African Economic Outlook 2006 2007

2007

African Economic Outlook The African Economic Outlook combines the expertise of the OECD – which produces the OECD Economic Outlook twice a year – with the knowledge of the African Development Bank on African economies. The objective is to review annually the recent economic situation and the short-term likely evolutions of selected African countries. The Outlook is drawn from a country-by-country analysis based on a unique analytical design. This common framework includes a forecasting exercise for the current and two following years using a simple macroeconomic model, together with an analysis of the social and political context. It also contains a comparative synthesis of African country prospects, placing the evolution of African economies in the world economic context. This edition includes a special focus on water and sanitation issues. A statistical appendix completes the volume.

African Economic Outlook

This volume will be of significant interest to decision makers in African and OECD countries, both in the public and private sectors, such as aid agencies, investors, and government officials of aid-recipient countries. The African Economic Outlook is a joint project of the African Development Bank and the OECD Development Centre, with generous support from the European Commission. This publication provides dynamic links (StatLinks) for graphs and tables. These StatLinks direct the user to a web page where the corresponding data are available in Excel® format.

COUNTRIES COVERED • ALGERIA • ANGOLA • BENIN • BOTSWANA • BURKINA FASO • CAMEROON • CHAD • CONGO • CÔTE D’IVOIRE • DEMOCRATIC REPUBLIC OF CONGO • EGYPT • ETHIOPIA • GABON • GHANA • KENYA • MADAGASCAR • MALAWI • MALI • MAURITIUS • MOROCCO • MOZAMBIQUE • NAMIBIA • NIGER • NIGERIA • RWANDA • SENEGAL • SOUTH AFRICA • TANZANIA • TUNISIA • UGANDA • ZAMBIA

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African Economic Outlook

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2006/2007

www.oecd.org/dev ISBN 978-92-64-02510-3 41 2007 01 1 P

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ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members. * **

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The Development Centre of the Organisation for Economic Co-operation and Development was established by decision of the OECD Council on 23 October 1962 and comprises 22 member countries of the OECD: Austria, Belgium, the Czech Republic, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Korea, Luxembourg, Mexico, the Netherlands, Norway, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey and the United Kingdom as well as Brazil since March 1994, Chile since November 1998, India since February 2001, Romania since October 2004, Thailand since March 2005 and South Africa since May 2006. The Commission of the European Communities also takes part in the Centre’s Governing Board.

The opinions expressed and arguments employed in Development Centre publication are the sole responsibility of the author and do not necessarily reflect those of the OECD, its Development Centre or of the governments of their member countries. * ** Également disponible en français sous le titre : PERSPECTIVES ÉCONOMIQUES EN AFRIQUE

© OECD, African Development Bank (2007) No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to OECD Publishing [email protected] or by fax 33 1 45 24 99 30. Permission to photocopy a portion of this work should be addressed to the Centre Français d’exploitation du droit de Copie (CFC), 20 rue des Grands-Augustins, 75006 Paris, France, fax 33 1 46 34 67 19, [email protected] or (for US only) to Copyright Clearance Center (CCC), 222 Rosewood Drive Danvers, MA 01923, USA, fax 1 978 646 8600, [email protected]. African Economic Outlook

© AfDB/OECD 2007

THE AFRICAN DEVELOPMENT BANK GROUP The African Development Bank Group is a regional multilateral development finance institution the members of which are all of the 53 countries in Africa and 25 countries from Asia, Europe, North and South America. The purpose of the Bank is to further the economic development and social progress of African countries, individually and collectively. To this end, the Bank promotes the investment of public and private capital for development, primarily by providing loans and grants for projects and programmes that contribute to poverty reduction and broad-based sustainable development in Africa. The non-concessional operations of the Bank are financed from its ordinary capital resources. In addition, the Bank’s soft window affiliates – the African Development Fund and the Nigeria Trust Fund – provide concessional financing to low-income countries that are not able to sustain loans on market terms. By the end of 2006, the African Development Bank Group cumulatively approved 3 102 loans and grants for commitments of close to $59 billion. The commitments were made to 52 regional member countries and institutions to support development projects and programmes in agriculture, transport, public utilities, industry, education and health services. Since the mid-1980s, a significant share of commitments has also gone to promoting economic reform and adjustment programmes that help to accelerate socio-economic development. About 60 per cent of the total Bank Group commitments were financed on non-concessional terms, while the balance benefited from concessional financing.

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© AfDB/OECD 2007

African Economic Outlook

Foreword

Foreword The African Economic Outlook project is a joint initiative of the African Development Bank and the OECD Development Centre. The Report was essentially drafted by a core team drawn from both institutions, supported by resource people in selected countries. A generous grant from the Commission of the European Communities was essential to initiating and sustaining the project.

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African Economic Outlook

© AfDB/OECD 2007

Table of Contents

African Economic Outlook Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Acknowledgements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Part One: Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Part Two: Country Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 • Algeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 • Angola . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 • Benin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 • Botswana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 • Burkina Faso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 • Cameroon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 • Chad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 • Congo Republic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 • Congo Dem. Rep. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 • Côte d’Ivoire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 • Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 • Ethiopia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251 • Gabon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 • Ghana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 • Kenya . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 • Madagascar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315 • Malawi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 • Mali . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343 • Mauritius . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359 • Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377 • Mozambique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389 • Namibia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405 • Niger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 • Nigeria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 • Rwanda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 • Senegal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 • South Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485 • Tanzania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501 • Tunisia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515 • Uganda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531 • Zambia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545 Part Three: Statistical Annex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563 © AfDB/OECD 2007

African Economic Outlook

5

Acknowledgements

Acknowledgements The African Economic Outlook was prepared by a team led by Kenneth Ruffing. The core team was composed of Peter Ondiege, Barfour Osei, Mohammed Salisu, Audrey Verdier-Chouchane and Beejaye Kokil at the Chief Economist Complex of the African Development Bank and Céline Kauffmann, Federica Marzo, Nicolas Pinaud and Lucia Wegner at the OECD Development Centre. The comparative synthesis of the Report was drafted by Céline Kauffmann and Kenneth Ruffing with inputs from: Andrea Goldstein, Federica Marzo, Audrey Verdier-Chouchane and Lucia Wegner. The country notes were drafted by Farid Benyoucef, Federico Bonaglia, Andrea Goldstein, Sana Harrabi, Céline Kauffmann, Federica Marzo, Ida Mc Donnell, Peter Ondiege, Felix N’Zue, Barfour Osei, Stephen Owusu, Nicolas Pinaud, Mohammed Salisu, Désiré Vencatachellum, Audrey Verdier-Chouchane and Lucia Wegner. The work on the country notes greatly benefited from the valuable contributions of local consultants: Rose Aiko (Tanzania), Oluyele Akinkugbe (Botswana), Salmata Ouedraogo (Burkina Faso), William Bekoe (Ghana), Abderrazak Zouari (Tunisia), Youcef Benabdallah (Algeria), Tabo Symphorien Ndang (Chad), Carlos Nuno Castel-Branco (Mozambique), Emilio Dava (Mozambique), Klaus Schade (Namibia), Malak Reda (Egypt), Eric Hazard (Senegal), Yaro Jinjiri (Nigeria), Serge Kpassokro (Côte d’Ivoire), Teigist Lemma (Ethiopia), Oumar Makalou (Mali), John McGraph (Malawi), Mohamed Derrabi (Morocco), Michel Matamona (Congo), Thierry Mutombo (Democratic Republic of Congo), Patrick Musila Mwaniki (Kenya), E.S.K. Muwanga-Zake (Uganda), Robert Ngonthe (Cameroun), Francis Gatare (Rwanda), Chiwama Musonda (Zambia), Modeste Mfa Obiang (Gabon) and Abdoulaye Zonon (Burkina Faso). The Angola country mission benefited greatly from the support of Massimo Pronio from the European Commission delegation in Luanda. The committee of peer reviewers of the country notes included: Maria João Azevedo, Sylvain Dessy, Paul Koffi Koffi, Anne-Marie Geourjon, Stephen Golub and Arne Wigg. 6

Valuable statistical inputs were provided by Hilaire Kadisha, Koua Louis Kouakou and Fetor Komlan at the AfDB Development Research Department. The macroeconomic framework used to produce the forecasting was updated and managed by Céline Kauffmann and Federica Marzo at the OECD Development Centre and Beejaye Kokil at the African Development Bank. The statistical annex is the product of a joint work carried out by Beejaye Kokil and Federica Marzo. The project also benefited from crucial research assistance provided by Ralph Christian Maloumby-Baka and Yvette Chanvoédou at the OECD Development Centre and Rhoda Bangurah, Nelson Abiana, Koua Louis Kouakou and Fetor Komlan at the AfDB Development Research Department. Michèle Girard, Librarian at the OECD Development Centre, was also of assistance. The country maps were produced by Roland Pourtier. The maps and diagrams used in this publication in no way imply recognition of any states or political boundaries by the African Development Bank Group, the European Union, the Organisation for Economic Co-operation and Development, the Development Centre or the authors. A large number of African government representatives, private-sector colleagues and civil society members provided extremely valuable inputs and comments, including all the participants in the joint AfDB/OECD Development Centre expert meeting on: Access to Drinking Water and Sanitation. Several institutions also contributed to the project at various stages: the AfDB country operations departments, the AfDB Water and sanitation Department, the European Commission delegations in Africa, the African Partnership Forum Support Unit, the OECD Economics Department, the OECD Development Co-operation Directorate, the OECD Environment Directorate, the OECD Directorate for Financial and Enterprise Affairs and the World Bank Economic and Prospects Group. The OECD Development Centre’s Communication Unit, led by Colm Foy and Sheila Lionet, was responsible for transforming the manuscript into the publication. Graphic design and layout were done by Vif Argent Communication, Paris The Outlook was prepared under the overall guidance of Javier Santiso, Chief Development Economist, OECD Development Centre, Louis Kasekende, Chief Economist, AfDB and Temitope Waheed Oshikoya, Director, AfDB Development Research Department. African Economic Outlook

© AfDB/OECD 2007

Preface

Preface This year’s edition of the AEO contains, once again, grounds for optimism regarding the continent’s sustained economic development. Backed by favourable commodity prices, increased aid flows, debt forgiveness and, most importantly, the implementation of needed reforms, economic performance improved in many African countries in 2006. Many African governments have taken promising steps towards restructuring their countries’ economies. In many countries, democracy is becoming deeply rooted, leading in turn to increased participation by civil society in the political process. Substantial progress has been achieved towards regional co-operation supported by the NEPAD initiative, under the auspices of the African Union. We are also pleased to note that the first three of the African Peer Review Mechanism (APRM) reviews have been completed, signifying in concrete terms the beginnings of a sustained commitment to improved political and economic governance. Furthermore, there appears to be a resurgent commitment on the part of the international community to support African efforts to mobilise resources for investment in infrastructure through the Infrastructure Consortium for Africa. These recent developments provide a sound basis for future economic progress. Access to drinking water and sanitation is the topic of special focus for this edition of the report. It is to be deeply regretted that few African countries are on track to reach the Millennium Development Goals set for these areas. In order for sub-Saharan African countries to reach the drinking water MDG by 2015, annual growth in the number of people provided with access to safe drinking water would need to triple. For the same countries to meet the MDG for access to sanitation, a further 35 million people annually would need to be provided with access to it; this is to be compared with the current pace of 7 million. Financing remains a major issue: government financing, private-sector participation and development assistance have been largely insufficient to cover the scale of investments needed. Within this generally disappointing panorama, many outstanding examples of good performance have nevertheless been identified. The experiences of the good performers in water and sanitation show that moving forward requires ambitious reforms in institutions, legal frameworks and policies in order to change the structure of incentives. They also point to the enormous benefits of strengthening capacity on the ground, notably at local level where most water management is undertaken, and developing monitoring mechanisms to follow progress and adopt corrective measures as necessary. They also demonstrate the need for cross-subsidisation between wealthier and poorer users, and between water and sanitation, as well as the identification of those polluting industries that should bear the costs of abatement. On the issue of financing, public-private partnerships need to be encouraged and international effort has to be redoubled to mobilise resources for water and sanitation in Africa. Looking ahead, economic prospects for 2007 and 2008 are in aggregate positive, though, in view of the likelihood of a softening in non-oil commodity prices, substantial differences are expected between the experiences of net oil-exporters and oil-importers. Resource-rich countries will need to ensure that a large part of the windfall gains now accruing to their treasuries due to favourable terms of trade is directed towards supporting medium- and long-term development: emphasis will need to be placed on investments in infrastructure and human capital. Net oil-importing countries will need to ratchet down inflation to single-digit levels while minimising the impact on growth. Though the economic prospects are broadly favourable, most countries are of course starting from a very low base. Human security continues to be severely affected by the vulnerability that accompanies extreme poverty. Exacerbated by weak governance structures and by internal conflicts, this vulnerability is holding back privatesector development and continues to impede the integration of African countries into the global economy. The added impetus to the international community’s support to Africa given by the G8 Summit in St-Petersburg has therefore been essential; the decision of the German presidency of the European Union to maintain this impetus at Heiligendamm is to be warmly welcomed. We are pleased that our two organisations have succeeded over the past six years in steadily increasing the usefulness of the AEO in improving understanding of the changes that are shaping the economy of Africa. We are proud to announce that this collaboration will continue in the future with the African Development Bank taking the lead role in this partnership beginning with the 2007/2008 edition. Donald Kaberuka President, African Development Bank Tunis

Louka T. Katseli Director, OECD Development Centre Paris April 2007

© AfDB/OECD 2007

African Economic Outlook

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Part One

Overview

The African Economic Outlook is based upon the experience and skills of the OECD and the African Development Bank to provide an annual snapshot of the economic condition of African countries. It is, therefore, a reference point and a health check for the continent as a whole, taking account of the international situation and the influences of both internal factors and of the global economy. In this Overview, we provide an overall analysis of the state of Africa’s economies in a continental and global context, identifying and examining key features applied to the review of each country making up our sample. In this year’s edition, the special focus is on access to drinking water and sanitation. The 31 countries examined in this sixth edition of the African Economic Outlook account for some 86 per cent of Africa’s population and 91 per cent of its economic output. The countries are classified by subregion: • In North Africa: Algeria, Egypt, Morocco and Tunisia. • In West Africa: Benin, Burkina Faso, Côte d’Ivoire, Ghana, Mali, Niger, Nigeria and Senegal. • In Central Africa: Cameroon, Chad, the Republic of Congo, the Democratic Republic of Congo, Gabon and Rwanda. • In East Africa: Ethiopia, Kenya, Madagascar, Mauritius, Tanzania and Uganda. • In Southern Africa: Angola, Botswana, Malawi, Mozambique, Namibia, South Africa and Zambia. Ours is a comparative assessment and provides a continent-wide perspective, drawing on the country studies and supplementary analysis from the OECD Development Centre and the African Development Bank. Economic activity in Africa is estimated to have risen by nearly 5.5 per cent in 2006, and is expected to © AfDB/OECD 2007

remain high, at 5.9 per cent and 5.7 per cent in 2007 and 2008, respectively. Oil-exporting countries, however, are outpacing others by a substantial margin. Moreover, some countries continue to face serious problems – including the humanitarian catastrophe in the Darfur region of Sudan, the economic collapse in Zimbabwe, conflicts and political unrest in Ethiopia, Côte d’Ivoire, Somalia, and security problems in the oil-rich delta region of Nigeria, which are likely to dampen their growth prospects. Nonetheless, the outlook for much of Africa continues to be highly favourable. The continued global expansion – albeit slowing somewhat – continues to sustain demand for oil and other industrial raw materials at relatively high prices. At the same time, a significant increase in official development assistance (ODA) to Africa, driven largely by debt relief and emergency assistance, and improving macroeconomic stability have all contributed to this positive economic outlook. In addition, increased oil and mineral production in Southern and Central Africa and some improvements in the security situation have boosted growth. Inflation, however, has returned to double-digit numbers in net oil-importing countries, mainly due to increasing oil prices. Current account balances have improved in many countries, with the largest gains for exporters of oil and metal ores, while some countries were adversely affected by higher import bills and lower prices for some agricultural products, cocoa and cotton in particular. The windfall gains from commodity prices have improved public finances, notably in net oil-exporting countries. These gains will need to be managed carefully with a sizeable proportion used for investment in transport and other infrastructure and in human resource development to lay the basis for sustained economic growth once the current commodity boom has run its course. In that respect, the Outlook identifies recent efforts by a number of oil-exporting countries to improve the transparency of their petroleum-sector operations and introduce fiscal rules for the use of oil revenue. African Economic Outlook

13

Overview

The challenge for net oil-importing countries is altogether different. While GDP growth is expected to remain buoyant in 2007 and 2008, inflation is now running at double-digit levels, mainly due to a more complete pass-through to consumers of the oil price increases, and reducing inflation to single-digit levels may have adverse consequences for growth. Moreover, the GDP growth forecasts in this edition of the AEO are associated with increases in current-account deficits that result from sustained higher oil prices even while the boom in non-oil commodity prices appears largely to have run its course. Thus, the forecasts assume that the additional funds required to finance the deficits will be forthcoming. This set of challenges for macroeconomic policy is one of the risks that must be borne in mind in assessing the current economic outlook for Africa.

14

Another challenge is associated with the widening of the large imbalances in the global economy. Should these unwind in a disorderly fashion, with sharp sudden movements in exchange rates, a precipitous decline in world output and, thus, demand for African exports, cannot be excluded. After a significant decline throughout much of the last decade, aid levels have increased in recent years and Africa is the continent that has benefited the most. The launch of NEPAD, the Monterrey consensus on financing for development in 2002, and the implementation of the Enhanced Heavily Indebted Poor Countries (HIPC) initiative and the commitments made at the G8 Gleneagles Summit (2005) which are expected to further ease external debt burdens significantly – have all played important roles in increasing flows of development finance to Africa. Nonetheless, it remains to be seen whether the amount of aid will continue to increase, once the temporary surge in debt relief and emergency aid has passed. The question is, therefore, whether donors will be able to mobilise sufficient resources to meet their commitments, which already fall well short of the amounts required to help most countries attain the Millennium Development Goals (MDGs) by 2015. Thus, an assessment of progress on the MDGs confirms the diagnosis of last year’s AEO; on recent African Economic Outlook

trends, only six African countries – most of them in North Africa – are likely to meet the key target of halving the share of the population living on less than one dollar a day. In this regard, the years 2005 and 2006 witnessed the development of a series of new initiatives aiming at providing increased and more effective aid in the run up to 2015. Outside the Doha Round, the lifting of quota restrictions on trade in textiles and clothing from the beginning of 2005 has presented a difficult challenge to textile-exporting countries in Africa (including North African countries, Madagascar, and Mauritius), due to their vulnerability to competition from Asian countries, and, in particular, China. With the recognition of its critical role in economic growth and poverty alleviation, the focus on promoting good governance has intensified in recent years. The NEPAD has played an important role here. Thus, the African Peer Review Mechanism is expected to provide a candid assessment of African countries and to foster progress in governance. Ghana, Kenya and Rwanda have already completed such a review. The Outlook notes that democracy has started to take root in a number of countries in the last decade, through, for example, substantial progress in the electoral process, while conflicts have started to subside. Corruption, however, continues to be prevalent in many countries and, despite progress in macroeconomic management and the regulatory environment, more needs to be done to ensure an environment conducive to private-sector development.

International Environment Growth in the OECD Area GDP growth strengthened somewhat to 3.2 per cent in 2006, the fifth year of the current expansion in OECD countries, up from 2.7 per cent in 2005 despite the persistence of sharply higher oil prices. Prospects are for some slowing of growth, to 2.5 and 2.7 per cent in 2007 and 2008, respectively (Figure 1), with growth rates becoming more similar across OECD © AfDB/OECD 2007

Overview

regions1. A sharp slowdown of growth in the United States was precipitated by a sharp correction in residential investment that began in the second quarter of 2006 and is expected to continue in 2007. However, other components of domestic demand remain robust. The expansion in Japan, led initially by exports, has spread to fixed investment by enterprises and household consumption, but GDP growth is expected to be considerably slower than in 2005 and 2006. Domestic demand in the euro zone accelerated markedly in the second half of 2006. Investment followed by consumption is now driving growth as the employment performance has strengthened. By and large, GDP growth in the OECD countries in the near term is expected to exceed or closely approach potential growth, thus eliminating the output gap and leading to an increase in fixed capital formation. Growth has continued to be underpinned by accommodative fiscal

policies, low long-term interest rates, and a stable outlook for inflation. However, prospects for 2007 and 2008 are for some tightening of monetary policies in most countries and less expansive fiscal policy. Outside the OECD area growth has continued to be especially buoyant in Asia, led by continued rapid growth in China and India. World trade growth accelerated to 9.6 per cent in 2006, up from a strong 7.3 per cent in 2005 and is expected to remain buoyant averaging about 8 per cent in 2007 and 2008. This strong growth in the OECD area and in Asia has helped sustain African economic activity in 2005 and 2006, led by growth in export volumes, which averaged about11.5 per cent per year. The robust growth in import demand expected for the OECD countries and Asia in 2007 and 2008 augurs well for sustaining demand for African exports during the next two years.

15 Figure 1 - Growth in OECD Countries —— United States

—— European Union

—— Total OECD

% 5

4

3

2

1

0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006(e) 2007(p) 2008(p)

Source: OECD (2006), OECD Economic Outlook, December. http://dx.doi.org/10.1787/735165510457

1. Source: OECD (2006), OECD Economic Outlook, December.

© AfDB/OECD 2007

African Economic Outlook

Overview

Exchange Rates Concerns over the sustainability of flows needed to finance the US current account deficit persist. They had already led to significant exchange rate adjustments, which strengthened the competitiveness of US exports vis-à-vis the euro area and Japan during the three year period, 2002 – 2004. After strengthening by about

12 per cent against the euro in 2005 due to large inflows of financial capital, the US dollar shed those gains in the course of 2006 and continued to weaken in early 2007. Thus in January 2007, one euro purchased nearly 48 per cent more dollars than in January 2002 (Figure 2). Changes against other currencies, however, have been more moderate; and, overall, exchange-rate adjustments have remained orderly.

Figure 2 - US$ per Euro and per Rand —— Euro

(base 100 in January 2001)

—— Rand

160 150 140 130 120 110 100 90 80 70

16

60 50 40 jan-01

july-01

jan-02

july-02

jan-03

july-03

jan-04

july-04

jan-05

july-05

jan-06

july-06

jan-07

Source: www.x-rates.com. http://dx.doi.org/10.1787/330475308837

The weakening of the US dollar against the euro during 2006 led to a modest appreciation of the effective exchange rate in the Franc Zone, in the real effective exchange rates of the West African Economic and Monetary Union (WAEMU). However, the South African rand and those countries whose currencies are pegged to it weakened against the US dollar and even more so against the euro. These developments partly reversed the sharp appreciation of these same currencies that had occurred in 2002/04, strengthening the competitiveness of non-traditional exports. Raw Material Prices Strong world demand and supply shortages were responsible for commodity prices rebounding sharply during the global recovery. In nominal dollar terms, metals and minerals, and oil prices increased the most between 2000 and 2006 (up about 159 and 128 per cent, African Economic Outlook

respectively). In domestic currency terms, however, the impact of these price hikes was dampened somewhat for many countries because of the depreciation of the dollar over the same period. The general rise in global commodity prices has had a positive impact on the trade balances of many African countries, although higher oil prices have hurt oil importers. The countries with the largest gains have generally been exporters of oil and metal ore. For most other countries, gains from higher-priced commodity exports vis-à-vis the prices of manufactured imports have been roughly equivalent to losses from higher priced oil imports. However, a number of countries have faced net losses reflecting lower prices for some agricultural products – cocoa (down nearly 12 per cent between 2003 and 2005) and cotton (down about 14 per cent over the same period). The dependence of many countries on commodity market developments remains © AfDB/OECD 2007

Overview

a key vulnerability over the medium term. Careful management of the windfall gains from the increase in commodity prices is key to avoiding boom-bust cycles that can result from price volatility.

average $/barrel 60 per year in both 2007 and 2008. High oil prices have slowed but not derailed the global expansion; however, oil price uncertainty will continue to be a major risk factor for economic growth in the near term.

Oil Metals The rise in crude oil prices to record nominal highs has been accompanied by higher price volatility (Figure 3). This surge in prices in 2005, which was largely unanticipated, reflected a number of factors, including: the level and growth in the global demand for oil as the global recovery has taken hold; the disappointing growth in oil production and the tensions in oil-exporting nations – particularly Iraq, Nigeria, Russia and Venezuela – and a confrontational stance with Iran; the low levels of spare oil production and refining capacity temporarily aggravated by hurricane-related damage in the Gulf of Mexico; and the low inventories of crude oil in the OECD countries. Weather-related problems did not figure in 2006, and there was some easing of political tensions. But with excess capacity still very low, prices are likely to remain high, especially if the global expansion remains solid. The average crude oil price (Brent) increased from $/barrel 38.2 in 2004 to $/barrel 54.4 in 2005 and $/barrel 65.2 in 2006. The assumption used in this report is that it will fall back slightly to

Metals prices continued to increase in 2006 to reach average levels 127 per cent higher than the average price in 2000, in large part because of China’s high demand for metals. They are expected to decline slightly (by 6 per cent) in 2007 and by a further 17 per cent in 2008, but to remain higher than in 2004. The price of gold has escalated since mid-2001, triggered by the reduction of producer hedging – as interest rates lowered – and by international uncertainty; this benefited South Africa, the world’s leading producer, and other African gold producers, such as Ghana and Mali – although the strength of the rand and the CFA franc dampened the impact of buoyant commodity prices in South Africa and Mali especially in 2005. Prices of other metals also rose substantially in 2005 and 2006. Copper prices rose by 83 per cent in 2006 following a 28 per cent increase in 2005 as the market remained in deficit on strong demand and marginal growth in supply; since then, prices have been

Figure 3 - Prices of Oil and Metals —— Petroleum

—— Gold

(base 100 in January 2001)

----- Copper

----- Aluminium

490 450 410 370 330 290 250 210 170 130 90 50 jan-01

july-01

jan-02

july-02

jan-03

july-03

jan-04

july-04

jan-05

july-05

jan-06

july-06

jan-07

Source: World Bank. http://dx.doi.org/10.1787/824402588583

© AfDB/OECD 2007

African Economic Outlook

17

Overview

volatile and began to decline in the second-half of 2006. Prices in 2007 are expected to fall by about 14 per cent and by a further 25 per cent in 2008. Gains in aluminium prices have been more modest over the last two years but continued to strengthen in 2006, because of the large expansion of primary aluminium capacity and exports to China. Zambia (for copper) and to a lesser extent Mozambique, Ghana, Cameroon and Guinea benefited from these increases. Metals prices are expected to decline cumulatively by about 18 per cent in 2007 and 2008.

Agricultural Products Prices of tropical commodities have been volatile and have generally performed poorly (Figure 4). Cocoa prices reflected the uncertainties generated by the civil conflict in Côte d’Ivoire, the world’s largest cocoa producer and exporter. Following record lows in early 2000, prices recovered to reach new highs in early 2003, then fell sharply as a significant supply response occurred, and fluctuated around a narrow range during the period 2004/06.

Figure 4 - Prices of Tropical Beverages —— Cocoa

----- Tea

(base 100 in January 2001)

—— Coffee (arabica)

----- Coffee (robusta)

300 250 200

18

150 100 50 0 jan-01

july-01

jan-02

july-02

jan-03

july-03

jan-04

july-04

jan-05

july-05

jan-06

july-06

jan-07

Source: World Bank. http://dx.doi.org/10.1787/807530736514

The prices of coffee, exported by many African countries, increased substantially in 2002; they held fairly steady (increased for the Arabica variety) in 2004 and then increased sharply in 2005 (by 41 and 43 per cent for Robusta and Arabica varieties, respectively), recovering the levels of early 2000. They fluctuated around these higher levels throughout 2006, with the Robusta variety moving sharply upward in the second half of the year. Little change in their current levels is expected in 2007 and 2008 because the fundamentals for coffee remain weak, with little growth expected in consumption while global stockpiles remain abundant. Tea prices in 2006 were little changed compared with 2004 or 2005, but are still about 12 per cent below their 2000 levels, and are expected to remain at African Economic Outlook

about the same levels in 2007 and 2008. The outlook is not favourable, given the declining trend in consumption growth and the continued growth in output. Cotton prices rose by slightly more than 4 per cent in 2006 recovering a small part of the losses in 2004 and 2005. By the end of the year, they were about where they had been in mid-2003 (Figure 5). They are not expected to improve much in 2007 and 2008, perhaps gaining another 3 or 4 per cent cumulatively. This drop has substantially lowered export earnings in countries like Mali, Benin, and Burkina Faso for the past two years. The cotton price illustrates the problems encountered by some of the poorest sub-Saharan countries in the context of trade distortions. West and © AfDB/OECD 2007

Overview

Central African countries produce low-cost, high-grade cotton, but face unattractive world prices, which have been dampened by the provision of substantial subsidies from developed countries in recent years. An additional burden for the cotton-producing countries in the CFA zone has been the appreciation of the euro against the US dollar since 2000.

The “cotton initiative” launched in September 2003 by four West African countries (Benin, Burkina Faso, Mali and Chad) to end cotton subsidies in WTO member countries was finally included in the WTO General Council decision reached in mid-2004 on the framework to proceed with agricultural negotiations. At the WTO Ministerial Meeting in Hong Kong,

Figure 5 - Price of Cotton

(base 100 in January 2001)

130 120 110 100 90 80 70 60 50

19

40 jan-01

july-01

jan-02

july-02

jan-03

july-03

jan-04

july-04

jan-05

july-05

jan-06

july-06

jan-07

Source: World Bank. http://dx.doi.org/10.1787/451820817024

further progress was made, including setting a timetable for its implementation. However, with the suspension of negotiations this potential improvement is on hold. In the meantime, there is a need to speed up the process of providing assistance to African producers until the removal of subsidies results in higher world prices. In the present situation of low prices, distorted by subsidies, African production costs are above the world price, which threatens cotton production in countries where the sector is key – an estimated 12 million people are dependent on cotton for their livelihood in West Africa. Official Development Assistance (ODA) Official Development Assistance has been growing steadily since the beginning of the decade, with net ODA disbursements reaching $107 billion

in 2005. This represents 0.33 per cent of the combined gross national income of members of the OECD’s Development Assistance Committee (DAC), up from 0.26 per cent in 2004 and the highest ratio since 1992. About 70 per cent of the real increase between 2004 and 2005 ($18 billion out of $25 billion) is explained by debt relief, heavily dominated by the Paris Club settlements for Iraq and Nigeria. Thus the increase was heavily concentrated by recipient country, and delivered in a form which does not provide new transfers to the recipient. Humanitarian aid also increased for the second successive year. Much of this increase was concentrated in Iraq and Afghanistan. As a result, ODA other than humanitarian aid and debt relief to the vast majority of recipients rose only very slightly in real terms.2

2. OECD (2007), DAC, 2006 Development Co-operation Report, Paris.

© AfDB/OECD 2007

African Economic Outlook

Overview

If all the commitments made in 2005 to increase aid are met, including the pledge to double aid to Africa announced at the G8 summit in Gleneagles, ODA from DAC donors alone will rise by almost $50 billion in real terms between 2004 and 2010, to nearly $130 billion (at 2004 prices and exchange rates)3. Yet the expected increase of ODA is less impressive when measured as a share of gross national income (GNI). The estimated figure for 2010 (0.36 per cent of total DAC GNI) would only marginally exceed the average level of 1980-92 (0.33 per cent), and would still fall short of the estimated financing required for countries to attain the MDGs by 2015. In addition, according a partial survey of DAC members carried out in 2006, aid commitments to 2008 appear to fall well short of the trend increases required by many DAC members to reach their 2010 targets. The sharp rise of ODA in 2005 is likely to be short-term, since future debt deals are unlikely to match the scale of relief granted to Iraq and Nigeria. 20 This issue is particularly worrying in the case of Africa, to which donors have promised to double ODA between 2004 and 2010. Debt relief to many African countries is now complete, and total debt relief is likely to fall sharply from 2007. To date, debt reduction packages have been approved for 30 countries, 25 of them in Africa, providing $35 billion (net present value terms as of the date of reaching the decision point) in debt-service relief over time4. Other forms of aid will therefore need to rise very fast – on the order of 10 per cent per year in 2008-10 – to compensate. This will mean increasing tax payerfunded aid faster than almost all other forms of public expenditures in donor countries. According to the DAC Development Co-operation Report, a particularly significant test of donors’

intentions will be their willingness to increase the funding for the next replenishments of the World Bank and African Development Bank soft funds, the International Development Association and the African Development Fund. These institutions also need to be compensated for the costs of the Multilateral Debt Relief Initiative (MDRI)5. Some encouraging signs of additional aid volumes have come from the launch of innovative forms of development assistance. In January 2006, six OECD countries established the International Finance Facility for Immunisation, which is expected to scale up the annual spending on vaccines to $500 million, averting up to 500 000 child deaths a year. 19 OECD and non-OECD countries have undertaken initial steps to introduce an air-ticket solidarity levy, and which may raise a total of $1 to 1.5 billion a year for development purposes. Three OECD countries have also agreed on Advanced Market Commitments – a market based mechanism to support research and development of vaccines. Flows from charitable and philanthropic foundations are also on the increase, from $7 billion in 2000 to over $11 billion in 2004. They seem likely to continue to rise, especially in the areas of humanitarian aid and research into vaccines and tropical diseases (for example in 2004, the Bill and Melinda Gates Foundation spent over $800 million on international health programmes). Although aid from DAC members will continue to account for close to 90 per cent of total ODA, nonDAC members are also helping to increase total aid volumes. For example, Korea has decided to increase its ODA to 0.10 per cent of its GNI by 2010, which implies more than doubling its aid to around $1 billion in that year. Other non-DAC OECD member countries

3. OECD (2007), DAC, 2006 Development Co-operation Report, Paris. 4. IMF Fact Sheet December 2006 5. The MDRI was proposed by the G8 countries in June 2005 to cancel all the multilateral debt held by the World Bank’s International Development Association (IDA), the IMF and the African Development Bank’s African Development Fund (ADF), incurred before 1 January 2005 with the IMF and the ADF, and before 1 January 2004 for the IDA.

African Economic Outlook

© AfDB/OECD 2007

Overview

such as Turkey, Mexico and several European countries also have ambitious plans to scale up their aid by 2010. The non-DAC OECD members of the EU (the Czech Republic, Hungary, Poland, and Slovakia) and the other new EU members committed themselves to reach 0.17 per cent of GNI by 2010 and 0.33 per cent by 2015. Official flows from Middle East and other OPEC countries are also expected to increase, mainly in the form of loans for project finance. China is also becoming an important donor. The November 2006 “Beijing Action Plan” launched in the Forum on China-Africa Cooperation (FOCAC) resulted in commitments to double the size of China’s assistance to African countries by 2009. Although increasingly important, China’s ODA programmes are likely to be less significant to developing countries than the effects of its trade, direct

investment and non-concessional financial flows. There may be a risk, however, of compromising debt sustainability efforts in the poorer and more aid dependent countries. While non-DAC and non-traditional donors are augmenting the resources available to help developing countries to reach all the MDGs, this recent trend poses new challenges for harmonisation and alignment with recipient country priorities. Non-DAC donors are a heterogeneous group; the degree to which nonDAC donors apply DAC approaches and norms as regards the provision of aid varies from country to country. In addition, the limited data on non-DAC ODA makes it difficult accurately to assess aid volume and prospects from these sources.

Figure 6 - DAC Members’ ODA: 1990-2005 and Simulations to 2006 and 2010, based on Commitments at Monterrey and Since Total ODA (right scale) ODA as a % of GNI (left scale)

Total ODA to Africa (right scale)

% of GNI

ODA ($ billion) 2004

150

0,40 0.36 0,35

0.33

0.33

120 0,30

0,25

0.26

90

0.22

0,20

60 0,15

0,10

30 0,05

0

0,00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: OECD/DAC statistics (2007) http://dx.doi.org/10.1787/573526007704

© AfDB/OECD 2007

African Economic Outlook

21

Overview

Growth of Aid to Africa Africa’s share of total ODA, which had fallen to 36 per cent by 1999, recovered to 42 per cent in 2004056. This rise was driven largely by debt relief and emergency assistance, which reached 27 per cent and 11 per cent of total ODA respectively in 2005, more than tripling their shares since 2000. Emergency aid from DAC countries, the World Food Programme, the European Commission and UNHCR has been channelled to relief and reconstruction in areas affected by drought, especially in Southern and Western Africa, and in fragile states, notably in Sudan.

22

Nigeria was the top recipient of ODA in 2005, receiving about 16 per cent of total aid to Africa (about $6 billion out of total commitments to Africa of $37 billion). About 85 per cent of aid to Nigeria was accounted for by debt relief. The other largest African recipients included several among the 17 which have achieved their Heavily Indebted Poor Countries initiative (HIPC)7 completion point or are in the process of doing so. Debt relief accounted for more than 50 per cent total aid in Zambia, about 40 per cent in Ghana, and about 30 per cent in the Democratic Republic of Congo.

The challenge of the HIPC initiative, and of the Multilateral Debt Relief Initiative (MDRI), is to ensure that the resources that are freed from debt repayment are channelled to expenditures on health, education and other social services. Although most of the HIPC countries have increased their spending in social sectors, difficulties remain to ensure that money is redirected to social priorities in fragile states. For example, in Rwanda and Ethiopia, large new loans are being contracted to meet pressing reconstruction needs while old debt is simultaneously being retired. Other countries face challenges to meet the criteria for reaching the HIPC decision point due to uneven policy records or poor governance resulting from civil conflict. Finally, even after debt relief under the HIPC and MDRI initiatives is fully implemented, maintaining a sustainable level of debt service while seeking the additional financing needed to make progress towards the MDGs will be a challenging task. For example, some countries might be tempted to use their improved creditworthiness to access international capital markets or export credits and loans with low levels of conditionality, including from non-DAC donors, risking a return to high and unsustainable debt levels.

Box 1 - Public Debt Management and Bond Markets in Africa8 The volume of government debt as a percentage of GDP varies across African countries. Some countries have low to moderate burdens, while in others the level is well in excess of 100 per cent of GDP. In between are countries where the level is in line with that of many OECD countries. The difference, however, is that the economies of African countries are typically more susceptible to shocks, which affects the ability of governments to service their debt. This is the case even after benefiting from external debt relief, as many African countries have under multilateral initiatives. Modern public debt management practices are used by only a handful of countries. As a result government securities markets in Africa generally remain rudimentary compared with markets in middle-income and more developed economies. Going forward, riskbased debt sustainability needs to remain a focus of debt strategy in Africa because volatility in the macroeconomic environment is high, often due to external shocks.

6. Based on region-allocable ODA only. 7. The HIPC initiative, started in 1996, is a comprehensive approach to debt reduction for heavily indebted poor countries pursuing IMF and World Bank supported adjustment and reform programmes. 8. This analysis is based on an OECD project on African Public Debt Management and Bond Markets. The authors, Greg Horman and Hans Blommestein, are Financial Analyst and Project Manager, respectively.

African Economic Outlook

© AfDB/OECD 2007

Overview

Box 1 - Public Debt Management and Bond Markets in

Africa8

(cont.)

Foreign-currency debt is more important than local-currency debt in most African countries. Foreign-currency borrowing typically offers lower interest rates and longer tenors than local-currency borrowing. The predominance of foreign-currency debt in general reflects the availability of, and continued reliance on, concessional multilateral and bilateral funding but this may entail a currency mismatch with foreign exchange earnings that can increase a country’s vulnerability. The lack of a developed domestic debt market can lead to budgetary volatility if the government is unable to draw on domestic funding sources in the event of drop-off in external funding or grants. A few African countries borrow successfully on the international bond markets, but they tend to be the ones with more developed domestic markets as well. A number of African countries have used local-currency funding to some degree since the 1980s, and more recently many countries have taken steps to develop their domestic markets. The few countries where local-currency debt constitutes the larger share of the debt portfolio have higher levels of per capita GDP, investment, and savings; stronger financial and banking sectors; more diverse private sectors; and a lower reliance on concessional funding from external sources. In much of Africa, however, the issuance of debt in the domestic market often remains erratic and in small volumes, leading to problems in developing liquid instruments and benchmarks. Local-currency debt is also primarily short-term. One consequence is that African governments are exposed to significant levels of refinancing risk in respect of their local-currency debt. Although a few countries issue bonds with tenors of 10 or even 20 years, in many African countries government yield curves do not extend beyond five years at the longest, and even in those countries where the curves do extend over longer periods, liquidity tends to be concentrated in the shorter maturities. Interest payments on local-currency debt often consume a higher share of the budget than interest payments on foreign-currency debt, even though local-currency debt makes up a lower share of outstanding debt. This is because the interest rates in African domestic markets tend to be relatively high compared with the interest rates prevailing for foreign-currency borrowing, although borrowing in local currency has the advantage of avoiding exposure to exchange rate risk. An important policy question for African governments is the appropriate balance between minimising cost and risk, in particular taking account of the major risks (interest rate, exchange rate, and refinancing) and the possibility of other budgetary shocks, such as from a sudden drop-off in aid inflows. In most African countries, local commercial banks represent the largest category of holders of government securities, often in excess of 50 per cent of outstanding debt. Participation of institutional investors and non-residents is relatively limited in most countries. This reflects, among other factors, capital account restrictions, limited information on creditworthiness, a perception of high country risk, and weak legal and regulatory infrastructures. Narrow investor bases, a tendency to hold to redemption, and the absence of entities prepared to commit risk capital to dealing in government securities contribute to a general lack of secondary market liquidity. An important policy question for many African countries is what priority to give to stimulating a diverse investor base and developing market-based instruments, trading facilities, and distribution networks that suit the needs of investors. Source: Public Debt Management and Bond Markets in Africa, OECD, Paris (forthcoming).

Much of the recent increase in ODA to Africa was accounted for debt forgiveness and emergency aid, with loans and grants for programmes and projects remaining almost unchanged in 2005 (see Figure 7). The social sectors and governance accounted for about 30 per cent of ODA in 2005 while aid for economic infrastructure and production sectors was about 17 per cent, compared to 36 per cent and 18 per cent respectively in 2004. Programme aid accounted for about 9 per cent of total ODA compared to 12 per cent © AfDB/OECD 2007

in 2004. It remains to be seen whether the absolute amount of this core development aid will rise once the temporary surge in debt relief and emergency aid has passed. The European Commission, France, the United States, and the United Kingdom are the leading donors in Africa, accounting for 51 per cent of total aid in the region, followed by Germany, Japan and the Netherlands. African Economic Outlook

23

Overview

Figure 7 - Net Official Development Assistance to Africa ■ Other ODA

■ Bilateral debt forgiveness

(all donors, constant 2004 $ billion)

■ Emergency aid

$ billion 2004 35

30

25

20

15

10

5

0 1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: OECD/DAC statistics (2007) http://dx.doi.org/10.1787/532023360860

24 Donors have continued to focus on a small number of countries which have historically benefited from large aid flows: Egypt accounted for 37 per cent of flows to North Africa, while Nigeria, Ethiopia, Sudan, the Democratic Republic of Congo, Tanzania, the Republic of Congo, Mozambique and Zambia accounted for half of total ODA to sub-Saharan countries in 2005.

Declaration on Harmonisation of 2003 to reduce the transactions costs associated with in aid, encourage more harmonised, joint efforts among bilateral and multilateral donors, and enhance aid effectiveness through results-based approaches. It is particularly noteworthy that all G-20 countries signalled their support for the Paris Declaration at the G-20 meeting in Melbourne in November 2006.

Despite the encouraging trend of increasing aid to Africa, the MDGs remain underfinanced and most of Sub-Saharan Africa is far from reaching most of the eight goals.

The aid effectiveness agenda stresses ownership by recipient countries, alignment of external aid to local priorities and local delivery channels when these meet adequate standards, harmonisation and simplification of donor procedures, a stronger focus on achieving real results by both recipient countries and donors, and greater mutual accountability for those results. A set of indicators has been established to measure progress in this regard.

Progress in making aid more effective In addition to the commitment by donors to increase ODA volumes, steps have been taken by the international community and African governments to improve the quality of aid. The international effort on aid effectiveness has been gaining momentum since 2005 when over 100 partner countries and donors endorsed the Paris Declaration on Aid Effectiveness. The participants renewed pledges made in the Rome African Economic Outlook

According to the 2006 Baseline Survey on Monitoring the Paris Declaration, about 60 countries have undertaken actions in support of the Paris agenda. Substantial progress has been made in a number of African countries including Burkina Faso, Ethiopia, © AfDB/OECD 2007

Overview

Ghana, Mozambique and Tanzania in terms of harmonisation actions (joint analytical work, joint programming and assistance strategies, programmebased approaches, pooling of financing among donors and use of country systems when feasible) which have helped reduce transaction costs. Nevertheless, the survey suggests that greater attention is needed in aligning aid flows with national priorities and improving the transparency of the flows. There are still substantial discrepancies between the funds disbursed by donors and the information recorded in the recipient’s budget9. In addition, the survey suggests that only a minority of countries have put in place mechanisms of mutual review of progress on aid effectiveness commitments.

Against the prospect of scaling up of aid, progress in the Paris agenda and especially more co-ordination among aid delivery channels (bilateral funds, multilateral funds, global funds, and private funds) will be all the more crucial. In particular, global funds need to support country-led strategies and priorities and avoid undermining the capacity of national authorities for coherent planning, financing and service delivery. The principles of the Paris declaration have been put at the heart of the Aid for Trade Agenda, aimed at helping developing countries benefit from WTO agreements and expand their trade. The WTO tasks force issued its recommendations in 2006, calling for donors active in the provision of aid for trade to abide by the principles enshrined in the declaration.

Box 2 - Dealing with Complexity: Health Financing in Ghana The international development finance system has become complex, with a proliferation of financing instruments and new actors, both public and private, entering the scene. How does this complexity affect a “donor darling” like Ghana, where ODA accounts for a large percentage of GDP (12 per cent in 2003)? A recent Development Centre case study identifies three major trends in Ghana’s health sector. Firstly, donors have diversified their financing instruments. Secondly, household spending on health is growing and bypassing the Ministry’s budget and purview. Thirdly, new actors have emerged as funding sources and implementing organisations. This new complexity has important implications for policy makers in developing and donor countries alike. Firstly, they must work together to strengthen information systems that can capture all flows and help craft effective policies. Strengthening information implies building capacity in data collection and monitoring. More generally, it also requires that local actors and donor agencies recognise the high potential of non-aid flows for development. Secondly, further efforts are needed in implementing the Paris Declaration. Global programmes, for example, have attracted criticism for contributing to a proliferation of co-ordinating mechanisms at country-level. HIV/AIDS matters, for instance, are now discussed in meetings of the Ghana Aids Commission (GAC), the Partnership Forum, the Business Meeting, the UNAIDS Technical Working Group, the GAC Sub-Committee, the Regional Aids Committee, and the District AIDS Committee. Finally, it must be recognised that the major challenge for decision makers does not relate to finance alone, but to larger issues of governance and administrative capacity. If recipient-country governments are to take the lead in managing development finance strategies, they must improve co-ordination and communication between their own national public entities. As donors move to general budget support in Ghana, for example, the Ministry of Health will need to develop new communication and negotiation skills vis-à-vis the Ministry of Finance. Source: Denis Drechsler and Felix Zimmermann, “New Actors in Health Financing: Implications for a Donor Darling”, OECD Development Centre, Policy Brief No. 33, 2006.

9. OECD (2007) , DAC, 2006 Development Co-operation Report, Paris.

© AfDB/OECD 2007

African Economic Outlook

25

Overview

Box 3 - Improving the Effectiveness of Aid for Trade in Africa The international community has long recognised the need to provide targeted trade-related technical assistance and capacity building to promote the integration of developing countries, especially the least developed ones, into the multilateral trading system. Donors have always provided substantial support to productive sectors and infrastructure to varying degrees long before the emergence of the Aid for Trade concept. New is the recognition of trade as part of the overall development strategies of countries. Moreover, there is increased awareness in the trade community of the importance of the so-called “supply side” constraints that hamper the ability of developing country enterprises to reap the opportunities created by trade liberalisation. The Doha Development Agenda adopted at the 2001 WTO Ministerial meeting reaffirmed this commitment stressing that the successful trade integration of LDCs “requires meaningful market access, support for the diversification of their production and export base, and trade-related technical assistance and capacity building (paragraph 42)”. Following the launch of the Doha round, the OECD and WTO improved the monitoring of aid flows to strengthen trade capacities, or “aid for trade” (http://tcbdb.wto.org). Provision of aid for trade has expanded significantly over the last few years, witnessing an increase in funding and in the number of donors and agencies with explicit strategies and guidelines for aid for trade. According to the WTO-OECD database, Africa is the largest recipient of trade-related technical assistance and capacity building, receiving one third of the world total. In 2005 the international community committed $1.03 billion to the continent, a 6 per cent increase in nominal terms over 2004. Africa also received $3.8 billion of aid to finance infrastructure, placing it as the second largest recipient after Asia.

Aid commitments for Trade Related Technical Assistance and Capacity Building and Infrastructure to Africa ($ million, 2005)

26

$ million

Share of Global TRTA (%)

Trade Policy & Regulations

361

39.2

923

Trade Development

667

30.1

2 220

1 029

32.7

3 143

$ million

Share of Total Infrastructure (%)

Total Infrastructure

3 810

31.2

12 197

Total TRTA

Infrastructure

Global TRTA

Source: WTO/OECD Trade Capacity Building Database. In October 2006, the WTO General Council endorsed the recommendations of the WTO Aid for Trade Task Force. The recommendations make several proposals to broaden the scope and enhance the effectiveness of trade-related development assistance. The Task Force also adopted a broader definition of aid for trade by adding to the “traditional categories” of trade-related technical assistance (trade policy and regulations and trade development) four new categories: (1) trade-related infrastructure, (2) building productive capacity, (3) trade-related adjustment and (4) other trade-related needs. In particular, they called providers of aid for trade to abide by the principles agreed in the Paris Declaration on Aid Effectiveness (including country ownership, aligning aid to national development strategies, donor co-ordination, and harmonisation of donor procedures). The recommendations insist on improved mainstreaming of trade into national development strategies and in country structures, using country-based processes such as PRSP and Consultative Groups. In addition, they include proposals for mainstreaming trade and growth issues in donor programming, including strengthening the trade expertise of donors. At global level, the recommendations point at strengthening monitoring and evaluation, including by establishing a monitoring body in the WTO, reporting by recipient countries on trade mainstreaming, reporting by bilateral donors, multilateral and regional agencies and the private sector on aid-for-trade activities. Source: WTO/OECD Trade Capacity Building Database; Aid for Trade: Making it Effective. OECD (2006); The International Architecture of Aid for Trade, joint SECO-OECD Development Centre Report (2007), forthcoming.

African Economic Outlook

© AfDB/OECD 2007

Overview

In parallel, with initiatives to improve aid effectiveness, G8 Heads and African leaders agreed on a comprehensive package of measures to support Africa’s development.

They set up the African Partnership Forum, a process intended to give fresh political and strategic impetus to the currents of cooperation for Africa.

Box 4 - The African Partnership Forum The Africa Partnership Forum (APF) is a unique international body established following the Evian G8 Summit in 2003 as a way of broadening the existing dialogue between the G8 and the New Partnership for Africa’s Development (NEPAD) to include other African institutions and Africa’s major bilateral and multilateral development partners. Its core remit is to catalyse action at the highest political level in favour of African development. The APF monitors progress achieved in delivering on commitments its membership have undertaken, identifies bottlenecks, and signals priorities for follow-up action. Members of the APF include “Personal Representatives” of the Heads of State and Government of African and G8/OECD countries, as well as representatives of the Chairperson of the African Union Commission and of regional and international institutions. The Forum is governed by four co-Chairs, two from Africa and two from development partners. At their October 2006 meeting in Moscow, APF members assessed progress achieved to-date regarding infrastructure, HIV/AIDS and agriculture across the African continent. The analysis indicated that while encouraging advances had been made in the first two areas, progress in achieving higher agricultural output and food security – a critical sector for poverty reduction — was lagging behind. It urged African governments to intensify their efforts and development partners to provide increased and more effective support to this sector in line with Paris Declaration principles. Two additional papers on energy poverty and infectious diseases – related to 2006 G8 St Petersburg discussion topics – were also discussed, and the following recommendations were agreed: • While energy issues in Africa have not been high on the international agenda, secure and sustainable access to energy is essential to achieving the MDGs. Mobilising the necessary investment – from both public and private sources – will require African governments and donors to take concrete steps aimed at improving financial viability in the sector, creating a more hospitable business climate to reduce risk and attract investors, and bolstering regional co-ordination and integration. • Infectious diseases impose a heavy burden on Africa: the continent accounts for two-thirds of global mortality from AIDS, malaria and tuberculosis. While the APF applauded efforts to tackle the “big three” – including through concerted government policy implementation and the creation for special delivery mechanisms and funds – it warned that the continuing neglect of other major debilitating diseases constitutes a ticking time bomb. The importance of reinforcing human resources in the health sector was stressed, as well as the capacity of health systems at national level to tackle the infectious disease burden. APF members acknowledged the importance of addressing the worrying gender dimensions of the escalating increase in sexually transmitted diseases (including HIV/AIDs), and asked members to work more resolutely on promoting women’s empowerment and self-determination. The Africa Partnership Forum will maintain a watching brief on developments in these areas and will report back to the membership at regular intervals. At its spring 2007 meeting in Berlin, the APF will address investment, climate change, peace and security, and gender. APF reports may be accessed at www.africapartnershipforum.org

Foreign Direct Investment After a downturn in 2002, FDI flows to Africa recovered in 2003 (+ 39 per cent) and remained relatively stable in 2004 ($18 billion)10. Still, Africa’s share in world

FDI inflows remained small at 3 per cent. High prices for minerals such as copper, diamonds, gold and platinum, and particularly for oil, along with the resulting improved profitability of investment in natural resources encouraged foreign investment in the region.

10. Sources: UNCTAD (2006a), World Investment Report, Geneva, and UNCTAD (2006b), Global Investment Prospects Assessment 2005-2008, Geneva.

© AfDB/OECD 2007

African Economic Outlook

27

Overview

Inflows rose in 40 out of the 53 countries in Africa, though they fell in 13, including in some of the region’s top FDI recipients such as Angola, Morocco and Nigeria. Cross-border mergers and acquisitions (M&As) in the mining industry increased to more than three times their 2003 value. The five top home countries of FDI for Africa in 2004 were France, the Netherlands, South Africa, the United Kingdom and the United States, together accounting for well over half of the flows to the region.

28

Africa received record high foreign direct investment (FDI) inflows in 2005 of $31 billion, but this was mostly concentrated in a few countries and industries, says the UNCTAD World Investment Report 2006, FDI from Developing and Transition Economies: Implications for Development. A sharp rise in corporate profitability and high commodity prices over the past two years helped produce a growth rate of 78 per cent in FDI inflows to the region. Prospects are good for another increase in 2006 given high project commitments, large numbers of investors eager to gain access to resources, and a generally favourable policy stance for FDI in the region. FDI continued to be a major source of investment for Africa as its share in gross fixed capital formation increased to 19 per cent in 2005. However, the region’s share of global FDI remained low at about 3 per cent in 2005. In the manufacturing sector, a number of transnational corporations (TNCs) in the textile industry pulled out of Africa because quota advantages for African countries declined after the end of the Multi-fibre Arrangement (MFA) in 2005. South Africa was the largest FDI recipient in the region in 2005, experiencing a sharp jump in inflows to $6.4 billion from only $0.8 billion in 2004. South Africa accounted for about 21 per cent of the region’s total. This was mainly due to the acquisition of Amalgamated Bank of South Africa by Barclays Bank (UK) for $5.5 billion. Africa’s top 10 recipient countries – South Africa, Egypt, Nigeria, Morocco, Sudan, Equatorial Guinea, the Democratic Republic of Congo, Algeria, Tunisia and Chad, in that order – accounted for close to 86 per cent of the regional FDI total. In eight of these countries, FDI inflows African Economic Outlook

exceeded $1 billion (more than $3 billion for Egypt, Nigeria and South Africa in particular). Inflows to South Africa were also the most diversified: investment was channelled into energy, machinery and mining, as well as into banking, which received the largest share. At the other extreme, FDI inflows remained below $100m in 34 African countries. These are mostly least developed countries (LDCs), including oil-producing Angola, which witnessed a drastic decline in FDI receipts in 2005. Many of the low FDI recipients in the region have limited natural resources; lack the capacity to engage in significant manufacturing, and, as a result, are among the least integrated into the global production system. Some countries have also experienced political instability or civil war in the recent past, which destroyed much of their already limited production capacity. FDI inflows to the region were concentrated in a few industries, such as oil, gas, and mining. Six oil producing countries (Algeria, Chad, Egypt, Equatorial Guinea, Nigeria and Sudan, in descending order of the value of FDI) accounted for about 48 per cent of inflows to the region. Although countries such as Kenya, Mauritius, Lesotho, Swaziland and Uganda had begun to receive FDI for their textile and apparel industries due to the African Growth and Opportunity Act (AGOA), the trend changed following the end of the MFA in 2005. In Mauritius there was a 30 per cent contraction in the volume of garments manufactured in 2005 following the departure of Hong Kong (China)-owned companies. In Lesotho, six textile TNCs closed, with a loss of 6 650 jobs. The setback demonstrates that the impact of trade-related initiatives can be short-lived in Africa, where domestic capabilities are inadequate for quickly absorbing and continuing production processes. It also underscores the fact that Africa’s industrial progress requires competitive production capacity, in addition to better market access and more welcoming regulatory frameworks. The persistence of the critical capacity problem may continue to hamper the region’s ability to attack and retain FDI in the manufacturing sector. © AfDB/OECD 2007

Overview

FDI outflows from Africa in 2005 remained small and originated from a few countries. Six home countries – Egypt, Liberia, Libya, Morocco, Nigeria and South Africa – accounted for over 80 per cent of total outflows. The largest African TNCs are also from a small number of countries. In 2004, Orascom Construction (Egypt) also made it onto the list. South Africa’s top TNCs were: Sasol Ltd (industrial chemicals); Suppi Ltd (paper); MTN Group Ltd (telecommunications); Steinhoff International Holdings (household goods); Barloworld Ltd (diversified); Naspers Ltd (media); Nampak Ltd (packaging); Gold Fields Ltd (metal and metal products) and Datatet Ltd (diversified). (UNCTAD.org-World Investment Report 2006) Continued high demand for commodities, a more stable policy environment and increasing participation in infrastructure networks by African multinational corporations (MNCs) boosted FDI in 2005. In the short run, expectations for FDI inflows to Africa remain fairly positive, although investment promotion agencies are more optimistic than foreign MNCs. Both experts and MNCs believe that North African

countries have greater potential to attract FDI than those in sub-Saharan Africa. South Africa and China were the most frequently cited as potential sources of FDI. In recent years, Chinese MNCs have expanded their resource-seeking and manufacturing activities on the continent, and Indian firms have begun to invest in IT-related services. A relatively new phenomenon is the increase in FDI outflows (as opposed to portfolio flows and capital flights, that have long been worryingly high) from African countries, which more than doubled in 2004. With the purchase of Italy’s second-largest telecom operator in 2005, Orascom of Egypt joined the list of African MNEs, hitherto largely limited to South Africa. Is Africa the next financial frontier to be explored by private equity? CDC, an emerging markets private equity investor owned by the UK government, and Citigroup has agreed to invest at least $200 million. They join a small group of specialists who put money to work south of the Sahara.

Box 5 - Private Equity in Africa Private equity funds raised $557 million in Africa in 2005, a decrease of 42.7 per cent from 2004. In 2005 government and aid agencies were the largest source of capital. Over half the funds raised were for additional investments in companies by investors who had invested in the same companies at an earlier stage (so-called late stage funds). Direct and portfolio equity investment combined reached $948.3 million in 2005 across Africa, of which South Africa recorded the largest amount. The vast majority of total investments (96.5 per cent) was provided by domestic investors. Transportation services overtook consumer products to account for most of the value of investment, attracting 132 domestic investments. In 2006, a handful of emerging market specialists active in Africa raised new funds in international capital markets. Ethos closed subscriptions to a $750 million fund in October 2006, Aureos Capital, which already runs three funds which total $140 million, is aiming to raise $400 million and Citigroup also established a dedicated fund to invest at least $200 million in Africa. Source: African Venture Capital Association, 2006 Yearbook and other sources

On paper, Africa has attractions. It certainly needs capital. Local equity markets, however, are small. Excluding South Africa, sub-Saharan market capitalisation is about $75 billion, even after some eyewateringly speculative recent rises. Raising debt, © AfDB/OECD 2007

meanwhile, is a “major problem”, even for cashgenerative companies, says the founder of Celtel, a private equity-backed mobile company recently sold to Kuwait’s MTC for $3.4 billion. And private equity, out of the public eye, may handle risk better than most. African Economic Outlook

29

Overview

Macroeconomic Performances in Africa Economic Growth Africa as a whole exhibited real GDP growth of 5.5 per cent in 2006 – well above the long-term trend for the fourth consecutive year – and GDP per capita

grew by about 3.5 per cent. The main factors supporting this growth performance were strong external demand for oil and non-oil minerals, increased investment in these sectors, and good growing conditions for agriculture in most countries. The continuation of sound macroeconomic polices in most of the countries in the continent has also increased business confidence leading to a pickup in private investment generally.

Table 1 - Average Growth Rates of African Regions Region

30

(annual % change)

1998-2004

2005

2006(e)

2007(p)

2008(p)

North Africa West Africa Central Africa East Africa Southern Africa Total Africa

4.5 4.0 5.0 4.0 3.0 4.0

4.6 5.6 4.9 6.4 5.6 5.2

6.3 4.8 3.9 5.1 5.4 5.5

6.0 5.9 5.2 5.8 6.1 5.9

6.0 5.1 6.3 6.0 5.3 5.7

Memorandum Items: Net Oil exporters Net Oil importers

4.5 3.6

5.9 4.7

5.9 5.2

7.4 4.7

6.7 4.8

SANE * Countries Other Countries

3.8 4.1

5.2 5.3

5.1 6.0

5.4 6.5

5.2 6.2

* South Africa, Algeria, Nigeria, Egypt Note: Due to lack of data, these aggregates do not include Liberia and Somalia Source: Various domestic authorities; IMF World Economic Outlook and authors' estimates (e) and projections (p). http://dx.doi.org/10.1787/185107384555

Growth also appears set to accelerate somewhat on average in 2007, and to remain buoyant in 2008 notwithstanding the recent softening of commodity prices most of which are expected to weaken further in the course of 2007 and 2008. However, this continent-wide average masks considerable differences between net oil-exporting and other African countries, groupings that face very different challenges. The challenge for the former and for some non-oil mineral exporters is to ensure that a large proportion of the proceeds from the minerals sector are invested in infrastructure and human capital development to support their medium- and long-term needs for diversification. For many of the others, especially in the second half of 2007 and in 2008, it will be to contain inflationary pressures now running at doubledigit rates as a result of the recent oil price increases, and to finance or contain the expected increases in their trade deficits. African Economic Outlook

As in the previous two years, GDP growth was particularly strong in net oil-exporting countries, at 5.9 per cent in 2006, the same as in 2005, largely due to the increase in oil prices and, in some countries, increases in production as well. However, the growth differential between these and net oil-importing countries remains large with average GDP growth in the latter of 5.2 per cent in 2006 (4.7 per cent in 2005). This generally strong GDP growth performance is expected to strengthen somewhat in 2007, when the average real GDP growth rate for the continent as a whole is expected to be 5.9 per cent, with net oilexporting and net oil-importing countries exhibiting real GDP growth of 7.4 and 4.7 per cent, respectively – a growth differential of more than 2.5 per cent. The projections for 2008 are for slightly lower growth for the net oil exporters and about the same for the net oilimporters as in 2007. © AfDB/OECD 2007

Overview

These forecasts are based on a number of plausible but somewhat optimistic assumptions, suggesting that they are subject to significant downside risk. Apart from assuming continued moderate growth in the global economy, they also assume that oil prices stabilise at $60 per barrel in 2007 and 2008; that growing conditions in agriculture will be favourable in 2007 and 2008; that oil output will increase in 2007 as stability is restored to the Niger Delta region; that no new regional conflicts having significant macroeconomic impacts emerge; and that the worsening current account balances forecast for many of the net oil-importing countries will be fully financed. In this respect the implementation of debt relief agreements for a number of the HIPC countries that began in 2006 will continue to be particularly helpful. North Africa Real GDP growth in North African countries averaged 6.3 per cent in 2006, significantly higher than the 4.6 per cent registered in 2005. It is expected to remain high at.6 per cent, in both 2007 and 2008. The high growth rates recorded in 2006 were largely due to the exceptionally high growth rates estimated for Mauritania (13.9 per cent) and Sudan (12.1 per cent) mainly due to increases in oil and gas production, as well as strong growth in Morocco (7.3 per cent) due to a recovery of agricultural output with the ending of the drought, as well as in Egypt (6.8 per cent). The 2007 and 2008 growth rates in most North African countries are projected to be about the same as in 2006, or higher, sustained by high prices for oil and gas, and strong growth in tourism. West Africa Economic growth in the countries of West Africa was 4.8 per cent in 2006, substantially less than in 2005; it is projected to accelerate to 5.9 per cent in 2007 and to remain high, at 5.1 per cent in 2008. In the West African Economic and Monetary Union (WAEMU), consisting of Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo, economic performance continued to be negatively affected by the continued political turmoil in Côte © AfDB/OECD 2007

d’Ivoire – the largest economy within WAEMU. Growth also slowed in Senegal, due mainly to sharp reductions in the output of cereals and groundnuts, as well as industrial output, especially phosphates and fertiliser. The major positive development in the WAEMU was the sustained growth in agricultural production in several of them. In addition to buoyant agricultural output, Mali benefited from high gold prices, with the result that GDP growth remained high at 5 per cent in 2006 after an exceptionally strong 6.1 per cent in 2005. Within the five non-WAEMU members (The Gambia, Ghana, Guinea, Nigeria and Sierra Leone), Nigeria – by far the largest economy in West Africa – exhibited GDP growth of 5.3 per cent in 2006 down from 6.5 per cent in 2005 due to disruptions of oil production in the Niger Delta. Projections for 2007 indicate an acceleration of Nigeria’s growth rate to 7 per cent, mainly due to the recent increase in oil prices, but also to increased production. Guinea’s growth performance strengthened in 2006 (5 per cent up from 3.3 per cent in 2005), while Sierra Leone’s and Ghana’s performance continued to be relatively strong in 2006 (7.4 per cent and 6.1 per cent, respectively) with particularly good performance in cocoa production and processing. Central Africa Average GDP growth in Central Africa slowed to 3.9 per cent in 2006. Projections indicate an increase in real growth to 5.2 per cent in 2007 and an acceleration of growth to 6.3 per cent in 2008. The slower growth in 2006 was due mainly to an end of the rapid expansion of oil production in Chad and Equatorial Guinea. Thus, the trends among Central Africa’s ten countries are very different, with the Central African Republic, Rwanda and São Tomé and Principe showing clear upward trends, while Chad, the Republic of Congo, and Gabon are expected to exhibit GDP growth of only about 2 per cent, at least in 2007. Growth is projected to remain broadly at 2006 levels for the Democratic Republic of Congo (6.2 per cent) due mainly to donor-supported reconstruction efforts, and to accelerate in Burundi (6.6 per cent in 2007 up from African Economic Outlook

31

Overview

6.1 per cent in 2006). The projections for Cameroon and Equatorial Guinea show some strengthening of growth for 2007 and 2008. East Africa

32

Economic growth in East Africa averaged 5.1 per cent in 2006, and is projected to accelerate to 5.8 and 6 per cent in 2007 and 2008, respectively. Ethiopia, Tanzania, and Uganda continued to be the fastest growing countries within East Africa, growing at 5.9 per cent, 5.7 per cent, and 5.4 per cent, respectively, in 2006. All three countries are also projected to broadly maintain or increase these high growth rates in 2007 and 2008, exhibiting broad-based growth, but led in some cases (Uganda) by the agricultural sector. However, these forecasts are subject to considerable uncertainties due to the unstable political situation in some countries. The Comoros, Djibouti, Kenya, Madagascar and Mauritius, which have recently been exhibiting slow growth, are expected to experience an acceleration of GDP growth in 2007 and 2008, reaching about 5.2 per cent on average in this period. The growth prospects of Mauritius and Madagascar continue to be negatively affected by the increased competition from Chinese, Indian and Bangladeshi textile producers and the end of the Multi-Fibre Agreement. Eritrea is projected to improve its growth performance from 1.5 per cent in 2006 to 2 per cent and 3.3 per cent in 2007 and 2008, respectively, while in the Seychelles GDP growth is expected to be low as well. Southern Africa Economic growth in Southern Africa was 5.4 per cent in 2006, about the same as in 2005, reflecting rapidly increasing output from new oil fields in Angola and the coming on stream of a large number of mega-projects in the mining sector in Mozambique. In South Africa growth – at 5 per cent, its highest since the end of Apartheid – has been broad-based and mainly driven by domestic demand. In Malawi and Namibia growth increased as well in 2006, but it slowed in Botswana. In 2007 and 2008, Botswana is expected to grow by slightly more than 4 per cent per year, and Malawi and Namibia by about 5 per cent per year. In Zimbabwe, economic African Economic Outlook

activity continued to decline in 2006, contracting by about 5 per cent. The projections for South Africa indicate that GDP growth should remain robust at about 4.5 per cent in both 2007 and 2008, marking an important break from the relatively slow growth rates experienced over the past ten years. Overall, the average growth rate for Southern Africa is projected to increase from 5.4 per cent in 2006 to 6.1 per cent in 2007, reflecting the projected near doubling of Angola’s growth rate from 14.8 per cent in 2006 to 27 per cent in 2007 (largely due to rising oil sector activity in new oil fields, and to a lesser extent by increased diamond mining). Inflation Following the historically low inflation rate of 7.5 per cent in 2004, inflation in Africa increased to 8.8 per cent in 2005 and to 9.1 in 2006, largely due to the impact of increasing energy prices (although partially offset by lower prices for imports of manufactures), and by unfavourable weather conditions, especially in Southern and West Africa which raised food prices. This continent-wide average masks important differences between net oil-exporters and net oilimporters. The latter experienced an upward surge of inflation from 8.4 per cent in 2005 to 12 per cent in 2006, which is expected to increase further to 12.7 per cent in 2007 and to 12.9 per cent in 2008.Although low worldwide inflation still benefited countries with pegged exchange rates (such as CFA franc countries), this was far less the case in 2005 and 2006 than in earlier years as the inflation differential between some CFA countries and the Euro region increased considerably. However, there were only 4 countries (Angola, DRC, Guinea-Bissau, and Zimbabwe) that experienced inflation rates at or above 20 per cent in 2005, and the number remained the same in 2006 (DRC, GuineaBissau, São Tomé and Principe and Zimbabwe). The forecasts assume that monetary authorities will not need to tighten monetary policy significantly since oil prices are not expected to increase further. North Africa Inflation in North Africa fell back to 4.3 per cent in 2006 following a temporary increase to 5.9 per cent © AfDB/OECD 2007

Overview

Table 2 - Weighted Mean CPI Inflation of African Regions Region

(annual % change)

1998-2004

2005

2006(e)

2007(p)

2008(p)

North Africa West Africa Central Africa East Africa Southern Africa Total Africa

4.4 9.4 33.5 5.5 16.3 10.0

5.9 13.6 9.1 8.2 10.7 8.8

4.3 7.7 9.5 9.9 16.5 9.1

4.6 5.7 4.2 5.7 20.1 9.2

4.3 6.7 4.2 5.5 21.3 9.5

Memorandum Items: Net Oil exporters Net Oil importers

11.6 8.8

9.4 8.4

5.7 12.0

5.3 12.7

5.5 13.0

SANE * Countries Other Countries

6.3 14.5

7.1 10.9

4.8 14.2

5.3 13.8

5.3 14.2

* South Africa, Algeria, Nigeria, Egypt Note: Owing to lack of data, these aggregates do not include Liberia and Somalia. Source: Various domestic authorities; IMF World Economic Outlook and authors' estimates (e) and projections (p). http://dx.doi.org/10.1787/053866558216

in 2005 when inflationary pressures gained momentum in Algeria, Egypt, and Mauritania. Inflation slowed in Egypt (from 11.4 per cent in 2005 to 4.1 per cent in 2006) and in Mauritania (from 12.1 per cent in 2005 to 6.4 per cent in 2006). However, inflation increased in Tunisia (from 2 per cent in 2005 to 4.5 per cent in 2006) and to a lesser degree in Libya (from 6.9 per cent in 2005 to 8 per cent in 2006). The average rate of inflation in North Africa is projected to remain low in both 2007 and 2008. West Africa The average rate of inflation in West Africa declined to 7.7 per cent in 2006 after experiencing inflation of 13.6 per cent in 2005. Increases in the prices of both food, reflecting the impact of drought which provoked a regional food crisis, and fuel in many WAEMU countries had a negative impact on inflation. Nevertheless, the WAEMU countries, whose currencies are pegged to the Euro, still have a far lower average inflation rate than the member countries of the West African Monetary Zone (WAMZ)11, each of which has inflation rates of at least 5 per cent. In Guinea, inflation rates declined slightly from 31.1 per cent in 2005 to 25 per cent in 2006. The rate of inflation in

Nigeria also declined from 17.9 per cent in 2005 to 8.6 per cent in 2006. In Ghana inflation declined from 15.1 per cent in 2005 to 10.9 per cent in 2006 and in Sierra Leone inflation declined from 12 per cent in 2005 to 9.5 per cent in 20006. In The Gambia inflation rates were low in 2005 to 2006, at 3.2 and 2 per cent, respectively. Projections for 2007 are for large decreases in inflation rates, especially in Ghana and Guinea. Central Africa The average rate of inflation remained high in Central Africa at 9.5 per cent in 2006 largely due to continued high inflation in three countries: DRC (22 per cent), Rwanda (9.3 per cent) and São Tomé and Principe (19.8 per cent). In Burundi inflation dropped from 13.5 per cent in 2005 to 5 per cent in 2006 as weather conditions normalised; and inflation rates remained stable in the remaining Central African countries (Cameroon, the Central African Republic, the Republic of Congo, Equatorial Guinea, and Gabon). The projections for 2007 and 2008 indicate that inflation will decrease in Central Africa to 4.2 per cent, much closer to the convergence target of 3 per cent, largely due to a return to single-digit inflation rates in all countries except São Tomé and Principe.

11. Nigeria, Ghana, Sierra Leone, Guinea and Gambia.

© AfDB/OECD 2007

African Economic Outlook

33

Overview

East Africa Except for Djibouti, Madagascar and Seychelles, inflation in each of the other countries of East Africa increased from 2005 to 2006. As a result, the average rate of inflation in East Africa increased from 8.2 per cent in 2005 to 9.9 per cent in 2006. In Madagascar, where inflation had increased to 18.3 per cent in 2005 due to increases in both food and fuel prices, it decreased to 11.4 per cent in 2006, with the resumption of a normal rice harvest. In Uganda, inflation decreased from 8 per cent in 2004/05 to 6.6 per cent in 2005/06 with the ending of the drought. Mauritius, however, experienced an increase in inflation of 4 percentage points from 2005 to 2006. The outlook in East Africa for 2007 and 2008 is for gradual reductions in inflation rates in every country, except for Seychelles where inflation is expected to remain low at around 2 per cent. Thus, the average rate of inflation in East Africa is expected gradually to fall to 5.7 per cent and 5.3 per cent in 2007 and 2008, respectively. 34 Southern Africa Southern Africa’s experience was mixed in 2006, with 6 countries experiencing higher inflation rates and 4 countries experiencing stable or lower inflation rates. Reflecting the relative sharp decreases of inflation rates in Angola (which thanks to a less expansive fiscal

policy, together with currency appreciation, declined from 23 per cent in 2005 to an estimated 10 per cent in 2006) and accelerating inflation in Zimbabwe, the average inflation rate in Southern Africa accelerated to 16.5 per cent in 2006 from 10.7 per cent in 2005. Moreover the 2006 inflation rate exceeded 1 200 per cent in Zimbabwe, clearly pointing to hyperinflation; and inflation remained above 10 per cent in Angola, Botswana, Malawi and Mozambique, posing the risk of accelerating rates. In all countries where inflation has been high (except Zimbabwe) it is expected to return to single-digit levels in 2007, and to remain close to 5 per cent in Botswana, Lesotho, Namibia, South Africa and Swaziland.

Public Finances In 2006 the overall fiscal balance (including grants) of the group of net oil-exporting countries exhibited a surplus equivalent to 8.2 per cent of GDP due mainly to higher oil prices but also to increases in production. The group of net oil-importing countries increased its overall deficit slightly to the equivalent of 2.3 per cent of GDP in 2006 from 1.9 per cent in 2005. The low deficit of the net oil-importing countries reflects good macroeconomic management and a higher level of grants, including a portion provided in the form of debt relief. On the one hand, projections for 2007 show a

Table 3 - Average Budget Balance to GDP Ratio Region

1998-2004

2005

2006(e)

2007(p)

2008(p)

North Africa West Africa Central Africa East Africa Southern Africa Total Africa

-1.4 -1.9 -0.6 -3.5 -2.6 -2.0

3.2 5.5 6.5 -2.9 0.4 2.4

5.0 5.7 8.3 -4.7 0.2 3.2

5.3 2.6 7.7 -3.4 0.2 2.7

4.9 0.5 7.8 -3.4 -0.3 2.0

Memorandum Items: Net Oil exporters Net Oil importers

-0.8 -3.1

7.0 -1.9

8.2 -2.3

7.3 -2.2

6.1 -2.4

SANE * Countries Other Countries

-1.8 -2.3

2.5 2.3

2.9 3.5

1.4 4.1

0.6 3.6

* South Africa, Algeria, Nigeria, Egypt Note: Due to lack of data, these aggregates do not include Liberia and Somalia. Source: Various domestic authorities; IMF World Economic Outlook and authors' estimates (e) and projections (p). http://dx.doi.org/10.1787/202878646475

African Economic Outlook

© AfDB/OECD 2007

Overview

large but declining fiscal surplus for the group of net oil-exporting countries (reaching 7.3 per cent of GDP) and then declining somewhat in 2008. On the other hand, the average deficit of the group of net oilimporting countries is expected to remain at about the same level as in 2006 in both 2007 and 2008. North Africa In North Africa the average fiscal balance exhibited a surplus equivalent to 5 per cent of GDP in 2006, as the largest oil-exporting countries in the region, Algeria and Libya, increased their surpluses to 13 per cent and 42 per cent, respectively. Egypt, Mauritania, Morocco and Tunisia, on the other hand, experienced little change in their fiscal deficits in 2006. Sudan is estimated to have eliminated the small deficit exhibited in 2005. In 2007 and 2008, nearly every country is projected to improve its fiscal balance except for Algeria whose fiscal surplus is expected to decrease somewhat. West Africa In 2006, fiscal balances deteriorated in 4 countries in West Africa. However, The Gambia, Guinea-Bissau, and Sierra Leone registered substantial reductions in their deficits. In spite of some improvement, 6 countries registered deficits of 4 per cent of GDP or more (Cape Verde, The Gambia, Ghana, Guinea-Bissau, Niger, Senegal). The projections for 2007 and 2008 are for stable or improving overall fiscal balances in most countries. In the case of Nigeria, however, the currently very high fiscal surplus is expected to decrease in both 2007 and 2008. Central Africa In 2006 the average fiscal position in Central Africa improved substantially for the second year in a row as all countries but one reduced their deficits or increased or maintained large surpluses. Chad exhibited a small deterioration. The Republic of Congo, Equatorial Guinea and Gabon also improved their fiscal balances significantly, and São Tomé and Principe continued to register a large surplus in 2006 due to revenue received from oil exports. Projections for 2007 and 2008 show © AfDB/OECD 2007

little change in Central Africa’s average fiscal surplus as a percentage of GDP. East Africa Fiscal balances worsened in East Africa in 2006, reaching -4.7 per cent of GDP. The deterioration was largely due to increased fiscal deficits in East Africa’s three largest economies, Kenya, Ethiopia and Tanzania, accounting for about two-thirds of East Africa’s GDP. In Kenya, fiscal balances worsened from a small surplus of 0.1 per cent in 2005 to a deficit of 3.5 per cent in 2006; in Ethiopia, the fiscal deficit increased from 4.7 per cent in 2004/05 to 7.4 per cent in 2005/06; while Tanzania’s deficit increased from 4.6 per cent in 2005 to 6 per cent in 2006. In 2007 fiscal deficits are expected to improve somewhat and to remain at about the same levels in 2008. Southern Africa The average fiscal balance of the countries in Southern Africa exhibited little change in 2006 with reduced deficits in Malawi, Namibia, and Zimbabwe offsetting reduced surpluses in Angola and Lesotho. The projections for 2007 and 2008 show little change for the region as a whole. However, the fiscal deficits of Mozambique and Swaziland are expected to worsen, while the fiscal surplus of Namibia is expected to give way to a small deficit. Balance of Payments In 2006, Africa’s average current account balance exhibited a large surplus equivalent to 4.7 per cent of GDP. This overall figure, however, masks large differences among countries. On the one hand, net oil-exporting countries recorded a current account surplus of 12.8 per cent in 2006 (up from 11.7 per cent in 2005); on the other hand, the group of net oilimporting countries experienced a significant average current account deficit of 3.9 per cent of GDP in 2006 compared with an average of 2 per cent in the period 1998-2004. These developments in current account balances were also far more homogenous within the group of net oil-exporting countries than in the group African Economic Outlook

35

Overview

of net oil-importing countries. Among the latter, only two countries improved their current account balances significantly (Botswana by 2.5 percentage points as a share of GDP and Mauritania by 8.7 percentage points). The surplus in the current account balances of net oil-

exporting countries is projected to decrease slightly in 2007 and further in 2008. Meanwhile the average current account deficits of the net oil-importing countries in 2007 and 2008 are expected to be about the same as in 2006.

Table 4 - Average Ratio of Current Account Balance to GDP Region

1998-2004

2005

2006(e)

2007(p)

2008(p)

North Africa West Africa Central Africa East Africa Southern Africa Total Africa

2.9 -3.6 -4.0 -3.3 -1.8 -0.4

10.5 5.3 0.9 -5.5 -2.4 3.6

12.5 3.2 5.2 -6.1 -1.3 4.7

11.9 4.1 2.4 -6.7 -1.4 4.3

10.3 3.7 4.7 -7.1 -3.4 3.1

Memorandum Items: Net Oil exporters Net Oil importers

1.4 -2.0

11.7 -3.9

12.8 -3.9

12.1 -3.9

10.0 -4.3

SANE * Countries Other Countries

0.7 -1.8

4.9 2.1

5.0 4.4

4.1 4.6

2.9 3.4

* South Africa, Algeria, Nigeria, Egypt Note: Due to lack of data, these aggregates do not include Liberia and Somalia. Source: Various domestic authorities; IMF World Economic Outlook and authors' estimates (e) and projections (p). http://dx.doi.org/10.1787/431735236880

36 Africa’s overall balance of payments has benefited from increased foreign direct investment flows and significantly reduced debt service payments in many heavily indebted poor countries (HIPCs) (see details in previous section). As of end-2006, 17 African countries had reached their completion points and 9 additional African countries had reached the decision point under the enhanced HIPC Initiative. North Africa Northern African countries continued to display large differences in their current account balances in 2006. While Algeria and Libya increased their trade surpluses to about 24 per cent and 48 per cent of GDP, respectively in 2006, Egypt and Morocco registered small and declining surpluses, and Tunisia’s deficit declined slightly. Mauritania made significant progress in reducing its current account deficit from nearly 50 per cent in 2005 to 37 per cent in 2006, while Sudan reduced its current account deficit from 10.6 per cent in 2005 to 5.9 per cent in 2006. Largely due to improvements in Algeria, Libya and Mauritania, North Africa’s current account surplus improved from 10.5 per African Economic Outlook

cent in 2005 to 12.5 per cent in 2006. In 2007 and 2008 the current account balances of Libya, Mauritania, Morocco and Sudan are expected to improve, while those of Algeria, Egypt and Tunisia are expected to worsen. West Africa In 2006, 11 countries in West Africa registered current account deficits ranging from about 4 to 14 per cent of GDP. Smaller deficits were registered only in Cote d’Ivoire and Mali. The average current account balance in West Africa is dominated by Nigeria where the current account surplus was 8 per cent of GDP in 2006 down from about 12 per cent in 2005. Little change is expected in 2007 or 2008 for most of the deficit countries. Central Africa In 2006, the average current account balance in Central Africa registered a further improvement reaching a surplus equivalent to 5.2 per cent of GDP, largely due to further large increases in the nominal value of oil © AfDB/OECD 2007

Overview

exports, especially in Chad, the Republic of Congo and Gabon. Four countries (Burundi, the DRC, Rwanda and São Tomé and Principe) registered deteriorations in their current account balances, while the surplus of Equatorial Guinea remained high. In 2007 and 2008 the current account surpluses of most net oilexporting countries in Central Africa are expected to decrease slightly. East Africa In 2006 the average current account deficit in East Africa widened to reach 6.1 per cent of GDP compared with an average of 3.5 per cent for the period 19982004. This was largely due to the sizeable deterioration between 2005 and 2006 in the deficits of Ethiopia (from 8.6 per cent of GDP in 2005 to 11.5 per cent of GDP in 2006), Madagascar (from 10.1 per cent of GDP in 2005 to 16.8 per cent in 2006) and Mauritius (from 5.2 per cent of GDP to 7.4 per cent). Current account deficits also widened in Kenya and Uganda. Tanzania reduced its current account deficit from 7.6 per cent of GDP in 2005 to 5.7 per cent in 2006. Prospects for 2007 and 2008 are for some further worsening of current account deficits reaching 6.7 per cent and 7.1 per cent of GDP in 2007 and 2008, respectively. Southern Africa Among the countries in Southern Africa, Angola experienced an increase in its current account surplus to 14.5 per cent of GDP in 2006, up from 12.8 per cent in 2005, as a result of rising oil production and prices and of increased diamond production. Botswana registered an increase in its current account surplus from 8.1 per cent in 2005 to 8.8 per cent in 2006, and Namibia also registered an increase in its current account surplus from 5.7 per cent of GDP in 2005 to 10 per cent in 2006. The current account deficit of Mozambique was reduced substantially in 2006, thanks to buoyant aluminium exports. Nevertheless, a new wave of mega-projects is expected to result in a strong increase in capital goods imports and a renewed deterioration of the current account balance in 2007 and 2008. Current account deficits in Lesotho and South Africa © AfDB/OECD 2007

worsened slightly in 2006, but deficits fell in Zambia and Zimbabwe. South Africa’s current account balance is projected to remain nearly stable in 2007 and 2008, while Angola’s very high current account surplus is projected to narrow slightly in 2007 and then to decrease substantially in 2008 with a slowdown in the growth of oil exports.

The Millennium Development Goals: Progress Report In making progress towards achieving the Millennium Development Goals (MDGs) Africa is lagging behind other developing regions. On current trends, the average number of targets likely to be met per country is 2.4 out of 9 in Sub-Saharan Africa and 7.4 in Northern Africa. Nevertheless, those countries that have adopted appropriate economic policies, coherent poverty reduction strategies and have a record of good governance have made considerable progress. Two main issues appear of particular importance to help African countries improve their social indicators. The first one relates to foreign aid. Arguing that large amounts of well-targeted aid could produce some remarkable success stories the UNCTAD report Economic Development in Africa 2006 calls for aid to be dramatically increased, depoliticised and distributed multilaterally instead of being concentrated on a relatively small number of countries. The second issue is the magnitude of the HIV/AIDS pandemic in Africa which affects all aspects of socio-economic life, leading to a decline in economic growth, productivity and many social indicators. These effects flow from the erosion of the most productive cohort of the labour force which reduces total labour input, depresses fiscal revenues and deepens the social crises of families. Based on World Bank and UNDP data, Table 5, Main Progress Towards Achieving the MDGs, shows only the countries that have already achieved or are on track to achieve the considered target. A country is “On track” when the actual growth rate of the indicator is equal or higher than the required growth rate to achieve the target. One should note that any situation can be reversed in the future; the trend from the baseline African Economic Outlook

37

Overview

scenario to 2015 is not necessary linear. In other words, even countries that have not achieved or are not on track to achieve the target this year, could reach it in the near future. The satisfactory performance ratio is the percentage of countries that has achieved or is on track to achieve the target out of the 53 African countries. Blanks may also indicate missing data. Goal 1 – Reducing extreme poverty and hunger by half Monetary poverty

38

This first target refers to halving, between 1990 and 2015, the proportion of people whose income is less than one dollar a day. Although Northern Africa (Algeria, Egypt, Libya, Morocco and Tunisia) and some SubSaharan countries (Botswana, Burkina Faso, Cameroon, Ghana, Lesotho, Mauritius, South Africa and Uganda) are making good progress, other countries are not yet making satisfactory progress. Overall, the poverty rate in Sub-Saharan Africa has declined marginally, from 44.6 per cent in 1990 to 44 per cent in 2002.

2015. Millions of children presently are not attending school, especially in rural areas, more than half of them girls. All North African countries are on track to reach the target with an average primary enrolment ratio of 94 per cent (64 per cent in Sub-Saharan Africa). Countries that are “On track” have a ratio greater than 85 per cent and increasing. Completion rates Unfortunately, increased enrolment in primary school has not often translated into increased completion rates. Children who have not completed a full course of primary education would not have become fully literate. The three countries (Egypt, Mauritius, and Seychelles) that have achieved the target had a completion rate of at least 99 per cent in 2004.The percentage of countries with a satisfactory performance ratio for completion rates is 22.6 per cent. However, considering both targets (primary enrolment and completion rates), only Algeria, Cape Verde, Egypt, Mauritius, Seychelles, Tanzania and Tunisia (13.2 per cent of African countries) are likely to ensure that all children complete primary school by 2015.

Hunger Goal 3 – Eliminating gender disparity In Africa, the proportion of people who suffers from hunger has declined from 31.4 per cent in 1990/92 to 29.1 per cent in 2001/03. Hunger is still widespread, particularly in rural Africa. However, over the same period 20 countries managed to reduce the proportion of people suffering from hunger by at least 22 per cent, including three countries that have achieved the target of a 50 per cent reduction. The prevalence of the undernourished as a percentage of the population has decreased from 53 per cent to 26 per cent in Djibouti, from 10 per cent to 5 per cent in Gabon and from 37 per cent to 12 per cent in Ghana. Goal 2 – Achieving universal primary education Primary school enrolment Only 24.5 per cent of African countries are likely to achieve universal primary education by African Economic Outlook

One of the challenges for many African countries is to ensure access to education for the girl-child. For the female primary school enrolment ratio as a percentage of the male ratio, the percentage of countries with satisfactory performance (62.3 per cent) is the highest of the nine targets. It was calculated by considering all the countries that had a ratio of greater than 85 per cent that was increasing. However, in secondary education, only 37.7 per cent of countries are on track. Only six countries (Botswana, Lesotho, Libya, Mauritius, Namibia, Seychelles) have achieved gender equality in both primary and secondary levels of education as indicated in the United Nations Millennium Declaration “preferably by 2005”. Thirteen other countries seem able to reach both targets by 2015 (Algeria, Cape Verde, Egypt, Ghana, Kenya, Madagascar, Rwanda, São Tomé and Principe, South Africa, Sudan, Swaziland, Tunisia and Zimbabwe). © AfDB/OECD 2007

Overview

Box 6 - Women in Sub-Saharan Africa According to recent estimates, women provide approximately 70 per cent of agricultural labour and produce about 90 per cent of all food. Women’s economic activity rate, which measures the percentage of people who furnish the supply of labour for the production of economic goods, ranks highest compared to other regions of the world (including the OECD countries) with a value of 61.9. However, women are predominantly employed in the informal sector and/or they occupy low-skill jobs. This can be illustrated by considering the percentage of women in wage employment in the non-agricultural sector, which scores lowest among all regions of the world with a value of only 8.5 per cent. The weak status of women in the formal economy of Sub-Saharan Africa has many reasons. Insufficient access to the key resources of education and health are two important contributing factors. As is illustrated by the Gender, Institutions and Development Data Base (GID-DB) of the OECD Development Centre, primary education of females is still at a strikingly low rate of 67 per cent despite international endeavours such as the second Millennium Development Goal to achieve universal primary education by the year 2015. Unsurprisingly, illiteracy remains a major challenge. Among those above the age of 15, only 51 per cent of women are able to read and write compared to 67.1 per cent of men. Improvements in maternal mortality also fall far short of international objectives. The African value of 866 deaths per 100 000 live births – partly due to dismal medical services which only guarantee 50.9 per cent of all births being attended by skilled health personnel – is alarming and far worse than in any other region of the world. Apart from these relatively obvious factors, the GID-DB also helps to identify and understand more hidden reasons that obstruct the socio-economic development of women. The comprehensive data base compiles for the first time in a coherent and systematic fashion information on inequalities that are based on social norms and traditions. The prevailing family code in many African countries, for example, discriminates against women in preventing daughters from having an equal share of inheritance or parental authority over their children after a marriage is dissolved. Similar to South Asian countries, girls often find themselves in arranged or even forced marriages, into which they enter at very young ages. Compared to an OECD average of 27.4 years, girls in Sub-Saharan Africa marry at only 21.3 years. What is more, 28 per cent of all girls before the age of 20 have been married at least once in their life. Polygamy is pervasive in many Sub-Saharan African countries and property rights over land are not granted equally to men and women. Although women may have the right to obtain a bank loan on paper, customs still prevent females from having equal access to credit in many rural areas in Africa. Other traditions such as female genital mutilation – which in some countries is reported to affect more than 95 per cent of all women (e.g. in Guinea, Mali, Somalia and Eritrea) – are not only a violation against women’s basic human rights but also impairs their health status and consequent chances in the labour market. Highlighting the important impact of social norms and traditions may help to design better policies that can improve the socio-economic status of women in the long-run. See www.oecd.org/dev/institutions/GIDdatabase for further information. Note: Sub-Saharan Africa as defined by the World Bank (including Mauritania and Sudan).

