Africa’s regional economic communities, common markets, and currency unions will be crucial to drive a post-pandemic recovery and boost intra-regional trade under the continent’s new free trade pact. While some regional blocs in the East and West are better suited to accelerate integration and take advantage of new trade and investment opportunities, institutions in Central Africa are poorly equipped to enhance their region’s competitive advantage. PANGEA-RISK compares six African regional blocs to determine the criteria for success.
As Africa turns its back on the first economic recession in 25 years, the continent will be able to take advantage of several key opportunities. Firstly, the African Continental Free Trade Area (AfCFTA) is being implemented to lower trade barriers and boost economic development. It is hoped that more expansive intraregional trade will meet the demands for jobs and food security of a growing population, while creating spin-off opportunities for related sectors and drive local beneficiation of the value chain. Africa’s regional economic communities and common markets will play a key role in advancing the AfCFTA and driving intra-regional trade.
Secondly, many of Africa’s commodity exporting markets stand to benefit from rising global prices for oil and gas, base and precious metals, and some soft commodities. An accelerated global economic recovery pushed along by vaccination rollouts and loose monetary policy is driving demand for Africa’s commodities, from copper to liquefied natural gas (LNG). Our recent African commodities special report identified a number of countries that stand to benefit from higher commodity prices (see SPECIAL REPORT: AFRICA’S NEXT COMMODITY BOOM OFFERS NO POST-PANDEMIC PANACEA).
Perhaps a nascent third opportunity in the post-pandemic recovery is the push by development finance institutions, which have taken the lead in buffering Africa’s economies and providing debt relief to distressed African countries, to bring about sustainable development with a focus on renewable energy and social impact investments. A new wave of concessional finance driven by multilaterals, banks, and impact investors is promising to fill a larger share of the continent’s USD 150 billion annual infrastructure financing gap.
However, Africa’s economic recovery will run on a multi-track course over the next few years, with more diversified markets governed by sound monetary and fiscal policy set to grow at noticeably faster rates than countries that continue to be dependent on extractive sectors or remain under the spell of nationalist economic agendas to suit local political interests. In Africa’s next phase of development, regional economic communities will increasingly play a role in laying the groundwork for AfCFTA free trade implementation and building bridges between countries on divergent growth tracks.
In this special report, PANGEA-RISK outlines the role of regional markets in Africa’s economic recovery and the impact that such institutions will play in bridging socio-economic and political divisions between the continent’s diverse countries. In this report, we have selected six east, west, and central African regional economic communities as a comparative sample of markets that will compete for trade and investment opportunities in coming years.
SAMPLING SIX DIFFERENT AFRICAN REGIONAL ECONOMIC COMMUNITIES
1. The Economic and Monetary Community of Central Africa (CEMAC)
The CEMAC promotes economic integration of its six central African member states, but it is economically dominated by Cameroon, which has seen a more severe negative impact from the pandemic on economic activity than originally anticipated, while localised insurgency is increasingly causing broader economic concerns for the country (see CAMEROON: SEPARATIST REBELS TURN TO ISLAMIST MILITANT TACTICS). Moreover, the bloc remains heavily dependent on oil production in Republic of Congo, Equatorial Guinea, and Gabon. Since the 2015/16 oil price crash, all its member states have committed to an International Monetary Fund (IMF) programme to avoid a devaluation of the regional Central African CFA franc, which is used in all six CEMAC member states. Both CEMAC and the Fund, as well as the European Union through France, have been concerned that another CFA devaluation would trigger inflation and associated unrest. The continued interventions by the IMF are therefore generally considered to be risk positive for the central African region’s outlook, with a less volatile currency and tempered inflation rate of below 2.5 percent forecast for coming years. Recent lower import costs have relieved pressure from the current account deficit which is set to narrow to 5.3 percent this year and to below 3 percent by 2023.
