Recent macroeconomic trends and prospects
Following the publication of the African Economic Outlook 2023, which addressed development challenges on the continent, this West African Development Outlook report addresses the same issues, with a particular focus on the West African region.
West Africa’s average GDP growth decelerated to 3.8 percent in 2022 from 4.4 percent in 2021, implying that growth recovery from the 2020 downturn has slowed. Growth is driven, on the demand side, by household consumption and investment, and on the supply side by the services sector.
Growth deceleration is attributable, among other causes, to successive shocks e.g., resurgence of Covid-19 in China, West Africa’s major trade partner; Russia’s invasion of Ukraine causing inflationary pressures in net food, fuel and fertiliser in importing countries; monetary policy tightening in advanced economies, which caused global risk averse sentiments, thereby contributing to exchange rate pressures; and lastly lingering security-related challenges.
GDP growth decelerated in all countries in the region, except Cabo Verde, The Gambia, Guinea, Mali, and Niger. Cabo Verde, a tourism dependent economy, registered the region’s fastest growth.
It grew by 10.5 percent from 7 percent in 2021. The magnitudes of GDP growth deceleration are expected to be, on average, smaller in oil-exporting and resource-intensive economies than non-resource intensive economies.
This is on expectation that countries in the former group would utilise shock-instigated commodity price surges (windfall incomes) to support growth.
This argument is supported by data at the continental level. However, this was not true in most of the resource rich economies of the West African region.
The GDP growth outlook for the region is positive. It is projected to slightly pick up in the medium term (3.9 percent in 2023 and 4.2 percent in 2024). This is on the assumption that global inflation would recede in the medium term.
Growth is projected to be driven, on the demand side, by domestic absorption (i.e., household consumption and investment) and external demand (due to an upturn in activities in emerging economies such as China). On the supply side, it should be driven by agriculture, industry, and services.
In terms of country groupings, regional growth is projected to be driven by the non-resource-intensive economies (Cabo Verde, Togo, Senegal, Guinea-Bissau, Benin, The Gambia, and Côte d’Ivoire), and few other resource-intensive countries.
The relatively high growth performance in non-resource-intensive economies could be attributed to the diversified nature of their growth base (e.g., Côte d’Ivoire and Senegal) and improved policy management.
In West Africa, the rate of inflation rose from an average of 9.7 per cent in 2014-2020 to 12.7 per cent in 2021 and 17 per cent in 2022.
Average regional inflation is projected to stabilize at 17.5 per cent in 2023 and decline to 11.1per cent in 2024 and will stay higher than the continental average both in 2022, 2023 and 2024. It is higher than all the other regions on the continent, except the East Africa region.
Because of the conventional peg regime of the West African Economic and Monetary Union (WAEMU), inflation in West Africa tends to be much lower than in East Africa where currencies are not pegged.
The inflation rates were, however, higher in West Africa than in other regions except the East Africa. Higher inflation in 2022 in West Africa and on the continent is primarily due to
rising food and energy prices.
The build-up in global supply chain pressures, amplified by effects of Russia’s invasion of Ukraine, has resulted in a sharp rise in global commodity prices, especially for food and energy in 2022.
As in most African economies, West African countries are characterised by structural fiscal deficits, resulting from sustained public infrastructure spending and low domestic resource mobilization. In 2014-2020, fiscal deficits in West Africa averaged 3.6 per cent of GDP, lower than the continental average of 5.4 per cent. Central Africa is the only region which had a lower deficit (2.7 per cent) while larger deficits were recorded in Southern Africa (4.6 per cent), Eastern Africa (4.8 per cent), and North Africa (8.7 per cent).
In 2021, the region’s average fiscal deficit increased to 5.6 per cent and remained unchanged in 2022, despite a decrease in the deficit observed in all other regions of the continent.
In 2022 fiscal deficit was higher in West Africa than in the other regions.
West Africa’s fiscal deficit is projected to narrow in percent of GDP to 5.2 per cent and 4.9 per cent in 2023 and 2024. It is higher than the continental averages of 4.1 of GDP and 3.8 per cent of GDP in 2023 and 2024, respectively.
Fiscal deficit is projected to narrow in all the countries in the region with the exception of Guinea.
This is expected to be supported by improved revenue collections, thanks, among other things, to an upturn in economic activities and to the gradual lifting of fuel and food subsidies.