Goal 3 also focuses on women’s empowerment in the areas of employment and political decision making. On the political front, the number of women in parliaments has constantly increased over the years. However, they are still under-represented in politics and at the highest level of economic institutions and sectors. Over the period 1990-2006, the share of women in parliament has increased from 7 per cent to 16 per cent in Sub-Saharan Africa and from 3 per cent to 7 per cent in Northern Africa. Rwanda is the only African country which has come close to parity. © AfDB/OECD 2007

Goal 4 – Reducing child mortality In Africa, progress towards reducing under-five mortality rates has been painfully slow. With only 20 per cent of the world’s children under age five, the region accounted for half of total child deaths worldwide. The percentage of countries exhibiting satisfactory performance is particularly low (15.1 per cent) and even lower (5.7 per cent) in sub-Saharan Africa. Only three countries in sub-Saharan Africa (Cape Verde, Comoros, and Eritrea) have managed to African Economic Outlook

39

Overview

reduce under-five mortality rate by at least 37 per cent between 1990 and 2004. Due to the HIV/AIDS pandemic or conflicts, several other countries have even slipped back over the period 1990-2004 (Botswana, Central African Republic, Côte d’Ivoire, Equatorial Guinea, Kenya, Rwanda, South Africa, Swaziland and Zimbabwe). The majority of children’s deaths can be attributed to preventable diseases such as polio, smallpox or parasites; this is due, at least in part, to that fact that the percentage of children receiving vaccination was only 65 per cent in sub-Saharan Africa in 2004. Goal 5 – Improving maternal health

40

Only 20.8 per cent of countries are on track to meet the target of reducing the maternal mortality ratio by three-quarters by 2015 and no country has yet achieved the target. In 2000, more than 1 500 women per 100 000 live births died during pregnancy or delivery in Angola, Malawi, Niger, Sierra Leone and Tanzania due to limited access to health care. The provision of skilled care at childbirth is one of the key elements necessary to reduce maternal mortality. However, in sub-Saharan Africa the proportion of deliveries attended by skilled health care personnel has increased by only 4 percentage points, from 42 per cent to 46 per cent, between 1990 and 2004; and inequality between urban and rural care at delivery is particularly significant. In contrast, the proportion has increased from 40 per cent to 71 per cent in Northern Africa. Goal 6 – Combating HIV/AIDS, malaria and other disease The goal of halting and reversing the spread of HIV/AIDS, malaria, tuberculosis and other major diseases by 2015 appears daunting in Africa. Concerning HIV/AIDS, although some prevention efforts are proving successful in some places (urban areas of Burkina Faso, Kenya, and Zimbabwe), deaths and new infections continue to increase. The world-wide epidemic remains centred in Sub-Saharan Africa. In 2005, the region accounted for 64 per cent of HIV-positive adults worldwide, and 90 per cent of children under 15 living with the virus. In sub-Saharan Africa, more than African Economic Outlook

12 million children were AIDS orphans and 59 per cent of HIV-positive adults were women. The apparent stabilisation of the HIV prevalence rate in Sub-Saharan Africa, at about 6 per cent, reflects the fact that as new people acquire the virus, nearly the same number die from AIDS. Concerning tuberculosis, Table 5 indicates that 10 countries (among which six Sub-Saharan countries) are on track to halve the spread of the disease by 2015. However, new tuberculosis cases are on the rise, not only because they are associated with HIV. Excluding people who are HIV-positive, the number of new tuberculosis cases per 100 000 has increased from 148 to 281 in Sub-Saharan Africa between 1990 and 2004. Concerning malaria, the fight against the disease has taken off with the increased availability of insecticidetreated mosquito nets and effective anti-malaria drugs. However, disparities between rural and urban areas in sub-Saharan Africa remain large. Goal 7 – Ensuring environmental sustainability Goal 7 embodies reversing the loss of environmental resources, along with provision of safe water, adequate sanitation and decent housing. Poverty across Africa has led to continued loss of forests and other precious environmental resources. The proportion of land area covered by forests has decreased from 29 per cent in 1990 to 27 per cent in 2005 in Sub-Saharan Africa. The conversion of forests to agricultural land and the use of fuel wood for heating, cooking and lighting have caused extensive deforestation. This in turn has increased drought and flooding. Sub-Saharan Africa has made little progress towards achieving the target of improving the lives of at least 100 million slum dwellers. During the period 1990-2001, the number of people living in slums increased at an annual average rate of 4.6 per cent. These families face overcrowding, inadequate housing and a lack of water and sanitation. However, there has been progress towards meeting the target of halving by 2015 the proportion of people without sustainable access to safe drinking water and basic sanitation. Five countries have already achieved the target for improving access to safe drinking water (Egypt, Malawi, Mauritius, Namibia and Tunisia), and © AfDB/OECD 2007

Overview

15 countries are “On track”, bringing to 37.7 the percentage of countries with a satisfactory performance. Concerning sanitation, progress has been much slower. In sub-Saharan Africa the proportion of population using improved sanitation increased on average, from 32 per cent to 37 per cent between 1990 and 2004, compared to the target for 2015 of 66 per cent. Rapidly growing populations and wide disparities between rural and urban areas pose daunting challenges to fully achieving the drinking water and sanitation targets. Goal 8 – Developing a global partnership for development This broad goal encompasses partnerships between developed and developing countries through aid, debt relief, trade, procurement of drugs, creation of work, exchange of new technologies, etc. Official development assistance (ODA) to Africa has started to increase since 2001. It recovered from a low of $15.3 billion in 2000 to $26.5 billion in 2004. In 2005, debt relief accounted for three quarters of the aid increase following the G8 Summit in July 2005 regarding debt cancellation. Other forms of aid rose by 9 per cent in 2005 and donors have pledged to double it by 2010. Unfortunately, debt relief as well as emergency and disaster relief will not necessarily release more money for poverty reduction and longterm development. Access to essential drugs has significantly expanded in Sub-Saharan Africa, especially those for treating HIV following availability of generic drugs. The number of people on antiretroviral therapy has increased from 100 000 in 2003 to 810 000 in 2005. Job prospects for youth have not kept pace with population growth both in sub-Saharan Africa and in Northern Africa: the rate of youth unemployment has increased from 18 per cent in 1995 to 18.3 per cent in 2005 in the former and from 33.9 per cent to 34.5 per cent in the latter. As regards international trade, producer subsidies in developed countries, and tariffs and quotas on imports, especially on strategically important categories, such as clothing and farm products, still restrict access for African products. The challenge of the ongoing Doha trade negotiations is to further reduce such trade barriers. © AfDB/OECD 2007

Governance and Political Issues Since the early 1990s, important progress has been recorded in strengthening democracy, reinforcing the judiciary and media, and lessening armed conflicts. The promotion of good governance has also become a mainstay in the policy dialogue between African governments and international donors. Nonetheless, few African political regimes have met the minimum requirements of representative democracy and the process of democratisation often suffers from breakdowns and setbacks to varying degrees of severity. In many countries the press is still controlled; and corruption is often perceived as endemic and regarded as one of the major hindrances to economic and human development. Moreover, while civil and international wars are less frequent and less intense than in the past, Africa remains the world’s most unstable region. Conflicts and Political Troubles The AEO political troubles indicator (reported in the Statistical Annex to this volume) shows a continuation in 2006 of the long-term decline in political instability that has been observed since 2002. In Algeria political troubles have dramatically dropped since 2001, and in Ethiopia and Kenya there has been an important and recent decrease in ethnic clashes. In Uganda, the government and the Lord’s Resistance Army (LRA) rebels signed an historical truce in August 2006, which marked a cessation of hostilities and the beginning of peace talks between the two sides, although the latter soon came to a halt. In a positive development for Côte d’Ivoire, President Gbagbo and the chief of the rebels, Guillaume Soro, signed an agreement on 4 March 2007. This agreement, which came after months of negotiations and is known under the name of “Accord Politique de Ouagadougou”, possibly constitutes the first concrete step towards the end of the crises that have beset the country during the past four years. More generally, the decrease of political instability in the continent is reflected, among other things, by the number of state-based armed conflict in sub-Saharan Africa falling from 13 in 2002 to 5 in 2005, while reported deaths decreased from 4741 to 1851 over the African Economic Outlook

41

African Economic Outlook

102 161 163 131 174 169 144 106 172 171 132 140 167 164 148 111 120 157 170 124 155 136 160 173 152 149 999

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia

HDI Rank

Indicators

Targets

42

Ensure that all children can complete primary school

Halve the % of people suffering from hunger

© AfDB/OECD 2007

On track

Achieved On track

Achieved

On track Achieved On track

On track

On track

On track

On track On track

On track

On track

On track

On track

On track On track Achieved

On track

On track

On track

Net primary Children reach enrolment ratio grade 5 (%) (% of grade 1)

Achieve universal primary education

Undernourished people (%)

Goal 2

Goal 1

Eradicate extreme poverty and hunger

On track

On track Achieved

On track Achieved

On track

Achieved

Achieved

On track Achieved Achieved On track

On track On track

On track On track

On track

Achieved

Achieved

On track

On track

On track

On track

On track

Under five mortality rates (per 1000 lives)

Female Female primary secondary ratio as % of ratio as % of male ratio male ratio On track

Reduce by 2/3 under 5 mortality rates

Reduce child mortality

Goal 4

Eliminate Gender disparity in all levels of education

Promote gender equality and empower women

Goal 3

On track

On track On track On track On track

On track

On track

On track

On track

Maternal mortality ratio (per 100 000 live births)

Reduce maternal mortality by 3/4

Improve maternal health

Goal 5

Goal 7

On track

On track

On track

Tuberculosis incidence (per 100 000 people)

Halt and reverse spread of Tuberculosis

On track

On track

On track

Achieved

On track

On track On track

On track On track On track On track

Access to improved safe water (%)

Halve the % of people without access to safe water

Ensure Combating environmental HIV/AIDS, sustainability malaria and Target other disease

Goal 6

Table 5 - Progress Towards Achieving the Millennium Development Goals

6 of 9 1 of 9 1 of 9 5 of 9 1 of 9 2 of 9 2 of 9 5 of 9 1 of 9 2 of 9 3 of 9 3 of 9 0 of 9 3 of 9 2 of 9 9 of 9 2 of 9 3 of 9 2 of 9 2 of 9 2 of 9 5 of 9 1 of 9 0 of 9 3 of 9 4 of 9 0 of 9

Number of targets to be achieved

Overview

© AfDB/OECD 2007 0 13 24.5%

3 17

37.7%

Satisfactory Performance Ratio

On track

11 22 62.3%

22.6%

On track

3 9

On track On track On track On track On track Achieved On track On track

On track Achieved On track On track Achieved

Achieved

On track Achieved On track

Achieved On track Achieved

On track

On track

On track

On track

Achieved

On track

On track

On track

Achieved

On track

On track On track

On track

On track

On track On track

On track

On track

On track On track On track

Achieved On track

Libya Madagascar Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

37.7%

13 7

On track

Achieved

Achieved On track Achieved

Achieved Achieved

On track Achieved

Achieved

Achieved

Achieved On track

5 15 37.7% 18.9% 20.8%

15.1%

Achieved On track

On track

On track

On track

On track

0 10

On track

On track

On track

Achieved

Achieved

Achieved

0 11

On track

On track

On track On track

On track

On track

0 8

On track

On track

On track

5 of 9 3 of 9 4 of 9 1 of 9 2 of 9 6 of 9 4 of 9 1 of 9 5 of 9 0 of 9 2 of 9 4 of 9 5 of 9 2 of 9 6 of 9 1 of 9 0 of 9 4 of 9 2 of 9 2 of 9 4 of 9 1 of 9 7 of 9 2 of 9 2 of 9 2 of 9

http://dx.doi.org/10.1787/811258553025

Sources: Author's calculations based on data from UNDP (2006) Human Development Report, Oxford University Press, New York and World Bank (on line) World Development Indicators, Washington, D.C.

64 143 166 175 153 63 123 168 125 177 159 158 127 156 47 176 999 121 141 146 162 147 87 145 165 151

Overview

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43

Overview

same period. There has also been a large decline in the number of countries in the region experiencing statebased conflict over this period from 11 to 412. Despite this generally positive evolution, some countries experienced increasing troubles in 2006. In Chad, the tensions generated by the neighbouring Darfour crises and by internal opposition to the regime have erupted in a coup attempt and an outbreak of civil strife. In Nigeria, several rebel attacks against oil platforms and kidnappings of firms’ foreign staff added to political tensions, which were already increasing with the approach of general elections. Finally, DRC is still experiencing a difficult political transition, which could hopefully lead

to the end of the civil war. In February 2007, the UN Security Council renewed the mandate of the MONUC, United Nations Mission in the Democratic Republic of the Congo, (in place since November 1999) which provides for assistance to prevent and manage conflict, support state institutions, monitor human rights abuses and enforce the arms embargo. MONUC is the world’s largest and most expensive peacekeeping operation. Armed conflicts remain the strongest threat to democracy and human rights, and violent conflicts in relation to the number of states remain higher in subSaharan Africa than anywhere else13. In 2006, as in the previous year, 74 political conflicts14 were recorded with

Figure 8 - Political Troubles in Africa, 1996-2006 Political troubles

Trend

600

44

500

400

300

200

100

0 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Note: the indicator has been calculated on the basis of 25 countries: Algeria, Botswana, Burkina Faso, Cameroon, Chad, Côte d’Ivoire, Egypt, Equatorial Guinea, Ethiopia, Gabon, Ghana, Kenya, Mali, Mauritius, Morocco, Mozambique, Namibia, Nigeria, Senegal, South Africa, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe. Source: Based on Appendix Table 21. http://dx.doi.org/10.1787/217725660146

12. According to Human Security Centre (2006), Human Security Brief 2006. Note that some countries have more than one conflict. 13. Heidelberg Institute for International Conflict Research (2006), Conflict Barometer 2006. 14. According to Conflict Barometer a conflict is “the clashing of interests (positional differences) over national values of some duration and magnitude between at least two parties (organised groups, states, groups of states, organisations) that are determined to pursue their interests and win their cases. A conflict is considered to be a severe crisis if violent force is repeatedly used in an organised way. A war is a type of violent conflict in which violent force is used with a certain continuity in an organised and systematic way. The conflict parties exercise extensive measures, depending on the situation. The extent of destruction is massive and of long duration”.

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three conflicts ending in 2005, and three new ones emerging in 2006. No conflict ended in 2006. Of these 74 conflicts, two were wars (Somalia and Sudan) and 13 were severe crises. Thus, 15 were characterised by a high level of violence, compared to nine in 2005. This increase was largely due to the re-emergence of regional conflicts. Besides the Darfour crises, the Horn of Africa showed ominous signs of breakdown, with Somalia experiencing all-out civil war, Eritrea arming the Union of Islamic Courts, and Ethiopian troops entering Somalia to restore the transitional federal government.

with the Western African Standby Brigade, building on the peacekeeping experience gained by the ECOMOG force in Sierra Leone, Liberia, and Côte d’Ivoire. The European Union has extended $330 million in aid to the force, which is also benefiting from the Global Peace Operations Initiative (GPOI), a multilateral, five-year programme led by the United States to train and equip 75 000 peacekeeping troops, a majority of them African, by 2010. The Political Stance

In 2002, the Durban Summit of the African Union endorsed the establishment of the African Standby Force (ASF) as one of the cornerstones of a new African security edifice. Phase two of ASF force development has begun and will run until June 2010. During this time, AU protocols state that the force will develop the capacity to manage complex peacekeeping operations, while the five regions will continue to develop the capacity of their own forces. Progress is more advanced

In 2006, there was no improvement in the indicator of political hardening (as defined in the statistical annexes to this volume), as the sharp deterioration in the political climate in a few countries offset the smaller improvements in many others. A hardening of the political stance has been provoked by the outburst of new conflicts (such as in Chad), by the slow progress in resolving ongoing crisis (such as Côte d’Ivoire), sometimes by the holding of elections (such as in 45

Figure 9 - Political Hardening in Africa, 1996-2006 Hardening of the regime indicator

Trend

250

200

150

100

50

0 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Note: the indicator has been calculated on the basis of 25 countries: Algeria, Botswana, Burkina Faso, Cameroon, Chad, Côte d’Ivoire, Egypt, Equatorial Guinea, Ethiopia, Gabon, Ghana, Kenya, Mali, Mauritius, Morocco, Mozambique, Namibia, Nigeria, Senegal, South Africa, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe. Source: Based on Appendix Table 23. http://dx.doi.org/10.1787/488128413665

© AfDB/OECD 2007

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RDC). In Guinea, a series of strikes that started towards the end of 2006 provoked a harsh response from the government in early 2007. The repressive means used

by the authorities caused the deaths of many civilians who were demonstrating for the resignation of the president, and raised concerns that the violence might

Table 6 - Political Governance Indexes for African Countries, 2005 and 2006 Country

46

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Central A Rep. Chad Congo Rep. of Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Libya Madagascar Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

Political Rights and Change from Civil Liberties 2006 (ranking) 2005 (value) 148= 148= 64= 64= 118= 111= 169= 130= 148= 140= 169= 169= 140= 148= 176= 176= 140= 140= 130= 52= 148= 111= 90= 80= 111= 185= 90= 118= 64= 140= 1= 130= 111= 64= 90= 118= 148= 64= 80= 90= 111= 176= 52= 185= 169= 111= 148= 148= 130= 118= 176=

0 0 0 0 -0.5 -1 0 -1 0 0.5 0 0 0 0 0 0 0 0.5 0.5 -0.5 0 -0.5 0 0 -0.5 0 0 0 0 -0.5 0 0 0 -0.5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Press Freedom 2006 (ranking)

Change from 2005 (value)

126 91 23 53 70 125 112 62 124 73 142 n/a 121 133 n/a 166 160 114 149 34 109 n/a 118 n/a 84 152 66 n/a n/a 77 n/a 97 n/a 26 95 120 n/a

-0.33 3.5 0 -1 -3 16.83 7.75 -5.25 5.5 0 -6.33 -27.25 -4 -5.75 4 -2.25 33 2.5 13 -6.5 -1.5 -2.5 0.25 -3.5 -1.5 -26.25 -9.5 2.75 1 -22.5 0.5 -11.34 1 0.5 11.5 -6.52 3

n/a n/a n/a n/a 44 139 127 88 n/a 148 116 n/a 140

-1.5 7.5 -13.5 -7.75 4.75 4.13 5.5 2.32 -8.75 -3.75 10.58 -0.5 -14.25

Source: Freedom House and Reporters sans frontières. http://dx.doi.org/10.1787/611133186550

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escalate. Developments in Nigeria have, however, been more positive. Some hardening of the political climate with the approach of presidential elections in 2007 notwithstanding, the Senate refusal to modify the constitution and, thus, preventing the incumbent president from being re-elected for the third time, is a sign of consolidation of parliamentary democracy.

including in Uganda, where no such polls had taken place since 1986 and where the incumbent president was reelected with 59.28 per cent of votes. Finally, in Côte d’Ivoire, where the situation remains extremely volatile, the conduct of new presidential elections – already postponed from December 2005 to October 2006 – is now planned for October 2007.

The political freedom index from Freedom House is based on measures of several components of political freedom such as free and fair elections; honest tabulation of ballots; the extent to which citizens are free to organise in different political parties or other political groupings of their choice; whether there is a significant vote for the opposition and a realistic possibility to gain power through elections; self-determination, and freedom from any kind of domination; reasonable selfdetermination for cultural, ethnic, religious and other minority groups; and the extent to which political power is decentralised.

Africans rate the quality of their elections relatively highly. These major achievements notwithstanding, however, the ability of elections to provide voters with either a real voice in government, or an effective means for enforcing accountability on their representatives, remains much less certain. In addition, while the state enjoys a considerable degree of legitimacy, and there is solid support for protection of individual freedoms and enforcement of the rule of law, there is also a sizeable and durable minority that appears willing to compromise on these safeguards, either to protect the state, or to “get things done”. It appears that the public recognises the need for citizens to be more critical of the state in principle, but does not always find itself able to fulfil this duty in practice15.

Progress towards Democracy The transition to competitive, multiparty politics continued in African countries during 2006. Almost 59 million Africans participated in the presidential elections held in ten African countries in 2006 (67.3 per cent turnout rate). The incumbent head of state was reelected in nine cases, with margins ranging from 67 per cent in the Gambia to 42 per cent in Zambia. In Senegal, in the aftermath of a tense electoral campaign, Abdoulaye Wade was re-elected in February 2007. The most convincing victory was in Benin, where a new president was elected with a 73 per cent second-round majority. An historical achievement was the first free and fair elections held in the DRC in 40 years in July 2006. Despite accusations by Vice President Jean-Pierre Bemba, one of the candidates, that President Joseph Kabila had tampered with the first-round results, and the eruption of violence in Kinshasa, the process ultimately succeeded. Moreover, seven countries organised multiparty elections,

Corruption Much has been said about corruption in Africa. Transparency International data indicate that out of 42 African countries for which the 2006 CPI perception index is available, only Botswana is listed in the world’s top quartile, 11 countries are in the second, 14 are in the third, and 15 in the lowest. Making comparisons from one year to another is problematic. Nonetheless, to the extent that changes can be traced back to individual sources, Seychelles and Tunisia are noteworthy examples of deteriorations between 2005 and 2006, while improvements were recorded for Algeria and Mauritius. More broadly, Africans themselves say they perceive less official corruption today than six years ago. This result runs counter to the popular wisdom that corruption in Africa is entrenched and worsening16.

15. Carolyn Logan, Tetsuya Fujiwara and Virginia Parish (2006), “Citizens And The State In Africa: New Results From Afrobarometer Round 3”, Afrobarometer Network, Working Paper No. 61. 16. Bratton, Michael and Wonbin Cho (2006), “Where is Africa Going? Views From Below. A Compendium of Trends in Public Opinion in 12 African Countries 1999-2006”, Afrobarometer Network, Working Paper, No. 60.

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Table 7 - Elections in Africa, 2006-07 2006

2007

Presidential (5 and 19 March)

Parliamentary (May) Presidential and parliamentary, (to be confirmed) Parliamentary (25 March)

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Congo Congo, Dem. Rep.

48

Côte d’Ivoire Djibouti Egypt Ethiopia Gabon Gambia Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Madagascar Mali Mauritania Mauritius Morocco Mozambique Nigeria Rwanda São Tomé and Principe

Parliamentary (May) Parliamentary (June) Parliamentary (22 January) and presidential (12 February) Presidential (3 May)

Parliamentary (April) Parliamentary (May)

Presidential (30 July and 29 October 29) and parliamentary (30 July)

Presidential (November) Parliamentary (17 December) Presidential (22 September)

Parliamentary (25 January)

Presidential (December) Parliamentary (17 February) Presidential (3 December)

Referendum (25 June) and parliamentary (19 November and 3 December)

Parliamentary (September) Presidential and parliamentary (21 April) Parliamentary (26 March) and presidential (30 July)

Senegal Seychelles Sierra Leone South Africa Tanzania Togo Tunisia Uganda Zambia Zimbabwe

Parliamentary Presidential (29 April and 13 May) and parliamentary (1 and 29 July) Parliamentary (21 January) and presidential (11 March)

Presidential and parliamentary (25 February) Parliamentary (November) Presidential and parliamentary (28 July)

Presidential (July 28)

Parliamentary (24 June) Presidential and parliamentary (23 February) Presidential and parliamentary (28 September)

Source: www.electionguide.org and http://africanelections.tripod.com/ http://dx.doi.org/10.1787/131105245444

The African Peer Review Mechanism (APRM), launched in July 2002 in the framework of the NEPAD, constitutes an opportunity for African countries and African Economic Outlook

their leaders to show their commitment to improving economic and political governance. In September 2006, a declaration to accede was received from São Tomé and © AfDB/OECD 2007

Overview

Principe, bringing to 26 the number of participating members. Although half of them (13) have already launched the process, the country review reports have been finalised for four of them (Ghana, Kenya, Rwanda and South Africa), and the draft report on Mauritius has been completed. To date, Ghana and Kenya have

achieved stage five, with the country report and programme of action having being published. In 2006, unfortunately, no new country deposited its ratification of the African Union Convention on Preventing and Combating Corruption, adopted in

Table 8 - Corruption Perception Indexes (CPI) for African Countries, 2005 and 2006 Country

Global Rank 2006

CPI 2006

Global Rank 2005

CPI 2005

37 42 51 51 55 63 70 70 70 79 79 79 84 84 84 90 93 93 99 99 105 105 105 111 121 121 121 121 130 130 130 130 130 138 138 142 142 142 142 142 151 151 156 156 156 160

5.6 5.1 4.6 4.6 4.1 3.6 3.3 3.3 3.3 3.2 3.2 3.2 3.1 3.1 3.1 3.0 2.9 2.9 2.8 2.8 2.7 2.7 2.7 2.6 2.5 2.5 2.5 2.5 2.4 2.4 2.4 2.4 2.4 2.3 2.3 2.2 2.2 2.2 2.2 2.2 2.1 2.1 2.0 2.0 2.0 1.9

32 51 46 43 47 55 70 65 78 70 70 78 97 97 88 107 88 88 97 117 97 117 107 88 103 83 130 137 107 137 126 151 130 144 152 126 152 152 158 144 144 -

5.9 4.2 4.5 4.9 4.3 4.0 3.4 3.5 3.2 3.2 3.4 3.2 2.8 2.8 2.9 2.6 2.9 2.9 2.8 2.5 2.8 2.5 2.6 2.9 2.7 3.1 2.3 2.2 2.6 2.2 2.4 2.0 2.3 2.1 1.9 2.4 1.9 1.9 1.7 2.1 2.1 -

Botswana Mauritius South Africa Tunisia Namibia Seychelles Egypt Ghana Senegal Burkina Faso Lesotho Morocco Algeria Madagascar Mauritania Gabon Eritrea Tanzania Mali Mozambique Libya Malawi Uganda Zambia Benin Gambia Rwanda Swaziland Burundi Central African Republic Ethiopia Togo Zimbabwe Cameroon Niger Angola Congo, Rep Kenya Nigeria Sierra Leone Côte d’Ivoire Equatorial Guinea Chad Congo, Dem. Rep. Sudan Guinea Source: Transparency International.

http://dx.doi.org/10.1787/063811658136

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Table 9 - African Index of Economic Freedom for 2000-07

50

World rank

Country

34 38 52 55 59 64 65 69 82 86 88 91 92 93 96 101 103 105 106 111 113 114 116 117 118 123 124 126 127 128 129 130 131 134 136 137 139 141 146 147 148 149 151 154 155

Mauritius Botswana South Africa Namibia Uganda Swaziland Madagascar Tunisia Kenya Senegal Cape Verde Ghana Zambia Gambia, The Morocco Mozambique Tanzania Côte d’Ivoire Malawi Guinea Burkina Faso Benin Ethiopia Cameroon Lesotho Mali Niger Mauritania Egypt Equatorial Guinea Gabon Djibouti Nigeria Algeria Rwanda Central African Republic Togo Sierra Leone Burundi Chad Guinea Bissau Angola Congo Zimbabwe Libya

Sub-Saharan Africa North Africa

2007 Score

2006 Score

2005 Score

2004 Score

2003 Score

2002 Score

2001 Score

69.0 68.4 64.1 63.8 63.4 61.6 61.4 61.0 59.4 58.8 58.4 58.1 57.9 57.6 57.4 56.6 56.4 55.5 55.5 55.1 55.0 54.8 54.4 54.4 54.1 53.7 53.5 53.2 53.2 53.2 53.0 52.6 52.6 52.2 52.1 50.3 49.8 48.4 46.8 46.4 45.7 43.5 43.0 35.8 34.5

66.5 70.3 66.3 60.9 64.9 62.2 63.0 59.2 60.0 57.4 60.3 56.7 59.1 57.9 53.0 55.1 59.3 56.8 57.9 53.7 55.7 54.3 53.4 54.2 57.0 54.1 53.6 55.6 52.2 50.2 54.9 55.0 48.8 53.4 54.3 54.8 48.5 46.7 49.6 49.4 47.1 43.3 43.6 34.0 34.3

64.3 69.8 61.5 60.0 61.4 58.0 61.6 56.7 56.0 56.6 59.7 55.1 54.5 56.3 54.0 54.6 54.0 54.9 53.4 55.8 54.6 49.7 50.1 49.7 52.9 56.6 51.2 57.0 52.7 50.6 52.3 56.4 45.8 50.3 48.5 53.6 46.8 43.4 n.a. 48.7 41.2 n.a. 43.0 33.9 28.4

64.3 69.5 65.0 61.6 61.6 56.8 59.1 59.4 55.4 57.3 59.5 56.5 51.9 53.7 58.1 55.5 57.3 56.2 52.0 54.0 55.8 52.5 52.3 50.1 48.6 55.7 51.4 59.0 53.5 49.2 54.3 55.3 47.3 54.9 50.2 54.7 45.8 42.6 n.a. 49.8 39.3 n.a. 41.2 31.6 28.9

64.5 68.5 66.0 66.5 57.9 60.1 62.9 59.2 55.8 56.1 53.5 56.0 53.5 54.8 59.4 58.1 54.1 55.2 51.3 54.7 55.4 52.3 46.6 50.1 50.7 57.8 51.1 56.0 51.7 49.0 56.5 54.1 48.5 54.0 44.9 57.3 45.6 41.1 n.a. 49.3 40.0 n.a. 42.4 33.9 31.8

65.4 60.9 62.8 64.2 58.8 60.2 56.5 60.3 55.3 56.5 56.8 56.6 57.7 56.3 59.3 56.8 57.7 55.9 54.1 52.9 56.3 54.4 47.1 50.8 49.1 60.3 45.3 52.3 50.5 42.2 55.9 56.3 49.8 60.0 47.6 57.0 44.0 n.a. n.a. 45.9 38.2 n.a. 40.9 33.9 31.7

66.7 62.7 60.6 63.7 61.2 63.7 54.0 60.8 55.8 58.4 56.2 61.7 57.4 54.1 63.7 55.7 55.7 53.8 52.3 56.2 53.9 58.3 48.6 50.8 52.3 60.6 47.2 48.9 48.7 44.7 54.7 57.0 52.3 55.2 44.9 n.a. 42.9 n.a. n.a. 44.2 40.3 n.a. 42.2 37.0 32.2

54.7 51.7

55.2 50.4

53.5 48.4

53.5 51.0

53.5 51.2

53.3 52.4

53.6 52.1

Source: The Heritage Foundation/The Wall Street Journal, 2007 Index of Economic Freedom. http://dx.doi.org/10.1787/451816350127

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2003, which remains four ratifications short of the 15 needed for it to enter into force. Fourteen African countries are members of the EITI (Extractive Industry Transparency Initiative).

Economic Governance Economic freedom suffered a minor setback in Africa (Table 9)17 according to the 2007 Index of Economic Freedom published by the Heritage Foundation and the Wall Street Journal. The 2007 index fell to 54.3 per cent, down slightly from the 54.6 per cent of the 2006 index. The decline in subSaharan Africa (-0.5 per cent) more than offset the improvement in North Africa (+1.3 per cent). Even so, the scores for both of these two years were higher than those recorded in any of the earlier years for which the index was compiled. Of the 39 countries graded numerically in the 2007 Index, none is classified as a “free” or “mostly free” economy. The bulk of countries—32 economies— have freedom scores of 50–70 per cent. Seven are “moderately free” (scores of 60–70 per cent) and 25 are

“mostly unfree” (scores of 50–60 per cent). Only 8 countries have “repressed economies” with scores below 50 per cent, although this represents 40 per cent of the economies around the world which are classified as such. Among specific economies during the past seven years, the scores of 29 countries are now higher, and the scores of 9 countries are worse.18 Thanks to reforms to financial, monetary, and trade policies, Mauritius surpassed Botswana as the region’s economically freest country. Nigeria recorded the largest improvement, graduating from repressed to “mostly unfree” status. Zimbabwe continues to be the least free country in the region and the gap vis-à-vis the second worse performer, the Republic of Congo, widened further.

Access to Drinking Water and Sanitation in Africa Access to safe drinking water and sanitation is essential to human health and well-being, and thus the direct concern of two of the MDGs, but it also contributes indirectly to achieving many of the other MDGs. Unsafe drinking water and inadequate sanitation cause illness and generates high health costs

Box 7 - Definitions Access to safe drinking water is measured by the percentage of the population using improved drinking water sources. Similarly, access to sanitary means of excreta disposal is measured by the percentage of the population using improved sanitation facilities. Improved sanitation facilities are those more likely to ensure privacy and hygienic use. Improved drinking water technologies are those more likely to provide safe drinking water than those characterised as unimproved. Improved drinking water sources: Household connection / Public standpipe / Borehole / Protected dug well / Protected spring / Rainwater collection Unimproved drinking water sources: Unprotected well / Unprotected spring / Rivers or ponds / Vendor-provided water / Bottled water / Tanker truck water Improved sanitation facilities: Connection to a public sewer / Connection to a septic system / Pour-flush latrine / Simple pit latrine / Ventilated improved pit latrine Unimproved sanitation facilities: Public or shared latrine / Open pit latrine / Bucket latrine Source: WHO/UNICEF Joint Monitoring Programme

17. Although the methodology used for measuring freedom was revised this year, previous scores were also revised to be consistent across time. 18. The decline occurred in Central African Republic, Djibouti, Gabon, Ghana, Guinea, Malawi, Mali, Swaziland, and Zimbabwe

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with negative impacts on economic activity. Children are particularly vulnerable to water scarcity and poor quality. In the latest Human Development Report19, the UNDP estimates that access to safe drinking water would diminish the risk of diarrhoea by close to 70 per cent in Ghana, and that improved sanitation would cut the risk of infant mortality by 40 per cent in Uganda. In water-scarce situations, women and girls also generally bear the burden of carrying water long distances to their homes and are as a result excluded from other economic activities or education. As discussed in an earlier section of this Overview chapter, however, progress remains inadequate in relation to needs and the likelihood of reaching the access targets for drinking water and sanitation of 78 per cent

and 69 per cent, respectively, by 2015 is low. SubSaharan Africa has the lowest drinking water coverage and the lowest sanitation coverage in the world, with over 322 million people without access to safe drinking water sources and 463 million without access to improved sanitation. The deficit in sanitation remains much larger than for water because efforts have been less intense. However, if progress in access to water is not matched with corresponding measures for sanitation and effluent management, the volume of sewage produced will proportionally increase with negative consequences for human health and natural ecosystems. Over the last 25 years water has become embedded in the sustainable development agenda. Substantial analysis has been conducted and many examples of

Box 8 - Milestones in the Building of an International Consensus and African Responses to Water Development Challenges

52

1981-90 – UN International drinking water supply and sanitation decade 1992 – UN Conference on Environment and Development, Rio de Janeiro: set the stage for subsequent discussions on water. 1992 – International Conference on Water and the Environment, Dublin: four guiding principles on water 1996 – Formation of the Global Water Partnership to implement holistic approach to water, concretised in the concept of Integrated Water Resource Management 1996 – Formation of the World Water Council, think tank on international water policy issues, leading organiser of the World Water Forum held every 3 years 1997 – First World Water Forum, Marrakech 1997 – Formation of World Commission for Water in the 21rst century: A Water Secure World indicated that an additional annual $100 billion investment in the water sector was required 2000 – Second World Water Forum, The Hague: Adoption of the African Water Vision for 2025 2001 – UN Millennium Declaration: setting of the water target of reducing by half the proportion of people without sustainable access to adequate quantities of affordable and safe water 2001 – NEPAD and the Water and Sanitation Infrastructure Programme 2002 – Establishment of the African Ministers’ Council on Water (AMCOW) to provide political leadership, policy direction and advocacy in the provision, use and management of water resources. 2002 – UN Conference on Finance of Development, Monterrey: new commitments on the part of donors to raising official development assistance 2002 – UN World Summit on Sustainable Development, Johannesburg: MDG targets extended to sanitation and recognition of the need for water storage and hydropower development. 2003 – Report of the World Panel on Financing Water Infrastructure (known as the Camdessus Panel) 2003 – Third World Water Forum, Kyoto 2004 – Establishment of the UN Secretary General’s Advisory Board on Water and Sanitation (UNSGAB) 2006 – Report of the task force on Financing Water for All (known as the Gurría Panel) 2006 – Fourth World Water Forum, Mexico 2006 – Human Development Report on Beyond Scarcity: Power, Poverty and the Global Water Crisis 2008 – UN International Year of Sanitation 2009 – Fifth World Water Forum, Istanbul

19. UNDP Human Development Report, 2006. Beyond scarcity: power, poverty and the global water crisis.

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good practice highlighted. Improvements are needed in several key areas, notably in the management of the water sector, the institutional set up, and strategic policy setting. Government budgets and development assistance have also been insufficient so far to cover the investment needs. Insufficient financial discipline and accountability combined with inadequate maintenance, deficient billing and poor collection rates have prevented the establishment of effective cost recovery mechanisms by water utilities in most countries. The water and sanitation sector has also been the infrastructure sector least attractive to private investors. Ensuring adequate financing remains a key challenge for improving water and sanitation coverage.

I - Taking Stock of Resources and Access The minimum supply of safe water for domestic use is commonly estimated by WHO at 20 litres per person per day for drinking and personal hygiene. Factoring in bathing, cooking and laundry brings the figure up

to around 50 litres per day. Domestic needs increase with development; European households consume on average about 200 litres per person per day, for example. In turn, development has an ambivalent impact on availability, both increasing the pressure on resources through increased activity and facilitating the development and implementation of new technologies to exploit water better. However, in nearly all countries there is more than enough fresh water available to meet the needs of households for drinking water. The following section gives an assessment of resource availability and population access based on the latest available data by FAO and the WHO/UNICEF Joint Monitoring Programme (JMP). A word of caution is needed, however, because the quality of data and especially information regarding access remains problematic. Nevertheless, the JMP data provide useful information on global trends and as such are used in the section to take stock of global progress. When calling on specific examples, however, the following sections will refer to alternative sources of information as appropriate such as the AMCOW, AfDB, EUWI, UNDP, WSP and UNDP MDG Country Status Reports.

Box 9 - The Quality of the JMP Data and Initiatives to Improve Information and Comparability Data collection and treatment in Africa is generally poor and in some cases distorted for political use. It is consequently difficult to assess the progress made to extend coverage but also to draw comparison across countries. For example, in Angola the national UNICEF MICS survey of 2001 estimated the percentage of population with access to safe water at 62 per cent. A later UNICEF estimate however suggests that just 34 per cent of urban population has access to safe water, this figure rising to 39 per cent for rural areas. Since almost 70 per cent of Angolans are urbanised, it is unlikely that the national coverage could be higher than 35 per cent. Meanwhile, the joint monitoring programme provides a global estimate of 53 per cent for 2004. Similarly, in Mozambique, current official figures report both urban and rural water coverage rates of about 40 per cent. According to the latest household survey, however, rural water access is only 27 per cent while urban water access is much higher at 64 per cent. The data collected by the Joint Monitoring Programme and meant to monitor the progress of countries towards the water related MDGs, have been criticised for lack of accuracy. To help improve the monitoring, some donors have supported the development of alternative figures based on wider consultation. Recently, AMCOW, the AfDB, the EUWI, UNDP, WSP and the UNDP20 have collaborated with local sources to produce MDG Country Status Reports for 16 SSA countries (Benin, Burkina, DRC, Ethiopia, Ghana, Kenya, Madagascar, Malawi, Mauritania, Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia), assessing the probability to achieve the MDGS for rural and urban areas respectively, not only looking at past trends in coverage extension, but also at investment gaps and quality of institutional arrangement to ensure sustainability.

20. Getting Africa on Track to meet the MDGs on Water and Sanitation, a Status Review of Sixteen African Countries, 2006, a regional initiative by AMCOW, AfDB, EUWI, WSP and UNDP

© AfDB/OECD 2007

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1- Availability of Resource and Uses and Perspectives for the Future According to the FAO, some 14 870 m3/inhab/year renewable water resources are available in Africa, including internal and external resources at the national level. These resources are considered overall abundant, but are only marginally exploited under managed conditions. One-third of countries experience some pressure on their internal water resources as measured by the volume of internal renewable water per capita

withdrawn annually. Over a quarter of the renewable water used is imported from other countries. Water is used primarily for agricultural purposes (68.4 per cent), followed by households (24.1 per cent) and finally by industry (7.5 per cent). Water availability in Africa is characterised by extreme variability (of rainfalls, rivers…). To cope with this variability, important water conservation and water storage measures are often needed. Water resources in Africa are also very unequally distributed

Figure 10 - Renewable Water Per Capita (m3/inhab/year), 2003-07

North Africa

East Africa

54

Southern Africa

West Africa

Central Africa

Africa

0

10000

20000

30000

40000

50000

60000

Source: Aquastat, FAO: www.fao.org/ag/agl/aglw/aquastat/main/indexfra.stm http://dx.doi.org/10.1787/603581614167

Figure 11 - Water Uses in Africa, 2003-07 Domestic use 24%

Agricultural use

68%

8%

Industrial use

Source: Aquastat, FAO: www.fao.org/ag/agl/aglw/aquastat/main/indexfra.stm http://dx.doi.org/10.1787/006482437356

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among countries. Africa hosts both some of the driest countries in the world (in Northern Africa), but also some of the best endowed (in Central Africa). Egypt and Libya receive very limited precipitation (some 51 and 56 mm/year respectively) and overall North Africa receives less than 3 per cent of the total precipitation of the continent. Central Africa, by contrast, receives 37 per cent of the total precipitation while accounting for only 20 per cent of land. DRC alone accounts for 23 per cent of internal renewable water resources in Africa. Consequently, most northern African countries experience stress on their water resources: especially Egypt, but also Libya and Sudan. For example, Egypt meets some 97 per cent of its water resources with imports. Availability evolves with climate change impact, demographic pressure and economic development. In 2003-07, some nine countries are estimated to face water-scarce conditions with less than 1000 m3 of renewable water resources per capita per year and eight others have to deal with water-stress conditions with less than 1700 m3/cap/year. According to a study by UNEP21 up to 25 African countries could be subject to water stress or water scarcity by 2025, the most severe cases arising in northern Africa. As water becomes relatively scarce, its use as an input in agriculture and industry needs to be progressively re-directed toward activities with high value-added per m3 of water used, and demand management for household use becomes more important as well. Tunisia manages to provide nearly universal access to drinking water and sanitation for its citizens despite having a resource endowment of less than 500 m3 of water per person per year.

Africa extracts only a marginal portion of its water resources compared to the rest of the world and has the lowest water storage capacity. Northern Africa and southern Africa however constitute exceptions. In South Africa, no fewer than 458 dams were commissioned between 1950 and 2000, initially for irrigation purposes and then shifted towards the provision of drinking water. With demand growing, South Africa faces a serious risk of shortages by 2020. In order to meet the challenge, the country is investing both in water use efficiency programmes (especially in the domestic and agricultural sectors) and in alternative sources such as re-use of water, desalination and development of further water-resource infrastructure. The municipally of Windhoek, in Namibia provides a successful example of use of unconventional sources of additional water. Windhoek was one of the first cities in the world to introduce direct recycling of effluent for drinking purposes. Extensive water quality monitoring programmes are in place to ensure an appropriate standard of water quality after each treatment process and of the final water supply. Water availability and quality are further affected by industrial pollution, poor sanitation and sewage practices. In Congo, only 68 per cent of water samples provided by the Société Nationale des Eaux are estimated to comply with the standard for good quality. Inefficient land use and agricultural practices (use of fertilisers and pesticides) also contribute to worsen the problem. In Ghana, for instance, pollution is considered the most serious threat to the sustainability of water resources. Pollution issues are also serious in South Africa, where agriculture, mining and energy sectors are key drivers of activity.

Box 10 - Increasing Available Supply in Tunisia The country’s available water supply rose from 2.6 billion m3 in 1990 to 4.1 billion in 2005 and 11 major dams and 50 hill dams are to be built in the next few years to increase it further. Demand still exceeds supply however and the government is trying to bridge the gap by using treated sewage for agriculture, reusing drainage water and developing water-saving methods to prevent leakage between production and use and to avoid waste by consumers. The authorities are steadily upgrading supply lines and distribution networks, making taps and toilet-flushes more economical, educating major consumers such as hotels and companies and introducing sliding rates that rise with consumption. Source: see country notes in the body of the report.

21. UNEP, 2000. Global Environment Outlook: http://www.unep.org/Geo2000/english/0056.htm

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56

However, wastage is certainly taking the greatest toll on availability. In most African cities over 50 per cent of the water supply is wasted or unaccounted for. A review of the water balance situation in Botswana reveals that on average, more than 46 per cent of it is wasted though leakage, lack of demand management programmes and inefficient water use. In Mauritius, 47 per cent of water consumption is unaccounted for, including 35 per cent due to pilferage and 7 per cent due to leakages as a result of old pipes (more than 50 years old). Unaccounted-for water also reaches 50 per cent in the cities of Cairo and Alexandria and 40 per cent in Algeria. Thus, addressing water conservation, demand management and efficiency of use could result in significant savings. Demand-side management programmes are becoming increasingly common since they represent a low-cost alternative to capacity development. They usually involve control measures (in particular restrictions on certain uses of water, rationing and supply intermittence), use of pricing to rationalise demand, incentives to use water saving devices, public campaigns to promote conservation and close control of distribution system to detect leakages. In an effort to ensure a sustainable demand of water in a context of scarcity, the municipality of Windhoek introduced water demand management in 1994. The strategy concentrates on changing consumer habits by increasing public awareness on the importance of water saving and the implementation of block tariff system with a steeply rising water cost with increasing consumption. Some other measures include the reduction of residential plot sizes, implementation of legislation to address water conservation in Windhoek, improved maintenance and technical measures to reduce leaks. In 2006, unaccounted-for water fell to 10.3 per cent, well below the African average and a very good performance by international standards (for reference unaccounted-for water reaches some 10-15 per cent in the United States and Canada and 15-20 per cent is considered good practice).

2- Access to Drinking Water22 Most countries in Africa are making insufficient progress towards achieving the water and sanitation MDGs, as underscored by the WHO/UNICEF Joint Monitoring Programme. In sub-Saharan Africa (SSA) only 56 per cent of the population are served with improved water and 322 million people are without access to improved drinking water. Despite a 7 percentage point improvement between 1990 and 2004 in drinking-water coverage, the population has grown even faster with the result that the absolute number of unserved people has increased by about 60 million over the same period. Moreover, this number is expected to increase by an additional 47 million by 2015. Although 10 million people have been provided improved drinking water annually over 1990-2004, this number would need to triple in order for SSA to reach the water MDG by 2015. Northern Africa presents a very different picture. The level of access is, with Latin America, the highest in the developing world at 91 per cent of the population and the number of people without access to improved water is expected to decrease further by one million by 2015. The region still remains slightly off track to achieve the water MDG for the region which is 95 per cent of total population. Within northern Africa, Tunisia has already achieved the water-related MDG and virtually all urban dwellers are connected to drinking water (some 98.5 per cent through home connections). Within SSA, Mauritius is a notable exception, having advanced well beyond the MDG goals for drinking water and sanitation. More than 99.6 per cent of Mauritians have access to water while 99.9 per cent of the population has access to improved sanitation services in both the urban and rural areas. In the 10 years after the end of apartheid, South Africa has also managed to increase access to safe water dramatically: a total of 21.4 million people have been provided with access to an improved water source since 1994, reducing

22. Country data are available in the statistical annexes.

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the percentage of people with no access from 39.9 to 7 per cent. In line with this active policy the Department of Water Affairs and Forestry in 2003 established a target of universal access to water by 2008, well above the requirements of the MDGs (80 per cent of access by 2015), which is likely to be reached by the end of the decade. However, most African countries remain off-track and some are even receding. Among key obstacles to sustainable increase in access, war is exacting a heavy toll on water and sanitation infrastructure. In Côte d’Ivoire for instance, the political crisis is leading to poor maintenance of the water network and explains the high percentage of deficient systems (60 per cent). In DRC, the war has led to a drop in access to drinking water from 37 per cent of the population in 1990 to 22 per cent in 2004. In Northern Uganda, civil conflict constitutes a major hindrance to effective water and sanitation services development. Even when existing and not threatened by wars, water infrastructures in SSA are usually aging and badly maintained leading to large unaccounted for water and low quality of water. Of course, conditions differ greatly, depending on whether people live in major cities, in small towns, in peri-urban areas or in rural areas. In general, coverage in urban areas is far ahead of that in rural areas where women and children often need to travel long distances carrying heavy containers of water. However, most of the population growth currently occurs in urban and peri-urban areas, putting great pressure on existing infrastructure and posing tremendous health risk. The UN Population Division estimates that urban population in Africa grows by some 15 to 20 per cent every five years, amounting to a doubling between 2005 and 2030 (from 360 million to some 783 million people)23. So if the rural population is certainly the most deprived, people in informal settlements in peri-urban areas are the most exposed to the consequences of deficient networks. Within countries, the situation also differs across different provinces. In Angola, for instance, the huge provincial inequalities are due to the extent to which different areas were affected by the

war, to the presence of national and international NGOs, and to the different management models chosen by each province in a context of incomplete decentralisation. In Mali, regional inequality is high, with the isolated, low population density regions facing great difficulties in maintaining water facilities. Between 1990 and 2004, some 62 million people gained access to safe water supplies in rural areas of subSaharan Africa (corresponding to an increase in coverage of 6 per cent) and a further 12 million people in North Africa (a 4 per cent increase in coverage). By contrast, high migration from rural to urban areas, combined with demographic pressure led to a mere 1 per cent increase in coverage for the urban population in North Africa and even to a 2 per cent decrease in sub-Saharan Africa. As a result, urban water coverage in Nigeria, Algeria and Mozambique declined by over 10 percentage point between 1990 and 2004. There are nonetheless encouraging examples. On current trends, Uganda is on course to achieve the MDG target on access to water supply in urban areas. In 2005/06, the government completed the construction of 6 water systems, and construction of water systems is in progress in another 13 towns. In the large towns operated by the National Water and Sewerage Corporation (NWSC), service coverage improved from 67 per cent in June 2005 to 70 per cent in June 2006 and new water connections increased from approximately 22 000 in the 2004/05 financial year to about 28 000 in 2005/06 due to a new customerfriendly connection policy. This growth trend is expected to continue thanks to the emphasis being put on service to the urban poor with the support of an OutputBased Aid programme of the World Bank. Benin has improved considerably its rural sub-sector by putting in place a coherent strategy and programmatic approach that for instance ensures that sufficient funding is channelled to rural communities bringing the MDG target for access to drinking water within reach. Even if the MDGs were to be reached by 2015, the backlog of unserved people will remain substantial. It

23. Source: www.esa.un.org/unpp/

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is estimated by the Joint Monitoring Programme that some 243 million people in Africa will be without access to drinking water (among whom 234 million located in sub-Saharan Africa) and 348 million without access to sanitation (317 million in sub-Saharan Africa). 3- Access to Sanitation

58

The situation of sanitation in Africa is more dramatic than water both in terms of the low level of access and limited progress since 1990. In 2004, two out of three people in SSA had no access to improved sanitation, with the prospect of a further increase of 91 million people without access to sanitation services by 2015. Very few countries are on track to reach the MDG by 2015 and if SSA were to reach the MDG some additional 35 million people would need to be provided with access to improved sanitation annually compared with the current rate of 7 million. Progress has been greater in northern Africa, where coverage has increased by 12 percentage points between 1990 and 2004 to reach 75 per cent. The number of unserved people is also expected to decrease by an additional 11 million by 2015. Thus, northern Africa appears to be broadly on track to reach the 83 per cent sanitation target by 2015. Rural sanitation coverage in SSA is half the urban coverage, i.e. almost totally absent in most areas. However, the negative consequences of insufficient sanitation services are much more acute in slums because

of high population densities. High urban population growth resulting from migration has led cities to grow rapidly in a few decades. Consequently, existing facilities have dramatically deteriorated where they existed and infrastructure development has not kept pace with the unplanned growth of informal peri-urban settlements. Increasing population density associated with poor sanitation habits (notably the flying toilets) have contributed to deteriorating health conditions in these settlements. A similar situation often prevails in the refugee camps in many African countries. Tanzania, however, demonstrates that progress is indeed possible. There, access to some form of sanitation is estimated at 90 per cent. The 2002 Census data indicate that in Dar es Salaam only 1 per cent of population had no toilet facility, while 83 per cent of population had access to pit latrines and 14 per cent of population had flush toilets. Most of the households without access to some form of sanitation facilities are in rural areas, where they account for 11 per cent of the rural population. These figures are consistent among several sources: the national census, the MDG Country Status Report by AMCOW et al., and the country status published by WaterAid. The quality of the facilities has however been questioned and according to AMCOW et al., a strict MDG definition would lower the rate of coverage to about 50 per cent. However, it would require only limited effort to upgrade the existing facilities. These achievements did not happen over

Box 11 - Critical Situation of Sanitation in Chad Except for some isolated projects, very few villages have improved traditional latrines, ventilated pit latrines or organised collection of sewage or garbage and 88.5 per cent of households use the fields as toilets. Major village water projects do not always include sewerage, which is fairly cheap but needs training and familiarisation of local people. None of the country’s towns and cities have functioning systems for disposal or treatment of sewage, garbage and solid waste and very few for rainwater. Those that do exist are antiquated. In February 1997, only N’Djamena, Moundou, Sarh and Abeche had urban maps showing housing zones, transport networks and rainwater drainage facilities. Hospitals and clinics have no established infrastructure or official ways of handling and disposing of biomedical waste, which often ends up in the streets where it can be picked up by children and reused. Hospital sewage is similarly dumped untreated and can be reused. In 2000, there was no regulation or standards applying to industrial waste and nearly all industries dumped their liquid effluent untreated into waterways. Source: see country notes in the body of the report.

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night. An active government policy aimed at ensuring a latrine for all households was initiated more than 30 years ago, in 1973, based on the “Mtu ni Afya” programme (You are your health). Efforts to raise awareness in households have been continuous, and hygiene and sanitation programmes continue to be well financed in government budgets.

II- Improving Management and Shifting the Focus to Sanitation – the Key Challenges The above assessment clearly highlights the need for improvement in the water sector in the countries that have been lagging behind: improving institutions

Table 10 - Sustainability Scorecard (scores range from 0-100 per cent) Countries

Rural Water

Urban Water

Rural Sanitation

Urban Sanitation

Overall sector

BENIN

Institutional Financial

67 73

74 51

78 54

76 54

76 91

BURKINA FASO

Institutional Financial

70 57

47 40

69 30

34 13

45 82

DRC

Institutional Financial

23 16

50 57

86 44

22 17

32 36

ETHIOPIA

Institutional Financial

70 57

47 40

69 30

34 13

46 82

GHANA

Institutional Financial

80 50

75 71

56 50

70 17

68 50

KENYA

Institutional Financial

55 43

50 36

31 10

23 32

55 50

MADAGASCAR

Institutional Financial

32 44

50 32

23 0

23 33

8 44

MALAWI

Institutional Financial

40 28

31 36

6 10

18 8

27 12

MAURITANIA

Institutional Financial

45 27

31 37

16 26

12 0

4 34

MOZAMBIQUE

Institutional Financial

39 25

56 70

26 24

28 12

41 47

NIGER

Institutional Financial

75 25

60 50

35 5

23 5

45 15

RWANDA

Institutional Financial

75 25

60 50

35 5

25 5

45 15

SENEGAL

Institutional Financial

75 57

81 86

50 40

59 58

86 75

UGANDA

Institutional Financial

80 57

65 74

67 50

52 25

80 57

ZAMBIA

Institutional Financial

47 53

74 32

43 31

32 34

63 42

All 15 countries

Total Institutional Financial

50.2 58.2 42.5

54.5 56.7 50.8

36.8 46.0 27.3

28.4 35.4 21.7

48.7 48.1 48.8

Source: Getting Africa on track to meet the MDGs on water and sanitation, a Status Review of Sixteen African Countries, 2006, Report on a regional initiative by AMCOW, AfDB, EUWI, WSP and UNDP http://dx.doi.org/10.1787/475735215038

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in both rural and urban areas and most notably remedying the deficiencies of the sanitation sector. Moving forward requires ambitious reforms in institutions, legal frameworks, and policies in order to change the structure of incentives. This is possible in an African context as shown by the box on Senegal. Progress also requires supporting these strategies with adequate resources for their implementation. Table 10 ranks the institutional and financial sustainability of sector strategies for 15 countries by means of a scorecard system developed by AMCOW, AfDB, EUWI, WSP and UNDP. It clearly shows that sanitation is the sector for which improvements are the least sustainable based on current strategies, the worst case being the financial sustainability of urban sanitation. 1- Implementing Integrated Water Resource Management (IWRM)

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Responsibility for water management is often split among different government ministries, between regional and local authorities as well as the private sector, NGOs and donors which makes it difficult to develop a coherent strategic approach to the sector. Drinking water is also a basic need, but water is often

a scarce resource with several other competing uses: hydropower generation, irrigation, and industrial. Consequently, there is a need for a comprehensive and integrated approach to ensure the sustainability of expanding simultaneously access to drinking water and sanitation while facilitating economic growth and meeting ecosystem needs24. The principles of a holistic approach to water were established in 1992 at the International Conference on Water and the Environment in Dublin and at the United Nations Conference on Environment and Development held in Rio de Janeiro. They led in 1996 to the creation of the Global Water Partnership whose mission is to “support countries in the sustainable management of their water resources”. In 2002, the plan of implementation of the Johannesburg World Summit on Sustainable Development aimed at stimulating the adoption of IWRM by calling all countries to develop integrated water resources management and water efficiency plans by 2005. IWRM is at various stages of implementation in most African countries. In the table 38 countries are classified in 3 categories, based on a survey conducted by GWP in late 2005: i) 5 countries have plans incorporating the

Box 12 - The Successful Reform of Senegal’s Urban Water System The grave financial crisis at the national water company SONEES (Societé National d’Exploitation des Eaux du Sénégal) caused by excessively low rates and poor recovery of customer debts was the incentive for reform in 1995. This involved thorough reorganisation, separating sanitation and drinking water supply and setting up a partnership between the government, a public water company, SONES (Société Nationale des Eaux du Sénégal), and a private firm, SDE (Sénégalaise des Eaux). Development partners mostly provided the funding for the new arrangement as part of clear sector policies – the Programme Sectoriel Eau (1995-2001) and its successor the Programme Sectoriel Eau de Long Terme (2002-07). A new sector policy and an investment programme were drawn up in 2005 under the millennium national drinking water and sanitation programme PEPAM (Programme national d’eau potable et d'assainissement du Millénaire). These cover upgrading the network, providing connections for the poor and drafting a “second generation” of institutional reforms to meet the sanitation needs of an expanding Dakar (including a new rates system that will raise more money to be spent on sanitation). The 1995 reform law replaced SONEES by two bodies. The public firm SONES is franchised by the government and approves three-year investment plans and supervises new investment, while the SDE is a private firm (part of the French group SAUR) operating the network and selling its products under a leasing arrangement with the government and SONES, which also has a performance contract. The leasing worked well and was renewed for five years in 2006, with the aim of balancing the books and improving drinking water access for the very poor. Source: see country notes in the body of the report.

24. See African Development Bank (2000), Policy for Integrated Water Resources Management.

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Box 13 - Defining IWRM IWRM is a process that promotes the co-ordinated development and management of water, land and related resources, in order to maximize the resultant economic and social welfare in an equitable manner without compromising the sustainability of vital ecosystems. This approach promotes more co-ordinated development and management of land and water, surface water and groundwater, the river basin and its adjacent coastal and marine environment, and upstream and downstream interests. IWRM is also about reforming human systems to enable people to obtain sustainable and equitable benefits from those resources. For policy making and planning, taking an IWRM approach requires that: • Water development and management takes into account the various uses of water and the range of people’s water needs; • Stakeholders are given a voice in water planning and management, with particular attention to securing the involvement of women and the poor; • Policies and priorities consider water resources implications, including the two-way relationship between macroeconomic policies and water development, management, and use; • Water-related decisions made at local and basin levels are along the lines of, or at least do not conflict with, the achievement of broader national objectives; and • Water planning and strategies are incorporated into broader social, economic, and environmental goals. An IWRM approach focuses on three basic pillars that aim at avoiding a fragmented approach of water resources management: • An enabling environment of suitable policies, strategies and legislation for sustainable water resources development and management • Putting in place the institutional framework through which to put into practice the policies, strategies and legislation • And setting up the management instruments required by these institutions to do their job. Source: Global Water Partnership

61 IWRM principles in place or a process well underway – level 1; ii) 21 countries are in the process of preparing national strategies which require further work – level 2; and iii) 12 countries are at a very early stage and have not yet inserted IWRM principles in their national policy and legal frameworks – level 3. In the five countries highlighted by the GWP as good performers the IWRM principles are part of the main policy and legal frameworks, as well as in the various official planning and development programmes related to poverty reduction (PRSP for instance), agriculture, energy and environment. Four out of the five countries have put in place IWRM action plans: Burkina in 2003, South Africa in 2004, Uganda in 1995 and Zimbabwe in 2001. Namibia does not have a specific IWRM Action Plan but is implementing the water policy through various programmes and basin committees. The whole water-sector review process is geared towards integrated water resources management. All countries are characterised by strong participation of all stakeholders from ministries to NGOs and strong leadership at national level (usually by the main ministry in charge: the Department of Water Affairs and Forestry © AfDB/OECD 2007

in South Africa, the Water Resources Management Department in Uganda, the Ministry for Water Resources and Infrastructure Development in Zimbabwe). The experience of these good performers shows that it takes time to integrate IWRM fully into local management. Successful implementation crucially hinges on institutional and human resources capacities. Even in well-performing countries, such as Burkina, limited capacities have slowed progress. Successful development of a sound IWRM framework also requires abandoning the supply-driven, top-down approaches, in favour of greater stakeholder involvement. Finally, where monitoring mechanisms are weak, progress is not easily measured and corrective actions not easily undertaken. There is a need for strong national water policies as a basis for legislation, strategic planning and management. In many cases, unfortunately, policies are poorly developed and little legislation exists. For example, there is usually no clear institutional responsibility for water quality management. Policy is African Economic Outlook

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Table 11 - Status of National IWRM Planning in African Countries Region

Northern Africa

Level 1

Level 2

Level 3

0

Egypt Morocco Tunisia Mauritania Sudan

Algeria Libya

Total respondents

7

Central Africa

0

Cameroon

Burundi Central African Rep. Chad Congo DRC Rwanda

7

Eastern Africa

Uganda

Eritrea Ethiopia Kenya Mauritius Tanzania

Djibouti

7

Western Africa

Burkina Faso

Benin Ghana Mali Nigeria Senegal

Cape Verde

7

Southern Africa

Namibia South Africa Zimbabwe

Botswana Malawi Mozambique Swaziland Zambia

Angola Lesotho

10

5

21

12

38

62

Total

Note: regional grouping follows AfDB classification. Source: based on GWP, Setting the stage for change, second informal survey, February 2006. http://dx.doi.org/10.1787/226346857718

Box 14 - Monitoring Water Quality in Uganda In Uganda, the water and sanitation sector has mechanism for monitoring and evaluation. There are 70 surface water monitoring stations, 16 groundwater water observation wells, 112 water quality sampling sites and 18 climatic stations. A water quality and pollution control laboratory has been established and equipped. Also, a Quality Assurance system has been established, including audits and external proficiency scheme to ensure performance to international standards; the process for obtaining accreditation of the laboratory is underway. However, standards and guidelines for water quality management in Uganda remain eclectic. These include the National Standards for Drinking (potable) Water, the World Health Organisation (WHO) guidelines on specific local conditions and water use habits, National Effluent Standards for discharge of waste water into the environment, and a Provisional Water Quality Guideline for untreated rural water supplies. Source: see country notes in the body of the report.

needed to provide incentives for conservation, for ensuring that planned expansion of water networks takes into account sanitation and wastewater treatment, and promote environmental protection. Policy making African Economic Outlook

should be accompanied by strong monitoring tools so as to assess the progress in implementing IWRM and to identify the need for adopting corrective measures if necessary. A good example is provided by Uganda. © AfDB/OECD 2007

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Box 15 - Trans-boundary Water Management in Tanzania Tanzania is an enlightening case where about 43 per cent of water resources are shared with other countries: Lake Victoria is shared with Kenya and Uganda; Lake Tanganyika is shared with Burundi, Zambia and Republic of Congo; and Lake Malawi is shared with Malawi and Mozambique. Also, water uses are diverse ranging from domestic, industry, agriculture and livestock, wildlife and hydropower supply (that accounts for 80 per cent of installed electricity generation capacity). A strong mechanism for water resources management is thus indispensable if conflicts among users within and between countries sharing the waters are to be avoided and ensure that the resource is used sustainably for human development. In August 2003 the Tanzania parliament ratified a protocol providing guidelines for the establishment of institutions to manage common water resources in SADC countries. Tanzania’s Water Ministry in collaboration with countries sharing river Zambezi waters are establishing a River Zambezi Commission that will manage sustainable use of the basin’s waters. Tanzania is also establishing a commission in collaboration with Mozambique Water Ministry for overseeing sustainable use of Ruvuma Basin waters. During 2005/06 Tanzania and other countries sharing water from the Nile continued to manage the use of water through the Nile Basin Initiative (NBI) which is an interim institution established for this purpose. The process of establishing the permanent Nile Basin Commission is in its final stages, including the required assessment of water use needs in the country. In collaboration with Kenya and Uganda, Tanzania continued with implementation of the First Phase of the Lake Victoria Environmental Conservation Project. The project, initiated by the East African Community, intends to assess the extent of pollution in lake waters and their sources in view of designing and implementing collective measures. Source: see country notes in the body of the report.

Co-operation at the regional level is also a key element of IWRM. Africa has a unique water resource endowment, with some 60 trans-boundary rivers, more than in any other continent. Consequently, many countries share river basins. For instance, ten countries share the Nile river basin, nine share the Congo River basin and nine others share the Niger River basin.

Some countries host all or parts of several river basins, such as Guinea, riparian for fourteen basins, and Mozambique, riparian for eight. This situation requires strong regional co-operation to establish trans-boundary mechanisms that can minimise the potential for conflict by organising the sharing of resource, regulating their uses, co-operating in infrastructure development, and

Box 16 - Managing the Different Actors through SWAP, the Case of Uganda In Uganda, the NGO and private sectors are very active in diverse water and sanitation related activities alongside the public sector service providers. Private-sector firms undertake design and construction in the water sector under contract to local and central governments. They provide maintenance services to water users in rural and peri-urban areas, and they manage piped water services in the majority of small towns with piped water. NGOs and Community Based Organisations (CBOs) are active in the provision of water and sanitation services (construction of facilities, community mobilisation, training of communities and local Governments, hygiene promotion as well as advocacy and lobbying). In August 2006 the Uganda Water and Sanitation NGO Network (UWASNET) had a membership of 150 NGOs/CBOs implementing projects in the sector. Between January and December 2005, NGOs served an estimated number of 113 420 people with new water sources (protected springs, shallow wells, boreholes, gravity scheme taps and rainwater harvesting faculties). Some of them have demonstrated their ability to innovate (e.g domestic roof water harvesting, biosand filters, and leverage of household investments). The UWASNET secretariat is supported financially by the government and development partners. In 2005, 5 per cent of the DWSCG and 11 per cent of NGO funds were utilised for sanitation. In order to co-ordinate the participation of all stakeholders in the sector, Uganda adopted a Sector Wide Approach to Planning (SWAP) for the Water and Sanitation Sector in September 2002. SWAP is a mechanism whereby Government and development partners support a single policy and expenditure programme using a common approach. The SWAP mechanism has resulted into a harmonised sector-planning framework in which duplication of efforts by different stakeholders has been minimised. Source: see country notes in the body of the report.

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co-ordinating measures to tackle pollution. Tanzania provides a good example of co-operation in transboundary water management. Beyond regional co-operation, all stakeholders should be part of the IWRM dialogue. Their various roles need to be clearly defined and strong co-ordination mechanisms developed. The first step for managing water resources is to clarify the most appropriate level of decentralisation and the corresponding allocation of functions. Central government should ensure that activities are co-ordinated across the broad range of actors. Uganda provides a good example in this regard.

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Finally, there is a need for sound and autonomous regulation to reap the benefits of partnerships in a decentralised framework. Effective water resources management requires separating the development and regulatory aspects from water supply and sanitation delivery functions. A service provider cannot at the same time fulfil the regulatory or allocative functions to decide among competing uses without giving rise to conflicts of interest. Autonomous institutions should carry out the regulatory functions. An example can be seen in Zambia, which established an independent water regulator in 1997, the National Water Supply and Sanitation Council (NWASCO), which has since developed regulatory tools and guidelines on service provision, tariff negotiations and yearly reporting. In particular, NWASCO has been instrumental in strengthening the monitoring of access to water and sanitation services through a close follow-up of the commercial utilities activities. It carries out detailed

inspections of the service providers and provides capacity building to ensure compliance with performance and corporate governance. It also approves tariff adjustments. In 2005, NWASCO put in place water quality guidelines describing the types and frequency of water sampling for routine water testing. The regulator also established Water Watch Groups to resolve disputes between consumers and providers. It includes a customers’ complaint handling procedure that encourages direct resolution with the utilities. This mechanism also helps to monitor service quality. In 2004/5 most complaints concerned erratic supply, and some were addressing sewerage overspill and water quality. 2- Strengthening Local Management Decentralising responsibility and ownership, and providing a choice of service levels to communities, based on their ability and willingness to pay can accelerate progress in expanding access. Communities have a better understanding of local realities enabling quick and realistic decision making. Consumer groups, cooperatives, and professional associations have a key role to play in water resources management: setting development goals, participating in project implementation, adapting technologies to local conditions, and bridging gaps between public sector and communities. Over the last two decades, central governments have started devolving the responsibility for providing water and sanitation services to local bodies and the responsibility for oversight to local authorities. There was an expectation that the water departments would subsequently evolve into

Box 17 - Institutional Reforms The design of the regulatory system is the most essential step in the process of reforming the water sector, especially in countries that seek to delegate water services to private operators such as North African countries (see table 12). An independent regulatory agency provides political stability and safe economic environment for both private and public water operators. Often countries create an autonomous water regulatory agency. However, in the practice these agencies are rarely independent from governments and are thus not very useful. The separation of roles – political, strategic, regulatory and operational – is also a condition of efficient management. Another important reform is the corporatisation of local water operators: establishing legal and financial independence of water operators reduces administrative burden and political interference. It guarantees the transparency of costs and financial flows. It also ensures a fair and fruitful competition among water operators, public or private. In addition, countries can create River Organizations, which are funded through users’ fees and aim to finance local water projects. Thus, part of the public responsibility is delegated to the regional level, which is able to evaluate more precisely the needs. This system also reduces the fiscal and administrative burden of the central state. Without creating Basin Agencies, the administrative burden can also be moderated by decentralising part of water policy to regions.

African Economic Outlook

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Overview

Table 12 - Elements of Regulation in North African Countries

Presence of regulatory agency

Algeria

Egypt

Morocco

Tunisia

Not yet but planned in the 2005 water law

Yes since 2004

No

No

Independence of regulatory agency

No

Separation of powers

Yes

Important political interferences

Yes

Some political interferences

Corporatisation of local operators

Possible since 2005

No

Possible since 2002

No

Basin organisations

No

No

Yes since 1997

No

Decentralisation

Decentralised

Highly centralised

Decentralised

Centralised

Decentralisation process planned Source: Perard, E (2007), Private Sector Participation and Regulatory Reform in Water Supply: the MEDA Experience, mimeo, OECD Development Centre, Paris. http://dx.doi.org/10.1787/037063805755

65 autonomous commercial entities, able to generate sufficient revenue to cover at least their operation and maintenance costs. However, although decentralisation is included in most countries’ institutional reform packages, local authorities do not always have sufficient management capacity to discharge their new responsibilities. Angola, for instance, established an ambitious decentralisation plan, but it was only partially implemented, with a number of local units existing only on paper or not officially recognised by the central government. The budget also remains mostly centralised, with central and provincial governments responsible for allocating the funds to local authorities. Similarly, the 2002 Water Law foresees the creation of Empresas de Agua for water treatment and distribution at provincial level by 2010. EPAL was created in Luanda, but only a few of the smaller urban centres have so far followed suit. Moreover, the regulatory framework attached to the 2002 Water law is still waiting for approval by the government. In Zambia, the Water Supply and Sanitation Act of 1997 delegated to the local authorities the © AfDB/OECD 2007

responsibility to provide water and sanitation services in their respective areas. Consequently 50 out of 72 local authorities have established nine commercial water utilities in urban areas, which are expected in the long term, to be commercially viable. The commercial utilities are responsible for service provision to 86 per cent of the urban population; the remaining areas are serviced either by 22 local authorities (13 per cent) or private providers (1 per cent). Commercialisation has been crucial to sustain improvement in service delivery. Over the years, the commercial utilities have made considerable progress in extending water supply coverage (from 58 per cent in 2004/05 to 73 per cent in 2005/06), thanks to the support of the Devolution Trust Fund (DTF) (a basket of co-operating partners’ funds which aims at assisting the providers to extend the provision of services to the peri-urban poor). The institutional framework for rural WSS, adopted by the government in 2004, devolved authority to the local authorities and communities, promoted community management in order to ensure service sustainability, and embodied the WASHE (Water, Sanitation and Health Education) concept to promote awareness regarding sanitation and environmental health. African Economic Outlook

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Decentralisation is well advanced in Uganda. It was first adopted because a combination of mismanagement and reduced revenue collection had led to unreliable services and deterioration of infrastructure. Local Governments (Districts, Towns, and Sub-Counties) were empowered by the Local Governments Act (1997) to provide water services. They receive grant funding from the central government and were authorised to mobilise local resources for implementing rural water and sanitation sector programmes and to support small towns. Local Governments also appoint and manage private operators for urban schemes outside the jurisdiction of the National Water and Sanitation Company. However, a number of obstacles to further developments in the WSS have been identified by the various stakeholders: i) poor technical competence in the water and sanitation fields at district levels; ii) poor co-ordination of sector activities; iii) inadequate capacity to handle the tendering, contract procurement and management of privatesector implementation; iv) inadequate supervision, monitoring and reporting capacity; and v) lack of capacity at sub-county and lower levels which are responsible for implementation. For example,

transparency now exists in the awarding of contracts by central authorities in the Ministry of Water Lands and Environment and/or National Water and Sewerage Corporation through properly constituted Contracts Committees. However, such transparency is rare in the case of contracts awarded by district tender boards, which lack capacity and qualified manpower, and are thought to be susceptible to political influence from local councillors. To respond to the lack of capacities, some countries have put in place interesting mechanisms, relying for instance on public-public partnerships and the expertise accumulated at central government to train subsovereign entities. The cross training of Umgeni by TCTA in South Africa presents such an example, where the South African government agency responsible for the implementation and funding of bulk water supply developments helped to build up treasury capacity at the water service provider. Uganda also presents an interesting case where the National Water and Sewerage Corporation has partnered with the Directorate of Water Development25 to train the local private sector and local governments in management and institutional development.

Box 18 - Cross-training of Umgeni by TCTA (Trans-Caledon Tunnel Authority), the government agency responsible for the implementation and funding of bulk water supply developments in South Africa South Africa’s TCTA, a parastatal, was created in 1986 in order to “implement, operate and maintain the project works within South Africa” according to the Treaty governing the Lesotho Highlands Water Project (LHWP). Because of its role in financing large-scale water infrastructure, and its strong financial skills, TCTA was able to provide assistance to Umgeni Water, which operates under the direction of the Ministry of Water Affairs and Forestry (DWAF). In 2001, TCTA assumed responsibility for treasury management services, with a remit to strengthen Umgeni’s own capacity. By 2004, DWAF determined that TCTA had built sufficient capacity, and the handover was completed in January 2005. Through this process Umgeni received sufficient training to perform treasury functions; in addition training and financial modelling skills and computer programs were transferred, such as cash-flow projections, debt modelling, tariff calculations, and other financial decision-making aids. TCTA remains a participant on Umgeni’s Water Finance Committee, and through a service agreement, continues to provide assistance on issues relating to tariffs, funding and debt management, risk management, formulating interest rate reviews, and other financial functions. Source: Based on African Development Bank (2006), Studies on Financial Instruments to Facilitate Investment for Water Infrastructures, by Rachel Cardone, based on TCTA website and discussion with Leslie Maasdorp, Chairman of the Board, TCTA.

25. The Directorate of Water Development is the government arm in charge of overall water-resource development and management and is responsible for the provision of services to the rural areas and small towns under a decentralised management framework.

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3- Advancing Sanitation and Wastewater Treatment to the Top of the Agenda Progress in sanitation has been largely disappointing. Neither has progress in improving access to drinking water been accompanied by an adequate increase of wastewater treatment capacities. Cholera and infant diarrhoea continue to figure prominently among the six main water-related diseases which afflict half of the African population. Cholera outbreaks affected Luanda and other large cities of Angola in 2006. In Zambia some 7 615 cholera cases were reported between August 2005 and April 2006, most of them in Lusaka. In Ghana, lack of access to clean water and sanitation systems are estimated to contribute to some 70 per cent of the burden of disease. In Madagascar, 60 per cent of infant mortality is related to low water quality and bad sanitation. Consequently, the World Health Organisation estimates the economic benefits to Africa of meeting the water and sanitation MDGs at about $23 billion annually26, compared to an annual cost of intervention of $2 billion. Moreover, environmental sustainability will worsen if the water supply target is achieved without accompanying measures for sanitation and effluent management. The volume of sewage produced will increase proportionally, exacerbating its threat as a main source of water pollution. Some sanitation solutions adopted by households, such as septic tanks, flush toilets and sewer connections without proper treatment, can also cause water pollution. The excreta disposal situation is also worsening in Africa because on-site installations are multiplying but are not properly emptied. Owners do not have the means or the awareness to pay for mechanical emptying and prefer to pay smaller fees for manual removal. On top of the sanitary risk for the removers, manual removal usually takes care only of the top layer and untreated waste is often disposed of in open urban areas, inland waters and the sea. Moreover, with rapid urbanisation, the number of people per plot is increasing and the new lands are often poorly drained and shallow. Pits fill

even faster and maintenance is becoming even more critical. Safe water supplies can only be secured if the water resources are protected from contamination by untreated or inadequately treated, wastewater discharges. In densely populated areas, increasing access to drinking water can therefore only be safely achieved if the sanitation situation is tackled simultaneously. Sanitation does not receive the attention it warrants for a variety of reasons. The costs might seem colossal to governments pressed by stringent budget constraints even though they are small compared to the health and environmental costs of inaction. Also, the sanitation system is highly segmented between the initial provision of facilities, the removal and transport of waste and its treatment, involving many different actors among which partnerships rarely exist. This situation is usually mirrored by a fragmented institutional framework where responsibilities are divided among several different state agencies. The current institutional framework for wastewater management in Botswana, for instance, comprises five departments responsible for some 11 Acts: the Department of Waste Management and Pollution Control, the local authorities, the Department of Water Affairs, the Directorate of Public Service Management and the Department of Local Government. Such fragmentation results in low capacity to undertake large projects, a lack of accountability, and excessively high costs of service provision. There is also a risk that sanitation facilities will be provided without ensuring maintenance services. The complexity of handling these issues leads governments to favour projects with more immediate returns and this results in too little money spent on sanitation compared to water. Change is possible, however, as illustrated by the case of Senegal. The difference between the costs of highly engineered sanitation solutions and the amounts considered affordable points to the need to adapt the technologies employed to local conditions. In fact, there is a range of potential technologies that can be adapted to the needs of communities, such as ease of maintenance, and entailing cost in line with their

26. Hutton and Haller (2004) Evaluation of the Costs and Benefits of Water and Sanitation Improvements at the Global Level, WHO, Geneva.

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Box 19 - Senegal’s Pro-Active Strategy Things have moved very slowly in sanitation in Senegal, so the government has made the sub-sector a priority, giving it pride of place in the PEPAM, creating a special ministry for it, drafting a sanitation law and spending more on investment. The sector strategy is based on synergy of urban and rural water operations and the need to increase the execution capacity of the national sanitation department ONAS (Office National de l’Assainissement) and the sanitation directorate (Direction de l’Assainissement), especially to handle the scale changes in rural sanitation. The aim is reduce financial barriers to access by encouraging shared connections, subsidising investment (semi-shared and independent) and strengthening monitoring and assessment methods. Second-generation reforms in urban areas will update the law on public drinking water supply. A rates survey is being done and an ONAS-government performance contract introduced to improve the financial situation of ONAS. Infrastructure is to be boosted with 92 400 shared connections, 800 km of sewerage and 135 100 autonomous networks. Access will be facilitated through the complementarity between shared, semi-shared and autonomous sanitation, as well as by increasing the capacity for treating sewage and disposing of drainage waste and by finding and introducing a viable way to fund management of rainwater. The plan in the countryside focuses on meeting demand, through training and education. Growth of the private sector is encouraged by local people carrying out the work. The plan aims to promote technical packages that are simple to construct and maintain (ventilated latrines, hand-flushed toilets, washbasins and standard public lavatories). The programme plans to build 355 000 autonomous domestic connections and 3 360 public lavatories. Investment in sanitation infrastructure between 2006-15 is estimated at 220.6 billion CFA francs in urban areas and 103.5 billion in the countryside, and for related work 15.8 billion in urban areas and 16.3 billion in rural areas. Source: Based on the intervention of Adama Mbaye, Director, Direction de l’assainissement, ministère de la Prévention, de l’Hygiène publique et de l’Assainissement, at the OECD/AfDB expert meeting on Access to Drinking Water and Sanitation, Paris, December 2006.

68 willingness to pay. Beside the main sewerage network, mini networks can be developed to cater for the needs of densely populated settlements that are not connected to the main sewer network, as shown by the experience of Mali. In informal peri-urban settlements, the main impediment to making these connections is often the reluctance of the authorities to permit investments in the sanitation infrastructure that could lead to legalising the settlements.

In any case, with rapid urbanisation, and the development of informal peri-urban settlements, the prospects for connecting all households to sewerage networks in the short term are slim. Thus, on-site sanitation is often the only practical solution, as the Building Partnerships for Development in Water and Sanitation27 programme has found. Involvement of communities in the construction of such facilities and their maintenance (through user fees) has proved useful

Box 20 - Mini-sewers in Mali The only areas connected to mains sewers are central Bamako (and its suburb of Koulouba), the industrial zone and a small part of the town of Ségou. Mini-networks of small-diameter sewers have also been built in Bamako to serve about 12,000 people and as a suitable way to manage sewage in a densely-populated urban area. The preferred solution is family-funded individual sanitation but the government (through the state housing department, the Office Malien de l’Habitat) has invested 139 million CFA francs building mini-sewers in the Bamako neighbourhoods of Bankoni and Baco Djicoroni, as well as building them in the towns of Djenné and Timbuktu. Microfinance institutions, sanitation co-ops and consortia are involved in funding, managing and cost recovery. The big problem is still the very low cost recovery rate (about 20 pour cent). Source: see country notes in the body of the report.

27. Schaub-Jones, D., K. Eales and L. Tyers, 2006. Sanitation Partnership: Harnessing their Potential for Urban On-site Sanitation. Building Partnerships for Development in Water and Sanitation, London.

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to promote political ownership. Local actions of NGOs and community-based organisations (CBOs) are also instrumental in influencing policy making. For example, the coalition “Muungano wa Wanvijijihas” formed by NGOs and CBOs operating in the area of Nairobi, emerged to improve conditions of the slum dwellers of Kibera. The coalition managed to lobby for the destruction of some clusters for the development of communal facilities, thereafter managed by the residents under CBOs’ oversight. This shows that making progress on sanitation requires both strong partnerships and awareness raising.

flow of orders. The public sector can also take the lead in co-ordinating demand. For example, the South African municipality of Durban has chosen to overcome the sporadic nature of demand by ensuring that pits are emptied every five years according to a specific schedule (regardless of volume), at no cost for the households. In parallel, the city is supporting the professionalisation of manual pit emptying operators, regulating their activity to ensure safety and security (allowing work only in daylight, requiring the use of appropriate material and securing the chain of custody from emptying the pits to the safe disposal of waste for treatment).

Partnerships can help overcome the fragmented nature of sanitation by providing a platform for discussion among the different actors. Partnerships can also consist in creating intermediaries (typically CBOs) between households and (private) service providers. Such intermediaries can catalyse demand and thereby help the local service providers to develop a more stable

The sanitation situation can also benefit from large awareness campaigns about the risks arising from untreated wastes, and also about the possibilities of using properly treated human excreta as fertilisers. Good examples of behaviour change can be found with community level sanitation programmes such as the AHEAD clubs in Zimbabwe. 69

Box 21 - Community Health Clubs in Zimbabwe Community Health Clubs were first pioneered in Zimbabwe in 1995, in a small pilot project in Makoni District, with the objective of creating demand for sanitation and rapid uptake of hygiene practices. From the start, the health clubs attracted a strong response from the community with clubs of between 50 to 200 members. It was estimated that approximately 70 per cent of the members in each club continued to attend the weekly health sessions for over six months. By 2001, there were 472 health clubs in Zimbabwe, with 27 784 members in 6 districts. In all districts Environmental Health Technicians, from the Ministry of Health, were responsible for facilitating the health club sessions, thus institutionalising the programme within the government structure. The approach has led to important changes in behaviour (Waterkeyn and Cairncross, 2005). Health club members constructed 3 600 latrines in two of the districts within 18 months in 1999 and 2000 which can be compared to some 8 000 latrines constructed in the entire country in 1998. The health promotion needed to stimulate this strong demand was achieved at a cost of $0.55 per head for 12,630 beneficiaries in Tsholotsho District, and $0.21 in Makoni District for 68 700 people. Despite minimal external support following the socio-political collapse of Zimbabwe, the health clubs are surprisingly resilient and continue to prosper (Waterkeyn, 2005). In 2004, Africa AHEAD Association was founded to replicate and adapt the CHC Approach throughout Africa by starting pilot projects in as many countries as possible. Source: http://africaahead.com

III- Financing There are various estimates of the additional financing needed to reach the MDGs28. However, they all agree that the largest financing need by far is for the treatment of wastewater. AfDB et al. estimate in the Africa Water

Vision 2025 that to ensure a sustainable water future, Africa should invest some $20 billion annually until 2025, a third of which for sanitation, a quarter of which for drinking water supply, and $1 billion for policy and institutional reform, capacity building, information, awareness and education, and R&D. UNDP argues that in low income

28. They are reported in Fonseca, Catarina and Rachel Cardone, 2005. “Analysis of cost estimates and funding available for achieving the MDG targets for water and sanitation.” WELL (WEDC/LSHTM/IRC), London. Internet: http://www.lboro.ac.uk/well//resources/Publications/Briefing per cent20Notes/BN9 per cent20Fonseca.pdf

© AfDB/OECD 2007

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Table 13 - Investment Requirements to Reach the MDGs in Selected Countries (in m$/year) Total Investment Required

BENIN

Water Sanitation

BURKINA FASO

Water Sanitation

DRC

Water Sanitation

GHANA

Water Sanitation

KENYA

Water Sanitation

MADAGASCAR

70

Water Sanitation

MAURITANIA

Water Sanitation

MOZAMBIQUE

Water Sanitation

NIGER

Water Sanitation

RWANDA

Water Sanitation

SENEGAL

Water Sanitation

UGANDA

Water Sanitation

ZAMBIA

Water Sanitation

Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban Rural Urban

New

Rehab

Public I required

Planned Pub I

Surplus /Gap

11 7 6 6 62.17 1.48 15.2 11.65 52 117 21 188 42 72 25 12 53 9 51 24 14 18 2 5.5 35.3 1.1 5.1 14 42 1 15 52 0 3.6 2.8 1.3 24 3 4 30.7 15.9 22 35 29 14 35 38 14.9 2.3 -

6 3 3 3 7.83 16.52 10.4 12 18 13 11 4 9 51 22 25 14 7 9 41 4 9.1 6.8 0.8 1.5 22 12 2 2 6.2 20 1.2 0.7 31 4 2 1 2.1 8.1 0 10.7 44 6 68 10 2.3 N/A -

16 7 8 8 68.96 17.87 14.57 11.52 39 132 3 40 44 81 14 57 67 0 59 26 7 6 1 13.1 35.8 0.6 3.3 35 47 0 2 50 20 2.8 3.5 40 0 1 0 32.4 17.8 20 43.9 69 20 35 18 9 1 -

24 10 2 0 10.97 2.42 0.3 3.67 7 62 1 1 42 36 10 33 77 2 14 52 21 4 15 11.4 25.2 0.2 0.8 23 44 1 19 5 0 1 0 9.7 3.3 2.6 23 46 54 10 9 0.18 0.27 0.02 0.03

8 3 -6 -8 -57.99 -15.46 -14.28 -7.86 -32 -70 -2 -39 -2 -45 -4 -24 10 2 -45 26 14 -2 14 -1.7 -10.6 -0.4 -2.5 -12 -3 1 17 -35 0 0 0 -22.7 -14.5 -17.4 -20.9 -23 34 -25 -9 8.82 0.8 -

Source: The Heritage Foundation/The Wall Street Journal, 2007 Index of Economic Freedom. http://dx.doi.org/10.1787/853764276241

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countries with limited coverage and a high level of poverty, public spending on drinking water and sanitation should equal about 1 per cent of GDP with cost recovery and community contributions making up an equivalent amount. These figures are more than twice as high as current levels of spending. Estimates for a selected number of countries are shown in the table below on investment requirements to reach the MDGs derived from the assessment of AMCOW et al. Ultimately there are three main sources of financing: through the user fees paid directly to the water utility, through tax revenues and their use to subsidise service delivery and finance investments, and official development assistance and contributions by non-state actors. The case of Uganda is enlightening as it shows the respective importance of the different actors in

funding. The Poverty Eradication Action Plan (PEAP) clearly recognises the fact that the tariffs cannot fully cover costs and, therefore, the Government still retains overall responsibility for financing investments in the water sector. In 2005/06, the total public spending on water and sanitation sector in 2005/06 was 103 billion shillings (i.e. some 0.6 per cent of GDP), 61 per cent of which was financed by donors. So far, however, government budgets and development assistance have largely been insufficient to cover the scale of investments needed. National water providers have also failed to help establish a financially sustainable system. Alternative sources such as private participation have proved disappointing, with water and sanitation the least attractive sector to private investors.

