Many African countries are entering a period of macro-economic crisis. The indicators of such a crisis are glaring. Government debt is at its highest level in more than a decade, and countries like Nigeria, Ghana, Ethiopia, Kenya, Zambia, and Mozambique now have an average debt-to-GDP ratio of 77 per cent, adding about 10 percentage points since 2019. Ethiopia, Ghana, Kenya, Malawi and Nigeria are facing foreign exchange shortages and (threats of) currency devaluation. Inflation has risen to around 9 per cent on average across the continent. In Ghana, for instance, inflation hit a staggering 40 per cent in October and interest rates currently stand at 27 per cent.
As macro-economists and the IMF step in – as it is increasingly doing, particularly for the much-needed bailouts – it is essential that they fully account for the main underlying issue driving this macro-economic crisis. While many external shocks – such as COVID, the Ukraine-Russia conflict, the rise in global interest rates, and climate change – are contributing to this situation, the main driver of this crisis is the structure of the economy: the relatively weak productive capacity of many economies, and the long-standing dependence on extractive industries.
As populations, welfare requirements and the requirements of managing external shocks soar, the economy needs to be able to generate sufficient income to pay for these. The rising debt and worsening fiscal and trade balances currently seen across the continent reflect the inability of the productive side of the economy to keep up, as yet, with the consumption side. Typically, the macro-economic policies recommended by the IMF – such as monetary, fiscal and exchange rate policy – that are tasked with ensuring macro-economic stability only consider macro-variables such as keeping inflation and the fiscal balance in check. This also includes the management of national debt. However, for economic prosperity, it’s important that African governments and the IMF consider together the requirements of macro-stability and of economic restructuring from extractive industries to value-adding sectors.
Beneath the headline-grabbing macro-story, major progress with regard to value-adding sectors has been made in recent years in the real economy. Sustaining this progress needs to be central in policymaking as we work through this macro-economic crisis. Take Ghana, one of the countries suffering the most macro-hardship. Over the past ten years the government has been proactively implementing an industrial policy, which has just begun to bear initial fruits.
Since colonial times, Ghana has been dependent on the export of commodities, particularly gold and cocoa beans. In 2011, oil joined these as a top three export, leading to a major surge in government expenditure which is inadvertently contributing to Ghana’s current fiscal crisis.
Yet according to TradeMap, value-adding sectors have also started to contribute to Ghana’s export basket, albeit at lower rates. This needs to be acknowledged. For example, cocoa paste exports – the first level of cocoa bean processing – rose from just $15 million in 2011 to $500m in 2021, making it Ghana’s fourth largest goods export after the above-mentioned three raw commodities and accounting for 3.3 per cent of Ghana’s goods exports. Similarly, cocoa butter, which is the second level of cocoa bean processing, rose to 2.3 per cent of goods exports from just 0.4 per cent. Cocoa powder exports, the third level of processing, have also risen – from just $500,000 in 2011 to $130 million in 2021. Significant progress is also being made in other products beyond cocoa, such as cashew nuts, processed tuna, rubber, banana, mangoes and palm oil. Exports of most of these products were insignificant just ten years ago.
In addition, exports of business and financial services are also growing rapidly, with total service exports now estimated to account for 38 per cent of all Ghana’s exports, up from just ten per cent in 2011. The manufacturing sector has also seen a turn in its fortunes. After declining from 12 per cent of GDP in 1985 to just 6 per cent in 2012, it rose to 11 per cent in 2021, driven by investments in sectors like agro-processing, textiles, pharmaceuticals and the automotive industry (which only started in 2021 and was beset by the COVID-19 pandemic).
Similar progress can be seen in other major African economies, such as Senegal, Morocco, Cote d’Ivoire, Nigeria, Kenya and Ethiopia. It is important that attempts to resolve the macro-economic crisis do not inadvertently undermine this progress.
The development of value-adding sectors is difficult and slow when compared to that of extractive sectors because you cannot just ‘dig a mine and turn on the taps’. When it comes to value-adding sectors, significant policy coordination and support are needed to ensure affordable and reliable access to inputs, energy, finance, skills, digital solutions and markets. It can also take years if not decades for production and net exports (i.e. direct exports plus domestic sales that reduce import dependence) to scale up to a level where they would have a significant bearing on macro-variables such as inflation, and the fiscal and trade balances. This is made harder when value-adding firms in these sectors have to also contend with external shocks, such as the COVID-19 pandemic and supply chain shortages for critical imported inputs.
As countries like Ghana make their way through this testing macro-economic crisis, it is critical that policymakers – whether in local capitals or at the IMF and World Bank in Washington DC – fully consider the needs of such productive industries. Otherwise, major damage can be done to the fragile but burgeoning productive sector that is just starting to bear fruit. It is essential that during the crisis, the ability of such sectors to access affordable financing, foreign exchange, energy, labour, and critical inputs for production is prioritised. During macro-economic crises, access to these critical inputs can easily be worsened by austerity-based macro-economic control measures that are usually recommended by financial institutions such as the IMF. The coming couple of years will be a test as to whether we have learnt the lesson that macro-economic policy needs to always be firmly anchored to industrial policy, particularly in times of crisis.