SUSTAINING ECONOMIC GROWTH IN AFRICA Presentation at the 17th Annual Conference on Global Economic Analysis: New Challenges in Food Policy, Trade and Economic Vulnerability – Dakar, Senegal by Prof. Njuguna Ndung’u, CBS Governor, Central Bank of Kenya 18th June, 2014

Outline Background Growth Performance and Outlook Opportunities for Growth in Africa Why is Growth Low in Africa? Some Solutions to Sustain Growth in Africa

1. Background Africa needs rapid and sustained growth to achieve the following: Meet the needs of a steadily growing population dominated by the youth – half of the population in SSA is below 25 years old (World Bank, 2013). Create employment for the youth – unemployment remains high as Africa is not generating even a tenth of the required jobs for this segment of the population. Poverty reduction has not been sustainable – what is needed is an inclusive growth strategy. Political stability which is intertwined with economic and social stability: Peace and stability required to facilitate growth and development of markets in Africa. Rapid and sustained growth may be required to promote peace. Rapid growth and stability will allow institutions to grow, develop and strengthen – institutions define the rules of the game and appropriate incentives for the markets to thrive. Finally, structural transformation and economic diversification takes place.

1. Background… Africa has diversity that can be characterized into: Coastal, resource rich, and Coastal resource poor, Land locked, resource rich, and Land locked, resource poor. The growth experience will follow these classifications – opportunities for investment will vary from country to country on the basis of each country’s geographical character and resource base. Growth, diversity and structural transformation has been supported or constrained by these factors. But a strong dependence on traditional trade partners has exposed Africa to spillover effects of financial/economic crises such as the instability in the Eurozone. There has also been a failure to establish value addition and new markets – Africa boasts over 380 million middle income class of its population, a massive market to rely on.

1. Background… But in the last decade we have seen an improved macroeconomic environment in SSA Prudent monetary policies and stable international food and fuel prices have supported declines/stability in inflation in SSA countries. Most SSA countries are re- aligning their monetary policy frameworks to changing economic and financial conditions – unstable money demand functions in the face of financial innovations. But currency wars and the prevailing unconventional monetary policy in the USA and Europe will create currency volatility Source: IMF Regional Economic Outlook: Sub-Saharan Africa – April 2014

1. Background… However savings and investment levels for SSA much lower than those of emerging market and developing Asia economies. The rapid growth rates experienced in some emerging and developing Asia economies can be associated with the comparably high savings rates Source: IMF World Economic Outlook – April 2014

2. Growth Performance and Outlook Growth in SSA countries expected to pickup with macroeconomic stability and global economic recovery in 2014 SSA economies have been recovering from the financial crisis in 2009. Strong growth is projected for SSA in 2014, rising from 4.9 percent in 2013 to 5.4 percent in 2014 – this gives scope for increased trade in the region including new product lines. SSA’s economic performance will benefit from stronger global economic activity due to the improved outlook for the advanced economies. Note: SSA frontier/emerging economies include Kenya, Mauritius, Ghana, Nigeria, Rwanda, Senegal, south Africa, Tanzania, Uganda, Zimbabwe & Cote dilvoire Source: IMF Regional Economic Outlook: Sub-Saharan Africa – April 2014

2. Growth Performance and Outlook… A strong growth recovery is expected for SSA in 2014 (IMF WEO, April 2014) to be supported by: Ongoing heavy investment in infrastructure development that enhances the productive capacity of the economies as well as opening up regional/external markets to private investors and facilitation of exports. Increased consumption and activation of new capacity in extraction sectors also underwrite beneficial distribution effects. Regional integration efforts and regional infrastructure projects will open up the economies and markets. Improved macroeconomic environment as inflation moderated from 10.7 percent in 2011 to 7.7 percent in 2012 and further to 5.9 percent in 2013 signifying an easing of supply side shocks. But the projected slowdown in the growth of China, Brazil and Indian economies coupled with the rollback of the unconventional monetary policies in advanced countries pose a risk to the SSA growth outlook – could lower export demand and investment through a rise in interest rates, and more importantly cause volatility in major prices.

3. Why is Growth Low in Africa? Why has Africa failed to grow given the structural changes, the policy reforms and the diversity of the economies? Is it a principle agent problem? Is it an incentive problem? Is it a collective action problem? Or is it a capacity problem? Investment and savings ratio are low – Africa needs to raise the investment to GDP ratio to over 30 percent to achieve and sustain growth rates that will address the current challenges. Investors have difficulties appropriating returns on their investments – there are binding constraints. Vulnerability to both domestic and external supply shocks impacts negatively to the price stability objective – volatile oil prices weighs heavily on oil importing countries with a likely expansion in current account imbalances. Dependence on and the decline in commodity prices (tea, cocoa, coffee and metals) has continued to significantly affect export earnings of some SSA. But above all the social-economic and political environment has pulled Africa growth: civil wars; ethnic violence; governance and resource extortion, etc

4. Opportunities for Growth in Africa Africa has the potential and is a large market for the world: Africa’s GDP in PPP terms is above USD 4 trillion which places it as the fifth block after the USA, China, India and Japan. Africa’s middle class is growing now at over 380 million which is considerably above the entire USA population and provides potential for consumption, innovation and consequential investment opportunities. Financial Institutions are diversifying, growing and strengthening across Africa. Widespread reforms supported by changes in legal and regulatory frameworks have improved the business environment – the devolved government structure as for example under the new Constitution in Kenya which provides new opportunities for inclusive growth. The prevailing macroeconomic stability in most SSA countries has enhanced investor confidence, and provided monetary policy space to support economic activity.

4. Opportunities for Growth in Africa… Adequate room for inclusive growth through reforms to promote economic diversification and employment, deepen financial sectors, and tackle infrastructural gaps – to make markets accessible. The large proportion of the population that is either unbanked or under- banked provides scope for financial institutions to increase their outreach – often dependent on innovations. The unbanked are often in rural areas where the multiplier generates more economic impact. Recent discoveries of oil and other mineral deposits in Eastern and Southern Africa countries could provide new impetus for growth by enhancing both the productive capacities of economies and finance public investment. The diversification of trading partners towards Asia and South America has increased prospects for increased trade opportunities and development cooperation. Public-Private-Partnerships should not only tap the skills of the private sector but increase the commitment of those with embodied domestic skills.

5. Some Lessons on Sustaining Growth in Africa Infrastructural gaps – enhance public investment in infrastructure to increase the future capacity for growth and promote private investment. Mobilise resources through domestic savings and foreign direct investment: Leverage on mobile financial services to raise financial inclusion levels and savings. Deepen the financial market with long-term funds through Pension Funds and Insurance Schemes reforms – A vibrant bond marketing. Strengthen institutions through socio-political reforms to enhance their effectiveness and efficiency. Generate youth employment – targeted interventions are required

5. Some Lessons on Sustaining Growth in Africa… Reinforce macroeconomic stability – through a comprehensive approach to managing public finances, expenditure programmes and sound monetary policy. Enhance productivity growth: Efficiency of investment that is manifested in total factor productivity is critical to growth. Promote competitive production – reducing transaction costs for firms, and enhancing intra-regional trade and investment will increase total factor productivity. Implement measures to reduce inequality that generate threats to security and sustainability of reforms: Growth targets should focus on reducing poverty – an incentive for the populace Redistribution policies increase growth by enhancing the poverty reduction impact. Countries in Africa should develop strategies that pronounce their vision: see Kenya Vision 2030: priority areas and investments in enablers.