Box 22 - Principles for Private-Sector Participation in Infrastructure 71 The shortage and low quality of infrastructure in African countries is an obstacle to meeting the populations’ needs, to enterprise development, and to achieving the goals of the Millennium Declaration (MDG). World Bank calculations identify a need for $40 billion investment in infrastructure per year, equivalent to 9 per cent of GDP of the continent, for the next 10 years in order to attain the MDG. To meet these needs, encouraging private-sector participation in infrastructure is an option that governments cannot afford to ignore in determining their overall strategies for enhancing and financing infrastructure. The OECD Principles for Private Sector Participation in Infrastructure http://oecd.org/dataoecd/41/33/38309896.pdf aim to assist governments to make the most of private-sector involvement in infrastructure development for the benefit of society. Specifically, they offer a coherent catalogue of policy directions to be assessed as a first step in the authorities’ consideration of effective ways of involving the private sector in their infrastructure sectors, in light of their own national circumstances and needs. The Principles cover five main issues: 1) deciding on public or private provision of infrastructure services; 2) establishing an enabling policy framework for investment; 3) enhancing the public’s acceptance and the government’s capacities to implement agreed projects; 4) making the co-operation between the public and private sectors work; and 5) communicating government’s expectations about responsible business conduct to their private partners. The Principles are of applicability to foreign and domestic operators, and to the various forms private-sector participation can take. They can be used as a template for country self-assessment at national and local government levels, an aid for progress reporting by public authorities, a tool for structuring regional and other inter-governmental co-operation and public-private dialogues. They may also be used by donors as a reference point, and complement donor guidance on pro-poor growth in the infrastructure area. The Principles will be used in the context of the OECD-supported regional initiatives, such as the NEPAD-OECD Africa Investment Initiative.29 This will include, inter alia, the development of more operational guidance, specific to infrastructure sectors, such as water and sanitation and developed through multi-stakeholder consultation and tested through pilot assessments of volunteering countries. For further information see: www.oecd.org/daf/investment

29. For information on the NEPAD-OECD Africa Investment Initiative, visit www.oecd.org/daf/investment/africa

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Overview

There are very specific risks for commercial funding in the water and sanitation sector, as underlined by the Camdessus panel30. The water and sanitation projects

are usually capital intensive. They involve high initial investment, long payback periods and low rate of return. As highlighted by the AfDB31, the commercial rate of

Box 23 - Matching Demand with Supply: Feasible Financing Strategies for Water Supply and Sanitation An important obstacle to achieving the internationally agreed targets on water supply and sanitation in many countries has been the failure to address the associated financial issues adequately: the costs of achieving the targets; how those costs could be minimised; and the challenge of matching costs with available resources. The need for a fresh approach has become evident as many developing countries and economies in transition struggle to maintain even the low levels of services currently delivered by water supply and sanitation infrastructure, not to mention the need to extend it to reach a greater share of the population. The Danish government and the OECD have jointly developed an approach to meet these challenges, particularly for investment-intensive environmental infrastructure, such as urban and rural water supply, waste water collection and treatment. This approach, backed by a special decision-support tool called FEASIBLE, has been applied in several transition economies including in the former Soviet Union, some new EU countries and China. The main ideas underlying this approach are realism, affordability and cost-effective use of resources. The basic approach underlying the FEASIBLE method is to collect detailed technical data on the existing state of infrastructure, set and agree upon the public policy targets with stakeholders in areas like water supply and sanitation, determine costs and timetables for achieving them, and compare the schedule and volume of expenditure needs with available financing. This analysis generally reveals financial deficits which would likely arise during the planned implementation. FEASIBLE can then develop various scenarios to determine how the gaps might be closed. This could involve identifying measures to help achieve the targets at lower cost; identifying ways to mobilise additional finance; adjusting the ambition level of the targets; or rescheduling tasks and targets.

72

An important feature of FEASIBLE is the emphasis on realism and affordability. The model can assess the levels of finance (public, private, domestic, foreign) that might be available under different macroeconomic conditions. In this way it provides a check on what public budgets might realistically be expected to contribute. It can also help to assess the potential social implications of increasing tariffs by determining the impacts of such price increases on household income. It helps to review the obstacles systematically that would need to be removed in order to mobilise private sector and foreign financing for environmental infrastructure. Thus FEASIBLE can support a process of dialogue and consensus building among stakeholders and build bridges between policy development and implementation. The assumption underlying the FEASIBLE methodology is that governments should not be expected to finance all or even most of the environmental expenditure required, or sponsor all or even most projects. The main role of government in relation to financing is to establish the policy, regulatory and institutional framework as well as the incentive structure, within which resources from users, financial markets, capital markets, local budgets and enterprises can be mobilised in a complementary way, and be applied as cost-effectively as possible to achieve agreed goals. These applications are more than technical exercises: by engaging all the major stakeholders involved in financing environmentally related infrastructure, they support constructive dialogue and agreements that facilitated effective programme implementation, improvement of service quality and the achievement of environmental goals. If properly developed financing strategies can help to generate additional financial flows from water users, public budgets, donors, IFIs, and the private sector. In some cases, the results of such work have been incorporated into medium-term expenditure frameworks in ministries of finance, and they could provide a useful input into Poverty Reduction Strategy Programmes through setting the indicators for monitoring of the services quality inter alia taking account the need to achieve the MDG targets on water supply and sanitation. Following the initial focus on the countries of the former Soviet Union countries, the OECD is now planning to adapt the methodology to the African context, where discussions are under way with Egypt as a possible pilot country. It is also planned to identify a country in sub-Saharan Africa where this work could effectively support efforts to achieve the internationally agreed water targets. For further information see: www.oecd.org/env

30. Winpenny (2003), “Financing Water for All: Report of the World Panel on Financing Water Infrastructure”, chaired by Michel Camdessus: http://www.gwpforum.org/gwp/library/FinPanRep_MainRep.pdf 31. African Development Bank (2006), Studies on Financial Instruments to Facilitate Investment for Water Infrastructures, by Rachel Cardone.

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Overview

return for a water infrastructure project is between 5 and 10 per cent compared to 17-25 per cent in the power sector and 25-30 per cent in telecommunications. The resulting water-related infrastructure is fixed and very specific; it cannot be used for other purposes or removed from the country. This profile generates high contractual risk especially in a context of poor initial information and a weak regulatory environment. The revenues come mainly from user fees or government subsidies in local currency while funding is largely in foreign currency, exposing the investor to high foreign exchange risk. Management of the projects are mainly local, exposing the investors to weak management and financial capacities of the sub-sovereign entities (subsovereign risk). Finally, as a basic need, water has important political repercussions, and therefore justifies political interference (notably in the setting of tariffs). Such a project profile deters commercial financing and explains that most funding to the water and sanitation sector mainly comes from government and donors. However, new developments in the area of guarantees and risk mitigation mechanisms supported by the donor community are helping enhance attractiveness of the water sector and make sub-sovereign financing a viable option. 1- Implementing Cost Recovery Mechanisms Establishing an appropriate tariff structure is a key element of water management since charging for water provides an incentive for its efficient use and the revenues can cover most of the costs of service provision. The objectives of cost recovery are to ensure sufficient revenues to deliver services of quality over the long term, extending the network to serve lower income consumers while providing incentives to make better use of scarce resources. The cost recovery ratio measures the extent to which user fees with other direct contributions can meet service costs, and contribute to financial sustainability of the sector. The costs can be broadly divided into three main categories: i) operating and minor maintenance expenditures, ii) infrastructure maintenance and replacement expenditures and iii) long-term cost of capital. In the past, maintenance has been largely overlooked, jeopardising the © AfDB/OECD 2007

sustainability of the services. It is therefore crucial that financing be designed not only to cover investment needs but also to provide for recurring expenditures, including maintenance. African countries are characterised by wide variations in payment capacity. While there is a potential for full cost recovery of providing water services in most urban settings, extension of networks in peri-urban areas and service delivery in many rural areas require subsidisation of capital expansion. By contrast, sewerage and wastewater treatment are not necessarily affordable by the majority, even in urban areas. Accounting for the wide variations of affordability across users, crosssubsidisation between the wealthier and the poorer users is necessary, together with subsidisation across water and sanitation and clear differentiation of industries (particularly the polluting ones that should bear the costs of pollution abatement). According to the “polluter pays” principle, the tariffs applied should reflect the cost of treatment and therefore depend on the volumes and pollution content of the wastewater. Alternatively, it could also give incentives to industries to treat wastewater on site (in line with clear agreed standards) to reduce the burden on treatment plants. Cross-subsidisation is not at odds with the cost-recovery principle since the average tariff can be set so as to ensure financial sustainability of the provider, without recourse to government support. The tariff structure that is usually implemented to incorporate crosssubsidisation is a stepped or progressive one where a low price is charged for a small quantity of water, and the tariff increases with successively higher levels of water consumption. This structure has the additional advantage of encouraging water conservation, unlike other financing systems, such as property taxes. However, monitoring consumption levels requires an efficient metering system and the prevention of illegal connections. Also, implementing different levels of cross-subsidies (across user categories and activities) can lead to a complex tariff system that may be difficult to administer. Wide variation in payment capacity is also matched by variations in the costs of water provision. This reflects the differences in technologies used, notably to African Economic Outlook

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access newer, more remote and deeper sources. In Uganda, for instance, the per capita cost of providing improved water to people in rural areas is $34 on average, but it varies between Districts. In some cases this is a result of the technology mix: there has been a steady increase in per capita costs due to a marked reduction in the availability of low cost options such as springs and shallow wells, increased expenditure on overheads (in part as a result of the creation of new Districts) and an increase in the cost of other resources (e.g. fuel, construction materials). In the 2005/06, financial year the per capita cost for small towns was $96, attributable to cost of diesel generators, poor state of schemes, and the purchase of bulk water. With tariffs ranging from 800 to 2 500 shillings per cubic metre, it is estimated that only 17 out of 53 small towns are able to cover their operation and routine maintenance costs.

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As of today, very few water utilities are financially sustainable. Even in urban areas, tariffs rarely fully cover all operating and maintenance costs, not to mention charges for capital raised to finance investment expenditures. In northern Africa, for instance, the World Bank finds that only the water utilities in Rabat and Casablanca reach operating cost recovery32. By contrast, the water utilities in Cairo and Alexandria are estimated to cover only some 25 per cent of their operating costs. Consequently, most water utilities rely on subsidies at least for network expansion and modernisation. Ensuring sustainable access for all: the respective role of user fees and subsidies. The key elements determining users’ payments are affordability and willingness to pay. Willingness to pay is in turn a function of quality and reliability of services. It is also influenced by the existence of competing water sources or by different price policies in neighbouring communities. Awareness campaigns on

the consequences of not paying, but also on the consequences of poor water and sanitation conditions on health and education, help to increase willingness to pay. The usual rule of the thumb to appraise affordability is that households should not pay more than 3 to 5 per cent of their incomes for water services. However, for a variety of cultural and historic reasons, paying for water and sanitation services is not well established in Africa. Following the Gurría task force33, it is however largely admitted today that “free water services ultimately may be very expensive for the poor”. Rural areas face a particularly difficult challenge to ensure financial sustainability as most of their population is poor and can hardly cover even operating and maintenance costs. Some transfer pricing mechanisms between urban and rural areas exist that involve for instance levies on volumes of water “imported” by cities from basins in rural areas. However, the challenge remains great as the population in richer areas might not be wealthy enough to support the resulting costs in most African countries. Also, the utilities are increasingly autonomous and managed on a commercial basis, making such transfers difficult. In the specific case of sanitation, the financing can not be raised through tariff-based user charges in areas where networks do not exist. Its cost, therefore, can hardly be covered by households. The AfDB34 concludes that most financing for rural water and sanitation will continue to come in the form of a mix of loans and grants, mainly from international development assistance (whose contribution is estimated at 80 per cent), from national governments (15 per cent) and from communities (for 5 per cent) in the form of free labour and material for construction and maintenance. It is widely acknowledged that sewerage operations should be linked with water services in an integrated tariff system to reflect the direct link between wastewater removal and provision of drinking water. However,

32. World Bank, 2007. Making the most of scarcity. Accountability for better water management results in the Middle East and North Africa. 33. World Water Council, 2006. Enhancing access to finance for local governments. Financing water for agriculture: Task force on Financing water for all, chaired by Angel Gurría. 34. African Development Bank (2005), Rural Water Supply and Sanitation Initiative, implementation Plan and Resource Mobilisation Strategy.

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sanitation remains the most difficult element to finance through cost recovery as shown by the case of Tunisia. The costs of sewerage and wastewater treatment are usually higher than the costs of networked water supply, depending on the level of treatment. However, charges for sanitation services are usually set at only 20 to 30 per cent of the costs of water provision. Since networked sanitation is only available in formal housing areas, such a level of cost recovery implies that some 70 per cent of sanitation costs are subsidised by general tax revenues. In Algeria, for instance, sanitation fees amount to 20 per cent of the water bill, even though improvement in services is much needed: only 14 of the existing 45 treatment plants work and the country reports 1 such plant for 711 000 inhabitants in 2005 to be compared with 1 per 5 000 inhabitants in France in 1998. Subsidies remain a central issue in the general problem faced by service providers and governments of ensuring greater access for the poor while preserving quality and quantity of access for the already connected.

In order to provide some answers, the AfDB35 makes a useful differentiation between the lower middleincome households, the developing poor, the coping poor, the very poor and the destitute. For the lower middle-income households, employed at low wages but living in conventional housing, water and sanitation tariffs are affordable but need to be structured to allow delays in payments in exceptional circumstances (as they are sensitive to shocks and might be pushed into poverty). The developing poor live in informal housing but have sufficient income to invest in developing their dwelling. The coping and developing poor could afford differentiated household connections but for low pressure, limited hours and a limited volume of water. The remaining poor have little means to access individual water and sanitation facilities, but would benefit from well-managed community-based toilets and sanitary blocks. The destitute, living on the streets, would need to access the services for free. A large number of the poor currently depend on water vendors, and therefore already pay at least ten

Box 24 - Implementing Cost-recovery in Tunisia The price of drinking water and sanitation in Tunisia is not used in its distribution or in active regulation of demand, but is part of cost recovery and depends on use (domestic, industrial or for tourism) and the amount used. Consumers get a single bill combining charges for water (from Sonede) and sanitation (Onas) and a government tax. The water and sanitation parts include a fixed charge (to cover maintenance) and a variable one according to consumption. The government keeps the fixed charge the same for the smallest consumers as a way of helping the poor and has steadily increased it for other levels of consumption and other users (tourism, industry). The variable rate increases according to five levels of consumption (in cubic metres). The distinction between sliding rates for domestic consumption and for type of use allows for some consumers to be subsidised by others. Sanitation’s share of the total bill varies between 21 and 46 per cent for domestic consumers, while industry’s is 32 per cent (low-level pollution), 42 per cent (medium pollution) and 49 per cent (heavy pollution). In the tourist sector, its share is 54 per cent (more than water’s share). Revision of the drinking water price structure has enabled Sonede to balance its books, but the structurally-indebted Onas is in dire financial straits and its debt grew from 18 per cent of turnover in 2002 to 35 per cent in 2004. Onas’ revenue mainly depends on its charges, which do not cover costs very well because they are fixed. The biggest operating costs are for depreciation and wages. The government contributed an estimated 64.9 per cent of Onas’ income in 2004 (a subsidy per cubic metre of sewage that was more than the average price paid by households) but this was not enough to cover investment needs, operating costs and renewal work, thus threatening the quality of Onas services. The National Statistics Institute’s household survey in 2000 showed that the average water and sanitation bill was only 0.93 per cent of total per capita spending, well below the usually accepted level of 3 per cent of income. Sonede says 90 per cent of its customers pay less than the cost price for water. Source: see country notes in the body of the report.

35. Guidelines for user fees and cost recovery for water, sanitation and irrigation projects, 2006.

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times more for water than middle-class urban dwellers with access to piped water. However, since the poor purchase only small quantities of water, their observed “willingness to pay” does not imply that they could pay the equivalent price for larger volumes. In poor, isolated rural areas, payments in cash are not common. Free labour forces and inputs are used to develop the networks and ensure some maintenance. However, recurring costs cannot be covered in this way and therefore still require subsidies. When they are necessary, subsidies should follow the key principles of affordability (for the general budget), targeted (to the groups in need) and transparency (clearly identified in the fiscal accounts). There are recognised difficulties in identifying and reaching target groups. Consequently, targeting areas where the majority of poor households are located could help avoid distortion.

Subsidies in the form of progressive tariffs with increasing levels of water consumption are however detrimental to large families and to groupings of families (to which the poorest might resort). Moreover, subsidising services only helps the poor if they have access to water. Otherwise, subsidies become countereffective as they leave little funding for extending infrastructure to the unserved. Helping the poor in areas where connection is low requires providing them with the means to access water and sanitation facilities, rather than providing on-going support for consumption. In this respect, social funds, access to credit and cost sharing are key elements. The NWSC of Uganda provides an interesting case in which connection subsidies are offered to promote access as opposed to consumption subsidies. However, subsidies that lower investment costs might not be

Box 25 - Affordability and Subsidies in Namibia

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In Namibia, survey data based on water tariffs in 2003/04 and 2004/05 show that low-income families or pensioners with an income of less than N$ 600/month cannot afford to use the 6m3/month, which is regarded as baseline water for a urban family of five with full water services. In rural areas the situation is likely to be worse. The non-payment of accounts leads to a vicious circle, where both NamWater and local authorities need to increase their tariffs to compensate for non-payment of accounts. This practice makes services even more unaffordable to the poor in Namibia. In both Windhoek and Rehoboth, the intention of the City Council is to subsidise low-income households to make baseline water (40 litre/person/day) available at a lower price. Windhoek currently applies a raising block tariff: each month, the first 6m3 are provided at a subsidised rate, while in the 6-to-36m3/month range the tariff is at average cost-recovery levels. For consumption over 36m3/month, the tariff is set at long-term marginal cost (above average costs). There is a general consensus within municipalities and at NamWater that the strategy adopted in South Africa of providing free water up to a consumption of 6m3/month would be ineffective, as it would create enormous problems for municipalities to cover costs of supply and increases in water wastage. Source: see country notes in the body of the report.

sufficient to help poor households to acquire a connection in case of non-financial obstacles. Land and property titling can be an issue, as well as growing tenancy that has accompanied rapid urbanisation. If the cost of providing and maintaining sanitation are not factored into the rent, the poor tenants have little incentive to develop facilities in places they do not own, while the landlord is only likely to provide a crude structure. The use of microfinance in the water sector is a recent development driven by the need to increase connections and improve the maintenance of existing facilities. As such examples, ASCI in Ethiopia and KRep in Kenya provide financial services for maintenance African Economic Outlook

purposes. In Cote d’Ivoire, the partnership between the water distribution company (SODECI )and CREPA (Regional Centre for low-cost Drinking Water and Sanitation) allowed 300 more poor households in Abidjan to be connected to the network. CREPA provided micro loans to cover the cost of the connection as well as assistance to the household to manage the payment of bills and repayment of the loan. • Strengthening utilities: the role of service providers, governments and the private sector Strengthening utilities is a key step in the process of establishing sustainable cost-recovery mechanisms. The performance indicators used to evaluate the © AfDB/OECD 2007

Overview

Box 26 - Microfinance for Rural Community-managed Water Projects in Kenya Kenya provides interesting examples of projects pre-financed with market-based finance from domestic private microfinance institution (K-Rep Bank) both for rehabilitation/augmentation of existing projects and new, greenfield projects. Under this scheme, KRep pre-finances loans worth 80 per cent of the capital costs for small-scale piped networks; the community is responsible for the other 20 per cent. The communities are also responsible for paying the costs of their technical and financial assessments. On project completion, 40 per cent of K-Rep’s loan will be provided as an Output-Based Aid (OBA) subsidy (performance-based subsidies, as developed below in the section on aid) which will help to keep the tariffs affordable in the short run. In practice, the OBA subsidy is intended for the first few communities, and, on positive outcomes, further lending by K-Rep will be without the subsidy. The expected outputs are increased service coverage (through direct household connections and kiosks) and increased quantity of water supplied. The key innovations of the schemes are the use of technical assistance to meet high transaction costs and build local capacity, the use of OBA to address affordability concerns and a risk-sharing mechanism by Community Water Projects and a CWP employed Project Engineer. The key parameters that allow replication of such schemes in other countries are a conducive policy environment that gives “space” and does not crowd out private market finance, a policy environment that supports a gradual move towards cost-recovery tariffs, reasonably well developed domestic financial institutions, a regulatory framework that gives “legitimacy” to small service providers and viable demand from an adequate “market size”. Source: Based on the intervention of Meera Mehta, Water and Sanitation Programme, at the OECD/AfDB expert meeting on Access to Drinking Water and Sanitation, Paris, December 2006.

efficiency of utilities are usually the staff per thousand connections, level of non-revenue water and billing and connection efficiency. A level of bill collection below 90 per cent either reflects a deficient billing system or that the tariffs are perceived as unaffordable or unacceptable given the quality of service. These performance indicators are not easily available for African utilities, making the assessment of their financial sustainability difficult. A practitioners’ workshop was organised by WSP in Pretoria in August 200636 that highlighted some

action points, distinguishing between the respective role of utilities and governments. Utilities were urged to improve revenue collection, to minimise unaccounted for water, to introduce financial and management information systems and to improve customer relations. For example, the Lusaka Water and Sewerage Corporation of Zambia embarked in late 2005 on a programme that included reducing the waiting time for the installation of a connection to 10 days and improving customer service (notably through greater responsiveness to complaints). The staff were sent to the different communities to identify the facilities,

Table 14 - Bill Collection Rate in Selected Countries Countries

Companies

Bill Collection Rate

Source

Burkina

36 urban centres

72%

Well briefing Note 33, 2006 www.lboro.ac.uk/well

Mali Senegal Tanzania Tunisia Uganda Zambia

16 urban centres 56 urban centres Dar Es Salaam SONEDE NWSC Average of the 9 commercial utilities

94% 98% 60% 99% 90% 77%

Perard (2007) NWSC, 2007 NWASCO, 2005/2006

http://dx.doi.org/10.1787/404832583528 36. http://www.wsp.org/filez/pubs/2122007120644_MobilizingMarketFinanceforWaterUtilitiesinAfrica.pdf

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inform the customers and negotiate debt settlements and call centres were established. The billing process was also improved with cross-checking of customers’ addresses and cancellation of double billing. As a result, by the end of 2005, 80 per cent of customers had noticed positive changes in the management and delivery of water services. In order to address the problem of payments arrears in Namibia, a number of towns began installing pre-payment water meters in 2003. This measure met widespread criticism from civil society organisations and was plagued from the beginning by a high incidence of faulty equipment. An alternative mechanism consisting of community level water committees that collect money from different household for the use of shared taps and toilet facilities has apparently been more successful, although it has been used only on a very limited scale.

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Benchmarking among water utilities also provides a basis for promoting efficient performance. To that end, the NWSC of Uganda has partnered with water utilities in Kenya, Tanzania, Nigeria and Zambia to share experiences and undertake performance enhancement programmes. Following the 2006 World Water Forum

of Mexico, the UN Secretary General’s Advisory Board on Water and Sanitation is also working on strengthening capacities of the key players in the water sector by establishing a Water Operators Partnership to promote co-operation. The objective is to set up mechanisms that will allow utility operators to provide mutual support on technical and managerial issues without intermediaries. Governments also have an important role to play in strengthening water utilities. It is widely recognised today, following work by the World Bank and others that governments have a key role to play in setting an environment which is conducive to business, notably by improving the institutional, policy and regulatory frameworks. One key element of such a businessconducive environment is predictability of agreed government transfers and respect for contracts. In Zambia, for example, six out of nine local commercial utilities had reached operational cost coverage by the end of 2006, but the number would have been even higher were it not for the non-payment by government institutions for their water use. Governments can also help to strengthen water utilities by strengthening their

Box 27 - The Success of NWSC-Uganda and Relevance for Other African Countries In NWSC-Uganda, the internal reforms and organisational restructuring carried out from 1998 have led to significant efficiency gains. Subsequently, the NWSC has improved its turnover from $11 million in 1998 to $33 million in 2006 and operating profit after depreciation has increased from a loss of $0.4 to $2.4 million. Through this improved efficiency, NWSC has managed to generate its own internal finances and constructed more than 1 060 km of new water mains to serve the peri-urban communities and the urban poor, for which the government or development-partner funds were not required. This has helped to improve service coverage from 48 per cent of target households in 1998 to 70 per cent in 2006. Internal sources of finance as a percentage of total capital investments reached a 45 per cent compared with 21 per cent in 1998. Consequently, internally generated funds through user fees currently cover all operation and maintenance costs, the cost of free new connections, depreciation, the construction costs of secondary and tertiary mains and a small contribution to major extensions. In NWSC-Uganda, the tariff is split into “public stand pipe”; “domestic”; “institutional” and “commercial” rates. This allows the Corporation to offer fair, sustainable and enforceable tariff rates to different customer categories. Furthermore, in addition to the new connections policy, NWSC has carried out tariff adjustments to keep user-friendly tariffs: reduction of the connection charges and reconnection charges by 50 and 75 per cent respectively, elimination of the minimum charge, indexation of the tariff against the factors of domestic and foreign inflation, exchange-rate depreciation and the electricity costs, and gradual re-balancing of the tariff thereby reducing the cross subsidy amongst the customer categories. However, the tariffs are not sufficient to meet external debt service obligations as full cost recovery would require, since this would mean significant tariff increases that cannot be afforded by the citizens or would be done at the expense of coverage extension. Source: Based on the intervention of Dr. William T. Muhairwe, Managing Director, NWSC at the OECD/AfDB expert meeting on Access to Drinking Water and Sanitation, Paris, December 2006.

African Economic Outlook

© AfDB/OECD 2007

Overview

balance sheets, e.g., through debt for equity swaps. In Uganda, for example, the NWSC has proposed converting the present value of NWSC long-term debt (comprising interest and principle amounting to $90 million) into government equity in the company under the condition that NWSC undertake a 5-year network expansion programme. Examples of good performance exist both for stateowned and privately run utilities. In Tunisia, the water and sanitation sector is entirely state-owned and fully centralised; yet it displays very sound performance: unaccounted-for water was only 18.2 per cent in 2004,

more than 99 per cent of bills are paid and access to water is available 24 hours a day in all cities. The stateowned utility behaves in this case as a private company would, seeking cost recovery. The same efficiency standards can be found in the water public sector of South Africa and Uganda. In other countries, however, such as Senegal and Morocco, the private sector has been playing an important role to extend coverage and improve quality of service. The difficulties faced by the private sector in its involvement in the water and sanitation sector often reflect difficulties inherent to the sector – huge infrastructure needs, the presence of externalities and tremendous sanitation backlogs.

Box 28 - Successful Public-Private Partnership in Urban Water Supply in Senegal The success of the public-private partnership is due to an appropriate institutional framework, suitable incentives and the major role of the government, which has inspired confidence in its partners. The private firm Sénégalaise des Eaux (SDE), owned by the French group SAUR, is upgrading the supply network under its contract but also because increased water consumption means bigger profits. The stakeholders have also established a good dialogue, with contracts reviewed every six months by a committee that monitors SDE’s performance. The review is based on 18 criteria spelled out in the contract between SDE and its public counterpart, the Société Nationale des Eaux du Sénégal (Sones), which is responsible for investment plans and supervision of them. Achievement of each of the main targets is rewarded and failure incurs fines. This system has made SDE more efficient and the firm increased its customers by 69 per cent between 1996 and 2005, had a volume production/sale ratio of 80.5 per cent (68.2 en 1996), network efficiency of 80 per cent (the target is 85 per cent) and has had balanced accounts since 2003. The government has played a strong regulatory and coordination role and has kept its promises, notably by paying its own bills (making for SDE’s 98.3 per cent bill collection rate). The necessary rate increases provided for in the SDE-Sones contract have also been made. Source: see country notes in the body of the report.

Together with the traditional national utilities, local small-scale operators can contribute to expanding service provision on a cost-recovery basis. Small-scale operators have been in the water market for a long time, but mainly as informal, unregulated providers meant to fill a gap, notably by reaching the poor and remote communities where bigger utilities do not operate. For example, the Well Briefing note 33 on Private Sector Participation in Urban Water Supply37 shows that some 39 per cent of the population of Dar es Salaam and up to 50 per cent of the population of Nairobi is supplied by small water enterprises. Bearing all the risks and faced with little competition, they frequently charge high prices for their services. As such policy makers largely saw them as problematic. Today,

however, they are more likely to be considered as part of the solution because they have a strong knowledge of population needs, operate without subsidies and are flexible. They are of particular use in peri-urban and rural areas where networked service provision is limited and actions are localised. However, their activity needs to be better regulated, especially as regards water quality. At the same time, the national institutional and regulatory frameworks should be made more flexible to facilitate their increased participation. Besides contributing to service provision, local entrepreneurs are also instrumental in developing water and sanitation-related activities: drilling, construction of latrines, emptying of latrines and in the provision

37. http://www.lboro.ac.uk/well/resources/Publications/Briefing%20Notes/BN33%20PSP.htm

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Box 29 - Association of Private Water Operators in Uganda APWO-Ug was established in 2003 with the support of GTZ(Gesellschaft für Technische Zusammenarbeit) (German technical co-operation agtency). It has ten member companies managing 57 towns-of the 180 in Uganda. The key principles for water provision are to use metering to reduce the unaccounted for water and ensure payment for the cost of service (93 per cent metering), customer care and sensitisation, good maintenance of water supply systems (functionality at 93 per cent), effective utilisation of government grants to extend water services (improved access by 0.5km), water quality testing and dosing (95 per cent of samples in conformity) and proper record keeping and regular reporting (availability of national data for assessing coverage). However, the sector faces some key issues: - Lack of streamlined policy frameworks for private-sector engagement, e.g. de-gazetting of towns to the public sector, inadequate compensation and uncertain business environment - Non inclusion in key policy/legal documents such as the Water Act - Restrictions on private-sector investment in water systems - Tariffs set without consultation with private operators and non reflective of the reality on ground - Sector governance, participation, accountability and transparency issues i.e. corruption - Delayed payment of management fees resulting from low rates of investment by government, low tariffs, delayed payments by government institutions - Inadequate regulation mechanisms in the entire water and sanitation sector.

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- Inadequate resource/capacity of the local authorities & DWD to facilitate performance monitoring for both private and public sector - Lack of representation on key water sector committees to create linkages to the sector mainstream - Political influence and interference in day-to-day operational issues including bidding and contract procurement processes, debt collection, water extension - National power crisis (load shedding reducing hours of production by 304 hours/month on average) - Lack of resources to facilitate planned activities like training, secretariat logistics Source: Based on the intervention of Winifred Kalebu, Chairperson, Association of Private Water Operators, Uganda, at the OECD/AfDB expert meeting on Access to Drinking Water and Sanitation, Paris, December 2006.

of the spare parts necessary to maintain existing facilities. They face the usual constraints of SMEs in Africa (highlighted in the African Economic Outlook 2004/2005). Helping them access funding can take the form of local revolving funds and provision of guarantees. • Conclusion: the need for a significant change in policies and practices Implementing cost recovery requires a radical change in management culture. It requires the establishment of an independent regulator as well as the involvement of the users (including the poor, the industries and government agencies) for all to buy into the new organisation. Indeed, changes in the tariffs structure require a good partnership between governments and utilities but also awareness campaigns since the population very often resists the reforms. This is also why, even if subsidises may be justified on social grounds African Economic Outlook

at one point in time, it is important to take into account their longer term impact, such as the adverse effect on the management of utilities, and the difficulty of removing them once established. One-off subsidies such as support for connection have the advantage of avoiding a habit-forming effect, of key importance in countries with a binding budget constraint. Beside a complete change in the tariff structure, there is a need for regular increases, notably to adjust for inflation. The widely agreed principle here is to implement small but regular increases, as they are better understood if the service is good enough. When indexation is not followed, revenue falls behind costs with the result that maintenance is deferred and services deteriorate. It becomes then even harder to fully adjust the prices. 2- The Role of Donors Aid to water supply and sanitation is the only social sector where aid allocations fell in the 1990s, partly © AfDB/OECD 2007

Overview

because of a general decline in aid, partly because of the sharp drop in aid for large dams and water storage schemes. However, the 2003 recommendations of the Camdessus panel to double financing for the water sector to achieve the Millennium Development Goals on water and sanitation, helped to reverse this trend. The share of African countries in total aid for water increased again slightly in recent years. Nevertheless, it is difficult to predict the expected increases in ODA for the water and sanitation sector since the donors do not make projections at sectoral level.

2004, followed by a slight decline in 2005 to levels that remain above the average of the 2000-03 period (see figure). Most of the increase in aid was due to new commitments by multilaterals (IDA and EC) whose allocation to the water and sanitation sector in Africa rebounded from about 30 per cent in the middle of the 1990s to 50 per cent in 2003-05. Nevertheless the share of aid devoted to water and sanitation in Africa by the World Bank remains low: only $146 million allocated to water over 19902005, representing some 6 per cent of the World Bank portfolio of $23 billion.

The most recent data from the Development Assistance Committee of the OECD show a sharp increase in the allocation of Official Development Assistance (ODA) to water supply and sanitation in

Conversely, the share of bilateral aid to water and sanitation in Africa declined from 34 per cent in mid the 1990s to 22 per cent in 2003-05, reflecting the

Figure 12 - Total Water ODA to Africa, $ billion, 2004 prices, commitments with 3 years moving average Bilateral ODA

Multilateral ODA

Bilateral Trend

Multilateral Trend

81

.2 .0 0.8 0.6 0.4 0.2 0 1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: DAC statistics, Creditor Reporting System http://dx.doi.org/10.1787/263526661141

Figure 13 - Water ODA Commitments by Sub-sector 2005 Rivers / Waste / Education 4% Basic drinking water s.& s.

Water resources policy 20%

32%

44% Water s. & s. - large systems

Source: DAC statistics, CRS http://dx.doi.org/10.1787/582267471277

© AfDB/OECD 2007

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Overview

weakness of new commitments compared to the large infrastructure projects carried out in the second half of the 1990s. The trend in bilateral aid to the water sector is mainly set by the large donors and allocations are concentrated in a relatively few recipient countries. In 2004-05 Germany, Japan, Denmark, France and the Netherlands extended about three quarters of total bilateral aid to water supply and sanitation. Over the same period, about three quarters of total aid was concentrated in 10 recipients, including Ghana, Nigeria, Tunisia, Kenya, Ethiopia, Benin, Morocco, South Africa, Tanzania and Burkina Faso.

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In the water sector most aid is used to finance investments in infrastructure (figure). Projects are large and on average take at least 8 years to be completed. In view of the capital-intensive nature of water projects, timely financial flows are crucial for planning and implementation purposes. Nevertheless, aid flows remain highly unpredictable. Late disbursements have strong negative consequences, leading to very low execution rates, to accumulation of debt to contractors, and to temporary suspensions of work. In Mozambique, for instance, the water sector’s execution in the first half of 2006 was only 17 per cent of planned investment expenditure reflecting late disbursements by treasury and by the funding agencies. The challenge for donors is to work towards longer-term, stable funding to enable better planning and implementation. In tandem, governments could put in place a special national or international facility to pre-finance disbursements budgeted for a later period.

Despite a general trend towards greater harmonisation and alignment on recipient country priorities, reflected by a relative increase in Sector Budget Support (SBS) and General Budget Support (GBS), the vast majority of foreign aid to water and sanitation is spent on projects. Most donors consider that the large scale and technical complexity of water and sanitation civil engineering works may be more adequately managed as projects. The project approach is also considered to support innovative approaches, involving the private sector and civil society that are not always well taken into account in government programmes. In addition, some donors favour harmonisation of policies but not of financial mechanisms and procedures, each donor country preferring to retain its own rules. The limited adherence to SBS and GBS support in some countries reflects the concern that these funding mechanisms are still at early stages and require major improvement. Accordingly, some donors and recipient governments are working to improve planning and monitoring, and to agree on the use of common reporting, auditing and procurement procedures. Water Sector Working Groups of donors and government representatives have been set up in many countries to improve national coordination, including Mozambique, Uganda and Zambia. While the trend of ODA for to the water sector to be increasingly given in the form of grants is to be welcomed (58 per cent in 2004-05 compared to 36 per cent in the mid 1990s), it is crucial that aid does not crowd out local initiatives or discourage

Box 30 - A Trust Fund to Improve Service Provision in Peri-urban Areas in Zambia The Devolution Trust Fund, instituted under the National Water Supply and Sanitation Council (NWASCO), has been financing projects on a pilot scale for commercial utilities to improve water supply since 2003. Funds are provided to commercial utilities to extend their services to the peri-urban poor. A total of about 120 000 people in low-income areas have since benefited in terms of safe and adequate water supply. During the pilot phase, detailed procedures and guidelines were developed to make DTF operations more transparent and accountable. The establishment of the DTF as a basket fund targeting peri-urban and low cost areas has been lauded as the most significant initiative the government has taken to extend water supply and sanitation services to these areas. Consequently a number of co-operating partners have made financial commitments to support the government achieve this objective. As at end 2006, about 8.8 million euro had been mobilised by the DTF from the German banking group KfW (Kreditanstalt für Wiederaufbau), the Danish International Development Agency (DANIDA), and the EU for financing implementation of WSS projects. In the future, there are plans to broaden the DTF mandate to water treatment investment. Nevertheless, the limit of the DTF is that it is not aligned to the decentralisation process. Source: see country notes in the body of the report.

African Economic Outlook

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Overview

water authorities from becoming financially selfsustaining. Thus, ODA funds should be used to mobilise other flows, such as user charges, other local revenues, bank loans and private capital, and to empower other stakeholders in line with the national water strategy. For example, in Zambia aid is channelled through a the Devolution Trust Fund which assists the nine commercial water utilities in urban areas to extend the provision of water and sanitation services to the peri-urban poor. Another means through which aid could be used to mobilise other financial flows is to provide subsidies targeted on performance, such as Output-Based Aid (OBA). OBA is a strategy for using explicit performancebased subsidies to support the delivery of basic services where policy concerns would justify public funding to complement or replace user-fees. OBA involves delegating service delivery to a third-party, typically

private firms, but also public utilities, NGOs, and community-based organisations, under contracts that tie disbursement of the public funding to the services or outputs actually delivered. OBA in the water sector can be used in the form of subsidies to reimburse water bills of low–income consumers, or to expand water and sewer networks, in cases in which disbursements are tied to the number of new connections. Many countries are adopting the OBA funding mechanism. For example, in Mozambique, the Global Partnership on Output-Based Aid (GPOBA), a multidonor trust fund administered by the World Bank, has recently launched a project to provide subsidised water connections for domestic consumers in five cities that currently utilise PPP contracts. The aim of the GPOBA-funded project is to increase access to water services for poor households through further public-private partnerships.

Box 31 - Mozambique Water Private Sector Contracts – OBA for Coverage Expansion The GPOBA project is to provide subsidised water connections for domestic consumers in Maputo, Beira, Nampula, Quelimane, and Pemba. This will facilitate access for low- to –middle-income households that currently have no access to piped water. The World Bank-financed National Water Development Project II (NWDP II) began implementation in 2000 and concentrated on large investments to increase the capacity of several water systems. These investments have secured a sufficient supply of potable water to dramatically increase service coverage. However, the high cost of an individual household connection is a major barrier for low- and middle-income households. Thus, GPOBA will contribute towards subsidising around 36,300 new connections, equivalent to an increase in the number of households gaining access to piped water by 23 per cent in Maputo, 31 per cent in Beira, 100 per cent in Quelimane, 46 per cent in Nampula, and 100 per cent in Pemba. Source: Global Partnership on Output-Based Aid, World Bank

3- Developing Innovative Financial Tools There is potentially great scope to tap domestic and international financial markets by issuing long-term bonds and shares in equity. The decentralisation process has raised the issue of long-term local currency financing for sub-sovereign entities38 and the issue of creditworthiness of utilities that could help generate funds. However, while devolution of the responsibility for service delivery has been proceeding, few subsovereign entities have been given the tools needed to

raise adequate funding. Raising taxes remains very often the task of central government. Some larger cities may have the capacity to raise bonds, such as the city of Johannesburg that launched in 2004 the first nonsovereign guaranteed loan in Sub-Saharan Africa. However, the central power remains in many cases reluctant to provide the corresponding guarantee as it constitutes a liability on the budget and local capacities are usually deemed weak. Moreover, the scale of the required funding very often exceeds the capacity of local financial markets. Furthermore, there are

38. See: Winpenny, J. 2005, Guaranteeing Development? The Impact of Financial Guarantees OECD Development Centre, Paris.

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Box 32 - Decentralised Financing in Mali There is little decentralised funding available in Mali, except for money from NGOs and local community groups. National water department (DNH) projects are internationally funded. In the Kayes region, Malians living in Europe often invest heavily in water supplies for their home village. Communities can also get money from the national agency for local investment, (Agence Nationale d'Investissement des Collectivités Territoriales – ANICT), which earmarks about 10 per cent of its funds for water and sanitation projects, but with conditions that prevent borrowers from buying more than hand-pumps and large diameter wells. Source: see country notes in the body of the report.

Box 33 - Responding to the Calls of the Camdessus and Gurría Panels: a Selection of Financing Schemes for the Water and Sanitation Sector in Africa IFC Partial Credit Guarantee The IFC partial credit guarantee is a credit enhancement mechanism for bonds and loans. IFC uses its triple-A credit rating to allow borrowers to access the financial market and extend debt maturity. The IFC guarantee covers creditors irrespective of the cause of default. Partial guarantees can be either in local currency (for domestic transactions) or foreign currency (for cross-border transactions). The outstanding example in Africa of provision of such a guarantee is the issue of bonds by the city of Johannesburg in 2004. See: www.ifc.org/structuredfinance The World Bank Multilateral Investment Guarantee Agency (MIGA)

84

MIGA is a multilateral risk mitigator, promoting foreign direct investment into developing countries by ensuring investors against political or non-commercial risks, mediating disputes between investors and governments, advising governments on attracting investment and sharing information through online investment information services. The main users are cross-border investors, but nationals and state-owned corporations operated on commercial basis are also eligible. MIGA action in the water and sanitation sector remains however limited and is almost non-existent in Africa. In 2005, however, MIGA issued four guarantees to Urbaser S.A. for its concession agreement with the Municipality of Cairo to contribute to the modernisation of Cairo’s waste management sector. See: www.miga.org The Public-Private Infrastructure Advisory Facility (PPIAF) PPIAF is a multi-donor technical assistance facility that aims to improve the quality of infrastructure through public-private partnerships. It was launched in 1999, is supported by 15 development agencies and managed by the World Bank. It finances advisory activities, including the design of policy, regulatory and institutional reforms. In 2006, 14 per cent of PPIAF funding to SSA was allocated to water and sanitation. See: www.ppiaf.org EU Water Facility In 2004, the European Commission created an ACP-EU Water Facility using €500 million from the 9th EDF, to be allocated in two tranches via competitive calls for proposal. A first Call to allocate €180 million was launched in late 2004. By January 2005, the EC had received 800 preliminary proposals requesting grant financing for €2.75 billion. The demand by far surpassed expectations and €50 million were anticipated from the second tranche, for a total available amount of €230 million. Together, the first and second calls for proposals of the Water Facility resulted in the selection of 175 proposals, from over 1300 submitted, for a total EC contribution of €420 million, leveraging an additional €360 million. The ACP-EU Water Facility is not designed to finance large water infrastructure projects. It is a fund that creates the conditions to attract funding from sources other than public development assistance and brings funding directly to the local level. Evaluation of the Facility is planned for 2007. Among the key themes for the evaluation will be to find ways to increase coherence with Country Strategies, to identify modalities for increasing the leverage of new resources, including a higher participation of the private sector.

sometimes (legal) restrictions on borrowing by subsovereign bodies, also on MFI funding. Sub-sovereign bodies also very often lack capacity to produce financial African Economic Outlook

statements, conduct auditing and oversight. Finally, the fiscal relationship between central government and sub-sovereign bodies is not always clearly defined and © AfDB/OECD 2007

Overview

Box 33 - Responding to the Calls of the Camdessus and Gurría Panels: a Selection of Financing Schemes for the Water and Sanitation Sector in Africa (cont.) EIB The EIB manages the Cotonou Investment Facility. The 2003 ACP-EU Cotonou Convention provided the EIB with new financial instruments allowing i) a higher level of risk-taking by the Bank to support the private sector, including the use of equity, quasi-equity, and guarantees, and ii) elements of concessionality in projects supporting reforms and eradicating poverty. After amendments, both the Investment Facility and own resources can be used for infrastructure financing with interest subsidies of up to 3 per cent. In 2006, the EIB-ACP Project Preparation Facility was created to provide technical assistance in tandem with the EUWI. See: www.eib.org The Private Infrastructure Development Group Umbrella (PIDG) - Emerging Africa Infrastructure Fund (EAIF): EAIF was launched in 2002 to provide long-term debt to pro-poor private sector funded infrastructure service projects in sub-Saharan Africa in the energy, telecommunications, transport and water sectors. It is supported by DFID, SIDA, DGIS and SECO. - GuarantCo: provides guarantees to enhance credit, notably of municipal bonds. Many infrastructure projects, particularly at the sub-sovereign level, derive most of their revenues in local currency, making hard-currency debt funding inappropriate. In 2004 the PIDG launched GuarantCo, which is designed to mitigate risks for local currency financing of infrastructure. It is supported by DFID and SIDA. - In 2003 PIDG established a local capacity Technical Assistance Facility (TAF) to assist in the building of local capacity and capability associated with private sector investment in infrastructure. Technical assistance is provided to both the public and private sectors in support of the planning and implementation of projects and programmes of any of the facilities or funds undertaken under the PIDG umbrella with funding support from the World Bank. See: www.pidg.org Cities Alliance Cities Alliance is an alliance of cities and their development partners to improve living conditions of the urban poor. It was launched by the World Bank and UN-Habitat in 1999. It operates the Community Water and Sanitation Facility (CWSF), which targets NGOs, local governments, private sector, CBOs. See: www.citiesalliance.org CLIFF (Community-Led Infrastructure Finance Facility) Guarantee Facility This is co-ordinated by Homeless International with funds from DFID and Sida. It provides venture capital and other financial products directly to urban poor organisations to support slum upgrading. It began operations in India in 2002 and started operating in Kenya in 2005, where it supports Muungano Wa Wanavijiji. The NEPAD Infrastructure Project Preparation Facility (NEPAD-IPPF) NEPAD-IPPF was established in 2003 with seed funding from the Canadian Government and transformed in 2005 into a multidonor facility. The key objective of the NEPAD-IPPF is to assist African countries, Regional Economic Communities (RECs) and related infrastructure development institutions, to prepare high quality, viable regional infrastructure projects in energy, trans-boundary water resource management, transport, and ICTs, which would be ready to solicit financing from public and private sources.

more than often fails to ensure continuous and sustainable funding. The case of Johannesburg in 2004 however shows how a successful loan can help build up investors’ confidence. In this specific case, the R1 billion operation was carried out with the support of DBSA and IFC in the form of a partial credit guarantee (for 40 per cent © AfDB/OECD 2007

of principal outstanding) that helped enhance the credit rating to AA-, allowing the participation of pension funds, and extended the final maturity to 12 years. That initial guarantee helped create confidence in the local market so that in 2005 Johannesburg was able to issue another R700 million bond with a maturity of 8 years without credit enhancement. In both instances, the bond issues were largely oversubscribed. African Economic Outlook

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The international community is responding to the calls of the Camdessus and the Gurría panels to develop and adapt financial instruments to improve funding for the water and sanitation sector. For example, the World Bank is developing a sub-sovereign financing facility in local currency. The AFD provides guarantees to West African local issuers through the WAEMU regional bond market that mitigates exchange-rate risk. However, sub-sovereign lending will continue to depend on the capacity of sub-sovereign actors to develop sound accounting systems, transparent management and the ability to develop sound, bankable projects. In parallel, local financial markets need to be strengthened. The potential role of domestic banks in financing the water sector is increasingly recognised since domestic financing

avoids the currency risk associated with raising finance in international capital markets. Pooling mechanisms are also emerging that help to leverage funds and mitigate risk. In South Africa, INCA (Infrastructure Finance Corporation Limited), a private fund, uses its AA credit rating and recognised diversified portfolio to borrow from capital markets and extend long-term fixed interest rate loans to infrastructure providers such as municipalities and water boards. Pooling of resources is also usually combined with pooling of expertise by involving NGOs, local business and government. There is great potential in such mechanisms to support the development of rural water and sanitation. More and

Box 34 - The AfDB Water Facility 86

The African Water Facility (AWF) is an initiative led by AMCOW, aimed at addressing the funding gap. Established within the context of the Africa Water Vision as well as the MDGs, the AWF is hosted by the African Development Bank (AfDB) at the request of AMCOW. The AfDB Board of Governors approved the Instrument establishing the AWF in 2004. The establishment activities took place in 2005 and operations started in 2006. The amount so far committed for the AWF is around €60 million, from Canada, France, Denmark, Norway, Sweden, Austria and EU. The main objective is to create an enabling environment to attract more resources into the water sector: focusing on policies, strategies, information system, monitoring and evaluation, knowledge sharing, and project preparation. After one year of operations, a total of 14 projects were approved in 2006, at a total budgeted cost of €9 million. Out of the 14 approved projects, three are related to the implementation of national IWRM policies; five projects focus on the implementation of transboundary water resources management initiatives and programmes; three projects concern preparation of programmes/projects in water supply and sanitation, which will lead to immediate sector investments. The remaining three projects are small capital investments designed to attract additional resources or to introduce innovative technologies. The key challenge is to accelerate the implementation of the approved projects and demonstrate the effectiveness and the value added of the Facility. The Facility is facing a rapidly increasing demand. As a result of the limited number of staff and the amount of funding, viable projects could not be considered. To mitigate the capacity challenge, the AWF will continue to depend mostly on the secondment pledges by member countries. The AWF has also developed a resource strategy paper to facilitate mobilising more resources. Looking Ahead, the AWF priorities are threefold: - Portfolio Building and Consolidation: The AWF will continue to implement quality portfolios through the preparation of viable projects and build the pipeline for future investments to ensure efficient processing and management of operational activities; - Building Partnerships: The AWF will continue to raise awareness and build synergy through creating partnerships, especially among Water Basin Organisations, and organisations with similar objectives; - Mobilising Additional Resources: The AWF will support activities that create an environment conducive to higher levels of investments from all sources, including, commercial finance, in concert with other partners. This will be done through supporting policy and regulatory environments that promote Private Sector Participation, beneficiary user fees and internal capital generation for investment in the water sector. Source: AfDB Water and Sanitation Department

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Overview

more, governments are developing comprehensive rural sub-sector strategies in order to strengthen the institutional framework, to strengthen planning and ultimately to catalyse funds and harmonise the different actors efforts (local population, NGOs, donors, local administrations and business). Development Banks have an important role to play as intermediaries between foreign lenders, central governments and sub-sovereign entities. As such an example, the AfDB was given the responsibility in

2005 at the Paris Conference to take the leadership in the financing – and in the mobilisation of resources – of the water and sanitation sector in Africa, especially in rural areas. The AfDB has consequently engaged in very diverse activities to support the water and sanitation sector: from direct investment in water storage facilities, to support to utilities and financial intermediaries via technical assistance. It has also developed two specific initiatives to support increased financing to the sector: the African Water Facility and the Rural Water Supply and Sanitation Initiative.

Box 35 - The AfDB Rural Water Supply and Sanitation Initiative (RWSSI) The RWSSI was conceived in 2002 as one of the Bank’s responses to the challenge of the MDGs in Africa. The objective of RWSSI is to accelerate access to water supply and sanitation services in rural Africa to attain 80 per cent by 2015 and extend water supply and sanitation services to 277 million and 295 million people respectively at a cost of $14.2 billion over 3 phases. The first phase (2004-07) is estimated to cost $4.6 billion; the second phase (2008-10) $4.2 billion; and the third phase (2011-15) $5.4 billion. The Bank is committed to financing 30 per cent of the needs and is encouraging other stakeholders to contribute the rest as follows: 50 per cent by multilateral and bilateral donors; 15 per cent by governments; and 5 per cent by beneficiary communities. The RWSSI strategy involves: raising awareness about the RWSS situation in Africa; mobilizing resources from donors, RMCs, NGOs and communities; adopting Fast Track Mechanisms for preparation and implementation of national programmes; adopting a demand–driven, programmatic approach; prioritising sanitation focusing on hygiene promotion and health education; ensuring beneficiary participation, especially of women, in the design and implementation of programmes; assuring Sustainability through promotion of appropriate technology. The Bank has made significant achievements since it started supporting RWSS programmes in 2003. The Bank has so far approved financing for 14 RWSS programmes for which it has provided financing of $536 million, and expects to approve five more by end 2007 and increase its funding to $803 million. These programmes are expected to extend services to 32.5 million people by 2010. A 43 per cent increase of ADF resources permitted a 5-fold increase in Bank’s annual lending for water supply and sanitation from less than $70 million prior to 2003 to about $330 million currently. Many donors like France, the Netherlands, the United Kingdom and Denmark and some African Governments have increased their water sector financing. Additional financing is available through a multi-donor RWSSI Trust Fund established by France, Denmark and the Netherlands at the Bank with contributions of €90 million. In Addition, RWSSI continues to raise awareness of the poor state of RWSS in Africa and the links to the health, education, gender, and poverty MDGs. The establishment of the first time within the Bank of a Department dedicated water and sanitation has allowed better co-ordination of the water initiatives and more efficient use of resources. Some of the key challenges include: maintaining the trend of increasing water-sector financing by the Bank, donors and African governments; improving staffing at the Bank’s headquarters and Field Offices, improving the Bank’s Business processes; according sanitation higher priority; building local government, community, local-contractor, artisan and consultant capacity; establishing reliable supply chains; improving monitoring and evaluation systems. Source: AfDB Water and Sanitation Department.

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Part Two

.

Algeria

Algiers

key figures • • • • •

Land area, thousands of km2 2 382 Population, thousands (2006) 33 354 GDP per capita, $ PPP valuation (2006) 7 160 Life expectancy (2006) 72 Illiteracy rate (2006) 30.1

Algeria

R

2005 led to considerable improvement in Algeria’s external balance, despite significant growth in imports of goods and services. However, public finances and monetary policy remained cautious. The reference price used in drafting finance acts is still $19 per barrel and inflation remained under control in a context of budgetary expansion and increased foreign exchange reserves. The overall growth rate increased from 5.2 per cent in 2004 to 5.3 per cent in 2005, which is a drop of 1.6 percentage-points compared with 2003. Estimates for 2006 show a slowdown to approximately 3 per cent. This clear drop is the result of a decrease in oil and gas production due to technical problems. The IMF has estimated a growth rate excluding oil and gas of 4.5 per cent, which ECORD OIL PRICES IN

nevertheless represents a slowdown in growth. These figures show the heavy dependence of growth on oil and gas, due to their major The complementary contribution to GDP. programme of sustainable growth (PCSC) 2005-09 2005 marked the beginning of could accelerate economic the Complementary Programme growth. for Growth Support (PCSC). This ambitious programme for 2005-09 continues the efforts of the Economic Recovery Programme (PSRE) from 2001-04. The PCSC has a total budget of $55 billion, plus approximately $14 billion for development of the High Plains and the far South. Budgetary policy efforts are aimed at maintaining economic growth, which has been significant in recent years, by equipping the 93

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/454755182784

© AfDB/OECD 2007

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Algeria

country with appropriate infrastructures, in order to improve the business climate and encourage the private sector to contribute more to boosting growth.

94

These positive macroeconomic results have nevertheless failed to have a positive and lasting influence on the economy, notably through generation of substantial industrial growth or export diversification. Growth is still mainly led by services, oil and gas, posing the problem of long-term sustainability. Although the private sector concentrated essentially on gross capital formation up to 2005, it has not succeeded in creating a viable alternative to growth that is less dependent on oil and gas. The private sector has invested in the non-tradable goods sector (services and construction) in order to benefit from the demand created by budgetary efforts and to avoid increasingly acute foreign competition due to greater opening-up of the country’s economy (partnership agreement with the European Union [EU], future membership of the World Trade Organization [WTO] and regional integration agreements). Because of the structure of the private sector (97 per cent of firms employ less than ten workers), it will probably resort to shielding itself even more in these sectors and also in the informal economy, in order to avoid having to face the uncertainties created by the opening-up of the economy. Ambitious present and future public programmes might reinforce this tendency. The state will in fact become - and remain - the biggest investor throughout the entire term of the PCSC.

Recent Economic Developments Oil and gas continue to make a major contribution to economic growth and macroeconomic developments generally. The power of this influence is due to two factors; growth in the oil and gas sector itself (given its share of GDP) and taxation on oil and gas (more than 75 per cent of budget receipts in 2006), which finances the big public programmes that lead to growth in services and construction. The contribution of oil and gas to GDP increased further in 2005 to 45 per cent, as against 38 per cent African Economic Outlook

in 2004. Oil and gas also made an increased contribution to growth in 2005, when it accounted for 43.13 per cent, as against only 25 per cent in 2004. Overall sectoral growth was 5.8 per cent in 2005, while GDP grew by 5.3 per cent. Crude-oil production grew by around 5.4 per cent in 2005, mainly due to an expansion in production of Sonatrach’s associates, whose production grew by 10.4 per cent in 2005, due to increased foreign investment in the sector. Oil production nevertheless fell slightly in 2006 because of technical problems. The export-share of crude oil continued to rise, at the expense of gas and oil byproducts, growing from 22 per cent in 2001 to 42 per cent in 2005. Overall gas production by volume remained stable. The contribution of agriculture to GDP fell again in 2005 to 7.7 per cent, as against 8.3 per cent in 2004 and 10 per cent in 2003. This was due to the growing contribution of oil and gas to GDP and to the weak growth of the sector. Agriculture is very much influenced by variations in rainfall and grew only by 1.9 per cent in 2005, as against 3.1 per cent in 2004 and 19.7 per cent in 2003. Cereal production, which is very dependent on rainfall, fell from 42.6 million quintals in 2004 to 35 million quintals in 2005. However, production of fresh fruit and vegetables remained good, due to the effects of the support programmes linked to the National Plan for Agricultural Development (PNDA). The construction sector accounted for 7.5 per cent of GDP in 2005. This sector has received special attention from the public authorities because of the lack of housing and basic infrastructures. The construction sector has grown remarkably over the past several years. In 2005, growth was 7.9 per cent, 0.4 percentagepoints higher than in 2004. This sector receives considerable support from expenditure on capital equipment, which increased by 31 per cent in 2005. In 2005, 104 905 housing units were delivered, as against 81 175 housing units in 2004. Basic infrastructures and housing will be allocated almost half of the total budget of the Complementary Programme for Growth Support (PCSC 2005-09), originally set at 4 202 billion dinars, but since then, © AfDB/OECD 2007

Algeria

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on IMF data. http://dx.doi.org/10.1787/511175266572

this sum has been multiplied by three. One million housing units are planned under this Programme. Investments in large infrastructures will enable a significant proportion of unemployed manpower to be absorbed, at least temporarily. The services sector, having suffered a relative decline with 34 per cent of GDP in 2005, as against 39 per cent in 2004, grew by 5.6 per cent; this represented a fall of 2 per cent compared with 2004, but was higher than the overall growth rate. Because of its important contribution to GDP, it accounted for almost 24 per cent of total economic growth, and employed more than 53 per cent of the total employed population. Valueadded in this sector was mainly contributed (85 per cent) by transport/communications and trade/distribution activities. Tourism has shown signs of recovery, especially in the Sahara. In 2006, it was expected that the number

of tourists would exceed 10 000 and that this would generate foreign currency revenue of $200 million, or the equivalent of 25 per cent of exports of goods excluding oil and gas. Agriculture and industry excluding oil and gas (which now accounts for only 5.3 per cent of GDP), are the sectors that have contributed least to overall growth. GDP excluding oil and gas grew 4.8 per cent in 2006, while the agricultural sector increased by 4.9 per cent, with a cereals harvest of 40 million tonnes. Industry excluding oil and gas nevertheless showed improved growth of 2.5 per cent at the end of 2005, as against 1.9 per cent in 2004. The public sector grew 3.4 per cent, compared with 1.7 per cent for the private sector. Manufacturing industry activities remain stagnant, with growth of only 0.2 per cent in 2005.

Table 1 - Demand Composition 1998

2005

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage of GDP (current prices)

Percentage changes, volume

Gross capital formation Public Private

28.8 7.5 21.3

30.0 9.6 20.4

6.0 8.0 5.0

8.7 10.0 8.0

9.3 12.0 8.0

Consumption Public Private

72.8 17.8 55.0

45.4 11.8 33.6

3.4 4.3 3.2

3.9 2.7 4.1

4.0 2.7 4.3

-1.6 22.5 -24.1

24.5 48.0 -23.5

1.6 5.7

4.1 4.5

3.7 5.9

External sector Exports Imports

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/452275288171

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Within this sector, however, the growth performance of the private sector (2.3 per cent) is nevertheless significantly better than that of the public sector, where activity has declined (-4.5 per cent).

96

Demand composition reflects the sustained effort of accumulation, with investment rates of almost 30 per cent over several consecutive years. In 2005, with the increase in stocks, 30 per cent of GDP was allocated to investment. Nevertheless, investment remains insufficient in proportion to the savings supply, which exceeds 45 per cent of GDP. The savings rate reached 54 per cent in 2005. Private investment remains sluggish because of a discouraging business climate (problems with industrial land, banking finance, corruption, etc.) The investment rate is expected to reach over 50 per cent in 2006 and probably also in 2007, in view of the efforts that need to be made in capital equipment within the framework of the PCSC. Although total consumption increased by almost 7 per cent in 2005 compared with 2004, it fell by 7 percentage-points of GDP in 2005.

Macroeconomic Policy Fiscal Policy Government revenue amounted to 3 082 billion dinars in 2005 and the predominant source of revenue continued to be oil and gas taxation. In 2005, this

revenue contributed 76.3 per cent of budget receipts, as against 70.4 per cent in 2004. Oil prices are the main reason for this revenue structure. Prices reached a record high in 2005: after increasing from an average of $28.9 per barrel in 2003 to $38.6 in 2004, they reached $54.4 in 2005. Nevertheless, like other oilrich countries, Algeria suffers from structural deficiencies as regards ordinary taxation, especially income tax. This reflects the complexity of a taxation system that leads to tax avoidance, development of the informal economy and deteriorating financial situations for a large number of public enterprises. Although ordinary revenue increased by over 10 per cent, its relative budget share went down from 29.3 per cent in 2004 to only 23.5 per cent in 2005. Income tax represented only approximately 2.5 per cent, largely due to salaried income more than other types of income. Tax exemptions aimed at promoting national and foreign investment run the risk of increasing the importance of oil taxation in the short and mediumterms. Almost 55 per cent of current government operating costs depend on oil and gas taxation – in other words, ordinary taxation covers only 45 per cent of operating costs. Although oil prices have tended to rise continually, government espenditures have been planned since 2000 (except for 2002) on the basis of a reference price of $19 per barrel. The surplus revenue generated with reference to this price is added to a Revenue

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Oil revenue

27.4 11.3 15.4

37.0 9.6 26.0

36.2 9.2 26.0

41.0 8.4 31.9

41.7 8.1 32.8

40.1 8.3 31.1

39.6 8.4 30.5

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

31.2 23.7 19.8 9.5 3.9 7.5

29.2 21.1 18.9 7.6 2.2 8.1

29.3 21.4 20.0 7.3 1.4 7.9

29.1 19.5 18.5 6.2 1.0 9.6

28.7 19.1 18.0 5.9 1.1 9.6

29.4 18.9 18.0 5.9 0.9 10.5

29.8 18.4 17.7 5.6 0.7 11.4

Primary balance Overall balance

0.1 -3.8

10.0 7.8

8.2 6.9

12.8 11.9

14.1 13.0

11.6 10.7

10.5 9.7

a. Only major items are reported. Source: IMF data; estimates (e) and projections (p) based on authors’ calculations.

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© AfDB/OECD 2007

Algeria

Regulation Fund (FRR), which has received a total of 3 046 billion dinars since 2002, or slightly more than $42 billion, 45 per cent of which was added in 2005 alone. To pay off the public debt, 1 118 billion dinars ($15.5 billion) were withdrawn from this Fund. Budgetary policy will remain sustainable in the short and medium-terms thanks to global economic growth, which promises to maintain oil prices at a relatively high level in comparison with the average price seen during the preceding decade. Budget expenditure increased by almost 5 per cent in 2005 and amounted to 1 971 billion dinars. Operating expenditure rose by 3.3 per cent, while capital expenditure grew by 8.3 per cent. Expenditure on capital equipment is expected to take a predominant place in budget expenditure in the medium-term, due to the Complementary Programme for Growth Support (PCSC) which foresees capital equipment expenditure amounting to 4 202.75 billion dinars over the period 2005-09. Almost 45 per cent of the total budget will be allocated to expenditure on socio-educational infrastructure (housing, education, health and regional development); 40.5 per cent will go towards basic infrastructure (transport, public works, water) and almost 8 per cent will provide support for agriculture. The budget for 2005 showed a surplus of 13 per cent if total revenue is taken into account but a deficit of 3.5 per cent if only revenue budgeted on the basis of a reference oil price of $19 per barrel is counted. The cautious attitude towards budgetary management hitherto adopted by the government relaxed somewhat in 2006 and record public expenditure is expected as a result of the capital equipment programmes planned for the period 200509. The finance act for 2006 authorised budget expenditure at 45.9 per cent of GDP, but the complementary finance act of the same year raised this figure to 62 per cent. Budgetary expansion mainly concerns capital expenditure and, to a lesser extent, operating expenditure. According to the complementary finance act for 2006, capital expenditure is authorised to reach 38 per cent of GDP, as against only 10 per cent in 2005. Operating expenditure is set at 23.9 per cent of GDP for 2006, © AfDB/OECD 2007

as against 16 per cent realised in 2005. In 2006, the budget deficit (admittedly excluding the Revenue Regulation Fund) is expected to reach 1 908.7 billion dinars, 7.4 times higher than that of 2005. This 2006 budget deficit corresponds to 32 per cent of GDP, as against 3.5 per cent in 2005. However, assuming stability in oil prices and taking all oil revenue into account, the deficit for 2006 (under the complementary finance act) is expected to correspond to 17 per cent of GDP. In order to finance the budget deficit, the government will draw on the Revenue Regulation Fund (FRR). This Fund was originally intended for use only to pay off the principal portion of the public debt and to finance a budget deficit caused by a price per barrel lower than the $19 reference price. The finance act for 2006 removed this stipulation by authorising recourse to this Fund, although only up to a limit that safeguards funds from falling below a minimum level of $10 billion. 97

Monetary Policy Since 2002, the Bank of Algeria has conducted an active policy aimed at solving the problem of excess liquidity, which is mainly due to the increase in foreign exchange reserves. In its 2005 report, the Bank of Algeria acknowledges the fact that the banks are reporting intermediation ratios that are much lower than those authorised by prudential rules, taking into account the stability of their resources. In order to control overall liquidity, the Bank of Algeria opted to regulate the compulsory reserve ratio and absorb excess liquidity directly. The compulsory reserve ratio rose from a level of 4.25 per cent in December 2001 to 6.25 per cent, then to 6.5 per cent in March 2004, where it has since remained unchanged. The rates of interest associated with these two instruments were revised in 2005: the interest on compulsory reserves has been 1 per cent since 2005, whereas before it was 1.25 per cent. During the second half of 2005, the Bank of Algeria introduced two new indirect instruments: the “quarterly withdrawal of liquidities” at a rate of 1.9 per cent and the “remunerated deposit facility” at a rate of 0.3 per cent. The first rate was raised to 2 per cent in 2006. These different mechanisms have resulted in an increase in African Economic Outlook

Algeria

deposits by banks at the Bank of Algeria from 361 billion dinars in 2003 to 673 billion dinars in 2004 and 732 billion dinars in 2005. Of these total deposits, 250 billion dinars in 2003, 400 billion dinars in 2004 and 450 billion dinars in 2005 related to the withdrawal of liquidity. By means of these different instruments, the Bank of Algeria has succeeded in stabilising the monetary situation. The broad money supply (M2) grew by 10.9 per cent in 2005, as against 11.3 per cent in 2004 and 15.3 per cent in 2003. The inflationary trend in 2004 (3.5 per cent) has been reabsorbed and inflation was only 1.6 per cent in 2005, proof of the effectiveness of indirect monetary policy instruments. In June 2006, the consumer price index had only increased by 0.6 per cent during the first half of the year.

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The Bank of Algeria will nevertheless probably need to adopt an attitude of greater prudence because of the salary increases which came into effect during the second half of 2006. As regards money creation, the increase in foreign exchange reserves has had an expulsion effect on other money supply counterparts. Net external assets, which have become the only source of money creation, amounted to 4 179.4 billion dinars in 2005, as against 3 119.2 billion dinars in 2004, representing an increase of 40 per cent. At the same time, the monetary growth rate was only 10.9 per cent, for a money supply that totalled 4 149.9 billion dinars in 2005. Monetary stability has been accompanied by a policy of “controlled floating” of the dinar aimed at stabilising the Real Exchange Rate (RER) at its longterm equilibrium level. The level of the RER at the end

of 2003 is taken as a reference for this. The nominal rate of the dinar rose slightly against the dollar during the second half of 2006, to 73.16 dinars for $1, compared to 73.84 dinars in 2005. Monetary Policy The price of oil per barrel, which rose from an average of $38.66 in 2004 to $54.36 in 2005, further strengthened Algeria’s external position. At the end of 2005, thanks to the trade balance, the current account showed a positive balance of 21 per cent of GDP, as against 13 per cent in 2004. Exports (f.o.b.) in fact increased by 50 per cent by value in 2005 compared with 2004, while imports (f.o.b.) increased by only 9 per cent in 2005, compared with 34 per cent in 2004. Imports have dropped by 2 per cent of GDP, reaching the same level as in 2003. In real terms, imports followed a trend similar to that of GDP. The overall trade balance showed a surplus of 26.1 per cent of GDP. The balance of services as a percentage of GDP remained fairly stable. Notably, however, the total of transfers of profits and dividends rose from $3.3 billion in 2004 to $5.35 billion in 2005, $4.74 billion of which were for Sonatrach’s associates. At the end of June 2006, the transfers of these associates had reached $2.8 billion. These transfers have an important effect on the current account balance. Table 3 shows a widening deficit in factor income, despite much lower interest payments on the debt, following payment of almost the totality of the debt in advance and substantial receipts from investments of foreign exchange reserves. The structure of foreign trade has remained unchanged. In 2005, oil and gas exports made up more

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

3.1 21.0 17.9 -3.1 -4.2 2.2

16.3 36.0 19.6 -2.0 -4.0 2.6

16.8 37.9 21.1 -2.4 -4.2 2.9

25.7 45.1 19.4 -2.8 -5.0 2.7

28.9 47.5 18.6 -2.5 -4.4 2.4

26.1 45.7 19.6 -2.3 -5.7 2.3

24.8 44.9 20.1 -2.7 -5.3 2.3

Current account balance

-1.9

13.0

13.1

20.7

24.4

20.4

19.1

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/724812360346

African Economic Outlook

© AfDB/OECD 2007

Algeria

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

Source: IMF.

99 http://dx.doi.org/10.1787/264045607711

than 97 per cent of total exports and over 50 per cent of remaining exports were by-products of oil and gas. Imports show the importance of capital goods and intermediate goods (49.2 per cent), as well as of food and non-food consumer goods (36.4 per cent). Algeria’s principal trade partner is the European Union (57 per cent), supplying 58 per cent of its exports and 56 per cent of its imports. France remained Algeria’s principal supplier, with 21 per cent, followed by Italy and China, with 9 per cent and 7 per cent, respectively. Over the last ten years, foreign trade has tended to develop more rapidly with regions outside the EU: imports of Chinese goods grew by 45 per cent during the first half of 2006 compared with the same period in 2005.

Structural Issues Recent Developments Algeria is seen as a country that is institutionally handicapped. Institutional reform has been slow in producing the desired results and is an obstruction to © AfDB/OECD 2007

sustainable economic growth. The justice and finance sectors are the most important constraints on the improvement of the business climate. In this respect, a World Bank study ranked Algeria between ninth and last in a group of 14 oil-exporting countries belonging to the Middle East and North Africa (MENA) countries or to Central and Eastern European Countries (CEEC). The analysis was based on six weighted criteria (responsibility, political stability, governance, fairness of the legal system, the role of law and corruption). The criteria that received most criticism for Algeria concerned the fairness of the legal system and the role of law. The justice sector remains most in question as the business community has limited confidence in the impartiality of the judiciary system, which moreover is considered to be slow and ineffective. Legal system reform which began in 2001 more or less enabled adaptation of the Algerian legal framework to the needs of a market economy. However, its application has suffered from procedural inadequacies, from a shortage of qualified magistrates in the field of African Economic Outlook

Algeria

commercial law (particularly in binding agreements and contracts) and from lack of capacity in administrative and technical evaluation as well as in implementing the decisions of justice. There is a clear need to strengthen the technical capacity of magistrates in the field of commercial law. Financing is the other major constraint on the business climate. A potential investor has to wait for an average of four months before receiving a reply to a request for an operating credit and almost six months for an investment credit. External credit (banking or other) makes up 25 per cent of operating credit and 30 per cent of investment credit. These rates are a reflection of the low bank ratio and weak bank intermediation of the Algerian economy, as well as of problems relating to credit-supply conditions (functioning of the banking and financial system) and credit demand (behaviour of firms).

100

The payment system is very slow and this encourages the use of cash transactions, even when large sums are involved. Half of the broad money supply is held in cash. The absence of a venture capital market is a salient feature of the Algerian financial market from the point of view of investment financing. Not having been set up to take risks, the banks prefer to turn to profitable, less risky markets. Financial depth (the ratio of private-sector credit to GDP) is only 12 per cent in Algeria, as against 140 per 0cent in China and 100 per cent in Korea and Thailand. The public banks maintain a solvency ratio that is higher than the prudential standard of 8 per cent. According to the October 2006 report of the Bank of Algeria, the banks are in fact applying rationing. Their excess of funds demonstrates the margin by which the banks have to increase the credit offered to firms. These shortcomings provide a breeding ground for the informal economy, which accounts for 35 per cent of GDP. These institutional handicaps increase transaction costs for small enterprises. The latter will also be more likely to take refuge in the informal economy, in order to survive the increasingly acute competition accompanying the opening-up of the African Economic Outlook

economy to external markets. It is also obvious that firms that do not declare their profits – or else only part of them - will tend to avoid the banking system, as it constitutes a subsequent means of control. The status of property is also relevant; property remains in the family in small businesses, where there is a strong preference for family savings rather than savings through an intermediary. Important measures have been taken however, some of which are beginning to be applied. The imminent privatisation of 51 per cent of the capital of the Algeria Popular Credit Bank (CPA) will improve the overall capacity of the financial market owing to a circulation of specific and management know-how and thus will enhance its attractiveness; moreover, two other banks, the Algeria National Bank (BNA) and the Local Development Bank (BDL) are also involved in privatisation and in opening up their capital to foreign investors. Modernisation measures began to take shape in 2006 with: i) the setting up of the Algerian Real Time Settlement System (ARTS) in February 2006; this system will enable banks to issue transfer orders for large amounts in real time; and ii) the start-up of the interbank e-clearing system in May 2006. Recently, the financial environment for small and medium-sized enterprises (SMEs) and handicrafts improved, with the appearance of a Credit Guarantee Fund (FGAR) and an Investment Credits Guarantee Fund (CGCI) for SMEs, which was endowed with 30 billion dinars. By 30 June 2006, FGAR’s operations remained limited: 35 guarantees amounting to 318 million dinars were awarded, an average of just over 9 million dinars per project, covering 35 per cent of credit granted. A government bill has been passed on the question of venture capital (which up until now has been absent from the Algerian financial sector). This bill conforms in every way to the practices of countries with greater experience in the matter. Capital investment companies will help to remove the constraints on financing for public and private SMEs. Nevertheless, these achievements have been well below the objective of © AfDB/OECD 2007

Algeria

creating 14 specialised financial companies. In Tunisia, for example, there are no less than 37 venture capital investment companies (SICAR). Access to Drinking Water and Sanitation Water resources are dependent on the climate, which in Algeria’s case is arid or semi-arid in nature. Resources are therefore not abundant and correspond to a total of 12.4 billion m3 for surface water and 2.8 billion m3 for groundwater, 800 million m3 of which (renewable water resources) are situated in the South. To satisfy the demands of different users (domestic, industrial and agricultural), samples of surface water are taken (dams, off-stream reservoirs, flowing streams/rivers) or groundwater samples (boreholes, wells and springs). Information on the volume of surface water intakes is relatively easily obtainable, but groundwater intakes are poorly recorded. Neither the agricultural sector nor the water resources sector possess the relevant statistics. It is also recognised that most of the groundwater tables in the North of Algeria are over-exploited, with negative consequences for water levels and water quality. Added to this is the problem of pollution of groundwater tables by nitrates, manganese and chlorides. Due to their over-exploitation, saline intrusions are also found in groundwater tables and this phenomenon threatens all the coastal regions. Over-exploitation is causing substantial lowering of the water tables, causing drops in levels in most of the water tables of more than one metre per year.

1.3 billion m3 of water. The network for the conveyance and distribution of drinking water is estimated to be 58 000 kilometres long. The current capacity for treating surface water is 570 million m3 per year, added to which is a storage capacity of 5 million m3. The sewage network is 24 000 kilometres long. The volume of waste-water is estimated at 600 million m3 per year, 550 million m3 of which comes from the towns in the north. This configuration reflects the population structure, which is strongly concentrated in the north (90 per cent). At the National Water Assizes in 1995, the authorities decided to take a number of measures, including opening up the concession to national and foreign private sectors. According to the new Article 21 of the water law, the concession can be granted equally to public bodies and enterprises, local authorities or private legal entities. This code, which was modified and completed by Decree No. 96-13 of 15 June 1996, allows the supervisory authorities to contract out public water services in whole or in part. Decree No. 96-100 of 6 March 1996 set up Hydrographic Basin Agencies and Basin Committees responsible for collecting statistical data, documents and information on water resources, for extraction and consumption. Their role is to participate in monitoring the state of pollution of water resources; defining the technical specifications relating to waste-water and sewage treatment facilities and awareness-raising among domestic, industrial and agricultural users about the rational use of water resources and their protection.

Over-exploitation is the consequence of ineffective groundwater resources management, due to several factors: i) an uncontrolled increase in illegal drilling; ii) insufficient knowledge of exploitable resources; iii) insufficient co-ordination between the national agency for water resources (ANRH), which is responsible for information on water resources and the agencies that manage drilling; and iv) the difficulty of deciding whether water should be allocated to human consumption or to agriculture.

Several agencies are involved in managing the territory, which is divided into five drainage basins:

Since independence, Algeria has constructed more than 50 dams capable of regulating more than

• the National Agency for Dams (ANB) is responsible for the mobilisation of resources

© AfDB/OECD 2007

In order to enable these agencies to fulfil their mission, the Finance Act of 1996 set up levies on “water quality” and “water saving” as part of the bill for drinking water and water for industrial and agricultural uses (8 per cent for the wilayas [departments] in the north and 4 per cent for the wilayas in the south).

African Economic Outlook

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Algeria

102

through programmes for the construction of dams and various interconnected networks (pipes, pumping stations, water treatment plants); • the Algerian Water Company (ADE), which is an EPIC-type company (industrial and commercial public enterprises), was set up in 2001 as a financially independent legal entity. The ADE is responsible for the distribution and supply of drinking water and has direct authority over 26 public economic enterprises (EPE), i.e. the public enterprises that actually deal with the distribution of water in the large Algerian towns (these EPEs are known as EPEAL in Algiers and EPEOR in Oran); • the National Office for Waste Water Treatment (ONA) which was set up at the same time as the ADE, is an EPIC under the authority of the Ministry of Water Resources. This Office is responsible for i) the management and operation of sewage infrastructures; ii) fighting against all forms of water pollution; iii) the design and implementation of projects for treating rainwater; and iv) undertaking study projects for the government and local authorities; • The National Agency for Dams (ANB) is also responsible for promoting and implementing planned investments as well as for the operation and maintenance of dams. In each wilaya, a regional director of water (DHW) represents the ministry and depending on the size of projects, may be the principal negotiator with the companies offering tenders for public contracts. As with many sectors of activity in Algeria, most of the companies operate in the public sector. A Ministry of Water Resources was created in 2000, as a supervisory body for all the agencies in the sector, in order to improve co-ordination of their activities and increase co-operation in sectoral policy-making. Recently, following the relative liberalisation of the Algerian economy, private companies that are often suppliers for large public enterprises have appeared. Private-sector participation is presently encouraged by the government, especially in the areas of seawater African Economic Outlook

desalination, with the possibility of BOT (build-operatetransfer) concessions. Since the end of 2003, negotiations have been under way with the French operators Suez and Saur for the management of water supply and distribution in the largest towns. The water-tariff system is defined in Decree No. 05-13 of 9 January 2005. The public services pricing system for drinking water and sewage covers all or part of the financial costs of operation, maintenance, renewal and development of water infrastructures. Prices increase according to consumption for domestic users and are standard for other categories of users. They include a standard management charge which is uniform throughout the country and a pricing structure which is specific to each region. For households, the tariffs per m3 are 1 dinar, 3.25 dinars, 5.5 dinars and 6.5 dinars, according to different consumption brackets by quantity. Government agencies are charged 5.5 dinars per m3 and industry and tourism, 6.5 dinars per m3. The water distribution companies in Algeria have shown poor financial results. Over the past few years, they have suffered serious financial losses, with continually deteriorating negative operating margins. This deterioration in the financial situation of the water companies is mainly due to low prices that fail to cover operating costs, debt service and new investments. Receipts generated by the prices set by central government only cover 70 per cent of the operating expenses of the companies. However, according to the decree that defined the pricing system, water should be provided at a price that covers maintenance and operation costs of water construction works and infrastructure as well as contributing to the financing of investments in maintenance and development. The companies are obliged to ask the state for a subsidy to make up the difference. Connection rates for access to drinking water (AEP) and to the sewage network were, on average, 85 per cent in 2002. Recent statistics on types of connection are not available. Seven out of ten households are connected © AfDB/OECD 2007

Algeria

to the public drinking water network.The others use wells, streams, tanks and other storage systems. Half of the latter households are dwellings located in sparsely-populated areas, but dispersion is not the determining factor in average connection rates; only the wilaya of Ain Defla has a rate below 50 per cent, because it has been lagging behind with development of its sewage network. Divergence from the average connection rate to the sewage network is not very great, with the exception of a few wilayas situated mainly in the far South. The Millennium Development Goal (MDG) for water aims to reduce by half: i) the percentage of the population without permanent access to an improved source of drinking water, by 2015; and ii) the percentage of the population that does not have permanent access to improved sewage facilities by 2020. These aims are attainable in view of the projects under way in the areas of water and construction works. The capacity for waste-water treatment could be multiplied by four in the medium term through the rehabilitation of sewage works and the creation of new works. The local authorities responsible for the operation of sewage infrastructures require considerable financial means if they are to provide a proper service. It is therefore important to set prices at a level that will enable these authorities to pay for sewage-management facilities. The new pricing system in place since 1996 has probably had positive effects on the finances of district authorities that are still faced with serious costrecovery difficulties. The comfortable financial situation produced by positive trends in oil gives the Algerian authorities a wide margin of manoeuvre for achieving the water-related MDG by authorising major investments to upgrade the infrastructures completely, since these are in a state of general disrepair due to lack of proper maintenance.

Political Context and Human Resources Development The aim of national reconciliation is notable among President Abdelaziz Bouteflika’s political actions. This © AfDB/OECD 2007

policy was initiated during his first term of office (19992004). A new government in 2006 was led by the secretary general of the National Liberation Front (FLN), which had a majority in both houses of parliament. The last few years of the president’s second term of office have been marked by the 2005-09 PCSC. Initially estimated at $60 billion, this plan has been reevaluated at over $140 billion, a substantial amount for a country like Algeria. This budget was almost entirely intended for economic and social infrastructures. Human development (health, housing and education) should benefit distinctly; 25.5 per cent of the budget is allocated to housing and living conditions (Finance Act for 2005) and there should be additional indirect effects due to investments in infrastructures (22.7 per cent). The authorities seem determined to equip the country with wide-ranging economic and social infrastructures. Large-scale roadworks have begun on the East-West motorway (1 200 kilometres), as well as works on railway lines of similar distance. Compared with the previous decade, the overall social environment has greatly improved. The state’s substantial revenue has enabled it to reassume a role of redistribution. The social categories receiving government assistance are relatively better targeted than during the controlled-economy epoch, when the policy of low prices was synonymous with rationing and, hence, with inequality. Government social action represented between 5.5 per cent and 7.7 per cent of GDP from 1999 to 2005. For GDP excluding oil and gas, it was between 10 per cent and 13 per cent over this period. Compared with income tax, which is limited to 2.5 per cent of GDP, government action is very considerable. Social solidarity is partly financed by oil taxation. According to the figures of the National Office of Statistics (ONS), economic growth, led by oil and gas, has been accompanied by a spectacular improvement in employment. The unemployed population in 2005 numbered 1 474 549 persons (of which 253 545 were women), which is a total unemployment rate of 15.3 per cent, as against almost African Economic Outlook

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Algeria

30 per cent in 1999. In urban areas, the rate is 14.8 per cent, as against 16 per cent in rural areas. This improvement is due to work-generation arrangements for young people, the support given to micro-enterprise creation and the Economic Recovery Programme (PSRE), followed by the PCSC. The government aims to reduce the unemployment rate to under 10 per cent by 2009 through significant infrastructure creation. The present buoyancy in massive job creation is unlikely to continue on a long-term basis, being the direct or indirect result of budgetary efforts and these have not yet been successfully superseded by economic growth directly created by companies.

104

At the same time, the increase of 25 per cent in the minimum guaranteed salary from January 2004 enabled purchasing power to catch up, due to the relatively moderate rate of inflation – even without taking into account increasing state intervention in gross household income. The proportion of transfer payments in gross household income went up from 16.2 per cent in 1996 to 20.3 per cent in 2000 and to 23 per cent in 2004. In June 2006, the state allocated a total budget of over 100 billion dinars (approximately $1.4 billion) to improve the allowances scheme of public-service employees. This measure, for example, raises the minimum public-service salary by about 15 per cent. Household consumption has benefited from the increase in salaries and the fall in unemployment. Real household consumption increased by an average annual

African Economic Outlook

rate of 3.1 per cent from 1990-2003, whereas over the same period, population growth was less than 1.6 per cent. The construction programme for one million homes within the framework of the PSRE – a large part of which has already been carried out – has helped to reduce the pressure on demand. The occupancy rate (TOL) went down from 7 persons to 5.5 persons between 1999 and 2004 and is expected to go down to 5 persons in 2009, with the construction of another million homes under the PCSC. Life expectancy at birth, which constitutes both health and development indicators, has increased by more than 20 years since 1970. It went above 73 years in 2005 and is now estimated at 72.5 years for men and 74.4 years for women. According to the 2006 human development report of the National Economic and Social Council (CNES), illiteracy – which is usually accompanied by poverty – affected 34.5 per cent of the population aged 15 years and over, or more than 3 million inhabitants, in 1998. This figure went down to 2.6 million inhabitants in 2005, but this is not a very significant reduction. According to the United Nations Development Programme (UNDP), efforts made up until now have been insufficient to create any marked improvement in the human development indicator for Algeria, which was ranked 102nd out of 179 countries in 2006.

© AfDB/OECD 2007

Angola

Luanda

key figures • • • • •

Land area, thousands of km2 1 247 Population, thousands (2006) 16 400 GDP per capita, $ PPP valuation (2006) 3 438 Life expectancy (2006) 41.7 Illiteracy rate (2006) 32.6

Angola

A

and prolonged economic growth, thanks to a boom in commodity prices and rapid development of oil and diamond production. Nevertheless, and despite encouraging signs of recovery in the non-mineral sectors, the lack of structural reform, widespread inefficiency and weak governance are still jeopardising the potential of economic growth to bring about social development. NGOLA IS EXPERIENCING RAPID

Record-high international oil prices and rapidly growing output from new oil fields sustained real GDP growth, which reached 14.8 per cent in 2006, following 20.6 per cent in 2005, and is expected to remain high at 27 per cent in 2007 and 17.3 per cent in 2008. Angola is exceptionally dependent on oil. Other economic activities account for a negligible share of

overall growth and of export revenues, although they contribute more to job creation. Improved performance in banking, construction, retail A number of factors trade and telecommunications are fostering rapid suggests, however, that some and prolonged economic impacts from the oil boom are growth but governance percolating through to the broader needs improving. economy. Agriculture is also picking up, although output and productivity remain far below potential and the situation is unlikely to improve considerably until infrastructure rehabilitation is completed, markets for key inputs are established and mine clearance is finished. At the macroeconomic level, despite the progress recorded since the end of the war, transparency of oil 107

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Angola - GDP Per Capita (PPP in US $)

■ Southern Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Angola - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

8000

30

7000 25 6000 20 5000

4000

15

3000 10 2000 5 1000

0

0 1999

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06(e)

2006/07(p)

2007/08(p)

Source: IMF and National Institute of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/474756712485

© AfDB/OECD 2007

African Economic Outlook

Angola

revenue management remains incomplete, and much remains to be done to align fiscal policy actions with the priorities of poverty eradication. Angola’s relationship with the Bretton Woods institutions is poor, and progress in reaching an agreement that would broaden the country’s access to international financial markets has stalled as the authorities have gained access to alternative bilateral credit lines. An expansionary fiscal policy continues to place the burden of macroeconomic stabilisation on monetary policy. Although the latter has proven to be very effective in reducing inflation, it has generated adverse consequences in terms of high interest rates, an over-valued domestic currency and uncompetitive domestic prices.

108

At the microeconomic level, despite the signs of recovery in the private sector, risk taking and entrepreneurship continue to be stifled by high de jure and de facto barriers to entry, including privileged access to market opportunities and finance for a small number of business people. Some important reforms have been made – for instance, to accelerate the procedures for establishing new companies – but implementation has been delayed in practice by the poor state of the bureaucracy. Finally, inter-generational considerations give rise to concern. Angola may be experiencing a petroleum boom, but output will soon reach a plateau and then decline quickly. To prepare for this, the authorities should redouble efforts to diversify and increase production by wisely investing current revenues for the benefit of future generations. One way of doing so would be to accelerate land reform, increase allocations to education and health, and improve the efficiency of public spending.

Recent Economic Developments Developments in the mining sector are driving the currently high rate of GDP growth. In 2006, the growth rate of the oil sector slowed down when compared to 2005, while that of labour-intensive diamond mining strongly increased. Overall, the mining industry is estimated to have expanded at a African Economic Outlook

somewhat slower rate in 2006 than in 2005, but is expected to accelerate in 2007. In 2005, the oil sector accounted for more than 56 per cent of GDP, 83.1 per cent of government revenues and 94.1 per cent of exports. In 2006, oil production is estimated to have grown by 15 per cent compared to 26 per cent in 2005. Daily production in offshore fields, mostly in the Congo River basin opposite the Cabinda enclave, averaged 1.4 million barrels a day in 2006 and is expected to peak at 2.6 million barrels in 2010/11. The slower growth was due to maintenance work in a number of fields, including the Girassol field in Block 17, and the slower than anticipated start-up of production on the Dália field. Hence, instead of the initial forecast of 597 million barrels, annual output amounted to 510 million barrels. With reserves now estimated to be between 20 and 22.8 billion barrels, the growth rate of production is expected to accelerate in 2007 and further increase in 2008. In early 2006, oil was produced for the first time from Block 14, while the Benguela, Belize, Lobito and Tomboco fields are expected to produce 200 000 barrels of crude oil per day in 2008. New concessions will be awarded in 2007, and imports of increasingly sophisticated equipment are rising as exploration and exploitation move to ultra-deep fields. In December 2006, Angola officially became a member of the Organisation of Petroleum Exporting Countries. Moreover, new explorations are being undertaken in the field of natural gas, whose potential has not been estimated yet. The Angolan oil boom has now been under way for a number of years, and reform of the policy environment is more imperative than ever. The government has traditionally intervened in the oil industry through Sonangol, a state-owned enterprise that retains responsibility for regulation and contract negotiations, is sole owner of the fields and has entered into production-sharing agreements with major western oil companies, led by Chevron, Total and ENI, although independent companies, as well as national oil companies from Brazil and China, also play an active and growing role. This combination of Sonangol’s various roles has long been criticised for giving rise to conflicts of interest. © AfDB/OECD 2007

Angola

The process of Angolanisation, started in 1982, requires oil companies to staff operations in the country with Angolan workers. The government recently proposed new procurement and employment clauses in the production-sharing agreements aimed at increasing local participation in the industry. This policy attempts to address the fact that the sector has little direct employment impact, creates few direct linkages to other sectors of the economy and relies on imports of capital equipment and specialised services. Nevertheless, there is a risk that foreign oil companies will recruit most of the few highly skilled Angolan workers and crowd out the public administration and the non-oil private sector. Moreover, having reduced inflation, modernised the banking sector and introduced electronic payments and real-time gross settlement of balances, the government has renewed its calls for oil firms to route all industry payments through the domestic banking system. These calls have raised resistance among oil firms, which doubt the capacity of local banks to handle large amounts of money.