However, the CEMAC region is heavily indebted and plagued by stubbornly low economic growth rates, even after the pandemic. Real GDP plummeted to a 3.25 percent contraction in 2020 and the region is set to grow by less than three percent over the coming three years. Meanwhile, CEMAC gross public debt has remained stubbornly high at over 50 percent of GDP. In January 2021, Chad became the first country to request a debt overhaul under the G20’s new common framework for debt restructuring. The move signals that the country’s debt situation is fast approaching a critical juncture, as a sustained depression in global oil prices and the lingering economic impact of the COVID-19 pandemic continues to place significant pressure on Chad’s state budgets, while other CEMAC states may follow suit (see CHAD: AVOIDING SOVEREIGN DEFAULT AHEAD OF TWO KEY ELECTIONS IN 2021).
Meanwhile, the Republic of Congo has seen disbursements by the IMF cease after revelations of undisclosed debt and allegations of high-level state corruption tarnished relations with the Fund. The IMF has made the provision of any additional aid conditional on the government making improvements to debt transparency, as well as negotiating a restructuring of its significant level of private debt. While the IMF expects a slight reduction in the country’s debt to GDP ratio in 2021, the risk of debt distress will be sustained into the coming months. The CEMAC region faces another challenge derived from depleting oil fields and lack of investment in new energy projects. The region’s largest oil producer, Republic of Congo, saw oil revenue shrink from USD 7.6 million in 2014 to USD 2.69 million in 2020, a drop of some 65 percent (see REPUBLIC OF CONGO: MACROECONOMIC RISKS LOOM AHEAD OF MARCH ELECTION).
2. The East African Community (EAC)
The EAC is an East African common market containing six member states, although previous ambitions of launching a single currency and creating a federal state have waned. The nominal combined GDP of the EAC is USD 220.6 billion, which would make the third largest sub-Saharan economy after Nigeria and South Africa. The bloc is economically dominated by Kenya, which has made other member states reluctant to expand the mandate of the EAC fearing loss of local market control. The EAC is also riven by staunch policy differences, notably the state interventionism and nationalism that is advocated by Tanzania’s government (see TANZANIA: REPRESSIVE GOVERNMENT POLICY RISKS CREATING A CORONAVIRUS INCUBATOR COUNTRY). Political disputes have also marred the common market, particularly border closures between Uganda and Rwanda which vie for influence in border areas of neighbouring Democratic Republic of Congo (DRC) (see UGANDA: STEERING TOWARD OIL PRODUCTION FOLLOWING TARNISHED ELECTIONS).
Moreover, the EAC is highly mismatched in its economic performance. Rwanda’s economy is set to grow by 6.3 percent this year, while the World Bank, perhaps too optimistically, forecasts seven percent growth in Kenya (see RWANDA: ECONOMIC RECOVERY FACES CHALLENGE FROM SECOND COVID-19 WAVE). These growth rates outpace other EAC economies, most notably South Sudan, which will be the worst performing African economy in 2021 with a 2.3 percent contraction forecast. Republic of Congo and South Sudan are expected to be the only two African states to see continued economic recession this year (see SOUTH SUDAN: NEAR POWER BLACKOUT IN JUBA THIS WEEK INDICATES NON-PAYMENT RISKS). This mismatch is driving down regional economic anticipations.
Nevertheless, the economic outlook for the EAC is strong, with the bloc set to grow by 4.3 percent this year, mostly boosted by faster economic recoveries in Kenya and Rwanda. Regional inflation will remain manageable at below five percent, while the current account deficit remains stable. The main concern for the East African bloc is the rising burden of public debt, which will reach 57.3 percent of GDP this year and peak 60 percent of economic output by 2023. The main culprit is Kenya, where public debt may exceed 70 percent of GDP later this year. However, Kenya, like several other East African countries, is implementing debt sustainability measures to mitigate the threat of sovereign debt distress that could have spill over effects across the EAC. Kenya’s government has recently secured a Paris Club debt service suspension, rescheduled sizable loans with China’s EximBank, and reversed some of its controversial 2020 tax cuts, while steering toward a new IMF programme. These developments bode well for Kenya and the region’s debt outlook (see KENYA: SUCCESSION POLITICS REMAIN A SPOILER FOR IMPROVED SOVEREIGN DEBT OUTLOOK).
