African Economies, University of Oxford.

Economic Commission for Africa, Report on Economic and Social Situation in Africa, 1997 (E/ECA/CM.23/3).

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