Commodity-dependent countries in Africa were mostly affected by global shocks in 2022
Over the years, it has been argued based on conceptual and empirical evidence that export concentration in commodities as evident in many African countries pose serious threats to economic growth and development1. Commodity-dependent countries—countries where commodities represent more than 60% of total merchandise exports—are more economically vulnerable to commodity price volatility, terms-of-trade shocks and other global shocks.
Such shocks tend to negatively affect both public and private investments which may reduce economic growth and welfare. For instance, a sharp fall in commodity prices leads to reduction in export revenues, dwindling profits of exporting companies, production and future investments, thereby reducing employment levels and average household income consequently. In addition, governments may suffer fiscal imbalance as a result of low revenue and more expenditure needed to stabilize the economy.
On the other hand, whilst increase in commodity prices may provide windfalls and increase revenues for commodity-dependent countries, these revenues may not be utilized prudently towards practical development gains as has been the case in many resource-dependent countries in Africa2,3. It has often been cited that in commodity-dependent countries, such booms precede debt crises4.
A newly published report on Africa’s Macroeconomic Performance and Outlook 2023 by the African Development Bank has shown that in 2022, economies of commodity-dependent countries in Africa were mostly affected by global shocks as compared to other non-resource dependent countries. A host of factors such as the COVID-19 pandemic, Russian-Ukraine war, climate change, commodity price volatilities and the US Federal Reserve’s interest rate hikes had a significant impact on the economies of resource-dependent countries in Africa.
Africa’s Growth Performance
The report revealed that in 2022, average growth in the continent’s major oil exporting countries experienced a marginal decline to 4% from 4.2% in the previous year. Other resource intensive countries also recorded growth decline from 4.7% in 2021 to 2.8% in 2022. Tourism dependent economies were the big earners in 2022 experiencing a growth of 6.3% from 4.2% in 2021. Overall, Africa’s estimated growth declined to 3.8% in 2022 from 4.8% in 2021.
Exchange Rate Depreciation and Public Debt
According to the report, foreign exchange markets in most African countries were destabilised due to tighter global financial conditions. Currencies in many African countries depreciated against the US dollar as US Federal Reserve’s interest rate hiked in 2022. Africa’s leading oil exporting countries except Angola experienced exchange rate depreciations despite the rise in international prices of the commodity. South-Sudan’s currency performed worst after depreciating by 68.8% to the US dollar.
Among other resource intensive countries, some of the worst performing currencies were Ghana’s cedi depreciating by 33.4%, Sierra Leonean’s Leone by 24% and the Sudanese pound with over 60% currency depreciation. However, in exceptional cases commodity-dependent countries such as Angola and Zambia saw their currencies appreciating by 29% and 14% respectively largely driven by increased oil revenue (for Angola), positive credit rating and investors’ favourable macroeconomic outlook which bolstered their currencies against the US dollar.
The exchange rate depreciations coupled with other tighter global financial conditions exacerbated the public debt situation in many African countries especially non-oil resource intensive countries. The appreciation of the US dollar against local currencies in Africa heightened the cost of debt service, hindered access to foreign investments and increased capital flight from Africa.
According to the report, public debt in non-oil resource intensive countries in 2022 was estimated to remain unchanged from the 2021 rate of 75% of GDP. Oil rich-countries recorded an estimated 64% of GDP public debt, a decline from 66% in 2021 mainly due to the windfalls from the oil price hikes. Non-resource dependent countries however saw an increase in public debt from 64.6% in 2021 to an estimated 65.2% of GDP in 2022. Overall, Africa’s public debt was estimated to have marginally declined from 68% in 2021 to 67% of GDP in 2022.
Moving away from commodity dependence to export diversification and value addition
The transition from commodity dependence to export diversification and value addition is critical for economic transformation and sustainable development in resource-dependent countries in Africa4. The need for such transition is included in the Sustainable Development Goal 8.2—“achieve higher levels of economic productivity through diversification, technological upgrading and innovation, including through a focus on high-value added and labour-intensive sectors”.
To escape the vulnerabilities and headwinds that come with global shocks, commodity-dependent countries in Africa need to rethink their commodity export strategies and adopt robust export diversification strategies that would ensure value addition to primary products. Shifting from commodity dependence to high value-added export products would not only accelerate growth in commodity-dependent countries but also shield them from adverse trade and external shocks.
Diversifying exports and adding value to primary products would also enhance both backward and forward linkages in the commodity sector as well as improve sectoral linkages with the services sector which can promote economic growth and transformation. Having a variety of value-added products for exports not only enhance competition but also improve the productive capabilities of local firms.
However, successful export diversification would require deliberate State policies and actions that encourage both public and private investment in technology and innovation towards industrialisation. With the coming into force of the African Continental Free Trade Area Agreement (AfCFTA) and its goal to drive intra-trade among African countries, there is great potential for commodity-dependent countries to turn their economies around by identifying new export diversification opportunities, market avenues and strategic areas to focus on in relation to industrialisation and value chain development.
- United Nations Conference on Trade and Development (UNCTAD) (2019). The Commodity Dependence: A Twenty-Year Perspective. United Nations Publications, New York.
- Deaton A (1999). Commodity prices and growth in Africa. Journal of Economic Perspectives. 13(3):23–40.
- Céspedes LF and Velasco A (2014). Was this time different? Fiscal policy in commodity republics. Journal of Development Economics. (106):92–106
- UNCTAD (2022). The Economic Development in Africa Report 2022: Rethinking the Foundations of Export Diversification in Africa – The Catalytic Role of Business and Financial Services. United Nations Publications, New York.