(about 5 per cent of total exports in 2005). Angola is considered to be one of the world’s most promising diamond areas, with estimated reserves of 400 million carats of alluvial diamonds and 40 million carats of kimberlite, although detailed geological exploration has started only recently and modern techniques are scarcely in use. Production increased by 16.2 per cent in 2005 and by 41.7 per cent in 2006 as output at the Catoca mine doubled, reaching 10 million carats. This trend is expected to continue, at least in the short term, since 23 new exploration licences were issued to private enterprises in Bié province. To add value to production, the largest polishing and cutting factory in Africa opened in November 2005. The Angola Polishing Diamonds factory – a joint venture between the state diamond company Endiama, the Angolan consortium PROGEM and Lev Leviev Diamonds (LLD), the world’s second-largest diamond trading company – employs 400 technicians. As in the case of Sonangol, Endiama combines the roles of regulator and economic operator. 109

Diamond mining in extensive kimberlite and alluvial projects is the second-largest source of export revenues

The domestic non-mining economy continued its recovery in 2006, exhibiting growth of 13.8 per cent

Figure 2 - GDP by Sector in 2004/05 Other services

Agriculture, forestry and fishing

9% Wholesale and retail trade

(percentage)

8.6%

14.9%

4.1% 4.1% Manufacturing 2.9% Diamonds Construction

56.3%

Oil and gas

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/384572172060

as the dynamism spread from construction and services to agriculture and, to a lesser extent, manufacturing. This positive trend is expected to impact favourably on internal market development and job creation and thus contribute to poverty reduction. Angola has fertile soil and a climate conducive to agriculture; in fact, at independence the country was © AfDB/OECD 2007

self-sufficient in food production, the largest staple food exporter in sub-Saharan Africa and one of the world’s biggest coffee exporters. The civil war exacted a heavy toll on the agricultural sector, especially in the central and northern regions, which were the most affected by fighting. Although production is recovering (the growth rate for the sector over the 2000-04 period has averaged 13.3 per cent and production has increased African Economic Outlook

Angola

by more than 80 per cent since 2000), agriculture accounted for only 8.6 per cent of GDP in 2005, because agricultural production is still hampered by the widespread presence of land mines, infrastructure inadequacy, low productivity, input shortages in general and the absence of storage systems. Agricultural output grew at a rate of 17 per cent in 2005, but the 2005/06 agricultural season has been below expectations, due to poor rains which have reduced Angola’s total cereal production to 742 000 tonnes, a 15 per cent fall compared with the previous season. According to the Famine Early Warning Systems Network (FEWS Net) assessment, households expect drought conditions to reduce their maize crops by 40 to 70 per cent. By contrast, coffee production increased during the 2005/06 growing season, but the road to recovery remains a long one due to high production costs and poor infrastructure. Coffee production had dropped sharply during the civil war, when output of cash crops in general became insignificant.

up by 22.14 per cent in the period January-September 2006, following 17 per cent growth in 2005. Progress has been made in rehabilitating transport infrastructure, particularly roads and bridges. Chinese contractors completed major projects such as the Keve bridge and the Luanda-Namibe railway, although completion of the Luanda-Malanje link will be delayed until 2007. In Luanda, on the other hand, a number of Portuguese construction firms completed or announced projects involving residential, hotel and office buildings. All in all, the construction sector expanded by a remarkable 66.2 per cent in 2006, and the hosting of the Africa Cup of Nations football championships in 2010 is expected to sustain growth over the next few years.

Angola once had one of Africa’s most developed manufacturing industries, but the civil war led to a prolonged phase of negative growth. There are signs, however, that production is picking up in certain industries, as consumers’ purchasing power recovers in Luanda and other major urban centres. The sector recorded a cumulative growth rate of 67.4 per cent in real terms for the 2000-04 period, 24.9 per cent in 2005 and 30.7 per cent in 2006. The beverages sector, for instance, grew by 8 per cent in 2005 and is estimated to have grown even more in 2006, benefiting from the national football team’s participation in the World Cup. In general, agribusiness is expected to benefit from the recent opening of cold-storage facilities in Luanda and the announcement of a rehabilitation programme for the national cold-storage network. On the negative side, the performance of the only existing petroleum refinery continues to be hampered by persistent bottlenecks, partly associated with the nature of the supply arrangement with Sonangol and distorted incentives that encourage imports of refined petroleum products.

The growth rate of the services sector (which accounted for about 15 per cent of GDP in 2005) slowed in 2006, compared to 8.5 per cent in 2005, with the trade sub-sector taking the lead. Telecommunications, and especially mobile telecommunication services, have experienced exceptional growth since 2002, benefiting from the end of the war and the privatisation of the sector. The total number of cell phone subscribers reached 2.6 million at end-2006 (a 44 per cent increase), with the incumbent’s market share falling slightly to 81 per cent. The geographical distribution of telecommunication service is extremely asymmetric, with Luanda and other few major towns accounting for more than 85 per cent of the existing connections. The growth potential of the sector is extremely large, considering the low access rate (0.60 per cent), well below that of neighbouring countries such as Namibia (6.86 per cent), South Africa (11.46 per cent) and Botswana (5.64 per cent). The financial sector is continuing on the track of fast post-war development. Ten commercial banks have applied for operating licences, and in 2006 two new banks opened, bringing the number of operating banks to nine. Bank deposits are rising, access to short-term credit is improving, and residential mortgages are increasing, but access to other long-term finance is limited, especially outside Luanda.

Construction, another booming sector, is leading growth in the non-oil sectors, with physical production

The demand structure reflects Angola’s historical reliance on oil exports and imports for most consumer

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© AfDB/OECD 2007

Angola

Table 1 - Demand Composition 1997/98

2004/05

(percentage of GDP) 2005/06(e)

Percentage of GDP (current prices)

2006/07(p)

2007/08(p)

Percentage changes, volume

Gross capital formation Public Private

35.2 5.9 29.3

7.5 4.7 2.8

51.9 80.0 5.0

12.8 12.0 15.0

13.7 15.0 10.0

Consumption Public Private

81.1 28.3 52.8

68.0 24.1 43.9

21.7 10.4 25.6

18.1 8.0 21.2

21.1 13.2 23.2

-16.3 56.2 -72.5

24.5 72.6 -48.0

9.6 26.9

30.1 14.8

7.0 16.1

External sector Exports Imports

Source: IMF and National Institute of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/624438874407

goods. This state of play is expected to continue in 2007 and 2008, with mineral exports continuing to improve the external sector balance and further stimulate growth. The investment component has continued to expand and is estimated to have increased by nearly 52 per cent in 2006. Private investment remains concentrated in the mineral sector, whereas public investment, which expanded at an exceptional rate in 2006, remains focused on infrastructure reconstruction and the social sectors. Growth of both public and private investment is expected to return to more reasonable rates in 2007 and 2008. Private consumption is recovering and accelerating, thanks to increased incomes in Luanda and higher public sector salaries. As a consequence of this growth in investment and consumption, import volumes are expected to grow by 27 per cent in 2006.

Macroeconomic Policies Fiscal Policy In recent years, efforts to reduce inflation and improve public finances have been broadly successful, and these gains were further consolidated in 2006, when the inflation rate approached the target of 10 per cent and the fiscal balance remained soundly positive. Nevertheless, the sustainability of the policy mix remains a cause for concern, unless structural reforms are © AfDB/OECD 2007

implemented. In fact, the country’s success in curbing inflation is largely due to expensive exchange-rate operations, which sterilise the huge amounts of foreign currency injected in the economy, while fiscal policy remains extremely expansionary, generating strong inflationary pressure. The concern arises from the fact that this policy seems to be sustainable only as long as oil prices (and revenues) remain high. Some improvements have been made in enhancing budgetary oversight over most off-budget expenditures, such as the quasi-fiscal operations carried out by Sonangol on behalf of the government and the central bank’s operating deficit. Nonetheless, the country still has no medium-term expenditure framework allowing for countercyclical expenditure planning, and the budget design does not seem to take into serious consideration the limited absorption capacity of the public administration. Unfortunately, the combination of high oil prices, reduced leverage of the international financial institutions with respect to new financing opportunities for the country and the upcoming legislative and presidential elections make any serious change in the policy mix rather unlikely in the short term. Despite some improvements on the revenue side, a great deal more progress is needed to achieve full transparency concerning the expenditure side and oil revenues (especially concerning Sonangol’s quasi-fiscal operations). Angola remains an observer to the Extractive African Economic Outlook

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Angola

Industries Transparency Initiative, arguing that full membership requires a set of implementation measures that exceed the country’s current capacity. For the time being, data on oil production and exports are published on the website of the Ministry of Finance and the financial statements of Sonangol for fiscal years 2003 and 2004 have been audited by international firms, although the latest audit reports have not yet been published. Revenue collection in the expanding diamond industry remains opaque.

Despite the conservative oil price adopted, the government had to revise the 2006 budget to take account of higher oil prices ($56 per barrel instead of the initial forecast of $45), lower oil production and weaker GDP growth. Oil revenues, although increasing, were also revised downwards, from 31 to almost 28.5 per cent of GDP. The government maintained its basic public spending priorities, as the oil revenue windfall made it possible to more than double budgeted expenditures. The largest bill is for the social sectors,

Table 2 - Public Finances

112

(percentage of GDP)

1997/98

2002/03

2003/04

Total revenue and grantsa Tax revenue Oil revenue

26.3 6.6 19.2

37.9 7.8 28.9

36.9 6.8 29.3

38.0 5.7 31.0

35.4 5.8 28.5

34.8 5.8 27.8

32.7 6.1 25.4

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

55.3 34.4 27.6 9.1 6.8 5.8

44.9 37.5 35.2 12.4 2.3 7.4

35.8 30.6 28.3 10.3 2.3 4.4

30.1 25.4 23.5 8.6 1.9 4.7

30.0 23.3 21.9 8.8 1.4 6.7

28.5 21.9 20.1 8.2 1.8 6.5

28.9 21.9 20.6 8.4 1.4 7.0

-22.3 -29.0

-4.6 -7.0

3.4 1.1

9.8 7.9

6.8 5.4

8.1 6.3

5.2 3.8

Primary balance Overall balance

2004/05 2005/06(e) 2006/07(p) 2007/08(p)

a. Only major items are reported Source: IMF and Ministry of Finance data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/837655487055

which attracted more than 30 per cent of total expenditures, as against 29 per cent of total spending in 2005. Nevertheless, taking into account the weak absorption capacity of the public administration, it seems highly unlikely that the government’s overambitious expenditure plan will be executed. The trend of current expenditure, which decreased in terms of GDP share, is characterised by an increase in public wages and new recruitment, and a decrease in goods and services expenditure, while subsidies to fuel, water and electricity were maintained and accounted for 3.8 per cent of GDP in 2006. The 2006 budget marked a significant change in the composition of expenditure, with the share of capital expenditure in overall budgeted spending increasing considerably, but not as much as foreseen by the government. Capital expenditure is estimated at 6.7 per cent of GDP in 2006, corresponding to an increase of 80 per cent in real African Economic Outlook

terms over 2005. This level should be maintained in 2007 and 2008. Overall, fiscal year 2006 is expected to close with a substantial surplus of 5.4 per cent, although the fiscal position is deteriorating with respect to 2005. The fiscal balance is expected to improve marginally in 2007 and to deteriorate again in 2008, due to a probable decrease in oil prices and hence in government revenue. The 2007 budget as announced by the government in December 2006 is based on the assumption of an international oil price of $50 for Angolan crude, and includes expenditure commitments for 1.8 trillion kwanzas (equivalent to a 32 per cent real increase). Although expansionary, the fiscal policy seems more reasonable than in 2006, taking more into consideration the limited absorption capacity of the economy. This, and in particular the forecast 12 per cent decrease in © AfDB/OECD 2007

Angola

net investment, should be considered a step towards the improvement of public expenditure efficiency. The social sectors are expected to receive 28.1 per cent of fiscal outlays, while the share of defence and security should fall further to 12.7 per cent as the country consolidates reconciliation. The budget is supposed to generate 260 000 new jobs in 2007 and 403 000 in 2008. The impact of the expenditure increase on the fiscal balance is expected to be offset by larger than budgeted oil receipts. However, this might not be the case in 2008, when oil revenue is expected to decrease sharply, leading to a deterioration of the fiscal balance. Monetary Policy Owing to an effective monetary policy, the inflation rate has been decreasing dramatically since 2003, with the annual rate declining from 98 per cent in that year to 43.5 per cent in 2004 and 23 per cent in 2005. Despite a slight increase at the end of the year, mostly fuelled by a spike in transport prices, inflation fell to about 10 per cent in 2006, almost achieving the government target. It is expected to stabilise at around 9 per cent in 2007 and 2008. This result has been achieved thanks to the ex ante stabilisation strategy of Banco Nacional de Angola (BNA), which has been purchasing kwanzas with dollars (derived either from oil receipts or from loans backed by promises of future oil receipts) to stabilise the kwanza’s nominal exchange rate against the dollar and dampen the inflationary pressures caused by substantial public expenditures. In the first half of 2006, the BNA sold $2.755 billion, twice as much as in the corresponding period in 2005, but still below the amount forecast because of the low absorption capacity of the economy. In consequence of this strategy, the nominal value of the kwanza has been stable against the dollar since the last big nominal appreciation of the exchange rate (7.8 per cent) in November 2005, while the real effective exchange rate has continued to appreciate. Real appreciation was 40 per cent between 2004 and 2005. While this strategy keeps down the prices of imports, which represent 90 per cent of domestically consumed goods, it damages the competitiveness of domestically © AfDB/OECD 2007

produced goods, thus working against the diversification of production. External Position Following the introduction of a revised six-level tariff structure in early 2005, the simple average Most Favoured Nation applied import duty stood at 7.4 per cent in 2005. Rules of origin are relatively simple, although the full implementation of Angola’s integration into the Southern African Development Community (SADC) Trade Protocol would add to their complexity. Angola has made very little use of bilateral schemes with the United States and the European Union under the Generalised System of Preferences (GSP). The trade balance has continued to improve, thanks to high oil prices coupled with increased production, which boosted export earnings in 2006. Oil and diamond exports, which together amount to 99 per cent of total exports, are estimated to have risen in volume by 13 per cent in 2006. Over the projection period, export volumes are expected to rise dramatically, by an estimated 31 per cent in real terms in 2007 and 8 per cent in 2008, due to expanded crude oil production, offsetting the decrease in oil prices which is expected for 2007. The increase in households’ disposable income, coupled with the growth in oil production and the boom in the construction sector, is expected to lead in turn to an increase in imports, particularly of cement and capital goods, which are projected to grow by 16 and 17 per cent per year in real terms in 2007 and 2008. In the first half of 2006, freight forwarders’ shipment data indicate that the United States remains the largest export destination (33 per cent), followed by China (25 per cent). The European Union remains relatively marginal for exports, while it accounts for roughly half of imports. Portugal is the largest source country, with imports from this country totalling EUR 1.098 billion in the 11 months to November 2006 (a 52 per cent rise over the same period in 2005). The growth of imports from Brazil to Angola has also been dramatic (60 per cent at the end of 2006, to reach $836 million). China’s 2005 exports to Angola stood at $370 million, an increase of 91 per cent. African Economic Outlook

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Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

22.4 54.3 32.0 -38.6 -14.9 2.3

28.9 68.2 39.3 -22.4 -12.4 0.7

38.6 68.1 29.5 -22.6 -12.5 0.0

44.9 71.3 26.4 -20.4 -11.8 0.1

41.4 64.8 23.4 -18.3 -8.7 0.1

41.6 63.1 21.5 -17.3 -11.4 0.0

36.1 57.6 21.5 -17.4 -16.8 0.0

Current account balance

-28.8

-5.1

3.5

12.8

14.5

12.9

2.0

Source: IMF and Banco Nacional de Angola data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/661783765870

114

The current account balance has been positive since 2004, and its improvement was consolidated in 2006, when the current account surplus expanded from 12.8 per cent of GDP to 14.4 per cent. This result is wholly attributable to the trade surplus, which largely offsets the persistent deficit in the factor income account. The latter, highly correlated with the performance of exports, is estimated at 8.7 per cent in 2006, down from 11.8 per cent in 2005. It is expected to worsen in 2007 and 2008, however, as foreign oil companies remit increasing profits to their headquarters following the increase in oil production. Together with Nigeria, Angola was Africa’s largest recipient of foreign direct investment (FDI) flows over the 2003-05 period, owing to its mineral wealth. Rising investment in the country is due to high oil prices, together with promising reserves prospects. In 2006, a number of new licences for nine blocks were granted, and the creation of five new blocks was authorised. Also in the natural resources sector, the world’s largest mining company, BHP Billiton, invested in nine diamond projects and is interested in investing in base metals. Although FDI flows remain small in the rest of the economy, new opportunities continue to emerge. In agriculture and food processing, for instance, Israeli and other investors are exploiting pent-up demand for fresh fruit and vegetables in peri-urban areas, at prices considerably lower than those of imported food. In banking, the Portuguese banks Banco Internacional de Crédito (BIC) and Banco Comercial Portugues (BCP Millennium) expanded their branch networks, African Economic Outlook

the Russian bank Vneshtorgbank and local partners constituted Banco VTB África and ten additional licences have been requested. As for FDI outflows, the government acquired the absolute majority of shares in the cement industry from Portugal’s Cimpor in September 2006. In November, Sonangol took full control of the Luanda refinery from Total, in anticipation of a major investment, possibly in partnership with Asian investors. The external debt burden continued to ease, following the trend of recent years. At end-2004, Angola’s debt amounted to $10.6 billion (including arrears and overdue interest), which corresponds to 53.6 per cent of GDP, down from 99 per cent in 2001. In 2005, although the external debt stock increased slightly when Sonangol contracted a new $3 billion oilbacked commercial loan, the IMF and World Bank estimate that the debt-to-GDP ratio fell below 38 per cent. Thanks to the high GDP growth rate, this downward trend is expected to continue for the next two years, stabilising at 24.6 per cent in 2007/08. A quarter of the outstanding stock of external debt consists of arrears, nearly all owed to the Paris Club. Imports are increasingly being financed by new credit lines provided either by Paris Club members that have signed bilateral debt renegotiation agreements (such as Germany, Spain and Portugal) or by non-OECD countries such as Brazil, Israel, Russia and China. In addition, Angola seems to have reached agreement on a supplementary multi-billion dollar facility from China, although official information on its terms is not available. Access to trade credits from a wider variety of sources has helped to sustain reconstruction efforts © AfDB/OECD 2007

Angola

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

Source: IMF.

115 http://dx.doi.org/10.1787/617054383372

and give the treasury some operational autonomy. It is more difficult to gauge the risks that such new loans entail for debt sustainability and creditworthiness. Similarly, it is hard to predict whether a homegrown reform programme that takes into account some of the IMF’s recommendations will provide a sufficient basis for successful conclusion of ongoing negotiations with the Paris Club. After three decades of external intervention, Angola’s government is sensitive to close monitoring by the international community.

Structural Issues Recent Developments The transformation of Angola into a functioning market economy is a long process that has not been facilitated by the circumstances of the country’s postconflict transition. Still, the pace of structural reforms is disappointing. Hindrances to private sector © AfDB/OECD 2007

development, including egregious examples of rentseeking behaviour, limit the potential benefits of the current economic boom. Moreover, the persistence of inefficiency in the public sector and of abuses of market power by state-owned enterprises in various sectors has impeded fiscal consolidation, shifting the burden of macroeconomic management to monetary and exchange rate policies. International rankings such as Doing Business and the Transparency International index confirm that major bottlenecks due to endemic corruption, outdated regulations and rent-seeking behaviour frustrate entrepreneurial efforts, thus hampering the creation of new job opportunities. Angola ranks 156th out of 175 countries in the 2007 Doing Business classification, losing one place with respect to 2006. Although the time required to open a business has been drastically reduced since 2004 – falling from a year to 30 days, thanks to the creation of a one-stop window for business creation – barriers to entry remain high as the regulatory burden is heavy and the privilege of venturing into African Economic Outlook

Angola

promising new business sectors is reserved to a small number of businesses thought to have strong political influence. According to the 2006 World Economic Forum ranking, Angola is the least competitive out of 125 economies. Decentralisation, meant to improve delivery of public services, remains incomplete, as administrative tasks have been transferred to lower levels of government without a corresponding delegation of spending or taxation authority.

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Since 2003, the authorities have introduced an array of new legislative measures that have gone in the right direction but not fully borne fruit in the absence of accompanying normative and institutional measures. In fact, since 2005, the pace of structural reforms has slowed. A competition bill was drafted in 2004 but has not yet been transmitted to parliament. Concerns regarding the status and success of the privatisation process had led the authorities to suspend it in 2001. To reactivate this process, a confidential diagnosis presented to the authorities in 2006 includes proposals to draft specific laws to cover public enterprises and holders of public service concessions. In the meanwhile, empire-building and prestige-seeking seem to abound in the strategies of state-owned enterprises. The national airline TAAG embarked on a major investment drive in view of a long-needed overhaul of its ageing fleet. The $150 million syndicated loan that a pool of local banks secured towards the acquisition of six new aircraft was rightly seen as a sign of the country’s financial maturity. Unfortunately, TAAG is still on the International Air Transport Association (IATA) list of carriers showing a sub-standard safety record, and its pilots have failed so far to obtain flying certification for the new aircraft, which were delivered on the day of Angola’s 31st anniversary. Sonangol and, most recently, Endiama have decided to expand their airline business. In financial markets, the dollarisation of the economy remains a cause for concern. Nonetheless, the return of price stability, the entry of new banks, the opening of a substantial number of new branches in Luanda and the provinces, and the availability of withdrawal facilities have combined to overcome African Economic Outlook

households’ reluctance to place their savings in formal financial institutions. As a result, total bank deposits increased by 23.9 per cent in real terms in the first half of 2006. Although the stock of commercial credit increased by just 1.38 per cent over the same period, the liquidation of treasury liabilities released resources for the productive sectors and credit to private firms increased by 42.2 per cent. A new development bank, Banco de Desenvolvimento de Angola (BDA), started operations in late 2006 and will receive 5 per cent of oil revenues. A similar initiative is the Fundo Nacional de Desenvolvimento (FND), which will disburse up to $300 million per year at concessional terms. The FND will be managed by BDA and be funded partly through oil and diamond extraction levies. The experience of the Fundo de Desenvolvimento Economico e Social (FDES), which managed to disburse only a fifth of its budget (also drawn from oil revenues) to support investment in the private sector, illustrates one of the challenges facing these new institutions. Inefficiencies in thermal generation facilities and delays in completing the Capanda dam and hydroelectric plant still plague energy infrastructure. Brownouts and power cuts have become even more frequent as the economy accelerates, and less than 20 per cent of the population has access to electricity. In Luanda, the number of households connected to the grid is as low as 131 500, one major obstacle to the increase of capacity and investment being the low tariffs applied to electricity. Nevertheless, thanks to massive government and Chinese investments, electricity generation is expected to grow by 42 per cent in 2007/08. In fact, a huge number of projects are to be financed by a new Chinese credit line of $5 billion, including the Apanda-N’Dalatando power line (2007), a new power line from the Cambambe dam to Luanda (2007), a series of electricity distribution and transformation centres (end-2006), a power line from Quifangondo to Caxito (2007) and a $70 million project to electrify Luanda’s suburban areas. In the meanwhile, government wishes to increase hydroelectric potential: the Cambambe dam, in Malange province, is expected to increase production by 260 MW from © AfDB/OECD 2007

Angola

2007 and the start-up of two new turbines should bring the dam’s output to its full capacity of 530 MW by July. Access to Drinking Water and Sanitation Angola has abundant water resources, but existing hydraulic infrastructure is largely inadequate, having been traditionally confined to the production of energy. Moreover, households’ access is severely deficient, as the available infrastructure was destroyed or damaged during the civil war and little or no investment has been made to cope with massive rural-to-urban migration. In urban areas, installed capacity is estimated, on average, at 40 litres per capita per day, for per capita consumption of 20 litres per day. In peri-urban areas, however, where most of the poor and most vulnerable population groups live, consumption falls as low as 5 litres per capita per day. Water utilities, where they exist, encounter major financial difficulties, due to inadequate tariff systems, a huge proportion of unaccounted-for water (between 50 and 60 per cent) and very poor collection ratios. This situation, together with the poor skills of available staff, leads to continuing degradation of the existing infrastructure. Households rely on fountains, standpipes and truck tank systems for their water supply. In the capital city, water is provided by Empresa Provincial de Aguas de Luanda (EPAL) and, in informal settlements, by informal private operators. Water sold by private truck tanks is much more expensive ($10/m3 as against less than $0.50/m3). EPAL maintains 100 000 connections, thus providing water to fewer than 1 million people through home connections or a prepaid fountain system. Considering the overall population of Luanda (close to 5 million) and the obsolescence of the hydraulic network, which dates back to the Portuguese period, the service provided is plainly inadequate. The network, measuring 570 kilometres, needs considerable investment, in terms of both length and capacity, and water quality controls should be introduced. However, the extension of the network to peri-urban areas would require an urbanisation plan, which does not exist. © AfDB/OECD 2007

In rural areas, safe water sources are in most cases standpipes – generally boreholes with hand pumps – where water is free of charge. Up to 50 per cent of all standpipes are out of order, however, due to lack of spare parts and of maintenance in general. This situation obliges most people to rely on a seasonal supply of surface water, which they must often travel considerable distances to collect. It is important to stress that this broad picture masks huge inequalities between provinces, due to the extent to which different areas were hit by the war, to the presence of national and international NGOs, and to the different management models chosen by each province. Since the secondary legislation (regulatory framework) attached to the 2002 Water Law is still waiting for approval by the government, each province can still choose its own management model for the water system. At central level, all water affairs are under the responsibility of the Ministry of Water and Electricity, which plays the role of regulatory authority, whereas technical support and operational supervision for the provincial departments is handled by the National Water Directorate (Departamento Nacional de Agua). In turn, provincial agencies create local units at town and community level (brigadas das aguas and grupos de agua e saneamento). This design, associated with the more general process of decentralisation, is only partially implemented, however, as local units are either inexistent or not officially recognised by the central government. Where the budget is concerned, the system also remains mostly centralised, with central and provincial governments allocating funds to local units. Data collection and processing in Angola remain very poor. It is therefore very difficult to have reliable quantitative estimates of access to safe water and sanitation. At the national level, the 2001 UNICEF Multiple Indicator Cluster Survey sets the percentage of population with access to safe water at 62 per cent and to sanitation at 59 per cent, but these figures are widely believed to overestimate access. A later estimate, produced by UNICEF in 2002, suggests that just 34 per cent of the urban population has access to safe water, this figure rising to 39 per cent for rural areas. This picture places Angola among the worst performers African Economic Outlook

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in Africa, despite its higher than average GDP per capita. Sanitation is even more neglected. Only 59 per cent of the urban population has access to sanitation, whereas in rural areas this percentage falls to 26 per cent. Even in urban areas, the high population density and the concentration of human and non-human waste can produce dramatic health emergencies, such as the cholera epidemic that afflicted Luanda and other major towns in 2006. Besides Luanda, only four cities have waterborne sewage systems, and in all cases these serve only very central areas covering 17 per cent of the urban population.

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As part of a Water and Sanitation Development Strategy, the government has identified the needs and deficiencies of the current system and formulated an ambitious 14-year programme to develop the sector. The strategy, which would require investment of up to $3 billion, calls for a 70 per cent increase in improved water production and the construction of 927 fountains and 1 060 wells. As for sanitation, the government’s objective is to reach an access rate of 85 per cent in urban areas and 65 per cent in rural areas by 2016. Considering the magnitude of the financial and institutional efforts required and the slow pace of improvements recorded so far, however, it is unlikely that Angola will achieve the Millennium Development Goal (MDG) of reducing by half the percentage of people not having access to safe water and sanitation. The Water Law provides for the creation of water utilities (empresas de agua) for water treatment and distribution at provincial level. Although the target is to create one empresa per province by 2010, only a few small urban centres have already created their water companies, apart from EPAL in Luanda. The World Bank’s Urban Rehabilitation and Environment Project for Benguela and Lobito Province (PRUALB) led to the establishment of such companies for the cities of Lobito and Benguela, and in Soyo and Caxito private companies owned by Angolans were given licences to operate the water system, with the assets remaining the property of the state. As a matter of fact, although the huge investments required for the rehabilitation and African Economic Outlook

construction of infrastructure constitute a major disincentive for private companies to enter the sector, the Water Law provides for the entry of private operators, specifying the rights and duties associated with grants and licences, as well as the terms under which they can be delivered. Since the central government provides only 50 per cent of EPAL’s overall financing, other sources of technical and financial support are clearly needed for expanding the system. With only a limited role foreseen for the private sector, external donor support will continue to be important in Luanda and elsewhere. The main external partners are China (construction and rehabilitation of infrastructure), Brazil (construction of water treatment facilities and technical assistance) and the European Commission (technical assistance). Since 2003, the Portuguese co-operation agency has been assisting in the restructuring and modernisation of EPAL, providing technical assistance and capacity building.

Political Context and Human Resources Development Long in gestation, the presidential elections – initially scheduled for September 2006 and now unlikely to be held before mid-2008 – are supposed to constitute a milestone in national reconciliation and the consolidation of democratic institutions. The basic procedures are now in place following the establishment of a national electoral commission, completion of the electoral census and of the corresponding voter registry, and the courts’ ruling that President Eduardo dos Santos can serve three consecutive terms of office. Reasons for the delays of the process include abundant technical problems (to name just one, the size of Angola’s population is unknown), friction within the ruling Movimento Popular de Libertação de Angola (MPLA) and the difficulty in building the necessary trust between the MPLA and opposition parties. Although the MPLA seems sure to remain in power, in each of the opposition parties there are separate fringes that, despite the authorities’ efforts to co-opt them, may refuse to acknowledge the verdict of polls and stir up ethnic © AfDB/OECD 2007

Angola

tensions. In fact, the peace agreement reached in mid2006 with the secessionist movement in Cabinda (Frente para a Libertação do Enclave de Cabinda – FLEC), which would include the appointment of new vice-ministers in some areas, was quickly denounced by some FLEC leaders who were excluded from the deal. In a post-conflict environment, it is very difficult for civil society organisations to exercise critical surveillance over governments’ deeds, and Angola clearly is no exception. The MPLA extends its control over state resources to the media, including radio stations and the press, while the number of people displaced during the hostilities who have not yet regained their homes is estimated to be 450 000. Despite the progress achieved since the end of the civil war, progress towards good governance is slow and corruption remains endemic. Transparency International has ranked Angola at 142nd on the Corruption Perception Index. Although small improvements towards democratisation have been recorded, the parliament does hardly anything to check the government’s actions and counter balance the overwhelming power of the presidential elite. In February 2006, Angola ratified the United Nations Convention against Corruption, which now requires domestic legislation to be implemented. Indicators of living standards are of poor quality and often rather outdated. The last household spending survey, covering only 8 provinces out of 16, dates back to 2001, and the last household living conditions survey was conducted in 2002. The latter, which is believed to be more reliable than the former, sets the urban share of the population as among the highest in Africa. Rapid urbanisation has had a number of negative consequences, from the deterioration of living conditions in overcrowded urban and peri-urban areas to the abandonment of the countryside and, in consequence, of many agricultural activities. Since the population in rural areas is mainly composed of children and the elderly, food insecurity is an issue (in early 2006, an estimated 800 000 people experienced food shortages before the main harvest). With the progressive withdrawal of emergency NGOs and the World Food © AfDB/OECD 2007

Programme, government has had to take responsibility for responding to food crises, which it seems to be doing rather effectively. The poverty rate was estimated at 68 per cent in 2000/01, with 28 per cent of the national population living in extreme poverty. Inequality in income distribution is among the highest in the world (62 per cent), and it is on the rise. In Luanda, the striking wealth of a small minority stands in sharp contrast to the harsh poverty of the large majority, a phenomenon that is certainly a root cause of widespread frustration and a rising crime rate. Although Angola enjoys one of the highest rates of per capita GDP growth in the world, there are few indications that the country will achieve any of the MDGs by 2015. This predicament underscores the responsibility of the government and the private sector, domestic and foreign, to do more to foster human development together with growth. Implementation of the interim Poverty Reduction Strategy Paper (drafted in 2004 and never formally approved) would support the social sectors, which still receive a very small share of the national budget. Despite the end of the war, the living conditions of the Angolan population have been deteriorating in recent years, life expectancy is only 40 years (UNFPA, 2005) and health indicators are among the worst in the world. The under-five child mortality rate rose from 250 per thousand in 2001 to 260 per thousand in 2004, the second highest rate in the world, while maternal mortality (1 400 to 1 700 per 100 000 births) also remains very high because of the very low rate of assisted deliveries, which decreased from 24 per cent in 2001 to 22.5 per cent in 2003. The incidence of malaria, which is one of the most frequent causes of child and maternal death, increased in the 2000-03 period, afflicting 22 per cent of the population as against 16 per cent in 2000. Other major causes of death are diarrhoea and respiratory diseases. Vaccination coverage for infants is rather low, ranging from 75 per cent for tetanus to 46 per cent for polio, and 43 per cent of routine Expanded Programme on Immunisation (EPI) vaccinations are financed by the government (UNICEF, The State of the World’s Children 2006). Another indication of the progressive deterioration of the living African Economic Outlook

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Angola

120

conditions of Angolans, especially in urban areas, is the severe cholera epidemic that struck Luanda and other towns in 2006 in 10 of the 16 provinces, the illness having been transmitted through contaminated water. The epidemic affected 56 213 people between February and October, and caused more than 2 300 deaths.

schools. The main innovations brought about by the reform include the restructuring of the school system with the creation of a compulsory primary school of six years (ensino primario), updating of the curriculum and teaching methods (using a child-centred methodology), and a maximum pupil/teacher ratio of 35.

Many obstacles hamper progress in health services quality and delivery. These include the low priority given to primary health care by the government, insufficient numbers of qualified staff, inefficient co-ordination mechanisms between different levels of the public administration and with other sectors (as well as donors), and inefficient management structures. The Ministry of Health is still to approve a national policy and a medium-term strategy that could provide guidance on tackling vertical programmes.

The demand for education exceeds supply and is rising. The evidence for this is a gross enrolment rate above 100 per cent, whereas net enrolment remains very low (around 50 per cent in 2003), at least when compared to other African countries. Access remains problematic for many Angolan children, as only 22 per cent of children enter primary school at age six. The reasons for this are manyfold. Since the system is decentralised, access to schooling and the quality of teaching are not uniform, and in general rural areas suffer from a lack of financial resources, resulting in fewer schools and less well-trained teachers. In particular, the expansion of the education system has been more rapid in the littoral area, which accounted for more than 60 per cent of primary pupils, as against almost 39 per cent in the central areas in 2004. The quality of teaching, although superior in urban areas, remains very poor. Nevertheless, the social context is crucial for educational achievement, and living conditions are often worse in peri-urban areas than in rural areas – hence the low levels of learning achievement recorded in some areas of Luanda. Finally, although schooling is supposed to be free of charge, in most cases families are obliged to pay a fee to the teacher in order to let the child attend school, and learning materials are rarely provided for free. The result of all this is very low achievement rates (30.6 per cent in 2003), high repetition rates (26.3 per cent in 2003) and high dropout rates. In its Poverty Reduction Strategy Paper, the government has set ambitious objectives, although the budget share allocated to the education sector still remains inadequate (7.14 per cent in the 2005 budget).

HIV/AIDS prevalence is officially one of the lowest in the region (2.7 per cent according to 2005 local estimates) owing to the country’s isolation during the years of war. However, the lack of statistical information and poor quality of surveillance centres suggest that actual HIV/AIDS prevalence might be much higher. Moreover, it seems that the national rate masks large regional disparities: border areas, where international mobility is easier, exhibit prevalence rates as high as 10.4 per cent (e.g. Cunene province). Hence, the increased openness of the country, due to political stabilisation and peace, could cause an increase in the national rate, especially when one considers that the population has limited knowledge of the illness and its transmission channels. On the positive side, some progress has been recorded in education. Since the end of the war in 2002, government efforts to increase school enrolment – through the construction and rehabilitation of schools and the recruitment and training of teachers – have led to a measurable increase in enrolment rates. Since 2003, the government has continued the recruitment campaign, and the number of teachers at the primary level is estimated to be around 80 000. In 2006, a reform of the public education system was finally implemented nationwide, after an initial experiment with a pilot project started in 2003 in 5 per cent of African Economic Outlook

© AfDB/OECD 2007

Benin

Porto-Novo

key figures • • • • •

Land area, thousands of km2 Population, thousands (2006) GDP per capita, $ PPP valuation (2006) Life expectancy (2006) Illiteracy rate (2006)

113 8 703 1 159 55.5 65.3

Benin

B

slowdown in growth since 2001, from 6.2 per cent in 2001 to 2.9 per cent in 2005. This has been caused by low cotton prices, high oil prices, appreciation of the CFA franc in real terms and the need to restructure the principal sectors of the economy (cotton, oil, electricity and telecommunications). Nevertheless, indicators for 2006 improved in comparison with 2005 and the overall outlook is quite positive. For example, inflation has slowed down, public and private investment ratios have increased and the trade deficit has been reduced. In spite of electoral expenditures, the budget deficit in 2006 fell by 0.2 per cent. GDP growth increased from 2.9 per cent to 4.5 per cent between 2005 and 2006, with predictions for increases of 4.5 per cent and 4.8 per ENIN HAS EXPERIENCED A GRADUAL

cent in 2007 and 2008 respectively. However, improving performance in coming years will be highly dependent on the ability of the Beninese economy to diversify its production. At present, the economy relies too heavily on the cotton sector in a relatively unfavourable international context, as well as on the activity of the Port of Cotonou, although Donors released important relations with neighbouring resources to finance Nigeria have not entirely infrastructures and social returned to normal. programmes but the economy is still too dependent on cotton Benin faces a number of and the Port of Cotonou. challenges, the greatest of which is the fight against corruption and poverty. The newly-elected President confirmed that improvements 123

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Benin - GDP Per Capita (PPP in US $)

■ West Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Benin - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage) 7

3500

6

3000

5

2500

4

2000

3

1500

2

1000

1

500

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and INSAE (National Institute of Statistics and Economic Analysis) data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/801167070428

© AfDB/OECD 2007

African Economic Outlook

Benin

in governance and transparency were key elements in his political programme and these were mentioned as priorities in the Poverty Reduction Strategy Paper (PRSP). Corruption is a perpetual problem affecting the business climate and Benin’s Corruption Perception Index ranking in 2006 was even worse than it was in 2005. Furthermore, the country has fallen behind in the implementation of structural reforms. The privatisation programme is making little progress and the cotton, electricity and telecommunications sectors require profound restructuring.

124

As regards social performance, Benin remains one of the poorest countries in Africa, with a per capita GDP at purchasing power parity of $1 159 in 2006, as against an average of $2 844 in Africa. Despite some recent improvements, health and education conditions are often deplorable. Expenditure on infrastructures has increased significantly and donors have allocated large amounts of funding in this respect. The Millennium Challenge Account (MCA) recently made a grant of $307 million to Benin to help it achieve the Millennium Development Goals (MDGs). In the areas of water and sanitation, the goals of access to both by 68 per cent and 51 per cent respectively of the total population stand a relative chance of being achieved by 2015, due to the fact that financial flows and amounts invested by donors are substantial. In 2004, the coverage rates were 48 per cent for drinking water and 40 per cent for sanitation. From the political point of view, 2006 was notable not only for the smooth running of the presidential elections, but also for the victory of independent candidate Boni Yayi bringing into question the influence of traditional political parties. The legislative elections of 2007 and the district elections of 2008 should enable Benin to take stock of these new internal political trends.

Recent Economic Developments The two main sectors that generally determine Benin’s growth rate are agriculture (the cotton sector) and services (the activity of the Port of Cotonou). The principal weak points of the Beninese economy are African Economic Outlook

poor production diversification and the dependence of trade on the status of relations with the Nigerian authorities. GDP grew from 2.9 per cent in 2005 to 4.5 per cent in 2006. The poor result in 2005 was mainly linked to the significant fall in cotton production. However, a revival in cotton production and the gradual recovery of re-exporting activities enabled the country to register 1.6 percentage-points of additional growth in 2006. Growth is expected at 4.5 per cent and 4.8 per cent in 2007 and 2008 respectively, subject to rapid resumption of trade with Nigeria and satisfactory continuation of the present restructuring of the cotton sector. The primary sector, which accounted for 35.9 per cent of GDP in 2005 and employed almost 54 per cent of the population, is dominated by cotton production. The cotton sector represents around 10 per cent of GDP and approximately 350 000 cotton producers support almost 40 per cent of the population of Benin. However, recent developments have not been very favourable. Cotton production only reached 190 700 tonnes for the 2005/06 harvest, compared with 427 000 tonnes for 2004/05. This fall is related to delays in payments to farmers and insecticide distributors and to the uncertainties linked with the privatisation programme and the sector’s future. Production has been damaged by recent insect infestations, together with the poor quality or unavailability of pesticides and insecticides. Production was originally expected by the Cotton Inter-Professional Association (AIC) to reach 300 000 tonnes, but is now not expected to exceed 250 000 tonnes in 2006/07. Moreover, producer prices have fallen along with world market prices. After long negotiations between the various actors in the sector, prices for 2006/07 were set at 170 CFA francs per kilogramme for first-grade quality cotton, compared with 185 CFA francs the year before and at 120 CFA francs for second-grade quality cotton, compared with 135 CFA francs in 2005/06. These prices are nevertheless higher than those of neighbouring producer countries and spinning enterprises in Benin have been worried about potential losses. © AfDB/OECD 2007

Benin

Figure 2 - GDP by Sector in 2005 Other services

(percentage)

Agriculture

18.8%

24.8%

Government Services 11.7% 11.1% 0.3% 5.8%

18.7% Trade

Forestry, livestock and fisheries

8.7% Manufacturing

Energy and construction Other industry

Source: Authors’ estimates based on INSAE data. http://dx.doi.org/10.1787/577244142618

The cotton sector is in need of restructuring. Primarily, the government should continue to withdraw from the sector, particularly from the public ginning company Sonapra (National Company for Agricultural Promotion). The government is generally responsible for ensuring respect for property rights and for competition in the sector. It has therefore to establish transparency and a genuine market system for all aspects of supply, credit and sales. The government has finally promised to reimburse the payment arrears due to cotton producers and demonstrated its goodwill by paying out 2.9 billion CFA francs in October 2006 (equivalent to one-fifth of the total amount). In 2005, the secondary sector, representing 14.8 per cent of GDP and 10 per cent of the active population, made a negative contribution to GDP growth. Apart from cement and import-substitution products for basic imports (such as staple food products), industrial production mainly consists of cotton transformation industries. In 2005, there was a fall in the value-added of manufacturing industries due to the reduction in cotton production, but also due to increased competition from Asian textile products. Creation of a new spinning enterprise is planned however, which should begin production in June 2007. Only the construction sector and the cement industry showed positive results, having benefited from the principal donors’ projects for infrastructures, especially for roadconstruction. The tertiary sector, consisting mainly of trade with neighbouring countries and transport, contributed © AfDB/OECD 2007

almost 49.2 per cent of GDP and employed 36 per cent of the active population in 2005. Nigeria’s partial cancellation in November 2004 of the ban on imports of products from Benin permitted an upturn in reexport activities, but administrative difficulties remain. Furthermore, in spite of an increase in goods traffic at the Autonomous Port of Cotonou (PAC) due to problems with insecurity, rates of return have remained fairly low (3 per cent in 2005, compared with 5 per cent in 2004). Moreover, the Port of Cotonou is facing increased competition from the Port of Lomé (Togo). Nevertheless, the volume of goods traffic increased in 2005 by 29.8 per cent and the total value of goods traded was 12.9 billion CFA francs. During the first eight months of 2006, trade was equal to the first eight months of 2005, but the destinations for traded goods changed. The volume of goods traffic with Togo fell by 67.7 per cent, while it increased with the landlocked countries of Mali, Burkina Faso and Niger by 133.4 per cent, 52.6 per cent and 25.5 per cent respectively. The volume of official goods traffic with Nigeria increased at a slower rate by 10.5 per cent. Beninese enterprises still face difficulties in exporting to Nigeria, even after fulfilling all of the required conditions. They are required to certify the origin of their products and to register with ECOWAS (Economic Community of West African States). Re-export activities represented 40.5 per cent of total exports in 2005, compared with 41.2 per cent in 2004 and 52.8 per cent in 2002. Besides these sectoral developments, private consumer and investment demand both remained fairly weak in 2005. The total investment rate stood at 18.2 per African Economic Outlook

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Benin

Table 1 - Demand Composition 1998

(percentage of GDP)

2005

2006(e)

Percentage of GDP (current prices)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

18.2 4.7 13.4

18.2 8.0 10.2

13.5 25.0 4.5

7.6 10.0 5.4

8.4 11.0 5.9

Consumption Public Private

87.3 13.1 74.1

88.8 12.0 76.8

3.2 -1.0 3.7

4.6 4.6 4.6

4.9 4.3 4.9

-5.4 27.1 -32.5

-7.0 21.6 -28.5

5.0 5.2

6.0 7.0

6.8 8.1

External sector Exports Imports

Source: National authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/508688751685

126

cent, as against 20.7 per cent in 2004, due to a reduction in private investment. The growth rate of private investment by volume is nevertheless expected to accelerate slightly in 2007 (5.4 per cent) and 2008 (5.9 per cent), in reflection of long-awaited improvements in the business climate and economic governance. The upturn in total investment in 2006 to 20 per cent of GDP was chiefly due to public investment, with a growth rate by volume of 25 per cent. In the external sector, exports are expected to stabilise at approximately 21.6 per cent of GDP as trade relations between Benin and Nigeria return to normal.

Macroeconomic Policy As regards macroeconomic policy, Benin has continued to pursue the reform programme begun with the IMF under the Poverty Reduction and Growth Facility programme (PRGF) for the 2005-08 period. At the time of the first review, Benin had not complied with the condition forbidding the accumulation of new payments’ arrears1. Nor did it comply with the condition forbidding new non-concessional borrowing; a loan totalling $31 million2 over six years was taken out with a Chinese bank by the public telecommunications company, Bénin Telecoms.

In 2006, Benin complied with four out of five of the first-level convergence criteria of the West African Economic and Monetary Union (WAEMU), as against three in 2005. The country’s inflation rate was less than 3 per cent in 2006 (at 2.4 per cent), whereas it was 5.4 per cent the previous year. On the other hand, Benin did not succeed in improving sufficiently the basic budgetary balance as a percentage of GDP. This ratio should normally be positive or zero, but it was -1.1 per cent in 2006, as against -1.7 per cent in 2005. Benin achieved compliance with only one second-level criterion out of four. The investments-to-internalresources ratio as a percentage of GDP was higher than 20 per cent (22.8 per cent in 2005 and 23.8 per cent in 2006). The wage bill as a percentage of fiscal revenue ratio was 37.7 per cent in 2006 (compared with an objective of 35 per cent). The current account deficit (excluding official transfer payments) amounted to 7 per cent of GDP, whereas the threshold is 5 per cent and the tax burden, which was 15 per cent in 2006, would have needed to be above 17 per cent to achieve compliance. Fiscal Policy The main objective of budgetary policy is to generate additional tax revenue and restrict current expenditure,

1. Payment arrears amounted to $62.6 million in 2005. 2. The rate applied for converting CFA francs to dollars is 100 CFA francs = $0.20.

African Economic Outlook

© AfDB/OECD 2007

Benin

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Grants

17.5 12.6 3.0

18.6 15.1 1.7

18.3 14.6 1.9

18.4 14.5 1.7

19.0 14.6 2.3

19.3 14.4 2.7

19.5 14.5 2.9

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

15.5 9.9 8.9 4.5 1.0 5.5

20.5 13.9 13.3 5.2 0.6 6.7

20.1 13.9 13.6 6.8 0.3 6.1

21.3 15.0 14.7 6.8 0.3 6.3

21.8 14.1 13.9 6.3 0.2 7.6

22.0 14.1 13.8 6.2 0.3 7.9

22.4 14.0 13.8 6.1 0.3 8.3

3.0 2.0

-1.3 -1.9

-1.4 -1.7

-2.6 -2.9

-2.5 -2.7

-2.4 -2.7

-2.6 -2.8

Primary balance Overall balance

a. Only major items are reported. Source: National authorities’ data; estimates (e) and projections (p) based on authors’ calculations.

in order to release capital for investment in priority sectors. Until recently the budget deficit, mainly financed by foreign borrowing, amounted to less than 2 per cent of GDP. The budget situation deteriorated in 2005 and 2006 following the agreement to subsidise the cotton sector, expenditure on poverty reduction and the organisation of the presidential elections. The total budget deficit went up from 1.7 per cent in 2004 to 2.9 per cent in 2005. It then fell to 2.7 per cent in 2006. It is expected to remain at around 2.7 per cent of GDP in 2007 and 2008. Revenue increased due to reforms in fiscal administration and tax collection as well as an increase in grants, which went up from 1.7 per cent of GDP in 2005 to 2.3 per cent in 2006. These are expected to account for an even greater proportion of GDP in 2007 (2.7 per cent) and in 2008 (2.9 per cent). However, in order to limit the impact of the rise in oil prices on consumer prices, the authorities have eliminated the specific tax on oil and gas. Revenue increased from 18.4 per cent of GDP in 2005 to 19 per cent in 2006 and this is expected to continue to rise in 2007 (19.3 per cent) and in 2008 (19.5 per cent). These estimates depend on the current implementation of financial administration reinforcement, on the introduction of “one-stop” customs clearance procedures and on the strict monitoring of tax exemptions. Expenditure is expected to increase in 2007 and 2008, after rising from 21.3 per cent to 21.8 per cent © AfDB/OECD 2007

http://dx.doi.org/10.1787/522276267850

of GDP between 2005 and 2006. However, while current expenditure represented a smaller proportion of GDP (14.1 per cent in 2006, as against 15 per cent in 2005), capital expenditure increased. It rose from 6.3 per cent in 2005 to 7.6 per cent in 2006 and is expected to represent an increasing proportion of GDP in 2007 (7.9 per cent) and 2008 (8.3 per cent) due to funds released by debt relief. The government is planning major investment in social sectors and infrastructures. However, the organisation of new elections in 2007 and 2008 is expected to put a strain on current expenditure, predicted to be approximately 14 per cent of GDP. Donors are calling for the restructuring of salaries in public services so that salary increases are merit-related rather than standard practice. Public-sector salaries are therefore expected to represent a reduced proportion of GDP, at 6.2 per cent in 2007 and 6.1 per cent in 2008, as against 6.3 per cent in 2006. Monetary Policy Benin’s monetary policy follows that of the Central Bank of West African States (CBWAS) whose main objectives are to guarantee price stability and parity between the CFA franc and the euro. Policy has been quite strict for many years. Monetary parity has not changed since 1994. In August 2006, CBWAS raised its refinancing rate (4 per cent since March 2004) to 4.25 per cent in order to reduce inflationary pressures. In Benin, following the rise in petroleum-product prices, the rate of inflation was 5.4 per cent in 2005, African Economic Outlook

127

Benin

as against 0.9 per cent the preceding year. In 2006, inflation slowed down to 2.4 per cent because of the fall in food-product prices. It is expected to be even more moderate in 2007 and 2008, with estimations of 1.8 per cent and 2.3 per cent respectively. At the end of 2006, Benin’s foreign currency reserves at the CBWAS equalled 10 months of imports.

128

Private-sector credit grew by 20.2 per cent in 2005, compared with 4.5 per cent in 2004. Although the financial system lacks depth, the majority of banks respect prudential standards and bad debts represented only 10 per cent of banking assets in July 2006. At that time, there were 12 commercial banks and 2 leasing companies operating in the market, along with approximately 100 formal micro-finance institutions. Benin possesses the largest number of micro-finance institutions in the West African Economic and Monetary Union (WAEMU). The sector consists of two main networks: first, the mutualistic activity of the Federation of agricultural savings and loan co-operatives (FECECAM), by means of which collected savings are converted into loans and second, direct-credit institutions which obtain funding from the financial markets. At an interest rate of 2 per cent per month, the cost of micro-finance remains far below the market price. Nevertheless, some sectors such as handicrafts have not benefited much from the loans provided; the financing of agriculture and trade has received more priority. No Beninese company is quoted on the West African stock exchange. External Position Due to its geographical position, Benin plays an important role in regional trade. Transport is a key

sector in the economy, providing both internal and international transit services to neighbouring landlocked countries (Burkina Faso, Niger, Mali) and neighbouring coastal countries (mainly Nigeria). Trade with Nigeria has been marked by complaints by Beninese private transport operators about non-observance by the Nigerian authorities of trade regulations signed by both countries. However, efforts presently under way to redefine the common border between Nigeria and Benin and to relax the restrictions on Beninese imports into Nigeria, should allow trade relations between the two countries to return to normal. In 2005, China was the leading export destination country and the principal provider of Beninese imports. China accounted for 44.2 per cent of Benin’s exports and 39.1 per cent of imports. France is the country’s second trade partner and its principal bilateral donor. Benin exports mainly cotton and textile products (which represent 72 per cent of foreign exchange revenue) and re-export products. In return, it imports food products (31.2 per cent of total imports in 2005) and petroleum products (14.7 per cent of total imports in 2005). However, it is difficult to estimate goods flows due to the large amount of illegal traffic with Nigeria. Trade liberalisation is much more advanced in Benin than in Nigeria, which applies high tariffs and protectionist import barriers. This creates a strong incentive to smuggle goods between Nigeria and Benin. For example, the Port of Cotonou is the principal port of transit for second-hand vehicles in West Africa. The majority of vehicles are destined for Nigeria although no declaration to this effect is made when they arrive in Benin. Conversely, Benin illegally imports most of

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-6.4 16.9 23.3 -2.0 -0.5 3.6

-7.8 15.2 23.0 -2.3 -1.1 1.9

-6.8 14.0 20.8 -1.8 -0.9 2.3

-6.7 13.1 19.8 -1.3 -0.9 4.5

-6.5 13.6 20.1 -1.2 -0.9 4.2

-5.9 13.9 19.8 -0.9 -0.9 3.5

-6.1 14.0 20.1 -1.1 -1.0 3.5

Current account balance

-5.4

-9.3

-7.1

-4.5

-4.4

-4.2

-4.6

Source: National authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/447086538244

African Economic Outlook

© AfDB/OECD 2007

Benin

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

80

70

60

50

40

30

20

10

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF.

129 http://dx.doi.org/10.1787/318051655382

its petroleum products from Nigeria, where prices are highly subsidised. Following the downturn in production in 2006, cotton exports fell by approximately 25 per cent. However this decline was compensated by improved performance in the exports of cashew nuts and reexport products. Total official exports increased slightly, from 13.1 per cent of GDP in 2005 to 13.6 per cent in 2006; they are predicted to rise to 13.9 per cent in 2007 and 14 per cent in 2008, provided that cotton exports recover. Imports made an increased contribution to GDP between 2005 (19.8 per cent) and 2006 (20.1 per cent) due to the oil-bill burden; they are expected to remain at about 20 per cent of GDP in the years to come. The trade deficit diminished during the period 2002-07. It stood at 6.5 per cent in 2006, as against 6.7 per cent in 2005 and is expected to decline further to 5.9 per cent in 2007. Due essentially to a reduction in the trade deficit, the current account balance deficit has continued to diminish during the period 2003-07. It went down from 4.5 per cent in 2005 to 4.4 per cent in 2006 and it is expected to reach © AfDB/OECD 2007

4.2 per cent and 4.6 per cent in 2007 and 2008 respectively. As regards the capital account, foreign direct investments were poor, amounting to only $21 million in 2005, as against $64 million in 2004. In spite of the country’s political stability, investors are discouraged from placing funds in Benin due to bad governance and the uncertainties that affect the two principal economic activities, primarily a climate of unpredictability in the cotton sector and relations with Nigeria concerning re-exports. In March 2003, Benin reached the completion point of the Heavily Indebted Poor Countries (HIPC) Initiative and benefited from total debt relief amounting to $460 million. Benin also recently benefited from an amount totalling over $1.14 billion from the Multilateral Debt Relief Initiative (MDRI). The IMF cancelled $62.6 million; the World Bank, $710 million; and the African Development Bank, $368 million. The ratio of external public debt to GDP was only 23.9 per cent in 2006, compared with 47.7 per cent the preceding year. Debt service represented 15.3 per African Economic Outlook

Benin

cent of exports of goods and services in 2006, as against 14.8 per cent in 2005. It is expected that these two ratios will continue to decline in 2007 and 2008.

Structural Issues Recent Developments Benin offers considerable advantages for privatesector development, namely political stability, a viable commercial banking sector and existing port and airport infrastructures. Benin’s geographical position also favours its role as gateway and best through-route to the hinterland countries (Niger, Burkina Faso) and Nigeria. Benin’s private sector succeeded very early on in taking advantage of these opportunities and in confirming the country’s position as a hub of the region’s economy.

130

The authorities have pledged to tackle the cotton, electricity and telecommunications sectors and the management of the PAC (Autonomous Port of Cotonou) through a programme of structural reforms. Progress with reforms has nevertheless been slow and privatisation has faltered. In March 2006 for example, the privatisation of cotton enterprise Sonapra was postponed until 2007. The privatisation of Bénin Télécoms and The Benin Electricity and Water Company (SBEE) has been postponed to 2008/09. Moreover, Sonacop (Benin Petroleum Company) has suffered from operating and governance problems since privatisation in 1999, with the result that the Beninese people have turned to the black market for their petroleum-product requirements. In March 2006, approximately 75 per cent of demand was met by illegal imports from Nigeria, at prices lower than those on the official market. However, the government (which holds 45 per cent of Sonacop) decided to regain control of the enterprise in order to take in hand petroleumsupply difficulties and plan for a more successful privatisation. In the energy sector, the country suffered in 2006 from the disruption of electricity supplies and the Beninese people had to face frequent power cuts. African Economic Outlook

Electricity is imported from Ghana and Côte d’Ivoire by the Electrical Company of Benin (CEB), which has experienced cash-flow problems. In addition to these difficulties, suppliers have reduced their deliveries by 43 per cent since May 2006 because of low waterlevels in the principal dams, gas-supply problems in Côte d’Ivoire and the negative effects of increased oil prices on electricity production. However the regional integration project for West Africa should improve power distribution with the installation of a highvoltage electrical line running along the coast and linking up enterprises in Togo/Benin, Côte d’Ivoire and Nigeria by 2007. This line has the potential to become a true regional electrical network by 2020. This first phase of integration will end also with the construction of a West African gas pipeline which will enable Ghana, Togo and Benin to receive supplies of gas from Nigeria. Regarding the business climate, the country’s ranking in Transparency International’s 2006 Corruption Perception Index went down from 88th place (out of 159 countries in 2005) to 121st place (out of 163 countries in 2006). Promoting governance is one of the strategic lines of the Poverty Reduction Strategy Paper (PRSP). The new president also announced that one of his priorities would be to fight against corruption and bad governance. Several financial audits have consequently been carried out in various ministries and public services. These showed that corruption was extensive and were followed up by sanctions, sending out a strong signal that the authorities are determined to fight against this affliction. In 2006, two former directors and several members of staff of public companies were arrested for embezzlement. Access to Drinking Water and Sanitation Benin possesses substantial water resources, but these are unequally distributed throughout the country. Resources and potential waterways are mainly located in the south, with lakes and lagoons constituting important reservoirs of water, while the centre and north of the country suffer from a water resource deficit. Average annual rainfall in Benin is 800 mm in the north and 1 500 mm in the south. The coastal © AfDB/OECD 2007

Benin

sedimentary basin, covering 10 per cent of the total area of the country, holds about 32 per cent of potential groundwater reserves. The exploitation of water resources remains limited and utilisation of groundwater from basal zones where borehole flows are low is difficult. Overall, there is a great deal of pressure on existing water resources, in both urban and rural areas. The water sector is under the control of the Ministry of Mines, Energy and Hydraulics. In urban areas, the National Water Company of Benin (Soneb) is an autonomous public enterprise with responsibility for drinking-water supply. The General Directorate of Hydraulics (DGH) has this responsibility in rural areas, but is essentially involved in infrastructure projects, since management is the responsibility of municipal bodies and consumer associations. Under the supervision of the Ministry of Public Health, the Directorate of Hygiene and Basic Sanitation (DHAB) shares the responsibility for sanitation in both urban and rural areas with Soneb and the communities themselves, as well as with certain departments of the Ministry of Environment, Housing and Town Planning and of the Ministry of Public Works and Transport. The Beninese authorities are unwilling to privatise the water sector since they regard it not just as a commercial sector, but above all as a public utility. In this sector, social imperatives have taken precedence over considerations of mere financial profitability. Figures for 2004 show a coverage rate of 48 per cent of total population for access to drinking water (37 per cent in 1990) and 40 per cent for access to sanitation (14 per cent in 1990). The MDG could therefore be achieved by 2015 if the present financial flows continue and if the country continues to increase its coverage rates according to present trends. The goal is to achieve access to drinking water for 68 per cent of the population and sanitation for 51 per cent by 2015. Financing requirements to achieve this are estimated at $26.8 million per annum for the water sector and $18.7 million per annum for sanitation. Substantial progress has been made in access to sanitation and to a lesser extent in access to drinking water, particularly © AfDB/OECD 2007

in rural areas. While only 2 per cent of the rural population had access to sanitation in 1990, the rate had reached 19 per cent by 2004. For access to drinking water, the rate increased from 35 per cent in 1990 to 41 per cent in 2004. Nevertheless, the inhabitants of many villages still obtain supplies from polluted surfacewater sources. Access to drinking water by the urban population was estimated at 57 per cent in 2004. However, drinking-water consumption is concentrated in the four large towns in the country (Cotonou, Porto-Novo, Parakou and Abomey-Bohicon) which alone consume approximately 80 per cent of the water distributed in urban areas. Other towns have a fairly low access rate, although this varies from one town to another and many town-dwellers resort to using alternative watersupply sources such as wells, rivers, backwaters and storage tanks. The situation regarding sanitation is more critical. The waste-water evacuation rate is estimated at 0.2 per cent for the country as a whole. This means that independent sanitation is the most common method for dealing with waste water. However, this randomly discharged water pollutes the environment and groundwater tables and creates breeding grounds for mosquito larvae and other vectors of disease. The situation is of particular concern in Cotonou because of high population density, the extremely hydromorphic nature of the ground and the shallowness of the groundwater table (between 0.5 and 3 metres from the surface). The situation regarding excreta management is critical, particularly in the smaller towns. Only the principal towns (Cotonu, AbomeyCalavi, Porto-Novo, Parakou, etc.) possess a sewer network and have a coverage rate of over 60 per cent. The overall access rate to adequate facilities for the evacuation of excreta was estimated at 32.1 per cent in 2001 (61.6 per cent in urban areas and 14 per cent in rural areas). In the smaller towns and in rural areas, a national strategy was adopted in the 1990s. Most of the measures come within the framework of the Programme for Support to the Development of Drinking Water Supply African Economic Outlook

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Benin

132

and Sanitation in Rural Areas (PADEAR). This programme is backed by several donors, who will most probably be the main source of financing in future years.

based on economics is essential, in order to ensure that management of Soneb is economically viable.

At national level, the various institutions in charge of the supervision, exploitation and protection of resources, as well as the distribution of water and prevention of water-related hazards, have not always collaborated sufficiently well with each other; policies and sub-sectoral strategies have not possessed any overall coherence. The country has recently embarked upon an ambitious process of reforms within the framework of Integrated Water Resources Management (GIRE). GIRE encompasses updating water laws and the creation of a co-ordinating unit for the sector, as well as for the Water Board which is responsible for defining a national strategy for the sector, as well as setting up four interdistrict agencies throughout the country. Prior to this, Benin possessed a set of legislative texts relating to water sector and sanitation management that no longer adequately reflected reality. For example, water law was inaugurated by an act of September 1987, but there were never any subsequent decrees to apply it. The recent extensive legislative reform concerning water now makes it necessary for related issues be taken into account, notably decentralisation and devolution, integrated resources management, contracting procedures and the reinforcement of the role of women and the private sector.

Political Context and Human Resources Development

The most significant obstacles to the development of the water and sanitation sectors include the obsolescence of drinking-water supply systems, the increasing quantity of rehabilitation works that are needed and especially, the high costs of water and sanitation equipment. Moreover, complex procurement procedures for goods, works and services create real bottlenecks in project implementation. One of the greatest challenges in urban areas is the question of billing and the financing of Soneb. The pricing system for water consumption is inappropriate, as sale prices do not cover the real costs of production and distribution. The system, which applies two price brackets, is based on a national equalisation scheme to guarantee the continuity of drinking-water supply to small towns and villages. Setting up a pricing system African Economic Outlook

The country has been politically stable for many years. Benin was one of the first countries in Africa to set up a liberal democratic political regime with the separation of powers and a full multiparty system. Freedom of expression is ensured through participation by a pluralistic press in the debate on all socio-economic development issues. The political scene was changed by the presidential election in March 2006, which was won by independent candidate Boni Yayi; the traditional parties lost power and their principal leaders were excluded from the new government team. The country is presently preparing for the general election of 2007 and the district elections of 2008. These representative elections should provide an opportunity to evaluate the influence of the various parties. A new Poverty Reduction Strategy Paper (PRSP) is needed for the period 2006-09, since the term of the previous PRSP ended in 2005. However, delays in its preparation will probably lead to similar delays in implementing the strategy for the fight against poverty. It seems very unlikely that the country will achieve any Millennium Development Goals (MDGs) other than those relating to water and sanitation. Considerable progress has nevertheless been made recently and donors have pledged substantial resources. In October 2006, a grant of $307 million (7 per cent of GDP) was awarded to Benin by the Millennium Challenge Account (MCA) for projects in education, health and infrastructures; this grant is expected to be disbursed over a period of five years. Almost 28.5 per cent of the population of Benin was living below the national poverty line in 2002 (as against 29.6 per cent in 1999/2000). Although the average has decreased, inequality among the poor nonetheless increased between 1999 and 2002 due to an increase in the severity of poverty in urban areas. Generally, however, monetary poverty was more © AfDB/OECD 2007

Benin

prevalent in rural areas (31.6 per cent in 2002) than in urban areas (23.6 per cent in 2002). Approximately 15 per cent of the population of Benin suffered from hunger during the period from 2000-02. In the social sector, years of under-investment have led to completely ineffective education and health systems. The 2006 Human Development Index ranked the country 163rd out of a total of 177 countries. One challenge is the level of demographic pressure, given that the fertility rate was still 5.6 children per woman in 2005 and the population increased by 3.2 per cent during the period 2000-05. Consequently more than 44 per cent of the population is under 15 years old. Life expectancy was 53 years for men and 54.5 years for women, for the period 2000-05. Years of laxity in the health sector have translated into poor indicators, with the root cause of numerous diseases and epidemics being deplorable socioenvironmental and living conditions. According to data provided by the national health information system, the five principal disorders in 2002 were: malaria (37 per cent); acute respiratory infections (16 per cent); gastrointestinal diseases (8 per cent); diarrhoeal diseases (6 per cent) and injuries (6 per cent). As regards transmissible diseases, the Extended Vaccination Programme gave good results and lowered infant mortality. In 2003, for children aged under 5 years, the vaccination coverage rates were 99 per cent against tuberculosis and 83 per cent against measles. Despite these positive results, the infant mortality rate was 100.6 per thousand in 2005. At the end of 2003, approximately 62 000 adults were infected by HIV, of whom more than 56 per cent were women. The adult prevalence rate was 1.9 per cent, but the growth rate of the epidemic is disturbing. Approximately 34 000 children had lost at least one parent due to the disease. In 2002, Benin adopted a National Policy for the Promotion of Women and since then, numerous feminist non-governmental associations have been created. In 2003, family law was changed in order to conform to the Constitution. The policy established equality between men and women, prohibited genital mutilations and refused to recognise polygamy. This © AfDB/OECD 2007

law also authorised ownership of means of production for women. The abolition of school fees for girls is also one of the supplementary measures that has been taken to promote gender equality. In reality, however, the female population of Benin remains somewhat marginalised. Almost 97 per cent of working women are part of the informal economy, mostly in rural areas. Moreover, the illiteracy rate for women was 71.6 per cent in 2005, compared with 41.2 per cent for men. Benin is also known to be a hub for child trafficking. Because of persistent poverty, poor parents entrust their children to “smugglers” who are supposed to take responsibility for their education, in exchange for amounts ranging from 10 000 to 20 000 CFA francs (EUR 15 to 30). According to reports by the United Nations Children’s Fund (UNICEF), these children are then sold on for ten times these amounts to large farms, particularly cocoa and sugar-cane plantations in Cameroon, Gabon, Côte d’Ivoire and Nigeria. Significant progress has been made in education at all levels of the educational system due to the efforts of the authorities and the financing opportunities opened up by the Education for All - Fast-Track Initiative (EFA). The goal is to achieve universal primary education by 2015. In primary education, the net enrolment rate went up from 45 per cent in 1990/91 to 58 per cent (47 per cent for girls) in 2002/03. Benin is therefore still far from achieving universal education and sustained effort will be required with regard to the education of girls. Moreover, the results within primary education remain poor, with high rates of school year repetition (23.6 per cent in 2003) and dropping-out (13.5 per cent in 2003). Out of 100 children entering the first year of primary school, only 68 reach the fifth year. In secondary education, the net enrolment rate was 20 per cent in 2002/03 (13 per cent for girls). The gender parity index (which approaches one as parity is achieved), went from 0.42 in 1997 to 0.48 in 2002/03, thus indicating a slight reduction in the difference between boys and girls. Due to the low efficiency and inadequate capacity of state schools, the increase in pupil numbers in private education is substantial (from about 12 000 pupils in 2001 to over 50 000 in 2003).

African Economic Outlook

133

.

Botswana

Gaborone

key figures • • • • •

Land area, thousands of km2 582 Population, thousands (2006) 1 760 GDP per capita, $ PPP valuation (2006/07) 11 611 Life expectancy (2006) 34.4 Illiteracy rate (2006) 18.8

Botswana ZAMBIA i Strip C

Capriv Windhoek

O

ka

va

e Kasane hob

ZIMBABWE

ngo



NAMIBIA



ANGOLA

Bulawayo

Nata

Maun Lake Ngami



Sua



Francistown Ghanzi

Lake Xau

Sha Selebi- Phickwe shi

KALAHARI DESERT po Li m

po



Sekoma GABORONE Jwaneng Kanye

Johannesburg Tshabong

Cape Town

SOUTH AFRICA



0

100 km

main airport

major road

500 000 - 1 000 000

secondary road

100 000 - 500 000

railway

commercial port

< 100 000

track

petroleum port



town > l million inhabitants

secondary airport

fishing port

M

and prudent use of diamond export earnings have catapulted Botswana, a low-income country half a century ago, to its current status as an upper middle-income country. Real GDP growth has averaged more than 9 per cent annually over most of the past four decades. Although there was a lull in economic performance starting in the late 1990s, economic growth has picked up in the last two years. In 2004/05 and 2005/06 real GDP grew by 8.3 per cent and 4.2 per cent respectively. ACROECONOMIC STABILITY

Efforts to create a more diversified economy, however, have so far had little success, with mining – largely diamonds – still accounting for a large share of domestic output and almost all exports. The government remains committed to reducing dependence

on mining and has recently initiated new measures to improve the business climate and export competitiveness. The new National Excessive dependence Development Plans (NDPs), the on the mining sector and budget and the Vision 2016 the HIV/AIDS pandemic document have all emphasised the continues to threaten need to diversify the economy. The human development other major policy priorities are and economic growth. poverty, unemployment and HIV/AIDS. The strategies identified in the Mid-Term Review of National Development Plan 9 (NDP9, covering 2003-09) are all aimed at addressing these challenges in more innovative ways. The HIV/AIDS pandemic remains the biggest threat to human development and economic growth 137

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Botswana - GDP Per Capita (PPP in US $)

■ Southern Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Botswana - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

14000

12

12000

10

10000 8 8000 6 6000 4 4000

2

2000

0

0 1999/2000

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06(e)

2006/07(p)

2007/08(p)

Source: IMF and National Institute of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/844335603130

© AfDB/OECD 2007

African Economic Outlook

Botswana

in Botswana. The proportion of people infected with HIV is still one of the highest in the world. The government remains committed to finding innovative ways to address the problem, however, through research, early detection, new treatment therapies, free antiretroviral therapy, free testing and ongoing vaccine trials. The efforts of Botswana’s government are complemented by the African Comprehensive HIV/AIDS Partnership, which is a collaborative scheme between the government of Botswana, the Bill and Melinda Gates Foundation and the Merck Foundation. This scheme is expected to continue until 2009.

Recent Economic Developments

138

Economic growth in Botswana, though on average quite good, has exhibited considerable volatility in recent years. Real GDP growth accelerated from 3.4 per cent in 2003/04 to 8.3 per cent in 2004/05, but then decelerated to 4.2 per cent in 2005/06. The slowdown in 2005/06 is, however, the result of appropriate restraint in government expenditure and credit to the private sector. Growth is expected to stabilise at the 4 per cent level in 2007 and 2008. The high growth performance in fiscal year 2004/05 was attributable to the mining sector, which grew by 18.2 per cent during the year, as opposed to just 0.3 per cent in 2003/04. The impressive performance of the mining sector reflected increased diamond production in the second half of 2004, making up for lower production in the first half of the year. Non-mining GDP, in contrast, grew at the lower rate of 1.9 per

cent in 2004/05, representing a considerable decline from the 5.6 per cent recorded in the preceding year. Services were the leading sector in 2004/05, notably the transport sector, which recorded growth of 5.6 per cent, and business services, 4.1 per cent. Agriculture grew at a moderate 3.3 per cent while manufacturing registered growth of just under 3 per cent. The mining sector, dominated by diamonds, contributed over 43 per cent to real GDP in 2005/06. The services sector, which accounts for 38 per cent of GDP overall, includes general government services (15.6 per cent of GDP), financial services (9.2 per cent), and wholesale and retail trade, including hotels and restaurants (9.1 per cent). Tourism, although it contributes only around 4 per cent to GDP, continues to be Botswana’s second-largest source of foreign exchange earnings after diamonds. Agriculture, which was the largest sector in the 1960s, contributed only 2 per cent of GDP in 2005/06. Agricultural production was adversely affected in 2005 by inadequate rainfall and drought, which hampered production of food crops. The share of manufacturing in total domestic output has also exhibited a declining trend. In 2005/06, the share of manufacturing in GDP was 3 per cent, in contrast to 8 per cent during the 1970s. Various government initiatives, including those of the Botswana Export Development and Investment Agency (BEDIA), have failed to spur diversification. Although the share of total domestic investment declined to 34.8 per cent of GDP in 2004/05, from 43.2 per cent in the preceding year, largely on account

Figure 2 - GDP by Sector in 2004/05 Other services 18.1%

Transport, storage and communications

Agriculture

3.8% 2.3%

Government services

Finance and business services

(percentage)

41.7%

7.5%

Mining

3.6% 11.4%

Trade, hotels and restaurants

7.7%

3.9%

Other Industry

Manufacturing

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/257607704432

African Economic Outlook

© AfDB/OECD 2007

Botswana

of a 23 per cent decline in private investment, the investment-to-GDP ratio is very high in Botswana by African standards. The share of private investment in GDP has risen dramatically since 1998 and is estimated to have recovered strongly in 2006. Public investment

also declined in 2004/05 but is estimated to have picked up in 2006. Investment, both public and private, is projected to continue to grow strongly at around 8 per cent.

Table 1 - Demand Composition 1997/98

2004/05

(percentage of GDP) 2005/06(e)

Percentage of GDP (current prices)

2006/07(p)

2007/08(p)

Percentage changes, volume

Gross capital formation Public Private

30.1 15.0 15.1

34.8 9.1 25.6

15.8 18.0 15.0

8.3 9.0 8.0

7.3 8.0 7.0

Consumption Public Private

57.4 27.1 30.3

50.5 22.8 27.8

3.1 4.1 2.4

2.8 4.1 1.8

2.7 4.1 1.7

12.5 56.6 -44.1

14.7 49.8 -35.1

1.6 8.7

3.4 4.0

3.3 3.6

External sector Exports Imports

Source: IMF and National Institute of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/261103801637

Macroeconomic Policies The Vision 2016 policy document, which sets ambitious goals for economic growth and poverty reduction, continues to guide macroeconomic policy in Botswana. The main elements of the country’s economic strategy are also articulated in NDP9. A key objective remains macroeconomic stability in an economy that is prone to large, unanticipated fluctuations in earnings from mining, as well as shocks such as droughts. Another primary objective is to create an environment conducive to private-sector development and export diversification. Fiscal Policy Botswana is well known for its fiscal prudence. Fiscal policy is aimed at ensuring that public resources are effectively used to provide the socio-economic infrastructure needed for rapid private-sector development and export diversification. The fiscal stance of the government is spelled out in the annual budget statements presented to parliament. It is noteworthy that, for 16 years prior to 1998/99, the © AfDB/OECD 2007

government recorded budget surpluses and the Bank of Botswana (BoB) accumulated a comfortable stock of foreign exchange reserves. From 1998/99 to 2003/04, the government incurred moderate fiscal deficits. In 2004/05, a budget surplus of 1.8 per cent of GDP was recorded, up from a modest deficit of 0.2 per cent of GDP in the preceding year. Although the government has estimated a budget surplus of 1.5 per cent of GDP in 2005/06, many independent forecasts point to a marginal deficit of around 0.2 per cent of GDP for the next two years. The maintenance of this healthy fiscal balance was made possible by the government’s prudent macro-economic management and the introduction of a number of measures to raise revenues and control expenditure. These include the introduction of the value-added tax (VAT) system and freezing of growth in certain expenditure categories such as official travel. Recently, the departments of Customs and Excise, VAT and Taxes were merged to form the Botswana Unified Revenue Service (BURS). Similarly, in 2005 a Fiscal Rule Budgetary Mechanism was introduced, which caps total expenditures at 40 per cent of GDP. For African Economic Outlook

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Botswana

Table 2 - Public Finances

(percentage of GDP)

1997/98

2002/03

2003/04

Total revenue and grantsa Tax revenue Grants

41.2 33.6 0.6

37.0 31.7 0.2

38.0 33.2 0.1

36.8 33.3 0.7

36.9 33.7 0.4

37.0 33.6 0.6

36.1 33.4 0.0

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

36.3 24.0 23.6 8.4 0.4 13.4

40.6 29.9 29.7 10.2 0.2 10.9

38.2 30.4 29.9 9.7 0.5 10.0

35.7 28.2 27.6 10.5 0.6 8.0

37.1 28.1 27.5 9.8 0.5 9.3

37.1 27.5 27.1 9.4 0.4 9.7

36.5 26.5 26.5 9.0 0.0 10.0

5.3 4.9

-3.4 -3.6

0.3 -0.2

1.8 1.2

0.3 -0.2

0.3 -0.1

-0.3 -0.3

Primary balance Overall balance

2004/05 2005/06(e) 2006/07(p) 2007/08(p)

a. Only major items are reported. Source: Domestic authorities’ data; estimates (e) and projections (p) based on authors’ calculations.

140

2006/07, a number of adjustments were made to the tax system; for example, the income threshold exempt from taxation was raised to 30 000 pula from 25 000 pula. Civil service salaries were increased by 8 per cent, slightly below the 8.5 per cent inflation rate forecast for 2006/07. Monetary Policy Monetary policy in Botswana seeks to achieve low inflation and a stable exchange rate. The BoB’s annual target rate of inflation was 4 to 7 per cent in 2006. For the first time, the BoB also set a medium-term target rate for the 2006-08 period, at 3 to 6 per cent. The medium-term inflation target was introduced in recognition of the lag between a policy change and its impact on the ultimate objective. It also affords the monetary authorities sufficient time to adjust policy as needed in response to shocks, such as large changes in administered prices, and is intended to help stabilise inflationary expectations. In controlling inflation, the Bank of Botswana uses the growth rate of commercial bank credit as an intermediate target. Although the BoB has no direct influence on fiscal policy, it does monitor trends in

http://dx.doi.org/10.1787/211722037833

the government budget, focusing on the impact of fiscal policy on its inflation objective. In 2006, inflation averaged 12.5 per cent, up from 11.4 per cent in the preceding year, and well above the target range. The rise in inflation was attributable in part to increases in administered prices, including the re-introduction of fees in government secondary schools, which contributed 1.1 percentage points, and fuel prices, which were increased three times in the first half of 2006 in response to high international oil prices and contributed around 1 percentage point to inflation1. Core inflation also increased from 11.1 per cent at the end of 2005 to 12.1 per cent in June 20062. External Position Exports of diamonds accounted for around 75 per cent of total exports on average over the 1980-2005 period, with other mining products accounting for roughly another 10 per cent. In 2005, diamond exports were 80 per cent of total exports, followed by copper and nickel (9 per cent), vehicles and parts (4 per cent), and textiles (3 per cent). Meat and meat products, which were Botswana’s main exports until the early 1970s, declined to less than 1 per cent of total exports.

1. Bank of Botswana, Mid-Term Review of Monetary Policy Statement, 2006. 2. Core inflation is based on average inflation excluding outlier months.

African Economic Outlook

© AfDB/OECD 2007

Botswana

The remarkable growth in diamond exports, along with prudent macroeconomic policies that restrained import demand, ensured that Botswana maintained a very strong balance-of-payments position, which led to the accumulation of large foreign exchange reserves. As at the end of 2006, Botswana’s foreign reserves stood at $6.2 billion, enough to cover 27 months of imports of goods and services. Botswana’s trade balance has consistently been positive. In 2004/05, the trade surplus increased to nearly 11 per cent of GDP, up from 5 per cent in the preceding year. Similarly, the current account surplus rose to around 8 per cent of GDP, as opposed to a deficit of 1.1 per cent of GDP in the preceding year. The current account surplus is forecast to increase further in the next two years.

Botswana’s principal trade partners are the Southern African Customs Union (SACU) member countries (especially South Africa), the United Kingdom, the United States and the rest of Europe. Botswana’s trade policies are largely dictated by its membership of SACU. The SACU agreement provides for a common external tariff structure and duty-free movement of goods originating within the customs union, except in specified exceptional circumstances. Currently, Botswana also participates in a number of other bilateral and multilateral agreements, including the Cotonou Partnership Agreement between the European Union (EU) and the African, Caribbean and Pacific (ACP) states (to be replaced by the Economic Partnership Agreement – EPA – currently being negotiated between the EU and the Eastern and Southern African regional grouping), the Generalised System of Preferences

Table 3 - Current Account 1997/98

(percentage of GDP)

2002/03 2003/04 2004/05 2005/06(e) 2006/07(p) 2007/08(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor Income

12.6 51.2 38.6 -4.9 2.5

7.8 40.8 33.0 -0.1 -9.2

4.9 33.3 28.4 -0.5 -11.3

10.9 40.1 29.2 -0.3 -7.9

7.7 39.4 31.7 3.2 -6.7

7.4 39.8 32.4 3.3 -5.3

7.7 40.1 32.4 3.3 -4.5

Current transfers Current account balance

5.0 15.3

3.7 2.2

5.8 -1.1

5.4 8.1

4.5 8.8

5.9 11.3

5.4 11.9

Source: Source: Domestic authorities’ data; estimates (e) and projections (p) based on authors’ calculations http://dx.doi.org/10.1787/703668733667

(GSP), the United States’ African Growth and Opportunity Act (AGOA) and the World Trade Organisation (WTO). Exchange-rate policy aims to balance the sometimes conflicting objectives of boosting non-traditional exports and lowering inflation. The policy has pegged the nominal effective exchange rate (NEER) of the pula to a basket of currencies comprising the IMF Special Drawing Right (SDR) and the South African rand in proportions that reflect Botswana’s trade shares. Stability of the NEER has acted as a nominal anchor for monetary policy. In recent years, however, the real exchange rate of the pula has exhibited considerable volatility. For instance, the NEER appreciated by 25 per cent between 2000 and 2003, but was devalued by © AfDB/OECD 2007

7.5 per cent in February 2004. In May 2005, a crawling peg for the NEER was introduced, under which a further nominal devaluation of the pula by 12.5 per cent occurred. During this period, however, the real effective exchange rate appreciated by about 3.5 per cent as the downward crawl of the nominal exchange rate failed to offset fully the differential between domestic and trading partners’ inflation rates. To foster a more attractive investment climate, Botswana has completely liberalised the exchange control regime. Foreign direct investment (FDI) into Botswana has steadily declined from $100 million in 1997 to around $37 million in 2004, despite a relatively favourable investment climate and political stability. Foreign investors are perhaps deterred by African Economic Outlook

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Botswana

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

25

20

15

10

5

0 2000

142

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/213686530562

Botswana’s situation as a small landlocked country. Low incomes and the HIV/AIDS pandemic might also curtail the volume of FDI inflows in sectors other than natural resources.

Structural Issues Recent Developments For over four decades, Botswana has based its development strategies on the NDPs. These plans cover a six-year cycle, subject to a mid-term review every three years. The first eight NDPs (from NDP1, 196669, to NDP8, 1997/98-2002/03) focused on the twin objectives of achieving sustainable economic growth and diversification of the economy. The current plan (NDP9, 2003/04-2008/09) continues this focus with an emphasis on competitiveness in global markets. A mid-term review of NDP9 carried out in 2005 revealed that the targets for diversification were again not being achieved. The government is reassessing its strategy, African Economic Outlook

focusing on a few key economic reforms, including privatisation and reform of public-sector management. Although the investment climate in Botswana is among the best in sub-Saharan Africa, the World Bank’s Doing Business indicators reveal deterioration in 2006, with Botswana’s rank falling to 48th from 44th out of 175 countries. The deterioration was most marked in the category of business licensing, where Botswana’s position fell to 136th from 115th. Botswana also ranks poorly in investor protection, where its position fell to 118th from 114th. Clearly, there is room for improvement in these matters. The government has recently created a High Level Consultative Council (HLCC), chaired by the country’s president, consisting of government and private-sector representatives. Sectoral HLCCs were established to identify constraints at the industry level, and their recommendations are forwarded to the main HLCC for consideration. The government has also put in place other institutions, programmes and policies aimed © AfDB/OECD 2007

Botswana

at promoting the development of the private sector. These include the Botswana Confederation of Commerce, Industry and Manpower (BOCCIM), the Hospitality and Tourism Association of Botswana (HATAB), the Botswana Export Credit Insurance and Guarantee Company Limited (BECI), the Botswana Bureau of Standards (BOBS), the Industrial Development Policy, the Small, Medium and Micro Enterprises (SMME) Policy, the Citizen Entrepreneurial Development Agency (CEDA) and the Botswana Export Development and Investment Agency (BEDIA). The government set up the Public Enterprises and Privatisation Agency (PEEPA) five years ago, but since its establishment PEEPA has made little progress in divestiture. It has, however, undertaken a review of the operations and activities of local and central government departments and public enterprises, and has examined the availability of opportunities for private-sector participation in these public institutions. PEEPA also developed the Privatisation Master Plan for Botswana, which has since been approved by government. The Master Plan provides the framework and guidelines for the implementation of reforms to increase private sector participation in the economy. In addition, PEEPA has developed guidelines and manuals to help managers of public institutions implement privatisation in a consistent, transparent and equitable manner. These include the Contracting Out Guidelines and the Divestiture Procedure Manuals, and plans are under way to introduce procurement guidelines for publicprivate partnerships. PEEPA’s annual work plan for 2005/06 included a feasibility study on merging the National Development Bank (NDB) and the Botswana Savings Bank (BSB). The study has since been completed, and the government has requested revisions of the recommendations. PEEPA is now finalising the procedures for the establishment of the Privatisation Trust Fund, which will hold shares of the privatised entities for the purpose of citizen economic empowerment. Access to Drinking Water and Sanitation Both surface and underground water resources are scarce in Botswana. Over most of the country, rainfall is low, varying from 250 mm a year in the far south© AfDB/OECD 2007

west to 650 mm in the extreme north; the national average is only 450 mm. Most of the rainfall, surface water and water in the soil is lost through evaporation and evapotranspiration, as open water evaporates at a rate of about 2 000 mm per year. Recurrent periods of drought exacerbate water scarcity. Eighty per cent of Botswana is covered by the sands of the Kalahari desert, which has no effective drainage system apart from dry valleys, which hardly carry any water even after intense rainfall. The thickness of the Kalahari sand beds inhibits groundwater recharge through rainfall in most areas. Groundwater can be found beneath these sand beds, but generally at great depth, and with low yields that can support few people and livestock. Away from the Kalahari, groundwater is found closer to the surface (30-100 metres in eastern Botswana) and is recharged from rainfall. Surface water resources are concentrated in the thinly populated Ngamiland and Chobe districts, where the only perennial sources – the Okavango delta and the Kwando, Chobe and Liyanti rivers – are found. These two river systems provide 95 per cent of Botswana’s surface water resources. Although Botswana continues to develop its water resources at very great expense, demand for water has been rising over the years owing to the increasing degree of urbanisation coupled with the increasing affluence of the population. Botswana’s total annual water demand reached 20 million m3 in 1990, with the agricultural sector, mainly livestock and limited irrigation, consuming about half of this. By 2006, water demand in Botswana has risen to about 88.3 million m3. This demand level is projected to rise to about 104.8 million m3 in 2015 and 186.5 million m3 in 2035. A review of the water balance situation in Botswana reveals that, on average, more than 46 per cent of it is wasted though leakage, lack of demand management programmes and inefficient use. The current average water losses of the Department of Water Affairs (DWA) are 28 per cent and those of the Water Utilities Corporation (WUC) 10 per cent. Thus, significant savings could be made by addressing water conservation and demand management in Botswana. The need for African Economic Outlook

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accurate reporting and monitoring is therefore essential, as a starting point for future demand management and water conservation. Botswana’s future water demand will be met by utilisation of shared watercourses because the available water resources may be insufficient to meet future demand projections. Thus, participation in transboundary water resources management is one of the government’s priorities, since most of the country’s major rivers share courses with neighbouring countries. Botswana has entered into four trans-boundary agreements concerning watercourses, namely the OrangeSenqu, Limpopo, Okavango and Zambezi rivers.

144

Water resources management is the responsibility of a number of institutions, including the Ministry of Minerals, Energy and Water Resources (MMEWR), Ministry of Local Government (MLG), Ministry of Agriculture (MOA), district councils, the National Conservation Strategy (Coordinating) Agency (NCSA), and the Department of Waste Management and Pollution Control (formerly the Department of Sanitation and Waste Management). The MMEWR has overall responsibility for policy in the water sector. Within MMEWR, the DWA is responsible for groundwater investigations, protection and monitoring of resources, and water supply development in rural areas. In the area of water resources development (i.e. construction of dams and well-fields, water transfer from source to user point, and water reticulation at the end user point), the WUC, a wholly government owned parastatal, is responsible for development of infrastructure and water supply to six urban centres. WUC supplies clean, safe drinking water to about 34 per cent of Botswana’s population. Significant progress has been made in the provision of water infrastructure, and the government of Botswana is committed to implementing the NDP9 projects in the water services sector. Planned projects in the next two years include: i) construction of the Lotsane, Ntimbale, Lower Shashe and Thune dams; ii) construction of new village water supply systems and major rehabilitation works on 13 existing systems; African Economic Outlook

iii) expansion of urban water supply systems to address increasing demand (which is growing by 16 per cent annually); iv) groundwater resources investigation and development (four projects). Water quality issues are governed by regulatory standards formulated by the Botswana Bureau of Standards, which stipulates product quality standards and the penalties for breach of such standards. In terms of water charges, the government subsidises the operating costs of water delivery by more than 40 per cent. In addition, there is a subsidy on water infrastructure. The structuring of water charges clearly reflects the government’s policy of making water available to rural communities at an affordable charge. Although water is scarce in Botswana, the country is determined to provide universal access to safe drinking water. The proportion of the population with sustainable access to safe drinking water increased from 77 per cent in 1996 to 97.7 per cent in 2000. Recently, however, this figure has marginally declined, as the data for 2005 indicate that 96 per cent of the population had access to safe drinking water. Surface water resources, though limited, continue to constitute the main sources of water supply in urban areas, while rural areas largely rely on groundwater resources. There are around 25 000 officially registered boreholes in Botswana, of which 10 000 are owned by the government. All officially recognised settlements have at least one standpipe within an average radius of 400 metres for every household, provided and maintained by the government. Some disparities are found between urban and rural areas in terms of access to water. In 2000, nearly all households in urban areas had running water in their homes (52.1 per cent) or could fetch it from a nearby public standpipe. Only 9.1 per cent of rural households had piped water in their homes. About 84.2 per cent have access to public standpipes, while about 7 per cent of rural dwellers did not have access to safe drinking water at all. Although Botswana has made great strides in terms of potable water supply, the wastewater and sanitation sector has not grown to the same extent. Currently, only © AfDB/OECD 2007

Botswana

41 per cent of the population in Botswana has access to sanitation. The Botswana’s Landfill Guidelines and Waste Management Act (1998) and the Sanitation and Waste Management Policy of August 2001 provide the necessary institutional, administrative and legal structures for the implementation of a programme of action on sanitation. The creation of the Department of Sanitation and Waste Management in the Ministry of Local Government was instrumental in the development of the National Master Plan for Wastewater and Sanitation (NMPWS) in 2003. Gaborone has a wastewater treatment plant, and there is a biological filtration plant in Francistown to treat the city’s wastewater. With the exception of these two cities, all of the municipal wastewater treatment plants in Botswana are currently using waste stabilisation pond systems, with or without anaerobic pre-treatment. The wastewater from government institutions is also treated in waste stabilisation pond systems except for the smallest institutions, where communal septic tanks are used. The NMPWS aims to double sewerage coverage from 12.5 per cent of the population to 25 per cent by 2030. Botswana currently has about 75 wastewater treatment facilities and manages to recover only half of its annual throughput of wastewater for reuse. To improve the coverage of waste management and sanitation in the country, NDP8 (1997-2003) provided for the construction of 22 000 latrine substructures in villages and other remote settlements. A total of 18 635 latrines (about 85 per cent of planned) have been completed. In addition to the latrines, other technological approaches have been tried in the villages. One such technology is the Enviro Loo, a sealed dry compost unit incorporating accelerated dehydration utilising a wind-powered turbine ventilator.

