Nigeria
Overview
Nigeria, the eighth largest oil exporter in the world and Africa’s second largest economy, continued to be buffered by the global recession in 2009. Reforms initiated earlier in the decade have strengthened the country’s capacity to manage the crisis and avert the boom-bust pattern characteristic of past oil cycles. Gross domestic product (GDP) growth fell to 3% in 2009, compared with 6% in 2008. It is projected to rise to 4.4% in 2010 and 5.5% in 2011, driven by a recovery in oil prices. Oil accounts for about 80% of fiscal revenues and 95% of exports. Oil revenues fell by 7.8 percentage points of GDP in 2009, moving the fiscal accounts from a surplus of 3.8% of GDP in 2008 to a deficit of 5.2% in 2009. A planned sovereign bond issue of 500 million US dollars (USD) (0.5% of GDP) has been shelved because of adverse market conditions. The external debt at the end of 2009 is estimated at only 2.2% of GDP. This suggests that debt sustainability is not likely to pose a major problem in the coming years. The current account surplus declined to 11% of GDP in 2009, compared to 21% in 2008.
Oil production has been affected by the conflict in the oil-rich Niger Delta region. Prospects for a lasting resolution in the conflict improved when the militant groups declared an indefinite ceasefire in October 2009, following talks with the government which, for its part, granted an amnesty to the militants. More than 12 000 militants have registered for reintegration into civil society. President Umaru Yar’Adua has asked the National Assembly to approve legislation that will give 10% of Nigeria’s equity in oil joint ventures in the Niger Delta region to local communities.
The Central Bank of Nigeria injected funds into the banking system in August 2009 when five banks – accounting for about a third of banking sector assets – became financially distressed as a result of excessive lending to the energy sector and the decline of the stock market. The foreign exchange market was hit by speculative activity triggered by a fall in external reserves in the wake of the global recession. Flows of foreign exchange into the economy shrank as a result of the drop in crude oil earnings. Consequently, the exchange rate depreciated from 119 Nigerian naira (NGN) to the US dollar (USD) in 2008, to NGN 150 in 2009. The inflation rate for 2009 was 12.1%, reflecting several sources of inflationary pressure, including a loosening of monetary policy. The Nigerian stock market fell in 2009 because of the global economic meltdown and the all-share value index stood at 26 860 in June 2009, compared with 55 949 in June 2008.
Agriculture was the leading contributor to GDP in 2009, accounting for 36.5% of GDP, thanks to a good harvest. Second was the oil and gas sector with 32.3%. Other major contributors included wholesale and retail trade with 15.9% and services with 8.2%.
Public resource mobilisation faces several challenges. These include, specifically: a seemingly excessive number of institutions involved in the process; overlap of functions among the three tiers of the federation; multiplicity of taxes; obsolete tax laws; and laborious tax filing procedures. Nevertheless, the scope for public resource mobilisation is considerable, in particular by increasing oil output and assessing the relative merits of the institutional arrangements for oil production. It is important to diversify revenue sources away from oil to enhance revenue mobilisation and help protect the economy against oil price shocks.
Infrastructure, especially electricity, remains in poor shape, while problems in the distribution of petroleum products persist, leading to queues. Finally, Nigeria has relatively poor human development indicators, despite its rich natural-resource endowment. Some 50% of the population lived below the poverty line of USD 1.25 a day in 2007. Nigeria is not on course to meet several of the Millennium Development Goals (MDGs), including halving poverty by 2015.
Snapshot of the Nigerian Stock Market in January 2011
The performance of the stock market during the first three weeks of January 2011 was very impressive with the Nigerian market ranking among the world’s best. The fourth week was rather bearish attributed to the upward review in the monetary policy rate (MPR), profit taking by investors and the impact of the regulatory action, which prevented some operators believed to be undercapitalized from participating in the market. The stock market recorded turnover of 10.84 billion shares valued at N104.1 billion in 139,950 deals during January 2011 in contrast to a total of 6.63 billion shares valued at N56.7 billion exchanged during December 2010 in 111,114 deals. In essence, the volume traded, value traded and number of deals rose by 63.53%, 83.62% and 25.95%, respectively. In the preceding month, volume traded, value traded and number of deals declined by 10.9%, 6.1% and 8.6%, respectively. Trading days in January 2011 was 20 compared with 21 in December 2010. There were no transactions through the stock market on the Federal Government Development Stocks, sub-National Bonds, Industrial Loans and Preference Stocks sectors.
South Africa
Overview
After several years of sustained growth, for the first time since 1992 South Africa’s economy fell into recession with GDP contracting by 1.8% in 2009. The economic slowdown had started already in 2008 with the weakening of domestic demand and was exacerbated when the global crisis led to a sharp fall in exports. Growth is expected to recover gradually to 2.4% in 2010, helped by the recovery of global demand and boosted by the FIFA World Cup, and to accelerate further in 2011 to 3.3%.
