June 21, 2017    4 minute read

Sub-Saharan Africa: A Region Holding Back the Continent

A Two-Track Nation    June 21, 2017    4 minute read

Sub-Saharan Africa: A Region Holding Back the Continent

Buoyed by the sustained economic crisis in developed economies across the globe, the resurgence of renewed interest in Africa is one that is based on the thrills of hope and what the future could hold for the continent. However, the promise of a better future is at risk, heavily detracted by the lack of goodwill from the political class across many African nations concentrated in sub-Saharan Africa; low commodity prices which have caused economic instability; civil wars amongst some key rich states (e.g. the DRC) and sluggish growth in key developed economies which are key destination markets for African economic goods. These factors have led to GDP contraction amongst Africa’s economic powerhouses, pulling down their economic growth.

The Engine of the North

Africa’s collective nominal GDP as at the end of 2016 stood at around $2.3tn, predominantly led by Nigeria which has faced a contraction in its GDP since it floated the Naira in 2016. South Africa, another key economic power in Africa, has also contracted given the recent political turmoil it is facing. Current GDP stands at ~$266bn. North African countries due to their proximity with Europe have enjoyed far better economic success relative to their sub-Saharan counterparts, with North Africa’s GDP at ~$688bn, a region comprised of about five countries while SSA has a GDP of about $1.3trn being driven by 49 nations.

Due to investments over the past two decades, largely fueled by China, smaller GDP countries in sub-Saharan Africa are growing at high single digits to low double digits. But can this really make a significant change in Africa’s economic status in the world? For example, a $1 growing to $2 is equivalent to a 100% growth whereas a $10 investment growing to $14 is only a 40% growth. The truth is, a significant number of African countries have significantly low GDPs compared to the rest of the world’s developing countries. A double digit growth in GDP that is in the low teens is not significant enough to make significant strides in GDP growth in the region to catch up with peers in the developing world or better yet the developed world. At current growth rates, Africa needs to grow at a minimum average of 6% for the next 40 years for it to catch up with the USA assuming the USA grows at a measly 1% for the next 40 years – all but impossible since this does not account for shocks and periods of economic boom and busts that may occur along the way.

The Influx of Chinese Funds

The recent level of FDI in Africa is encouraging and a sign of investor confidence with the current state of economies in Africa. However, African economies undoubtedly need to grow faster, focusing on more diversification of economies and more intra-African trade. Essentially, “Chinese money” or “Chinku” as popularly known in East Africa comes without any strings attached and just requires repayment of interest and use of Chinese companies across most countries in Africa. This leaves leeway for governments, often rife with corruption to invest in the projects the way they see fit which almost certainly comes at an inflated cost. For example, Egypt in 2014 completed a 17.7km train track for $1.2bn while Ethiopia in 2016 completed a 792km track at a cost of $4bn. It seems one country is getting more out of its investment than the other. With these kinds of investments across the continent, one cannot help but wonder why economies across the continent are not growing faster than the level and size of investments being put in. Much needed infrastructure investments are opening up intra-African trade; however, African countries need to capitalize on these projects. Is it so difficult to cut a pipeline across North Africa to East Africa coupled with a train track for goods and people transportation? Or perhaps provide food to North Africa since Sub Saharan Africa contains 60% of the world’s arable land.

Conclusion

One the whole, African economies need a rethink in terms of where the money invested goes. If it doesn’t translate into faster economic growth, they will be left with burgeoning debt from the Chinese and sluggish economies which stutter along the way to economic independence which could be more than a century away. To achieve better growth and satisfy a number of economic master plans across many sub-Saharan countries, Africa needs a corporate governance overhaul focusing on intra-African trade which will create employment for its vast youthful population.

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