Political Context and Human Resources Development Botswana is well known for political stability and good governance, and democratic principles are deeply entrenched following decades of successful democratic © AfDB/OECD 2007

transitions. Botswana operates a multi-party democracy with a parliamentary system of government. In the last election, President Festus Mogae was re-elected, and his party, the Botswana Democratic Party (BDP), won 44 of the 57 parliamentary seats. Despite the country’s long experience of democracy, the opposition parties are very weak, fragmented and unco-operative. In spite of its excellent economic performance, Botswana faces the serious development challenges of chronic unemployment, high levels of poverty and the HIV/AIDS pandemic. The rate of unemployment increased from 14 per cent in early 1990s to 24 per cent in 2004/05. Unemployment is much higher among women (24 per cent) than among men (17 per cent), even though the labour force participation rate for women is far lower than that for men. In terms of regional distribution, unemployment is highest in urban villages (25 per cent), followed by rural areas (18 per cent) and lowest in urban towns (16 per cent). As in most developing countries, unemployment is most prevalent among young people aged between 15 and 24 years. The overall youth unemployment rate in Botswana is over 40 per cent; the rate for females is higher at 48 per cent unemployment, while male youth unemployment is 35 per cent. A number of factors have contributed to the growing unemployment in Botswana, including skill shortages (especially entrepreneurial skills), poor attitudes towards work that contribute to low productivity and lack of funds to start up a business. Recent studies on productivity in Botswana confirm that workers have a relaxed attitude to work and seem to lack motivation. There have been numerous efforts to address these problems in recent years, some by the Botswana National Productivity Centre. A recent status report on progress towards the Millennium Development Goals (MDGs) shows that Botswana is on target to achieve many of these goals, including the poverty reduction target. Even so, the incidence of absolute poverty is still high in Botswana. Estimates from the 2002/03 Household Income and African Economic Outlook

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Botswana

Expenditure Survey data indicate that the proportion of people living below the poverty line fell from 47 per cent in the 1990s to 30 per cent in 2003. The United Nations Human Development Report for 2006 also estimates that 23.4 per cent of the population was living below $1 per day during the 1990-2004 period; in fact, the report ranked Botswana 93rd out of 102 developing countries in terms of the human poverty index (HPI)3. For the economy to achieve its Vision 2016 goal of zero poverty, there must be concerted efforts and new strategic thinking towards poverty eradication.

146

The HIV/AIDS pandemic is imposing high budgetary expenditures on treatments as well as disabling a sizeable part of the workforce, thus reducing employment and output. The government continues to implement the comprehensive national strategic framework (NSF) for HIV/AIDS, aimed at having an HIV-free generation by 2016. The NSF involves a triple approach of prevention, care and treatment, which has already begun to yield dividends, as the proportion of the sexually active age group (15-64 years old) infected with HIV appears to have declined below 35 per cent. While the increased government expenditure on the NSF is important, behavioural change is also required if the incidence of HIV infection is to be reduced. The government remains committed to finding innovative ways to address the problem, and its efforts are being seconded by the African Comprehensive HIV/AIDS Partnership. Such a collaborative scheme between the government and non-governmental organisations is expected to continue for the next three years. The international community,

led by bilateral and multilateral donors, is providing additional support towards addressing the HIV/AIDS pandemic in Botswana. Botswana has made significant progress on the other MDGs, particularly on those relating to universal education and gender equality. The country has already achieved the 100 per cent target for primary school enrolment and 100 per cent transition rate from primary education to junior secondary education. Secondary school enrolment is currently above 90 per cent, and the immediate focus is on raising it to 100 per cent within the next few years. The government is also striving to improve the quality of education at all levels, with strong emphasis on technical, management and vocational education. With regard to gender equality, Botswana has already surpassed its targets in primary and secondary education, as the net school enrolment rate for girls is greater than that for boys, while the female literacy rate exceeds the male rate. Despite these impressive statistics, women remain relatively disadvantaged in terms of access to social services and economic opportunities, and women are also disproportionately afflicted with HIV/AIDS. Overall, the human development index (HDI) for Botswana is relatively favourable but exhibits a declining trend since the early 1990s. From a peak of 0.68 in 1990, it had fallen to 0.57 in 2004, largely due to the relatively low value of its life expectancy index. The HIV/AIDS situation and other health-related problems have combined to reduce average life expectancy to only 35 years.

3. Of the 102 countries, only nine (Mozambique, Sierra Leone, Guinea, Swaziland, Ethiopia, Niger, Chad, Burkina Faso and Mali) have worse poverty situations than Botswana.

African Economic Outlook

© AfDB/OECD 2007

Burkina Faso

Ouagadougou

key figures • • • • •

Land area, thousands of km2 274 Population, thousands (2006) 13 634 GDP per capita, $ PPP valuation (2006) 1 314 Life expectancy (2006) 48.9 Illiteracy rate (2006) 78.2

Burkina Faso

town > l million inhabitants

main airport

500 000 - 1 000 000

secondary airport

100 000 - 500 000

commercial port petroleum port fishing port

W

ITH A PER CAPITA INCOME OF $400 in 2005 (World

Bank data), Burkina Faso is one of the poorest countries in the world. More than 45 per cent of the population lives on less than a dollar a day. Nonetheless, development perspectives appear good based on recent economic performances. Over the 1996-2005 period, Gross Domestic Product (GDP) grew on average by 4.6 per cent a year. It was estimated to have grown by 5.5 per cent in 2006 – after having reached 7 per cent in 2005 – and is forecast at 5.4 per cent for 2007. The economy is very vulnerable and highly exposed to internal and external shocks. The country’s economic performance is deeply dependent on that of agriculture, itself at the mercy of climatic hazards. Poor rainfall, a

locust invasion or even floods are enough to jeopardise the entire harvest and to plunge the country into recession. The solid economic performance of the last five years is primarily the result of good climatic conditions, which have made possible cereal surpluses of several hundred thousand Cotton remains the dominant tonnes. This trend appears economic sector but there have to be continuing, with been promising developments cereal production expected in mining linked largely to rise in the 2006/07 to the liberalisation policy. campaign by 6 per cent over the previous harvest, and by 18 per cent over the fiveyear average. Thus, a net cereal surplus of more than 1 million tonnes will be produced for the 2006/07 agricultural campaign. 149

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: IMF and national sources data; estimates (e) and provisions (p) based on authors’ calculations. http://dx.doi.org/10.1787/207675023222

© AfDB/OECD 2007

African Economic Outlook

Burkina Faso

GDP should continue to grow at a sustained pace notwithstanding predictable climatic shocks. The combination of a more than 13 per cent rise in the price of cotton in 2006/07, the first gold exports from new commercial mines and the implementation of new reforms should all help sustain growth. Measures are being taken in line with the following strategic policies: improving the legal environment of business, continuing state withdrawal, strengthening business capabilities, developing institutions to support the private sector, financing the private sector, developing infrastructure, and developing the mining sector.

Recent Economic Developments

150

Real GDP grew by 5.5 per cent in 2006, thanks to the favourable agricultural season. A growth rate of 5.4 per cent is forecast for 2007. This solid performance is primarily attributable to increased growth of cotton production and the first exports from new gold mines. The rate of increase in exports has in general exceeded that of imports in recent years. However, owing to a deterioration of the terms of trade, the current account deficit increased from 10.4 per cent of GDP in 2005 to an estimated 12.4 per cent in 2006. In the medium term it is expected that the current account deficit will drop to 11.4 per cent in 2008. The primary sector is the chief source of income and employment for the majority of the population (80 per cent). In 2006, it accounted for 37.2 per cent of GDP. The performance of the Burkinabè economy

is overwhelmingly reliant on harvests. Four primary shocks marked the 2006/07 agricultural campaign: i) the late arrival of the rains; ii) floods and locust attacks in some provinces; iii) a reduction in crop surfaces planted with cereals; and iv) falling profitability of crops and the bursting of dykes of irrigation works. In spite of this, the agricultural sector posted volume growth of 6 per cent in 2006. Gross cereal production for the 2006/07 harvest reached 3 858 713 tonnes, including 3 669 048 tonnes of cereals (sorghum, millet and maize) and 189 176 tonnes of rice. These results, chiefly due to good rainfall and the continuation of village irrigation programmes, translate into a rise of about 6 per cent over the previous year, and of 18 per cent over the fiveyear average. The production of other food crops (yams and sweet potatoes) fell by 1 per cent over the 2005/06 campaign and rose by 13 per cent over the five-year average. As a result, the available stocks at the end of October 2006 were estimated at 233 553 tonnes. These represent growth of around 23 per cent over the last harvest. The expected cereal harvest should permit annual consumption needs to be met at the level of 284.9 kilogrammes per inhabitant. But despite an expected sizeable cereal surplus of more than 1 million tonnes, areas with food security risks remain. These areas were hit by the shocks experienced during the 2006/07 campaign. Six regions (Sahel, Central-North, North, Boucle du Mouhoun, Hauts Bassins and the South-West) were affected by floods. The regions of Sahel and Central-East suffered from pest invasions and in August-September, periods and pockets of

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on Ministry of Economy and Finance data. http://dx.doi.org/10.1787/808303161368

African Economic Outlook

© AfDB/OECD 2007

Burkina Faso

Table 1 - Demand Composition 1998

(percentage of GDP)

2005

2006(e)

2007(p)

2008(p)

Percentage of GDP (current prices)

Percentage changes, volume

Gross capital formation Public Private

24.2 11.3 12.9

20.6 11.1 9.5

6.1 5.0 7.3

6.8 6.7 7.0

6.4 9.4 3.0

Consumption Public Private

91.1 22.3 68.9

94.1 21.5 72.5

5.3 8.2 4.5

4.5 3.7 4.7

5.4 3.7 5.8

-15.3 12.8 -28.1

-14.6 9.7 -24.3

9.7 8.4

12.1 5.5

8.4 6.8

External sector Exports Imports

Source: Source: National Institute of Statistics and Demography data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/112662154136

drought were observed in the provinces of Oudalan, Soum and Séno.

200 000 people and are the source of income for many households.

Cash crops (cotton, groundnuts, sesame and soya) rose by 2.26 per cent over the previous campaign though they fell by 1.01 per cent over the five-year average. The cotton harvest reached a record level, with 730 000 tonnes in 2006. But the price paid to producers fell, from 210 CFA francs per kilogramme in 2004/05 to 175 CFA francs per kilogramme in 2005/06. A further decrease is expected in 2006/07. These fluctuations played a major part in the collapse of producer profits, leading some to abandon cotton farming, and to an increase in rural poverty. Nevertheless, the government’s creation of a stabilisation fund to protect farmers from fluctuations in world prices, and the expansion of the investments of Sofitex, the fibre and textile company, raising its capital from 4.4 billion CFA francs to 38 billion CFA francs, will enable cotton production to continue to grow.

The secondary sector’s GDP share (including mining) should stabilise at around 20 per cent in 2006/07. The total contribution of the secondary sector to growth should rise from 1.2 per cent of GDP in 2005 to 10.9 per cent in 2007. This performance is explained by the dynamism of manufacturing industries.

Gold is Burkina Faso’s principal mineral resource and the 1996 liberalisation of the sector attracted several foreign investors. Production of 9.4 tonnes is expected for 2008, against 7.4 tonnes in 2006 and an estimated 8.7 tonnes in 2007. Several projects are under way. The sector is experiencing difficulties, however, as safety concerns in small mines will eventually lead to their closure, entailing heavy economic and social repercussions as these mines employ some © AfDB/OECD 2007

The tertiary sector grew by 5.2 per cent in 2005. This rate could increase to 5.4 per cent in 2006 and 7.8 per cent in 2007. The growth is attributable to commercial and non-commercial services the GDP share of which should pass from 42.8 per cent in 2005 to 43.6 per cent in 2007. With the transport, trade and telecommunications sectors expected to flourish, the contribution of the tertiary sector to economic growth will be 2.1 per cent of GDP in 2006 and 3.1 per cent in 2007.

Macroeconomic Policy Fiscal Policy Burkina Faso is a member of the West African Economic and Monetary Union (WAEMU). Within it, countries retain a discretionary margin solely over budgetary policy with convergence rules that must be African Economic Outlook

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Burkina Faso

respected. One of the convergence criteria sets out a minimum contribution from taxes of 17 per cent of GDP. In 2003 however, Burkina Faso did not comply with this criterion. Indeed, fiscal revenue only barely exceeded 11 per cent of GDP, although a rising trend has been observed since 2006. This weak fiscal pressure prevented Burkina Faso from meeting the first convergence criterion, which calls for a neutral or positive basic fiscal balance in relation to GDP. The budget deficit (including grants) fluctuates. It rose from 2.9 per cent in 1998 to 4.4 per cent in 2002. It is expected that the budget deficit will fall from 4.9 per cent of GDP in 2005 to 3.3 per cent in 2006. This relative improvement was due to larger foreign assistance in the form of grants. Over the period the ratio of grants to GDP was fairly unstable, although since 2002 a significant fall has been observed.

152

From the perspective of the International Monetary Fund fiscal policies in 2006 struck a fair balance between the implementation of priority social spending and debt sustainability: they draw on resources released by the Multilateral Debt Relief Initiative (MDRI), concessionary loans and budgetary support from donors. According to the IMF, the primary balance went from a deficit of 4.9 per cent of GDP in 2005 to a deficit of 2.8 per cent in 2006, reflecting the cancellation of the debt.

Without the MDRI, the deficit would have increased to 5.2 per cent of GDP. Nonetheless, the IMF stressed that the improvement of the debt indicators should not encourage the government to begin borrowing. It recommended instead that the government capitalise on the savings realised through the MDRI by adopting a prudent fiscal policy, improving the mobilisation of resources, redoubling efforts to contain the risks attendant on international grants and borrowing only on concessionary terms. These are all prerequisites for meeting the Millennium Development Goals and for reducing poverty. For 2006, fiscal reform focused on VAT reimbursement procedures, improving customs administration and adopting a new investment code. The government maintained the tax on oil products but it increased its subsidies to the national electricity provider (Sonabel) by 18 billion CFA francs (0.6 per cent of GDP) in 2006 in order to prevent a rise in the price of electricity of around 30 per cent. These subsidies will be removed between now and 2009 (with an exception being made for low income households) once the country is connected to the electricity grid of Côte d’Ivoire. In spite of the macroeconomic results, the IMF remarked on the slowdown in the privatisation programme.

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grants Tax revenue Other revenue Grants

18.3 11.1 0.9 6.3

17.5 10.9 1.2 5.4

17.1 11.8 1.0 4.3

16.8 11.1 0.9 4.8

19.8 11.2 0.9 7.8

16.9 11.2 0.9 4.9

17.2 11.3 0.9 5.0

Total expenditure and net lending Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

21.2 9.5 8.8 4.4 0.8 11.7

20.4 10.4 9.7 4.5 0.7 9.0

21.4 10.5 9.8 4.4 0.7 11.1

21.7 11.2 10.6 4.8 0.6 10.9

23.1 11.8 11.3 4.8 0.5 11.1

22.6 11.6 11.1 4.8 0.5 11.1

23.1 11.5 11.0 4.7 0.4 11.7

Primary balance Overall balance

-2.1 -2.9

-2.2 -2.9

-3.6 -4.3

-4.3 -4.9

-2.8 -3.3

-5.3 -5.7

-5.5 -6.0

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/506787344782

African Economic Outlook

© AfDB/OECD 2007

Burkina Faso

To implement its policy, the finance and budget ministry is focusing on sustainable growth and the fight against poverty through: i) economic liberalisation; ii) good economic governance; iii) ongoing stabilisation of public finances and of the banking sector; iv) strengthened mobilisation of domestic and external resources; and v) regional integration. The execution of poverty-reduction policies contained in the Poverty Reduction Strategy Framework (PRSF) should increase both the supply of essential goods and services and facilitate access to them, as well as strengthening the capacity of groups to acquire basic goods and services.

for the approval of the National Assembly, during the Finance Act. Monetary Policy Burkina Faso’s monetary policy is determined by the BCEAO (Central Bank of West African States) whose priority is to control and contain inflation. Its monetary policy nonetheless remains influenced by the European Central Bank as the WAEMU currency (the CFA franc) is pegged to the euro. It is thus obvious that Burkina Faso’s BCEAO-led monetary policy is strongly influenced by the policy conducted in the euro zone. The consumer price index (CPI) was more or less contained up until 2004. In 2005 it rose however to reach the record level of 6.4 per cent, a figure unseen since 1998. This increase is explained by the rise in the price of oil and gas, which had a severe impact on household living standards. Inflation dropped noticeably in 2006 to2.4 per cent. This drop is partly explained by the stabilisation of the price of oil on world markets. According to projections, this decline should be sustained in 2007 with an inflation rate of around 2.7 per cent of GDP.

The finance and budget ministry intends to keep up its reform efforts in order to boost growth while keeping inflation below the 3 per cent ceiling fixed by the WAEMU convergence programme. In terms of fiscal policy, the goal is to limit the overall deficit to 3.5 per cent of GDP through increased control of spending and improved fiscal revenues. Attention will also be given to improving the quality of public investment in order to increase its effectiveness. The government also wishes to strengthen reforms undertaken in recent years regarding budget formulation, monitoring budgetary execution, control and audits.

External Position

In terms of revenue, the authorities are planning to focus on developing a computerised revenue tracking system following the example of the computerised expenditure tracking system, in order to widen the fiscal base and strengthen the efficiency of fiscal and customs administration. They seek to improve the collection of both direct and indirect taxes as well as revenue from services. The spending programme will be based on the identification of operational measures likely to reduce the delays noted in executing spending financed by the HIPC (Heavily Indebted Poor Countries) initiative. It also aims at better management of public consumption of water, electricity and telephones, as well as the wage bill.

The country’s current account deficit should remain sizeable in 2006 and for the coming two years. The country has a structural trade deficit. Nevertheless, the deficit has been fairly well contained in recent years. Indeed, the trade deficit on GDP fell from 11.1 per cent in 1998 to 9.7 per cent in 2006. This improvement should continue, and the deficit should stabilise in the neighbourhood of 8.6 per cent in 2007 and 2008. These positive results are attributable to an increase in cotton and gold exports. Imports should, however, increase under the strong influence of the rise in the price of oil products, a trend towards deteriorating terms of trade, and the vibrancy of the Burkinabè economy.

The drawing up of a procedures manual should enable more effective execution of HIPC-funded priority programmes. Utilisation authorisations for these funds will henceforth be submitted, with details of all activities,

The services deficit relative to GDP exceeded 5 per cent in 2006 having been limited to 4.5 per cent since 1998. This indicates a fairly strong dependence on external aid. An examination of the ratio of current

© AfDB/OECD 2007

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Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-11.1 11.5 22.6 -4.4 -0.4 6.7

-8.4 7.6 16.0 -4.4 -0.6 4.9

-7.6 9.4 17.0 -4.5 -0.6 3.7

-9.4 8.3 17.6 -4.1 -0.7 3.7

-9.7 8.6 18.3 -5.4 -0.7 3.4

-8.6 9.0 17.6 -5.4 -0.3 2.9

-8.6 9.3 17.9 -5.6 -0.3 2.9

Current account balance

-9.2

-8.5

-8.9

-10.4

-12.4

-11.4

-11.6

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/003136308577

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

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Source: IMF. http://dx.doi.org/10.1787/683167457327

transfers in GDP shows a drop over the period, dropping from 6.7 per cent in 1998 to 3.4 per cent in 2006. This decline should continue in 2007 and 2008 with the ratio contracting to 2.9 per cent. These results can be explained by unfavourable circumstances at the regional level, particularly the crisis in Côte d’Ivoire, which contributed to a major reduction in the volume of transfers to Burkina Faso. In 2005, public debt stabilised at 34.8 per cent of GDP because of debt relief granted under the HIPC African Economic Outlook

initiative. Revenues will continue to benefit from various debt relief programmes under the HIPC initiative and the Multilateral Debt Relief Initiative (MDRI). In January 2006, Burkina Faso was granted relief totalling $89 million. Following this, in March and April 2006, the World Bank and the African Development Bank cancelled $861 million and $340 million of public debt, respectively. The government committed itself to allocating the amounts saved by debt cancellation to the reduction of poverty and to spending in priority social sectors. © AfDB/OECD 2007

Burkina Faso

Structural Issues

$321 million including an annual drilling capacity of 311 000 ounces of gold for eight years.

Recent Developments The various structural reforms undertaken and the increase in investment in some sectors seek to maintain sustained growth. Furthermore, the poor ranking of the country in the World Bank’s Doing Business index – 163rd in 2006 – prompted several reforms with the goal of improving the business environment and, in particular, encouraging private sector development. In the cotton sector, the government introduced a programme to insulate farmers from the market volatility of the past few years. This programme consists of special reserve funds to protect producers from price fluctuations. For the 2007/08 agricultural season, the price paid to farmers will depend on past prices and anticipated international prices. If there are fluctuations, stabilisation funds will be used for adjustments. This equalisation system will make it possible to safeguard producer revenues and to reduce rural poverty in the coming years. The price-fixing mechanism has not yet been set, however, and the IMF has advised the government only to use this equalisation system in exceptional circumstances. The European Union and the Agence Française de Développement (AFD) have expressed interest in the programme. In November 2006, the chief shareholders of SOFITEX textile and fibre company, which include the state (35 per cent) and the French group DAGRIS (34 per cent), agreed to increase the company’s capital, which should rise from 4.4 billion CFA francs to 38 billion CFA francs. This recapitalisation is a sign of better times for the cotton sector. The liberalisation of the mining sector in 1999 succeeded in attracting several foreign companies. Orezone Resources (the owner of the Essakan mine) has set up the largest project in the gold-mining sector. Some 1.9 million ounces of measured and indicated gold deposits and another 1.5 million ounces of inferred deposits have been identified in the northeastern Dori region. The total cost of the project is estimated at © AfDB/OECD 2007

Goldrush announced the implementation of a mining permit acquired in August 2006 for Falagountou. Finally, in November 2006, five large mining projects intensified their activities: i) Riverstone Resources completed its operations on the Tao project and work will continue throughout 2007; ii) Goldcrest Resources began exploitation of the mines at Kampti and Gaoua in the southwest of the country, where mines could hold millions of ounces; the company is also planning to operate the mines of Malba and Souhouera; it has also purchased the Danyoro mine, assumed to contain significant quantities of gold; iii) Etruscan Resources is sinking a mine at Youga, near the border with Ghana, where extractions should reach 86 000 ounces of gold annually during six and a half years; the company is planning to invest $44 million in the second half of 2007; iv) The Canadian company High River Gold increased its financing for the Bissa project, put at $12 million, which it expects to yield 1.3 million ounces, with an initial annual production of 100,000 ounces rising to 140 000 ounces; v) Goldbelt completed its feasibility study for the Belahouro project, 220 kilometres northeast of Ouagadougou; this project includes the sites of Inata, Souma and Fete Kole. The Inata mine could produce 100 000 ounces of gold annually during the first five years, and up to 140 000 ounces once development works have been completed. For 2007, gold exports from commercial mines will grow significantly. They are estimated at 8.7 tonnes in 2007 and 9.4 tonnes in 2008. In September 2006, the Minister of Transport announced plans to construct a new airport at Donsin, 35 kilometres northeast of the capital Ouagadougou. The project will cost 235 billion CFA francs, and the first phase of the project beginning in 2007 will cost 115 billion CFA francs. The new airport will make it possible to process more than 1.5 million passengers a year, compared to 250 000 passengers in the current airport. The banking sector in Burkina Faso is comprised of commercial banks and microfinance institutions. African Economic Outlook

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On 31 December 2005, 11 banks were operating, in addition to five financial institutions (unchanged from 2004). In 2006, three new institutions authorised at the end of 2005 (Banque Régionale de Solidarité Burkina, Banque de l’Habitat du Burkina Faso – BHBF – and Banque Atlantique Burkina) were due to expand their operations.

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Microfinance institutions have expanded rapidly over the past few years and microfinance plays an important role in Burkina Faso. According to the BCEAO, on 31 December 2005 almost 600 000 people used the services of the main networks. Deposits, which had risen 22 per cent over the end of 2004, were assessed at 34 billion CFA francs, and credits (up 19 per cent) at 31.5 billion CFA francs. Since starting operations at the beginning of the 1990s, the sector has moved towards increased professionalism. The average portfolio loss rate of the decentralised financial systems in Burkina Faso has improved over the last five years, reaching 5 per cent in 2005, down from 12.5 per cent in 1999. In 2006, the Banque Régionale de Solidarité Burkina expanded, having been created at the end of 2005 with the aim of financing individual projects and of micro-enterprises. The government aims to reinforce supervision of the financial sector in co-operation with the monetary authorities, and an overall strategic plan to improve the organisation of the microfinance sector is also expected. Elsewhere in the field of finance, savings taxes will be re-examined both to adapt to the regional context and to promote their mobilisation to finance SMEs.

a new approach to water and established a distinction between urban centres, semi-urban zones and rural areas. The water and sanitation sectors are faced with several operational and infrastructural constraints. The government’s first priority is to pursue the Millennium Development Goal (MDG) to reduce the number of people without access to clean water. Several strategic actions have been put in place. These include: i) developing sanitation policies, especially in rural and semi-urban areas; ii) developing decentralised governance capacities; and finally, iii) ensuring proper co-ordination in the two sectors. The relationship between the water sector and the poverty reduction strategy remains weak. Funds are limited and the sanitation system is not included in the programme. Still, in May 2005, a roadmap for the MDG in the sectors of drinking water and sanitation was adopted for 2007-09. With the aim of making the national strategy more effective, the following measures were decided upon: i) improving co-ordination in the sector; ii) increasing transparency and financial flows; and iii) aligning national budget objectives with those of the sector.

Burkina Faso has scant renewable water supplies: only 906 m3 per inhabitant per year in the 2003-07 period.

In Burkina Faso, the water management department, the DGRE (Direction de Gestion des Ressources en Eaux) and the national water and sanitation office, the ONEA (Office National de l’Eau et de l’Assainissement) share responsibility for infrastructure and water and sanitation projects. In urban zones, the ONEA is putting in place a set of strategies for managing water, while in rural areas, the Charte Générale des Collectivités Territoriales (CGCT) is investing local communities with responsibility for managing water and sanitation until 2009. Given the low level of decentralisation in Burkina Faso and the lack of technical and legislative mechanisms for transferring responsibilities, the execution of this policy remains unclear. The project is still being developed and has set out some ambitious targets both for urban and rural zones. Only the two largest cities (Ouagadougou and Bobo-Dioulasso) have adopted sanitation plans.

In March 2003, the government adopted an action plan for drinking water and sanitation. This laid out

The ONEA has more than 60 000 subscribers. In February 2003, it began increasing its rates. Households

Since 2004, the privatisation process has been remarkably slow because of administrative delays, trade union opposition, and, above all, the weak capacity of the government to implement reforms. Access to Drinking Water and Sanitation

African Economic Outlook

© AfDB/OECD 2007

Burkina Faso

pay 188 CFA francs per m3 of water, instead of 180 CFA francs, for consumption between 0 and 6m3. These prices are progressive depending on the level of consumption. During the last decade, performance in terms of access to clean water and sanitation has been highly contrasted in urban and rural areas of Burkina Faso. Coverage rates are inadequate despite the efforts devoted to the subject over the past several years. In urban areas, the proportion of the population with access to running water rose from 66.3 per cent in 1993/94 to 88.5 per cent in 2003. In rural areas, however, the rate fell from 4.8 per cent to 4 per cent over the same period. Similarly, the proportion of the rural population with access to well water fell sharply: it was estimated at 78.4 per cent in 2003, compared to 90 per cent in 1993 and 92 per cent in 1999. In 2003, 67.3 per cent of urban households were located 15 minutes or less from their most frequently used water source, while in rural areas this proportion dropped to 49 per cent. The significant increase recorded between 1992/3 and 2003 (from 43 per cent to 49 per cent) should, however, be noted. The increase in the population using surface water (groundwater and rivers) as a source of domestic water supply should also be noted, having risen from 4.8 per cent to 17.4 per cent between 1993 and 2003. Improvements in sanitation have also taken place. In urban areas, the proportion of households with access to a flush toilet rose from 4.7 per cent to 9.9 per cent between 1992/3 and 2003. An overwhelming proportion of the urban population (83.3 per cent) continues, however, to use latrines. In rural areas, flush toilets are practically non-existent: 0.4 per cent in 2003. The use of latrines is stable (14 per cent), and a large part of the population thus has no access to toilets of any description. This situation increases the spread of infectious disease in the population, exacerbating poverty. It also increases mortality and morbidity rates. In 2005, 8.03 million (62.5 per cent) inhabitants of Burkina Faso had access to drinking water and only 1.4 million (11 per cent) to sanitation. With the various © AfDB/OECD 2007

investments committed to the sector by the ONEA, the MDG of reducing by half the proportion of the population without access to clean water could be reached for urban residents: 5.83 million people should thus have access to drinking water, and 7.88 million to sanitation. In contrast, the situation in rural areas is alarming. The laudable developments in terms of access to toilets in the urban milieu were not reproduced in the countryside. If corrective measures are not put in place quickly, the gap will be maintained or even widen further. The estimated cost of meeting the MDG sanitation goal is $116.25 million per year for the nine coming years, with $88 million a year for the water sector and $28.25 million a year for sanitation. The proportion of the budget devoted to the sector is very low. Total public investment is estimated at $17.76 million per year: $13.3 million for water and $3.96 million a year for sanitation. 157 In urban areas, the ONEA has invested around $30 million a year over the past nine years, but 70 per cent of this investment is allocated to the Ziga project, a project to dam 200 million m3 of water managed by the ONEA and primarily designed to improve the inhabitants of Ouagadougou’s access to a reliable and plentiful supply of clean water. Additional funds remain necessary for the water and sanitation sectors, as well as for urgent improvements to the sanitation system and management of waste water. The drinkinge water and sanitation sectors additionally require a management-assessment programme. This was recommended by the MDG roadmap. In February 2006, with the technical and financial support of foreign partners (International Development Agency, AFD, European Union, Swiss and Danish co-operation, and Arab financial institutions), the African Development Bank financed a complete assessment of sanitation and clean water resources in semi-urban and rural areas. This assessment should permit the implementation of a national water and sanitation programme valid until 2015. Overall the great challenge confronting the government in these African Economic Outlook

Burkina Faso

sectors is to improve its capacity to implement the various national strategies.

Political Context and Human Development Resources

158

Blaise Compaoré, president of Burkina Faso, has been in power since 1987. In 2005, he was re-elected in the first round with 80.3 per cent of the vote. In February 2006, the prime minister, Paramanga Ernest Yonli, who has been in office since 2000, was reappointed. Despite the social stability that exists in Burkina Faso, a disturbing social, political and military crisis rocked the country at the end of 2006. The altercation pitted soldiers against police and ended with the death of five people and the destruction of many public resources (equipment and buildings). These incidents led to the cancelling of the WAEMU and ECOWAS (Economic Community of West African States) summits scheduled for 22 and 23 December 2006 in Ouagadougou. In January 2007, the ECOWAS summit appointed Compaoré president of the organisation. The country has made progress in the fight against poverty. The incidence of poverty fell from 46.5 per cent in 2003 to 43.7 per cent in 2005 and it is hoped that it will contract to 43.3 per cent in 2007 thanks to economic growth. Similarly, the incidence of rural poverty should drop from 50.4 per cent in 2003 to 48.1 per cent in 2007 and the incidence of urban poverty should fall from 21.5 per cent in 2003 to 16.6 per cent in 2007. With the aim of attaining poverty reduction goals, a strategy has been in place since 2000. Public bodies have been elaborating several initiatives to promote development in order to: i) reduce poverty and vulnerability, as well as disparities in the population; ii) put in place macroeconomic policies to promote better and sustainable growth; iii) accelerate the decentralisation process and modernisation of the public administration; and iv) engage the country in a process of regional integration and globalisation. In November 2002, the government adopted a policy aimed at improving the business environment. An action plan was subsequently introduced in 2004, African Economic Outlook

and two important measures were taken: the dialogue between the government and the private sector was strengthened and mechanisms for private sector development were reinforced. The government and private sector actors discussed their problems during a conference in June 2004 and put forward potential solutions. A series of projects and programmes are under way: i) an arbitration structure; ii) a business formalities centre; iii) a support project to encourage competition and business development; iv) a programme to strengthen the capacities of businesses in Burkina Faso; v) infrastructure projects: a road freight and passenger terminal at Bobo; expanding the terminal at Ouagadougou, renewing the refrigerated abattoirs at Ouagadougou and Bobo; vi) simplifying investment formalities by creating a one-stop bureau and introducing an attractive framework for conducting business; and vii) lightening taxes and complying with regional reforms relating to business law, the organisation of financial and insurance markets and to a harmonised accounting system. Burkina Faso has the highest illiteracy rate in the world: 87.2 per cent of the population in 2003, more than double the average for sub-Saharan Africa. While measures have been taken to improve basic education indices, the results remain poor. Between 1996 and 2003, the net schooling rate went from 32.6 per cent to 39.9 per cent. However, great disparities persist between boys and girls (44.6 per cent and 35 per cent respectively in 2003) on the one hand, and between urban and rural areas, on the other. Progress has been constant since 1996, but the gap between boys and girls, on one hand, and between the rural and urban milieux, on the other, remain very large. A set of measures, including the school initiative, Bright, under the Millennium Challenge Account (MCA) and the Ten-year Basic Education Development Plan (TBEDP) seek to correct both inequalities between cities and the country and between boys and girls. The Bright school initiative costs around 6 billion CFA francs and is financed by the MCA through the United States Agency for International Aid (USAID). It is implemented by the Bright consortium of national and international non governmental organisations. © AfDB/OECD 2007

Burkina Faso

The TBEDP is used as a reference framework for the interventions of all actors in the basic education system for the 2000-09 period. Its broad aims are fourfold: i) increase supply of basic education and reduce disparities between types, geographic regions and the socioeconomic situation of pupils; ii) improve the quality, relevance and effectiveness of basic education and develop the consistency and integration between various levels and education methods; iii) promote literacy as well as new types of alternative education; iv) develop capacities to guide, manage and evaluate the central and decentralised structures leading the sector, as well as capabilities to co-ordinate foreign assistance. The overall cost of the plan is estimated at 235 billion CFA francs. According to the UNDP Human Development Report 2006, the net rates of primary schooling rose from 29 per cent in 1991 to 40 per cent in 2004. The net rate of secondary schooling was stable at 10 per cent in 2004. As a result, international donors introduced a strategic plan for the education sector with the aim of bringing schooling rates up to 70 per cent for primary schooling and 25 per cent for secondary schooling by 2010. Between 1998/99 and 2002/03, the proportion of budget expenditure allotted to education rose from 10 per cent to 14 per cent. In July 2005, a $12.9 million Millennium Challenge Account fund was invested to encourage female education. A retrospective evaluation of the nutritional situation in Burkina Faso was carried out from 11 to 22 September 2006 under a joint government-UN mission to assess and plan UN interventions in the fight against malnutrition. Mortality figures are alarming with very high infant and juvenile mortality, respectively at 81 per 1 000 and 184 per 1 000 in 2003 (Demographic and Health Survey, DHS 2003). In fact, almost 50 000 children under the age of 12 months and more than 110 000 children under the age of five die each year, meaning almost 50 per cent of infant mortality occurs under the age of 12 months. Mortality thus remains very high despite having fallen since 1998. It is estimated that 50 per cent of deaths in children under the age of five are due to malnutrition. © AfDB/OECD 2007

Malnutrition, including micro-nutritional deficiency, is severe, beyond the critical threshold of the World Health Organization (WHO). Thus, 19 per cent of children, or more than 450 000, under the age of five suffer from acute malnutrition (emaciation), while 39 per cent or nearly 925 000 children, have chronic malnutrition (growth retardation), and 38 per cent are underweight for their age, representing more than 905 000 children. Finally, 21 per cent of women of reproductive age are malnourished, and 15 per cent of newborns are underweight at birth. A further study of nutrition in the country revealed that deficiencies in vitamin A, iron and iodine pose a great problem for public health. Anaemia affects 91 per cent of children aged between 6 and 59 months, 68 per cent of pregnant women and 54 per cent of women of reproductive age. Despite a national policy of salt iodisation being in place since 1996, as well as obligatory sale of iodised salt, only 48 per cent of households have access to salt that is sufficiently iodised. Vitamin A deficiency is endemic is some areas, 13 per cent of pregnant women suffer from night blindness, and use of supplements remains low (DHS, 2003). Malnutrition appears very early in the youngest children, particularly those aged between six and 23 months. Most worrying is that the situation has deteriorated over the last 10 years, despite an improvement in some health indicators and lower mortality. This is due to inadequate diet (in terms of quantity and/or quality), and recurrence of illnesses. These factors are themselves affected by other underlying factors such as food insecurity in households, problems accessing health services, lack of hygiene and sanitation, lack of treatment for mothers and children, and deeper causes such as poor education of mothers, household poverty or the status of women. Illnesses such as malaria and schistosomiasis remain endemic. Furthermore, each year during the Harmattan wind season, from January to April, meningitis is pervasive and kills between 1 000 and 1 500 people. Weaknesses and poor organisation in the health system make it difficult to organise effective immunisation or vaccination campaigns. African Economic Outlook

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The problem of avian flu from now on presents a fairly acute challenge. In April 2006, the health authorities announced that an outbreak of avian flu had been detected at Gampela, a town about 15 kilometres from the capital, Ouagadougou. Measures were been taken to inform and protect local people. Imports of poultry and poultry products from affected countries were banned. An inter-ministerial ruling was promulgated involving a number of ministries so that

the fight against avian flu would become national in scale. Finally, measures were introduced to raise awareness among various groups, particularly among poultry farmers. In October 2006, a quick test on laying hens came out positive in Sector 30 of Ouagadougou and led to the implementation of phytosanitary policing measures (slaughter, disinfection, medical monitoring of personnel and promises of compensation procedures).

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© AfDB/OECD 2007

Cameroon

Yaoundé

key figures • • • • •

Land area, thousands of km2 475 Population, thousands (2006) 16 601 GDP per capita, $ PPP valuation (2006) 2 848 Life expectancy (2006) 46.2 Illiteracy rate (2006) 32.1

Cameroon

T

CAMEROON ECONOMY appeared to regain momentum in 2006 after its sluggish performance in 2005. Real GDP growth rose to 3.8 per cent in 2006 from 2.8 per cent recorded in 2005, and the economic upturn is expected to continue. Real GDP growth is projected to reach 4 and 4.1 per cent in 2007 and 2008 respectively, with domestic investment rising due to increased confidence in the economy following the government’s recent reforms, which culminated in Cameroon reaching the completion point of the Heavily Indebted Poor Countries (HIPC) process in 2006. HE

Although the recent reforms have begun to yield positive dividends, especially in the management of public finances, with continuing sound monetary and financial indicators, much remains to be done. The

continued very high dependence on oil revenues does not augur well for sustained improvement in the government’s finances or in the external accounts. The pace of structural reforms remains slow and there are many gaps in the effort to improve High dependence on oil governance. The structural deficit revenues threatens in electricity remains a major sustainability in growth bottleneck that hinders economic and development, while development. Limited access to governance reforms safe drinking water and sanitation are too slow. in the country constitutes an affront to human dignity. In the area of governance, Cameroon enjoys relative political stability, but it needs to address the rampant abuse of human rights and the perceived high level of corruption. 163

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: IMF and Ministry of Finance and Economy data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/063478386420

© AfDB/OECD 2007

African Economic Outlook

Cameroon

Recent Economic Developments Following its sluggish economic performance in 2005, the Cameroon economy appeared to regain momentum in 2006 when real GDP growth rose to an estimated 3.8 per cent from the 2.8 per cent recorded in 2005. The improved economic performance in 2006 was led by the petroleum sector and supported by gains from recent reforms. It is anticipated that the upturn will continue in 2007 and 2008, with projected growth rates of 4 and 4.1 per cent respectively. These stronger growth rates are expected to reflect higher levels of domestic investment as the economic reforms take root.

164

The growth performance in 2006 was broad-based, observed across most sectors of the economy. In particular, there was a substantial rise in mining activity as well as major improvements in manufacturing and the telecommunications sector. Mining activity, which accounted for a 9 per cent share in total GDP in 2005, picked up further in 2006, driven largely by increased crude oil production and the high price of crude on the international market. Oil output rose to an estimated average of 94 386 barrels per day (b/d) in 2006 from the average 82 337 b/d in 2005. Nonetheless, Cameroon’s oil output remained well below the peak of 186 000 b/d attained in 1985. Since 1985, Cameroon has not seen any significant discoveries, and production from the maturing oil fields has continued to stagnate. Recently, the government has shown a commitment to reviving the oil industry by attracting oil companies to develop marginal and deep-water offshore fields. To this end, the national oil company (Société national d’hydrocarbures – SNH) signed two production-sharing agreements in 2005 and 2006 with Total E&P to explore for oil in the Dissoni and Bomana offshore blocks in the Rio del Rey basin. Cameroon has intensified its efforts in exploring for natural gas exploration as well as in crude oil production. In addition, the country’s vast mineral deposits offer hope of continuing mining activity in the country for some time to come, when the oil deposits run out. A fairly large gas field has been discovered at Sanaga, which could supply the planned African Economic Outlook

thermal power plant at Kribi. In 2006, SNH signed a production-sharing agreement with the French-based firm Perenco to develop the South Sanaga gas field. As for minerals, two bauxite exploration permits were issued in 2004 to the Hydromine Company in the Minim Martap and Ngaoundal areas. These vast deposits could supply the Alucam smelter, especially after it has increased its capacity, and could also be exported. Furthermore, plans are far advanced for the Geovic Company to begin cobalt mining in some of the forest areas of the country. These efforts to develop mineral extraction are not commensurate, however, with the extent of the country’s mineral wealth. Indeed, exploitation has remained minimal except for the small-scale, clandestine mining of gold and diamonds that occurs in some eastern parts of the country. The situation appeared to change in 2006, when the Australian firm Sundance Resources acquired Cam Iron, which owns an exploration permit for an 875 square kilometre prospect in the southeastern MBalam area. Also in 2006, Geovic Cameroon, the local subsidiary of a US-based firm, completed a pre-feasibility study on the extraction of cobalt and nickel. It is expected that about 4 000 tonnes of cobalt and 3 000 tonnes of nickel will be produced per year as from 2007. Nevertheless, Cameroon needs to do more to increase mineral extraction, at least of its known deposits, which include rutile (titanium ore), of which there are 3 million tonnes of reserves in the Akonolinga area; bauxite, of which there are an estimated 1 billion tonnes of reserves; and iron ore, of which there are an estimated 300 million tonnes of deposits, particularly in Kribi. It is ironic that in spite of such known deposits the government has not revised the mining law it passed in 2001 to replace the outdated 1964 mining code. Cameroon’s manufacturing sector is more diversified than those of its neighbours. In 2005, manufacturing activity contributed about 18.9 per cent of total GDP. The overall output of the sector increased by 5.1 per cent in 2006, as against 4.7 per cent in 2005. However, the various components of manufacturing displayed uneven performance. Aluminium output increased by 6.2 per cent, with production of 92 000 tonnes, buoyed by the continuing high international price of the © AfDB/OECD 2007

Cameroon

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on Ministry of Finance and Economy data. http://dx.doi.org/10.1787/283154630854

commodity. The agro-food sector, badly hit by a 4 per cent decline in household consumption in 2005, rose by an estimated 3.5 per cent in 2006. Beverages, in contrast, fell by 9 per cent in 2006, prolonging the 12.5 per cent decline recorded in 2005. The growth of the manufacturing sector, though relatively robust in 2006, continued to be limited by structural problems, particularly inadequate energy supply, aggressive competition from Asia and smuggling, which gives an unfair advantage to informal activity. Electricity remains expensive in Cameroon and is always in short supply, reflecting the country’s inability to exploit its huge hydroelectric potential. Cameroon’s hydro resources are the second richest in sub-Saharan Africa (after the Democratic Republic of Congo), but scarcely 1 per cent of this potential has been harnessed. Hydroelectric power accounts for about 77 per cent of the country’s installed generating capacity of 933 MW, but the recent depletion of water levels in the main dams, along with the poor condition of power plants and transmission equipment, have cut capacity by about onethird. Thus, power supply remains well short of demand, currently estimated at 1 000 MW. Cameroon has a rich, varied agricultural sector that in 2005 accounted for about 20.5 per cent of GDP. In 2006, the sector expanded by 4.8 per cent, up from 4.3 per cent in 2005. The expansion in agricultural production in 2006 was experienced across all the subsectors. The cash crops – cocoa and coffee – have seen increased production in recent years following the recovery in their international prices, which seems to have enticed farmers back into production of these © AfDB/OECD 2007

crops. In 2005/06, cocoa output rose to 198 000 tonnes, up from 116 000 tonnes in 1999/2000. Coffee production rose to 68 000 tonnes in 2005/06 from 65 000 tonnes recorded in the previous season. Similarly, cotton production has continued to increase despite the recent drop in the international price of the commodity. Cotton output rose slightly from 273 000 tonnes in 2004/05 to 274 500 in 2005/06. Cotton producers in Cameroon have been somewhat cushioned from the international price fall by the policy of the cotton development agency (Société de Développement du Coton – Sodecoton) of ring-fencing farm-gate prices from the volatility of world prices. Cameroon’s cash crop production, particularly cocoa and coffee, has been unable to reach its full potential owing to a number of constraints – primarily the ageing of plantations, the high costs of imported inputs, the poor state of rural infrastructure and limited credit facilities – all of which have affected productivity and reduced quality. The government is pursuing plans to boost output by increasing the area under cultivation, introducing higher-yielding strains and providing more technical, financial and institutional support to farmers. In 2006, the government set up a fund to finance the development of the coffee sector. In addition, the cocoa development agency (Société de Développement du cacao – Sodecao) has been restructured and placed under new management. Food crop production increased in 2006, benefiting from good climatic conditions. The thriving subregional market for Cameroon’s food crops – particularly tubers, plantain, maize, sorghum and millet in Nigeria, African Economic Outlook

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Cameroon

Gabon and Equatorial Guinea – continues to serve as a demand pull for increased production. The timber industry remains an important component of the economy, contributing about 13 per cent of exports in 2006. The sector’s growth rate rose from only 2.1 per cent in 2005 to 3.8 per cent in 2006. While some forestry firms lost their licences in 2005 as part of the government’s re-organisation of the sector, new forestry concessions granted in late 2005 contributed to the upturn in 2006. Prospects for the industry remain bright in 2007 and beyond as the opening up of new areas for mining, particularly forested areas for cobalt mining, as well as the planned opening of the Lom Pangar dam in 2009, could also boost timber extraction.

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The services sector expanded by an estimated 4.9 per cent in 2006, following the 4.7 per cent growth rate recorded in 2005. Services contributed about 45 per cent of GDP in 2005. In 2006, telecommunications recorded a 52.5 per cent increase in subscribers, especially for mobile phones (up 54.6 per cent), partly as a result of extended coverage by mobile phone operators and Camtel. However, the telecommunications infrastructure in Cameroon is still not good enough to support the kind of quality call centres seen in countries such as Senegal. Ongoing projects to modernise telecommunications, including the fibre-optic network along the Chad-Cameroon pipeline, are investments in the right direction.

Tourism is important in Cameroon, but the country has yet to fulfil its enormous potential by exploiting to the full its nature reserves, spectacular rock pinnacles and attractive beaches. Although tourism expanded by an estimated 6 per cent in 2006 (as against 4.2 per cent in 2005), with the number of visitors rising to 467 500 (from 411 000 in 2005), the sector continued to be hampered by expensive airfares, cumbersome procedures for obtaining visas, and inadequate and underdeveloped tourist infrastructure. The government appears to be making efforts to enhance Cameroon’s tourist attractions. Since 2005, it has opened tourist promotion offices in key foreign markets. In addition, a national tourism council has been established to oversee the promotion of the industry, and the government is considering issuing tourist visas on arrival at airports. These measures, however, need to be supplemented by efforts to tackle the perceived high crime in the country, which deters visitors on safety grounds. Cameroon’s economic growth is traditionally driven by domestic demand, although exports remain a significant driver. In 2006, slower growth in domestic consumption was a drag on growth. This was offset by higher investment, however, especially from the public sector. It is anticipated that high investment will continue to propel growth in 2007 and 2008. The reaching of the HIPC completion point in 2006 is expected to boost public investment and consequently private investment in 2007; projects already in the pipeline include the construction of the Lom Pangar

Table 1 - Demand Composition 1998

2005

Percentage of GDP (current prices)

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

15.0 3.9 11.2

19.4 4.9 14.5

7.5 15.0 5.0

6.9 12.0 5.0

6.4 10.0 5.0

Consumption Public Private

81.2 9.1 72.1

81.7 9.9 71.7

3.0 7.9 2.4

4.0 6.3 3.7

4.1 4.0 4.1

3.7 21.4 -17.7

-1.0 20.4 -21.4

3.4 4.4

2.2 4.5

2.0 4.7

External sector Exports Imports

Source: IMF and National Institute of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/337472506108

African Economic Outlook

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Cameroon

dam (between 2007 and 2010) and of a $900 million hydroelectric power plant at Nachtigal. Other major investments expected include the building of an 86 billion CFA francs thermal power plant at Kribi, a cobalt processing plant (by Geovic), a new cement plant at Limbe and major road projects.

Macroeconomic Policies Fiscal Policy Cameroon is implementing a new Poverty Reduction and Growth Facility (PRGF) programme with the IMF for the 2006-08 period, aimed at strengthening its fiscal position, preserving macroeconomic stability, promoting investment and boosting poverty reduction. The main challenges of Cameroon’s public finances have been to increase non-oil revenue to compensate for the expected gradual decline in oil production and to control recurrent expenditure. In 2006, the government made great efforts to improve its fiscal performance, especially as regards monitoring spending and transparency of public accounts. In a novel move, the 2006 budget was presented to parliament before the start of the budget session so that it could be thoroughly examined. In addition, the government drew up plans to implement the Extractive Industries Transparency Initiative (EITI) and gave a commitment not to use surplus oil revenue to finance recurrent spending. Further, a determined effort was made to adhere to the integrated budget management system introduced in 2005, which provides running accounts, including monthly updates on budget execution that compare commitments and disbursements. Efforts were also made to improve execution of capital spending through a medium-term expenditure framework (MTEF) in construction, health, education and rural affairs. Moreover, in 2006 the government began to incorporate HIPC spending into the budget to allow proper supervision. The prior arrangement, whereby the spending of HIPC funds was agreed after approval of the budget, was considered to slow down disbursement of HIPC funds. Consequently, it was agreed that specified © AfDB/OECD 2007

projects would be HIPC-funded in 2005, and these were put in the national budget for 2006. In 2006, improvements in the government’s fiscal performance were reflected in an increase in the overall fiscal surplus from 3.6 per cent of GDP in 2005 to 4 per cent in 2006. Although the budget is projected to remain in surplus, the balance will fall to 2.9 per cent in 2007 and to 2.6 per cent in 2008 owing to higher spending (especially capital spending) and a slowdown in oil revenues. In 2006, the government’s total revenue increased to 18.8 per cent of GDP (18.1 per cent in the preceding year). The improved performance in 2006 was the result of increases in oil revenues and grants. Oil revenue rose as a result of increased production and higher prices on the international market. Non-oil revenue remained stable as a percentage of GDP after tax increases and improvement in the tax and customs administrations. The government implemented a fourfold increase in windscreen licences in 2006, and the introduction of a value-added tax (VAT) on mineral water and non-alcoholic beverages took effect during the year as well. In addition, the government took measures to reduce tax evasion in the forestry sector. On the expenditure side, although the government’s programme in 2006 was expansionary, expenditure was held to the target levels through prudent management. Total government expenditure increased to 14.8 per cent of GDP in 2006 (up from 14.6 per cent in 2005). The spending increase in 2006 was due largely to higher capital expenditure, with continued reconstruction of the bridge over the Mungo river and the initiation of a national programme of road rehabilitation. Moreover, spending by local authorities was boosted in 2006 following the government’s reversal of its policy of retaining a proportion of municipal revenues at the central level. Furthermore, the public sector wage bill was held in check as a result of continuing efforts to remove “ghost workers” from the public payroll. In addition, the substantial debt writeoff granted under the enhanced HIPC initiative and the Multilateral Debt Reduction Initiative (MDRI) exerted downward pressure on debt service obligations. African Economic Outlook

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Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Grants

14.9 9.7 0.0

16.5 10.0 0.7

15.5 9.3 0.2

18.1 10.4 0.5

18.8 10.3 0.6

18.1 10.3 0.4

17.9 10.3 0.3

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

13.1 11.1 8.8 4.6 2.3 1.9

15.4 13.3 11.0 5.3 2.3 2.1

16.0 14.0 12.1 5.4 2.0 2.0

14.6 12.0 10.5 4.7 1.5 2.3

14.8 12.2 10.9 4.7 1.4 2.6

15.2 12.4 11.2 4.7 1.2 2.8

15.3 12.4 11.3 4.7 1.1 2.9

4.1 1.8

3.4 1.1

1.5 -0.5

5.0 3.6

5.4 4.0

4.1 2.9

3.7 2.6

Primary balance Overall balance

a. Only major items are reported. Source: IMF data; estimates (e) and projections (p) based on authors’ calculations.

168

Despite the government’s efforts to exert fiscal control, the country’s public finances have persistent structural weaknesses. They remain very dependent on oil revenue (28 per cent of total revenue, excluding grants, in 2006) at a time of great uncertainty over the continuation of production increases. The domestic effort to fund the budget through taxation is rather weak because the tax base has remained narrow, given the large informal sector. The budget outcome may suffer further from reduced revenue collection, as the Economic Partnership Agreements (EPAs) with the European Union (EU) in 2008 will reduce customs revenue. A particular problem of Cameroon’s fiscal system is the huge proportion of current expenditure (80 per cent of total government spending), with the wage bill alone accounting for over 30 per cent of the total in 2006 despite the effort to purge “ghost names”. Moreover, capital expenditure (only 20 per cent of total spending) is never entirely disbursed, reflecting major absorption problems that could hamper implementation of future investment plans. Monetary Policy The monetary policy of Cameroon is determined by the regional central bank, the Bank of Central African States (BEAC). The main monetary policy objectives of the BEAC are to control inflation and maintain the stability of the CFA franc, which is pegged to the euro. Accordingly, the BEAC’s policies are heavily African Economic Outlook

http://dx.doi.org/10.1787/475751853845

influenced by those of the European Central Bank (ECB), with the BEAC’s rate broadly reflecting movements in the ECB’s main intervention rate. In 2006, monetary policy was more accommodating of the expanding economic activity. By end-September 2006, the money supply (M2) had risen by about 12 per cent, compared with a rise of only 2 per cent for the same period in 2005. Moreover, interest rates followed a downward path. In March 2006, the BEAC reduced its discount rate by 25 basis points to 5.25 per cent. Short-term rates in the financial system followed suit, with the average lending rate falling from 18 per cent in 2005 to 15 per cent in 2006. The average deposit rate also fell, but very slightly from 5 per cent in 2005 to 4.5 per cent in 2006. Inflation rose from an average of 2 per cent in 2005 to an estimated average of 4.5 per cent in 2006, mostly as a result of the increase in taxes, particularly VAT, and the rise in fuel prices. Cameroon does no oil refining, so the world price of refined oil was partly (and with a delay) passed on to the pump price, which rose 16 CFA francs in August 2005, then 4 CFA francs a month between October and December 2005, and then by a further 12 CFA francs in mid-2006. These prices hikes, in turn, significantly pushed up the price of transport. The prices of consumables, including tobacco and beverages, rose also as a result of tax increases. However, inflation is expected to settle back © AfDB/OECD 2007

Cameroon

to about 2 per cent in 2007 and 2008 as prudence in the government’s fiscal programme and sound monetary policies take hold.

in 2006. China has also emerged as a major supplier of imports, although it is not yet a major buyer of Cameroonian goods.

External Position

Developments in Cameroon’s current account balance largely reflect fluctuations in merchandise trade, which in turn is driven by oil export earnings. Cameroon’s current account has traditionally been in deficit, as weaker trade balances have been compounded by persistent deficits on the services and income accounts owing to heavy spending on shipping, insurance, foreign travel and other services.

Cameroon stands to gain considerably from the creation of an integrated regional market as part of the future regional EPA with the EU. The country is a major pillar in the CFA franc zone, accounting for over 50 per cent of the wealth in the CEMAC countries. The port of Douala is the main shipping port for countries in the sub-region. The country’s location, its relatively large economic clout and the relative diversification of its productive capacity all give it growth potential in a context where regional trade can only expand. Currently, however, Cameroon trades very little with the other CEMAC countries. The CEMAC accounted for only 4 per cent of its exports and 3.5 per cent of its imports in 2006, although this should not be expected to hinder negotiations for an EPA between the EU and CEMAC. The second (“regional”) phase of these talks started in 2006, and a full draft agreement is expected by end-2007. Cameroon’s main trading partners remain the EU countries, which accounted for about 58 per cent of exports and 45 per cent of imports

In 2006, the trade account showed a relatively strong surplus equivalent to 3.1 per cent of GDP, up from 1.5 per cent of GDP in 2005. The strong performance in 2006 was due to the high international oil price and rising oil production, as well as stronger performance of non-oil exports. The trade surplus in 2006 thus rose to an estimated $1.2 billion from $215 million in 2005, and as a result, the current account balance moved out of its persistent deficit to register a small surplus equivalent to 0.3 per cent of GDP in 2006 – the first time in about a decade. The trade surplus is forecast to decline in 2007 and 2008 on account of a more than proportionate fall in exports against imports, and consequently the current account balance should return into deficit.

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

3.7 18.7 15.0 -2.2 -4.8 1.1

1.7 17.3 15.6 -1.4 -3.9 1.5

0.0 16.7 16.7 -1.8 -2.6 0.9

1.5 18.2 16.7 -1.5 -2.8 1.3

3.1 19.9 16.8 -1.4 -2.5 1.2

2.3 18.7 16.4 -2.2 -2.2 1.2

1.8 18.1 16.3 -1.9 -1.6 1.0

Current account balance

-2.1

-2.0

-3.4

-1.5

0.3

-1.0

-0.7

Source: IMF data estimates (e); and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/605135178485

Cameroon had accumulated substantial external debt, estimated in 2005 at $9.5 billion, or 61.5 per cent of GDP. As a result of the country reaching the HIPC completion point in May 2006, the overall debt stock fell to $3.7 billion in that year. The country’s debt © AfDB/OECD 2007

burden, as measured by the debt service ratio, is also estimated to have fallen from 12.4 per cent in 2005 to 7.7 per cent in 2006. Since reaching the HIPC completion point, Cameroon has benefited from debt relief amounting to $1.3 billion and reduced its debt African Economic Outlook

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Cameroon

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

170

Source: IMF. http://dx.doi.org/10.1787/543617210040

service obligations by about $4.9 billion in nominal terms. In addition, Cameroon has become eligible for debt relief under the MDRI, an estimated amount of $1.1 billion. As part of the HIPC debt write-off, in June 2006 Cameroon reached an agreement with the Paris Club of creditors to reduce bilateral debt by a further $921 million. In addition, the Paris Club creditors have committed themselves to further bilateral debt relief of $2.6 billion.

Structural Issues

of the biggest drags on the growth of the otherwise vigorous formal private sector. The competitiveness of business is limited by the high cost of production factors and the poor business environment. Administrative delays and bureaucratic bottlenecks force entrepreneurs who want to start a business to go through 12 steps that require an average of 37 days in total to complete. Moreover, contracts are extremely difficult to enforce: 58 procedures are needed to enforce a contract, requiring an average of 800 days at a total cost of 36 per cent of the value of the claim.

Recent Developments Although Cameroon has made progress in structural reforms under the PRGF – including improving public financial management, strengthening the judiciary and enhancing transparency in the petroleum sector – much remains to be done, especially in the areas of improving the business climate, private sector development and privatisation. The poor business climate is probably one African Economic Outlook

The private sector and the government in Cameroon seem to have developed mutual mistrust, which the government is now trying to change. In 2006, the government continued with efforts to re-establish dialogue with the private sector, including expansion of the 2005 inter-ministerial committee to include the private sector, a meeting with all the country’s main business operators in January 2006 and consultation © AfDB/OECD 2007

Cameroon

of the private sector in drawing up the 2006 national budget. Nonetheless, increased private sector participation in the Cameroonian economy will also depend to the government’s ability to reduce the high levels of crime and corruption, which add to the cost of doing business in the country. Privatisation did not advance much in 2006, but as part of the PRGF the government has committed itself to revamping the process. The major state firms still to be divested include the national water company SNEC, Camtel, Sodecoton, Camair and the CDC agro-industrial complex. Concerning the privatisation of Camair, the winner of the tender process was selected in June 2006, but the privatisation deal is yet to be finalised. According to the government’s plans, SNEC will be disposed of through a leasing arrangement; takers were sought at a meeting of investors at end-2005, but no firm offers have so far been forthcoming. Camtel was put to tender in mid-2006 with 51 per cent of its shares on offer. In order to attract investors, Camtel’s mobile phone licence will be divested at the same time as its fixed-line business. The future of Sodecoton remains very unclear, in view of its difficulties stemming from very low world cotton prices, but talks with the French firm Dagris are continuing. Privatisation of the CDC is set for 2007. Within the financial sector, the banking sector has become quite solid after the restructuring that transferred supervision of the sector to the Banking Commission of Central Africa (COBAC). The banking system comprises ten commercial banks. The loan recovery rate of the sector has improved significantly to about 139 per cent in June 2006, and six of the banks had liquidity ratios in excess of 200 per cent in 2006. Prudential ratios are rising steadily, and almost all the banks meet the six key ratios set by the COBAC. The entire sector, however, is dominated by just three banks, which hold over two-thirds of all loans and deposits – a situation that undermines competition. Furthermore, despite the relative soundness of the sector, the rate of financial intermediation in the country is rather low. Fewer than 10 per cent of households have bank accounts, and large areas of the economy still © AfDB/OECD 2007

lack access to loans. In addition, there are regular complaints from bank customers about high charges, reflecting the lack of active competition in the sector. The World Bank is currently helping BEAC to improve the efficiency and security of the regional payments system, with the introduction of an electronic bulk clearing system and a real-time gross settlement mechanism for the instant settlement of transactions. Access to Drinking Water and Sanitation Cameroon is well-watered, with uneven distribution of rainfall from one part of the country to another. The country boasts major underground water resources spread over the country’s main water-bearing areas. In all, the country has at least 120 billion m3 of useable groundwater resources, unevenly distributed. Groundwater resources are the main source of drinking water in rural areas. A number of players are involved in the management of the water and sanitation sector. These include not only public and private structures but also civil society. The sector’s co-ordination is the responsibility of the Ministry of Water Resources and Energy (MINEE), which is in charge of designing, preparing and implementing the national policy and of co-ordinating and monitoring operations and projects concerning water and sanitation in urban and rural areas. It is also responsible for planning projects, making an inventory of water resources and helping to set water and sanitation rates. In the sanitation sub-sector, MINEE’s responsibility is limited to the management of wastewater. The Urban and Rural Land Development Mission (MAETUR), under the supervision of the Ministry of State Property and Land Affairs (MINDAF), is responsible for putting in place water supply and sanitation systems in low-cost housing estates. Other ministries with cross-cutting remits are involved in the preparation and implementation of the government’s water and sanitation policy. So-called urban communities are responsible for managing sanitation services and the use of equipment. The proportion of Cameroon’s population with access to safe water was estimated at 57.8 per cent in African Economic Outlook

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Cameroon

2005. For urban areas, the estimate was 77 per cent, while in rural areas, water supply projects have made it possible to reach a service rate of 42 per cent. Access to sanitation services is difficult for most of the population, especially the poorest who live in areas with little infrastructure. Indeed, the rate of access to adequate wastewater drainage systems is estimated at 17 per cent in urban areas and 15 per cent in rural areas. Where they do exist, such systems consist mainly of natural channels (mostly rivers) or underground outlets that are also used to evacuate household garbage, solid waste and wastewater, which stagnate and end up clogging the systems and causing floods during the rainy season.

172

Cameroon’s water and sanitation sector faces a number of institutional, technical and financial constraints. The main institutional constraint stems from the large number of sector players, leading sometimes to fragmentation and overlapping of responsibilities and poor co-ordination of their operations. The National Water Committee (CNE), established to co-ordinate activities in the water subsector, is not yet operational. Regarding urban sanitation, the following bodies are engaged in similar and uncoordinated activities: urban communities, the Ministry of Public Works, the Ministry of Urban Development and Housing (MINDUH) and some non-governmental organisations (NGOs) involved in the construction of tertiary structures. On the technical front, there are weaknesses in the management of sanitation infrastructure and services. Municipal technical departments, local contractors and consulting firms often lack the skills necessary to conduct studies and works properly, especially the design and implementation of labour-intensive works. Poor institutional and human capacity at the levels of elected officials, officers and other sector players, together with a lack of project monitoring and evaluation, also hinder the sector’s development. Lack of adequate funding for the sector is another major obstacle to its development. In the context of decentralisation, the transfer of competencies to local communities has not been accompanied by allocation African Economic Outlook

of adequate financial resources which enable them to assume these responsibilities. The government’s plan to establish a National Water and Sanitation Fund, which is expected to mobilise resources for the sector, will contribute in the long run to lifting the constraints facing the use and management of sanitation structures. Cameroon’s national water and sanitation policy incorporates the guiding principles of the millennium MDGs. The main lines of this policy are as follows: i) promoting access to drinking water for all Cameroonians by 2025; ii) promoting a demanddriven approach to the supply of water and sanitation services; iii) decentralising the planning and management of drinking water supply and sanitation services; iv) building capacity; v) redefining the role of various institutions involved in water and sanitation services with a view to greater participation on the part of the population; vi) supporting the private sector; and vii) redeploying the private sector as facilitator. The government has defined public sector guidelines for the water and sanitation sector with the primary aim of redefining the role and responsibilities of the government in the management of infrastructure and basic services, especially in rural areas. This implies replacing the supply-based approach by a demandbased approach that takes into consideration the needs of the population, especially the most underprivileged. In the short term, the government’s strategy is to be implemented through a partnership of the three leading players in urban development – local authorities in urban areas, the private sector and civil society – within the framework of the “urban contract” concept. Urban contracts are an institutional mechanism which enables the government and local authorities to express their urban planning priorities and facilitates the introduction of cross-financing. In the context of this participatory management policy, urban communities, in partnership with grassroots communities and the private sector, join forces with the population in establishing and maintaining infrastructure. Several bilateral and multilateral donors have been involved in the water and sanitation sector of Cameroon in terms of project and programme financing (see Box 1). © AfDB/OECD 2007

Cameroon

The Yaounde Sanitation Project: How the African Development Bank Group Is Making a Difference in Water and Sanitation Provision The population of Yaoundé, capital of Cameroon, has increased by 6 per cent every year since the early 1990s and stands today at nearly 1.5 million. The Survey on the Living Environment of Yaoundé’s population (CAVIE), carried out in 2002, highlights the predominance of so-called squatter areas, which cover about 62.4 per cent of the city’s area. The main rainwater drainage systems are regularly blocked by all types of solid waste. As a result, during the rainy season, floods (15 to 20 major floods annually) totally disrupt the city’s socio-economic activities and especially those of the squatter areas. Some 53 000 persons (or about 9 000 households) are subject to regular floods, and a further 243 000 persons (or around 40 000 households) to occasional floods. Thus, quality of life is very adversely affected, as the people must dwell in damp, filthy and unhygienic surroundings. In addition to the discomfort caused by these floods, their effects on health, the environment and the economy are enormous. In terms of health, not only do floods cause latrines to overflow, thus polluting drinking water wells, but they create breeding sites for mosquitoes and the waste carried by the rainwater accumulates, thereby increasing the spread of waterborne diseases. Concerning the environment, floods cause soil erosion, land subsidence and slides, and the pollution of the Akomnyanda water treatment station, which supplies Yaoundé with drinking water. As for the economy, the floods cause the destruction of houses and businesses, loss of income for traders, etc. In short, the lack of rainwater drainage in Yaoundé, where rainfall is considerable (nearly 2 000 mm a year), has a far-reaching impact on the population, most of whom already live in poverty. In order to control flooding in Yaoundé and address the difficulties inherent in its increasing filth, the government prepared a Yaoundé City Sanitation Master Plan (PDA), which was financed by the African Development Bank Group. As a follow-up, a project was conducted on the emergency phase of Yaoundé City Rainwater Drainage, consisting mainly of the re-calibration of the Mfoundi Canal and the cleaning of the collectors. An update of the project engineering designs was also financed by the African Development Bank Group. The Bank Group is also financing the entire foreign exchange cost of the Yaounde Sanitation Project. This project is to: i) contribute to rainwater drainage in Yaoundé City; ii) contribute to improving the living conditions of the city’s population; and iii) build the capacity of the sector’s stakeholders. The project comprises the development of sanitation infrastructure, capacity building and project management. Specifically, it involves a study for landscaping along the Mfoundi Canal; the establishment of a project monitoring and evaluation system; construction of a canal 4.32 kilometres long; protection and cleaning of three underground collectors, about 2.35 kilometres long; development of two maintenance roads on either side of the canal and the construction of access ramps; construction of two footbridges, a rail bridge and a road bridge; construction of four disposal structures at forks in the canal; construction of 50 containers and installation of 50 garbage bins along the canal; development of the areas around the canal (4 kilometres of paved footpaths, planting of trees and gardens, installation of 54 public benches and public lighting, construction of two parking areas of 400 square metres each and two shelters); and training Cameroonian sanitation professionals and other staff. The project is being implemented over four years, starting January 2006 and scheduled for completion in December 2009.

© AfDB/OECD 2007

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In particular, the Japanese government, the French Development Agency (AFD), the African Development Bank, the Islamic Development Bank (IDB), Belgian Technical Cooperation, German Financial Cooperation (KFW), the European Union, German Technical Cooperation (GTZ), the Canadian International Development Agency (CIDA), United Nations agencies such as the UNDP and UNICEF, NGOs and various associations. The World Bank has also been involved in major road network and sanitation projects. The AFD is involved in rural water supply projects and has also contributed funds for the rehabilitation of deteriorated sanitation and road networks. The IDB funds rural water supply projects. Belgium’s Technical Cooperation Department also finances rural water supply projects, particularly in the far north of the country, and projects to rehabilitate and extend water and rainwater drainage systems in Maroua. In addition to rural water supply, KFW has financed the development of water and sanitation services in four secondary towns. It remains the responsibility of Cameroon to complement these forms of assistance with effective management of the water and sanitation systems to improve access for the population.

Political Context and Human Resources Development Cameroon has remained a politically stable country over the past 20 years, and the government is intensifying efforts to strengthen the political process and deepen the country’s democratic propensities. President Paul Biya, in office since 1982 with the full support of the ruling party, has consolidated his grip on power following his re-election for a seven-year term in October 2004. The government continues to make efforts to improve the democratic and administrative governance of the country. Following measures taken in late 2005, such as the requirement for public officials to declare their assets and property, and the establishment of an anti-corruption commission, the government made further efforts to improve governance in 2006. In particular, it announced in early 2006 the creation of an independent electoral body to replace the system African Economic Outlook

whereby the Ministry of Territorial Administration manages the electoral process. The government is yet to provide details of this new body, but even the Cameroonian opposition has already hailed the move as a significant step in the right direction. Nonetheless, Cameroon still has major hurdles to clear in improving governance. Continuing flagrant abuse of human rights constitutes an indictment of the government. The security forces are often accused of human rights abuses, including the use of excessive force, without any response or redress from the government. As reported by the International Centre for Prison Studies, Cameroon has the second-highest prison occupation rate in sub-Saharan Africa, with twothirds of the inmates awaiting trial. In addition, corruption remains the bane of socio-economic activity. Cameroon’s ranking in the Transparency International corruption perception index has continued to deteriorate, dropping from 129th in 2004 to 137th in 2005. For sub-Saharan Africa, Cameroon is a relatively high-income country in per capita terms, at $862 per capita. It nonetheless remains a poor country, where the national household survey ECAM II (2001) indicated that 40 per cent of the population lived below the poverty line (of 232 547 CFA francs per adult per year). The 2005 UN Human Development Index put Cameroon in 148th place out of 177 countries. As with most African countries, poverty in Cameroon is a rural phenomenon. In recent years, however, poverty in towns and cities has become worse due to increasing urbanisation. A shortage of housing and inadequate public facilities underlie the poverty situation in towns and cities. As mentioned above, the structural deficit of electricity remains one of the main hindrances to poverty reduction, as household access to electric power is rare and unevenly distributed among regions. The third national demographic and health survey (EDSC-III), carried out in 2004 and published in June 2005, found that 52.8 per cent of all households (and 84.5 per cent in rural areas) had no electricity, a situation that undermines individuals’ efforts to move up the economic ladder. In the education and health sectors, Cameroon has better facilities than the average sub-Saharan country, © AfDB/OECD 2007

Cameroon

but major efforts continue to be needed to address regional inequalities. The results of the ECAM-II (2001) survey indicated a fairly high and rising literacy rate of 68 per cent, up from 47 per cent in 1987. Net school attendance was 77.8 per cent at the primary level but fell very significantly to 32.8 per cent in secondary school. The even greater problems at the tertiary levels may be a disincentive for pupils who might otherwise pursue secondary education. The state universities in Cameroon are having severe problems coping with an unprecedented influx of new students. As a result of the country’s policy of granting admission to anyone who has completed secondary school, university facilities are overstretched and severely overcrowded. The government is making great efforts to improve education in Cameroon. In 2005, about 29 per cent of the national budget was earmarked for the sector, and the government recruited about 1 700 supply teachers to equip schools. Although the government’s emphasis appears to be on primary education, with the aim of reaching the MDG of universal access to primary education by 2015, it is also paying attention to higher education. In 2005, it gave approval for the opening of two new medical schools and an engineering faculty, which will go some way to alleviating the problems faced in the tertiary sector.

© AfDB/OECD 2007

The government of Cameroon attaches great importance to the health sector, and health performance is satisfactory relative to the rest of sub-Saharan Africa. In 2006, government outlays on health amounted to about 5.8 per cent of total spending. The government is making special efforts to combat Malaria and AIDS, the two main causes of death in Cameroon. In an effort to reduce the spread of malaria, the price of treated mosquito nets was reduced from 5 000 to 3 500 CFA francs in 2004, but only 20 per cent of households have at least one such net (17 per cent in the countryside). The HIV infection rate is estimated at 5.5 per cent in the 15-49 age group. The national anti-AIDS plan drawn up in 2000 has been revised for the 2006-10 period. The government has opened 19 new prevention and testing centres, and in 2006 about 55 000 people were tested, up from only 6 000 in 2003. The price of antiretroviral (ARV) drugs was brought down from 7 000 to 3 000 CFA francs per dose in 2005, and they are now given free to infected children. Infected pregnant women and newborn babies receive nevirapine at no charge. The cost of the half-yearly follow-up tests of ARV patients has also been cut, from 18 000 to 16 000 CFA francs.

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.

Chad

N’Djamena

key figures • • • • •

Land area, thousands of km2 1 284 Population, thousands (2006) 10 032 GDP per capita, $ PPP valuation (2006) 1 551 Life expectancy (2006) 44.2 Illiteracy rate (2006) 74.3

Chad

T

CHADIAN ECONOMY ENTERED the oil age at the turn of the millennium. In 2004, the exploitation of “black gold” was the country’s main engine of growth, enabling it to reach a record growth rate of 31.3 per cent. However, the “oil boom” was followed by a disappointing performance of the sector. Chad’s GDP nevertheless rose by 8.6 per cent in 2005, reflecting the recovery of the country’s non-oil-sector, where growth primarily occurred, at a rate of 11.6 per cent. However, 2006 was marked by rising violence in the easternmost part of Chad, at the Sudanese border, as a result of clashes between government forces and rebel troops opposed to the current regime. This military escalation, with Chad accusing Sudan HE

of serving as a rear base for the rebellion, is exposing the two countries to a full-blown conflict and could lead to considerable movements of refugees and displaced persons. This acute military tension is also engendering an alarming Disappointing performance in food situation in the refugee the oil industry affected other camps and increasing sectors where compensating insecurity amongst the host for the drop in oil revenues population. In 2006, is proving difficult. national economic activity, although down from the performances recorded in 2005, remained buoyant despite the decline in oilsector activity. Real overall GDP growth is estimated at about 1.3 per cent for 2006.

179 Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: IMF and National Institute of Statistics and Economic and Demographic Studies (Inseed) data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/018610673606

© AfDB/OECD 2007

African Economic Outlook

Chad

Recent Economic Developments In the harvest season 2005/06, the primary sector (oil and agriculture) contributed 3.8 percentage points to growth. Growth of the primary sector is estimated at 0.2 per cent for 2006. This weak performance of primary-sector activities was mainly due to the decline in oil extraction, leading to a fall of 3.6 per cent of its value added. Sustained growth in the other sectors was barely able to offset the decline in oil production. The return to normal weather and pest conditions should set agricultural growth at about 7 per cent, as against 26.6 per cent in 2005. The contribution of the agricultural sector to GDP growth is estimated to be no more than 0.1 percentage point for 2006. As for food-crop production, its normal growth rate (6.7 per cent per year on average) will not be able to make up for the decline in oil activity, which is expected to settle at 1.6 per cent, -0.6 per cent and -6.1 per cent in 2007, 2008 and 2009, respectively. 180

The final results announced by the agricultural statistics division indicate 53 per cent progress in cereal production thanks to good rainfall distribution over the year and around the country, and to the increase in cultivated areas. Contrary to forecasts, which had predicted stagnation, seed-cotton production increased by 7.5 per cent in 2006. It is estimated at 215 000 tonnes by the national rural-development bureau. This progress is apparently due to the fact that farmers were highly motivated to pursue cotton production subsequent to their joining the board of CotonTchad, but also to

the government’s decision to exempt CotonTchad from paying value-added tax (VAT) on the materials, equipment and services necessary for production, and to the government’s will to take on part of the costs of inputs in the future. The estimated slow-down in the primary sector is explained by the decline in oil output. Activity in the oilproduction sub-sector, which made a strong contribution to growth over the past few years, now shows disappointing performance. The growth rate of the oil-production subsector took a sharp drop, from 293 per cent in 2004 to 2.1 per cent in 2005, due to the decline in oil extraction. The initial output forecast of 175 000 barrels per day on average for 2005 was not met for technical reasons, including the water content in the crude oil extracted from the three fields (Miandoum, Komé and Bolobo) and the quality of the crude oil (heavy, viscous and acidic). By the end of 2005, average production was only 172 400 barrels per day on average, despite the start of production in the Nya field (June 2005). Since 1999, management of the proceeds generated by oil production had been regulated by the oilrevenue management law drawn up with the World Bank. Under the terms of this law, direct revenues, i.e. royalties and dividends (12.5 per cent of the selling price of crude oil on the international market), were paid into a Chadian state account. Ten per cent of this revenue was then placed in an escrow account opened with an international institution for the benefit of future generations. The remaining 90 per cent were

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on Inseed data. http://dx.doi.org/10.1787/512540586074

African Economic Outlook

© AfDB/OECD 2007

Chad

deposited in special accounts of the Chadian treasury and distributed as follows: 80 per cent to finance specific development projects in priority sectors such as education, health, infrastructure (roads), rural development, the environment and access to drinking water; 15 per cent to general administrative and investment expenditures in the state budget; and 5 per cent to the decentralised authorities of the oilproducing region. On 29 December 2005, however, the National Assembly of Chad unilaterally revised this law. The government, facing an armed rebellion attempting to overturn it, decided to turn part of its oil revenues over to security expenditure. The World Bank responded immediately by freezing the funds it had granted to Chad and part of the country’s assets reserved for future generations in the London-based escrow bank account. The World Bank also suspended the disbursement of $124 million in loans to Chad. Negotiations were held in April 2006, and on 15 July, a budget law was adopted specifying that 70 per cent of oil revenues would be used for priority poverty-reduction programmes and, thanks to the creation of a stabilisation fund, would contribute to long-term growth and to the development of new opportunities. The priority programmes identified by this agreement are directed towards health, education, agriculture, infrastructures, the environment, rural development, de-mining and good governance in public affairs. The agreement also stipulates that security spending will be funded from the state treasury’s general revenues. The Chadian authorities also agreed to strengthen their support of the Collège de contrôle et de surveillance des ressources pétrolières, an independent body in charge of monitoring and supervising the use of oil revenues. The protocol includes provisions whereby the Collège’s own resources will be increased in order to help it accomplish its task of supervision. In addition, it stipulates that 5 per cent of oil proceeds will be allocated exclusively to the Doba region, where the oil is extracted and then transported to the sea via a pipeline that goes through Cameroon. The secondary sector showed sustained activity in 2005, contributing 1 percentage point to growth.

© AfDB/OECD 2007

Incentive measures taken by the government in the cotton sector made it possible to relaunch ginning. Moreover, the manufacturing industries (sugar, beverages and cigarettes) benefited from tariff-protection measures set up to curb fraudulent imports. Investments in the industrial sector also increased, in response to demand. The water and electricity utility Société tchadienne d’eau et d’électricité (STEE) contributed to the growth of this sector thanks to the rehabilitation of old generators and a number of different investments. The contribution of the construction sector is also to be noted, in particular through road construction and works in the N’Djamena power station. The steady, sustained growth of the secondary sector (17 per cent in 2005 and 14.5 per cent in 2006) is estimated to be largely due to the recovery of researchand-development activities undertaken to overcome geological constraints. Its contribution to growth in 2006 is estimated at 0.4 percentage point. The continuance of major construction works (roads and buildings) is estimated to have supported construction-sector activity, which realised 11.3 per cent growth. The handicraft, bakery and milling sector, dominated mainly by cereal flour production, is estimated to have benefited largely from the excellent 2005/06 agricultural season: its value added is expected to progress by 17.5 per cent in real terms. The energy (water and electricity) sector has maintained its buoyancy, thanks in particular to the upcoming commissioning of the new Farcha power station. Although the contribution of the secondary sector to total growth was not very great (around 10 per cent of GDP at constant prices), it is estimated to have contributed 1.5 percentage points to growth in 2006. Although this sector has recorded a favourable trend in its activities, the good performance of its sub-sectors has not compensated for the drop in oil investments. In 2007, the activity of the secondary sector is expected to fall considerably, by 8.8 per cent. However, it is expected make a recovery in 2008 and 2009 reaching 3.7 per cent and 3.3 per cent, respectively, thanks to the lint-cotton industry, water and electricity, and handicraft sub-sectors. Despite competition from the informal sector, the tertiary sector marked clear growth in 2005 thanks to

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the development of commercial activities, mobile telephony, transport and tourism. The contribution of this sector to growth amounted to 3.5 percentage points. The tertiary sector received support from the state’s continued policy to settle its debts towards local economic operators. The steady progression of tertiarysector activity since 2000 continued in 2006. Growth of the value added of the sector is estimated at 7.4 per cent, driven by: the public-administration sub-sector (12 per cent), which increased its expenditures on poverty reduction; the transport and communications sub-sector (6.4 per cent), thanks to the development of roads (which should increase domestic trade) and the expansion of mobile telephony; and the trade subsector (5.4 per cent), which benefited from the effects induced by recovery in the other sub-sectors. This sector’s contribution to growth in 2006 is expected to stand at 2.7 percentage points including a contribution of 1.2 points made by the public-administration subsector. The strong activity of the tertiary sector recorded since 2001 is expected to slow down and grow by 2.9 per cent, 2.2 per cent and 2 per cent in 2007, 2008 and 2009, respectively. The tertiary sector is projected to contribute 1.1 point and 0.8 point to growth in 2007 and 2008/09, respectively. On the demand side, new investments were realised in the oil sector in order to cope with geological

constraints. This new pace was reinforced by the increase in public-investment expenditures. Growth of final consumption in real terms is estimated to have fallen to 1.6 per cent in 2006. There is hope of a slight recovery in 2007, but it is not expected to become consolidated. Most (about 70 per cent) of the good cereal production of the 2005/06 agricultural season is estimated to have been consumed in 2006, with a considerable increase in non-market consumption (reflecting the importance of home-consumed production in rural areas). It is estimated to have risen by 15.6 per cent and contributed 4.1 percentage points to growth. Market consumption also contributed to this increase, benefiting from an improvement in the purchasing power of households brought about by perspectives of wage increases in the civil service. As for the external sector, for the first time since the start of oil production in the Doba Basin, exports are estimated to have fallen by 1 per cent in real terms. Imports, on the other hand, are estimated to have increased significantly, by 7 per cent in 2006, benefiting from the recovery in oil investments. The estimated employment level is down by 10.4 per cent in real terms, but is projected to climb slightly in 2008 and 2009 to 0.6 per cent and 0.4 per cent, respectively. This is seen as the result of the weakness of gross fixed capital formation (GFCF) in the oil sector and of the slowdown in exports related to the fall in oil output.

Table 1 - Demand Composition 1998

2005

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage of GDP (current prices)

Percentage changes, volume

14.3 6.4 7.9

26.6 8.7 17.9

7.3 4.8 8.5

8.3 4.8 10.0

7.0 4.8 8.0

Consumption Public Private

101.9 41.1 60.8

45.5 20.8 24.7

1.6 3.5 0.6

4.3 2.7 5.2

3.7 3.3 3.9

External sector Exports Imports

-16.1 20.4 -36.5

27.9 54.4 -26.6

-1.0 7.0

-0.2 6.6

-3.0 5.4

Gross capital formation Public Private

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/332031360071

African Economic Outlook

© AfDB/OECD 2007

Chad

Macroeconomic Policies Fiscal Policy Given the problems that the country had met in executing its budget, Chad’s finance law was revised in 2005. Budget execution finally ended with a deficit (on a commitment basis, including grants) of 31.3 billion CFA francs. Non-grant receipts went up by 27.9 per cent due to the increase in oil receipts (+65.3 per cent) reinforced by the high level of prices. Non-oil receipts went up by 7.9 per cent thanks to the increase in income tax (+22.2 per cent) and in customs receipts (+22.4 per cent). Current expenditure increased by 52.4 per cent in 2005, owing in part to hiring in the primary sector and to the rise in transfer and subsidy expenditures. Capital expenditures declined (-20 per cent) partly as a result of the 33 per cent drop in investments in external resources. The Chadian authorities adopted a corrected finance law for 2006 which takes into account the rise in prices of crude oil and the agreement signed with the World Bank on the use of oil proceeds. The corrected budget sets state expenditures at 641.29 billion CFA francs and its revenues at 607.5 billion CFA francs, as against the 539 and 510.33 billion CFA francs, respectively, of the initial text. This change takes account of the outcome of the negotiations with the World Bank, which released the frozen funds, and of the addition of new oil-related revenues. The latter are due to the constant rises in the price of the barrel on the international market and on the proceeds from the company income taxes paid by the oil consortium, estimated at 69 billion CFA francs, as well as from another tax amounting to 9.434 billion CFA francs, none of which had been taken into account in the initial finance law. The new budget text also includes non-recurrent security expenditures. In the 2007 finance law, the estimated additional taxes from oil companies are expected to create budget surpluses for the first time ever. This unprecedented situation has led the authorities to decide to no longer tax building materials as of 2007; the costs of building materials had previously been amongst the highest in the sub-region. © AfDB/OECD 2007

In 2006-09, it is expected that public finances, in terms of receipts, will evolve in line with the revenues received from oil activities, and in terms of expenditures, according to the implementation of the national povertyreduction strategy, the Stratégie nationale de réduction de la pauvreté. The overall volume of receipts collected by the general administration is predicted to evolve very positively. As a percentage of GDP, expenditures are expected to be twice the percentage noted in 2005, settling at an average of 18.6 per cent of GDP. Nonoil tax revenues (i.e. revenues excluding the taxes on the oil-consortium companies) are expected to progress slightly to reach 10 per cent of non-oil GDP in 2007, up from 9.6 per cent in 2006. As for non-tax revenues, excluding oil royalties, they are projected to stagnate as a percentage of non-oil GDP despite the revenues expected from the announced privatisations of Novotel (2006), CotonTchad (2007) and the telecommunications company Sotel Tchad (2007/08). Monetary Policy 183 Monetary policy is managed at the regional level by the Bank of Central African States (Banque des États de l’Afrique centrale – BEAC) with the priorities of keeping inflation under control and pegging the CFA franc to the euro. Monetary policy in the zone is therefore strict, like that of the European Central Bank (ECB). The only difference is that the BEAC’s monetary policy takes account of the economic situation of its member countries with respect to inflationary pressures and banking liquidity levels. In the area of inflation, tensions arose in the prices of most food products: the average inflation rate in the first five months of 2006 was 14.1 per cent higher compared with the first five months of 2005. This situation was mainly the result of the sharp increase in the prices of meat and fish products brought about by the Avian Flu outbreak in Nigeria, which resulted in a massive output of fish from Lake Chad into bordering countries. There was also a marked fear on the part of the local population of the possibility of a local outbreak of the virus. This situation resulted in a high demand for meat, which was in limited supply: the slaughterhouse company Société moderne des abattoirs African Economic Outlook

Chad

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Oil revenue

11.0 6.0 0.0

15.2 6.6 0.0

11.3 4.8 2.5

12.3 4.1 4.2

11.7 4.0 4.3

11.5 4.1 3.8

11.1 4.3 3.5

Tax expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

14.8 7.2 6.4 3.8 0.8 7.6

22.0 9.4 8.8 4.7 0.6 12.6

14.4 6.6 6.2 3.4 0.4 7.8

13.0 6.0 5.7 3.3 0.3 7.0

13.3 6.3 5.8 3.3 0.5 7.0

14.0 6.6 6.1 3.6 0.4 7.4

14.7 6.9 6.5 3.8 0.5 7.8

Primary balance Overall balance

-2.9 -3.7

-6.2 -6.8

-2.7 -3.2

-0.4 -0.8

-1.1 -1.7

-2.1 -2.5

-3.1 -3.6

a. Only major items are reported. Source: IMF data; estimates (e) and projections (p) based on authors’ calculations.

184

in Farcha, which has a monopoly on meat production for N’Djamena, recorded a 4 per cent drop in its production. Inflationary pressures increased in the second half of 2006 partly because of the break-up of markets in the east and south of the country resulting from the growing insecurity there. This could make trade increasingly difficult and lead to a continuing rise in demand from refugee populations. Nonetheless, the conservative monetary policy of the BEAC should prevent any pronounced increase in inflation, which is estimated at an average of 8.8 per cent in 2006 and projected at 4 per cent in 2007; this is still above the convergence criterion of the Economic and Monetary Community of Central Africa (Communauté économique et monétaire de l’Afrique centrale – CEMAC), which sets it at 3 per cent. External Position Chad is a member of the CEMAC and of the Economic Community of Central African States (ECCAS). In February 2005, in the framework of the Poverty Reduction and Growth Facility (PRGF), the International Monetary Fund (IMF) and Chad negotiated a new three-year programme amounting to $38 million. This programme with the IMF is currently suspended because of the poor macroeconomic results obtained by the authorities. The European Union (EU) signed a co-operation programme with Chad for EUR 273 million in the framework of the 9th European Development Fund (EDF). During the period 2004African Economic Outlook

http://dx.doi.org/10.1787/043648417017

06, the World Bank granted an IRSC (Institutional Reform Support Credit) of $25 million to finance institutional reforms. There was no significant change in Chad’s exports or imports: between 2005 and 2006, exports moved from 52.8 to 52.6 per cent and imports from -13.8 to -13.9 per cent. Chad is applying a cautious external-debt policy and contracting most of its loans under very privileged conditions. The country also became eligible in mid2001 for debt relief under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. However, in 2006 Chad did not receive any HIPC funding. External-debt servicing (after the overall borrowing operation) was estimated at the end of 2004 at 780 billion CFA francs, up from 732 billion CFA francs in 2000. Debt stock declined from 75 per cent of GDP in 2000 to 34 per cent in 2004. In 2004, Chad’s long-term external debt amounted to nearly 93 per cent of total debt, rising by 8.2 per cent to reach $1.58 billion, as against $1.46 billion previously. Recourse to IMF credit declined by 9.4 per cent. Shortterm debt stabilised at $23 million. Chad was expected to reach the HIPC Initiative completion point by the end of 2005 and to be able to benefit from the Multilateral Debt Relief Initiative. However, the November 2005 to July 2006 break in relations between Chad and the World Bank made it impossible for Chad to reach the completion point. The adoption of the new © AfDB/OECD 2007

Chad

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-1.1 14.9 -16.0 -9.9 -1.1 2.9

-6.5 22.1 -28.6 -27.8 -16.5 3.6

29.1 49.0 -19.8 -27.3 -13.3 5.0

39.0 52.8 -13.8 -29.5 -9.8 5.3

38.7 52.6 -13.9 -26.6 -8.9 4.8

34.0 48.5 -14.5 -26.8 -18.4 3.7

29.9 45.2 -15.2 -23.5 -13.3 3.4

Current account balance

-9.2

-47.1

-6.5

4.9

7.9

-7.5

-3.5

Source: IMF and BEAC data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/267852762744

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

185

Source: IMF. http://dx.doi.org/10.1787/124118888446

oil-revenue management law in July 2006 should make it possible not only to release suspended World Bank credits but to clear up Chad’s situation with regard to the HIPC Initiative completion point.

