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Africa's Reforms Payoff Held Up by Global Uncertainty

Roadbuilding in Kigali, Rwanda: biggest obstacle to more intra-African trade is continent’s infrastructure, African finance ministers said (photo: Simon Maina/AFP)

AFRICAN FINANCE MINISTERS

Africa's Reforms Payoff Held Up by Global Uncertainty

IMF Survey

October 13, 2012

  • Investment flows yet to follow reforms to boost business friendliness
  • Better infrastructure key to boosting trade between African countries
  • Ministers note greater flexibility of Bretton Woods lending institutions

The uncertain global economic environment is hindering foreign investment in African economies and delaying the payoff that African countries expected after they improved their domestic business climates, African finance ministers said.

Speaking to reporters during the IMF–World Bank Annual Meetings in Tokyo, the ministers said the fact that Africa has maintained annual average growth of around 5 percent during difficult times for the world economy gave reason for confidence.

“The main concern, as has been stated in these Annual Meetings, is that we still have these uncertainties: we don’t know what is happening next year in the world economy,” Rwandan Finance Minister John Rwangombwa said.

Rwangombwa noted that Rwanda had enacted several reforms with the aim of attracting foreign investors. The country had dismantled obstacles to private investment, and in the last four years it had moved up in the “doing business” rankings by creating an environment for investment—both domestic and international.

Hampered vision

“These challenges in the world economy hinder us from seeing the benefits we should be getting from creating an enabling environment back home,” Rwangombwa stated. “To maintain our growth rates we need to transform our economy from a predominantly agrarian to a service-based economy, and we need investors from abroad to be able to achieve this vision we have and, if these uncertainties are not dealt with immediately, that is going to hamper our vision going forward.

“Even when we have achieved maturity in terms of managing our economies, we are still reliant on the global economy in terms of investment and markets for exports,” Rwangombwa said.

Economy Minister Kerfalla Yansane said Guinea needs appreciable extra resources to deal with social needs because more than half of the population is below the poverty line. “But we do not yet see substantial investment coming in to help us to meet the expectations of the population, and I think this is due somewhat to the international climate.”

Namibian Finance Minister Saara Kuugongelwa-Amadhila noted that prospects for a quick resolution of global economic and financial distress and for the resumption of strong growth in global trade were uncertain. “The protracted uncertainty in the outlook for the global economy, and especially the eurozone crisis, elevates the challenges going forward,” Kuugongelwa-Amadhila said.

“These uncertainties will definitely affect economic activity and prospects in a small, open economy like that of Namibia. In light of that, Namibia has been preparing itself to best deal with instances of financial instability, from within and from outside.”

Infrastructure upgrade

Responding to questions from reporters, the ministers stressed that increasing intra-African trade would boost growth and employment but depends on upgraded infrastructure throughout the continent.

Rwangombwa said the solution for sustaining future growth in Africa lies in expanding trade between African countries. Steps taken by countries to achieve this goal included regional integration, such as Rwanda’s membership in the East African Community, which was operating as a customs union, common market, and free trade area.

“But the biggest challenge to trade between African countries is infrastructure—how we move goods from one country to another. There we have a problem,” Rwangombwa said. East African Community members were working together as a bloc to attract investment in infrastructure, which made more sense than attempting to do so as individual countries.

Kuugongelwa-Amadhila said Africa is committed to, and is implementing, an integration agenda. The Southern African Development Community had already implemented a free trade agreement, and more than 80 percent of the goods that flow between its members were free of tariffs. The group was also moving toward a common system of customs administration.

Trade promotion

The community had a customs unions and a common monetary area, Kuugongelwa-Amadhila noted. The grouping had also set up an infrastructure fund to promote the development of cross-border infrastructure and achieve the physical integration of community members to promote trade.

Yansane observed, however that promoting intra-African trade also required political stability. Whenever instability arises in a country, leaders do everything they can to address it. He noted that the Economic Community of West African States promoted the free circulation of people and goods. “The subregion is the only one in Africa where there are no more visas required by the citizens of the various countries,” Yansane stated.

He also noted that the community had also established projects that aimed for interconnections in energy that included a west African power pool. He said Guinea has plans to develop major hydroelectric dam projects for domestic power generation and for exports of power to neighboring countries.

More flexible IMF

The ministers said they believed the IMF and the World Bank are now more flexible in helping member countries to design programs supporting financial and other arrangements. “We no longer receive packages from the Fund or the Bank that say ‘Do this, do that,’ “ Rwangombwa said. “They come in to support our efforts on where we want to go as a country. They just support us, they don’t dictate.”

Kuugongelwa-Amadhila said she had also observed a positive change in the way the Bretton Woods institutions related to developing countries. “Of specific interest is their embracing of the positive role that can be played by fiscal policy to support growth in the aftermath of what has happened to the global economy.

But she added that she would want to see “a more positive attitude” from the institutions toward recognizing individual country circumstances and diversifying lending instruments, as opposed to allocating them on the basis of “one size fits all.”

Yansane noted that Guinea had recently graduated from the Enhanced Heavily Indebted Poor Countries debt relief mechanism. This opened a new phase in Guinea’s economic development, and the country would need assistance in the period ahead. “There is more confidence between our countries and the institutions,” Yansane said.