3. The Economic Community of Central African States (ECCAS)
The ECCAS is a central African community that includes the six CEMAC member states, as well as Angola, Burundi, DRC, São Tomé and Príncipe, and Rwanda. While CEMAC is a currency union of the Central African CFA franc, the other five ECCAS members all have their own local currencies. For ECCAS, regional security and the establishment of free movement of goods and people between member states are the main current priorities. However, the ECCAS community lags other regional organisations such as ECOWAS in terms of integration. The bloc is dominated by Angola, which is the largest member economy, its biggest oil producer, and enjoys military superiority.
Among our sample of six regional communities, the ECCAS region is the worst performer due to relatively lacklustre economic growth (3.35 percent), the highest public debt ratio (68.69 percent of GDP), and the highest inflation rate (11.11 percent). The ECCAS region suffers from the same weaknesses as the CEMAC region, as well as the deficiencies of larger volatile markets, particularly Angola. A tempered economic recovery, sizable debt burden (120 percent of GDP in 2020), and high inflation do not bode well for Angola’s risk outlook after five consecutive years of recession. However, a successful restructuring of some USD 6 billion in Chinese debt, a roll-out of planned privatisations, and improved Chinese demand for crude would enhance Angola’s prospects in the coming year (see AFRICA DEBT REPORT: ANGOLA AND KENYA MAY NOT FOLLOW ZAMBIA ON PATH TO DEFAULT).
Some ECCAS member state economies may rally over the coming year, such as DRC. Congo may be in a better position to benefit from the copper price rally. An improved outlook for copper and cobalt mining may also encourage donors, foreign banks, and investors to borrow more to the country, particularly as the government is building up its pro-investment credentials. Newly appointed Congolese Prime Minister Sama Lukonde Kyenge, who is a former head of the state mining company, is expected to drive a reform programme in the mining sector that would encourage fresh investment. Moreover, DRC’s government has better managed its debt profile than Zambia and is seeking to engage multilaterals (see DRC: CONGO’S PRESIDENT WINS A CRUCIAL POLITICAL BATTLE, BUT NOT YET THE ‘WAR’). Despite some improvements in individual member state economies this year, the ECCAS community lacks a coherent integration plan and credible purpose. Beyond marginal security interventions, the ECCAS bloc is the least likely regional community among our sample that will drive economic recovery and be able to capitalise on fresh opportunities such as impact investment and commodity price rises.
4. The Economic Community of West African States (ECOWAS)
The ECOWAS is a 15-member regional political and economic union in West Africa that boasts strong integration and enhanced interconnectivity, particularly relative to central African counterparts such as ECCAS. The ECOWAS includes the West African Economic and Monetary Union (UEMOA), whose mostly francophone eight member countries use the West African CFA franc as their currency, as well as mostly anglophone countries that intend to adopt their own currency, called the eco, whose adoption has been delayed indefinitely (see GHANA: POLITICAL AND ECONOMIC CONCERNS MAY FRUSTRATE CURRENCY UNION AMBITIONS).
The regional bloc is overwhelmingly dominated by Nigeria, which is Africa’s largest economy and oil producer, as well as the continent’s most populous country. Nigeria’s ongoing economic weakness is thus depressing the outlook of the whole bloc. According to the IMF, Nigeria’s GDP shrank by 4.3 percent last year (although other estimates show a much-deeper contraction), while the economy is forecast to grow by just 1.7 percent this year. Nigeria’s headline inflation now stands at its highest level in over three years, while public debt is creeping up. Interest payments as a proportion of revenues for the national government, estimated at 92.6 percent in 2020, is projected to decline to 60.8 percent in 2021 before rising to 94.1 percent of revenue by 2025 (see NIGERIA: NAIRA DEVALUATION DEBATE RETURNS AS INFLATION HITS RECORD HIGH). As a result, ECOWAS regional debt is set to expand rapidly in line with Nigeria’s weighted influence, with added concerns over debt affordability.