Structural Issues Recent Developments One of the challenges facing the country is the establishment and stabilisation of national institutions © AfDB/OECD 2007

whose role will be to set the “rules of the game” in the economic, political and social arenas. In the areas of decentralisation and good governance, it is true to say that decentralised institutions remain weak and that the establishment of solid local governance remains a non-negligible challenge. Today, municipalities are the only local authorities with a distinct legitimate organisation. Decentralisation is limited by the quality of communications between the central government and the regions. Despite the development and validation in December 2005 of a blueprint for decentralisation African Economic Outlook

Chad

which was intended to render the Chadian authorities’ commitment to decentralisation operational, the associated legal framework remains to be completed and the establishment of regional authorities is hanging on the organisation of elections. The country organised a general convention of justice in 2003 and of the army in 2005, to consolidate the foundations of the rule of law. Subsequently, commercial courts were set up in four main towns in the country (in addition to N’Djamena) to facilitate the settlement of conflicts related to commercial transactions. The country has stated its determination to fight corruption. A Ministry of General State Control and Moralisation was created in June 2004. Nonetheless, the measures against corruption are not always well-targeted and run into highly complex procedural rules and mystifying results. In 2005, Chad was ranked in first place as the most corrupt country in the world. This situation argues in favour of the use of information technology by the financial authorities (customs, taxes, etc.). 186

In the area of agricultural-sector reforms, analyses cover mostly the cotton sub-sector, for even though the latter benefits from considerable state support and donor backing, it is facing a drop in production, due particularly to purchase prices that provide little incentive and to marketing problems. Smallholders’ production is often paid as much as six months late. All of this discourages production. The government and its partners have drawn up a list of measures to be taken (roadmap) in order to prepare effectively the privatisation of the CotonTchad company in 2007. In the framework of a crop-diversification policy, many studies were conducted for the launching of new agricultural sub-sectors, including poultry, peri-urban livestock, Spirulina and pasture-fattened bovine animals. So far, these studies have not resulted in the launching of new projects. Chad is the second world producer of gum arabic, a sub-sector that is booming. Finally, sesame and groundnut production offer potential for substantial monetary income for rural populations, but these sub-sectors are badly known, badly exploited and badly organised. The Chadian banking system comprises seven banks (no change with respect to 2004): the Banque agricole African Economic Outlook

du Soudan au Tchad (Bast), the Banque commerciale du Chari (BCC), the Banque internationale pour l’Afrique au Tchad (Biat), the Commercial Bank Tchad (CBT), the Financial Bank Tchad (FBT), the Société générale tchadienne de Banque (SGBT) and the Banque sahélosaharienne pour l’investissement et le commerce (BSIC). The Chadian economy still possesses a poor level of bank utilisation and suffers from low bank density. Microfinance is a relatively important sector, representing nearly 4 billion CFA francs of loans granted. Informal mutual-help entities have constituted fertile ground for the blossoming of microfinance, through not-for-profit organisations, mutual societies and associations. This sector is expanding. The Microfinance Institutions (MFI) movement actually started in the 1990s as an offshoot of the Vita project financed by the United States Agency for International Development and the savings-and-credit union – Union des clubs d’épargne et de crédit (UCEC) – in Pala, funded by the diocesan bureau for development, the Bureau d’Études et de Liaison, d’Action Caritative et de Développement (BELACD). In 2001, according to the microcredit division of the Ministry of Finance and Information Technology, there existed 128 microfinance organisations, 111 of which were grouped into 5 networks; these organisations had collected 635 million CFA francs in savings and granted 1.3 billion CFA francs in loans to users. Moreover, 32 000 persons had used these MFI financial services. In the framework of the implementation of the CEMAC/COBAC (Central African Banking Commission) procedure, 214 MFIs were identified in 2004, 187 of which were networked and 5 in project status; these represented 4 419 billion CFA francs of collected deposits and 3 669 billion CFA francs of loans granted to 98 378 users, tripling the 2001 figures. On 31 December 2005, 97 MFIs had been accredited by the COBAC. The government drew up a national transport programme (PNT) for 2000-09 aimed primarily at contributing to economic growth and reducing poverty by means of: better access within, and from outside of, the country; reduction of transport costs, both within the country and internationally; minimum access to all regions of the country, even during the rainy season; an adequate network of roads suitable for motor vehicles © AfDB/OECD 2007

Chad

all year round linking up the main towns in the country; pursuit of the liberalisation process of the sector and of the modernisation of its administration; development of rural infrastructures; and so on. One of the objectives of the national transport programme is the improvement of the system in rural areas. The results obtained so far in this domain have been limited. To correct this, the government has set up a division for roads and earth roads (DRPR), which is to be responsible for implementing the “rural transport” component of the national transport programme support project (Papronat) funded by the World Bank. The government has drawn up a five-year investment plan (2006-10) for roads and earth roads for a yearly amount of 4 billion CFA francs. This plan should make it possible to repair 3 000 to 4 000 kilometres of rural roads with national funding (oil revenues). In addition, some other major projects include a “roads and earth roads” component, such as: the project to build 100 kilometres of earth roads in the target zone selected for the 6th EDF (EU funding); the project to repair earth roads in the former Biltine prefecture (Swiss co-operation funding); and the repair and maintenance project for earth roads in the former Mayo-Kebbi prefecture (KFW [Bank of Reconstruction Credit] – German development cooperation funding). A postal-services and telecommunications strategy is currently being finalised. Its goal is to improve the coverage of urban and rural areas, particularly through the development of mobile telephony. Sotel Tchad (a subsidiary of the Anglo-Dutch company MSI Mobicom), which is the leading mobile-telephony operator, runs a telephone network that has infrastructure and intercity transmission connections linking up 16 of the country’s towns. In June 2006, the company announced a 24 billion CFA franc expansion plan. The mobile-telephony market has experienced rapid development. In 2004, there were about 1 200 000 subscribers. The expansion of mobile telephony has brought about considerable improvement in overall access to the telephone (15 per cent in 2004). Since October 2005, the quasi monopoly held by Celtel has been challenged by the Swedish group Millicom International. The rural-telephony project has succeeded in installing VSAT antennas in 15 out of the 25 initially © AfDB/OECD 2007

targeted secondary towns, which represents a 63 per cent completion rate. The Internet penetration rate is only 0.3 per thousand inhabitants. The Ministry of Postal Services and New Communications Technologies is currently developing a national strategy for information technology and telecommunications. In the energy sector, the policy and strategy letter for the electricity sub-sector (2002-06) states as its main purpose to meet at a lesser cost the energy needs of the population as a whole and to extend access to energy for the benefit of agricultural and industrial production. Its also aims to promote alternative energy sources (solar and wind energy) so as to limit the impact of firewood cutting on the regeneration of forest resources. Ligneous fuel (stove wood and wood charcoal) still represents 90 per cent of energy consumption, leaving only 10 per cent for conventional energy (oil products and electricity). From 2001 to 2005, annual energy consumption went up from 240 to 292 kg of oil equivalent per capita. 187 Access to Drinking Water and Sanitation Chad has considerable water resources. This should not, however, obscure the major constraints involved in the mobilisation of water resources – especially, the unequal distribution (both spatially and temporally) of rainfall and surface water, as well as the lack of knowledge regarding how the main aquifers work. Improving the rate of access to drinking water in Chad, amongst the lowest in Africa, is one of the country’s most important socio-economic challenges. In 2003, the government adopted an integrated plan for Chad’s water and sanitation development and management (Schéma directeur de l’eau et de l’assainissement – SDEA), which is still the main reference in the sector. The SDEA constitutes a strategic, multisectoral master plan providing guidelines for the sustainable development and management of water resources in Chad, with a view to meeting the population’s basic needs and promoting the economic and social development of the country. It is through the SDEA that the government’s environmental policy has been defined. African Economic Outlook

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The three institutions principally involved in water and its management are: the National High Committee for the Environment (HCNE), the Ministry of the Environment, Quality of Life and National Parks (formerly the Ministry of the Environment and Water – MEE), and the Ministry of Fishing and Rural Waterworks. The HCNE’s mission is to ensure that there is effective application of the recommendations of Agenda 21 (drawn up by the United Nations Conference on Environment and Development held in Rio de Janeiro in June 1992). The National Water Management Committee (CNGE) is attached to the HCNE. The two ministries are in charge of designing and implementing policies for environmental protection, the fight against desertification, and naturalresources management; they are also responsible for the implementation of policies for urban, agricultural and rural waterworks and sanitation, as well as for meteorology and hydrology. The Ministry of the Environment, Quality of Life and National Parks is also in charge of the HCNE Secretariat. Finally, the ministry in charge of decentralisation under the authority of the prime minister is responsible for the implementation of the decentralisation policy in this area, so enabling participation and decision-making at the lowest possible level. Since 2001, the main institutional actors in the domain of urban water have been the MEE – through the Directorate of Hydraulic Affairs (DH), which deals with the non-concessionary sector – and the Ministry of Mines, Energy and Petroleum (MMEP) (now the Ministry of Mines and Energy), responsible for the utility company STEE – which deals exclusively with the concessionary sector. The main producers have been water-point management committees (Comités de gestion des points d’eau) in conurbations equipped with thermal or solar drinking-water supply (DWS) stations, for the non-concessionary sector, and the STEE for the concessionary sector. Artisans and associations comprised of hydraulic engineers and street-fountain managers often act as intermediaries between network owners and retail water-carriers or non-subscribed consumers. They are, in a sense, wholesalers. African Economic Outlook

In the area of water management, it is worth noting that the management system is of the community type, based on the experience of the Directorate of Hydraulic Affairs. The water-management committees comprise 7 to 10 members covering the different management functions. They are backed by a technical team in charge of equipment servicing and maintenance. The main finding regarding the DWS stations run by a management committee is that the management systems set up recently often do not work properly. Moreover, water is often under-invoiced as the price of water is set with no reference to real operating costs. Water is too commonly supplied for free and in unlimited quantities to notables and public services. There is little or no maintenance, and servicing is limited to system drainage and lubrication. The main actor in the institutional framework for urban sanitation is the Ministry of Public Health, which is responsible particularly for promoting environmental hygiene, for the purification and quality of water for consumption, and for drawing up legislation and regulations in the area of hygiene and sanitation. The Ministry of Regional Development, Urban Planning and Housing is responsible for regulations in the area of town and country planning, urbanism and construction, and for defining viability levels for the different types of neighbourhoods. The Ministry of the Environment, Quality of Life and National Parks is responsible for project design and construction supervision for all activities related to urban hydraulics and sanitation. The Ministry of the Interior and Public Security, through its sanitation section, is in charge of: disinfestation, disinfection and rodent control in homes; disaster response (epidemics, floods, etc.); and the hygienic disposal of urban solid and liquid wastes and faeces. Municipalities also play a role in the sanitation chain – as well as the populations, which have organised sanitation committees in a number of towns. These committees are involved in the maintenance and construction of channelling systems to drain rainwater, in waste collection and in repairing streets after the rainy season. © AfDB/OECD 2007

Chad

The basic prices of water and connections vary according to the management. Management committees, for lack of customer market research and of any real calculation of the local cost price, sometimes apply STEE rates when new installations are commissioned (connection, renewal or reinforcement). The price of water is usually broken down into three categories. The first, so-called “social” category (15 m3/month) is set at 105 CFA francs. The second (15 m3 to 100 m3/month) varies depending on the centre: it is 230 CFA francs/m3 for the sites manages by the STEE and can go up to as much as 490 CFA francs/m3 (in Pala). The third category is set at 110 CFA francs/m3. Generally speaking, the prices do not reflect the real costs to the owners. STEE rates have been frozen since 1984. The most underprivileged populations sometimes buy water from a reseller for up to 15-25 times more than the price paid by subscribers with private connections. The drinking-water supply rate for the Chadian population as a whole was only 42 per cent in 2004 according to the United Nations Environment Programme (UNEP); this was almost twice the rate of 2001, when it was 23 per cent (16.5 per cent in rural areas, 25 per cent in centres in the non-concessionary sector and 40 per cent in towns in the concessionarysector managed by the STEE). Regarding sanitation, there is practically no basic infrastructure in either rural or urban areas. Everything remains to be done in this domain. In 2002, 30 per cent of the urban population had access to sanitation, but in the rural areas the prevailing rate was practically equal to zero. In 2004, sanitation needs in terms of percentage of population were estimated at 35 per cent in urban areas and 56 per cent in rural areas. According to the SDEA drawn up in 2002, village needs amount to more than 12 500 new water points by 2015 to be able to supply 70 per cent of the rural population: this will require considerable investments. For the village areas, outside of a few projects, there are very few villages equipped with improved traditional latrines or ventilated pit latrines, or even waste or wastewater collection systems. This means that 10.6 per © AfDB/OECD 2007

cent of households are using rudimentary latrines, 0.6 per cent are using improved traditional latrines and 88.5 per cent are relieving themselves in nature. Moreover, there is no waste collection in the villages and domestic animals are left wandering about. In Chad, the major (current and future) village-hydraulics projects do not systematically include a sector for “village sanitation” – which is inexpensive, but requires specific programmes for local mobilisation and awareness raising. There is not a single town with a functional wastewater disposal system. The collection networks are decrepit. Less than 2 per cent of town-dwellers have sanitation installations with running water. Moreover, only four towns – N’Djamena, Moundou, Sarh and Abéché – adopted urban reference plans (Pur) in February 1997; these plans identify built-up areas and outline the main road-networks and rainwater-drainage options. Hospitals and health centres have neither infrastructures in good working condition (incinerators, waste-processing plants, etc.) nor well-established “procedures” to process and dispose of biomedical waste. This waste often ends up in the streets, where it can be picked up by children or anyone wishing to “recover” it. Waste-water from health facilities is rarely processed: it is merely disposed of in the environment, often in natural streams; in some cases, it is re-used for a variety of purposes (to water small market gardens, etc.). In addition, most industries discharge their liquid wastes into large waterways, such as the Chari and the Logone Rivers, with no prior treatment. Only the four largest towns –N’Djamena, Moundou, Sarh and Abéché – have a more-or-less organised secondary network of open gutters to evacuate rainwater, but they are rarely in good condition. In the past 25 years, the main donors for urban and semi-urban hydraulics have been Chinese Taipei (15 346 billion CFA francs), Germany (10 756.6 billion CFA francs), the European Investment Bank (1 486.8 billion CFA francs), the European Development Fund (1 395.3 billion CFA francs), African Economic Outlook

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Chad

France (985.8 million CFA francs), Italy (835.2 million CFA francs), the Inter-American Development Bank (105 million CFA francs), the World Bank (54 million CFA francs) and the African Development Bank, which has launched a project in this sector.

Political Context and Human Resources Development

190

The real challenge that is facing the government is to contain the resurgence of insecurity and conflicts in Chad. The public life of the country is marked by the continuing existence of focal points of tension, making it difficult to build a social fabric and maintain a stable political consensus. After having been weakened over several months by defections within his regime and by rebellion – backed, according to N’Djamena, by neighbouring Sudan – Idriss Déby, who had been in power since 1990, was re-elected on 3 May 2006 for five years on the first round of an election that was boycotted by the opposition. The rebel groups Union of Forces for Democracy and Development (UFDD), Rally of Democratic Forces (RAFD) and United Front for Democratic Change (FUC) confronted the national Chadian army in violent combats. This armed confrontation has affected the areas of Chad bordering Sudan and the Central African Republic, as well as towns in the centre of the country, without sparing the capital. This situation has resulted in nearly 50 000 displaced persons who are fleeing to escape from combat zones or because of fears of reprisal from armed militia, usually called djandjawid. In this deteriorating context, several missions have been sent to the country, including emissaries from the African Union’s Peace and Security Council; also, the United States Ambassador to Chad visited the refugee camps. Combats have led to a deterioration of the security situation, to additional inflows of refugees at the southern border of the country and to displaced persons in the eastern region. The measure of insecurity, considered by the humanitarian organisations present to be often of great concern, has forced the latter to relocate their staff temporarily to the larger towns. The political dialogue between the government and the opposition which was organised African Economic Outlook

by President Déby under international pressure, with the aim of restoring a “healthy political climate” in Chad after the presidential election of 3 May, resulted in the adoption of several resolutions relating to the general elections. Fifty-four political parties, most of them with very low representativeness, took part in the dialogue process, but it was boycotted by the two main opposition groupings: the main member parties of the Coordination of Political Parties for the Defence of the Constitution (CPDC) – the most important Chadian opposition coalition – and the Federation Action for the Republic (FAR) pulled out before it began. The CPDC, which comprises some twenty political groupings including four of the five main opposition parties in the National Assembly, and the FAR, the second parliamentary opposition force, denounced the non participation of the armed opposition, the opposition in exile and civil-society opposition. Chad drew up its National Poverty Reduction Strategy in 2003. This strategy sets out the framework for co-operation with all the donors represented in the country. The authorities plan to fund the programme for the fight against poverty with oilexport revenues. According to the Human Development Report of the UNDP (United Nations Development Programme), Chad was ranked 171 out of 177 countries, with a Human Development Index (HDI) of 0.341 in 2006, as against 0.359 in 2000. This means that over 65 per cent of the Chadian population lives with less than one dollar a day. If this trend continues, the number of persons living in absolute poverty in Chad, which was 6.3 million in 2005, could grow to 8.2 million in 2015. The latest consumptionbudget survey (ECOSIT II) of 2003, confirmed in 2006, estimated the percentage of poor populations in Chad at 55 per cent. Poverty is mostly rural (more than 80 per cent of the rural population lives under the poverty line). The priority areas on which the donors have focused their efforts include education, health, rural development, transport, urban planning and housing. In its National Indicative Programme, the European Commission has channelled its efforts (9th EDF, 2002-07) through the framework of the National Poverty Reduction Strategy. © AfDB/OECD 2007

Chad

Under the terms of a Framework Partnership Document (FPD) signed in June 2006, France will grant Chad EUR 130 million for its development up to 2010. According to this document, 80 per cent of this commitment will be devoted to the three major priority sectors of basic education, water and sanitation, and health and the fight against HIV/AIDS. French aid will also be directed towards the sectors of governance and the rule of law, on the one hand, and to the influence of the French language in culture and research, and higher education, on the other.

staff, 468 of which were graduates with state diplomas and technical health officers. Only 7 per cent of the total staff were doctors, giving a ratio of 1 doctor per 26 054 inhabitants. This scarcity was exacerbated by the unequal distribution of qualified personnel amongst the provinces, the urban and rural areas, and amongst curative- and preventive-care institutions. About onethird of the health personnel was in N’Djamena alone, for only 8 per cent of the population. In 2003/04, the expenditure execution rate in the sector did not exceed 36.4 per cent of budget provisions.

The situation of the HIV/AIDS epidemic is a subject of great concern. Starting with 2 cases in 1986, a total of nearly 20 000 cases of AIDS had been recorded by health groups by the end of 2004. A seroprevalence survey conducted in 2005 showed that in Chad, 3.3 per cent of persons aged 15 to 49 were HIV carriers. This rate is lower than that estimated by UNAIDS (Joint United Nations Programme on HIV/AIDS) in 2004, which was 4.8 per cent. The prevalence rate was 7 per cent in urban areas, as against 2.3 per cent in rural areas. More women (4 per cent) than men (2.6 per cent) were infected. In urban areas, seroprevalence reached 8 per cent amongst women. A declaration of national policy for the fight against HIV/AIDS covering prevention aspects as well as overall care is included in the 2006-10 national strategy framework. To improve the institutional framework of the fight against this pandemic, the government, with the support of its development partners, intends to implement a number of measures, including: i) reinforcement of the institutional basis of the co-ordinating body; ii) decentralisation and multi-sectorisation of the fight; iii) networking of non-governmental organisations (NGOs) and private-sector actors; and iv) making it an obligation to produce results for all actions taken in the framework of the fight against HIV/AIDS, along with periodical and systematic assessments of these actions with a view to taking appropriate adjustment decisions. A number of constraints, however, are likely to complicate the implementation of these programmes. Particularly problematic is the shortage of qualified staff and the low execution rate of health expenditures. In 2003, the total human resources of the Ministry of Public Health were estimated at 4 265 members of

In the area of education and training, the progress achieved in the primary-education sub-sector is encouraging. The gross enrolment rate went up from 72 per cent in 1999/2000 to 87.58 per cent in 2003/04, which is much higher than the average for the 15 francophone African countries (80.4 per cent); this represents an average rate of increase of 22 per cent over the last five years. The net enrolment rate reached 63 per cent and the primary completion rate 60 per cent in 2002/03, whereas the girl/boy ratio in primary schools was 0.68. Gender equality holds a major position in the country’s development programmes. There is a pro-women action programme featuring a large variety of activities. In practice, however, the situation of women is far from satisfactory. The percentage of women members of parliament is only 6 per cent, with about the same ratio in the government.

© AfDB/OECD 2007

African Economic Outlook

191

.

Congo Republic

Brazzaville

key figures • • • • •

Land area, thousands of km2 Population, thousands (2006) GDP per capita, $ PPP valuation (2006) Life expectancy (2006) Illiteracy rate (2006)

342 4 117 1 394 53.2 13.4

Congo Republic

D

situation foreshadowing a brighter future, Congo is still suffering overall from the 1990s civil wars, whose devastating effects on the populations and infrastructures continue to weigh heavily on economic and social recovery. The social and political climate has nevertheless gradually tended towards normality, thanks to peace and nationalreconciliation efforts, and to the continuation of the disarmament, demobilisation and reintegration (DDR) process of the 9 000 ex-combatants. Presidential, parliamentary, senatorial and local general elections were held between January and June 2002, making it possible to set up the new constitution’s democratic institutions. The attack on a United Nations Development Programme (UNDP) convoy in the Pool region in April 2005 and rebel attacks on the main ESPITE AN IMPROVED ECONOMIC

railway line from Brazzaville to Pointe- Noire show that the political and social situation remains explosive. Nonetheless, parliamentary elections are to be held in 2007 to complete the country’s political normalisation. Fuelled by the leap in Social and economic recovery world oil prices over the is still inhibited by the effects past few years and by an of the 1990 civil war, but higher increase in oil production in oil prices and growing production 2005, Congo’s real GDP are aiding a fragile economic recorded strong growth, up recovery. from an average of 4 per cent in 2000-04 to nearly 7.7 per cent in 2005 and 6.8 per cent in 2006. The country’s overall economic activity has nonetheless remained vulnerable to external shocks because of its excessive dependence on oil. 195

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Congo - GDP Per Capita (PPP in US $)

■ Central Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Congo - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

3500

9 8

3000

7 2500 6 2000

5 4

1500

3 1000 2 500

1

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/603045674464

© AfDB/OECD 2007

African Economic Outlook

Congo Republic

As one of the oldest oil-producing countries in Africa (also endowed with substantial natural and mineral resources), Congo is capable of mobilising additional resources from donors and private investors and of putting its economy on a sustainable growth track, provided that it extends its reforms. The high prices of oil and the upturn in non-oil production in 2006 contributed to an increase in the country’s tax revenues. Furthermore, the cancellation of bilateral debts decided by some of the Club of Paris creditors and the debt relief granted under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative will allow the country to settle part of its external arrears and have at its disposal additional resources for development.

196

In order to address the challenges specific to the postconflict situation, and to broaden the foundations for economic growth and step it up, in September 2004 the government adopted an Interim Poverty Reduction Strategy Paper (I-PRSP) based on five pillars: i) consolidation of peace and promotion of good governance, ii) macroeconomic stabilisation and revival of key sectors, iii) access to basic social services and social welfare, iv) infrastructure development and v) reinforcement of the fight against HIV/AIDS. The medium-term reform programme (2004-07) underpinning I-PRSP implementation benefits from the support of the major donors, including: the International Monetary Fund (IMF), which approved a Poverty Reduction and Growth Facility (PRGF) for Congo in December 2004; the World Bank, through an Economic Recovery Credit; and the African Development Bank (AfDB), which approved a loan to support economic-reform programmes. These measures are aimed at attaining an average annual growth rate of 5.2 per cent in 2005-07 (with an average annual growth of non-oil GDP of 5.4 per cent); at containing the inflation rate at 2 per cent and at maintaining the current-account balance at an average of 3.3 per cent of GDP. The expenditure policy is structurally geared towards poverty reduction through an increase in the share of resources allocated to the priority I-PRSP sectors, i.e. education, basic health, the fight against HIV/AIDS, basic infrastructure, water, energy and agriculture. The government has pledged to devote the additional tax revenues generated by the rise in oil African Economic Outlook

prices to increasing the share allocated to the priority I-PRSP sectors, in order to take this share from 20.6 per cent of total primary expenditures in 2004 to 30 per cent in 2007.

Recent Economic Developments The Congolese economy suffers from a very high dependence on the oil sector – from which it still draws most of its export and tax revenues – and from very low diversification. Congolese oil comes mainly from offshore fields, whose operating costs are high compared with average costs world-wide, so that the gap between the price obtained and the world price can only decrease when the latter declines. The economy recorded a solid 7.7 per cent growth rate in 2005 and progressed by 6.8 per cent in 2006. The decline recorded in 2006 can be essentially attributed to the oil sector, which grew by only 9.6 per cent, as against 12.8 per cent in 2005; this was mainly due to a 9.3 per cent reduction in oil production at the end of June 2006 (5 455 000 tonnes, as against 6 017 342 tonnes at the of end June 2005), despite the commissioning of the Mboundi field, which had contributed nearly 12.5 per cent to the growth in total output in 2005. If this downward trend were to be confirmed, it would have serious consequences for GDP growth, which would then amount to only 1.9 per cent in 2007. At the same time, exports recorded a leap of 9 per cent, to more than 6 million tonnes, as against 5.5 million tonnes in 2005, mainly owing to the endof-year sale of stocks. The volumes of crude oil delivered to the Congolaise de raffinage (CORAF) oil refinery increased by 23.8 per cent over the same period. On the other hand, the average price of Congolese crude oil rose considerably, going from $28.9 per barrel in 2000-04 to $53 in 2005 and $69.6 in 2006, and bringing about a corresponding rise in oil revenues. In the first half of 2006, exports declined by 11 per cent, whereas the production of gas remained stable compared to its 2005 level. However, in the area of oilrelated activities, investments made by the Total, Eni and Zetah companies in the construction and maintenance work of oil facilities increased the turnover of this sub-sector by nearly 37.5 per cent. © AfDB/OECD 2007

Congo Republic

The primary sector, which represents hardly 5 per cent of GDP, was particularly characterised by uneven activity in the fishing sub-sector: while there was an almost 24 per cent increase in the local production of fish at the end of June 2006, shrimp production declined by 18.7 per cent compared with 2005. Forestry, the second major primary sub-sector, showed an annual growth of 15 per cent for four years running, after an even stronger progression in 2002. This growth could continue for a few more years because production (1.5 million m3, all species included) is below the potential of 2 million m3 that is compatible with international regeneration standards for forest ecosystems. In the area of wood-processing (sawn timber, veneer and plywood), the new forest law which came into force in January 2005 made it an obligation

for operators to process on-site 85 per cent of the logs produced. The law also introduced a surcharge for companies not complying with this ratio. Measures have also been taken: for the implementation of mandatory management plans for all forests and buffer zones; for greater co-ordination between the ministries of forests and of finance to improve the setting, collection and transfer of taxes due by this sector to the public treasury; for improvements in forest tax schemes and in the terms covering the social-responsibility of operators in the sector; and for greater transparency in the granting of forest permits. The secondary sector generates almost two-thirds of GDP. It is dominated by the extractive industries, mainly oil and gas (nearly 2 307 billion CFA francs,

Figure 2 - GDP by Sector in 2005

(percentage)

Electricity, gas and water Services 0.7% 12.4%

Oil

64.1%

Government 5% 3% Construction 6.2% Trade, hotels and restaurants

4% Mining and industry 3.8% Agriculture, livestock and fishing 0.7% Forestry

Source: Authors’ estimates based on local authorities’ data. http://dx.doi.org/10.1787/725642664244

as against 1 389.5 in 2004). The backbone of manufacturing activity (excluding refining and wood processing) is made up of food and miscellaneous industries, chemical industries, and metals and steelwork; in 2005, turnover progressed by 19 and 13.8 per cent, respectively, for the first two, and declined by 1.6 per cent for the third. Turnover in the construction sector grew by 16.2 per cent in the first half of 2006 compared with the same period in 2005 thanks to the resumption of a number of public works and to the completion of civil-engineering works commissioned by oil companies. Despite the deterioration of its electricity-generation facilities as a consequence of the war, the electricity sub-sector experienced an increase in energy consumption of 4.6 per cent in 2006, owing to better management of supply by the national electricity utility (SNE), which © AfDB/OECD 2007

is attempting to generalise the installation of electricitysupply meters so as to improve the fight against illegal connections and fraud. However, the sub-sector does not generate enough electricity to meet demand, and the country remains dependent on supplies from neighbouring Democratic Republic of Congo for nearly half of its needs. The services sector, which represents more than 20 per cent of GDP, also contributed to growth, although moderately (0.7 per cent), mostly in trade, restaurants and hotels. The modern branch of trade has however suffered from competition from the informal sector and also, despite rehabilitation work on the infrastructure of the Congo-Ocean Railway (COR), from problems in supplying Brazzaville by rail from Pointe-Noire. The other services sub-sectors, such as African Economic Outlook

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Table 1 - Demand Composition 1998

2005

(percentage of GDP) 2006(e)

Percentage of GDP (current prices)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

26.7 4.7 21.9

22.4 5.4 17.0

19.1 41.7 12.0

10.6 17.0 8.0

5.0 5.0 5.0

Consumption Public Private

69.7 24.2 45.5

40.7 13.2 27.4

3.5 -1.8 5.7

9.6 10.2 9.4

6.5 4.0 7.4

3.6 76.3 -72.6

36.9 87.1 -50.2

5.8 7.4

-4.9 6.1

5.1 3.8

External sector Exports Imports

Source: Directorate General of the Economy data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/081640884701

transport and telecommunications, also took an upward turn in 2005 (0.4 per cent), especially for the telecommunications sub-sector, where the extension of the telecommunications networks (particularly for mobile telephony) contributed to growth. 198 Growth was sustained in 2005 by the increase in net domestic demand, with private and public consumption rising from 1 114.6 billion CFA francs in 2004 to 1 280.3 billion in 2005, but falling back to 1 238.1 billion in 2006. Private investments, especially in the oil sector where they progressed by nearly 36 per cent in 2005 (536.5 billion CFA francs, as against 395.3 billion in 2004), were a good growth vector; however, public investments showed relative stagnation. Although oil investments contributed to the rise in imports of goods and services, GDP growth was supported by strong external demand, with exports of goods and services recording a total of 2 742.5 billion CFA francs in 2005, as against 1 938.2 billion in 2004.

Macroeconomic Policies Fiscal Policy The state’s fiscal policy remains the main lever in the fight against poverty, but the authorities’ compliance with the standards adopted by the Economic and Monetary Community of Central Africa (CEMAC) for African Economic Outlook

fiscal management, convergence indicators and mutual monitoring sometimes falls short of requirements. In 2005, fiscal revenues increased by 67 per cent compared with 2004, up from 746 billion CFA francs to 1 245.7 billion in 2005; this figure includes 1 047.6 billion in oil proceeds, i.e. a 97.5 per cent increase from 2004, owing to a 12.5 per cent rise in oil production and to world prices for Congolese crude oil. Non-oil receipts, which increased by only 6 per cent, nevertheless benefited from improved VAT (Value Added Tax) and company tax collection. Other revenues turned out to be lower than predicted because of a decline in customs revenues due to the customs-duty exemptions granted on oil sector and public-enterprise imports. Thanks to relatively cost-restrictive management, public expenditures increased moderately, up from 656 billion CFA francs in 2004 to 746 billion 2005. As a percentage of GDP, current expenditures were 18.3 per cent in 2005 due to continued budgetary support to the CORAF oil refinery, as well as to a 5.8 per cent increase in wages and a 21.7 per cent rise in expenditures on goods and services. Subsidies and transfers to the poor also increased by 26 per cent, but primary expenditures on the fight against poverty rose by only 0.5 per cent, to 4.9 per cent of GDP. Investment expenditures increased by 25 per cent. This expenditurecontainment policy resulted in a primary surplus © AfDB/OECD 2007

Congo Republic

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Oil revenue

22.9 9.8 12.7

29.6 8.6 20.4

32.5 8.7 23.1

39.6 6.7 32.4

40.1 6.1 33.7

38.0 6.8 30.6

37.6 6.8 30.2

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

42.8 38.1 24.2 8.9 13.9 4.7

29.2 22.6 17.0 5.8 5.6 6.5

28.6 21.6 16.0 5.4 5.6 7.0

23.7 18.3 13.2 4.1 5.0 5.4

21.2 14.0 11.1 3.3 2.9 7.1

25.7 16.1 13.1 3.8 3.0 9.5

25.4 15.8 12.9 3.7 2.9 9.5

-6.1 -20.0

6.0 0.4

9.5 3.9

20.9 15.9

21.8 18.9

15.3 12.3

15.1 12.1

Primary balance Overall balance

a. Only major items are reported. Source: IMF data; estimates (e) and projections (p) based on authors’ calculations.

amounting to 20.9 per cent of GDP, but the improvement is mainly due to the oil sector, which still largely dominates public resources and exposes them to unforeseeable external shocks. The overall balance on a commitment basis also showed a surplus, of 500.1 billion CFA francs (15.9 per cent of GDP), as against 89.5 billion in 2004 (3.9 per cent of GDP). This significant fiscal surplus generated some inflationary tensions, even although inflation was limited to 2.5 per cent. Oil price subsidies, which were close to 1.5 per cent of GDP in 2005, were brought down to 0.5 per cent in 2006, and they are expected to be abolished in 2007. In 2006, revenues generally performed very well (1 870.5 billion CFA francs, as against 1 245.7 in 2005), with the exception of customs revenues, which balanced out at 2 billion CFA francs less than projections. Expenditures, on the other hand, largely exceeded projections, going up from 746 to 984 billion CFA francs in 2006, and therefore, following a review of public finances in October 2006, the IMF took the decision to freeze the third tranche of the PRGF for failure to comply with budget-restriction measures. The IMF has set conditions for the resumption of the Facility in 2007: this will depend on Congo’s application of ten measures relating to high and low limits for public-finance expenditures. The reasons for this uncontrolled slippage were related to: i) the security precautions taken by the state to face the risk of population inflows from the Democratic Republic of © AfDB/OECD 2007

http://dx.doi.org/10.1787/575666174456

Congo, where tense presidential elections were being held; ii) the election of President Denis Sassou Nguesso at the head of the African Union for a year, which resulted in off-budget expenditure assumed by the Congolese treasury; and iii) the quasi-doubling of the investment budget, which had initially been estimated at 185 billion CFA francs, including 150 billion from internal resources. Moreover, donors are showing reluctance to disburse their share and are waiting for the conclusion of talks on the trade debt with the London Club – a necessary stage in reaching the decision point of the HIPC Initiative); the Paris Club has meanwhile already cancelled nearly 25 per cent of the external debt. In 2007 and 2008, the country manifested its intention to use part of the oil-reserve fund for advance payment of the costly debts guaranteed by oil receipts and to increase expenditures aimed at achieving the Millennium Development Goals (MDGs). In addition, in order to improve the control and auditing of expenditures, a new law for government purchasing was presented to parliament in late 2006, and a functional classification of expenditure will be put in place in the course of 2007. Monetary Policy Congo belongs to the CFA franc zone and to the CEMAC: this means that monetary policy remains subject to regulation by the Bank of Central African African Economic Outlook

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States (BEAC), which oversees the stability of prices and of the exchange rate. Monetary evolution in 2005 was marked by a decline in net domestic credit. The country’s money supply nevertheless progressed at the same pace as that of non-oil GDP growth and most of the exceptional revenues in foreign currency were sterilised through BEAC deposits. The rate of foreignexchange coverage of domestic currency settled in 2005 at 71.7 per cent, as against 29.3 per cent in 2004, placing it largely above the statutory minimum of 20 per cent. As a result of the increase in world prices of crude oil, of the growth of the volumes of crude oil exports and of the repatriation of the state’s oil revenues, the country’s net external position improved substantially, increasing from 58.3 billion CFA francs at the end of December 2004 to 466.1 billion at the end of 2005. Moreover, Congo benefited from debt relief amounting to nearly 94.9 billion CFA francs under the second tranche of the PRGF. 200 Domestic credit, which had slightly increased in 2004, fell in 2005, particularly with respect to credits to the state, indicating that the government resorted more to public-treasury savings and the central bank in order to finance its needs. In addition, the state’s outstanding debts to the banking sector recorded a net drop, falling from 185.1 billion CFA francs to 59.6 billion at the end of 2005, thanks to the combined effect of a better control of public expenditure and the escalation of oil revenues. Hence the state’s net position moved from 188.8 billion CFA francs in debt in 2004, to 61.3 billion in credit at the end of 2005.

On the other hand, credits to the economy grew slightly as a percentage of the broad money supply at the beginning of the period (1.3 per cent, as against 0.3 per cent in 2004); this increase was driven by renewed activity in construction, telecommunications and energy, despite the banking sector’s reluctance to grant credits to enterprises (especially public enterprises) because of the large share of non-productive loans in its portfolio. The real exchange rate, which remained 14 per cent lower than its level prior to the 1994 devaluation, depreciated only slightly in 2005 because of the relatively low inflation rates in 2005 (2.5 per cent) and 2006 (3.7 per cent). External Position In 2005, Congolese exports continued to be dominated by oil exports (2 298 billion CFA francs), representing more than 85 per cent of total exports. Driven by the imports of goods and services in the private sector, particularly the oil sector, total imports also increased appreciably (1 580.6 billion CFA francs, as against 1 314.5 billion in 2004). The strong growth of export income resulted in a surplus on the current account in 2005 amounting to 8.3 per cent of GDP. This favourable evolution is due to the quasidoubling of the surplus, in nominal terms, on the balance of current transactions, which came to 1 161.9 billion CFA francs in 2005 as a result of the improvement in the terms of trade and of the hikes in the world prices of oil, logs and timber. This positive situation made it possible to improve the country’s gross currency reserves, which rose to 7.3 months of imports in 2005.

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

41.5 70.2 28.6 -38.0 -15.8 -0.2

50.7 74.0 23.3 -19.1 -16.4 -0.5

56.7 79.1 22.3 -18.9 -21.8 -0.5

53.9 79.6 25.7 -26.5 -19.5 0.4

53.8 81.1 27.3 -20.3 -14.9 0.3

49.3 74.7 25.4 -17.8 -21.7 -0.4

48.9 73.5 24.7 -17.4 -21.5 0.1

Current account balance

-12.4

14.6

15.5

8.3

19.0

9.3

10.1

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/003371771264

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© AfDB/OECD 2007

Congo Republic

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

250

200

150

100

50

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF.

201 http://dx.doi.org/10.1787/320668854808

The services deficit grew in 2005, reaching 835 billion CFA francs, as against 433.1 billion in 2004, as an effect of the rise in transport and insurance expenditures. The factor-income balance also declined, falling from a 501.1 billion CFA franc deficit recorded in 2004 to a 612.9 billion deficit in 2005, owing to the increase in transfers of profits by the oil companies. The country remains highly indebted, with a total debt stock evaluated at 3 512.4 billion CFA francs at the end of 2005. Nonetheless, the government has made significant efforts to reduce the debt, which amounted to 4 322.4 billion CFA francs in 2000. The ratios of debt-service to exports and to budget receipts were thus brought down from 17.4 and 41.5 per cent in 2004, to 15.8 and 33 per cent in 2005, respectively. The ratio of debt stock to GDP fell from 160.6 per cent in 2004 to 111.0 per cent in 2005, but still remains far from the 70 per cent criterion decided by the financial community. The state’s overall financing needs reached 125.0 billion CFA francs in 2005, taking account of: the payment of domestic and external arrears (69.7 billion CFA francs); the amortisation of © AfDB/OECD 2007

the external debt (298.5 billion); the reinstatement of the state’s position in relation to the banking system (250.1 billion); and the withdrawal from the nonbanking sector (38 billion). Those needs were covered by the mobilisation of external resources amounting to 5.9 billion in project grants, 10.4 billion in project loans, 13.9 billion in treasury loans and 94.9 billion in debt relief.

Structural Issues Recent Developments The programme for public-sector reform and privatisation which was started in 1994 has suffered greatly from the successive wars in Congo over the past ten years. The programme was reactivated in 1998 with technical support from donors, but has developed under difficult political and economic conditions. In terms of the objectives of the privatisation programme, achievements remain marginal. Out of African Economic Outlook

Congo Republic

six enterprises earmarked for privatisation in the first part of the programme, only Hydrocongo (fuel distribution and marketing) has in fact been privatised; the process is ongoing for the other five, but some of these need first to be brought up to standard. Concerning the second part, the MAB (livestock feed mill), two hotels (Palm Beach and Méridien) and three banks have been privatised. In some cases, privatisation is quite problematic because of sociallydeteriorated situations in a number of public enterprises, such as the national postal services and telecommunications bureau (ONPT) or the autonomous Brazzaville port authority. This has led the World Bank to cancel the International Development Association (IDA) credit initially granted for the implementation of the privatisation programme and to limit its aid to following up the implementation process of the concessioning of the COR.

202

In the water and electricity sector, the calls for bids in 2002 for the concessioning of the national electricity utility (SNE) and of the national water utility (SNDE) were unproductive, despite the decree granting a temporary concession of the SNDE to the British company Biwater, which was later rescinded because of the substantial investments needed to bring the infrastructure up to standard, as demanded firstly by the partners. The World Bank and the government therefore decided, through the IDA’s Transitional Support Strategy, to include the entire privatisation process of the SNE and the SNDE in infrastructure rehabilitation under the project for the rehabilitation of the water and energy infrastructure (PRIEE). The cost of the water programme is estimated at 9 billion CFA francs, 10 per cent of which is to be covered by the government, while the cost of the electricity programme amounts to $25 million, to be entirely financed by the IDA. To improve the SNE’s financial situation, a programme to install 50 000 electricity meters began in 2005 and 2006, and the pricing structure will be reviewed in 2007. Other large public enterprises, such as the harbours of the former Congolese transport agency, ATC, are being restructured and the related studies are being financed by the French Development Agency (AFD) African Economic Outlook

with the surplus balance of the 1994 structural adjustment plan (PAS). Also, the by-laws of the autonomous Pointe-Noire port authority were modified and a priority investment programme was drawn up; financing for this amounting to 35 billion CFA francs will be provided by the European Investment Bank, the AFD and the Development Bank of Central African States. For the autonomous Brazzaville port authority and the secondary ports, a benchmark business plan was drawn up to increase their performance; however, the financing of the rehabilitation programme has not yet been completed. Following a call for bids, the Golliard company has been declared successful tenderer for the potential purchase of the shipyard. For the concession of river transport, the single bid from the enterprise NBTC (Niger-Benue Transport Company) is still being examined. After an unsuccessful call for financial bids for the privatisation of the COR, the government opted for direct negotiations with SHELTAM-MVELA, a consortium that submitted the financial parameters for the concession in 2004 and is waiting for the authorities’ decision. Finally, decisions will have to be made to finalise the liquidation/privatisation of the LINA CONGO airline company; negotiations are also in progress with an Italian company for the concessioning of the Sangha Palm palm groves (palm oil). In the telecommunications sector, the authorities have yet to define the final privatisation scheme (total or partial transfer of the public assets) for the Congolese telecommunications company (SOTELCO), for which the state has financed an organisational audit. As regards the Congolese postalservices and savings enterprise (SOPECO), which remains public, the government has financed a study to establish SOPECO’s opening-balance sheet and ONPT’s closing balance sheet. In a context of a downward trend in oil production, a thorough institutional reform of the oil sector was undertaken in 2005: this reform had become essential for a sector that generates important resources for the country. The purpose of the reform was to allow the state to allocate oil revenues to the country’s development with greater efficiency and transparency. The reform began in 2005 with the adoption of a strategy aimed at refocusing the activities of Congo’s © AfDB/OECD 2007

Congo Republic

national oil company, the SNPC, on its basic business concerns, and this resulted in the liquidation of two of SNPC’s subsidiaries in 2005. The reform continued into 2006, mainly addressing the organisation and management of the SNPC, which markets nearly twothirds of the state’s share of oil (profit oil), controls 40 per cent of the state’s total oil income, and supervises the oil sector and the budget flows on its behalf. With the backing of AfDB, IDA and IMF, the state also undertook: i) to review the SNCP’s accounting and internal-control systems by providing the external auditor, KPMG (Klynveld Peat Marwick Goerdeler), with the necessary documentation to enable it to certify the oil receipts and to guarantee that the revenues due to the state by the SNPC, by its customers and by its private-sector partners were in fact transferred to the public treasury; ii) to review how the SNPC markets oil products, with the aim of matching best international practices and ensuring a profitable price for the country; and iii) to eliminate any conflict of interests through the enactment of legislation, to be certified by the national anticorruption commission, that requires that, while they exercise their position, SNPC management executives withdraw from any form of participation or investment in subsidiaries of the company or in companies doing business with it. Finally, an internal auditing committee was recently set up to monitor the implementation of the accounting, auditing and internal control procedures and to supervise the application of the SNPC auditing recommendations. The state has also recently decided to impose the systematic recourse to competitive calls for tenders for all contracts for the execution of works and for purchases of goods-andservices when these exceed 20 million CFA francs. Basic economic infrastructures (which directly affect the living conditions of the population) and collective infrastructures are very poorly developed and, moreover, in a state of great disrepair. For example, the road network, totalling 17 300 kilometres, only about 1 235 kilometres of which are asphalt, has deteriorated and suffers from lack of maintenance. The rural earth roads, which are needed for distributing rural products, are for the most part impassable, and hence contribute to the sharp decline in the population’s purchasing power and to the amplification of poverty. The © AfDB/OECD 2007

Congolese railway network (795 kilometres) has experienced a considerable decline in traffic due in part to the very run-down state of its equipment and to insecurity on its lines. This state of disrepair applies equally to the port, maritime and river facilities. Air transport, which is very little developed and is centred on the two main international airports, Brazzaville and Pointe-Noire, remains to be developed in order to face sub-regional competition efficiently. Most of the secondary airports, which could have offered possibilities for servicing populations situated in remote areas, are in disrepair and pose problems of flight security. The development of the private sector is encountering enormous difficulties, and the regulations that govern its operations are considered obsolete insofar as the needs of a modern, competitive economy are concerned. According to the World Bank’s Doing Business 2006 report, Congo’s business climate possesses significant deficiencies, particularly in what the report refers to as the “Ease of ”: paying taxes, where Congo is ranked 170 out of 171 worldwide; trading across borders, for which procedures are particularly laborious (rank 166); registering property (rank 163); and enforcing contracts (rank 155). The banking and financial system is ineffective and incapable of satisfying the demand for credit, because of its low human and financial resource capacities, or else the unsuitability of the products offered to customers. Nonetheless, in order to inject dynamism into this sector (especially the almost embryonic financial market), some significant restructuring and privatisation efforts have been made during the past few years, with the privatisation of the COFIPA investment bank and the planned creation in 2006 of a bank for the housing sector, the Banque de l’Habitat, with majority Tunisian capital. Investment on the whole remains limited, and business credit is low and practically inexistent for poor populations, who are forced to resort to (recent and littledeveloped) microfinance structures. In the domain of agriculture and natural-resource and environmental management, efforts have been made to energise forestry and preserve forest potential through better management of the sector. Forest law African Economic Outlook

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is aiming at a more efficient rotation system for log cutting and processing, in order to improve the exploitation and rational regeneration of this resource. In the mining sector, the controls necessary for putting the country back into the Kimberley Process for diamonds have been set up. Access to Drinking Water and Sanitation Congo is rich in water resources, its rainfall is abundant and the drainage network consists of the Congo and Kouilou-Niari River basins. However, some regions, especially the table-land region and the northern suburban area of Brazzaville, depend on scarce underground resources for their water supply. Surface and underground water, although easily collected, remains very vulnerable, because it is exposed to the natural hazards inherent to heavy rainfall (floods, serious erosion, etc.) and to anthropogenic pollution, due mostly to the fact that surface water is used for the evacuation of various kinds of waste. 204 The SNDE is in charge of drinking-water distribution, but it serves no more than 18 urban watersupply centres, 3 of which are no longer operational. Moreover, this utility company sells only 54 per cent of the volume of water produced (39 million m3) and its technical and commercial situation has continued to deteriorate since 2004. In Brazzaville for example, it appears that only half of the subscribers are invoiced regularly, on a flat-fee basis, because the water meters have disappeared; also, only 68 per cent of water samples meet the quality standards. An act voted in February 2003 aims to transfer jurisdiction to local authorities; which will then have important responsibilities in the field of water, but the overall paucity of their human, material and financial resources is a major obstacle to this transfer. The private sector is a stakeholder in water-resource management, but it is still in an embryonic stage (research offices, construction and service enterprises). According to the Congolese household survey for the evaluation of poverty (ECOM) of 2005, the coverage rates for drinking water and sanitation as defined by African Economic Outlook

the MDGs indicate that 68 per cent of households have access to drinking water on the national level, 52 per cent of these being in semi-urban areas and (depending on sources) 15 to 28 per cent in rural areas. Only 19 per cent of households – none of which are in rural or semi-urban areas – have access to sanitation, and only 6 per cent have modern latrines (Pointe-Noire has the best level of equipment, at 13.5 per cent). In Brazzaville, a conurbation of more than one million inhabitants, it is estimated that only 30 per cent of households have direct access to a water-supply point. The rest of the population obtains its supply through informal means (neighbours, water carriers or traditional sources). This situation is likely to deteriorate: the SNDE is finding it hard to ensure the maintenance of the network because 50 per cent of users with operational connections do not pay their water bills. Contrary to the findings of the 2005 ECOM survey, which argued that “access to drinking water is far from being problematic” in Congo, it is important to underline the disparities in conditions of access to basic services, especially as the lack of data on these conditions of access makes it impossible to establish an exhaustive inventory. The supply level in rural areas hence remains very low, and high geographical disparities persist. For example, 48 per cent of villages are equipped with water points in the Lékoumou region, whereas the rate in the departments of Kouilou and Likouala is under 5 per cent. In urban areas, estimation of the servicing rate is imprecise because it relies on the number of connections and not on the number of active subscribers. Besides, no distinction has been made between household consumption and the consumption of public subscribers, large estates, industries and businesses. Analysis of the supply conditions in urban areas shows that the real servicing rate, in terms of individual connections, is deteriorating and probably only amounts to 15 per cent at the present time. Concerning cleansing and sanitation, only the capital city has a household-refuse disposal service, but this benefits only 41 per cent of the households –when refuse is removed regularly, which is far from being the case. Since there is no sewerage network, most industries, hotels, health centres and shopping centres © AfDB/OECD 2007

Congo Republic

use their own facilities. Sludge and waste-water flow into the river and its affluents, and there is no quality control of the waste. Various studies which have been conducted on faeces-management practices, particularly in Brazzaville, reveal that the population is exposed to major faecal danger. The sanitation blueprint for Brazzaville needs to be updated to take into account the evolution of the city’s urbanisation. Resources need to be mobilised to finance gutter-cleaning at least once every five years.

sector; it also provides for the delegation of drinkingwater supply in the form of concession, contracting or local authority, to one or several legal bodies under private law. On the other hand, the institutional framework for sanitation is lacking in clarity, with responsibilities scattered amongst the ministries responsible for the environment, for hydraulics, for health and for public works. Since budget classification does not explicitly mention sanitation, national efforts in this domain are difficult to evaluate.

Moreover, as the insufficiency of transfer sites and landfills induces the population to use rainwater drainage channels, it will be necessary to install two transfer sites per precinct and three final-disposal landfills (at the north, west and east of the city). The underequipment of the agents involved, especially in terms of vehicles and loaders for disposing waste in finaldisposal landfills, also constitutes a problem. It will also be necessary to establish sanitation blueprints for all municipalities and to reinforce the application of waste-management regulations. Furthermore, in order to draw up local waste-management plans, it will be necessary to make an inventory in each municipality of the quantities of waste, waste-water and faeces produced.

The institutional framework for the development of the sanitation sector has yet to be defined and no investment is planned in this domain. The authorities should, therefore, either set up a single authority in charge of sanitation (waste-water, faeces, rainwater, solid waste), or else redistribute government tasks more effectively. Analysis of the strategic memo for the water and sanitation sector prepared in the framework of the PRSP reveals the absence of an appropriate strategy for the development of the sector and for improved access to these services by the most underprivileged populations.

The objectives announced in December 2005 by the Minister of Energy and Hydraulics (MEH) for drinking-water supply aim at servicing the country’s 10 department capitals, at increasing the coverage rate in rural areas to 75 per cent by 2015, and at servicing the 86 district capitals and all urban centres of more than 5 000 inhabitants; however, the implementation strategy for attaining these objectives has yet to be defined. In December 2005, a roadmap for the promotion of an integrated management of water resources was adopted. This act includes the water law adopted in April 2003, but for which there have been no application decrees as of yet; it provides specifically for the establishment of new management bodies for the sector, such as a consultative water council, a national agency for rural hydraulics, a regulatory agency for the water sector and a development fund for the water and energy © AfDB/OECD 2007

Civil society is also organising its participation in the development of the water, sanitation and hygiene sectors; its actions specifically include: the regional centre for low-cost drinking water and sanitation (CREPA); the citizens’ dialogue programme (mobilisation of more than 100 local organisations to draw up an “advocacy for access to drinking water” document); and the mobilisation of local organisations by the Research and Technological Exchange Group (GRET) for the implementation of alternative drinkingwater services in suburban areas. The citizens’ dialogue programme was launched in September 2004 in the framework of a partnership between the Forum des jeunes entreprises (“young enterprises forum”, one of the largest NGOs in Congo) and a French NGO, the French Committee for International Solidarity. This fiveyear programme benefits from financial support from the French Ministry of Foreign Affairs. Also, the Global Water Partnership (GWP) aims to set up national water partnerships whose role will be to support the government in preparing and implementing an action plan for the integrated management of water resources. African Economic Outlook

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The roadmap accepted in December 2005 proposes that the consultative water council planned under the water law should constitute GWP’s national dialogue platform. The French Ministry of Foreign Affairs is providing financial support to the GWP regional coordination initiative for Central Africa.

206

The state’s investment budget in the water sector planned for 2006 amounts to 9 billion CFA francs, which is less than 15 per cent of the total investment budget of the Ministry of Energy and Hydraulics; moreover, experience has shown that this budget is often executed at no more than 30 per cent of initial projections. The strategic memo for the water and sanitation sector drafted for finalising the PRSP sets out the list of priority investments proposed in the framework of the poverty-reduction strategy without any mention of the expected impact. The investments necessary for achieving the MDGs relating to drinking water and sanitation (faeces and waste-water management) would amount to an average of 22 billion CFA francs per year over the next ten years. Many multilateral and bilateral co-operation programmes have been cancelled following the country’s turmoil since 1997. The World Bank froze its commitment in the financing of the PRIEE, while the AFD, without co-ordinating with the World Bank, is considering gearing its support exclusively towards developing the supply of water in peri-urban districts from boreholes. The UNDP is highly involved in the sanitation sector, and the AfDB, through the African Water Facility, is preparing to provide institutional support to the country by drawing up a national document on water-policy and by making an inventory of resources and needs. The current organisation of the water sector and its place in government priorities make the ambitions announced in December 2005 by the MEH unrealistic. To improve the state’s vision of the sector and make it a higher priority, the authorities require drawing up a more realistic short-term action plan that would benefit poor populations more quickly. An action plan of this kind would no doubt lead to better mobilisation of the international partners and, above all, provide a clearer African Economic Outlook

definition of the roles of the different players at national level, as well as of the assets they possess and the actions they can undertake.

Political Context and Human Resources Development In 2006, the political context was marked by an appeasement approach on the part of the authorities, who allowed an important opposition leader to return from exile; they also plan to organise parliamentary elections open to all political tendencies in 2007. Unemployment is higher amongst women (20.6 per cent) than men (18.1 per cent) in all economic strata. The adult literacy rate is 80.4 per cent, which is a good performance for a country of sub-Saharan Africa, where the average is below 50 per cent, but there is a big gender gap in this figure, amongst both the poor and the non-poor: amongst the poor, the rates are 86.3 and 68.2 per cent for men and women, respectively, and amongst the non-poor, 91.7 and 76.6 per cent, respectively. The net school enrolment rate is 86.8 per cent, which is considerable compared with the sub-Saharan average, but the figure is a flimsy mask pulled over the mediocre quality of the system with regard to the age/level standard. These results are partly the consequence of the social and political instability the country has experienced since the 1990s, since there are now catch-up effects. In secondary schooling, the gross enrolment rate is estimated at 65.3 per cent and the net rate at 44.4 per cent. In higher learning, the gross and net enrolment rates are 10.1 and 2.3 per cent, respectively. The drop-out rate is relatively low for both primary and secondary schools, but is about three times higher in the upper secondary school (7.5 per cent). For both primary and secondary schools, the non-poor benefit from better access in every region of the country. From the point of view of residence, the rate of access to schools is higher in urban areas than in rural areas, irrespective of the schooling level or the poverty level of the households. The cost of access to school is, however, high for all social strata. © AfDB/OECD 2007

Congo Republic

According to data from the Demographic and Health Survey which was conducted in 2005 (DHS 2005) with the support of the IDA and the United Nations Children’s Fund (UNICEF) and used in finalising the PRSP, the infant mortality rate was estimated at 75 deaths per thousand live births, while the child mortality rate was 44 per thousand. Overall, the infant-child mortality rate is 117 per thousand, which means that one child out of ten in Congo dies before the age of five. The mortality rate is distinctly higher in the countryside (136 per thousand, as against 108 in cities). In a per region analysis, the rate varies from 102 per thousand in Pointe-Noire to 142 per thousand in the north. For the same period, the maternal mortality rate is 781 deaths per 100 000 births. The average coverage rate for children aged from 12 to 23 months for complete vaccination against the target diseases of the Extended Vaccination Programme is 52 per cent, but this rate is distinctly lower in rural areas (41 per cent) than in urban areas (64 per cent). This disparity is even greater between the regions of the north (33 per cent) and the Brazzaville/PointeNoire zone (64 per cent). The survey found that the vaccination rate increases in proportion to the mother’s education level and also in proportion to household income and standard of living (29 per cent of children in the poorest quintile vaccinated, as against 73 per cent in the richest quintile). HIV/AIDS prevalence was estimated by the Joint United Nations Programme on HIV/AIDS at 5.3 per cent in 2006. As early as 1985, the setting-up of a scientific committee for the diagnosis and fight against HIV infection constituted the first stage of an overall countering strategy. In 1987, a national programme for fighting the disease reinforced this first stage and made it possible to implement a short-term emergency plan, followed by two medium-term plans (1989-91 and 1996-98) financed by the World Health Organization. With respect to the poverty profile, the PRSP preparation process necessitated the completion of the ECOM survey on the living conditions of households (the first survey of its kind to be conducted on a national scale in Congo), which was jointly funded by the © AfDB/OECD 2007

government, the World Bank and the UNDP. This survey showed that the social situation is marked by an incidence of poverty reaching almost 50.1 per cent and is characterised by the insufficiency of health services, sanitation and basic education (with falling enrolment school success rates), and by a high prevalence of HIV/AIDS. The various results revealed that poverty in Congo is characterised by monetary poverty, affecting 42.3 per cent of households, or 1 779 300 persons in all. Poor households are found most often in periurban and rural areas, as well as in Brazzaville. The average age of poor household heads is 48 (47 for men and 50 for women). Households headed by women comprise relatively more poor persons than those headed by men, and large-sized households are the most affected. The poor can be distinguished from the non-poor by level of education, with the poverty rate declining as the level of education rises; this shows that the poor usually drop out of the education system earlier and only rarely go beyond the primary-education level because of the relatively high cost of school. Hence, a greater proportion of illiterate individuals of 15 years and over is found amongst the poor. The survey also revealed that the nonworking population is the population category most exposed to poverty. In the working-population group, household heads working in the agriculture, construction, mining and manufacturing sectors are the ones most frequently facing difficult living conditions. This situation is aggravated when they work in the informal sector. The survey showed that, bearing in mind the causes of poverty identified by the households themselves, the priorities of government action should be mainly directed towards structural investments (employment, school and health infrastructures, roads, water points, etc.). In fact, the survey revealed that 97 per cent of the poor attribute their poverty to their lack of work, 47 per cent to the absence of transport and travel infrastructures, and 41 per cent to the lack of care and medicine. Hopes were also expressed that the state would: increase the number of primary-school classes and/or primary schools in urban areas in order to solve the problem of extremely over-crowded classrooms; African Economic Outlook

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encourage poor parents to keep their children longer at school by offering better education; reduce the cost of education services; and improve teachers’ working conditions and training. In the area of health, households hoped that the state would: reinforce prevention against the principal endemic diseases, especially in poorer social categories; raise public awareness about the dangers of self-medication, which is a very widespread household practice, especially in non-poor households; reinforce awareness campaigns in the area of family planning, especially in rural areas; expand public health infrastructures and bring them closer to residential areas, especially in rural areas; and re-examine, harmonise and reduce the cost of health services. The survey also highlighted the need to promote and develop activities and employment in the agricultural sector and in sectors where natural resources are abundant and under-exploited, such as fishery, hydraulics, and mining. Special interest should also be given to the situation of women in urban and rural areas so as to guarantee them sustainable means of existence.

The labour market in Congo is characterised by a national unemployment rate of nearly 19.4 per cent. This is higher in Brazzaville and in Pointe-Noire, where it is estimated at 32.6 per cent and 31.5 per cent, respectively, while it is distinctly lower in the rural areas (5.8 per cent). The activity rate of persons of 15 years and over was estimated at 69.4 per cent in 2005. The rate is higher in rural areas that in urban areas (93.8 per cent, as against 81.4 per cent) because employment there is less formal and therefore more flexible. More than half (56 per cent) of the working population aged 15 years and over have a job, and the majority live on agriculture (35.6 per cent) or trade (20.7 per cent). The proportion of persons employed in industry is relatively low (16.3 per cent). For men, 57.7 per cent are in employment, as against 54.5 per cent for women. The employment situation is preoccupying, because most of the occupied working population (70 per cent) is self-employed and 75 per cent are considered poor.

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© AfDB/OECD 2007

Democratic Republic of Congo

Kinshasa

key figures • • • • •

Land area, thousands of km2 2 345 Population, thousands (2006) 59 320 GDP per capita, $ PPP valuation (2006) 856 Life expectancy (2006) 44.4 Illiteracy rate (2006) 32.8

Democratic Republic of Congo

Lake Édouard

Lake Maï-Ndombe

Lake Tanganyika

Lake Moero

T

HE FIRST FREE ELECTIONS IN 40 YEARS (presidential,

parliamentary and local) made 2006 a very important year, which also saw the adoption of the national constitution for the Third Republic. The elections mostly went well, but the Democratic Republic of Congo (DRC) struggled to maintain macroeconomic stability and suffered major conjunctural upsets. Public finances went off track in 2006, aggravating the nominal budget deficit, stepping up inflation and leading to a depreciating currency. The budget excesses, which were directly linked to the implementation of the various elections, to maintaining security in the country and to restoring civil servants’ wages, reflected the vulnerability of the economy to external contingencies. The still very large external debt is a brake on the

economy. The most optimistic forecasts indicate that the completion point for the Highly Indebted Poor Countries (HIPC) Initiative will be reached at the end of 2007, after application of a poverty reduction and growth strategy paper The elections went well, (DSCRP) and its assessment but the authorities are having during 2007. difficulty maintaining macroeconomic stability Generally speaking, the and there is a risk of spiralling DRC’s new leaders face very inflation and public spending. great challenges in all economic, social and political spheres. The country is one of the world’s poorest and years of war have destroyed most infrastructure and productive activity. Its inhabitants live in deplorable economic and sanitary 211

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: IMF and local authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/266155225581

© AfDB/OECD 2007

African Economic Outlook

D.R. Congo

conditions, especially in the east, where bands of rebels are still striking. Social indicators are so low that it will be virtually impossible for the country to reach even one of the Millennium Development Goals (MDGs). Only 22 per cent of the population have access to drinking water and only 9 per cent to sanitation, with wide regional and urban-rural disparities. However, potential for growth and economic development is immense. The country is literally brimming over with water, mineral, forest and oil resources. The domestic market serves more than 60 million people. The international community as a whole, with both foreign-aid donors and private investors, is watching the post-election period closely, as it will be decisive for reviving projects and programmes. If political stability and democracy manage to take root, with restoration of state authority, good governance and a fight against corruption, the DRC could well be posting excellent economic results in a few years time. 212 With the end of the fighting and with massive foreign aid, real GDP growth speeded up, from 3.5 per cent in 2002 to 6.5 per cent in 2005 and 2006. This excellent performance should continue, with growth expected to be 6.2 per cent in 2007 and 6 per cent in 2008. Growth in 2006 was boosted by copper, cement, wood, beverages (alcoholic and soft drinks) and electricity. However, more than 80 per cent of the economy is in the informal sector.

Recent Economic Developments The agricultural sector grew at about the same rate as the population did in 2006 – around 3 per cent – because of the lack of major roads and agricultural service roads. Agriculture employed more than 70 per cent of the population and provided 46.7 per cent of GDP in 2005. Food crops (manioc, maize, rice and plantain) dominate the sector. The potential is huge because only 10 per cent of arable land is cultivated or used for livestock. Agricultural exports are mostly coffee, cocoa, wood and rubber, but yields of these items have collapsed in recent years and export revenues African Economic Outlook

from them have slumped. The agricultural sector is a cornerstone of the DSCRP and of the multi-sector emergency programme for repair and reconstruction (Programme multisectoriel d’urgence pour la réhabilitation et la reconstruction – PMURR) due to its importance in boosting food security and reducing poverty. The DRC has enormous mineral potential, but mining only accounted for 8.8 per cent of GDP in 2005 and its performance was far from that expected. The country has 34 per cent of the world’s known reserves of coltan and 10 per cent of its copper, as well as uranium, cobalt, zinc, silver, diamonds, gold and oil. Growth of mining is hampered by overall bad management of resources, fraud and slow structural reform, and the country has not been able to benefit fully from the opportunities provided by rising world metal prices. The copper sector grew by 33.7 per cent in volume in 2005 due to higher production but only 4.4 per cent in 2006 because of a drop in output and problems in the state-owned mining enterprise Gécamines. Prospects for copper are quite good however. A mixed-capital enterprise, Kamoto Copper Company (KCC), revived copper and cobalt production in Katanga’s mining centre of Kolwezi in mid-2006. After a five-year warm-up period, annual production should exceed 150 000 tonnes of copper and 5 000 tonnes of cobalt. Oil output is declining and shrank 1.5 per cent in real terms in 2006 after a drop of 8.9 per cent in 2005 (9.2 million barrels in 2005, down from 10.1 million in 2004) because of delays in renovating wells. Also, only the coastal area is being tapped, though test-wells in the past have shown presence of oil in the centre and east of the country. Industrial output of diamonds has also been disappointing and fell 26.7 per cent in 2005, while artisanal production rose 33.1 per cent, though this rise seems to have peaked, with negative growth of 13.6 per cent in the first nine months of 2006. This fall in production was due to the depletion of mines, lack of capital to purchase spare parts and fierce rivalry between the state-owned mining enterprise Minière de Bakwanga (Miba) and about 10 000 illegal workers. Some $10 million worth of diamond-mining equipment could not be used in 2006 because of lawlessness at the © AfDB/OECD 2007

D.R. Congo

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on central-bank data. http://dx.doi.org/10.1787/785001361156

Miba mines. The resulting drop in production caused cash-flow problems, failure to pay Miba’s 6 500 employees and increased unpaid debts to suppliers. Official figures show an 80 per cent fall in the volume of diamond exports in 2006. The industrial sector supplied 13.7 per cent of GDP in 2005 and grew 9.3 per cent in volume, with construction and beverages taking the lead. Alcoholic beverages, especially beer, showed a 16.7 per cent growth rate in September 2006 (down from 18.9 per cent year-on-year). Cement production in volume was good in 2005 (up 26.2 per cent) and 2006 (up 9.7 per cent), mainly due to the country’s reconstruction and huge needs. Log production increased substantially, by 16.8 per cent in 2005 and by 54 per cent in the first five months of 2006.

The tertiary sector was 27.9 per cent of GDP in 2005 and grew 7.8 per cent in real terms, largely thanks to transport, telecommunications and financial services. The DRC also has untapped potential for tourism. Household demand in 2005 was in step with these sector increases, as was public consumption, helped by external funding. Public consumption grew strongly, by 22.5 per cent in volume, in 2006, an election year. Final consumption should grow more slowly in 2007 and 2008 (less than 4 per cent in volume) and its share of GDP is expected to fall, from 97.7 per cent in 2006 to 93.5 per cent in 2007 and then 88.7 per cent in 2008, while private savings should increase. Domestic savings rates, however, will probably not be enough to fund domestic investment and recourse to foreign savings seems inevitable in the next few years.

Table 1 - Demand Composition 1998

2005

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage of GDP (current prices)

Percentage changes, volume

Gross capital formation Public Private

17.8 0.1 17.7

14.2 3.7 10.5

8.2 9.0 7.9

29.2 28.0 30.0

26.3 30.0 25.0

Consumption Public Private

83.3 8.2 75.1

93.5 8.3 85.3

9.2 22.5 7.9

3.8 6.8 3.4

3.4 6.9 2.9

-1.2 27.3 -28.5

-7.7 31.6 -39.3

13.8 25.1

7.5 4.0

7.8 4.3

External sector Exports Imports

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/623432437015

© AfDB/OECD 2007

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Fixed capital formation will have steadily risen during 2000-08, from 3.4 per cent of GDP in 2000 to an estimated 19.1 per cent in 2008. The investment rate fell slightly, from 14.2 per cent in 2005 to 13.6 per cent in 2006, because of low public investment. Money that should have gone to government capital expenditure was used in current expenditure during the election period. Both private and public investment in volume is expected to increase substantially, by 29.2 per cent in 2007 and 26.3 per cent in 2008, and suggest speedier economic growth.

Macroeconomic Policies

214

The aim of the government’s three-year economic programme (Programme économique de gouvernement – PEG), is macroeconomic stability and renewal of growth. It was originally meant to last until the end of 2006 but results were unsatisfactory because of excessive government expenditure and the slow progress of structural reform. The sixth review by the International Monetary Fund (IMF) in late March 2006 resulted in a freeze on budgetary support and the country adopted a bridge consolidation programme (Programme relais de consolidation – PRC) in April that year, losing $40 million of IMF funding. A new three-year Poverty Reduction and Growth Facility (PRGF) is expected to be signed with the IMF for 2007-09.

Fiscal Policy The 2005 budget deficit was 2.7 per cent of GDP (down from 4.1 per cent in 2004) and is estimated at 1.2 per cent in 2006. It should increase in 2007 to 1.4 per cent and in 2008 to 1.9 per cent. The deficit was reduced in 2005 and 2006 by a substantial increase in revenue, but especially by the international community’s grants and budgetary support for the elections, peace-keeping and reconstruction. Grants were about one-third of government revenue in 2005 (5.2 per cent of GDP). External aid in 2006 was a huge 57 per cent of the government’s budget ($2.2 billion, or 9.5 per cent of GDP) and should fall only slightly in 2007 (to 9.0 per cent) and 2008 (to 8.5 per cent). Tax revenue is expected to remain high (8.9 per cent of GDP in 2007 and 8.4 per cent in 2008) due to increased growth and resumption of productive activity. Oil revenue has also risen significantly thanks to higher world oil prices, which were raised five times in 2005 and three times in 2006, when they rose more than 11 per cent. Along with all this, government expenditure was much greater than expected in the second half of 2005 and several times in 2006, especially in April, when it was more than CDF 13 billion ($29 million) in excess, in July (CDF 9 billion – $20 million) and in September (CDF 12 billion – $27 million). One reason was the

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

8.0 5.4 1.2 2.0

7.7 4.9 0.8 2.0

11.5 7.5 2.0 2.0

16.8 8.6 2.9 5.2

22.0 9.3 3.2 9.5

21.1 8.9 3.2 9.0

20.8 8.4 3.4 8.5

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

10.9 10.6 10.3 5.3 0.3 0.1

13.6 10.9 7.5 2.5 3.4 2.7

15.6 12.8 9.2 3.6 3.6 2.8

19.5 16.1 12.7 4.4 3.4 3.4

23.2 20.1 16.9 4.7 3.2 3.1

22.5 18.8 16.4 4.4 2.4 3.7

22.8 18.3 16.3 4.2 2.1 4.5

Primary balance Overall balance

-2.6 -2.8

-2.5 -5.9

-0.5 -4.1

0.7 -2.7

2.0 -1.2

1.0 -1.4

0.1 -1.9

Total revenue and grantsa Tax revenue Other revenue Grants

a. Only major items are reported. Source: IMF data; estimates (e) and projections (p) based on authors’ calculations.

African Economic Outlook

http://dx.doi.org/10.1787/022083357032

© AfDB/OECD 2007

D.R. Congo

lawlessness in the eastern part of the country, as well as bonuses for police to ensure security during elections and extra expenditure connected with the voting. Another was the civil-servants census, which ended payments to non-existent officers but also led to payment of wage arrears to public servants who had not been paid for months. A third reason was that decentralisation led to a higher rate of surrender of the budget to provincial services and decentralised bodies. The large domestic debt also meant quite heavy debt service payments, aggravated by higher fees by the central bank (BCC). Debt servicing was 3.4 per cent of GDP in 2005 and is estimated to have been 3.2 per cent in 2006. It should be less in 2007 and 2008, as steps to relieve the debt are taken. Finally, the government’s much higher operating expenditure was partly caused by a lot of travel and missions by ministry officials. All these expenditure excesses meant the budget execution rate was very uneven. In 2005, when the execution rate of operating expenditure was 243.9 per cent, capital expenditure, essential for reducing poverty, had an execution rate of only 12.1 per cent. Total government spending is expected to be a high 22.5 per cent of GDP in 2007 and 22.8 per cent in 2008. Capital expenditure should rise from 3.7 per cent of GDP in 2007 to 4.5 per cent in 2008 if the money freed up by debt relief is indeed reallocated to infrastructure and poverty reduction. Monetary Policy Monetary policy has been hit by this budget performance and to fund the extra expenditure in the absence of an effective financial system, the government has resorted to printing more money. The substantial issue of insufficiently secured currency by the BCC speeded up inflation and increased exchange rates, thus devaluating the local currency, the Congolese franc. To curb the inflation, the BCC tried to limit the money supply as much as it could. Bank refinancing rates rose several times in 2006 and from 28.5 to 45 per cent over the year. Reserve-requirement rates went up from 2 to 3 per cent, then to 4 per cent, doubling the amount of money immobilised. Inflation was kept to an annual 22 per cent in 2006 (against 21.4 per cent in 2005), far from the 8 per cent annual target of the PRC, which © AfDB/OECD 2007

was revised to 9.5 and then 15 per cent. The goal is to bring inflation below 10 per cent in the next two years (7.4 per cent in 2007 and 7.1 per cent in 2008). The BCC also found it increasingly harder in 2006 to immediately honour in cash cheques it issued. The Congolese franc is a floating currency and depreciated more than 18 per cent in 2006 in relation to the benchmark US dollar. The PRC had projected a rate of CDF 526 to the dollar at the end of 2006 but it had risen to more than 530 by November. The economy is highly dollarised as a result of successive devaluations and inflationary pressure and 99.5 per cent of quasi-money (the sum of time deposits and savings deposits) is in foreign currency. The programme for monetary cooperation in Africa, PCMA, aims to set up a single monetary zone with a single African currency by 2021, which means countries will have to meet convergence criteria. The DRC had met only one of four primary convergence criteria by 2006 (public deficit as percentage of GDP, excluding grants) and only two of seven secondary ones (non accumulation of new domestic and foreign debt arrears and maintaining positive real interest rates). Otherwise, commercial banks seem to be doing better, with increased deposits and liquidity in 2006 as well as 15.5 per cent more loans granted to the private sector. Banks have greatly relaxed their rules and expanded their range of products in a bid to attract more savings. For instance, the $10 000 minimum required to open a bank account has been abolished in a context of competition amongst the new banks. The Banque internationale pour l’Afrique au Congo (BIAC) introduced an “Ekonzo” savings account in 2005, without charges for opening and holding an account and with annual interest on the average balance. The BCC also received more requests to open new banks. Microfinance is flourishing and enables many Congolese to start small businesses. External Position The DRC belongs to four regional groupings: the Southern African Development Community (SADC), African Economic Outlook

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D.R. Congo

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of good (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

6.6 19.2 12.6 -7.5 -6.6 0.5

-2.7 23.6 26.4 -4.5 -3.0 8.8

-3.7 27.6 31.3 -5.1 -4.5 7.6

-2.8 28.9 31.7 -4.9 -4.8 7.7

-5.6 28.1 33.7 -6.3 -4.8 11.9

-4.2 28.2 32.4 -5.5 -4.1 10.2

-2.4 29.2 31.5 -5.3 -3.3 8.1

Current account balance

-6.9

-1.5

-5.7

-4.9

-4.8

-3.6

-2.9

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/333143703213

the Common Market for Eastern and Southern Africa (COMESA), the Economic Community of Central African States (ECCAS) and the Economic Community of the Great Lakes Countries (ECGLC). It benefits very little from these agreements, however, because its exports are not very diversified. About 56 per cent of the country’s $2.07 billion export earnings in 2005 were from diamonds and 22 per cent from oil. In addition, the DRC depends very heavily on developed countries for its imports.

produced a positive balance ($529.5 million), thanks to public transfers, the magnitude of which (11.9 per cent of GDP in 2006, up from 7.7 per cent in 2005) was able to bring about a slight improvement of the current-account deficit (from 4.9 to 4.8 per cent of GDP) despite the greater trade deficit. The trade balance is expected to improve in 2007 and 2008 and correspondingly reduce the current-account deficit from 4.8 per cent of GDP in 2006 to 3.6 per cent in 2007 and 2.9 per cent in 2008.

Exports were 28.1 per cent of GDP in 2006 (28.9 per cent in 2005). Despite higher world oil and metal prices, the volume of exports slumped badly, especially of oil and diamonds, due to smaller production. About 26 million carats of diamonds (worth $624.7 million) were exported to Israel and Belgium in 2006, most of them industrially mined alluvial stones from the central region of Kasai. Apart from export duties, the government collects a 2 per cent tax on the value of all exports. The total value of exports was slightly down in 2006 and is expected to stagnate in 2007 at 28.2 per cent of GDP before improving to 29.2 per cent in 2008 as raw material production picks up and exports diversify. Copper and cobalt should boost export earnings in the next few years.

Foreign direct investment (FDI) in the DRC amounted to $500 million in 2006, up from $405 million in 2005 and from an average of only $5 million between 1990 and 2000. Foreign investors, especially from China and South Africa, diversified their capital spending into the mining sector, as well as into the energy and banking sectors. The return of peace and the successful elections should attract even more FDI. A South Korean enterprise, Bleu Tech Business Group, has announced that it will shortly build motorways and high-class hotels in the DRC.

216

Economic growth and reconstruction increased the share of imports in GDP from 31.7 to 33.7 per cent in 2006. The trade deficit worsened, from 2.8 percent of GDP in 2005 to 5.6 per cent in 2006, when it was in the red by more than $468 million and the invisibles balance stood at more than $355 million in deficit. The revenues balance also showed a loss amounting to $293.7 million. Only current transfers African Economic Outlook

The country is eligible for debt relief under the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI) and can expect its more than $14 billion of debt to the World Bank, the IMF and the African Development Bank (AfDB) to be entirely cancelled. Nonetheless, 2007 will be difficult for the external debt, as the adoption of the DSCRP in September 2006 ran into funding problems. It will be a year after its introduction and assessment before the HIPC completion point can be reached, so the DRC is unlikely to get any debt relief until 2008, when debt cancellation should amount to more than $7 billion. © AfDB/OECD 2007

D.R. Congo

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

Source: IMF.

217 http://dx.doi.org/10.1787/360646183580

The country’s debt amounted to $12 billion at the end of 2005, more than 150 per cent of gross domestic product. Servicing it absorbs about 7 per cent of goodsand-services exports. The DRC also uses the SYGADE debt-management system to produce reports on the public debt. The European Union announced at the end of 2006 that it would double its aid to the DRC.

Structural Issues The elections period was not the time for introducing major structural reforms and the IMF noted that only minor and inadequate progress had been made in this domain. Only key sectors such as mining and energy were involved in major projects matching the country’s huge resources. Corruption and mismanagement of natural resources is still a big problem, however, and Transparency International’s 2006 report ranked the DRC as the sixth most corrupt of 163 countries. New investment and tax codes in the mining and forestry sectors should soon be approved © AfDB/OECD 2007

by parliament in a bid to attract foreign capital and encourage projects and public-private partnerships. Recent Developments The revival of copper and cobalt production by the enterprise KCC is the country’s biggest private investment since its independence. The state mining company Gécamines has a 25 per cent share in the enterprise, which is otherwise controlled by the private Belgian-Canadian company Kinross Forrest Ltd. Nonetheless, the establishment of KCC required Gécamines to yield its mining rights, whereas Kinross Forrest committed to investing $426 million to boost mining, as well as $257 million more to keep operations going for about 20 years. The government should get about $2.2 billion in royalties and income tax from the project, which is expected to generate 2 500 jobs (or 12 000 if sub-contractors are included) and support 240 000 people in the whole region. The contract does involve handing over a key part of the country to the private sector, and in June 2005 a parliamentary report African Economic Outlook

D.R. Congo

called for the renegotiation or cancellation of mining contracts as about 30 joint ventures, drawn by big tax breaks, took over Gécamines’ richest concessions. The IMF asked the transitional government in August 2006 to stop granting new mining licences pending installation of a new government. A report by the international NGO Global Witness in 2006 criticised the illegal export of minerals across the Zambian border as well as endemic corruption in Katanga’s copper and cobalt mines.

218

Many electricity projects are under way, including a $262.3 million two-year rescue and recovery programme launched by the national power company (Snel) in 2005. The country has an enormous hydroelectric potential of about 100 000 megawatts, 44 000 of them at the Inga site alone, which has two power-stations of total installed capacity of 1 774 megawatts, although Inga’s output was only 700 megawatts in 2006. Several projects are being considered to supply other (especially SADC) countries from the Inga dam. The cost of building a third plant at Inga (of 3 500-megawatt installed capacity) by 2010 has been put at $3.5 billion. The Great Inga project (13 500 megawatts) would cost $5.66 billion. If electricity is sold below the average rate of $0.035 kilowatt/hour for the region, the great Inga power station could generate largely sufficient profits to write off the investment. Access to Drinking Water and Sanitation The DRC is one of the few countries in Africa with no desertification or water-scarcity problems. Its extensive water resources include 30 or so rivers, 20 000 kilometres of river-banks and the 4 670kilometre long Congo river (which has the world’s second biggest estuary outflow – 40 000 m 3 per second). The country has the continent’s largest water supply, with internal renewable water resources averaging 900 km3 a year, nearly one-quarter of all Africa’s fresh water. The potential is huge and almost entirely untapped. The DRC has been asked in recent years by its neighbours and by international organisations to channel fresh water from the Congo basin to other countries. African Economic Outlook

The DRC shares the Congo river basin with eight countries (Angola, Burundi, Cameroon, the Central African Republic, Congo, Rwanda, Tanzania and Zambia), and the Nile basin with nine (Burundi, Egypt, Eritrea, Ethiopia, Kenya, Rwanda, Sudan, Tanzania and Uganda). It belongs to the Nile Basin Initiative, launched in 1999, and to a regional management project called Pollution Control and Other Measures to Protect Biodiversity in Lake Tanganyika, along with Burundi, Tanzania and Zambia, which aims to institute regional management for the lake that is ecologically rational and sustainable. Access to drinking water and sanitation is difficult, and badly organised and coordinated. Decision making and responsibility is hard to pin down because it is spread between a dozen ministries and public bodies. Urban water operations and distribution are the job of the state-owned water company Regideso, which is facing technical-management, commercial and financial problems. In the countryside, the national rural water service, SNHR, has very few resources and its institutional framework is inappropriate. As for the national sanitation programme, PNA, which handles domestic and industrial waste and produces drinking water under Regideso and the ministry of environment, it is practically non-existent. Water-borne sewage systems are only available in the centre of the biggest towns, and their networks are in very bad condition (cracked, destroyed or partly clogged). Wastewater flows untreated straight into the Congo river and its tributaries. The government recognises the need to rebuild and decentralise the sector covering access to drinking water and sanitation and to focus on the neediest people. The fighting in recent years and the dilapidated state of the existing infrastructure have reduced access to drinking water from 37 per cent in 1990 to 22 per cent in 2004 and to sanitation from 10 to 9 per cent for the same period. The figures for sanitation need to be qualified, as only 46 per cent of the Congolese have “hygienic” toilets, while the rest use uncovered latrines or open pits, which are counted as sanitation. In view of such extensive needs, the MDGs have been reduced to 49 per cent coverage for drinking water (36 per cent in the countryside and 65 per cent in towns and cities) © AfDB/OECD 2007

D.R. Congo

and to 45 per cent for sanitation. The total cost of reaching these targets is put at $217 million, but success is extremely unlikely because of the very small current investment and the vastness of the country, especially as aid donors would be the only source of money for this sector, at least for the next five years. People in rural areas seem to have been abandoned many years ago and physical infrastructure there is crumbling, with 60 per cent of water facilities no longer working because of lack of maintenance, an inefficient participatory approach and the difficulty of getting spare parts. Drinking-water access problems feed epidemics and water-borne diseases such as cholera, typhoid and dysentery. Women, as traditional watercarriers, have a particularly heavy burden, as only 12 per cent of rural households had direct access to drinking water in 2004. Regional disparities are also very wide (only 3 per cent of people had access to drinking water in the Banalia area of the Orientale province). Water is not always drinkable because wells and other supply sources are not covered or protected. It is mostly NGOs and religious orders that share the responsibility for supplying drinking water in the countryside. The population has not managed to take charge of operating and maintaining the facilities. Despite the great need, only four drilling enterprises are active in the DRC. The average cost of a hand pump is about $14 000 and $50 000 for an industrial one. In urban areas, 37 per cent of the population had access to drinking water in 2004. Only 65 per cent of the inhabitants of the capital, Kinshasa, were connected to the network, while more than 2 million people depended on springs or wells, often polluted and drilled less than a metre deep near latrines. The situation is much worse in other towns and cities. Regideso’s laboratories are supposed to treat the water but the result is far from satisfactory due to frequent shortages of purifying chemicals, seepages of contaminated water into the distribution network and the collection of water close to pollution sources. When Regideso’s taps run dry, water vendors take to the streets on bicycles offering 25-litre tins for CDF 100 ($0.25) each. In contrast, Regideso’s price of around $0.65 per m3 is not enough to cover production costs. The water metres © AfDB/OECD 2007

are obsolete and only 30 per cent of sales points have any at all, which means most customers simply pay flat fees. At the height of the crisis in 2003, Regideso owed the government and other public bodies 85 months of arrears totalling more than $200 million. There is no mechanism for recovering costs for sanitation.

Political Context and Human Resources Development The various elections held in 2006 involved an astronishing 282 registered political parties, 50 000 polling stations opened up and 33 million ballots printed for a total cost estimated at more than $500 million, virtually all of it paid by the international community. Eleven elections were held, including presidential, local and a one-round poll amongst 9 707 candidates for 500 seats in parliament. President Joseph Kabila won 58 per cent of the votes cast by 25.6 million people, but his party and its allies only control 44.8 per cent of the seats in the national assembly. The delicate transition period is now over. The new national constitution has instituted a Third Republic and a strongly decentralised unitary state, and laid the foundations for a democratic regime by balancing executive and legislative authority. The president, elected by direct universal suffrage for five years (with a right to one extra term), appoints a prime minister who reflects the parliamentary majority. The national assembly can censure the government and the president can dissolve the assembly. The judiciary is independent and gender equality is written into the public institutions. Only 42 women, however, were elected to parliament (8 per cent of its members). The country’s provinces, which will be increased from 11 to 26 by 2009, have wide autonomy and levy directly 40 per cent of the tax revenue allocated to them in the national budget. This point is one of the main concerns of international observers, as it supposes that local officials should be responsible and a vigorous fight against corruption. Another political challenge will be to make progress with economic and legal issues now that they are African Economic Outlook

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D.R. Congo

subject to parliamentary approval and will require political alliances to win majority approval. Central government authority will also have to be re-established nationwide. The eastern provinces of Ituri, Nord-Kivu and Sud-Kivu, which have twice been the seat of rebellions that have plunged the DRC into war, are still the scene of ethnic tension and daily violence against civilians despite a July 2006 amnesty for all rebels laying down their weapons. The United Nations (UN) World Food Programme has announced resumption of its airlifts to help more than 8 800 people in these areas. The UN put the country’s humanitarian needs in 2007 at $686.5 million, and at the end of 2006, there were still 1.6 million displaced persons.

220

Despite its immense natural resources, the DRC is still one of Africa’s poorest countries, with more than three-quarters of its population living on less than one dollar a day in 2005 and fewer than 20 per cent with regular access to water and electricity. The UN Development Programme’s 2006 worldwide Human Development Report ranked the country 167 out of 177, with annual per capita income (at purchasing power parity) of $705, far behind neighbouring Congo (ranked 140) even though it, too, recently suffered from war. About 1 200 people, half of them children, die every day in the DRC from violence, disease or malnutrition. The DRC is also thought to have more child soldiers than any other country in the world – about 30 000 fighting or living with armed groups, some 12 500 of them girls. On the gender front, Congolese women are increasingly heads of large families as their men either die of HIV/AIDS or in wars. According to surveys, as many as 90 per cent of them have informal or unstructured jobs, or a subsistence activity such as prostitution. Women’s rights are generally ignored on a daily basis and gender disparity in access to education, health care and resources is large. In the eastern provinces they are subjected to violence, abuse and rape by armed men.

African Economic Outlook

The health situation remains dramatic. The health ministry’s reform and reconstruction strategy, backed by international aid donors, planned to spend $3 annually per inhabitant in 2005, far below the $15 to $26 recommended by the World Bank. About 20 million Congolese were under-nourished in 2005, and 4 million died between 1998 and 2004 of common curable diseases for lack of public services, infrastructure, equipment and access to health care, especially in the countryside, where there was only one doctor for every 56 000 people in 2005. Infant mortality was 205 per thousand live births in 2005 and more than 1 million children had lost one or both parents to HIV/AIDS. According to the UN, the steadily rising prevalence of the disease was 4.5 per cent in 2005. At least 2.6 million people are thought to be infected, including 120 000 children. Only about 5 000 people have access to retroviral treatment out of the more than 400 000 who need it. The DRC is also one of the countries in the world most affected by cholera, with 65 000 cases declared to the World Health Organisation between 2002 and 2004, including 3 200 deaths. In the field of education, the primary-school enrolment rate fell from 54 per cent in 1990/91 to 33 per cent in 2000/01 and was only 12 per cent at secondary level in 2000/01. According to Amnesty International, only 29 per cent of children complete primary school and 4.7 million (including 2.5 million girls) do not go to school at all. The Catholic Church runs 80 per cent of primary and 60 per cent of secondary schools, mainly because of the collapse of the state education system. Teachers are still waiting for a pay rise granted after February 2004 talks between civilservice unions and the government that set the minimum monthly salary at $208 (a Congolese teacher currently gets an average $67 a month). Higher education is provided by four national universities – two in Kinshasa, one in Lubumbashi and one in Kisangani – and by many colleges.

