Key facts and messages

Growth is recovering, but is still not enough

African economies continue to sustain the growth momentum of previous years, recording an overall real GDP growth rate of 5.7% in 2006 compared to 5.3% in 2005 and 5.2 % in 2004.

However, according to the Economic Report on Africa 2007, produced by the UN Economic Commission for Africa in collaboration with the Commission of the African Union, for most African countries, real growth rates have remained low relative to their development goals. Indeed, at the current growth rates, few African countries are positioned to achieve the Millennium Development Goals by 2015.

Growth performance varies substantially by region and status as oil exporter

Meanwhile, growth performance exhibits substantial disparities across the five subregions. North Africa recorded the highest acceleration in GDP growth, followed by Central Africa. There was a deceleration in growth in West Africa and Southern Africa, whereas East Africa maintained the same growth rate as in 2005. Heavy dependence on primary commodities remains a common feature of production, exports and growth in all the subregions. This exposes the continent to external shocks and makes economic diversification a top priority for growth policies on the continent.

Growth in oil-exporting African countries was on average 1% higher than growth in non-oil-exporting countries (6.1% versus 5.2%). Efficient management of oil revenues and economic diversification are essential for oil-exporting African economies to reduce vulnerability to oil price shocks, ensure that gains from oil revenue are broadly shared, and achieve sustainable growth. Improved economic management and increases in non-oil commodity prices have more than offset the negative impact of high oil prices on the real GDP of African oil importers. The growth impact of higher oil prices was particularly moderate for non-oil and non-mineral-rich economies, where growth performance improved from 4.1% in 2005 to 5.8% in 2006, thanks to debt relief and increased aid flows as well as improved agricultural production and high agricultural commodity prices.

Sustainability of macroeconomic balances remains a concern over the medium term

For the third consecutive year, Africa achieved a positive and increasing current account surplus (from 2.3 per cent of GDP in 2005 to 3.6 per cent in 2006). While exchange rates have been stable for most African countries, high commodity dependence exposes African economies to terms-of-trade fluctuations and extreme exchange rate volatility. As fluctuations in commodity prices have a significant impact on export revenue and the exchange rate many African countries have accumulated excessive foreign exchange reserves at high economic cost. African countries need to adopt a comprehensive strategy for prudential regulation and capital controls that can minimize exchange rate risk while allowing the countries to benefit from increased export revenue and foreign direct investment inflows.

Growth prospects for 2007 remain optimistic but risks persist

Africa is expected to grow at a rate of 5.8 % in 2007, if the world economy remains stable. Factors that are likely to hinder growth in the future include lack of diversification of production and exports and subsequent instability and vulnerability to shocks, and the increasing spread of the HIV/AIDS pandemic, which undermines labour supply and labour productivity. In addition, inefficient public infrastructure and unreliable energy supply at the national level as well as poor integration of transportation and energy networks at the regional level will continue to undermine productivity and international competitiveness.

Slow progress in international negotiations

The 2001 Doha Development Round of WTO trade negotiations saw ups and downs in the deliberations up to July 2006 when progress stalled. Talks have resumed since then informally and on a low-key basis but the prospects for a breakthrough still appear dim. Probably one of the most significant developments has been the increase in the participation of African countries in the actual negotiations. African countries were not only engaged actively in the definition of the mandate for the negotiators, but have been active at every stage, as the negotiations have progressed. However, this active participation has not translated to concrete results whereby African priorities are holistically addressed.

Diversification is key to sustained growth

Diversification process in Africa has been slow and volatile. It has been negatively influenced by discovery of primary resources, especially oil, inducing movement away from other sectors. Among key constraints to diversification, the report underscores the problems of ill-advised industrial policies, poor infrastructure that raises production costs, high sovereign risk, due especially to political instability that discourages investment in new activities, and rigid macroeconomic frameworks that limit the possibility of demand-led growth strategies.

Diversification plays a key role in helping countries to not only achieve higher growth rates, but also to sustain these growth rates over a long period. Indeed, diversification is a means of hedging against exogenous shocks, arising, among other things, from the vagaries of international commodity markets. Diversification also plays an important role in increasing productivity and maximizing the impact of growth on employment creation, a key mechanism for raising the standards of living of the population and reducing poverty.

African countries need to design diversification policies for Africa at three levels: macroeconomic policies to support diversification; trade and sectoral policies to deepen diversification; and strengthening institutions to enhance diversification efforts. Flexible macroeconomic policies that especially allow countries to achieve high levels of public investment are key to a successful diversification agenda.

In addition, financing research and development is essential to encourage innovation and increase the contribution of productivity in economic growth. This would then enable these countries to reap maximum benefits from their diversification efforts.