East Africa Economic Outlook 2019
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East Africa Economic Outlook 2019 Macroeconomic developments and prospects Political economy of regional integration East Africa Economic Outlook 2019 The opinions expressed and arguments employed herein do not necessarily reflect the official views of the African Development Bank, its Boards of Directors, or the countries they represent. This document, as well as any data and maps included, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries, and to the name of any territory, city, or area. Cover design by the African Development Bank based on images from Shutterstock.com © African Development Bank 2019 ISBN 978-9938-882-97-1 (print) ISBN 978-9938-882-97-1 (electronic) You may copy, download, or print this material for your own use, and you may include excerpts from this publication in your own documents, presentations, blogs, websites, and teaching materials, as long as the African Development Bank is suitably acknowledged as the source and copyright owner. CONTENTS Acknowledgments v Executive summary 1 Part 1 Macroeconomic developments and prospects 5 Economic performance and outlook 5 Macroeconomic stability and outlook 8 Domestic resource mobilization 12 Poverty, inequality, unemployment, and structural change 13 Emerging policy issues 17 Part 2 Political economy of regional integration 19 Progress in regional integration 19 Political economy of regional integration 24 Infographic: Moving Across East Africa 28 Intervention strategies and policies to strengthen regional integration 33 Notes 35 References 36 Annexes 39 Statistical annex 45 Boxes 1 The diversity of East Africa 6 2 Progress toward the African Continental Free Trade Area in East Africa 18 3 An empirical analysis of the East African Community’s readiness for monetary union 22 4 The Ethio-Eritrea Peace Agreement and its imperative for regional integration 26 5 Informal cross-border trade in Ethiopia and Uganda 27 Figures 1 GDP growth, by region, 2008–20 6 2 GDP growth in East Africa, by country, 2014–20 7 iii 3 Overlapping membership in regional economic communities in East Africa 20 4 Revealed comparative advantage of selected African countries and African trading partners in manufactured goods, 2010–13 32 Tables 1 Inflation in East Africa, by country, 2017–20 9 2 Fiscal balance, including grants, in East Africa, by country 10 3 External current account balance, including grants, in East Africa, by country 11 4 External debt stock and debt indicators in East Africa, by country, 2018 12 5 Domestic resource mobilization and financial sector development in East Africa, by country, 2016 and 2017 13 6 Poverty and inequality in East Africa, by country, various years 14 7 Structural change, growth, and unemployment, various years 16 8 Macroeconomic convergence criteria in the Common Market for Eastern and Southern Africa and the East African Community, by country 21 9 Intraregional trade in East Africa, 2012–17 23 10 African Regional Integration Index ranks among Common Market for Eastern and Southern Africa members, by country, 2016 24 11 Actual intra-Africa trade as a share of potential intra-Africa trade in Common Market for Eastern and Southern Africa members, by country, 1993–2010 25 12 Exports and imports in East Africa, by country, 2014–17 (exports) and 2017 (imports) 29 A1.1 Real GDP growth rate in East Africa, by country, 2008–20 39 A2.1 External debt accumulation in East Africa, by country, 2008–18 40 A3.1 Unemployment rates in East Africa, by country, 2010–18 40 Statistical tables 1 Basic indicators, 2018 45 2 Real GDP growth, 2010–20 46 3 Demand composition and growth rate, 2017–20 47 4 Public finances, 2017–20 48 5 Monetary indicators 49 6 Balance of payments indicators 50 7 Intraregional trade, 2017 51 8 Demographic indicators, 2018 52 9 Poverty and income distribution indicators 53 10 Access to services 54 11 Health indicators 55 12 Major diseases 56 13 Education indicators 57 14 Labor indicators, 2018 58 iv Contents ACKNOWLEDGMENTS The East Africa Economic Outlook 2019 was Patrick Kanyimbo, Principal Regional Inte- prepared in the Vice Presidency for Eco- gration Officer for East Africa. Alemayehu nomic Governance and Knowledge Man- Geda (University of Ethiopia) contributed agement, under the supervision and general a background note to the report. External direction of Célestin Monga, Vice President consultant Esther Katende-Magezi provided and Chief Economist, with support from Eric the background note for the infographic on Kehinde Ogunleye, Amah Marie-Aude Ezanin people and goods moving across East Africa. Koffi, Tricia Baidoo, and Vivianus Ngong. Augustin Fosu (University of Ghana) and The preparation of the outlook was led Peter Montiel (Williams College) served as and coordinated by Ferdinand Bakoup, peer reviewers. Acting Director, Country Economics Depart- The cover of the report is based on a gen- ment, with a core team consisting of Abra- eral design by Laetitia Yattien-Amiguet and ham Mwenda and Marcellin Ndong-Ntah, Justin Kabasele of the Bank’s External