© AfDB/OECD 2007

Côte d’Ivoire

Yamoussoukro

key figures • • • • •

Land area, thousands of km2 322 Population, thousands (2006) 18 454 GDP per capita, $ PPP valuation (2006) 1 393 Life expectancy (2006) 46.2 Illiteracy rate (2006) 51.3

Côte d’Ivoire

D

ESPITE THE POLITICAL CRISIS THAT HAS been ongoing

since 2002, Côte d’Ivoire’s economy nonetheless registered growth estimated at 1.2 per cent in 2006, following a 1.8 per cent increase in 2005. In 2005 growth was stimulated by the start of construction of new oil wells and the arrival of new telecommunication operators on the market. The slowdown observed in 2006 resulted from delays in the start of reconstruction works, themselves incurred by delays in the peace process and an ongoing climate of insecurity.

At the political level, 2006 was marked by the collapse of UN resolution 1633, which meant that elections could not take place; it was also marked by the voting of a new Growth has been positive resolution 1721 prolonging the since 2005, thanks to new mandate of the president of the oil wells and the arrival republic for one year and of new telecommunications maintaining the prime minister operators. in power. The year was equally marked by the toxic waste scandal, which led to the resignation of the government for the first time in the history of the country.

223 Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: National Statistics Office data. http://dx.doi.org/10.1787/125480464137

© AfDB/OECD 2007

African Economic Outlook

Côte d'Ivoire

Recent Economic Developments

224

In 2006, preliminary results for the first nine months of the year indicated a 2.4 per cent growth in food production over the 2006/07 agricultural campaign against 2.8 per cent in 2005/06, owing to favourable climactic conditions. With regard to production of principal export crops, the cotton harvest increased by 11.3 per cent year on year, reaching 256 000 tonnes. Since the 2002 crisis, cotton production, which is mostly based in the north of the country, has encountered considerable difficulties in terms of supply (phytosanitary products and fuel), financing and transport. Nevertheless, the corrective measures taken by producers to remedy the input supply difficulties seem to have borne fruit. Coffee production increased by 2.7 per cent to reach 115 000 tonnes, while cocoa production is estimated at 1 350 000 tonnes, 3.6 per cent more than in 2005/06. The coffee-cocoa sector is comprised of around 600 000 farms and provides a living, directly or indirectly, for nearly 6 million people. Thanks to its geographical location (in the southern and southeastern part of the country) production suffered comparatively less from the effects of the crisis. Cocoa production also benefited from the securing of the transport corridors between production zones and the ports, notably that of San Pedro. All the same, the sector has been weakened by the crisis, in particular because of cocoa smuggling to Ghana and Burkina Faso, and is suffering from the significant impact of institutional factors. Effectively, high taxes on cocoa exports tend to unbalance the distribution of profits, to the detriment of producers. The export tax (Droit Unique de Sortie - DUS) and various other taxes are estimated at more than 300 CFA francs per kilogramme for a factory purchase price of around 350 to 380 CFA francs per kilogramme. This level of taxation weighs equally on the price competitiveness of the sector. Against this background the national association of coffee and cocoa producers (Association Nationale des Producteurs de Café-cacao de Côte d’Ivoire ANAPROCI) that unites the majority of the 600 000 planters in the country, has denounced the new purchase price for beans set by the coffee and African Economic Outlook

cocoa exchange (target/indicative purchase price margin Bourse du Café et du Cacao - BCC) which was fixed at 400 CFA francs per kilogramme. The planters had called for 600 CFA francs per kilogramme, deeming the price of 400 CFA francs low given the high taxes, and furthermore called for a reduction of 100 CFA francs per kilogramme of the DUS, which is currently 220 CFA francs per kilogramme. It would appear that productivity in the coffeecocoa sector has registered a general decrease, probably linked both to ageing of the production fields and to fewer phytosanitary treatments. Indeed, without a guaranteed minimum price and with producer prices so low, the latter are finding it difficult to apply effective treatments, which also have an impact on the quality of the beans produced. To this end, since December 2006 the European Union has financed a coffee-cocoa quality improvement programme worth 1.2 million CFA francs, to be executed by the Ministry of Agriculture, with the help of the United Nations Industrial Development Organization (UNIDO). The programme’s aim is to prevent the contamination of coffee and cocoa beans with Ochratoxin A, a toxin produced by micro fungi. In the mining sector, activity was highly dynamic in 2005, due to the combined effect of a net expansion in oil extraction and an increase of gold and gas production. Following the activation of the Baobab oilfield in August 2005, oil production has registered strong growth (more than 83.2 per cent) for the fourth consecutive year since 2002, with record production of 14.5 million barrels (almost 2 million tonnes). Gold production reached 1 637.7 kilogrammes, which represents growth of 28.7 per cent over 2004, coinciding with the implementation of security measures and the relative calm observed in production zones. After having increased by 10 per cent in 2005 to reach 1 742.3 million m3, gas production fell in 2006 as a result of the silting up of wells. Because of its location in the northern zone, no statistics regarding diamond production exist. Activity in the secondary sector, which had suffered more than the primary sector from the intensification © AfDB/OECD 2007

Côte d'Ivoire

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on Ministry of Economy and Finance data. http://dx.doi.org/10.1787/844744475874

of political troubles at the end of 2004, recorded an upturn in 2005, with the industrial production index growing by 3.7 per cent compared to 3.2 per cent in 2004. The textile-shoes and wood sectors also suffered the effects of the political crisis, production again showing a strong decrease compared with 2004. Over the first seven months of 2006, industrial production grew by 10.6 per cent, an evolution essentially due to the strong increase in the index of the extraction industries, with oil and gas production practically doubling. On the other hand, manufacturing industries declined by 0.9 per cent as a result of the 4.5 per cent decrease in agro alimentary production and the 22 per cent decrease in textile industry production, their subindicators decreasing by 4.5 per cent and 22 per cent respectively. The electricity, gas and water sectors for their part have fallen by 1.7 per cent.

The tertiary sector has suffered most from the economic impact of the political troubles. In 2005, almost all branches of the sector recorded a slowdown. Overall maritime traffic (18.6 million tonnes) only increased by 5 per cent in 2005 compared with 17.7 per cent in 2004. Air transport posted mediocre results, with the overall number of passengers decreasing in 2005. Retail sales, measured by the sales index, remained stable (up 0.6 per cent) in 2005. Over the first nine months of 2006, the retail sales index declined by 0.9 per cent due to the effect of the downturn in sales of oil products, cars, motorcycles and parts. The distribution sector fell victim to the negative effects of the toxic waste scandal. On the demand side, growth was fed by the resumption of external demand and a light recovery in

Table 1 - Demand Composition 1998

2005

Percentage of GDP (current prices)

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

16.0 6.0 10.0

9.3 2.7 6.6

-4.3 -10.0 -2.0

2.1 5.0 1.0

6.4 10.0 5.0

Consumption Public Private

76.2 10.0 66.2

84.2 13.9 70.3

2.4 4.0 2.1

2.7 3.5 2.5

2.7 4.1 2.5

7.8 36.9 -29.1

6.5 50.6 -44.1

2.1 3.3

1.8 2.5

2.2 3.5

External sector Exports Imports

Source: National Statistics Office data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/686577802785

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domestic consumption. It is estimated that final consumption increased by 2.4 per cent in 2006. However, investments decreased by 4.3 per cent, mainly due to the fall in public investment (down 10.2 per cent) and, less obviously, a slump in private investment (down 2.0 per cent). A light recovery is forecast for 2007 and 2008.

Macroeconomic Policy Fiscal Policy

226

In 2005, the ongoing crisis continued to weaken the fiscal policy implemented by the Côte d’Ivoire government. Revenues were 1 251.2 billion CFA francs, an increase of only 0.7 per cent compared to 2004, which can be explained by the closure of numerous small and medium-sized enterprises (SME), which reduced the tax base and intensified the dependence of the budget on coffee and cocoa taxes. Unfortunately, the coffee and cocoa sector has also experienced a number of difficulties, including smuggling of part of production to neighbouring countries, and malfunctions in the customs services, which have weighed on revenues. The revenue losses recorded on the DUS export tax have been offset by better performance by the Direction Générale des Impôts (Inland Revenue), notably in taxcollection on profits. Public spending, valued at 1 704.6 billion CFA francs in 2005, increased by 2.3 per cent over 2004, due to a more than 7.7 per cent rise in current expenditure, which accounted for 80 per cent of total public spending in 2005. Interest payments on public debt have decreased consistently since 2001. The fiscal deficit (commitment basis, including grants) was valued at 138.8 billion CFA francs, or 1.7 per cent of GDP for 2005. In 2006, the situation was reversed; the Direction Générale des Douanes (Customs) posted higher revenue than expected, while the Direction Générale des Impôts (Inland Revenue) posted less. Adopted over a year late by the Council of Ministers on 14 June 2006, the 2006 budget rests on the assumption of an emergence from the crisis, with a prudent but positive macroeconomic forecast. It is balanced at 1 965.3 billion CFA francs, an increase of 13.3 per cent compared with 2005, and is aimed at African Economic Outlook

financing government priority actions related to a return to peace (demobilisation, disarmament and reinsertion, identification, organisation of elections). State resources for 2006 are calculated at 1 965.3 billion CFA francs, of which 1 535.9 billion CFA francs are from domestic resources, or 78 per cent of the total, external resources representing the more modest amount of 429.4 billion CFA francs. The main multilateral and bilateral stakeholders financing programmes to emerge from the crisis through scheduled donations, calculated at 93.6 billion CFA francs, are the World Bank, the International Monetary Fund (IMF), the UN Development Programme, the European Union, France, Belgium and Denmark. State expenditure for Côte d’Ivoire reached 1 965.3 billion CFA francs in 2006, which represents an increase of 13 per cent, principally due to efforts devoted to building peace. Recurrent expenditure represents 1 091.5 billion CFA francs, or 55.5 per cent of the total, and is allocated as follows: personnel (586.3 billion CFA francs), subscriptions/supplies (35 billion CFA francs) and operations (470.2 billion CFA francs). Debt servicing is assessed at 576.4 billion CFA francs, or more than 29 per cent of the total budget (84 per cent of the amount executed in 2005) covering all current instalments. Under the fiscal annex of the 2006 Finance Act, the reforms undertaken by the state since 2001 have been continued. This authorises a certain number of measures, of which the most important is the lowering of the commercial tax rate, from 35 per cent to 27 per cent on industrial and commercial profits (bénéfices industriels et commerciaux - BIC) and on commercial agricultural profits. The 25 per cent tax rate applicable to new information technologies and to small and medium-sized industries (SMI) has been extended to all SMEs. This measure is the result of negotiation between the private sector, notably the Côte d’Ivoire employers, and the Minister of Economy and Finance. The following measures should also be noted: i) cancellation of some tax arrears that were due on 31 December 2004; ii) improvement of procedures and reimbursement of VAT tax credits; and, iii) implementation of state control. The intended aim is to simplify the VAT reimbursement procedure for corporations. © AfDB/OECD 2007

Côte d'Ivoire

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grants Tax revenue Grants

19.1 15.1 0.7

17.6 15.0 0.5

18.5 15.2 0.9

18.2 14.5 1.1

17.9 15.0 0.3

17.7 14.6 0.5

17.6 14.5 0.5

Consolidated expenditure Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

20.7 14.7 10.9 5.5 3.8 6.0

20.2 17.4 14.7 6.8 2.7 2.7

20.4 17.1 14.8 6.7 2.3 3.2

19.9 16.9 14.9 6.5 2.1 2.7

19.9 17.3 15.7 6.8 1.6 2.5

19.8 17.2 15.6 6.9 1.6 2.5

20.0 17.3 15.7 6.9 1.5 2.6

Primary balance Overall balance

2.1 -1.6

0.1 -2.6

0.4 -1.8

0.3 -1.7

-0.4 -2.0

-0.5 -2.1

-0.8 -2.3

Source: National Statistics Office data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/073771368836

The overall balance (commitment basis, excluding grants) is still changing, but is coming out positive at 94.9 billion CFA francs at the end of June 2006 against 70 billion CFA francs during the same period in 2005. This improvement is due to an increase in total revenue greater than that of spending and net loans. The rise in current expenditure was limited to 4 per cent. Capital expenditure remained relatively weak because of financial constraints experienced by the country due to lack of external financial support. According to the Central Bank of West African States (BCEAO), public finances deteriorated in 2006. The financial operations of the state resulted in an overall deficit (commitment basis, excluding grants) of 0.4 per cent of GDP, linked to the rise in public administration expenditure on stipends and salaries. Thus, in terms of macroeconomic convergence and of the first order criteria, the negative budgetary balance (-0.4 per cent of GDP), fails to fulfil the community norm. Financial Policy Financial and credit policy are implemented at regional level by the BCEAO, whose main mission is to preserve parity between the franc CFA and the euro and to control inflation. Monetary policy in the zone is thus rigorous, following the example of the European Central Bank (ECB), with a tailored level of foreign exchange reserves. The only difference is that in its monetary policy, the BCEAO takes into account the economic situation of its member countries. Effectively, © AfDB/OECD 2007

it remains attentive to the evolution of their economic and financial situations, in particular the impact of oil prices on domestic prices, the conduct of agricultural campaigns, trends in credits to the economy and liquidity. In 2005, the monetary authorities adopted a prudent monetary policy while creating favourable conditions for financing to the economy. Net external credit progressed from 9.8 per cent compared with 2004 to reach 704.5 billion CFA francs. Private sector credits reached 1 189.3 billion CFA francs, an increase of 1.3 per cent. Money supply increased by 7.4 per cent to reach 2 081.2 billion CFA francs. On an annual basis, credits to the economy contracted by 3.7 billion CFA francs or 0.3 per cent. Money supply, up by 0.6 billion CFA francs, stabilised at 2 047.9 billion CFA francs at the end of June 2006. Compared with June 2005, aggregate liquidity rose by 8.2 per cent. As regards inflation, responses for the first five months of 2006 attest to a 2.4 per cent grow in the consumption price index as against 4.1 per cent over the same period in 2005, and over the entire year, inflation reached 2.5 per cent under the effect of a rise in the price of fish products, oil products and transport services. External Position The recovery of external trade was confirmed in 2005, even if still marked by the effects of the crisis. Generally, external trade increased by 3.3 per cent in volume, owing to the simultaneous growth of imports African Economic Outlook

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(2.5 per cent) and exports (3.9 per cent). In value, imports rose by 18.5 per cent and exports by 8 per cent. The deterioration of the trade balance observed since 2002 was confirmed in 2005, when it reached 14.5 per cent of GDP. This downturn apparently continued with a trade balance of 12.9 per cent of GDP in 2006 because of a drop in cocoa exports and a rise in imports of equipment goods. The weakness of the international cocoa markets and the rise in imports could not be totally offset by the increase in the oil surplus resulting from the strong rise in the international price of energy. The current account balance was for the first time in

deficit by 6.6 billion CFA francs (approximately 0.3 per cent of GDP), an evolution that can mainly be attributed to the deterioration of the trade balance. Raw cocoa exports have been decreasing regularly since 2002 (a cumulative decrease of 30 per cent in four years): they accounted for 27 per cent of exports in 2005 as against 40 per cent in 2002. At the end of November 2006, 200 000 tonnes of cocoa were ready for export, as against 300 000 tonnes for the same period in 2005, which constitutes a significant loss to recoup, as much for exporters as for the state, which loses substantial tax revenue in this way, notably on the DUS export tax.

Table 3 - Current Account

228

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

13.1 34.6 21.6 -7.1 -5.5 -3.1

18.5 40.9 22.4 -8.1 -4.8 -3.5

16.6 43.3 26.7 -8.2 -4.2 -3.0

14.5 44.3 29.9 -7.9 -4.0 -2.8

12.9 45.1 32.1 -8.3 -3.9 -2.8

13.5 43.7 30.2 -8.1 -6.0 -1.0

12.9 42.9 29.9 -8.2 -5.8 -1.0

Current account balance

-2.7

2.0

1.2

-0.3

-2.1

-1.6

-2.0

Source: Source: National Statistics Office data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/385820705017

Although the country has exported oil since 2002, the increase in imports was primarily the result of the rise in oil prices. Imports went from 576.5 billion CFA francs in 2004 to 867.8 billion CFA francs in 2005. Imports of equipment goods (spare parts or new equipment such as machines, engines and utility vehicles) reached 1 077.4 billion CFA francs in 2005, as against 838.9 billion CFA francs in 2004, owing to the positive development of most industrial branches. Furthermore, imports of consumables grew overall. Purchases of medicines, which are third in rank in imports after oil and rice, grew by 14 per cent. In 2006 exports showed a stronger performance linked to the rise in exports of oil products but imports increased as well. Thus the current account balance, excluding transfers, showed a surplus equivalent to 0.7 per cent of GDP, as against 2.5 per cent in 2005. In terms of international agreements, Côte d’Ivoire is a member of the Conseil de l’Entente between Benin, Burkina Faso and Niger, of the West African Economic African Economic Outlook

and Monetary Union (WAEMU) and of the Economic Community of West African States (ECOWAS). The resumption of financial assistance from the Bretton Woods Institutions and the restarting of the debt reduction process within the framework of the Heavily Indebted Poor Countries (HIPC) Initiative, from which Côte d’Ivoire began benefiting in 1998, are urgent priorities. They are still nonetheless secondary to the normalisation of the political situation. In 2005 and 2006, the government instigated discussions with the IMF for a post-conflict aid programme, which became active on signature of a letter of intent by the prime minister. In tandem with the World Bank, $100 million of support for the National Disarmament, Demobilisation and Reintegration Plan (PNDDR) was negotiated in June 2006. These programmes nonetheless remain linked to the discharge of arrears owed to the World Bank, which reached a total of 200 billion CFA francs. The last reduction of its public debt from which Côte d’Ivoire was able to benefit was agreed in April © AfDB/OECD 2007

Côte d'Ivoire

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

Source: IMF.

229 http://dx.doi.org/10.1787/406813772163

2002. This relief, which corresponded with a preliminary agreement to the strengthened HIPC Initiative, marked the resumption of financial co-operation between Côte d’Ivoire and its foreign partners. It translated into debt cancellation of $911 million and the reduction of debt servicing from $2.26 billion to $750 million between 1 April 2002 (the date of the agreement with the Paris Club creditors) and 31 December 2004. The relief granted by foreign creditors assumed that Côte d’Ivoire would respect the terms of the three-year agreement concluded with the IMF under the Poverty Reduction and Growth Facility (PRGF), and it would have allowed further relief once the HIPC Initiative decision point had been reached. This process was interrupted however by the crisis. The overall public debt of Côte d’Ivoire was estimated at 5 524.7 billion CFA francs at end 2005, which is 64.1 per cent of GDP and 128.8 per cent of goods and services exports. This amount includes 4 746.3 billion CFA francs of foreign debt (55.1 per cent of GDP and 109.9 per cent of goods and services exports) and 778.4 billion CFA francs of domestic debt (9 per cent of GDP). Compared with 2004, there has been a 2 per cent reduction of 97.4 billion CFA © AfDB/OECD 2007

francs. Outstanding external debt is broken down primarily between multilateral creditors (1 593.8 billion CFA francs), members of the Paris Club (1 991.5 billion CFA francs), and the London Club (1 123.5 billion CFA francs).

Structural Issues Recent Developments The unfavourable situation created by the sociopolitical crisis does not prevent the government from continuing to take measures to lighten the negative effects of the crisis. Notable advances took place in 2005. At public administration level, the national steering committee for the reorganisation of the administration (Comité National de Pilotage du Redéploiement de l’Administration - CNPRA) implemented a pilot project to return state agents to the western region (3 756 civil servants in total) and to rehabilitate public buildings, African Economic Outlook

Côte d'Ivoire

roads and water services, with the aim of facilitating the return of populations to the occupied zones. After execution of this pilot phase in the west, the CNPRA then carried out a census of displaced civil servants. Around 15 000 agents were waiting to reclaim their posts. The crisis strongly deteriorated transport and administrative infrastructures.

230

In the agricultural sector, measures were taken in the coffee-cocoa sector in order to reduce indirect taxes, brought from 54.26 CFA francs per kilogramme to 53.15 CFA francs per kilogramme. These measures followed the rationale of decree n° 420 of 21 October 2005 fixing of the level of taxes and dues for 2005/06 agricultural campaign. In addition, the authorities strengthened the monitoring and control of financial movements by putting in place a reliable information system for levies and allocations. In the medium term, the steering committee report must be published so that the reforms can be strengthened and the second phase of the financial audit of the sector must be finalised. The first phase of audit took place in July 2003. In the energy sector, the leasing contract with the electricity company, Compagnie Ivoirienne d’Electricité (CIE) was extended in September 2005. This extension was accompanied however by major provisions including, notably: (i) regular monitoring of contract execution; (ii) setting up a fund equipped with a management committee; and, (iii) the possibility or revising the contract every five years. These provisions, which enable the institutional framework to be improved, will contribute to stabilising the financial situation of the sector (given the implementation of recommendations from the tariff study of the sector). It should however be noted that the electricity sector is widely stricken and there are not inconsiderable risks of disturbance in the medium term, despite the increase in the level of rural electrification. In 2005, the banking system was comprised of 19 credit establishments, of which 17 were banks (16 in 2004) and 2 were financial establishments. These developments were due to authorisations granted to the Banque Régionale de Solidarité Côte d’Ivoire (BRS-Côte d’Ivoire) and to Citibank Côte d’Ivoire, and to the African Economic Outlook

withdrawal of the authorisation of the Citibank NAAbidjan branch. The financial institutions are characterised by activity mainly oriented towards leasepurchasing of property and goods. The Caisse Nationale des Caisses d’Epargne (CNCE), formerly the Caisse d’Epargne et des Chèques Postaux (CECP), was set up as a banking establishment by decree n° 2004-565 of 14 October 2004, bringing an increase in capital and transforming the CNCE into a bank. This new structure has delayed implementing the reforms recommended under the framework of the restructuring, which has brought about a new accumulation of arrears with the state. With the perspective of absorbing these, through decree n°2005-306 of 29 September 2005 for the financial restructuring of CNCE, the government accepted the discharge of the cumulative losses covering the 1999-2003 period and the capital conversion of a part owed to the Treasury. The lifting of these constraints enabled the transformation of CNCE into a bank. Following devaluation of the CFA franc in 1994, a labour consultation commission was put in place in Côte d’Ivoire in order to consider a new standard salary grill for the different sectors of the economy. The work of this commission resulted in the signing of agreements between the state, the three central unions and Côte d’Ivoire employers, and in an official salaries scale for Côte d’Ivoire. This document establishes a minimum professional wage (SMIG) and a minimum agricultural wage (SMAG) set at: 211 CFA francs per hour, or 36 607 CFA francs per month for industry; at 333 CFA francs per day for the agricultural sector; and, at 581 CFA francs per day for the forestry sector. Executive salaries are fixed by negotiation between employer and employee. The telecommunications sector has developed appreciably despite the crisis. Introduced in Côte d’Ivoire in 1996, GSM (global system for mobile) cellular mobile telephony is today operated by three licensed enterprises: Orange Côte d’Ivoire, MTN-Côte d’Ivoire and Atlantique Télécom, which launched its activities in June 2006 under the brand name of “Moov”. The US enterprise, Comstar Cellular, which also held an operating license, ceased activity three years previously. The mobile telephony market is © AfDB/OECD 2007

Côte d'Ivoire

constantly moving, with operators competing in ingenuity to offer the best solutions to their clients at the most competitive prices. However, Orange Côte d’Ivoire, a subsidiary of the France Télécom group, is predominant in the market by number of subscribers. Where geographical coverage is concerned, the most recent arrival (Moov) is the least well represented nationally, while Orange Côte d’Ivoire and MTN Côte d’Ivoire cover more than half the country. Around seven companies provide Internet access in Côte d’Ivoire. This relatively young market is rapidly developing thanks to the lowering of connection charges. Clients are mostly from the professional sector, as access costs are still high for the average individual. These latter prefer Internet cafés that offer cheaper rates, with one hour of connection often costing just 250 CFA francs. According to the figures published by the Côte d’Ivoire telecommunications agency, in terms of subscriber numbers the market is dominated by Aviso, a subsidiary of Côte d’Ivoire Télécom, followed by Africa Online and Afnet. Internet service suppliers offer solutions graded according to client category and their needs. In 2003, Côte d’Ivoire Télécom launched an ADSL product, which enables the high-speed transmission of multimedia data via the telephone network. Access to Potable Water and Sanitation In Côte d’Ivoire, the population is supplied with potable water in three ways: urban water systems, village water systems and improved village water systems. In urban areas, the institutional arrangement for managing potable water services centres on a private operator, SODECI, (Société de Distribution d’Eau de Côte d’Ivoire), which operates the national potable water supply system under a 20-year leasing contract (1987-2007). With the support of the World Bank, in 1987 the government of Côte d’Ivoire introduced a reform formalised through several decrees, notably decree n°87-1471 of 17 December 1987, which approved the concession agreement signed between the state and SODECI for the public water distribution service. SODECI is a subsidiary of the French urban and rural planning enterprise, Saur (Société d’Aménagement Urbain et Rural). Within this © AfDB/OECD 2007

framework, SODECI is responsible for routine operation of the service in terms of treatment, distribution and billing of potable water in the country’s towns and cities. The state of Côte d’Ivoire however, which owns the installations, decides on which investments to make to extend the network. To this end, the water management department, the Direction de l’Eau, which became the Direction de l’Hydraulique Humaine (DHH) (Department for Potable Water), represents the government in the management and operation of the conceded service. The DHH, which reports to the Ministry of Economic Infrastructure, is in charge of monitoring the exploitation of state holdings, that is to say, the creation of national policy for water resource programmes and implementing research, assessment, protection and mobilisation programmes for potable water consumption. It is also charged with organising and monitoring construction and maintenance of facilities related to the production and public distribution of potable water. The 1987 institutional reform also structured village water resources. This made the DHH the main actor in village water resources and thus gave it control of the national policy for both urban and village potable water. However, in rural areas, follow-up of execution of projects is undertaken by the Direction Nationale de l’Hydraulique Villageoise (DNHV) (national department of rural water systems). Provision of potable water to rural communities was realised through the Programme National d’Hydraulique Villageoise (PNHV) (national programme for rural water systems) that was set up in 1973 in order to exploit underground water resources via wells and boreholes to supply potable water to the rural population. However, difficulties appeared in the strategy to supply rural groups, notably, the high cost of operations and the lack of adequate equipment in semi-modernised villages, as well as the virtual absence of technical assistance related to the completion of works. To remedy these problems, an improved village water system (système d’hydraulique villageoise améliorée - HVA) was introduced in 1990. In rural areas, the population is responsible for its exploitation and maintenance within the framework of the DHH. To benefit from the allocation and realisation of an HVA system, the locality must fulfil certain criteria, notably: i) have a population of between African Economic Outlook

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1 000 and 4 000 inhabitants; ii) agree to contribute 10 per cent to financing; iii) be divided into plots and have undergone electrification; iv) have a borehole capacity of more than 3 m3/hour; and, v) establish a management committee.

232

To finance the requirements of this sector and contribute to new investments, the state has put in place a water rates system divided in five consumption categories: social (0-18 m3/quarter), domestic (1990 m3/quarter), normal (91-300 m3/quarter), industrial (more than 300 m3/quarter) and administrative (special rate). The water rate comprises three elements: i) the farmer’s part (remuneration of the concession holder) allowing operation costs to be met; ii) a surcharge for the water development fund (Fonds de Développement de l’Eau - FDE) to finance the extension and renewal works authorised by the DHH; and finally, iii) a special water tax (taxe spéciale de l’eau - TSE) given to the national water fund (Fonds National de l’Eau - FNE) to service state debt from the sector. The price scale, which is identical throughout Côte d’Ivoire, varies according to consumption level. The social, domestic and normal consumption bands are respectively billed at 184 CFA francs, 286 CFA francs and 464 CFA francs per m3. For the industrial band, the cost per m3 of water is fixed at 532 CFA francs and a single rate of 360 CFA francs is applied for the administration. Subsidised connections accounted for more than 3 billion CFA francs before 2001. In 2002, the government decided to restrict the criteria for attribution of subsidised connections in order to limit the envelope to 1 billion CFA francs. Over the 1997-2002 period, subsidised connections accounted for nearly 15 billion CFA francs financed by the FDE. With regard to urban water resources, more than half of the urban population is connected to the potable water system, either via individual connections, or via standpipes. This system allows the production of 110 million m3 of potable water per year and ensures a coverage rate of 75 per cent. The rest of the population consumes water from private wells, illegal water-sellers, rivers or other non-hygienic sources of water. The coverage rate of potable water for Abidjan is 82 per cent and 75 per cent nationally. African Economic Outlook

At village water resource level, efforts to improve water supply to rural areas have encountered two major problems. Effectively, 37 per cent of infrastructure requirements have yet to be met, which represents a need for almost 8 000 further water supply points. As regards maintenance, many population centres lack potable water because of a high breakdown rate. This stands at 60 per cent over the whole country and is caused by the socio-political crisis in Côte d’Ivoire. In terms of the improved village water system (HVA), groups are provided with potable water via standpipes. Since 1990, when they were established, 118 localities have been equipped with a total of 1 470 standpipes. The cost of extending coverage to all these localities is estimated at around 110 billion CFA francs. The political crisis has had an effect on the entire Côte d’Ivoire water sector. The European Union has remained one of the chief supporters for resolving water issues during the crisis period. It had already agreed to an emergency programme, named PUR 1, which has been fully carried out. A second emergency programme (PUR 2) is currently being carried out. PUR 1 consisted, among other things, of buying treatment products to sterilise water and of creating boreholes in the north. PUR 2 is concerned with the sinking of boreholes in Korhogo, cleaning reservoirs, replacing water channels in this city and, carrying out works in Man and Bouake, etc. The chaotic shantytowns that have sprung up in Abidjan, due to population displacement following the crisis, are threatening the water table that supplies the capital with potable water. This is also the case for the lagoon that serves as a reservoir. Frequent dredging of the banks is reducing the thickness of the protective layer against contamination by saltwater. After the initial large works to improve sanitation and drainage in Abidjan in 1975, the economic capital was equipped with at least 1 040 kilometres of water drainage network. This allowed the construction of infrastructure necessary for equipping constructible land and the curbing of flooding problems. Since then however, nothing further has been done. Consequently, © AfDB/OECD 2007

Côte d’Ivoire

less than 49 per cent of households have access to appropriate sanitary installations. This is even more serious throughout the country. Only seven cities (Bouake, Yamoussoukro, Daoukro, Daloa, Gagnoa and San Pedro) have a real sanitation plan. That said, they are collapsing under the weight of problems with waste- and rainwater disposal. The national sanitation policy was revised in 1973 to focus on several major guidelines. From 1983 to 1995, taking these guidelines into account the government prepared and executed a programme to improve environmental protection and to manage investments in the sanitation sector rationally. Further to this, in August 1999 SODECI obtained a 12-year concession contract (1999-2011) to manage covered waste- and rainwater channels, theoretically disposed of in a sea outfall passing through the Vridi canal. This service is billed to the client in the form of a fee payment, the amount charged depending on potable water consumption. To these institutions must be added the national technical research and development department (Bureau National d’Etudes Techniques et de Développement - BNETD), a state company under the president of the republic, which ensures the conception, monitoring and management of outfitting and construction projects. Two of its departments are linked to the water sector, natural resources and the environment, and agriculture. It is this company that issues authorisations to the research departments. Human water resource needs are estimated at almost 700 billion CFA francs for the 2002-25 period. Despite investments already agreed by the state, the requirements to ensure the supply of potable water to around 95 per cent of the population by 2025 (Millennium Development Goal) remain significant. The government has taken measures to avoid the pollution of fresh water resources in the region of the capital of Abidjan by outlining a protective border of the water table and by subjecting every borehole to authorisation. To ensure efficient management of water resources, an institutional reform must be put in place through the creation of reservoir agencies that will manage water resources by catchment area. This © AfDB/OECD 2007

regrouping will be carried out around three delegations of water regions taking on the three main geographic water reservoirs (Comoé-Agneby, Bandama-Boubo, Cavally-Sassandra). The programme for the treatment and disposal of wastewater remains crucial and must be implemented rapidly, at least in the industrial sector, which dumps effluent in the lagoon and sea all too often. For village water systems, the fund for development and the promotion of coffee-cocoa activity (Fonds de Développement et de Promotion des Activités du CaféCacao - FDPCC) and the drilling company Forexi signed an agreement at the beginning of 2004 to construct 2 000 wells in 48 country regions. Valued at EUR 15 million, the follow-up of work on this project is carried out in concert with the DNHV and the FDPCC. Many projects are financed by international funding agencies, notably the African Development Bank (ADB), the Agence Française de Développement (AFD), the West African Development Bank and KFW (Kreditanstalt für Wiederaufbau). The political situation of the last few years has prevented the state from carrying out water sector programmes. The sponsors of these programmes have suspended all disbursements and the resumption of financing is strongly dependent on the normalisation of sociopolitical life in the country. As regards sanitation, a rigorous awareness-raising and financing programme that is monitored by the authorities must be put in place. Financial resources, notably the specific surcharges on water consumption and the sanitation tax, that were initially allocated to the financing of sanitation and drainage, are not available, since they are not transferred to the FNE (the organism created to monitor works) when they are collected (for example the drainage tax included in land tax). The leasing contract with SODECI will no longer be sufficient to meet demand. The state is seeking funding of 200 billion CFA francs (of which 30 billion CFA francs alone will be for the city of Abidjan) to finance the sanitation and drainage of the main cities of the country. African Economic Outlook

233

Côte d’Ivoire

Political Context and Human Resources Development

234

After a plethora of summits, meetings and mediation at national and international level to find a solution to the crisis in Côte d’Ivoire, the country has still not managed to re-establish peace. The “neither war nor peace” situation experienced by the population of Côte d’Ivoire remains frozen and the country is still divided in two, with the north remaining under the control of rebel forces, as well as a strong presence of neutral forces, of which 3 500 are French soldiers and 7 000 are UN troops. The UN Security Council has extended, beyond the initial one-year period, the mandate for President Laurent Gbagbo, and Prime Minister Charles Konan Banny. The resolution 1721 which frames this new transition in Côte d’Ivoire reprises the decision of the Peace and Security Council of the African Union on its principal points, one of which is the allocation of expanded powers to the prime minister. Among other things it involves decision-making by decree or decree-acts in the council of ministers or government, and authority over defence and security forces. The prime minister must implement all the elements of the roadmap established by the International Working Group working towards the organisation of free and transparent elections, which must take place by 31 October 2007 at the latest. However, the effectiveness of this new resolution on the ground remains doubtful, and other questions also remain, arising from many unresolved points between the constitution and this last resolution. This last United Nations resolution was much criticised, above all by the president of the republic who proposed a direct dialogue with the rebels, given that according to him, UN resolutions had not resolved the problems of Côte d’Ivoire and could not resolve them. Recent diplomatic developments (African Union Summit in Addis Ababa in January 2007) have demonstrated that the international community is ready to support this direct dialogue even if its outline is not very clear. On 4 March 2007, under the mediation of the President of Burkina Faso, Blaise Compaoré, this willingness of both parties to engage in a dialogue resulted in the signature of the Ouagadougou Agreement African Economic Outlook

between President Gbagbo and the rebel chief, Guillaume Soro. This agreement sets out a detailed set of measures that should lead to political stability and, as a result, appears to represent a concrete first step towards the resolution of the crisis. The activities of the independent electoral commission have begun and new ones from the PNDDR and the CNPRA are in operation. The IMF, following a mission conducted between 2-16 May 2006, gave its agreement in principle to support the efforts of Côte d’Ivoire to re-establish stable economic growth and improve the quality of life of the population. However, there still exist many disturbances that disrupt social life and that further destabilise the economy. At the end of 2005, the prevalence of HIV/AIDS among adults (15-49 years) was 7.1 per cent, and 750 000 people of all ages were living with HIV in 2005. According to a report produced by the ministry of the fight against AIDS, the national infection rate went from 7 per cent in 1991 to 4.7 per cent in 2006. Despite the current crisis, the US has scheduled to provide an additional 10 billion CFA francs for the 2006/07 budget for the fight against HIV/AIDS in Côte d’Ivoire. A US emergency plan of 12 billion CFA francs in 2004 and 22 billion CFA francs in 2005 has already been deployed to prevent new infections. This new plan will contribute to the prevention of 200 000 infections by treating 77 000 Côte d’Ivoire inhabitants already infected with the illness. Infection rates in the scholastic population are estimated at 4 per cent according to this same report. The Côte d’Ivoire government has made AIDS in the scholastic population a new priority. Faced with the risks of a proliferation of infections and numerous cases of unwanted pregnancies in the school population, the government has decided to strengthen its teaching programme for combating AIDS in schools throughout the country. Thus, a new programme comprised of preventative education modules based on strengthening knowledge and psychosocial skills about AIDS has been adopted and will be implemented during the 2006/07school year. The budget allocated to health has remained relatively weak. On domestic financing, health © AfDB/OECD 2007

Côte d’Ivoire

expenditure represented 6.2 per cent of the total budget in 2004, 6.1 per cent in 2005 and 9.2 per cent at the end of September 2006. That said, health represented 0.9 per cent of GDP in 2004, 0.8 per cent in 2005 and 0.4 per cent at the end of September 2006. However,

the part of the budget dedicated to education is growing. On domestic financing, education spending as a proportion of the total budget grew from 29 per cent in 2004 to 32 per cent in 2005, to reach 51.6 per cent in September 2006.

235

© AfDB/OECD 2007

African Economic Outlook

.

Egypt

Cairo

key figures • • • • •

Land area, thousands of km2 1 001 Population, thousands (2006) 75 437 GDP per capita, $ PPP valuation (2006) 4 500 Life expectancy (2006) 70.9 Illiteracy rate (2006) 28.6

Egypt

E

reforms to open up and liberalise its economy in recent years and has quickly become a dynamic market economy, led by the private sector and well integrated into the global economy. It has chalked up excellent real GDP growth rates – 6.8 per cent in 2005/061 – with over 6.6 per cent predicted for the next few years. This performance has been accompanied by record foreign direct investment (FDI) – more than $6 billion – and improvement in most economic and social indicators. GYPT HAS GREATLY BENEFITED FROM

The only macroeconomic indicators that need to be substantially improved concern the budget deficit, which was 9.3 per cent of GDP in 2005/06, and the level of public debt, which is more than 100 per cent

of GDP. However, the country’s leaders do not want to break the current virtuous circle of growth by drastically cutting government spending, especially basic food and energy subsidies for consumers. This might increase poverty at a time Foreign and domestic when more than 10 per cent of investment rates exploded the workforce is unemployed and in 2006 and the economy pockets of great poverty exist all performed very well in over the country, especially in spite of rising public debt, Upper Egypt. Moreover, inequality a high fiscal deficit and and poverty offer fertile ground political uncertainty. for Islamic fundamentalists. Although commerce and finance have been greatly liberalised, the political situation has hardened as the authorities have rejected demands to allow new political 239

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Egypt - GDP Per Capita (PPP in US $)

■ North Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Egypt - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

6000

8

7 5000 6 4000 5

3000

4

3 2000 2 1000 1

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and local authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/756538863046 1. Egypt’s fiscal year runs from 1 July to 30 June the following year.

© AfDB/OECD 2007

African Economic Outlook

Egypt

parties and arrested many members of the fundamentalist Muslim Brotherhood. The private sector’s share in the domestic economy is growing steadily as the business climate improves and the privatisation programme resumes. Banking has been transformed over the past three years, with new laws, state withdrawal from the sector, restructuring and recent privatisations. Financial intermediaries can now support the private sector and economic growth. At the international level, Egypt has embarked on major economic and trade partnerships with China, Russia and Turkey and strengthened those with its older partners. If the country can meet the key challenges of reducing poverty, unemployment and the budget deficit, it should be able to take full advantage of its potential.

Recent Economic Developments

240

Real GDP grew a robust 6.8 per cent in 2005/06 (4.9 per cent in 2004/05), mostly due to good performances by natural gas, construction, the Suez Canal and communications, and to major structural reforms and soaring domestic and foreign investment. Growth is forecast as 6.6 per cent in 2006/07 and 6.7 per cent in 2007/08 – steady progress that, if it lasts, promises to reduce poverty. Agriculture grew 3.2 per cent by volume in 2005/06 (3.3 per cent in 2004/05), and its share of GDP was steady at about 15 per cent. Irrigated farming did well and is increasingly focusing on high-value products such as horticulture, whose fruit and flowers are delivered fresh daily to the nearby European market. Domestic

consumers bought 95 per cent of agricultural output in 2005/06. The country is still a major importer, mainly of cereals (about 7 million tonnes a year). It is also trying to modernise its cotton mills to maintain its share of the world market and has set up a committee to deal with manufacturing and marketing problems. Despite these efforts, cotton production fell 5.4 per cent by volume in 2005/06, continuing a decline of several years. Mining expanded 20.8 per cent in 2005/06, but there were great disparities within the sector. While oil output shrank 2.1 per cent, natural gas production is booming (+50.2 per cent real growth), and further gas discoveries were made in early 2007. Oil reserves at the end of 2005 were 3.7 billion barrels and production 579 000 barrels a day (compared with 922 000 in 1996). About two-thirds of output is refined in Egypt’s nine refineries, which have a total daily capacity of 726 250 barrels. Natural gas resources are huge, with proven reserves estimated at 66 700 billion cubic feet at the end of 2005, plus potential reserves of 40 000 to 60 000 billion. The country has exported gas in liquefied form since 2003 and continues to expand its markets with the building of a gas pipeline to Jordan and Syria, and also to Russia, Turkey, Israel and Europe. To reduce pollution, the government is encouraging local use of natural gas not only for motor vehicles but also for electricity generation, by converting power plants to use gas turbines. Manufacturing grew 5.8 per cent in real terms in 2005/06 (4.4 per cent in 2004/05) and largely comprises small units of fewer than 15 employees. In industry, a broader sector, the share of the private sector increased to 86 per cent in 2005/06 with the privatisation of large

Figure 2 - GDP by Sector in 2005/06

(percentage)

Agriculture

Government Services and other services

14.9%

16.7%

Electricity and Water 1.9%

Trade, Finance and Insurance

21.9%

30.4% 10.3%

Industry, Petroleum and Mining

4%

Transportation, Communication and Suez Canal Construction

Source: Authors’ estimates based on National Institute of Statistics data.

African Economic Outlook

http://dx.doi.org/10.1787/507334376630

© AfDB/OECD 2007

Egypt

public firms. Egyptian industry turns out a wide range of items: pharmaceutical, ceramic and metal products all increased their share in GDP, but the best performances in 2005/06 were by textiles and agro-food. The textiles sector made up for market losses caused by the end of the Multifibre Arrangement by producing textiles and ready-to-wear items in the country’s seven Qualifying Industrial Zones (QIZ). Construction did very well, growing 14 per cent in real terms, with its GDP share rising to 5 per cent (up from 3.8 per cent in 2004/05). More than 84 per cent of the 2005/06 cement production of 35.8 million tonnes was sold domestically. The services sector accounted for about 48 per cent of GDP in 2005/06. As a result of the growing dependence of the West on Middle Eastern oil, the expansion of China’s and India’s trade, and military

operations in the Middle East, more than 7 per cent of the world’s maritime traffic passed through the Suez Canal in 2005/06, earning Egypt $3.56 billion – $274 million more than in 2004/05. Its value added at constant prices grew 16 per cent in 2004/05 and 9.4 per cent in 2005/06. Canal revenues have nearly doubled since 2001 and should continue rising in 2006/07, notably because of the March 2006 increase of 3 per cent in charges for all ships passing through. Telecommunications is also booming, with 10.3 per cent growth in 2005/06 (9.4 per cent the previous fiscal year). After growing 21.1 per cent by volume in 2004/05, tourism was up only 4.3 per cent in 2005/06, mainly because of an attack – the third in 18 months – on a Red Sea tourist site in April 2006.

Table 1 - Demand Composition 1997/98

(percentage of GDP)

2004/05

2005/06(e)

Percentage of GDP (current prices)

2006/07(p)

2007/08(p)

Percentage changes, volume

241

Gross capital formation Public Private

21.5 5.4 16.1

18.0 4.5 13.4

15.8 -26.1 30.0

17.0 12.0 18.0

14.2 10.0 15.0

Consumption Public Private

88.0 11.3 76.7

84.3 12.7 71.6

9.3 5.7 10.0

5.8 4.7 6.0

7.2 5.0 7.6

-9.5 16.2 -25.7

-2.3 30.3 -32.6

13.1 17.2

5.0 11.0

2.5 11.8

External sector Exports Imports

Source: Central Bank data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/611681120765

Domestic investment is expected to grow a record 15.8 per cent in 2005/06 (followed by 17 and 14.2 per cent in the two subsequent years) and is increasingly provided by the private sector, which promises strong economic growth. Private investment accounted for 58 per cent of total investment on average between 2000 and 2005 and topped 66 per cent in 2005/06. The GDP share of investment was 18.7 per cent in 2005/06 and that of consumption 83.7 per cent. The tertiary sector (transport and communications) was the main target of domestic investment (with 18 per cent of the total), followed by the social sector, manufacturing, and oil and gas (each 15 per cent). Domestic demand (both © AfDB/OECD 2007

investment and consumption) should pull growth upwards in 2006/07 and 2007/08. Exports should grow more slowly than imports, which are expected to rise sharply to meet strong domestic demand.

Macroeconomic Policy Fiscal Policy The 2005/06 budget was the first one complying with the new Government Finance Statistics (GFS) budget classification system of the International African Economic Outlook

Egypt

Monetary Fund (IMF), which treats subsidies explicitly since they are a very big part of government spending. This makes it hard to see budget trends, as the budget was recalculated from 2002/03 under the new system. The GFS system increases the deficit: for example, the 2002/03 deficit was 6.1 per cent of GDP under the old system and 9.1 per cent under the new. In 2005/06, the deficit amounted to 9.3 per cent of GDP (6.2 per cent under the old system), compared with 9.4 per cent (6 per cent) the previous year. It is now expected to fall steadily, to 8.6 per cent in 2006/07, 7.7 per cent in 2007/08 and eventually to 4 per cent – still a high figure – in 2010/11. The challenge facing the government is to cut spending to reduce the budget deficit and public debt without slowing economic growth. Over the 2002-06 period, public expenditure accounted for a very big share of GDP (over 30 per cent). Soaring oil prices have

pushed up spending on subsidies and social benefits from 29.3 billion Egyptian pounds (EGP) in 2004/05 to 50 billion in 2005/06 and an expected 58 billion in 2006/07 (more than 20 per cent of all government spending). Energy subsidies were 40 billion EGP in 2005/06 ($6.7 billion). One solution being considered is to make subsidies more effective by better targeting the poorest people, notably by issuing a smartcard to the poorest families. The reform would be introduced gradually, over four to five years. The price of petrol was put up recently from 1 EGP to 1.30 EGP per litre to reduce the cost of these subsidies to the national budget, but government spending will still be strained by the burden of servicing the national debt, given the country’s high level of domestic debt (102 per cent of GDP at the end of the 2005/06 fiscal year). Pay rises promised to civil servants during the presidential and parliamentary election campaigns will also weigh on the budget.

Table 2 - Public Finances

242

(percentage of GDP)

1997/98

2002/03

2003/04

2004/05 2005/06(e) 2006/07(p) 2007/08(p)

Total revenue and grantsa Tax revenue Oil revenue Grants

23.6 12.9 2.4 2.8

21.4 10.4 2.9 0.8

21.0 10.8 3.0 1.0

20.6 10.8 3.3 0.5

21.1 12.8 0.4 0.5

21.2 13.0 0.4 0.4

21.6 13.4 0.4 0.4

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

24.7 19.2 14.0 5.9 5.2 5.4

30.5 25.2 19.0 8.1 6.2 4.9

30.1 25.0 18.7 7.7 6.3 4.7

30.0 25.3 19.2 7.7 6.1 4.3

30.4 26.8 19.9 7.4 6.9 3.2

29.8 26.0 19.6 7.2 6.4 3.4

29.3 25.3 19.3 6.8 6.0 3.6

Primary balance Overall balance

4.2 -1.0

-2.9 -9.1

-2.7 -9.1

-3.3 -9.4

-2.4 -9.3

-2.2 -8.6

-1.7 -7.7

a. Only major items are reported. Source: Central Bank data; estimates (e) and projections (p) based on authors’ calculations.

On the revenue side, customs duties and tax rates have been significantly reduced. The average customs tariff was cut from 14.6 to 9.1 per cent in 2004, and the highest income tax rate was cut by half to 20 per cent in the 2005/06 budget. In the same year, company tax was sharply reduced and harmonised at 20 per cent (except for oil companies). Despite the lower rates, tax exemptions were abolished and the tax base broadened. Tax revenue rose 17 per cent in 2005/06, whereas the government was expecting a drop of 12 per cent. Better African Economic Outlook

http://dx.doi.org/10.1787/447428415487

tax and customs collection and the vigour of the private sector also contributed to this performance. Total revenue increased to 21.1 per cent of GDP in 2005/06 (20.6 per cent in 2004/05) and should continue to rise in 2006/07 and 2007/08, helping to ease the budget deficit. Monetary Policy Under flexible exchange rates, the main job of the Central Bank of Egypt (CBE) is to maintain price © AfDB/OECD 2007

Egypt

stability. It has become more independent and active since 2005, setting up a new framework for intervention using the interbank interest rate and taking many steps to liberalise the various markets. It issues its own bonds, with maturities ranging from one day to two years, which it trades on the interbank market twice a week. In June 2005, it established a corridor within which the interest rate can fluctuate. The ceiling and floor rates are set by the monetary policy committee. The interest rate, after being cut to encourage investment, was raised again in December 2006, from 8.75 per cent to 10.75 per cent, to curb inflationary pressure. Banking supervision has been improved and a wholesale reorganisation of commercial banks undertaken to make the sector more efficient. Financial intermediaries seem to have better performed their role of supplying funds to businesses. Loans to the private sector rose 8.5 per cent in 2005/06 (+3.6 per cent in 2004/05). Inflation expectations are mixed. Restoration of confidence in the economy plus higher foreign exchange reserves ($26 billion at the end of 2006) may even increase the value of the Egyptian pound. Consumer price index inflation eased sharply to 4.1 per cent in 2005/06 (from 11.4 per cent in 2004/05), and real interest rates turned positive for the first time in many years. Some inflationary pressures were observed, however, and the inflation rate is expected to climb back to about 6.5 per cent in 2006/07 and 6.1 per cent in 2007/08. The renewed rise in inflation is largely due to the effects of bird flu on prices for farm products, which make up a sizeable share of the basket of items used to calculate prices, and to cuts in subsidies, which pushed up prices for energy (petrol rose 30 per cent) and other items such as water.

has signed preferential trade agreements with many Arab states (Sudan, Lebanon, Morocco, Tunisia, Libya, Jordan, Iraq and Syria) as part of the Greater Arab Free Trade Area (GAFTA). A trade and investment framework agreement (TIFA) was signed with the United States in 1999 and an economic partnership agreement (EPA) with the European Union (EU) in 2001. QIZs were set up in 2004 under an agreement with Israel that in certain conditions allows items produced inside these areas to have duty-free access to the US market. Egypt is also looking for new bilateral trade partners, such as Russia and Turkey, as well as strengthening ties with longstanding partners such as Libya. Its priorities are trade diversification and opening up markets to foreign trade. As the first African country to establish diplomatic relations with China in 1956, it has stepped up co-operation and partnerships with Beijing. While the TIFA accord with the United States is conditional on political reforms, the business possibilities with China are huge, and in five or six years’ time China could replace the United States as Egypt’s main trading partner by volume. Egypt is currently negotiating with China and Italy to allow virtually all China’s exports to Europe to pass through the Suez Canal (only 60 per cent do so at present) at a cut price. Egypt’s main trade partners in 2005/06 were the European Union ($11.9 billion – 24.4 per cent of Egypt’s total trade) and the United States ($11.4 billion – 23.3 per cent), but trade with China was growing fast and reached $1.39 billion (from less than $1 billion in 2004/05). The balance was heavily skewed in favour of China, whose exports to Egypt were $1.34 billion (48.6 per cent more than in 2004/05), while trade the other way amounted to only $45.4 million.

External Position Egypt is busily signing trade agreements in all directions. This strategy, helped by the country’s geostrategic position at the crossroads of Africa, Europe and Asia, has boosted trade in goods and increased foreign investment. Egypt belongs to the Common Market for Eastern and Southern Africa (Comesa) and © AfDB/OECD 2007

Egypt and China signed 11 bilateral economic and technological co-operation agreements and memorandums in June 2006, especially involving oil and gas. China wants, among other things, to ensure that it has enough natural resources for its booming economy, and Egypt, whose main source of revenue is tourism, would like to attract some of the 100 million African Economic Outlook

243

Egypt

Chinese who travel each year. Chinese investors have also invested in Egyptian firms to the tune of $2.7 billion, and Beijing is considering reducing tariffs on imports from Egypt. The two countries have agreed to build factories to make electric cables, cement, glass, aluminium and chemical products, and plan to focus next on energy, textiles, ready-to-wear clothing, electronics and construction materials. The Chinese vehicle firm Cherry, for example, is building an assembly plant in Egypt, scheduled to come on stream in 2007. A $500 million Chinese industrial zone in Egypt is also in the works. Trade with Russia amounted to $813.5 million in 2005/06, but in the first eight months of 2006 it increased 52 per cent year-on-year and reached $953.3 million. Egypt began producing Russian Lada vehicles in December 2005 and will soon turn out Russian Gasel and Sobol minibuses.

244

The trade deficit fell in 2005/06 from 11.5 to 11.2 per cent of GDP as a result of strong GDP growth and higher world oil prices. Oil revenue almost doubled (93 per cent) in 2005/06 to $10.2 billion, up from $5.3 billion in 2004/05, but oil imports rose 35 per cent as well. Volume exports in 2005/06 were up 27 per cent for non-oil items and 44 per cent for oil products. Egypt is a net exporter of oil products and textiles and a net importer of food (mainly cereals) and chemical, electrical and metal goods. It also has comparative advantages in exporting cotton, fruit and vegetables, medicinal and aromatic plants, and cut flowers. The share of raw materials in exports has fallen sharply while that of high-tech manufactures has risen, which

makes Egypt less vulnerable to raw material price fluctuations on world markets. The trade deficit is expected to rise in the next two years because of the sharp projected rise in imports (29.5 per cent of GDP in 2006/07 and 30.2 per cent in 2007/08) and the fall in exports (16.5 per cent and 14.8 per cent of GDP for the same two years). Imports of intermediate and capital goods will be needed to sustain increased domestic investment and productive activity. The current account surplus is expected to shrink in 2006/07 and then go into deficit in 2007/08 as the higher trade deficit cancels out the invisibles surplus (mainly due to tourism). The Suez Canal was the country’s third-largest revenue source ($3.6 billion) in 2005/06, after tourism ($7.2 billion) and remittances by foreign workers abroad (more than $5 billion). About 2 million Egyptians live outside the country. FDI has risen spectacularly in recent years and switched from oil to other sectors, such as construction, communications and natural gas. It rose from $435 million in 2003/04 to $4.13 billion in 2004/05 and $9.1 billion in 2005/06. This surge was led by US investments, which more than doubled, from $2.04 billion in 2004/05 to $4.55 billion in 2005/06, and accounted for half of total FDI. European investment (in second position) increased by 360 per cent in 2005/06 to reach $2.94 billion. Chinese investment was only $0.8 million in the 2005/06 figures, but is expected to be very much greater in the coming years. Egypt’s direct investments abroad, or capital outflow, also soared, from $232.7 million in 2004/05 to $2.99 billion in 2005/06.

Table 3 - Current Account 1997/98

(percentage of GDP)

2002/03 2003/04

2004/05 2005/06(e) 2006/07(p) 2007/08(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-13.9 6.0 -19.9 4.1 1.4 5.4

-8.2 10.2 -18.4 6.2 0.1 4.5

-9.7 13.0 -22.7 9.3 -0.3 4.9

-11.5 15.4 -26.9 9.0 -0.3 6.0

-11.2 17.2 -28.4 7.1 0.5 5.7

-13.0 16.5 -29.5 8.4 0.4 5.0

-15.4 14.8 -30.2 7.8 -0.1 4.7

Current account balance

-2.9

2.6

4.2

3.2

2.1

0.9

-2.9

Source: Central Bank data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/306287660158

African Economic Outlook

© AfDB/OECD 2007

Egypt

Investor confidence is also reflected by the amount of net portfolio investment in Egypt, which more than tripled to $2.8 billion in 2005/06 (from $831 million in 2004/05). Egyptian securities raised $2.69 billion in 2005/06, a more than 103-fold increase over 2004/05 ($25.9 million). The external debt was $29.7 billion in September 2006. The main creditors were the United States, Japan,

France and Germany, and only 17.1 per cent of total debt was multilateral. The low cost of servicing domestic and external debt (the latter consists mostly of longterm and soft loans) is a big advantage for the economy. Debt indicators are also healthy. The external debt amounted to 27.6 per cent of GDP in 2005/06 (down from 31.1 per cent in 2004/05), while debt service fell from 9.4 per cent of goods and services exports to 8.5 per cent.

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

40

35

30

25

245

20

15

10

5

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/341277703630

Structural Issues Recent Developments Current and future structural reforms mostly aim to sustain healthy economic growth and boost the private sector’s capacity to create jobs. Major progress was made in 2006 in reform of the tax and customs departments, management of public finances, monetary policy, privatisation and financial sector reorganisation. The private sector is still hampered by red tape and poor management of services such as port facilities. © AfDB/OECD 2007

A total of 170 of the 314 state firms earmarked under the 1991 privatisation law are still to be divested, but the programme has begun to speed up: in 2005/06, 46 firms were transferred to the private sector, up from 28 in 2004/05. The proceeds of these 74 divestments (13.8 billion EGP in 2005/06 and 5.64 billion in 2004/05) were the highest since the privatisation programme began in 1991, and comprised more than 52 per cent of the proceeds between 1991 and 2006 and a quarter of all the firms up for sale. President Hosni Mubarak has said the country will develop nuclear energy for peaceful purposes and build African Economic Outlook

Egypt

four nuclear power plants. He has asked China and Russia to help and has tried to reassure the international community by saying Egypt will import the enriched uranium required rather than produce it itself. Egypt began a nuclear development programme in the 1950s and has a research centre north of Cairo with two reactors, one Russian and the other Argentine. The Palestinians are expected to start buying electricity from Egypt in 2007 with completion of a 200 KW, 50mile long high-tension line to the Gaza strip. In transport infrastructure, a 33-kilometre third line is being added to Cairo’s metro network; on completion of the new line, scheduled for 2020, the metro system will have 100 kilometres of track and carry 5 million passengers a day (a third of the city’s population). The government is also spending 8.5 billion EGP ($1.48 billion) on modernising the railways, as a quarter of the locomotives are more than 30 years old and half of them need to be upgraded to carry the 1.5 million passengers the network serves each day. 246 In telecommunications, a consortium led by the United Arab Emirates firm Etisalat was awarded Egypt’s third mobile phone licence in July 2006 for a reported sum of 16.7 billion EGP ($2.9 billion), with the government getting 6 per cent of its future revenue. The banking sector has been the main target of reforms and restructuring. The chief aim of the 50 billion EGP ($8.7 billion) Financial Sector Reform Programme (FSRP) due to end in 2008 is to set up an efficient and competitive financial system, with more effective intermediation and risk management, and to boost the security and solidity of both bank and nonbank financial institutions, with closer monitoring by the CBE. Under the FSRP, a wide-ranging consolidation of the banking sector was undertaken, with capital reorganisation, reduction in the number of banks and privatisation of the large state-owned Bank of Alexandria. The latter, which attracted bids from 12 European and Arab banks and was awarded to the Italian bank Sanpaolo, is now the country’s biggest privately-owned bank, ahead of the National Société African Economic Outlook

Générale Bank (NSGB) and the Commercial International Bank (CIB), with 188 branches, 6 per cent of all deposits ($5.4 billion) and $6.9 billion in assets. The $1.6 billion sale of the bank was the biggest privatisation of 2006. To facilitate its sale, $1.2 billion worth of non-performing loans to the public sector was repaid in January 2006. The bank was the smallest of the four state-owned banks. Of the three others, the huge National Bank of Egypt is not being privatised and the Misr Bank and the Bank of Cairo are due to merge at some point. In 2006, the government also sold the shares it held in 13 commercial banks, and several Egyptian banks came under foreign control, such as the MIBank (bought by a subsidiary of the French Société Générale) and the Egyptian American Bank (EAB), which was taken over by Crédit Agricole-Indosuez. In September, France’s biggest bank, Crédit Agricole, launched an Egyptian subsidiary, Crédit Agricole Égypte (CA-E), which has about 2 per cent of the market; the parent company aims to double its market share in three to five years, making it one of the biggest privately-owned banks. The government also wants to reduce the number of banks by increasing their required minimum capital. Seven voluntarily merged in 2006, six were forced to merge, six were wound up and one new bank opened. The sector, which has been called overcrowded, shrank from 57 to 39 banks, and the goal for 2007 is 22. The last problem concerns non-performing loans. For state-owned banks, the investment ministry is supposed to use income from privatisation to reimburse some of these loans. For privately-owned banks, it is vital to set up a department to manage non-performing loans, and this unit should report directly to the CBE. About half of all non-performing loans are thought to have been eliminated by the banks in the past two years. Access to Drinking Water and Sanitation The water resources and irrigation ministry has drawn up a national plan to improve management of © AfDB/OECD 2007

Egypt

water from the Nile and tackle many other problems. First, the rapid growth of the population and of industry requires ever-increasing amounts of water from a limited supply. Egypt depends largely on the Nile to meet these needs, and despite the huge reservoir formed by Lake Nasser, the supply of water does not increase. Under 1959 agreements with Sudan, Egypt gets 55.5 cubic kilometres of water a year. This works out to an annual 800 m3 per person in 2005 and only about 600 m3 in 2015, less than the annual 1 000 m3 considered as the water poverty line and the regional average of 1 200 m3. Second, the country has to protect the river against pollution and waste. The Nile is often below minimum quality standards. Third, the population is highly concentrated around the river valley and delta, and 97 per cent of Egyptians live on 4 per cent of the country’s land. To ease pressure on the river, the government is to set up industrial zones and major agricultural projects in the desert (such as the Toshka project), but the ambitious programme needs a lot of water. The national 2003-17 water plan is an integrated approach involving suppliers, users and other stakeholders, needing investment of 145 billion EGP and incurring costs of 41 billion EGP. Infrastructure and connection work for the water and sanitation network is handled by the Cairo and Alexandria Potable Water and Wastewater Organisation (CAPWO) in the Cairo and Alexandria areas and by the National Organisation for Potable Water and Sanitary Drainage (NOPWASD) in the rest of the country. Most of the infrastructure is in bad condition, either broken or antiquated. Meters no longer work, and this hampers collection of customer charges. The network needs huge investment. The water and sanitation sector performs quite well compared with those of other African states. In 2004, 86.1 per cent of the population (97.5 per cent in towns and cities and 82.1 per cent in the countryside) was connected to the drinking water network. Some governorates (provinces) are much worse off, such as Bani Suwayf (72.1 per cent) and Minufiyah (75.4 per cent), but country has already reached the Millennium Development Goal (MDG) of halving the number of people without access to water and sanitation between © AfDB/OECD 2007

1990 and 2015. Where sanitation is concerned, the access rate is 93.6 per cent of the population (99.6 per cent urban and 78.2 per cent rural), though only 53.6 per cent of households were connected to mains sewage in 2004 (96.6 per cent in urban areas). Less than half the wastewater collected is treated, and pollution and poor water quality are very serious problems. The government’s main priority is to increase sanitation access in the countryside, since the high rate of access to water without sanitation is costly and damages water quality and the environment. The estimated cost of providing all Egyptians with sanitation is about 60 billion EGP ($10 billion). The government has just released 20 billion EGP for rural sanitation work over six years, with 1 billion of it coming from the proceeds of privatisation. The government is very active in water and sanitation, heavily subsidises both and continues to set prices to the consumer. It plans to reduce this heavy burden on the budget, though such a measure would be highly unpopular. A cubic metre of water costs an average 0.23 EGP ($0.04) for consumption of up to 10 m3 a month, a rate that is among the lowest in the world and does not cover operating or maintenance costs. As a result, the many bodies responsible for water and sanitation had accumulated a deficit of 7.6 million EGP by the end of 2002/03, which led to the introduction of a major reform. The sector also suffers from fragmented management, as authority is divided between a dozen ministries and state bodies, hampering decision-making. There used to be no policy at all for the sector. In April 2004, the Holding Company for Water and Wastewater (HCWW) was set up with 14 regional subsidiaries to centralise management of water distribution and sewage treatment. An advisory body to examine requests for consumer rate changes was also set up. By the end of 2006, only Cairo’s rates had been increased. The HCWW has nonetheless improved water management, issuing quarterly reports on technical and commercial indicators, computerising customer billing, providing a help desk and website to allow centralised handling of customer complaints and gather statistics. An awareness-raising campaign has been African Economic Outlook

247

Egypt

launched to induce the public to prevent waste and pollution, and especially to make people understand that water has a price. The HCWW also plans a programme to detect leakages and to train middle managers in new methods of water management.

Political Context and Human Resources Development

248

President Mubarak has promised to amend the national constitution to make it still easier for political parties to nominate presidential election candidates. The amendment is due to be put to a referendum in 2007. The last constitutional amendment was in May 2005, after a referendum endorsed allowing more than one candidate to stand in presidential elections and approved a switch to direct universal suffrage. However, a party must hold 5 per cent of the seats in parliament before it can nominate a presidential candidate, and independent candidates must be backed by 250 members of the country’s representative organisations. Thus the ruling party’s domination of parliament and local councils makes it impossible for any independent candidate to stand, including candidates from the powerful fundamentalist Muslim Brotherhood. The Brotherhood, which won 20 per cent (88) of the seats in the last elections for the People’s Assembly (the lower house), is the main opposition group but is only tolerated by the authorities, not recognised as a political party. President Mubarak, in power since 1981, has been re-elected until 2011. Mubarak has promised that 2007 will see new constitutional reforms to speed up democratisation, yet the political climate is hardening. Thirteen requests for recognition by political parties, including one Islamist grouping, were rejected in early 2007, and many members of the Muslim Brotherhood were arrested in 2006. The government is worried about the rise of Islamist groups, especially at the last parliamentary elections, and unrest among Arab Muslim Egyptians as expressed through demonstrations and increasingly active support for Islamist leaders. To cope with this movement, the government needs to improve social services and reduce inequality to limit the African Economic Outlook

possibilities for these leaders, while at the same time keeping to serious budget constraints. Parliament voted in June 2006 to limit the powers of the justice minister and give the judiciary more independence. The measure allows the prosecutorgeneral to act independently of the ministry, gives the Supreme Judicial Council the right to monitor appointment of judges, provides the judiciary with an independent budget and gives judges the right to appeal against decisions of the judiciary’s disciplinary committee. An estimated 20.2 per cent of Egyptians live below the national poverty line of 1 450 EGP a year ($242). In 2004, 23 per cent of the poor (4.7 per cent of the population) were under-nourished. Social indicators and progress varied greatly in 2004 between the governorates of Upper Egypt (34 per cent of whose inhabitants were poor) and those of Lower Egypt (where only 13.9 per cent were poor). Pockets of poverty are highly localised and thus are masked in the calculation of average indicators. Although the growing population adds 700 000 to 800 000 people to the labour market each year, the official unemployment rate fell in 2005/06. New jobs in the private sector reportedly reduced joblessness there to 10 per cent, from 11.2 per cent the previous year. The unemployment rate is much higher among young people (37.3 per cent of those between 20 and 25), people having finished secondary education (65.9 per cent) and those having university education (25.3 per cent). Part-time and short-term jobs accounted for between a third and a half of all salaried employment. The government’s strategy is to encourage growth of the private sector and small businesses, the main jobcreators, especially in the services sector. Egypt has a very good chance of reaching several of the MDGs, such as those on poverty and education, and has already achieved some of them (access to drinking water and sanitation). The least progress has been made in gender equality. Women, hit by civil service job cuts, are now down to 25 per cent of the national workforce and are concentrated in a few © AfDB/OECD 2007

Egypt

segments of the labour market, mostly healthcare (46 per cent of the national female workforce) and education (40 per cent). The number of women wearing the Islamic veil increases each year; in 2006, 80 per cent of all women did so. The latest demographic and health survey (DHS), in 2005, showed that 95.8 per cent of adult woman in 2004 had undergone female circumcision, at an average age of 10. This ancient tradition of the pharaohs is followed throughout the country and among all social classes. Health and education indicators improved significantly overall. Life expectancy rose from 55 years in 1976 to 70.6 years in 2004. Infant mortality fell from 108 per thousand in 1961 to 22.4 in 2004. Access to healthcare was around 100 per cent in both urban and rural areas, as was vaccination of children against the main childhood illnesses. A very low proportion of the population is infected with HIV (0.03 per cent), but the 2005 DHS showed that only 18.3 per cent of adults (between 15 and 49) knew about tests to detect it.

Egypt is among the bottom nine countries in the world for literacy, with only 40.8 per cent of the population able to read and write in 2005. The literacy rate for urban women in 2004 was 63.6 per cent, and that in the countryside 29.6 per cent. Only 13.5 per cent of rural women had access to secondary or higher education. The illiteracy rate should fall in the next few years with increased school enrolment. In 2003/04, 90.9 per cent of children were in primary or secondary education, compared with only 42 per cent in 1960. Seven per cent of children between five and 14 were working in 2004. The pupil/teacher ratio in primary education was a quite high 40.9, and as a result, twothirds of pupils take private lessons to keep up. More than 85 per cent of children were being educated in state schools, 6.1 per cent in private ones and 8.1 per cent at Al-Azhar Koranic schools. Leaving aside those who go on to higher education at Al-Azhar University, the number of university students increased from 1.6 million in 2001 to 2 million in 2006. 249

© AfDB/OECD 2007

African Economic Outlook

.

Ethiopia

Addis Ababa

key figures • • • • •

Land area, thousands of km2 1 104 Population, thousands (2006) 79 289 GDP per capita, $ PPP valuation (2005/06) 794 Life expectancy (2006) 48.3 Illiteracy rate (2006) 53.7

Ethiopia

T

ETHIOPIAN ECONOMY has performed strongly in recent years. Growth has averaged an impressive 8.9 per cent over 2004-06, driven mainly by strong agricultural growth along with expansion in industry and services. The economy also benefited from donorfunded investments in infrastructure, ongoing policy reforms, and strong coffee prices. The current growth rate is significantly higher than the average rate of 5 per cent per year recorded over 2001-04, under the Sustainable Development and Poverty Reduction Program (SDPRP). If this growth rate is sustained, Ethiopia will make considerable progress towards achieving the Millennium Development Goal (MDG) of halving income poverty by 2015. This optimistic scenario is threatened by high world oil prices, which are partly responsible for the widening budget and HE

current account deficits, and the continuing political crisis stemming from the hotlycontested May 2005 election Significant donor-funded results and its subsequent effect investments in infrastructure, policy reforms and strong on donor support. coffee prices are boosting The government has economic growth but high launched the second phase of fiscal imbalances persist. the SDPRP, known as the Plan for Accelerated and Sustained Development to End Poverty (PASDEP). The PASDEP is Ethiopia’s guiding poverty-reduction strategic framework for the next five years. The objectives of PASDEP are: i) annual economic growth of 7 per cent rising to 10 per cent by the end of the programme, through massive investments in key anti-poverty sectors; ii) a sustained rise in agricultural productivity and 253

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Ethiopia - GDP Per Capita (PPP in US $)

■ East Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Ethiopia - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

3500

14 12

3000 10 2500

8 6

2000 4 1500

2 0

1000

-2 500 -4 -6

0 1999/2000

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06(e)

2006/07(p)

2007/08(p)

Source: IMF and domestic authorities’ data. http://dx.doi.org/10.1787/750577841568

© AfDB/OECD 2007

African Economic Outlook

Ethiopia

production, with crop output rising from approximately 15 million tonnes per year to 38 million tonnes; iii) an emphasis on the textile, leather and floriculture industries, in an effort to boost exports.

Recent Economic Developments Recent economic developments in Ethiopia have been favourable, despite the ongoing political tensions. Real GDP growth in the 2006 fiscal year was estimated at 5.9 per cent and was due largely to robust growth in agriculture, industry and services. Real GDP growth is projected at 6.3 per cent in 2007, again reflecting strong performances in the industry and services sectors.

254

Agriculture accounted for 47 per cent of real GDP in 2005/06 and employs about 85 per cent of the population. Agricultural production consists mainly of export products such as coffee, tea and spices and other crops such as cereals, pulses, oil seed, fruits and vegetables. Coffee is the most important export product. Total coffee production was 301 304 tonnes in 2004/05 and is estimated to have increased to 305 000 tonnes in 2005/06. Tea is next in importance as an export product. In 2004/05, tea production amounted to 5 598 tonnes and is estimated to have increased to 5 900 tonnes. It is projected at 6 000 tonnes in 2006/07. Among the food crops, cereal production reached 12.99 million tonnes in 2004/05 and is estimated to have increased sharply to 18.07 million tonnes in 2005/06. All the other crops, namely pulses, oil seed, fruits and vegetables as well as cotton are estimated to have increased in production during 2005/06, over the 2004/05 levels. Production and export of flowers is growing rapidly as new local and foreign local investors have entered the sector, while existing growers are expanding. This new agricultural commodity is generating significant jobs and export revenue. Export earnings have more than doubled to $20 million in 2005 and have been estimated at $40 million in 2006 and are projected to reach $100 million in 2007. Ethiopia’s main attractions are its climate, which is highly suitable for floriculture and horticulture, and an impressive scheme of investor incentives and lower freight costs, compared with competitors in Kenya and India. African Economic Outlook

In spite of the increases in the food components of the agricultural products, food insecurity remains pervasive, requiring improved agricultural productivity through capacity-building, improved input supplies, technology adoption and the provision of infrastructure. During the PASDEP period, particular improvements to rural roads, irrigation systems, and better provision of extension and research services are to be emphasized. Selected small-scale government support for commercialisation will also be provided where there are gaps in private provision. The meher (main) harvest which occurs during the October to December period provides more than 90 per cent of annual agricultural production in Ethiopia. The 2007 harvest is anticipated to be bountiful again due to abundant rainfall in most regions of Ethiopia, as has been the case in the previous three years. Despite the good harvests, food insecurity continues to be a serious problem in Ethiopia. According to the preliminary results of the Food and Agriculture Organization (FAO), World Food Programme (WFP), Crop and Food Supply Assessment Mission (CFSAM) and the Disaster Preparedness and Prevention Agency (DPPA), the number of people needing emergency food assistance in 2007 is expected to be substantial, although less than the peak of 3.1 million in 2006. The government and humanitarian community are expected to continue providing assistance in 2007 to the 7.3 million or more Ethiopians who are chronically food-insecure through the Productive Safety Net Programme (PSNP). Achievements under SDPRP in the agricultural sector have included: i) an increase in the amount of irrigated land, affecting 200 000 additional farmers; ii) the development of livestock through the use of new breeds and types of forage; iii) improved grain marketing and the introduction of an inventory and warehouse system; iv) promotion of agricultural exports, and v) the launch of the National Food Security Programme intended to attain food security for five million chronically food-insecure people and another 10 million are affected by food shortages in drought years. © AfDB/OECD 2007

Ethiopia

Funded by the World Bank, the PSN programme is aimed at combating poverty by providing 5 million people in need of help with cash rather than food donations. It is hoped that the programme will boost agricultural productivity and help farmers become more self-sufficient. The second stage of the PSN (PSN-II)

has received funding of $759 million, including $150 million from the World Bank, and was set to begin in the first quarter of 2007. The aims of this phase include continued improvement of governance and reduced financial vulnerability to shocks, particularly droughts.

Figure 2 - GDP by Sector in 2004/05

(percentage)

Other services 14.4% Government services Transport, storage and communications

5.6%

6%

Trade, hotels and restaurants

47%

Agriculture

13.9% 6.1% 2%

5.1%

Other industry

Manufacturing Electricity, Gas and Water

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/230081167604

Industry only accounts for about 12 per cent of GDP but this sector grew strongly in 2005/06, with mining and quarrying, manufacturing, electricity and gas all contributing to growth. Within manufacturing, small-scale and cottage industries grew at a robust 10.8 per cent in 2005/06, compared with 4.8 per cent in 2003/04. Electricity, gas and water also grew by 10.8 per cent in 2005/06, reflecting the development of the Caleb and Shalala gasfields by Petronas (a Malaysian oil firm), which received the concession in 2006. A gas-to-liquid plant and a pipeline to the Djibouti coastline are planned. Petronas is expected to invest $1.9 billion. In addition, electricity-generating capacity is expected to triple by 2009/10, with access to electric power rising to 50 per cent of the population from the current 17 per cent. To accomplish this, the Ethiopia Electricity Power Corporation (EEPCo) has undertaken the construction of the largest-ever hydroelectric dam in the country on the Omo-Gibe River. Ethiopia’s mineral deposits, including gold, tantalum, iron and nickel, have been under-exploited. Gold nevertheless accounts for a significant part of exports, amounting to more than $40.7 million in 2003/04. The government also earned more than © AfDB/OECD 2007

$172 million in the privatisation of the Lege Dembi Gold Mine. Although 24 foreign and local companies have invested $1.75 billion, exploration activities have been lagging. The PASDEP aims to increase mining exports through higher investment, formalising 85 per cent of unregistered precious metals production, and increasing regional and hydrogeological mapping to enable mineral exploration and infrastructure development. Telecommunications have expanded greatly over the last few years. Ethiopia has approximately 5 fixed lines per 1 000 persons, one of the lowest in the world. The government has invested heavily in basic infrastructure such as fibre-optic cables, radios and satellites over the last three years. The PASDEP aims to raise the percentage of the population within a 5 kilometre radius access to telecommunications from the current 87 per cent to 100 per cent by 2010. Furthermore, the Ethiopian Telecommunications Corporation has contracted with an association of Chinese firms to expand telephone coverage. The $1.5 billion plan will run from 2006 to 2010 with the goal of raising the number of mobile phone lines from 1.5 million to 7 million and the number of fixed lines from 1 million to 4 million. African Economic Outlook

255

Ethiopia

The tourism sector has also experienced robust growth in recent years. Earnings from the tourism industry were $134.5 million in 2005, an increase of 18 per cent over the previous year. The Ethiopian Tourism Commission hopes to transform Ethiopia into one of the top ten tourist destinations in Africa by the year 2020 and plans to raise the number of visitors to 500 000 by 2010. Tourism recently accounted

for about 13.9 per cent of GDP in 2005/06 and is slated to grow more rapidly in the future. More hotels, restaurants and other tourist facilities are needed. Fortunately, Ethiopia is blessed with many tourist attractions, ranging from unique historical artifacts to religious monuments, as well as other cultural attractions. Tourism has grown at an average annual rate of 13 per cent over the last few years.

Table 1 - Demand Composition 1997/98

2004/05

(percentage of GDP) 2005/06(e)

Percentage of GDP (current prices)

256

2006/07(p)

2007/08(p)

Percentage changes, volume

Gross capital formation Public Private

19.6 13.8 5.8

20.5 12.1 8.3

17.5 12.5 24.9

3.0 6.9 -2.0

5.9 5.1 7.0

Consumption Public Private

88.3 10.2 78.2

98.0 13.8 84.2

5.5 6.2 5.4

7.2 4.4 7.7

7.3 3.6 7.8

-7.9 13.3 -21.2

-18.4 15.8 -34.3

2.1 10.4

5.0 6.9

5.2 7.3

External sector Exports Imports

Source: Domestic authorities data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/575627000138

Domestic demand, especially consumption, has grown strongly over the period 1998-2005, and has entailed booming imports and burgeoning trade deficits. In 2005/06 total gross capital formation recorded a robust growth of 17.5 per cent, with private investment growing especially strongly. Private investment is expected to slump in 2007, however. Although private investment has been increasing in recent years following market-oriented reforms, government investment still accounts for about 60 per cent of total investment. Much of government investment has been financed by donors.

Macroeconomic Policies Fiscal Policy The fiscal deficit in Ethiopia has averaged approximately 5 per cent of GDP in the last few years, but in 2005/06 it increased to 7.4 per cent of GDP. African Economic Outlook

Total revenue decreased from 13.3 per cent of GDP in 2003/04 to an estimated 12.5 per cent of GDP in 2005/06, due mainly to inefficiencies in tax collection. In addition, grants were also reduced considerably due to donor concerns about the recent political turmoil. Government spending, on the other hand, has been growing rapidly in recent years, although it has slowed down from the much higher level registered in 2002/03. Government spending was estimated at 26.3 per cent of GDP in 2005/06. Going forward, the aim of fiscal policy is to restrain the deficit while prioritising povertyreduction expenditures in the main sectors of health, education and agriculture. The government has enacted a series of tax reforms starting in 2001 to boost tax revenues through improved tax administration and compliance. The 2006/07 budget targets a 16 per cent rise in government spending, to birr 35.4 billion, largely for infrastructure investment. As in previous years, higher spending has been allocated to the priority sectors. As a result, capital spending is forecast to increase slightly from 12.1 per cent of GDP in 2005/06 © AfDB/OECD 2007

Ethiopia

to 12.2 per cent of GDP in 2006/07, with the largest share of spending going to the woreda (local or district) level, followed by regional governments (some of the allocation will be spent on capital projects) and the federal government. The new budget also reflects the redirection of World Bank funding to the woreda level through the Protection of Basic Services (PBS) programme. Because of the higher spending envisaged in 2006/07, and coupled with the insufficient generation of domestic revenue and reduced donor inflows, the budget deficit has been projected to be 5.8 per cent of GDP in 2006/07, down from the burgeoning deficit of 7.4 per cent of GDP recorded in 2005/06. The

shortfall in 2006/07 will, as usual, be financed through a mix of domestic and external borrowing. The deficit is forecast to fall back to the still-high 5 to 6 per cent range in 2007/08 and 2008/09 as the government continues with its large-scale capital projects to improve infrastructure. The government will also continue with its high levels of anti-poverty spending, and donor support will be crucial in achieving this objective. Notwithstanding this need, no major scaling-up of donor funds in 2007/08 is expected as the political situation is likely to remain strained, even though support will slowly increase as relations with donors continue to improve in the near-term.

Table 2 - Public Finances

(percentage of GDP)

1997/98

2002/03

2003/04

2004/05 2005/06(e) 2006/07(p) 2007/08(p)

Total revenue and grantsa Tax revenue Grants

17.6 9.9 2.4

22.8 12.0 6.6

21.9 13.3 4.9

20.5 12.6 4.6

18.9 12.5 3.2

20.8 12.4 5.2

20.5 12.1 5.2

Consolidated expenditurea Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

21.2 13.5 12.0 4.3 1.6 7.8

29.8 19.6 17.9 5.8 1.8 9.2

25.1 17.1 15.7 6.3 1.3 10.1

25.2 14.3 13.3 6.0 1.0 11.5

26.3 14.2 13.3 5.7 0.9 12.1

26.6 14.4 13.1 5.5 1.3 12.2

25.8 13.9 12.5 5.3 1.4 11.9

Primary balance Overall balance

-2.1 -3.6

-5.2 -7.0

-1.9 -3.2

-3.7 -4.7

-6.4 -7.4

-4.5 -5.8

-3.9 -5.3

a. Only major items are reported Source: Domestic authorities’ data; estimates (e) and projections (p) based on authors’ calculations.

http://dx.doi.org/10.1787/342164300568

There is currently no IMF programme in Ethiopia and key donors such as the World Bank are withholding direct budget support to the federal government. Funds will instead be transferred directly to the woreda level. Each woreda will be allocated funding through a strict monitoring programme, under the supervision of the World-Bank-led PBS project.

emerged and entered the business since 1994 with the issuance of regulations governing the businesses. At the moment, there are two commercial government banks and one specialised government bank operating competitively with six private commercial banks. In the insurance business, there is one government insurance corporation and eight private insurance companies.

Monetary Policy

The NBE is the central bank and regulatory authority of financial institutions. It also provides certain commercial bank activities such as holding the accounts of government departments and ministries and facilitating government import letters of credit and foreign exchange business. As the central bank of Ethiopia, the NBE’s primary monetary policy aims are to attain relative stability of prices to help protect the

The current financial sector of Ethiopia consists of the National Bank of Ethiopia (NBE, the central bank), commercial and specialised banks, insurance companies, the Pension and Social Security Authority (PSSA) and saving and credit co-operatives. A number of private commercial banks and insurance companies have © AfDB/OECD 2007

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poor from the impact of inflation and to create a stable backdrop for encouraging saving and long-term investment. This involves limiting money growth at a slightly higher rate than nominal GDP.

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Inflation stood at 6.8 per cent in 2005 and was estimated at 10.5 per cent in 2006, reflecting high food prices due mainly to rising aggregate demand, despite the good meher harvest and the rising costs of inputs and market inefficiencies, as well as fuel-price increases. Inflation is projected to ease to 6 per cent in 2007, due to continued good food harvests and declining international oil prices. In 2006, monetary policy was aimed at achieving prudent growth in money supply as well as maintaining ceilings on domestic government borrowing of about 1 per cent of GDP. However, this became difficult to achieve in view of the government’s rising fiscal deficit. Also, the aim of limiting “core non-food” inflation to less than 3 per cent per year could not be achieved due to the lack of co-ordination between fiscal and monetary policies. The NBE therefore had to increase credit to the government to accommodate the large fiscal deficit of 7.4 per cent of GDP in 2005/06. In spite of this, the private sector was not crowded out, as credit to the private sector showed a significant increase in 2004/05 and was expected to keep the same momentum in 2005/06, reflecting strong domestic demand and the ongoing government’s infrastructure development and capacitybuilding programmes. To make indirect monetary instruments effective and mop up excess liquidity in the banking system, the NBE has instituted measures for the next five years, aimed at encouraging banks to reduce their excess reserves. For this reason, a study intended to address excess reserves was completed in 2005. The NBE intends to continue taking measures to strengthen the inter-bank foreign exchange market and further enhance the financing of the inter-bank money market through elimination of the obstacles that continue to hamper the market’s smooth operation. The amount of foreign exchange transacted in the inter-bank foreign exchange market fell to $134 million in 2005/06, down from $138.9 million in 2004/05, due African Economic Outlook

to a decline in the amount of foreign exchange transacted between commercial banks, because of the financing of the surge in imports by commercial banks. Ninetytwo per cent of the total foreign exchange transacted in the inter-bank market during 2006 was made available by the NBE, underscoring the pivotal role that the NBE is playing in providing foreign exchange liquidity to the market, especially for the financing of imports. In the retail market, commercial banks’ purchase of foreign exchange from exporters grew 12.8 per cent to reach $148.8 million, due to improvements in export earnings. Simultaneously, commercial banks’ sales of foreign exchange to finance imports increased to almost $2.8 billion in 2005/06, from $2.5 billion in 2004/05 and $1.6 billion in 2003/04. With regard to the foreign exchange bureaux, their purchases of foreign exchange decreased to $43.5 million in 2005/06 from $76.6 million in 2004/05, on account of slowdowns in receipts from travel services, and the increasing spread between the parallel and official rates to 3.97 per cent in 2005/06, from 0.68 per cent in the previous fiscal year. In contrast, their sales increased by 96.7 per cent to reach $31.3 million, which reflects the intention of travellers to buy foreign exchange at low prices from the official market. A major development that has occurred in recent years in the financial sector is the strengthening of the NBE. The central bank is currently implementing a fiveyear strategic plan. The main objectives of the bank are to undertake tasks concerning institutional transformation, improving service delivery by the bank, enhancing the soundness of the financial system, making available timely research and policy advice to the government, building an efficient payment system, and enhancing currency management. The NBE has identified the major challenge that needs to be addressed as being the lack of skilled manpower and institutional dynamism. To address this problem, the NBE has instituted a detailed restructuring plan that included a revision of the salary scale in 2004/05. Re-engineering of business processes has also been carried out to improve the Bank’s supervisory, regulatory and research capacity, as well as service delivery. In addition, two major divisions of the NBE, namely Government Accounts and the Cash and Foreign Exchange Inspection © AfDB/OECD 2007

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Divisions, completed the study and began its implementation. The studies pertaining to all other departments of NBE were nearing completion in 2005 and their implementation is ongoing. In addition to the capacity-building exercise of the NBE, the government is also reforming other aspects of the Ethiopian financial sector. These include strengthening the financial sector infrastructure, developing new financial products, enhancing professional skills in the financial sector and in project implementation and monitoring. The World Bank is supporting this financial sector capacity-building project with a loan of $5 million. External Position Exports are projected to reach an all time high of $1.08 billion by the end of 2006. Coffee is the dominant cash crop. The volume of coffee exports declined in 2005/06 to 148 000 tonnes from 161 000 tonnes in 2004/05, but rising coffee prices pushed up the value of exports by 5.7 per cent to $354 million. Earnings from oil seed exports increased from $82.7 million in 2003/04 to $211 million in 2005/06 thanks to increasing sales to China. Meat and meat product exports continued to increase, reaching $18.5 million, up from $14.6 million in 2004/05. Exports are expected to remain strong through 2007 and 2008. In 2006, the main export destinations were Asia (39.31 per cent), with China accounting for 34.4 per cent, followed by Europe (37.79 per cent) and then by Africa (16.94 per cent). Of the total exports destined for Africa, two neighbouring countries, Djibouti and Somalia, received the highest proportion (60 per cent). Exports to these countries were qat, fruits and live animals.

Imports have been growing more rapidly than exports, resulting in larger trade deficits. Imports are now more than four times the amount of exports, and the former increased to $4.4 billion (32.3 per cent of GDP) in 2005/06, up from $3.6 billion in 2004/05 (31.9 per cent of GDP) and $2.6 billion in 2003/04 (27.3 per cent of GDP) owing to improvements in all components of imports, with the exception of fuel. Imports of raw materials increased 57.3 per cent in 2006, mainly due to the worldwide increase in the prices of steel and iron. Metal prices increased by 45 per cent in 2006 as a result of strong demand and production disruptions. Capital goods imports grew 21 per cent in 2006 to reach approximately $1.5 billion, reflecting the continued rise in imports of machinery and transport equipment, related to ongoing private investment activities and government capacity-building programmes in infrastructure facilities. In 2006, capital goods imports, on average, generally accounted for a third of total imports. Increases in anti-poverty programmes also led to rising medical and pharmaceutical goods imports. With respect to the origin of imports, more than 50 per cent of Ethiopian imports were from Asia (55 per cent), followed by Europe (29 per cent). Of the total imports from Asia, more than 50 per cent were from China and Saudi Arabia, with imports from the latter consisting mainly of petroleum products (90 per cent). The higher growth of imports over exports led to a widening in the merchandise trade deficit to 25 per cent of GDP in 2005/06 from 24.5 per cent of GDP in 2004/05. The trade deficit is forecast to rise further to 25.4 per cent of GDP in 2006/07 after which it will fall slightly to 25 per cent of GDP in 2007/08.

Table 3 - Current Account 1997/98

(percentage of GDP)

2002/03 2003/04

2004/05 2005/06(e) 2006/07(p) 2007/08(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-9.7 7.8 17.5 1.4 -0.4 7.0

-17.1 6.0 23.1 2.1 -0.8 13.6

-20.9 6.3 27.3 3.3 -0.7 13.0

-24.5 7.4 31.9 2.4 -0.3 13.7

-25.0 7.3 32.3 2.1 -0.3 11.7

-25.4 7.3 32.7 1.0 -0.3 11.6

-25.0 7.2 32.2 0.2 -0.2 11.5

Current account balance

-1.7

-2.2

-5.3

-8.6

-11.5

-13.1

-13.4

Source: Domestic authorities’ data: estimates (e) and projections (p) based on authors’ estimates. http://dx.doi.org/10.1787/382783536864

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The surplus in net services declined to 2.1 per cent of GDP in 2005/06 from 2.4 per cent of GDP in 2004/05, due in part to slowdowns in net receipts from travel and transportation services. The slowdown in net receipts was due primarily to a fall in the number of international conferences held in Addis Ababa as well as an increase in the number of residents travelling abroad for holiday and business purposes. Net receipts from transportation services declined from $70.7 million in 2005 to $43 million in 2006, reflecting an increase in payments by Ethiopian Airlines and Shipping Lines for fuel and port expenses. In contrast, net payments to other services increased by 181 per cent to $235.4 million in 2006, up from $83.7 million in 2005, reflecting a significant increase in payments for construction, communication and insurance services.