Of the six regional communities sampled, ECOWAS has the slowest economic growth rate for 2021 and the second highest inflation rate after ECCAS. However, overall public debt is the lowest compared to the other sampled regions as a proportion of GDP – at least for now. Despite some fast growing in ECOWAS, such as Niger and Guinea, and more diversified economies like Côte d’Ivoire (all set to grow at over six percent this year), Nigeria’s overwhelming weight drags down the entire region. This is a worrying position for ECOWAS as Nigeria’s GDP is unlikely to grow by more than 2.5 percent in the three-year outlook. The stark divisions between ECOWAS member states, including politically unstable and tiny markets such as Guinea-Bissau, and the regional investment champions and diversified economies Ghana and Côte d’Ivoire, make ECOWAS’ economic fortunes highly volatile and too dependent on Nigeria’s lacklustre performance. It is more useful to divide the west African economies into separate sub-regional blocs, such as UEMOA, the West African Monetary Zone (WAMZ), or other organisations such as OHADA.
5. The Organisation for the Harmonisation of Corporate Law in Africa (OHADA)
OHADA is a system of corporate law and not a regional economic community. However, its legal institutions’ integration has been far more successful than many other central and west African blocs. Moreover, the OHADA has a stated objective of fostering economic development in West and Central Africa by creating a better investment climate, which translates loosely into the same objectives as common markets and currency unions in these regions. More importantly, the OHADA is not dominated by any single economy, such as Angola in ECCAS and Nigeria in ECOWAS. Instead, OHADA includes 15 small and medium-sized economies that work together to harmonise business laws and implementing institutions. The OHADA has become one of the most integrated and successful regional communities in Africa since its launch in 1993.
Due to the absence of overbearing weight from a single member state, OHADA’s more diversified and fast-growing economies have a better standpoint within the regional community. As a result, the OHADA boasts the second highest economic growth rate at 4.46 percent among the sampled communities, as well as a relatively low public debt regional average, and a stable inflationary outlook. OHADA includes some of Africa’s fastest growing economies, such as Niger, Guinea, Côte d’Ivoire, and Chad, which despite their smaller market size are all set to grow at over six percent this year. It also includes more diversified economies that have attracted significant amounts of foreign direct investment in recent years, such as Benin, Senegal, and Togo.
Most importantly, the largest economies in OHADA are Côte d’Ivoire (USD 61 billion GDP), DRC (USD 46 billion GDP), and Cameroon (USD 39 billion GDP), which ensures that the body’s constituency is not dominated by any one member. However, OHADA does also contain at least six states that are facing severe insurgency and war risks, namely Burkina Faso, Central African Republic, Chad, DRC, Mali, and Niger (see SAHEL: FRANCE RESHAPES SECURITY ENGAGEMENT WITH TASK FORCE TAKUBA and SPECIAL REPORT: EASTERN DRC INSECURITY DETERIORATES AS GOVERNMENT IS DISTRACTED). Other members such as Guinea-Bissau and Comoros suffer from chronic political instability and unrest. Some OHADA countries pose serious reputational risks due to corruption and human rights abuses, particularly Equatorial Guinea and Republic of Congo. This consistency makes the OHADA more volatile than smaller blocs that are geared toward economic integration rather than legal streamlining.
6. The West African Economic and Monetary Union (UEMOA)
The UEMOA is an economic and currency union of eight, mainly francophone West African states within the ECOWAS. Since its creation in 1994, the UEMOA states are no longer dominated by larger anglophone markets such as Nigeria and Ghana. All its members are also part of ECOWAS and OHADA, but the institution is more streamlined and geared toward economic integration and open borders, which has benefitted economic and currency stability, boosted intra-regional trade, and facilitated foreign direct investment.
It is no surprise that UEMOA boasts the highest economic growth rate among the sampled communities, a steady public debt regional average, and the lowest inflation rate. The IMF and other global bodies have consistently rated UEMOA as Africa’s most successful integration bloc among all the regional groupings in Africa. The UEMOA has implemented macro-economic convergence criteria and an effective surveillance mechanism. It has adopted a customs union and common external tariffs, and has also combined indirect taxation regulations, in addition to initiating regional structural and sectoral policies. UEMOA’s trade liberalisation and macroeconomic policy convergence are steadily being adopted by other regional communities as a mark of their success.