Output in manufacturing and mining declined in 2009 as a result of lower exports and agriculture contracted because of adverse climatic conditions. The only sector that showed sustained growth was construction, boosted by a public investment programme and by the forthcoming football World Cup.
Thanks to its prudent macroeconomic policies, South Africa was one of the few countries on the continent able to implement strong and coordinated countercyclical fiscal and monetary policies. Fiscal stimulus measures together with cyclical revenue shortfalls resulted in a sharp deterioration of the fiscal position by 6.2 percentage points of GDP, culminating in a deficit 7.3% of GDP in 2009/10. The Central Bank responded to the recession by cutting the repo rate by 500 base points. Weak demand and the appreciation of the currency helped reduce inflation from its peak of 11.5% in 2008 to 7.1% in 2009. A sharp increase in electricity prices and wage cost pressures prevented a further decline of inflation into the target range of 3-6%. This made the trade-off between fighting the recession and achieving low inflation more delicate, causing public debate over the mandate of the Bank. Inflation is expected to decrease in 2010, falling back into the target range.
In the coming years, the main policy challenge will be to strike a good balance between fostering growth, while preserving fiscal sustainability and low inflation.
South Africa‘s economic and social outlook remains shadowed by huge structural challenges, notably deficiencies in transport and energy infrastructure, which raise production costs and limit growth potential.
Public service delivery, also a severe bottleneck to growth, has proven inadequate in a period of severe economic distress and has led to significant social discontent. Demonstrations took place throughout 2009 and if the government fails to improve basic service delivery social instability could continue. President Zuma, elected in April 2009, must achieve a delicate balancing act: reassuring the international and domestic business community by upholding market friendly policies, while delivering on his promises to alleviate poverty, against a backdrop of sharply increased unemployment. Public resource mobilisation has improved, as shown by the rising number of registered taxpayers, both individuals and corporations. However, the recession resulted in significant revenue shortfalls in 2009. Further simplification of the tax code and of filing procedures will meet business expectations and free staff within the tax administration to strengthen auditing in sectors where evasion is still widespread. Here again, voter satisfaction with public service delivery must be improved in order to broaden and strengthen the direct tax base and to increase its contribution to public financing.
Botswana
Overview
The global economic crisis has had a devastating impact on Botswana’s economy, mainly because of the latter’s heavy dependence on the mining sector, which accounts for more than a third of gross domestic product (GDP), and particularly on diamond exports. The collapse in demand for diamonds forced operators to suspend mining activities in late 2008 and early 2009. In contrast, the non-mining sectors of the economy were less affected. Botswana’s banking sector has only limited interactions with the international financial system and thus was insulated to some extent from the effects of the crisis, while other private sectors benefited from increased government spending. Nonetheless, the collapse of diamond production caused GDP to fall sharply in the first quarter of 2009. When diamond mining resumed in the second quarter, the economy picked up again, but owing to the sharp first-quarter decline, annual GDP for 2009 fell by an estimated 4% with respect to 2008. In 2010, the mining sector is expected to benefit further from the global recovery. At the same time, the government is starting to tighten spending in order to ensure long-term fiscal sustainability. The economy will thus begin to grow again with rates of 3.4% in 2010 and 3.1% in 2011, driven by mineral exports and services.
To mitigate the impact of the crisis, the government followed moderately anti-cyclical fiscal and monetary policies. On the fiscal side, since about two-thirds of government revenue stems from the diamond sector, the drop in diamond production led to substantial revenue losses. However, the fiscal surpluses recorded in previous years and ample foreign reserves enabled the government to continue the major spending programmes in the 2009/10 budget. Only a few development projects were cut or postponed as a result of the tight fiscal situation. The government thus avoided a pro-cyclical policy, which would have aggravated the recession, but at the cost of Botswana’s first fiscal deficit since 2003: the budget balance deteriorated by about 10 percentage points of GDP, from a surplus of 5% of GDP in 2008 to a deficit of 5.4% in 2009. To finance its development projects, the government contracted a general budget support loan of 1.5 billion US dollars (USD) from the African Development Bank (AfDB) in 2009.
Monetary policy was eased by lowering the benchmark interest rate and increasing credit to boost economic activity in the non-mining sector. At the same time the monetary authorities sought to reduce inflation, which had reached the double-digit level. The drop in energy and food prices helped them to achieve this goal, and inflation fell below the 6% mark towards the end of 2009, thus entering the target range of 3-6%.
