Year of Publication: 2023

Authors: Kalame Fobissie & al.

EXECUTIVE SUMMARY

 

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. The theme of the 2023 edition of the report is “Mobilizing Private Sector Financing for Climate and Green Growth in West Africa”.

GDP Growth. West Africa’s average GDP growth decelerated to 3.8% in 2022 from 4.4% 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 fertilizer 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% from 7% 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 utilize 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% in 2023 and 4.2% 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 Cote 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., Cote d’Ivoire and Senegal) and improved policy management.

In West Africa, the rate of inflation rose from an average of 9.7% in 2014-2020 to 12.7% in 2021 and 17% in 2022. Average regional inflation is projected to stabilize at 17.5% in 2023 and decline to 11.1% 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 characterized 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% of GDP, lower than the continental averaoe of 5 4% Central Africa is tha onlv raoion which had a lower deficit.

West Africa’s fiscal deficit is projected to narrow in percent of GDP to 5.2% and 4.9% in 2023 and 2024. It is higher than the continental averages of 4.1 of GDP and 3.8% 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.

Current Account. 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% of GDP from 2.3% in 2021. This was caused by widening current account deficits in Guinea, Cabo Verde, Senegal, Ghana, Guinea Bissau, Togo, Cote 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% of GDP in 2023 and narrow to 2.4% of GDP in 2024, reflecting projected trends in the global demand. It is projected to be higher than the continental average of 2.3% 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 labor 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…