The Central Bank of West African States (BCEAO) actively develops financial inclusion policy, while maintaining currency stability and ensuring moderate inflation despite high economic growth rates among many of its members such as Niger, Guinea, and Côte d’Ivoire (see NIGER: AFRICA’S URANIUM GIANT IS HEADED TOWARD A PEACEFUL POLITICAL TRANSITION and GUINEA: LATEST EBOLA OUTBREAK IS NOT EXPECTED TO HALT BAUXITE AND IRON ORE BOOM). While Côte d’Ivoire is the largest market in the UEMOA bloc, it does not dominate other member states or the body as a whole (see COTE D’IVOIRE: MARCH LEGISLATIVE BALLOT OFFERS CHANCE TO RESET THE POLITICAL MAP). This has allowed for more measured policymaking and a stable framework for regulatory and legislative policy across all members states. Among the six regional communities sampled in this report, the UEMOA stands in best stead to drive a sustained economic recovery and to benefit from key opportunities such as intra-regional free trade, higher commodity prices, and impact investment.
Note – All economic indicators are forecasts for 2021 and weighted to GDP based on Purchasing Power Parity (PPP), as a share of the world and derived from the IMF World Economic Outlook 2020. The Risk Rating is a normal average of the PANGEA-RISK regional default highest country risk rating per country. Red values indicate weak economic performance, debt distress, or relatively higher country risk ratings that are a cause for concern.
Africa’s regional economic communities, common markets, and currency unions will be crucial to drive a post-pandemic recovery and boost intra-regional trade under the continent’s new free trade pact. While some regional blocs in the East and West are better suited to accelerate integration and take advantage of new trade and investment opportunities, institutions in Central Africa are poorly equipped to enhance their region’s competitive advantage. Based on a sample of six west, central, and east African regional communities, the organisations that will see more sustained economic recoveries are smaller, nimbler, and highly focussed institutions that are most successful at regional integration in terms of creating common markets, and sometimes currency unions.
The economic weakness of central African economies stands in contrast to the sustained performance of regional powerhouses in East and West Africa. The ECCAS is rated as the worst performing bloc in our report, due to high public debt, soaring inflation, and one of the highest regional country risk ratings. Moreover, ECCAS seems to have little purpose and lacks any plans for regional integration. In contrast, the CEMAC region has been successful as a currency union to ensure a moderate inflation outlook and a more stable currency. However, political risk in the CEMAC bloc is the highest in our sample, which is due to remaining sovereign default risk concerns and political instability.
ECOWAS has one of the most accomplished regional integration tracks in Africa, although the bloc remains divided between rival currency unions (one of which is in the making). Moreover, the West African community is overwhelmingly dominated by Nigeria, which accounts for the region’s lowest economic growth trajectory in our sample, while Nigeria’s rampant inflation is also impacting the community as a whole. OHADA has been successful in integrating West and Central African markets in their integration of legal systems and institutions, although it lacks economic integration and includes many countries that are exposed to political and security risk factors.
Instead, smaller and more nimble common markets such as the EAC and currency unions like UEMOA rate the best among the regional blocs sampled in this report. The East African bloc may have a concerningly large current account deficit and suffer from divergent nationalist agendas, but the community is more integrated than many of its peers and benefits from dependence on diversified and more developed economies. Similarly, the UEMOA has a smaller base of diversified economies that boost the West African common market and currency union. The UEMOA also has one of the most exemplary integration frameworks and its institutions are successful in maintaining currency stability, low inflation, moderate public debt, and the highest economic growth rates among the six blocs sampled in this report.
Africa has a large and diverse array of regional economic communities, from the expansive Common Market for Eastern and Southern Africa (COMESA), and security-focussed Intergovernmental Authority on Development (IGAD), to the powerful Southern African Development Community (SADC) in the south. Some of these institutions will be able to lead African countries toward economic recovery after the pandemic and boost intra-regional trade, while taking advantage of related investment opportunities such as concessional finance for infrastructure and social impact projects. However, regional blocs that lack a clear purpose of integration, that remain dominated by single member states, or that face severe political risk perils may lose out on the economic recovery and the benefits of the AfCFTA in coming years.