East Africa

EAC economies grew the fastest in Africa last year


Summary

  • Southern Africa was affected negatively, with South Africa registering the highest number of Covid-19 cases in 2020, pushing the economy into deep recession.
  • In the latest outlook, although gross domestic product growth in Ethiopia and Tanzania slowed in 2020, it remained in positive territory while the general East Africa GDP is expected to pick up in 2021.
  • The key to sustainable growth in Africa remains foreign direct investment, which peaked at an all-time high in 2019, but has plummeted since 2020.
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By ANTHONY KITIMO


East African economies remained resilient, growing by 2.3 percent and keeping the region on its trajectory as the fastest-growing in Africa in 2020, says a report by Ernst & Young.

The report, “Reset for Growth: Fast Forward EY Attractiveness Report Africa November 2021” indicates that across the continent, East Africa was most robust, with Tanzania and Ethiopia growing the fastest in 2020.

Southern Africa was affected negatively, with South Africa registering the highest number of Covid-19 cases in 2020, pushing the economy into deep recession.

In the latest outlook, although gross domestic product growth in Ethiopia and Tanzania slowed in 2020, it remained in positive territory while the general East Africa GDP is expected to pick up in 2021.

Kenya’s growth is expected to rebound to five percent, supported by its Economic Recovery Strategy and a strong recovery in the services sector. The country is also eyeing a free trade deal with the US.

The EY survey indicated that a new stable government in Tanzania and rebound in manufacturing will drive growth in 2021 to 4.5 percent while Ethiopia’s growth is projected to decline to 2.2 percent as it struggles with high unemployment and political unrest in Tigray.

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High Covid numbers

Both Ethiopia and Kenya recorded some of the highest Covid-19 numbers across Africa, with the current low vaccination rates continuing to pose risk.

In addition, rising public debt, with high debt distress risk in both Kenya and Ethiopia, could slow the growth rebound. Kenya’s debt rose to an estimated 69 percent of GDP at the end of 2020, which is considered high by emerging market standards.

The Africa report forms part of the broader global EY Attractiveness Programme that focuses on insights derived from understanding growth from foreign direct investment in and across Africa.

According to EY Africa Chief Executive Ajen Sita, rising investment into sectors outside the traditional extractive industries is creating more sustainable long-term growth in the continent.

“Rapidly rising FDI into service sectors including business services, telecoms, media, technology, financial services, and consumer services will enable sustainable job creation over time,” said Mr Sita.

High potential

EY Africa government and infrastructure leader Sandile Hlophe on the other hand said Africa is still an attractive investment destination, with its young population and vast natural resources giving it potential for enormous growth and innovation.

The outlook for 2021 is mixed, with government recovery measures varying by country.

Private sector involvement, slowly recovering trade, rising commodity and crude prices, rebounding tourism and strong agricultural output are expected to determine Africa’s recovery prospects.

The continent is projected to grow by 4.6 percent in 2021, then averaging four percent up to 2025. Côte d’Ivoire, Morocco and Kenya are expected to rebound more strongly in 2021.

But mounting debt, high unemployment, low vaccination rollouts, political unrest, lack of basic infrastructure and rising poverty levels pose risks to this outlook.

“Africa’s demographic dividend looks promising but to make significant progress, the continent needs to improve governance, continue with political reforms, enhance transparency, diversify its economy, invest in infrastructure, and proactively seek inbound investment to create more employment opportunities for its people,” says the report.

Free trade area

The outlook noted that one of the most promising developments is the African Continental Free Trade Area (AfCFTA), which came into effect on January 1, 2021 and has the potential to create the biggest free trade area in the world, cutting red tape and boosting trade throughout the continent.

The treaty aims to address historical gaps in intra-regional trade and investment. However, in the nine months since it came into existence, implementation has been patchy, with many members reluctant to cut tariffs and thus expose their local businesses.

The key to sustainable growth in Africa remains foreign direct investment, which peaked at an all-time high in 2019, but has plummeted since 2020.

Africa’s FDI halved in 2020, making it the hardest-hit region globally. It trailed all other emerging markets, as well as the key mature regions Europe (-23 percent) and North America (-19 percent). Only Asia-Pacific’s decline was close (-43 percent).

This can be ascribed to its large resource-export dependent economies, which felt the impact of commodity price declines and rapidly decreasing demand, causing them to fall into recession.

“The share of FDI in the service sectors including business services, telecoms, media and technology, financial services, and consumer is rising rapidly, supporting sustainable job creation over time,” noted the report.

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