Rela- Lead Economists for East Africa. tions and Communications. Editing, transla- The data appearing in the report were tion, and layout support was provided by a compiled by the Statistics Department, led team from Communications Development by Charles Lufumpa, Director, and Louis Incorporated, led by Bruce Ross-Larson and Kouakou, Manager, Economic and Social including Joe Brinley, Joe Caponio, Meta Statistics Division. Their team included de Coquereaumont, Mike Crumplar, Peter Anouar Chaouch, Mbiya H. Kadisha, Souma- Redvers-Lee, Christopher Trott, and Elaine ila Karambiri, Stephane Regis Hauhouot, Sla- Wilson, with design support from Debra heddine Saidi, Kokil Beejaye, Adidi Ivie, and Naylor and translation support from Jean- Guy Desire Lakpa. Paul Dailly and a team at JPD Systems. Contributions were received from Tilahun Temesgen, Chief Regional Economist, and v EXECUTIVE SUMMARY his report analyzes economic growth, its drivers, and its implications for social development T (including) poverty, employment, and inequality as well as progress in regional integration in East Africa. In 2018, real GDP in East Africa grew by an 2018, and is projected to drop to 3.7 percent estimated 5.7 percent, slightly less than the in 2019 and 3.5 percent in 2020. But cur- 5.9 percent in 2017 and the highest among rent account deficits remain high, and two African regions. Economic growth is pro- patterns are emerging. First, since almost all jected to remain strong, at 5.9 percent in 2019 countries depend on primary commodities and 6.1 percent in 2020. The countries with for exports, falling global commodity prices the highest economic growth are Ethiopia, have negatively affected their terms of trade. Rwanda, Tanzania, Kenya, and Djibouti. In Second, the region’s high growth has been both Ethiopia and Rwanda, real GDP growth achieved through high investment, which is has been driven by industry and services. The above domestic savings. The internal invest- service sector has also been the main driver ment–savings gap is strongly associated of growth in Tanzania and Kenya, followed by with the persistent current account deficit (or the agricultural sector, the main growth driver external gap). from the supply side. On the demand side, As in 2017, East Africa’s strong growth has consumption has been the main driver of eco- not been matched by commensurate and nomic growth across East Africa. substantial reduction in poverty and inequal- The region continues to face various ity. So in 2018, the region is still characterized downside risks that could undermine eco- by high poverty, inequality, and unemploy- nomic growth and development prospects. ment. Poverty pervades all countries in the Major risks are agriculture’s vulnerability to region and is extremely high in Burundi and the vagaries of nature, heavy reliance on pri- Rwanda and very low in Seychelles, Sudan, mary commodity exports, and — in oil-import- and Comoros. ing countries — rising oil prices. Another key Structural transformation remained mark- risk is persistent current account deficits and edly absent in the region. The service sector related increases in external indebtedness. dominates the composition of GDP in the Finally, state fragility — with its adverse impli- region, averaging 59.0 percent, followed by cations for security and economic progress the agricultural sector, averaging 25.7 per- — is a risk for Burundi, Somalia, South Sudan, cent. Industry, which includes construction, and, to some degree, Ethiopia. is very small, averaging 15 percent. Similarly, Notwithstanding the variation across the average share of manufactured exports countries, the region’s fiscal deficit remained — about 14.6 percent — also indicates the low, at an estimated 4.1 percent of GDP in region’s lack of structural transformation. 1 Countries in East Africa are members of three on the African Regional Integration Index, while important regional economic communities (RECs): Eritrea, Ethiopia, Sudan, and Djibouti had the the Common Market for Eastern and Southern lowest. Africa (COMESA), the Intergovernmental Author- There are numerous drivers of — and hence ity on Development (IGAD), and the East African opportunities for — regional integration in East Community (EAC). Progress in regional integra- Africa, including considerable unexploited poten- tion in East Africa varies widely across these three tial in trade, underexploited cross-border transport RECs. The EAC is approaching the highest stage, corridors between landlocked and coastal member having ratified the protocol for a monetary union, countries, endorsement by 44 African countries of but IGAD is farther behind. COMESA is also work- the agreement to establish the CFTA, the necessity ing toward a monetary union by 2025, but prog- of regional peace and security that emanates from ress in the prerequisite macroeconomic conver- the large number of fragile states in the region, the gence criteria is lagging. recent discovery of natural resources, and substan- In East Africa, the Continental Free Trade Area tial informal cross-border trade.