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HSBC | Political stability and reforms underpin sub-Saharan growth – Focus on Nigeria, Kenya & Uganda

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Posted August 13, 2012 by Ugandan Diaspora News Team in Business ~ 10,959 views

     

Sub-Saharan Africa, long marred by political instability, conflicts and an uncertain business environment, is making an impressive leap forward thanks to an improving political backdrop and an eagerness to undertake structural reforms that are at times unpopular.

South Africa has the region’s largest economy and the deepest markets, but we focus here on three up and coming economies with bright growth prospects – Nigeria, Kenya and Uganda. All three have pasts tainted by political infighting but domestic stability has improved significantly. Nigeria held successful and democratic elections in April 2011; in Kenya, the 2008 power-sharing agreement is working fairly well with the main parties cooperating on a new constitution; and Uganda has now enjoyed political stability and high economic growth for some time.

There are still major challenges. The most important is price stability as all these countries are suffering from high double-digit inflation, leading to occasional social unrest. This makes it difficult to implement key reform steps such as overhauling public finances by withdrawing inefficient subsidy schemes. Separately, Nigeria and Uganda have to set up proper legislation to benefit from their oil wealth more equitably.

Nigeria also suffers from a chronic energy-supply shortfall that necessitates massive investment. The sub-Saharan region has the largest infrastructure deficit in the world, but domestic savings are generally insufficient to cover investment needs so external capital is needed. However, the region attracts only a small share from the global pool of foreign direct investment.

We are optimistic that political stability and structural reforms will help attract foreign investment and thus spur fast growth. At the end of the day, sub-Saharan Africa has the most favourable demographic outlook in the world and China has long been pouring resources into the continent.

In Nigeria, President Goodluck Jonathan has been trying to address key structural problems including governance, corruption, power shortages and deregulation of the petroleum sector. But some reforms are progressing slowly. The Petroleum Industry Bill has been stuck in the parliament with local administrations objecting to plans to put part of Nigeria’s oil windfall into a kind of sovereign wealth fund. Oil proceeds make up about 95 per cent of Nigeria’s export receipts and 80 per cent of fiscal revenues.

Kenya’s economic activity is too dependent on rain-fed agriculture and horticulture where climatic conditions can cause large swings in output. However, service-sectors such as telecommunication, finance and tourism are flourishing. The large infrastructure deficit also requires constant investment and although officials have unveiled major oil finds, their commercial viability is currently unclear.

Uganda has enjoyed political and economic stability for a relatively long time. The land-locked country has successfully positioned itself as a transit hub to tap into increasing trade within the region, supported by a broadened East African Community, the economic union that promotes free trade.

The sub-Saharan region has the largest infrastructure deficit in the world, but domestic savings are generally insufficient to cover investment needs so external capital is needed.
The country is also investing in its oil finds, estimated at 2 billion to 6 billion barrels of recoverable oil, placing it among sub-Saharan Africa’s top producers. The projected production of 150,000 barrels per day could start in the next three to four years and double current government revenues within the next ten years.

But inflation is a problem in all three of these countries. High prices result from fast growth in money supply related to robust economic activity and fiscal spending by local governments as well as to cost pressures such as rising food and energy prices and currency depreciation.

Nigeria’s near-term challenge is to bring inflation back to single-digit levels. Its central bank has doubled its monetary policy rate to 12 per cent since 2010 but in the longer term, disinflation requires overhaul of public finances, further liberalisation of the economy and improvement in its energy supplies.

Kenya’s inflation has been exacerbated by droughts that lead to food and electricity price pressures. The Central Bank of Kenya hiked interest rates by 1,100bps in the final quarter of last year and while headline consumer inflation appears to have peaked, it remains excessively high.

Uganda’s electricity regulator raised tariffs by 36 per cent for retail and commercial users, and 69 per cent for large industrial consumers, to withdraw subsidies. Inflation will thus remain high. The Bank of Uganda also raised its policy rate by 1,000bps last year to rein in inflationary pressures but as the currency stabilised, rates have been gradually cut.

Sub-Saharan Africa has high growth potential because of a significant demographic advantage, underground riches and huge scope to catch up with a proper economic framework. HSBC’s ‘The World in 2050′ report said “Half the increase in the world’s population over the next 40 years will be in Africa.”

We are optimistic that as political stability improves and structural reforms are undertaken, the region will attract more and more capital. However, the massive infrastructure deficit requires investments that are not covered fully by domestic savings so foreign capital is clearly needed. With the exception of South Africa, the share of consolidated foreign claims in sub-Saharan Africa countries – a proxy for foreign lending – has been small relative to the sizes of the economies, pointing to the under-leveraged nature of sub-Saharan African markets. – Source HSBCnet.com


About the Author

Ugandan Diaspora News Team

Ugandan Diaspora News Online is an independent, non political news portal primarily aimed at serving Ugandans who work and reside outside Uganda. Our aim is to be a one stop shop for everything Ugandan and the celebration of our Ugandan heritage.

One Comment


  1.  

    we are still thousands of years back in time because of the prehistoric leaders





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