Recent policy initiatives undertaken by the government include the establishment of the Transport hub (one of six sectoral co-ordinating bodies, or “hubs”, created to foster economic diversification and sustainable growth) to promote the construction of the Kazungula Bridge, the dry port at Walvis Bay, the trans-Kalahari railway and other projects. Major progress has also been made towards meeting the Millennium Development Goals (MDGs), particularly in health and education. On the negative side, the privatisation master plan of the Public Enterprise Evaluation and Privatisation Agency (PEEPA) has run into further delays.
Where resource mobilisation is concerned, Botswana’s economic development has been financed by domestic resources rather than by capital or aid inflows from abroad. National saving has been relatively high and has steadily increased over the years, thanks to the robust growth in diamond revenue until the recent crisis and to the government’s sustained effort to build up reserves by running fiscal and current account surpluses. As a result, national saving has not been a constraint on the financing of domestic investment. In future, however, capital inflows are likely to become more important as Botswana pursues economic diversification away from mining. The government recently announced a 2 percentage point increase in value added tax (VAT) in an effort to boost domestic revenue.
In addition to immediate revenue shortfalls, the Botswana economy is likely to face considerable economic challenges in the coming years. In the short term, policy will need to support the recovery until the world diamond market recovers fully. Structural problems need to be addressed to diversify the economy and foster growth potential. Despite many attempts over the years to upgrade the national skills base, the supply of skilled labour does not match the demand, which is a major hindrance to efforts to diversify the economy and move it into a higher growth path. As a result of the skills gap, vacancies for skilled labour cannot be filled, while at the same time unemployment is high, particularly among the young. According to a 2008 Central Statistics Office report, the unemployment rate in 2005/06 was over 60% among 15- to 19-year-olds and around 45% among 20- to 24-year-olds. The report also noted that these age groups were highly vulnerable to HIV/AIDS.
Egypt
Overview
Egypt’s economy slowed down in 2008/09. The gross domestic product (GDP) growth rate reached 4.7% (Figure 1). The deceleration of growth was a result of the global crisis. Domestic final consumption proved resilient and increased public investments offset the decline in private investments to some extent. The key driving sectors in the economy were extractive industries, information and communications technology (ICT), construction and wholesale and retail trade. However, all sectors with international linkages were negatively affected by the global crisis especially tourism, the Suez Canal, and workers’ remittances. Foreign direct investment (FDI) dropped by around 38.7% in 2008/09.
Egypt held up well during the first round of the global financial crisis thanks to its reformed banking sector and low integration into global financial markets as a whole. As a result, Moody’s raised Egypt’s sovereign rating from negative to stable in September 2009. Egypt advanced by 10 ranks – to 106 out of 183 grades – in the World Bank’s Doing Business 2010 report. Its ranking also improved by 10 positions in the World Economic Forum’s Global Competitiveness Report 2009-10, to 70th out of 133 countries.
The overall budget deficit stabilised at 6.9% of GDP in 2008/09, close to its previous year’s level. As the Egyptian government continues its counter cyclical policy, the overall budget deficit is expected to widen to 7.5% of GDP in 2009/10. Average annual CPI inflation increased to 16.2% in 2008/09, up from 11.7% in 2007/08. As international prices continue to stay at a lower level, we expect inflation to decline to 13.2% in 2009/10.
To counter the adverse effects of the global financial crisis on the Egyptian economy, the government took several measures to prevent a sharp decline in economic activity. Fiscal and monetary policy boosted economic activity while targeted programmes cushioned the effects of the crisis on the most exposed sectors such as manufacturing, tourism and foreign trade.
The balance of payments is in deficit for the first time in five years because of declining current account receipts, falling remittances and receding foreign investment. As the impact of global economic crisis starts to subside and the world economic outlook brightens, the Egyptian economy is expected to grow at higher rates, 5.4% in 2009/10 and 6.1% in 2010/11. The balance of payments deficit is expected to decline. The biggest challenges are rising unemployment, especially with investment slowing-down, and unequal income distribution: more than two fifths of the population are close to the poverty line. Illnesses such as hepatitis B and C represent major challenges to improving health and labour productivity as do, potentially, an H1N1 swine flu or bird flu epidemic.
Egypt’s key goal for tax reforms is to increase tax revenues. Throughout the last decade, there have been several legislative and administrative reforms that have led to increased tax revenues. Yet more effort is needed to reduce the regulatory burden of tax compliance and to formalise the informal sector. On the other hand, the impact on income distribution and social welfare of new tax measures such as the property tax or a new fully fledged value added tax (VAT) should be carefully studied.
Egypt faces many challenges: lower savings and investments, lower FDI, rising unemployment, reducing poverty and improving health and education. All that in the context of an unpredictable political environment in the face of upcoming parliamentary and presidential elections.
