After a trend of high economic growth, the sub-Saharan African region finished 2015 with a GDP growth rate of only 3.4 percent. However, with growth rates above the world average, Africa stands as the second-fastest growing continent, behind Asia. As China continues its slowdown, contributing to lower commodity prices, and amid a weak global financial and political environment, it has been argued that sub-Saharan Africa must look inward for economic growth. For Africa’s largest economies, South Africa and Nigeria, political and economic turmoil has rocked the markets, greatly challenging the growth prospects in Africa’s largest economies.
* Update and modification of Figure 2.1. Sub-Saharan Africa must look inward more than ever for economic growth of Foresight Africa 2016.
South Africa regains position as the largest economy in Africa
During the first six months of 2016, the South African rand’s value has remained relatively unchanged, while the Nigerian naira reached an all-time low this month. The start of the naira’s massive devaluation began on June 20, 2016 when the peg to the dollar was lifted, leading to immediate losses of over 40 percent.
Owing to the differences in the currency exchange rates, South Africa’s GDP in U.S. dollars soared over that of Nigeria, and the gap in economy size has widened since June 20, notwithstanding a 6 percent climb by the naira and a slight dip in the rand this past week (Figure 2). In addition, rumors of a potential arrest of South African Finance Minister Pravin Gordhan also threaten the rand.
Although GDP figures are one of the most commonly used measures of an economy’s output, forecasted GDP growth rates and GDP per capita are more important for policymakers, for they have a more tangible effect on returns for investors, unemployment numbers, and the overall wealth of the citizens; albeit these statistics do not accurately portray the state of income inequality or poverty. In fact, South Africa has had lower GDP growth rates than most other sub-Saharan Africa nations, and these rates are projected to remain low (Figure 3). Meanwhile, Ghana, Kenya, and Uganda, among other sub-Saharan Africa countries, are projected to recover from low growth rates, with growth averaging around 6 percent in the next few years. Nigeria’s economy has struggled so far this year and is seeing growth rates under half the level of that in 2014.
Remnants of hope as Nigerian economy remains in shambles
An unrelenting series of economic shocks has been striking Nigeria, sending the most populous African nation deeper into distress after a decade of strong growth. The largest hit to the economy, sending Nigeria into a $7 billion budget deficit, has been the steep drop in oil prices. Oil accounts for 70 percent of government revenue and 95 percent of export income. And as oil prices remain low, the militant group known as the Niger Delta Avengers have cost the country 700,000 barrels of oil per day by blowing up pipelines in the Niger Delta region in southern Nigeria. The aforementioned drop in currency value has led to foreign exchange shortages, import barriers, and economic turmoil for local and multinational firms (Nestle Nigeria’s profits dropped 94 percent due to the currency depreciation). These large economic shocks only add to the country’s instability (Table 1).
Although the Nigerian economy remains vulnerable, there are reasons to be optimistic about the future. A weak currency may have many negative effects on a country, but the naira value drop is also an opportunity for exporters who have costs in naira and revenue in foreign currencies. Additionally, the Niger Delta Avengers have agreed to dialogue with the federal government accompanying a declared ceasefire, and the Nigerian army claims to have killed the current leader of Boko Haram, Abubakar Shekau, strengthening the basis of a strong economy: political stability and peace.
Tor Syvrud contributed to this post.