The subsidies were introduced to cushion households and businesses from price surges caused by Russia’s invasion of Ukraine. Further, improvement in the fiscal metrics will be supported by growth-friendly fiscal consolidation programs.
In 2022, amid the lingering disruptions in global supply chains caused by Russia’s invasion of Ukraine, the current account deficit in West Africa widened to 2.9 per cent of GDP from 2.3 per cent in 2021.
This was caused by widening current account deficits in Guinea, Cabo Verde, Senegal, Ghana, Guinea Bissau, Togo, Côte d’Ivoire, and Niger.
This could be attributed, among other causes, to a trade balance decrease, especially in oil- and food-importing economies due to higher fuel and food prices. The current account deficit is projected to slightly widen to 2.8 per cent of GDP in 2023 and narrow to 2.4 per cent of GDP in 2024, reflecting projected trends in the global demand.
It is projected to be higher than the continental average of 2.3 percent of GDP in 2023.
Only the Eastern Africa region is projected to register a wider current account deficit than the West Africa region.
On average, current account deficits are projected to be driven by deficits in trade balances driven by export and import performances, in line with movements in the global demand.
A mix of policy interventions should be considered to accelerate the region’s economic growth and stable macroeconomic environment amid the existing and emerging shocks.
In the short run, restoring growth recovery requires addressing the costs associated with shocks, which is a tough task amid tightening financial conditions on a global scale.
This calls for international financial assistance to facilitate short-term and immediate growth, as well as the medium to long-term implementation of growth-oriented structural changes.
These changes are essential to support rapid, sustainable, and inclusive growth. It is worth noting that the region has experienced a shift in its economic structure, transitioning from agriculture to services, with a limited contribution from the industrial sector.
If not corrected, a GDP growth higher than current rates would be needed to absorb new entrants into the labour market.
Member States are projected to operate under constrained fiscal policy spaces in the short to medium term.
This is especially relevant in countries where the negative gaps in debt sustainability are widening, unless external financial assistance is sought.
Overcoming these gaps can be a daunting task for countries that already face external financing pressures due to limited market access.
Under suitable circumstances, these countries could contemplate the option of seeking international financial assistance, which can provide them with the necessary breathing space to implement growth-oriented fiscal consolidation programs, while also working towards achieving a sustainable trajectory for public debt.
Many countries in the region have implemented fiscal consolidation programs for many years. Regardless, debt sustainability is far from being achieved.
This is because implementations have been hampered by successive shocks, which derailed fiscal reforms and disrupted growth-enhancing structural policy reforms.
Furthermore, where room for policy maneuver existed, clarity was lacking on the drivers of fiscal consolidation programs – revenue enhancement-led, or expenditure reduction-led or a combination of both.
The fiscal policy direction to be pursued in situations of lower growth and high debt burden remains to be a growth-enhancing fiscal consolidation program complemented with a debt restructuring initiative (external and domestic).
This approach has gained currency in recent policy discourses. Should the crisis persist (i.e., Russia’s invasion of Ukraine and monetary policy tightening in advanced economies), gross financing needs are expected to increase across all countries in the region.
This could increase the adjustment costs to be incurred to achieve fiscal and debt sustainability.
Countries with constrained finances (limited fiscal buffer) could find it cost effective to seek international financial assistance. On the contrary, countries on the other side of the isle, might consider embarking on preemptive debt restructuring initiatives to create fiscal spaces.
According to the IMF/WB DSA, 10 countries in the region were assessed to be facing a moderate risk of debt distress situations. These countries are expected to utilize the available fiscal policy spaces with care – need to strike a balance between growth and debt sustainability.
Improvement in the global inflationary outlook is expected to enhance global liquidity.
This, in turn, is expected to bolster capital inflows into the region. This could go a long way towards supporting capital/financial account balances and ease the burden on the foreign exchange reserves.
The year 2022 was characterised by significant capital reversal, erosion of external positions, and foreign exchange reserve financing of current account deficits. Foreign exchange reserve positions, measured in months of imports, declined significantly.
They fell below the Ecowas currency union convergence criteria for some countries.
This means that should global financial tightening persist, the fiscal position of many countries in the region could be impacted. Impacted countries could be forced to seek balance of payment support of some sort as a result.