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The overall current account deficit is estimated to have widened to a disquieting 11.5 per cent of GDP in 2005/06, up from 8.6 per cent of GDP in 2004/05, reflecting the significant deterioration in the trade balance

as well as a decline in transfers and the slowdown in the surpluses of net services. The current account deficit is expected to balloon to 13.4 per cent of GDP in 2007/08, posing further questions about the sustainability of present macroeconomic and structural policies. The surplus in the capital account plummeted to $515.4 million in 2006 from $570 million in 2005, representing a decline of 9.6 per cent, on account of low long-term loan disbursements, even though there was a marked improvement in principal loan repayments, which were largely due to Heavily Indebted Poor Countries Initiative (HIPC) debt relief. In spite of the decline in the surplus of the capital account, net inflows of foreign direct investment (FDI) increased to $342.7 million in 2006, compared to $150 million in 2005. This increase in inflows of FDI contributed to the positive balance of the capital account. The deficit in the overall balance of payments widened to $327 million in 2006, up from $101.4 million in 2005, due to the increase in the

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

120

100

80

60

40

20

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/376275654538

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trade deficit that more than wiped out the impact of the surpluses recorded in transfers, the services account and the capital account. The deterioration in the overall balance of payments shows the importance of the trade deficit in determining the overall balance of payments position of the country. The five-year PASDEP seeks to bring down the wide trade deficit through the diversification of exports into products such as meat, leather articles and horticulture, while also bolstering traditional exports of coffee, tea and spices. The PASDEP aims to increase the amount of land used for coffee cultivation from 500 000 hectares in 2005 to over 700 000 hectares in 2006, with a resulting 37 per cent growth in coffee production. Similarly, 17 per cent growth is projected for tea and 254 per cent for spices. Oilseed, cut flowers and pulses are also promising new exports. The PASDEP also seeks to stimulate the inflow of foreign direct investment. For this reason, the government has revised an investment law that reduces the minimum threshold for FDI to $100 000 for wholly foreign-owned businesses and abolishes minimal capital requirements altogether for foreign investors who export at least 75 per cent of their production The deterioration in the current account balance of payments put downward pressure on the Ethiopian birr, but exchange-rate movements have been comparatively slight given the continued tight control over currency transactions exercised by the government. In 2006, the weighted average exchange rate of the birr depreciated by 0.34 per cent in the inter-bank market and 3.62 per cent in the parallel market. The spread between the parallel market and the inter-bank market average rates widened to almost 4 per cent in 2006 from 0.7 per cent last year, reflecting increasing fears of devaluation. The premium fell back to 2.4 per cent by the end of June 2006 as the government clamped down on parallel foreign exchange dealers. As a result of the change in the overall balance of payments from a surplus of $226.7 million in 2004 to © AfDB/OECD 2007

a deficit of $327.1 million in 2006, the net reserve holdings of the banking system registered a reserve draw down of $194.1 million in 2006, compared to a reserve build-up of $308.2 million in 2004. The reserve draw down was solely due to NBE’s reserve draw down of $275.9 million, which amply offset a reserve buildup of $81.8 million by commercial banks. The fall in NBE’s reserve stock was due to the intervention activity of the NBE in the inter-bank market in order to give banks liquidity, and also make payments for imports of fuel, fertilizer and infrastructure-related equipment. As a result of these transactions, the gross official reserves of the central bank at the end of June 2006 were enough to cover 2.3 months of goods and non-factor services of 2007. Ethiopia’s stock of total external debt fell to $6 billion in 2005/06 from $7.2 billion in 2003/04, reflecting relief granted under the HIPC initiative. 80.9 per cent of the total debt was owed to multilateral creditors, followed by bilateral creditors (13.2 per cent) and commercial lenders (5.9 per cent). Ethiopia reached the completion point under the HIPC initiative in April 2004. As a result, Ethiopia will receive further debt relief of $2.4 billion from the World Bank in July 2007. Reductions in debt service are to be used for povertyreduction initiatives.

Structural Issues Recent Developments The government recognises the contribution that the private sector can make to the overall economic growth and poverty reduction of PASDEP. For this reason, it continues to take measures that will spur the growth and development of the private sector. One of the four main elements of the government’s strategy to achieve this objective is strengthening the institutional framework to enable private initiative to thrive. Progressive withdrawal of state entities from areas where the private sector has a comparative advantage, through continued privatisation, fits well into this framework. In line with this framework, the government started a privatisation programme in 1998. The process of African Economic Outlook

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privatising state-owned firms was slow in the initial years. A study commissioned to find out the cause of the slowdown revealed that the two public institutions then existing that were responsible for the programme, the Privatization Agency and the Public Enterprises Supervising Agency, were not co-ordinating well. Following the implementation of the study’s recommendations, the two agencies were merged to form the Privatization and Public Enterprise Supervising Agency (PPESA) in July 2004, which is now responsible for the sale of all state-owned enterprises (SOEs). In order to undertake an effective and efficient privatisation programme, PPESA set up different procedures, revised the guidelines for preparing companies for evaluation in terms of making the bid price flexible. This has enabled buyers to quote their own bid prices; however, the agency is the organisation that determines the price of sale. Following these reforms, the participation rate of would-be buyers in the privatisation exercise has increased considerably. During the period 2003-05, 111 state-owned enterprises were offered for sale, most of which were in the industries of food, beverages, garments, leather and shoes, hotels and tourism, printing, construction, textiles and agriculture. In 2006, there were 135 SOEs for sale registered on the books of PPESA. As of May, 13 of the firms had been privatised, 12 of which were bought by local investors and one by a foreign investor. The process has gained momentum and more companies are now being prepared and listed for sale. Among the companies that have been prepared and listed for sale in 2007 are three state-owned agriculture enterprises (Awash Agro Industry Enterprise, Gojeb Agricultural Enterprise and the Horticulture Development Enterprise) and the Assela Malt Factory, the only malt-producing factory in the country. In order to improve the process, the government has sought to provide a market-oriented, transparent and competitive process, and has permitted the winning bidders to reorganise the labour force of the companies they acquire. The government has so far limited privatisation to smaller firms such as the Bahir Dar Textiles factories, the Repi Soap factory, and Akaki Textiles. African Economic Outlook

Utilities and other strategic enterprises such as the Ethiopia Telecommunications Corporation and the Ethiopian Electric Power Company are to remain under state control. Internal auditors have protested that managers of state companies subject to privatisation have pressured them to produce favourable reports. In response, the government has decided to create a three-member audit committee for each firm, consisting of one of the company’s board of directors and two government representatives. Ethiopia’s business climate is ranked relatively favourably in the region, placing it 97th out of 175 countries on the World Bank’s 2007 Doing Business (DB) index; this is an improvement from its 101st ranking last year. Ethiopia’s ranking is particularly good on the DB “paying taxes” sub-indicator, but poor on the “trading across borders” and “registering property” measures. These scores are problematic given Ethiopia’s goals of boosting exports and FDI, and indicate that Ethiopia still has a long way to go to improve its business climate. The government also sees infrastructural development as an essential element in its strategy for accelerating overall economic growth and reducing poverty. For this reason, during the SDPRP period, in the roads sub-sector, priority was accorded to new road construction as well as major rehabilitation/ upgrading/maintenance work. Of the targeted 5 637 kilometre road development, 5 561 kilometres were completed, of which 1 276 kilometres were new rural roads. As a result, road density rose from 32.3 km/1 000 square kilometres in 2001/02 to 33.6 km/1 000 square kilometres by the end of the programme. In the power sub-sector, the total electric power generated from the inter-connected and selfcontained systems in the last three years increased from 473 megawatts (MW) in 2001/02 to 768.5 MW and 791 MW in 2003/04 and 2004/05, respectively. During the same period, the power generated from self-contained systems increased from 19.99 MW to 22.78 MW. Total length of high voltage transmission lines (230 kilo volt, 132 kilo volt, 66 kilo volt and 45 kilo volt) has increased © AfDB/OECD 2007

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from 6 304.22 kilometres in 2000/01 to 6 534.04 kilometres and 7 927 kilometres in 2003/04 and 2004/05, respectively. The length of distribution line has increased from 9 512.9 kilometres in 2001/02 to 13 798 kilometres in 2003/04 and 25 000 kilometres in 2004/05. In the telecommunications infrastructure sub-sector, before the commencement of SDPRP, services were poorly-developed and did not cater for the needs of the rural community. The situation has started to reverse in recent years, due to steps taken by the government to emphasise network expansion, service improvement and expansion packages. Ethiopia made huge investments amounting to birr 8 billion ($930 million) in basic multi-media core infrastructure to extend network expansion for woreda–net, cable-net and agri-net projects. As a result, by the end of 2004/05 the number of users had increased to 620 000 for regular fixed telephone lines, 410 630 for mobile phones and 17 375 for Internet lines. Despite this progress in the infrastructure sector, many challenges still remain. The PASDEP programme for strengthening the infrastructure of the country includes building more than 20 000 kilometres of new roads by 2010. In terms of telecommunications, the PASDEP hopes to extend access to fixed telephone lines to 3.2 million people. The cellular mobile telephone network is also to be expanded to 6.8 million people by the end of the PASDEP in 2010. As noted earlier, the electrical system in Ethiopia will also be increased three-fold by the end of the PASDEP, through the construction of five new dams, including the large Gilgel-Gibe III project. The government is undertaking a series of land reforms in order to encourage individual farmers, pastoralists and agricultural investors to make better use of rural land. The first step in this exercise was the proclamation of land administration law no. 456/2005, which allows peasant farmers/pastoralists who are engaged in agriculture for a living, the right to own land free of charge. The law clarifies land usage rights and allows for the transfer of rights. The law is already being tested in one of the regions on a pilot-scheme basis, whereby 13 million farmers/pastoralists have been given temporary user rights certificates. © AfDB/OECD 2007

Access to Drinking Water and Sanitation Ethiopia is favoured with a considerable untapped water supply from 12 main river basins as well as 12 sizeable lakes. The total annual surface runoff of these sources of water adds up to about 122 billion m3. Estimates of underground water resources currently stand at about 2.6 billion m3. Nevertheless, more effort needs to be made to develop these water-supply sources so that they can contribute to the reduction of poverty and diseases. Ethiopian water policy allows all stakeholders the opportunity to participate in improving efficient access to and utilisation of safe water. A comprehensive National Water Resources Management Policy established in 1998 and corresponding strategy introduced in 2000 provide guidance for investment in both rural and urban water supply and sanitation. In 2002, the government prepared a National Water Sector Development Programme and has incorporated a Universal Access Plan (UAP) in its Second Plan of Action for Sustainable Development to End Poverty (PASDEP). The national sanitation strategy outlines the need for participatory learning, advocacy, appropriate technology and reliance on local producers. A memorandum of understanding has also been signed between the Ministry of Water Resources (MoWR), the Ministry of Health (MoH), and the Ministry of Education (MoE). The memorandum ensures that while the MoWR and the MoH take responsibility for access to and safe utilisation of water, the MoE will promote water and sanitation in schools through the curriculum, the establishment of clubs, the promotion of reliable technologies for water and sanitation, and the education of teachers. In addition, a National Sanitation and Hygiene Protocol has been implemented to enhance the synergies within the programme’s implementation. The sanitation protocol identifies ways to implement hygiene and sanitation elements into the planning and finance strategy. It also deals with co-ordination in the preparation of guidelines, and defining minimum standards and information management. African Economic Outlook

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The government has also established Water Sanitation committees (WatSan). Current WatSan committees have no formal bylaws guiding their activities. A study commissioned in 2006 indicates that the scope of community ownership of WatSan assets is not clearly understood in most of the community-managed systems in Ethiopia. The legalisation of these committees is essential since this will allow them to use formal services such as banking services (access to deposits and loans), and help them to address legal issues.

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The successful implementation of water policies has also been based on the application of appropriate low-cost technologies, the manufacturing of low-cost water-lifting devices, the decline in the unit costs of construction, and political leadership from the federal, regional and woreda governments. In addition, the shift from public to local private sector for the construction of wells has contributed to a more efficient system of well production. The cost of hand-dug wells, for instance, has reportedly declined from approximately birr 50 000 to birr 15 000 due to a shift towards involving the local private sector1. The private sector and civil societies are also involved in rural water services through the establishment of cooperatives under the provision of the Cooperative Society Proclamation. According to survey results carried out in Ethiopia, 36 per cent of households had access to safe drinking water in 2004, compared to 19 per cent in 1996. Of these households, 12.9 per cent use water from a protected well or spring, 18.8 per cent get their water from a public water tap, while 4.2 per cent have access to their own private water taps. While 90 per cent of urban households had access to clean water in 2004, only 25 per cent of rural households had access to safe water. Of these rural areas, 32 per cent of family households obtain their water from unclean rivers and lakes, 42 per cent receive their water from unprotected wells, 14 per cent obtain their water from protected springs, and the remaining 10 per

cent use public taps. However, 64 per cent of households in the urban areas have a public tap, while 23 per cent use their own water taps. It is estimated that 92 per cent of rural households live less than 5 kilometres away from the closest source of drinking water, while around 6 per cent still need to travel an average of 5-9 kilometres in order to obtain water for daily uses. The corresponding accessibility in urban areas is much better. More than 82 per cent can access drinking water within a radius of 1 kilometre. The availability of sources of drinking water within a 5 kilometre radius has not notably changed in recent years. In addition, more than 93 per cent of total households reported no improvement in the sources of drinking water available to them during the past 12 months. However, 19 per cent reported a change during the last five years. With respect to sanitation, the Ethiopian Ministry of Health (MoH) estimates that Ethiopia has some of the lowest sanitation coverage in the world, placing it at 30 per cent. Furthermore, a detailed water-quality study revealed that fecal matter was present in approximately 40 per cent of collected and stored drinking water samples. Nevertheless, only 3 per cent of these contaminated water supplies were at a level that would present a risk to human health. In addition, 63.9 per cent of the population lives in one room, while 23.8 per cent of households live in two rooms. This issue is all the more detrimental and unsanitary since 63.9 per cent of households have families with 5 to 10 people all living together; 39.5 per cent of these families also have animals living with them. Ethiopian studies on Knowledge, Attitude and Practice (KAP) reveal that most of the respondents were uninformed and unaware of the causes of diseases or the effects of sub-standard living conditions on their health and well-being. According to the studies, 71.5 per cent of respondents disclosed that they had never received education about the health and hygiene issues pertaining to water and sanitation. 52.7 per cent did not understand the implications of overcrowding, while

1. MoWR, verbal information July 2006.

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28.4 per cent could not identify any diseases which were due to poor living conditions. MoH estimates that 60 to 80 per cent of communicable diseases were due to the lack of basic sanitation services. Personal hygiene has been a critical factor in most rural areas and small towns, due to the lack of soap and acute shortages in the quantity and quality of water. The KAP study revealed that 37.5 per cent of people took a bath at an interval of between 1 and 5 days, 47.7 per cent at intervals between 3 to 30 days, and 14.1 per cent took a bath after 30 days. The current programme for the elimination of poverty, PASDEP, is expected to enhance access to safe water across the country through capacity-building, adopting low-cost, affordable and labour-intensive technologies, and promoting gender equality in the design and implementation of water projects and programmes. This programme is expected to increase water coverage from 44 to 80 per cent in rural areas and from 80 to 92 per cent in urban areas from 2005/6 to 2009/10. The PASDEP will also target the regions with the lowest supply of water. To increase the supply of rural drinking water, 2 133 deep wells will be constructed, along with 14 908 shallow wells, 101 355 hand-dug wells, 404 ponds, 505 cisterns, 14 surface water sources, and 11 065 spring developments. 48 510 rehabilitation work schemes will also be undertaken. With respect to urban development, study and design for 738 town water systems, construction works for 514 towns and rehabilitation works for 228 towns will be undertaken, in order to provide the essential water services required for private sector development. This will provide 85 per cent of the population with water access, as opposed to an estimated 42 per cent by the end of the SDPRP period 2004-05. The Universal Access Plan (UAP) will also enhance water supply coverage by providing water supplies within 1.5 kilometres for rural areas and 0.5 kilometres for urban areas. The PASDEP will also provide a substantial programme aimed at promoting the use of latrines. This will increase rural coverage from 17.5 per cent to 79.8 per cent, and urban sanitation coverage from 50 per cent to 89.4 per cent. © AfDB/OECD 2007

Investments in water and sanitation under the PASDEP are estimated at birr 15.6 billion. 77 per cent of this sum will be provided by the government while the other 23 per cent will be shared amongst the private sector and NGOs.

Political Context and Human Resources Development Ethiopia is a federal parliamentary republic, with the prime minister heading the government. The president holds all executive powers while legislative power is shared by the president and the two chambers of parliament. The judiciary is independent from the other branches. The ruling Ethiopian People’s Democratic Revolutionary Front (EPDRF) came to power in 1995. The EPDRF consists of the Tigray People’s Liberation Front (TPLF), the Amhara National Democratic Movement (ANDM), the Southern Ethiopia People’s Democratic Movement (SEPDM) and the Oromo People’s Democratic Organization (OPDO). The EPDRF, headed by Prime Minister Meles Zenawi, has sought to encourage a system of ethnic federalism dominated by nine semiautonomous regions with the authority to spend or raise their own revenues. Ethiopia held general elections in May 2005 in which more than 90 per cent of eligible voters participated. The ruling EPDRF won 327 of the 547 seats available in parliament. The Coalition for Unity and Democracy came second with 109 seats. However, the elections were marred by allegations of widespread vote-rigging and intimidation. Nevertheless, the US Carter Center’s evaluation of the elections judged that “the majority of the constituency results based on the May 15 polling and tabulation are credible and reflect competitive conditions.” Some opposition supporters carried out street protests and strikes against the results of the elections. Thousands of others were arrested and sent to various detention centres around the country. As of February 2006, hundreds of political prisoners were set to go on trial for a range of offences. Journalists were being held African Economic Outlook

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in custody on charges of defamation while members of the opposition parties were being held on the grounds of treason, genocide and fomenting a coup. These include leaders of the CUD and other members of civil society who are still currently in detention. Trials began in May 2006, but have been proceeding at a very slow pace. The outcomes of the trials are currently unknown. There are concerns that key opposition members may die during trial, inciting new bouts of protests and unrest.

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The political climate was relatively stable during 2006, largely because the government was able to negotiate a working agreement with the majority of the parliamentary opposition. The EPDRF signed deals on parliamentary procedure and rules of conduct in June 2006 with the two main opposition blocks, which was an important step towards reconciliation. In a key development, the more radical elements of the original CUD that have refused to join parliament, as a way of expressing solidarity with the position taken by the imprisoned leaders, formed a new opposition grouping in May 2006. This grouping, called the Alliance for Freedom and Democracy (AFD) was formed with outlawed opposition groupings including the Oromo Liberation Front and the Ogaden National Liberation Front, which continue to wage a low-intensity war against the government. The AFD is likely to cause trouble as some of its members may attempt to intensify the armed conflict, even though they lack effective capacity to do so. In December 2006, the Ethiopian government launched air strikes against fighters loyal to the government of the United Islamic Courts (UIC) in Somalia in support of the weak Somali interim government. Ethiopia has frequently warned that it would protect the transitional federal government in Somalia against the UIC which controlled most of southern Somalia. Ethiopian forces quickly captured the capital Mogadishu and routed the UIC. Ethiopia’s involvement in Somalia was justified by fears that a united anti-Ethiopian regime in Somalia may be detrimental to Ethiopia’s security. Furthermore, the UIC has been receiving help from the Eritrean government, an antagonist of the Ethiopian African Economic Outlook

government. Fulfilling its promise that Ethiopian forces would not stay long in Somalia, the government began the first phase of a planned withdrawal on 23 January. Some Ethiopian troops are likely to remain in Somalia for some months to come in the expectation that an African Union (AU) peacekeeping force can be assembled and put in place before complete troop withdrawal. Ethiopia may remain longer than expected in Somalia as an AU force is unlikely to be constituted as quickly as hoped. This could fuel anti-Ethiopian sentiment in Somalia. There has been no progress on the clash between Ethiopia and Eritrea over the demarcation of the borders. In April 2002, the Boundary Commission otherwise known as the Eritrea-Ethiopia Boundary Commission (EEBC) established by International Court of Justice, awarded some land to both sides. Badme, a key area under dispute was awarded to Eritrea but Ethiopia rejected this decision and both countries have since remobilised their armies along the border, leading to fears that war may be imminent. Military commanders from both armies continue to meet in Kenya under the guidance of the UN Mission to Ethiopia and Eritrea (UNMEE). Meanwhile, the EEBC has given both sides until November 2007 to begin demarcating the border defined by the Commission in 2002, although changes would not be recorded on official maps, irrespective of the official demarcation. However, both sides have refused to comply with the ultimatum. Corruption is perceived as widespread in Ethiopia. The country ranked 137th out of 158 countries on Transparency International’s Corruption Perception Index for 2005 (the latest available). According to expert analysis by the Ethiopian civil service reform programme, the major causes of corruption in Ethiopia are poor governance, lack of accountability and transparency, a low level of democratic culture and tradition, lack of citizen participation, lack of clear regulation and authorisation, low institutional control, extreme poverty and inequality, harmful cultural practices, a command economy during the Derg regime, weak financial management, inadequate accounting and auditing, and a weak legal and judicial system. To fight corruption, the government established © AfDB/OECD 2007

Ethiopia

the Federal Ethics and Anti-Corruption Commission (FEAC) in 2001. Since its inception, the Commission has launched a three-pronged campaign (prevention, investigation and prosecution) against corruption. The Commission has achieved some success in the last four years. However, it still faces a number of challenges in pursuing its goal, which includes the lack of skilled work force in all areas of concern, particularly in investigation and prosecution. In addition, the low level of public participation and the absence of a vibrant media to present a balanced report on the ongoing anti-corruption campaign in the country, have also negatively affected FEAC’s performance. The Commission has made wide-ranging plans to redouble its efforts in the coming years to mobilise the public and other resources against corruption in a more vigorous and dynamic way. Prevention of corruption will be given top priority as it is seen as the most cost-effective and sustainable way of fighting corruption and impropriety. The Ethiopian government is currently prioritising improved governance and decentralisation. The National Capacity Building Strategy Programme promotes civil service and judicial reforms, improved democracy and decentralisation. Civil service laws have been implemented to improve the recruitment, selection and promotion of government staff. The judicial reforms include the training of more federal and regional judges and prosecutors. A human rights commission and ombudsmen have been appointed and efforts are being made to strengthen institutions with the establishment of working systems and procedures. The names and qualifications of approved judges have been publicly announced to ensure transparency and judicial independence. A study is underway of human resource planning and training needs assessment. Efforts have been made to increase the participation of the rural population in development, to build a democratic system and to improve operating conditions within an organised administration. A manual has been prepared and published to attract and obtain adequate participation of the public in all matters. Efforts have been made to improve the capacity of officials at the woreda level and to strengthen the organisational structure of woreda administration. © AfDB/OECD 2007

Poverty as measured by food consumption (the food poverty index) declined only moderately from 42 per cent in 1999/2000 to 38 per cent in 2004/05, while poverty rates as measured by income (the head count index) fell sharply in the rural areas from 51 per cent in 1999/2000 to 39 per cent in 2004/05. Urban poverty has declined more slowly. Given the strong performance of the economy and the agricultural sector, it is projected that the head count index will fall to 29 per cent by 2009/10. The failure of food poverty to decline in step with income poverty primarily reflects a substantial increase in the cost of food. During the SDPRP period, the government placed strong emphasis on the participation of women in the development process since improvements in women’s circumstances generally have positive effects on poverty reduction. For this reason, policies and strategies have been formulated to integrate and mainstream gender dimensions in economic, social and political decisions. Progress made in the area of gender so far includes adopting strong measures in gender-responsive goals and targets to decrease the workload of women in order to enable them take part in political and socioeconomic decision-making. Progress has also been made in the adoption of the Penal Code that has included strong measures in support of women’s rights. Progressive legislation has been passed on women’s access to land, credit facilities, and productive resources. Furthermore, encouraging results were achieved by conducting awareness-creation workshops to incorporate gender dimensions in budgetary processes, resource allocation and in building women’s capacity to implement strategies. In terms of healthcare, the government has focused on areas such as malaria, tuberculosis and childhood diseases, as well as HIV/AIDS. The Health Extension Worker Programme (HEWP) seeks to move healthcare delivery from hospitals towards household and village levels. The programme has trained 3 000 women in the provision of sanitation and immunisation services. Some of the healthcare-related investments that have taken place under the SDPRP include i) the training of 10 500 nurses and other healthcare professionals, ii) the construction of 1 900 new health centres, iii) the African Economic Outlook

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immunisation of over 3 million children, and iv) greater provision of anti-retroviral treatment (ART) drugs to HIV/AIDS sufferers. By 2004, child mortality rates had declined to 166 per thousand, while infant mortality rates had decreased to 110 per thousand. The prevalence rate of HIV/AIDS according to the Ethiopia Demographic and Health survey (2005), for the 15-49 age group is estimated at 1.4 per cent, a huge apparent decrease from the 4.4 per cent rate recorded in 2003, but with some uncertainty about the quality of data. UNAIDS estimates that the prevalence rate is in a range of 0.9 to 3.5 per cent. Forty-two per cent of HIV-positive pregnant women are currently receiving ART drugs. Advanced AIDS patients receive drugs under the Social Mobilization Strategy against HIV/AIDS; 94 per cent of patients have been provided with the drugs at no cost.

focuses on providing universal primary school education by 2015, with interim targets for 2010 of 86.6 per cent primary enrolment and 63.8 per cent secondary enrolment. Current net enrolment rates (2004) in primary and secondary schools stand at 46 per cent and 25 per cent respectively. According to the Household Income Consumption Expenditure Survey 2004/05 (HICES), urban unemployment averaged 26 per cent, and ranged up to 40 per cent in the larger urban centres such Addis Ababa. The Urban Development Strategy in the PASDEP aims to reduce unemployment to less than 20 per cent through vocational and training programmes and through support to small and microenterprises. Furthermore, microfinance institutions will be encouraged to provide funding to the unemployed. Finally, labour-intensive public work programmes are to be developed to employ the urban poor.

The National Education and Training Policy was established in 1994. EDSP III is a programme that 268

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© AfDB/OECD 2007

Gabon

Libreville

key figures • • • • •

Land area, thousands of km2 Population, thousands (2006) GDP per capita, $ PPP valuation (2006) Life expectancy (2006) Illiteracy rate (2006)

268 1 406 7 668 53.6 …

Gabon

T

2005 PRESIDENTIAL ELECTION WAS a contest between opposition parties and a “presidential majority” coalition of about 40 other parties and groups backing President Omar Bongo Ondimba for another sevenyear term. Bongo was declared by the constitutional court to have won re-election with about 80 per cent of the votes cast. HE

Despite shrinking oil reserves and declining production, oil was still Gabon’s main natural resource in 2005, providing more than half its GDP, 80 per cent of export earnings and 63 per cent of tax revenue. Without new discoveries, however, the country will have to prepare for the post-oil era by creating better economic and institutional conditions to enable diversification of the economy and generation of new

sources of income. Moreover, despite the government’s promises that budgetary indiscipline linked to the 2005 presidential election would not be repeated, parliamentary elections in late 2006 are also expected to have been accompanied by Gabon should diversify excessive spending. Inflation, its economy and prepare which fell back in 2005, rose in for the after-oil era pursuing 2006 to 1.9 per cent, mainly institutional reforms to owing to a higher wage bill for improve the investment government workers. climate, governance, and eradicate poverty. Many institutional reforms were introduced in 2005 affecting business conditions, the civil service and the judiciary, as well as restructuring and reorganising the state sector and improving governance – the fourth pillar of the full poverty 271

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Gabon - GDP Per Capita (PPP in US $)

■ Central Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Gabon - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

8000

4

7000

3

6000 2 5000 1 4000 0 3000 -1 2000 -2

1000

-3

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and local authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/546801745412

© AfDB/OECD 2007

African Economic Outlook

Gabon

reduction and growth strategy paper (PRGSP), implementation of which began in 2006. A national commission to combat illegal enrichment was set up, and top officials and government members have been asked to declare their personal assets. Like the other Central African Economic and Monetary Community (CEMAC) countries, Gabon has joined the Extractive Industries Transparency Initiative (EITI), requiring it to use its oil revenue (especially windfall profits due to higher world prices) to reform public finances and balance its budget. To this end, some 170 billion CFA francs in 2005 windfall profits went to investment in selected sectors, to poverty-reduction programmes, clearing domestic debt arrears and consolidating the treasury’s position in relation to the central bank. The government also began drafting a national good governance programme in 2004, with support from the African Development Bank (AfDB) and the United Nations Development Programme (UNDP), and this is expected to be ready by late 2006. 272

Recent Economic Developments The economy recorded relatively strong growth in 2005 and inflation fell by 0.2 per cent. Despite a 1.3 per cent shrinkage of the oil sector, real GDP increased 3 per cent, well above forecasts and the 2004 figure of 1.4 per cent, owing to the strong expansion of the non-oil sector (4.3 per cent of GDP), especially mining, wood and services. In 2006, however, GDP is expected to increase only 2.1 per cent, with inflation rising to 1.9 per cent. Higher world oil prices boosted the balance-of-payments surplus to 16.7 per cent of GDP in 2005, allowing a further reduction (4.4 per cent) in external debt that brought the stock of such debt down to 39 per cent of GDP. The overall commitment-basis budget surplus amounted to 9.4 per cent of GDP, and the 2006 budget calls for reduction of the non-oil fiscal deficit to 7.8 per cent (from 12 per cent in 2005). The country’s economy depends heavily on extractive industries. The oil sector alone accounted for 50.7 per cent of GDP in 2005. Recoverable proven reserves of some 2 billion barrels and daily output of around 270 000 barrels made Gabon the third-largest African Economic Outlook

sub-Saharan oil producer after Nigeria and Angola. Mining provided 2.5 per cent of GDP (up from 1.9 per cent in 2004). The country is also Africa’s secondlargest wood exporter after Cameroon, though the wood and forestry products sector accounted for only 2.5 per cent of GDP in 2005. Oil continues to dominate the country’s growth structure despite falling crude production and reserves, but investment in exploration that could stem this decline barely increased in 2005 (388.3 billion CFA francs, compared with 387.1 billion in 2004) and was expected to drop to 360 billion in 2006. Exploration and production-sharing contracts since 1997 have included royalties of 10-20 per cent of the oil sold. The producer gets about half of the remainder, with the rest going to the government. After rising slightly in 2003 (6.9 per cent) and 2004 (0.3 per cent), production resumed the decline it began in 2001 and 2002, falling 1.3 per cent in 2005 and 3.1 per cent in 2006 due to ageing wells and antiquated equipment. The decline is likely to continue unless more effort is devoted to exploration and new discoveries made. The average price of Gabonese crude has risen in the last few years, from $27.8 per barrel (2003) to $35.75 (2004) to $50.49 (2005) and an expected $60 in 2006. The steady increase, due to higher world prices, certainly boosts government revenue but does not get the country out of danger. A combination of structural shocks (falling national production) and a drop in world oil prices would seriously harm the economy, which is too dependent on oil for tax and customs revenue. After deduction of the 750 000 tonnes delivered to the national oil refinery (Société gabonaise de raffinage – Sogara), exports are falling in step with production (down 1.9 per cent in 2005 and 2.7 per cent in 2006). The government joined EITI to make its handling of extractive revenue, mainly from oil, more transparent, to assess the fiscal and economic impact of the windfall profits of the previous three years and to try to give more credibility to the process by which oil revenue is collected and transferred to the national budget. The first EITI report, covering 2004, done by independent consultants and published in 2005, was considered incomplete by stakeholders because it did not include profit oil in © AfDB/OECD 2007

Gabon

Figure 2 - GDP by Sector in 2005

(percentage)

Government services Forestry 1.3%

Other services

6.6%

27.2%

50.7%

Petroleum

3.6% 1.2% 1.7% Agriculture, livestock and fishing 5.2% 2.5% Water and electricity Mining Manufacturing Construction

Source: Authors’ estimates based on local authorities’ data. http://dx.doi.org/10.1787/884002681682

the 2004 revenues. Profit oil is the crude oil the government gets under production-sharing agreements, and it accounts for at least half of all state revenue from the oil sector. The government promised that profit oil would be included in the 2006 revenue report. Despite the budgetary indiscipline in 2005 due to the presidential election, the government managed to save about half its 2005 windfall profits, since higher world oil prices boosted oil revenue about 40 per cent in 2005 even though production stagnated. Expansion of mining could be an alternative to oil, especially as non-oil extractive industries showed the best growth performance (11.9 per cent) in 2005, though their GDP contribution is still only 2.5 per cent. The Moanda manganese deposits (in Haut-Ogooué province), mined since the 1960s by the Compagnie minière de l’Ogooué (Comilog), a subsidiary of the French metallurgical group Eramet, could be a motor of such growth. Moanda produces a steady stream of good-quality ore, expected to top 3 million tonnes in 2006 (up from 2 million in 2005). In March 2004, the Brazilian firm Vale de Rio Doce (CVRD) began prospecting two other Haut-Ogooué deposits, at Franceville and Okondja, estimated at 175 million tonnes. Mining these deposits will require improved infrastructure, however, especially railways. The Chinese firm Sinostel has been authorised to prospect near Mbigou, in the south. Two other Chinese firms have formed the Compagnie industrielle et commerciale des mines du Gabon to prospect for and extract manganese at Njole. Gabon, which should produce around 7 million tonnes of the ore by 2007/08, hopes to become the world’s top supplier of manganese. The © AfDB/OECD 2007

country also has niobium, a very high value-added mineral used in making special steels and heavy-duty alloys used in aeronautics. Once investments are complete in manganese, niobium, phosphates and the huge Belinga iron deposits, the mining licence for which was granted in 2005 to two Chinese firms that plan to invest some $3 billion, the mining industry should generate $300-400 million a year. With 20 million hectares of mostly-untapped forests containing about 60 marketable species, the forestry and wood industries can also contribute to the economy, as shown by their 2005 growth performance of 5.6 per cent. Their share of GDP is still small (2.5 per cent in 2005), but forestry and wood employ more than a fifth of the working population, and the sector could boost its output if its regulation were changed to make it more efficient and reduce management costs. The forestry law needs to be revised to encourage local and foreign operators to invest more in infrastructure items such as log carrier ships and other facilities. A technical, analytical and financial audit of the state timber company Société nationale du bois du Gabon (which has a monopoly on the marketing of logs from Ozigo and Okoumé) and conversion of the company into the sector’s chamber of commerce could boost sector growth. As lumber is the country’s second-largest export after oil, the government has streamlined the sector’s taxation and imposed a moratorium on new felling permits so as to encourage investment. Agriculture, livestock and fisheries came second from bottom on the list of major sector growth rates in 2005, at 4 per cent. Though this was double the 2004 African Economic Outlook

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Gabon

figure (2 per cent), the sector still contributed only 3.6 per cent of GDP in 2005, far below the 16 per cent it provided in 1964. Gabon has no strong agricultural or stock breeding tradition and must import more than half the food it needs. The coffee and cocoa sector is also neglected compared with that in nearby countries. Agricultural growth in 2005 was fairly satisfactory as a result of modernisation and privatisation of state rubber and palm-oil firms. The secondary sector grew strongly in 2005 (4.6 per cent compared with 0.9 in 2004), mainly thanks to “other industries” (up 6.7 per cent), agro-food (+6 per cent), wood processing (+10 per cent) and oil refining (+5.6 per cent). Water and electricity (+2.5 per cent), construction (+2 per cent) and oil services (+2.5 per cent) also did well, and the sector contributed 8.1 per cent of GDP.

274

“Other industries” performed well partly because of investment linked to “rotating festivals” (independence celebrations held in a different region each year), and agro-food advanced due to stronger demand for its products during the 2005 presidential election campaign and higher per capita GDP. Wood industries did well because, at government insistence, more logs were processed before export; the proportion of processed logs reached about 40 per cent of production. Oil refining maintained growth begun in 2004 thanks to the generally buoyant economy and

higher domestic demand for its products. Household consumption of water and electricity rose due to expansion of coverage by the utilities firm SEEG (Société d’énergie et d’eau du Gabon), but the sector underperformed after the loss of several major customers such as Sogara. Growth in the construction sector halved to 2 per cent (from 4.2 per cent in 2004) as building and civil engineering activity slackened. The tertiary sector (27 per cent of GDP) turned in one of the year’s best performances, growing by 5 per cent thanks to services (+5.8 per cent), trade (+5.6 per cent) and telecommunications (+4.5 per cent). Growth in services was driven by increased services to business and households, as well as realestate services. Trade benefited from the general economic upturn and from improvement in the formal trading sub-sector due to higher demand for industrial vehicles, pharmaceuticals and oil products. Transport and telecommunications did very well in 2005 due to the healthy state of the economy. Passenger and goods transport by sea and rail was up, but air transport continued to suffer from the problems of airlines, mainly Air Gabon. The impending inauguration of 13 recently-created national parks is expected to boost tourism, especially eco-tourism. Growth in 2005 was driven more by final domestic demand, which rose 4.1 per cent in volume and contributed 3.8 points to overall growth, largely due

Table 1 - Demand Composition 1998

2005

(percentage of GDP) 2006(e)

Percentage of GDP (current prices)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

36.5 11.2 25.2

23.2 5.8 17.4

10.2 12.5 9.5

5.0 2.0 6.0

3.8 2.0 4.4

Consumption Public Private

64.1 20.4 43.7

42.9 11.5 31.4

-1.5 -1.4 -1.5

2.1 7.1 0.5

1.2 2.6 0.7

-0.6 46.1 -46.7

33.9 66.2 -32.3

2.0 3.2

-2.7 1.2

1.3 0.8

External sector Exports Imports

Source: Ministry of Economy data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/107416262314

African Economic Outlook

© AfDB/OECD 2007

Gabon

to a 5.5 per cent increase in final spending by households and government, while total investment stagnated. Household consumption rose because of higher wages, and public consumption because of the government’s efforts to stimulate the economy. The very small rise in total investment was due to slack public investment (down 1.8 per cent), while gross fixed capital formation in the non-oil sector grew under the stimulus of rising demand for consumer goods. Exports of non-factor goods and services were down 9.3 per cent in volume, while goods exports, especially manganese and wood, did not make up for declining oil exports. Imports, spurred by increased spending on the presidential election, grew 4.7 per cent in volume terms.

Macroeconomic Policies Fiscal Policy Reforming budget policy will be the cornerstone of Gabon’s future economic policy, and tough decisions will have to be taken. To ensure the viability of its policy under conditions of falling oil production and reserves, the country is in a position to make deliberate, gradual adjustments to its public finances, thanks to the substantial resources it still enjoys as a result of higher oil revenue. If this is not done and oil prices drop, the country may be forced to undertake these imperative reforms in more difficult conditions, especially for the less well-off, and to the detriment of poverty-reduction efforts in general. Infrastructure investment and attending to the social needs of the population place constant pressure on public resources. Although the improvement in the balance of payments and the national budget makes it possible to meet these needs, the government must keep a sharp eye on public spending and the economy’s absorption capacity and must redirect budget policy towards the non-oil sector. This sector is still a better indicator of the country’s ability to meet growing needs, despite its falling share of total GDP (from 56.3 per cent in 2004 to 49.3 per cent in 2005). After the budgetary indiscipline in 2005, greater rigour is required in 2006, especially as the December parliamentary © AfDB/OECD 2007

elections may also eat into government funds. The authorities predict a non-oil primary deficit of 7.8 per cent of non-oil GDP (down from 12.1 per cent in 2005) and aim to reduce it to 6.4 per cent in 2008 and 5 per cent thereafter. The 2006 scenario includes continuing subsidy of Air Gabon until it is reorganised into Air Gabon International, which will have to survive alone in the open market, and also includes promises of public investment in major infrastructure. The 2006 budget was drawn up without taking account of additional spending caused by completion of the PRGSP, so a supplementary budget (Loi de finances complémentaire) based on a new budgetary framework including this extra spending was approved by parliament in June 2006. After receiving a recentlycompleted International Monetary Fund (IMF) report on the observance of standards and codes in public finances for 2006, the government is determined to draft a new action plan to improve management of public funds and make some capital expenditures more effective. Implicit subsidies for oil products will be reduced and more money redirected to the poor. Taxation laws were thoroughly updated in 2006, and a department to deal with the biggest taxpayers – i.e. major public and private firms – was set up during the year. The final 2005 budget was increased 14.3 per cent over the first draft to include the increase in oil revenue due to rising world prices of crude. The adjusted budget (Loi de finances rectificative) set total resources and appropriations at 1 354.1 billion CFA francs. Locallygenerated revenue (oil and non-oil) increased 16.1 per cent, while loans, including those for investment, were reduced 42.9 per cent, from 35 billion CFA francs to 20 billion. Non-oil revenue was boosted 2.9 per cent, from 540.3 billion CFA francs to 555.8 billion, mainly due to better tax collection (VAT receipts rose 8 billion CFA francs) and higher direct taxes. Customs receipts fell 10.7 billion CFA francs. On the expenditure side of the adjusted budget, the item that saw the biggest increase was investment spending (28 per cent over the initial budget), followed by debt service (+14.8 per cent). With respect to 2004, African Economic Outlook

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Gabon

recurrent expenditure rose 24 per cent due to transfers and subsidies, while capital spending fell more than 3 per cent. Public debt was reduced by 6.3 per cent in 2005 but was still a fairly high 35.8 per cent of nominal GDP, though well below the 70 per cent CEMAC limit. This budget policy gave the country a primary surplus up 27.5 per cent on 2004, mainly because of its increased oil revenue. The commitment-basis overall

balance rose 50.6 per cent to 431.5 billion CFA francs, while the cash-basis overall balance was 341.8 billion due to repayment of 89.7 billion CFA francs of treasury debts and interest arrears. Gabon’s budget policy, which still needs to be tighter, is worrying in the non-oil sector, which had a high 2005 deficit of 12.1 per cent of non-oil GDP, much larger than the expected 8.5 per cent. The government aims to bring the non-oil deficit down to 7.8 per cent in 2006, but it will still be higher than the 5 per cent considered viable by the IMF.

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Oil revenue

34.5 15.0 18.8

29.8 12.3 16.2

29.4 12.0 15.8

31.4 10.3 19.8

30.8 9.6 19.8

29.9 10.2 18.4

29.6 10.1 18.1

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

48.4 34.7 27.1 7.7 7.6 13.7

22.4 18.7 14.7 6.5 4.0 3.7

21.8 17.6 13.6 6.0 4.0 4.2

21.9 18.5 15.7 5.0 2.8 3.4

20.9 16.8 14.7 4.6 2.1 4.0

23.2 18.8 16.4 5.1 2.4 4.5

23.2 18.7 16.6 5.1 2.0 4.5

-6.4 -14.0

11.4 7.4

11.5 7.6

12.3 9.4

12.0 9.9

9.1 6.7

8.4 6.4

276 Primary balance Overall balance

a. Only major items are reported. Source: IMF data; estimates (e) and projections (p) based on authors’ calculations.

Monetary Policy Gabon’s monetary policy is in the hands of the Bank of Central African States (BEAC), which ensures price stability and the CFA franc exchange rate in CEMAC. Gabon, like the other member states of CEMAC, is required to comply with convergence criteria and multilateral monitoring, just as West African Economic and Monetary Union (WAEMU) members do, though the WAEMU process is more advanced. Inflation remained close to zero in 2005 and was expected to be 1.9 per cent in 2006 (below CEMAC’s 3 per cent limit). The money supply (M2) grew 26.7 per cent in 2005, while non-monetary assets increased only 8.6 per cent. The money supply was backed by net external assets that almost doubled, from 286 billion CFA francs in 2004 to more than 536 billion in 2005, and government African Economic Outlook

http://dx.doi.org/10.1787/651707343724

debt to banks eased due to greater revenue, mainly from oil. Credits to the economy grew more slowly (only 9.9 per cent in 2005 – 464.7 billion CFA francs, against 422.7 billion in 2004), and 60 per cent were still shortterm loans, reflecting the fact that demand for capital is mainly driven by the cash needs of firms. This trend, if confirmed, would be worrying since the economy needs to diversify into non-oil sectors. External Position The overall balance of payments almost doubled in 2005, to 764.5 billion CFA francs (from 386.8 billion in 2004), largely due to a 43 per cent increase in the trade surplus. The robust growth of goods and services exports (up 32.3 per cent on 2004) was based on a 40.9 per cent rise in the price of Gabonese crude and healthy exports of manganese and wood. In contrast, the services balance deteriorated and showed a 2005 © AfDB/OECD 2007

Gabon

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

16.6 42.5 25.9 -17.2 -11.5 -1.2

35.3 52.5 17.2 -10.5 -9.7 -3.0

39.8 56.7 16.9 -13.6 -13.3 -2.7

47.2 63.1 15.8 -14.3 -14.1 -2.2

51.1 66.2 15.1 -12.4 -12.3 -1.9

44.7 60.9 16.2 -13.6 -13.5 -2.1

43.6 59.7 16.1 -13.6 -12.3 -1.0

Current account balance

-13.3

12.0

10.2

16.7

24.5

15.5

16.7

Source: IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/726646716605

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

70

60

50

277

40

30

20

10

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/777580601364

deficit of 26.7 per cent caused by weak performance in freight and insurance, travel and tourism, and transport. The capital balance fell substantially, due to a 27 per cent increase in the factor income deficit and a big drop in net foreign direct investment, which shrank from 115.7 billion CFA francs in 2004 to minus 145.8 billion in 2005. Analysis of the viability of Gabon’s debt suggests that if world oil prices stay high and fiscal discipline is maintained, the external debt can be brought down from 44 per cent of GDP in 2004 to 33.5 per cent in 2006, © AfDB/OECD 2007

reducing the country’s great vulnerability to external shocks and accumulating budget reserves that would provide future protection through more remunerative long-term financial assets. Gabon’s national oil fund earns average nominal interest of barely 1.6 per cent, according to the IMF, compared with Norway’s which has a real average yield of 4.3 per cent excluding management costs. As part of efforts to clear much of its domestic debt, the government has taken fewer loans from the BEAC, which carry a high rate of interest (5.75 per cent). Talks with CEMAC are going on to replace these loans with negotiable treasury bonds that African Economic Outlook

Gabon

will raise money more cheaply and boost the country’s financial market. If the government reduced its external debt (which is more than 90 per cent of the total debt) by early repayments and the domestic debt by eliminating treasury bonds on which it has to pay 7.5 per cent interest, it could substantially cut the cost of debt service (which stood at nearly 44 per cent of the national budget in 2005), better withstand shocks and increase its budget capacity to make scheduled PRGSP investments.

Structural Issues Recent Developments

278

The presidential election not only led to financial excesses in 2005 that damaged public finances and budgetary discipline but also was one of the factors holding back the introduction of the government’s promised structural reforms. Owing to pressure from development partners and government support for these reforms, however, a serious plan has been drawn up to implement them as part of the PRGSP, which started to come into effect in 2006. Gabon’s regulatory and judicial framework hampers business activity at a time when falling oil production requires the country to diversify the economy and boost the private sector so that it can take over investment activity from the government. The level of state investment in Gabon is among the highest in Africa but is still too focused on the oil sector. To expand the non-oil sector, total factor productivity has to be increased through serious efforts to reform capital markets, business laws and governance to improve the business climate and restore the confidence of local and foreign private investors. The government set up a private investment promotion agency (Agence de promotion des investissements privés – APIP) in 2004 and joined the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID), but thorough reform is needed of the still cumbersome, costly and drawn-out procedures for setting up businesses. The World Bank report Doing Business African Economic Outlook

2006 said the situation did not improve at all in 2006 and even worsened in some respects. Gabon dropped nine places in the 2006 annual ranking for tax-paying procedure (to 94th from 85th), eight for foreign trade procedure (to 112th) and eight for rules about closing down firms (to 130th). The government set up a public procurement office in 2005 to improve management of public funds by examining all contracts exceeding 30 billion CFA francs. Infrastructure development in 2005 included road improvement works in Libreville and Owendo, whose first phase (3.5 billion CFA francs) involved the expressway and some access roads to the SNI housing development of Owendo. The biggest infrastructure investments in 2005 related to preparations for the franchising of railways and engineering structures. The mining firm Comilog was awarded a 30-year contract in 2006 to run the Transgabon Railway and spend 50 billion CFA francs modernising the 650-kilometre line from the Libreville suburb of Owendo through the equatorial forest to Franceville. Another major project, completed in 2005 in northern Gabon, was the 180-metre tri-border bridge across the river Ntem at Eboro linking Gabon and Cameroon, with an 18-kilometre slip-road to Equatorial Guinea. Chinese franchise-holders plan to build a hydroelectric dam to serve the Belinga iron mines and a 560-kilometre railway to carry ore to the future deepwater port at Santa Clara, near Libreville. Gabon’s private sector enjoys a degree of freedom rarely found in Africa but confines itself to services and small industry activity. Under the 01-96 privatisation law, the government has progressively handed over state firms to local and foreign private operators and focused its efforts on regulation and supplying social services to reduce poverty. The legality and transparency of privatisation operations are ensured under the international bidding system. About 30 state firms have already been divested, notably Gabon Telecom, with 51 per cent of its capital privatised. The state post office, which has swallowed up substantial government funding since 2003, is being reorganised. The liquidation of Air Gabon and creation of a new company, Air Gabon International, with Royal Air Maroc as the majority shareholder, is another major government project, but © AfDB/OECD 2007

Gabon

negotiations seem to have bogged down. The reorganisation of Société nationale des Bois du Gabon and the ending of its monopoly have not affected its viability, as the company showed record profits in 2005. The state monopoly may turn into a private one, however, with prices and services to the public suffering if the government does not regulate it properly. Since it was reviewed in 2002, the financial sector seems to have become more stable, though it still has clear structural weaknesses. It is quite small compared with those of other countries in the region, and its banks are reluctant to provide more loans despite the great excess liquidity resulting from higher world oil prices and repayment of the government’s domestic debt. Loans to the private sector fell from a high of 13.2 per cent of GDP in 2002 to less than 9 per cent in 2005 (from 22.6 to 19 per cent of non-oil GDP), probably because of fixed interest rate bands and banks’ inability to monitor loan portfolios effectively. The banks say there are few viable projects around and that their loans are often non-performing. They deal with only a few local or mixed-capital firms and are more used to doing business with foreign firms, notably oil companies, which often use external funding. They also tend to play safe, setting minimum deposit and personal income levels for customers. Lack of financial instruments other than loans means that small and medium-sized firms often have no access to banks. Microfinance is rare, but the government plans to allow the business promotion fund Fodex (Fonds d’expansion et de développement de la petite et moyenne entreprise) to extend its activities to include microfinance. These shortcomings slow the growth of the private sector, which the country needs to diversify the economy. Enlarging the financial sector requires structural reform to reduce or abolish the minimum-deposit rule and eliminate obstacles that prevent banks from making reliable credit risk assessments of local customers. Other needed steps include strengthening the legal framework, registering mortgaged or secured assets offered as guarantees for loans, increasing the legal rights of creditors and improving business accountancy practices. Gabon has no tradition of agriculture and imports most basic food items it needs. Tropical fruit growing © AfDB/OECD 2007

is still in the hands of small farmers, while coffee and cocoa are neglected compared with the sector in neighbouring countries having similar resources. The agriculture project PADAP (Projet d’appui au développement de l’agriculture périurbaine), set up in October 2004 by the national development institute IGAD (Institut gabonais d’appui au développement) to encourage horticulture, food-crop production and pig-rearing by small farmers and agriculture-related businesses on the outskirts of urban areas, is still a long way from performing adequately. The government’s diversification programme has included handing over the rubber company Hevegab and the palm-oil firm Agrogabon to the Belgian tropical agriculture company SIAT, which hopes eventually to meet Gabon’s needs in edible oils and soap, which are currently imported. The government also plans to build the sector’s capacity by reopening the rural development school (Ecole nationale de développement rural) and redefining the job of the rural development office (Office national de développement rural). 279 The new forestry law obliges timber firms to present a plan of operation including an environmental survey, a felling rotation schedule and provision for reforestation. Creation of 13 national parks covering about 11 per cent of the country will enable better supervision of the country’s plant and animal life to preserve its biodiversity and resources. Access to Drinking Water and Sanitation Gabon is one of the 10 best-endowed countries in the world where water is concerned, with 90 per cent of the country supplied by water courses (rivers, lakes, lagoons and streams) and 72 per cent of its land area irrigated by the Ogooué river and its tributaries. The 2005 national poverty survey (Enquête gabonaise pour l’évaluation et le suivi de la pauvreté – EGEP) showed that although access to drinking water had significantly improved in the previous five years, the country had far to go as regards sanitation. The country’s water resources are managed and developed by the Ministry of Mines, Energy, Oil and Water Resources and the Gabonese energy and water African Economic Outlook

Gabon

company SEEG (a subsidiary of the French group Véolia Water). SEEG obtained a 20-year nationwide franchise in 1997 to supply drinking water and electricity, but serves only major urban areas. The government continues to supply remote areas, either with surface water that needs treatment before delivery, or water from wells that requires simpler treatment.

280

Water is sold at the same price wherever the customer lives, which is theoretically fair, except that in reality many households (equal to more than a quarter of the 46 per cent of directly-connected households) get their water from a connected neighbour, who re-sells it to them at a profit. Although a subsidised official supply, including credits, costs only 81 524 CFA francs a month, which would seem affordable for most, except the poorest households (the average monthly income of the bottom 10 per cent is 172 000 CFA francs), this does not reflect the true situation. The gap between the “fair” official price and the price actually paid favours wealthier and often better-supplied households, so the official price is not an effective “subsidy” because the poor do not fully benefit from it. More than 40 per cent of households have running water, and more than a quarter get water from a neighbour’s tap. Surface water, which may not be clean, is only used by 17 per cent of households, practically none of them in Libreville, Port Gentil and most other urban areas. It is the main source of supply in the countryside (for about 60 per cent of households) but with great disparities by income category. In the richest quintile of the population, more than half of households have running water and fewer than one in 10 uses surface water, whereas in the poorest quintile, only one in six has running water and one in three uses surface water. The use of tap water is a good indicator of access to drinking water, and it shows that rural areas still lag far behind. Water targets in the Millennium Development Goals (MDGs) define drinking water as water found less than 30 minutes from a household and coming from an individual tap, or from another tap (either public or belonging to a neighbour or seller) or from a well. According to this definition, more African Economic Outlook

than eight out of 10 households in Gabon have drinking water – ranging from two out of three in the poorest quintile to nine out of 10 in the richest. Access varies by geographical region, with the north and south (the poorest parts of the country) having the least access. The countryside, where fewer than two households out of five have access, is much worse off than urban areas. Access to drinking water has improved a little over the past five years. Comparison with Gabon’s last population and health survey (Enquête démographique et de santé du Gabon – EDSG) in 2000 showed that surface water was used for drinking by only 17 per cent of the population in 2005, down from 23 per cent in 2000. This overall figure breaks down as 5 per cent of urban households in 2005 (7 per cent in 2000) and 59 per cent of rural households (down from 66 per cent). Although the two surveys did not define access to drinking water in the same way, this fall in the use of surface water (the main source of unsafe water) can improve such access. These good results were obtained because 80 per cent of the population lives in urban areas, which are easier to serve, and because some rural areas have village water systems. Sanitation offers a much less hopeful picture. Fewer than two out of five households use hygienic facilities (flush toilets and improved latrines), and this is not dependent on social class. Even in the richest quintile, 47 per cent of households use nonhygienic toilets (simple latrines, septic tanks), and about half do so in Libreville. Non-hygienic facilities can cause infectious diseases, especially if they are not deep enough or far enough away from the house. The situation is especially worrying for those in the poorest two quintiles nationally, in rural areas and in the north and south of the country, where non-hygienic toilets are virtually the norm. Under a programme launched as part of the 7th European Development Fund (EDF) covering communities of more than 150 people in the north and west, 165 successful wells have been drilled in five provinces since 2000, but requirements in rural areas are still great. Village water projects could reach more © AfDB/OECD 2007

Gabon

people if older physical structures were better maintained, making it unnecessary to devote a large share of available funds to repairing them. Experts say that to avoid repairs, a minimum maintenance budget should be set and local people must be involved. In the long term, the government is planning national drinking water distribution using solar-powered pumps in the countryside for all villages of between 100 and 250 people, especially in river and lake areas. A water database (surface and groundwater) is also being compiled.

and was marked by accusations and protests over the electoral roll, especially in rural areas. At the end of the first week, the 13-party opposition coalition (Partis politiques de l’opposition – PPO) demanded in vain that the election be postponed by a month because the legal deadline for posting the electoral lists had not been met. The PPO claimed the interior ministry had given the lists to the independent permanent elections board (Commission électorale autonome et permanente – Cénap) only 20 days before the vote instead of the legally-required 45 days.

With support from the Global Water Partnership Central Africa, a number of projects and programmes have been launched in countries of the sub-region, including Gabon, which share the Congo river basin and its tributaries. The first joint project is for reports on each country’s water development situation, to be followed by national action plans for water. A feasibility study on channelling water from the Congo river basin to Lake Chad is also planned as an integrative project under the New Partnership for Africa’s Development (NEPAD).

The 2006 PRGSP identified governance as one of four keys to the country’s growth and poverty-reduction strategy. To improve management of the proceeds of its mining (mainly oil) activity, Gabon has joined the EITI, set up a national commission to fight illegal enrichment (Commission nationale de lutte contre l’enrichissement illicite) and introduced a new law on public procurement to satisfy requirements of transparency, good governance and the use of resources for social development and reducing poverty. However, public investment is still of very poor quality, ineffective and far from the priorities set out in the PRGSP. The public investment programme (Programme d’investissements publics – PIP) will have to be thoroughly reviewed, since the present system of public resource allocation prevents the country from achieving its goals of poverty reduction and growth promotion.

Gabon’s aim is for 70 per cent of the population to have drinking water by 2015. The government wants to build small water systems in larger villages if it can get the funding. In villages that already have water and electricity, it is planned to introduce improved water systems by linking village water systems together and having them run by the local communities. Rural water supply will be treated according to World Health Organisation (WHO) standards, and proceeds from its sale will go to maintain the hydraulic infrastructure and pay maintenance workers.

Political Context and Human Resources Development Parliamentary elections were held on 17 December 2006, with all registered political parties allowed to take part. The open and lively two-week campaign featured sharp clashes between supporters of the majority Gabonese Democratic Party (Parti démocratique du Gabon – PDG) and a multitude of smaller parties, © AfDB/OECD 2007

Despite a high literacy rate (85.4 per cent in 2005) and net primary school enrolment (92.4 per cent), the country’s education system is weak, with high repetition rates at all ages and a high attrition rate. Over the 2000-03 period, the repetition rate was 37 per cent at the primary level and 30 per cent in secondary school, and on average only 36 per cent went on to higher education. This is mostly due to overcrowded classes in urban areas, especially Libreville, the poor quality of teaching staff and of the instruction provided, and the shortage of teachers in rural areas. The health situation is one of the country’s notable contradictions. Gabon is classified as poor even though its per capita GDP is that of a middle-income country. Life expectancy is 2005 was only 55.2 years for women African Economic Outlook

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Gabon

and 53.7 for men, according to the UNDP’s 2005 World Human Development Report (HDR). The mortality rate for children under five years of age was 87 per thousand inhabitants, according the 2000 EDSG, and 95 according to UN estimates for 200005, while infant mortality (below the age of one) was 58 per thousand for the same period – troubling figures for a country with such high income. Maternal mortality remains high at 519 per 100 000 live births. Gabon had only 29 doctors for every 100 000 inhabitants in 2004, and less than 6 per cent of its health budget went to primary healthcare.

282

High rates of infant and maternal mortality are mainly due to diarrhoea, malnutrition, anaemia and especially malaria. Access to healthcare varies greatly and is skewed towards wealthier families, who account for a quarter of all visits to health centres, compared with only 14 per cent for the poor. The disparity is partly due to the cost of treatment and the shortage of medicine. HIV/AIDS affected 8.2 per cent of the population in 2004, according to sentinel sites, and recent UNAIDS data showed that 4.2 per cent of people between 14 and 49 were infected. To address these glaring deficiencies, the government is finalising a national health development plan (Plan national de développement sanitaire – PNDS) for 2006-10 to improve the health system, develop human resources, improve the financing of the system, adapt the supply and quality of care, and tackle the main health problems. The PNDS will be backed up by national anti-malaria and anti-TB programmes. The national strategic antiHIV/AIDS programme covered the period from 2000 to 2005. Poverty in Gabon has been described by the EGEP, using the unified development indicators questionnaire (QUID) drafted in 2005 with the help of the World Bank. The EGEP showed that the poverty line – 429 336 CFA francs ($818) a year – stood at 14 per cent of average income and that 33 per cent of the population was poor. The survey revealed that poverty was mainly urban, with routinely vertical inequalities. Urban areas (80 per cent of the population) had a poverty rate of only 30 per cent but were home to 75 per cent of the poor. In the countryside (20 per cent African Economic Outlook

of the population), the poverty rate was over 45 per cent, representing 25 per cent of the poor. Social inequality is very clear, with about 90 per cent of national income held by the wealthiest households and the richest quintile alone accounting for half of national income. Even the government’s social spending benefits the rich, with 33.5 per cent of these transfers going to the richest quintile and only 9 per cent to the poorest. Such inequality cancels out much of the effect of economic growth on poverty reduction and threatens the MDG poverty targets, according to the 2005 HDR. Using income, health and housing criteria, more than 81 per cent of Gabonese feel they are poor. Gabon was classed high among the middle-income countries in 2004, with a per capita GDP of $5 226 (80th in the world), but the UNDP Human Development Index puts it only in 123rd place, in the medium human development category. This situation is often explained by an excessive debt-service burden which prevents more spending on social services and by the ineffectiveness of public investment. Gabon’s desire to combat poverty seriously was shown by the drafting of its first poverty reduction strategy paper (PRSP) in 2003, followed by a PRGSP in 2006, though the country is subject neither to the conditionalities of the Heavily Indebted Poor Countries (HIPC) Initiative nor to those of the poverty reduction and growth facility (PRGF). Unemployment was estimated in 2005 at about 25 per cent of the working population, despite a slight (2.1 per cent) increase in overall employment due mainly to a 4.2 per cent rise in public sector employment, which already accounted for 51 per cent of the workforce. The number of civil servants alone grew 5.2 per cent year-on-year. Private sector employment was sluggish, rising only 0.1 per cent on 2004; most of this increase came in the oil sector (+0.9 per cent), while jobs in the agro-food industry shrank by 5.1 per cent. The modern sector wage bill (all employers) increased 7 per cent in 2005 because of a 13 per cent rise in wages in the “other industries” and “banks and insurance” sub-sectors, as against an increase of less than 2 per cent in parapublic firms

© AfDB/OECD 2007

Ghana

Accra

key figures • • • • •

Land area, thousands of km2 239 Population, thousands (2006) 22 556 GDP per capita, $ PPP valuation (2006) 2 146 Life expectancy (2006) 57.8 Illiteracy rate (2006) 42.1

Ghana

T

HE GHANAIAN ECONOMY is benefiting from one of

the most successful reform programmes in Africa, with increased growth reflecting strong economic fundamentals underpinned by anti-inflationary monetary policy and fiscal consolidation. It is now apparent that the private sector is responding positively. Banks are restructuring their portfolios in order to increase lending to the private sector. With inflation expectations subdued, business-planning horizons are broadening, and rising capital inflows suggest increasing investor confidence in Ghana’s economic prospects. The economy seems to be on the cusp of becoming an emerging market. The improving policy environment has contributed to a recent upsurge in economic growth, with real

GDP growth reaching an estimated 6.2 per cent in 2006 from the average annual rate of 5.5 per cent during 2000-05. Growth is Reforms and political projected to remain at around stability are leading to an 6.1 per cent in 2007 and 2008. emerging market economy Recent strong performance has while export diversification enabled Ghana to accelerate and public-service delivery implementation of its poverty will speed up growth reduction strategy. Economic and development growth is becoming more broad-based, although the agricultural sector still dominates economic activity. The track record in strengthening democracy and a stable political environment bodes well for continuing economic expansion. However, the political situation could be improved further by tackling growing perceptions of 285

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Ghana - GDP Per Capita (PPP in US $)

■ West Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Ghana - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage) 7

3500

6

3000

5

2500

4

2000

3

1500

2

1000

1

500

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: Authors’ estimates and predictions based on IMF and Ghana Statistical Office data. http://dx.doi.org/10.1787/253016408551

© AfDB/OECD 2007

African Economic Outlook

Ghana

corruption in public life. Also, going forward, Ghana needs to diversify its export base and follow through on its structural transformation, in order to enhance private-sector participation in the economy. Economic growth also needs to accelerate in order to generate adequate employment growth, further reduce poverty, and attain middle-income status over the next decade. Ghana must furthermore upgrade public services, especially in water and sanitation, to improve the health of the population.

Recent Economic Developments

286

Ghana is implementing the Growth and Poverty Reduction Strategy II (GPRS) for the medium-term 2006-2009. The country’s growth performance has continued to be robust, with real GDP growth reaching 6.2 per cent in 2006, up from 5.8 per cent in 2005. Performance in 2006 represented the first time in several years that economic growth had reached the six per cent mark and constituted the sixth consecutive year that the economy has experienced strong growth.

II, the government expanded the PSI initiatives in 2006 through measures to enhance access to credit and agricultural inputs, and by increasing the availability of extension services. This is highly important because the agricultural sector remains constrained by structural problems. For example, it was reported in 2006 that only 5 per cent of irrigable land in Ghana is actually irrigated, leaving production largely dependent on the vagaries of the weather. Extension services are so limited that each technical officer is responsible for helping nearly 2 000 farmers. Moreover, 40 per cent of all agricultural output is wasted due to inadequate storage facilities, marketing chains and infrastructure.

Until recently growth was driven largely by the agricultural sector. In 2006 it was led by the industrial and services sectors, although agriculture continued to perform strongly. The 5.7 per cent growth of agricultural output was below the 6.6 per cent recorded in the preceding year. The slowdown led to a slight decline in agriculture’s share in GDP to 35.8 per cent in 2006 from 36 per cent in 2005. The boom in agriculture in recent years is mainly due to cocoa production, which has responded very favorably to incentives put in place by the government. (See Box 1). In 2006 cocoa output rose by 8.7 per cent, following an average yearly expansion of 19.8 per cent over 2003-2005.

Industrial activity accelerated in 2006 with a growth rate of 7.3 per cent as compared with 5.5 per cent in 2005. Industrial activity in 2006 was led by a 9 per cent expansion in gold production. Industry growth would have been even stronger in 2006, had there not been reduced electricity supplies resulting in part from low water levels at the Akosombo Dam, the largest source of electricity in Ghana, as well as a failure to invest in additional generating capacity, and losses due to illegal connections. The Volta River Authority (VRA), the main overseer for electricity, plans to install an emergency thermal electricity generator at Tema, to be upgraded by a larger thermal unit in the next few years. As a share of GDP, the industrial sector improved from 24.7 per cent in 2005 to 25.4 per cent in 2006. This share, however, is still some way off the government’s target figure of 37 per cent by 2010. In order to achieve this, the industrial sector would need to expand by at least 12 per cent per annum, which is significantly above the rate currently being achieved.

Other sub-sectors of agriculture, notably staple crops like cassava as well as palm oil, continued to benefit from the Presidential Special Initiatives (PSI) on agriculture. These initiatives aim to modernise Ghanaian agriculture through the dissemination of information about better farming practices, the provision of irrigation facilities, and the distribution of improved varieties of seeds and fertilizers. As part of the GPRS

In particular, difficulties in the manufacturing sector have been hampering efforts to boost industrial growth. In 2006 manufacturing grew by 4.2 per cent compared to 5 per cent in 2005. The reasons put forward for the closure of British American Tobacco in December 2006 underscored the main problems facing manufacturing activity in the country. High taxes and the influx of cheap imports have constantly

African Economic Outlook

© AfDB/OECD 2007

Ghana

The Role of the State has been Crucial in Revamping Cocoa Production in Ghana Since 2000 the government of Ghana has made a concerted effort to reform Ghana’s cocoa sector, which in the 1960s and 1970s led the world in production, but now ranks third. Various government measures – increased producer prices, bonus payments, effective disease and pest control programmes, improved agronomic practices and the promotion of new and innovative methods of cocoa farming – have succeeded dramatically, resulting in record output. In the 2005/06 crop season, cocoa output reached approximately a record 740 000 tonnes. This represented an increase of 23 per cent over the 600 000 tonnes harvested in the preceding season and bringing the average for the past three seasons to 692 300 metric tonnes, more than twice the 340 000 tonnes produced in the 2001/02 season. The increase in producer prices contributed significantly to the rise in output. In the 2005/06 season, the producer price paid per tonne of cocoa was ¢9 million or ¢562 500 per bag of 64 kilogrammes. The producer price represented 72.86 per cent of the net f.o.b. price, 2.86 per cent more than previously agreed. In fact producer prices have increased nearly threefold since 2001 when farmers were paid only ¢3.475 million per tonne. The government has also guaranteed the farmers’ minimum net share at 70 per cent of the net f.o.b. price in any particular year. For the 2006/07 season a new producer price of ¢9.15 million per tonne, representing 72.19 per cent of the net f.o.b. price, was announced in October 2006. The government has also used bonus payments to farmers as an additional incentive. In the 2005/06 season a bonus of ¢17 140 per bag was paid. In addition, the government has instituted a Farmers’ Scholarship Trust Fund to finance scholarship awards for cocoa farmers in secondary educational institutions. A total amount of ¢15 billion was paid into the Cocoa Farmers Scholarship Trust Fund in the 2005/06 Season to finance 2 500 scholarship awards for cocoa farmers. Moreover, the government has provided seed funds for the establishment of a housing scheme for farmers and has already started the construction of some houses under the scheme through the Department of Rural Housing. Furthermore, the government has launched a Vehicle Loan Scheme for Cocoa Farmers, aimed at helping the farmers acquire their own means of transport. In 2006, 33 cocoa farmers benefited from the scheme. Another major measure instituted by government to boost cocoa production has been disease and pest control. Since the programme started in 2001, more than 740 000 cocoa farms have been sprayed against black pod disease. Nearly 520 000 farmers have benefited from the programme. The programme has also offered employment to over 50 000 youths from local communities. The government intends to expand the programme in 2007 to reach 775 000 farms, covering 650 000 farmers, with the resulting creation of more than 51 000 jobs. Also, a number of feeder roads have been rehabilitated in the cocoa-growing regions of Ashanti, Brong Ahafo, Central and Western Regions.

been cited by manufacturers as militating against the sector. Also, private-sector organisations and industry leaders have complained about the neglect of the sector and the inability of government to implement bold measures to salvage it from stagnation. The government’s recent manufacturing growth strategy © AfDB/OECD 2007

targeted textiles and ICT industries. This strategy, however, appears to have failed, as the local industry, relying on antiquated machinery, facing constant power outages and producing low volumes, has continued to decline in the face of cheap imports of textiles and second hand clothing. African Economic Outlook

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Ghana

Figure 2 - GDP by Sector in 2005

(percentage)

Government services Agriculture and livestock 10.5%

Other services

23.4%

8.4% Trade, hotels and restaurants Transport, storage and communications

7.8% 8.8%

4.9% 8.7%

10% 3%

Construction Electricity and water

Cocoa production and marketing

Other agriculture

5%

9.5%

Mining and quarrying Manufacturing

Source: Authors’ estimates based on Ghana Statistical Office data. http://dx.doi.org/10.1787/178726760846

288

The services sector grew by an estimated 6.5 per cent in 2006, slightly higher than the 6.2 per cent achieved in the preceding year. The expansion in 2006 was driven by increased government expenditure in the provision of services and increased activity in finance and insurance services. Also, growth in mobile telecommunication was strong in 2006, as Ghana Telecom, Millicom and Scancom – providers of mobile phone services – all expanded their services. The combined activities of the telecom providers have contributed to an increase in tele-density (telephones per 100 persons) from approximately 5.2 per cent in 2003 to 6.7 per cent in 2006, with the number of telephone lines more than doubling from approximately 650 000 in 2003 to more than 1.7 million in 2006. The tourism sector continued to grow with visitor arrivals and spending increasing by an estimated 47 per cent and 69 per cent respectively between 2000 and

2006. Tourism receipts are expected to reach $1.5 billion by 2007 – the third largest foreign exchange earner after merchandise exports and remittances. In order to achieve this, the government is pursuing a strategy of establishing Ghana as the “homeland” for Africans in the diaspora. This is intended to change the current situation, where the majority of tourists to the country are Ghanaian expatriates. Investment performance continues to improve significantly. In 2006, there was a sharp increase in both public and private capital formation. Reductions in the stock of external debt and domestic public debt over the last few years have improved the savingsinvestment balance and growth dynamics of the country. In 2006, debt-reduction enabled the government to commit more resources to capital expenditure. The volume of domestic private and public capital formation

Table 1 - Demand Composition 1998

(percentage of GDP)

2005

Percentage of GDP (current prices)

2006(e)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

23.1 11.2 12.0

29.0 12.0 17.0

13.4 14.5 12.6

7.7 9.5 6.4

8.7 6.9 10.0

Consumption Public Private

89.7 16.1 73.6

96.6 15.3 81.3

7.7 2.2 8.5

4.6 9.2 4.0

6.8 4.9 7.0

-12.9 33.9 -46.7

-25.6 36.2 -61.8

5.9 15.4

4.4 4.5

4.6 9.5

External sector Exports Imports

Source: Authors’ estimates and predictions based on Ghana Statistical Office data. http://dx.doi.org/10.1787/062304780517

African Economic Outlook

© AfDB/OECD 2007

Ghana

is projected to increase again in 2007 and 2008 as confidence in the economy is maintained. On the other hand, export growth is expected to slow down, reflecting the continuing lack of progress in significantly diversifying exports.

Macroeconomic Policies Ghana maintains good relations with the IMF. The Poverty Reduction and Growth Facility (PRGF) loan expired in October, and will not be renewed. Instead, the government may establish a Policy Support Instrument programme (PSI) with the Fund, under which the IMF agrees to advise on and monitor policies but will not provide direct financial support. Fiscal Policy With macroeconomic stability now well established, the challenge is to shift the thrust of macroeconomic policy towards accelerated growth through targeted public investments and encouragement of privatesector development. In 2006 the government sought to ‘crowd-in’ private investment through a net domestic debt repayment equivalent to approximately 1 per cent of GDP, while also enhancing resources for development. The policies were largely successful insofar as the domestic debt/GDP

ratio fell from around 21 per cent in 2004 to an estimated 17.8 per cent in 2006. Moreover, the ratio of domestic debt service to total revenue fell from 45.1 per cent in 2003 to 27.5 per cent in 2005 and was estimated at 24 per cent in 2006. In 2006, total revenues increased, due in part to a reform of tax administration which strengthened the revenue collection agencies, and to the introduction of new taxes and increased grants. Since 2004 when revenue collecting agencies were allowed to retain 3 per cent of revenue collected to meet their administrative costs, the agencies have continued to exceed their targets. As a result, the domestic tax effort increased to 19.8 per cent of GDP in 2006 from 19.4 per cent of GDP in 2005. Also, donor grants increased to 5.6 per cent of GDP in 2006 from 5.3 per cent of GDP in 2005. Nonetheless, given the narrow tax base, with its high dependence on petroleum taxes, it might be difficult for the government to increase revenue significantly in the absence of efforts to widen the tax base. As a result, tax revenues are likely to remain virtually flat in 2007, and subsequent improvements in total revenue will depend largely on increased grants. In this regard, Ghana’s fiscal situation will benefit from a $547 million grant from the United States Millennium Challenge Account (MCA), which is by far the largest award so far under this programme. The government maintained an expansionary expenditure programme in 2006 following the

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenues Grants

20.5 15.8 2.2

24.4 19.1 4.7

29.8 21.3 6.4

27.9 19.4 5.3

28.6 19.8 5.6

29.2 19.9 6.1

29.0 20.2 5.5

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

28.6 17.3 10.3 5.5 7.0 11.3

28.8 19.8 13.6 8.4 6.2 8.9

33.3 20.9 16.6 8.8 4.4 12.4

30.8 18.8 15.1 8.5 3.6 12.0

32.9 18.3 15.3 8.2 3.0 14.6

32.9 17.8 15.2 7.8 2.7 15.1

32.7 17.6 15.1 7.6 2.5 15.1

Primary balance Overall balance

-1.1 -8.1

1.8 -4.4

0.8 -3.6

0.7 -3.0

-1.3 -4.3

-1.0 -3.7

-1.1 -3.6

a. Only major items are reported Source: Authors’ estimates and predictions based on Ghana Statistical Office data.

© AfDB/OECD 2007

http://dx.doi.org/10.1787/258534361777

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improvement in revenues. Total expenditures increased to 32.9 per cent of GDP in 2006 from 30.8 per cent of GDP in 2005. The government appears to be succeeding in controlling recurrent expenditure following the enactment of a number of legislative measures, including the Financial Administration Act, the Internal Audit Act and the Procurement Law in 2004. As a result, the increase in total expenditure in 2006 was due largely to increased capital spending, which was a welcome development, given the near stagnation of capital spending in recent years. The government’s resolve to continue controlling current spending in favour of public investment will be tested in 2007 by strong political pressures as the 2008 general elections approach. Even so, it is anticipated that the continuing decline in interest payments will enable the government to maintain a stable overall fiscal deficit in 2007 and 2008. Monetary Policy 290

Ghana’s monetary policy remains focused on bringing down inflation to the single-digit level and limiting exchange-rate volatility. The inflation objective has been pursued by controlling the amount of reserve money, with broad money supply as the intermediate target. In 2006, the monetary authorities lowered the growth of reserve money to 16.4 per cent from 19.3 per cent in 2005. However, broad money supply (M2) increased very rapidly at 34.6 per cent, compared to 22.5 per cent in 2005. Much of the expansion in money supply in 2006 was due to a stronger demand for credit by the private sector, in response to increased economic activity. Inflation tended to trend downwards in 2006 despite the lagged effects of increases in petroleum prices in the latter part of 2005, which were largely offset by a relatively stable exchange rate and improved food supplies. The target of the single-digit inflation rate was almost attained in 2006, as consumer price inflation declined to 10.5 per cent at the end of October 2006 from 14.8 per cent at the end of December 2005. Moreover, the core measures of inflation remained between 3 and 9 per cent in 2006, indicating low underlying inflationary pressures. African Economic Outlook

The easing of inflationary expectations in 2006 contributed to a decline in interest rates during the year. The Bank of Ghana (BOG) policy rate – the prime rate – which had been lowered continuously from 2003, was maintained at 14.5 per cent in 2006. Short-term rates in the financial system generally declined, with the average rate on the 91-day Treasury bill shedding 3.6 percentage points to 10.3 per cent in 2006. After declining much faster than deposit rates over the 200005 period, lending rates remained stable at 27.7 per cent between September 2005 and September 2006. Ghana’s managed floating exchange rate regime appears to be working well, with fewer interventions recently from the BOG to smooth fluctuations in the foreign exchange market. Higher levels of remittances, steady donor inflows and strong earnings from cocoa continued to help offset the effects of higher oil prices, enabling the cedi maintain its relative stability against the major international currencies. In 2006, the cedi recorded a slight depreciation of 0.9 per cent against the US dollar, following the moderate depreciations of 2.1 per cent and 2.2 per cent in 2005 and 2004 respectively. These moderate movements stand in sharp contrast to the unprecedented depreciation of 57 per cent that was witnessed in 2000. International recognition of the stability of the cedi was established in October 2006 with the first offshore cedidenominated eurobond issued by the African Development Bank. External Position The government is pursuing a development strategy based on export growth and increasing inward direct investment. With this in view, Ghana developed a National Trade Policy in 2005, which aims to enhance international competitiveness and secure greater market access for Ghana’s products. In particular, the policy seeks to promote regional integration within the Economic Community of West African States (ECOWAS) through the harmonisation and reduction of tariffs and non-tariff barriers to trade. At the same time, Ghana, together with other West African countries, is engaged in the negotiation of the WTO-compatible Economic Partnership Agreement (EPA) with the © AfDB/OECD 2007

Ghana

European Union (EU) to replace the existing nonreciprocal preferential trade regime in the Cotonou Partnership Agreement (CPA). Ghana’s current account balance has consistently been in deficit, and this deficit increased sharply from 7.1 per cent of GDP in 2005 to 11.7 per cent of GDP in 2006. Developments in the current account balance largely reflect fluctuations in merchandise trade, which have been characterised by widening deficits in recent

years. In 2006, the trade deficit increased from 23.5 per cent of GDP in 2005 to 25.7 per cent of GDP. One factor behind the recent widening trade deficit has been a higher than expected oil import bill due to the sharp increase in the average price of crude oil. Also, the non-oil trade deficit has widened in recent years due to an appreciation of the real exchange rate of the local currency, which has made export diversification rather difficult. Ghana continues to depend largely on a few primary commodity exports, especially cocoa

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-11.1 28.0 39.0 -1.8 -2.0 9.9

-10.3 32.4 42.7 -4.0 -1.5 18.4

-17.1 31.4 48.5 -4.4 -1.9 20.7

-23.5 25.6 49.0 -1.3 -1.5 19.2

-25.7 25.9 51.6 -1.2 -1.3 16.4

-25.1 25.1 50.2 -2.3 -0.7 16.5

-26.0 24.5 50.4 -2.5 -0.3 15.4

Current account balance

-5.0

2.4

-2.7

-7.1

-11.7

-11.6

-13.4

Source: Authors’ estimates and predictions based on Ghana Statistical Office data. http://dx.doi.org/10.1787/678451732837

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

160

140

120

100

80

60

40

20

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/632106841355

© AfDB/OECD 2007

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and gold, and thus remains vulnerable to external terms of trade shocks. As a result exports are projected to remain flat in 2007 and 2008, with the current account deficit remaining high. In spite of the recent deficits on the current account, Ghana’s overall balance of payments has been in surplus, driven primarily by payments on the capital account. In 2006, the surplus on the balance of payments rose to $155 million from $110.0 million in 2005. This significant injection to the capital account came largely from private capital inflows. Ghana’s international reserves position stood at $1.65 billion in October 2006, which translated into 3.3 months of import cover for 2005.

292

Ghana’s total external debt at end-2005 stood at $6.3 billion, representing about 59 per cent of GDP, with a debt service ratio of 6 per cent. The composition of debt remained largely unchanged in 2006, with approximately 63 per cent of the debt owed to multilateral creditors, 29 per cent owed to bilateral creditors, and the remaining 8 per cent representing commercial debt. The total debt was reduced by two thirds to $2.1 billion at end-September 2006, under the Multilateral Debt Relief Initiative (MDRI) of the IMF, World Bank and the African Development Bank. This debt burden fell to a low 13 per cent of GDP in 2006 with a debt service ratio of only 2 per cent.

Structural Issues Recent Developments Ghana’s current structural reforms put emphasis on improving public services and promoting private sector development. Under the GPRS II, private sector development is a key strategy for accelerated growth, and improving the business environment is seen as a crucial cornerstone to this. Ghana’s recent efforts at improving its business environment has begun to yield positive results as the country’s aggregate rank listed in the 2006 World Bank Doing Business Report was 94th out of 175 countries, compared to last year’s rank of 102nd. In addition, African Economic Outlook

Ghana was rated among the top ten reformers in facilitating business. The government is enhancing this progress by pursuing the development of a national index that tracks the costs and burdens of doing business, as well as improving the process of reform itself, by including more stakeholders in order to obtain useful inputs and to build consensus and ownership. The government has also for some time now been developing a Regulatory Impact Assessment tool to analyse the costs and benefits of new policies and regulations. In 2007, the Regulatory Impact Assessment tool will be formalised and implemented. Further to this, the implementation of the Private Sector Development Strategy is continuing with the establishment of Client Service Units to enhance the delivery of public services under the Public Sector Reform Programme. Other activities being pursued under the strategy include the establishment of a one–stop–shop to fast-track the registration of investments. The government has reinvigorated its stalled privatisation programme and is restructuring some of the state enterprises as a first step towards divestiture. As part of this process, relevant stateowned enterprises (SOEs) have been given full commercial mandates and autonomy to borrow from local and international capital markets. In 2006 the government began a review of the mandate of the State Enterprises Commission to realign its functions within this new framework. Ghana’s recent financial sector reforms have put in place much of the necessary payments system infrastructure for the development of efficient financial markets. The government is pursuing structural changes that will help to maintain the health and stability of the financial system and improve the transmission mechanism of monetary policy. To this effect, various measures were submitted to Parliament in 2006. These include the Foreign Exchange Bill, the Credit Reporting Bill, the Central Depository System Bill, and the AntiMoney Laundering Bill. The Foreign Exchange Bill institutionalises the current liberal external trade and payment regime, and removes the documentation and © AfDB/OECD 2007

Ghana

bureaucratic requirements associated with exchange controls. The Credit Reporting Bill provides for a registry to increase information on the creditworthiness of potential borrowers. The Central Depository System Bill ensures the certainty and safety of titles to equities and government debt instruments and can thereby help foster the development of the stock market. The Anti-Money Laundering Bill protects the integrity of the financial system from criminal abuse. The government has sought to foster the development of the local bond and stock markets. Recent measures include the listing of medium-term government securities, the establishment of a central securities depository, the automation of the Ghana Stock Exchange, and the commitment to use the Ghana Stock Exchange as the preferred medium for the divestiture of state-owned enterprises. While private sector companies have increasingly been using the capital market to fund their long-term investments, there has been a noticeable absence of public sector institutions. Accordingly, in 2007, the government is putting significant resources into preparing key public sector institutions, such as the utilities, universities and municipal and district assemblies, to meet their long-term funding needs from the domestic capital market. Access to Drinking Water and Sanitation Ghana is fairly well-endowed with water resources. There is more than enough surface water nationally to meet the estimated national demand of about 321 million m3. The Volta lake system drains about 70 per cent of the total land area of Ghana, with the Volta River flowing directly into the sea. The Volta Lake – the largest man-made lake in the world – covers approximately 8 482 square kilometres. The southwest and southeast parts of the country, which fall outside the Volta drainage basin, are drained by many large rivers and streams that also flow directly into the sea. These rivers are used for drinking water, fishing, agricultural and industrial purposes. The Volta river basin is shared with Cote d’Ivoire, Burkina Faso, Mali, Togo and Benin, while the basins of the big rivers Bia and Tano are shared with Cote d’Ivoire. While the Volta runs © AfDB/OECD 2007

through several countries, there is presently no mechanism for co-operation to jointly develop the river. Ghana has recently made a call for a joint commission to manage the basin for sustainable and equitable development. The production and delivery of water and sanitation in Ghana has largely been the government’s responsibility. The Ghana Water Company Limited (GWCL) is the lead agency for developing, operating, monitoring and regulating water and sanitation. The private sector’s role is largely confined to the design and construction of water supply systems. It also participates in water vending, which involves private water tanker operators selling water. To ensure efficiency and public accountability in the water sector, several regulatory institutions have also been set up. These include the Public Utility Regulatory Commission (PURC) that regulates tariffs and water supply operational performance; the Water Resource Commission (WRC), which is responsible for the regulation and management of water resources; the Ghana Standard Board, which is responsible for the development of drinking water standards; the Environmental Protection Agency that deals with environmental regulation of water supply operations; the Ghana Water Company Limited which has ownership of urban water supply assets, monitoring of water supply operations and development, and expansion of urban water supply systems; and the Community Water and Sanitation Agency, which is responsible for the facilitation of community water and sanitation services through District Assemblies. In Ghana, lack of access to clean water and sanitation systems is a central public health concern, contributing to 70 per cent of diseases in Ghana. There is substantial variation in access to clean, affordable water and sanitation, depending on income, between rural and urban areas, and across regions in Ghana. According to the Ghana Water Sector Restructuring Secretariat (WSRS), in 2005 only 46 per cent of the total population had access to piped water. The figure falls to 22 per cent for those classified as poor. Uninterrupted access to treated and piped water is only significant in some urban areas. Average urban access is 46 per cent, while in rural areas only 35 per African Economic Outlook

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Ghana

cent of the population have access. Access to proper sanitation is equally dismal. Again according to the WSRS, the percentage of the population with access to improved sanitation facilities is approximately 40 per cent in urban areas and 35 per cent in rural areas. To meet the Millennium Development Goals, water supply coverage for the urban areas will have to be increased to 88 per cent and sanitation coverage must be increased to 80 per cent. Households without access to clean water use a variety of less reliable and hygienic sources, and often pay more. Pollution is the most serious threat the sustainability of water resources. The rising demand for water resulting from the expansion of the chemical, oil, mining, and other water-consuming industries, along with urban growth and farming, threatens to outpace the available supply.

294

The main constraint to the improvement of water access and sanitation in Ghana is lack of financial resources. The investments required for an adequate water supply and sanitation infrastructure are estimated at $1.3 billion for the rehabilitation and expansion of urban water infrastructure alone. As a result of inadequate funding, maintenance and expansion of water and sanitation services has not kept pace with population growth. Most of the existing network was installed at the time when cities and towns were approximately half their current population sizes. According to GWSC estimates, almost a third of water supply systems in the country are non-functional, with the rest operating substantially below designed capacity. Other constraints to improving water and sanitation include inadequate tariffs to ensure full cost-recovery, especially in rural areas, lack of coordination and supervision of donor and NGO activities and lack of community participation in local water and sanitation projects. The government now appears to be tackling some of the major constraints to improving the water supply and sanitation situation. Since 2003 the government has phased out the subsidisation of water services and has initiated moves towards full cost-recovery. A Public Utility Regulatory Commission (PURC) has been African Economic Outlook

established to formulate appropriate pricing mechanisms. The government has also developed a proposal for private sector participation (PSP) in the production and delivery of water and sanitation. The PSP proposal intends to lease the 74 urban water systems across the country to two private water companies, with an expected injection of approximately $140 million for rehabilitation, renewal and improvement of the water systems. The proposal has been criticised, however, for separating water delivery from sanitation services. Moreover, considerable public resistance has been demonstrated against what is considered the inappropriate privatisation of water; consequently, the government has not been able to make any headway with this proposal. The government is also shifting responsibility for maintenance and operation of both urban and rural water supply to the respective communities. To this end, Community Water and Sanitation Boards have been established in towns, and Sanitation Committees have been set up in rural areas. Under this new arrangement, most issues that were previously managed from centralised departments in Accra, or through regional offices, are now being devolved to the districts. A Community Water and Sanitation Agency (CWSA) has also been created to assist the communities in the development, operations and maintenance of water systems. Under the Community Managed Systems (CMS), towns and villages will own and manage the water and sanitation systems, set their own rates and maintain their water systems with assistance from the CWSA. In recent times, donors and non-governmental organisations (NGOs) have also been instrumental in financing the production and delivery of water and sanitation services in Ghana, especially in the rural communities. The main actors in water-financing include the World Bank, which, over the two decades up to 2000, invested $152.4 million in improving Ghana’s urban water supply infrastructure. The government must ensure that such investments yield the desired results in raising the operational efficiency and performance of water and sanitation delivery systems in the country. © AfDB/OECD 2007

Ghana

Political Context and Human Resources Development Ghana remains a rare example of a maturing democratic culture in West Africa, where many countries have experienced civil wars, coups or sustained incumbent rule. The government has continued to promote democracy and good governance. One of the major indications of determination to pursue good governance has been its unreserved commitment to the African Peer Review Mechanism (APRM). Ghana reached the ultimate milestone of her APRM aspirations when President Kufuor became the first Head of State in Africa to be peer-reviewed by his colleagues at the 4th Summit of the APR Forum in Khartoum, Sudan in January, 2006. Nonetheless, substantial governance problems remain. Although Transparency International rates Ghana as one of the least corrupt countries in Africa, the corruption perception rating has slipped back to levels last seen when the Kufuor Administration came to office in 2000. In particular, increasing decentralisation in service delivery has helped to create additional opportunities for corruption. The political pressures related to the upcoming 2008 parliamentary and presidential elections are also giving rise to fears that the government’s commitment to improving governance could slip. It is becoming increasingly clear to observers that aspirants to the Presidency are utilising any means, including corrupt ones, to gain advantage. The problem for the government is how to check the many aspirants from the ruling party who wish to succeed President Kufuor in 2008. Ghana’s consistent growth of approximately 5 per cent per annum over the last 15 years has resulted in one of the fastest rates of poverty reduction in Africa. Acute poverty – income of less than $1 a day – has fallen from about 51 per cent in the early 1990s to 35 per cent in 2006. Most poverty is still rural, although the figures available indicate a slight increase in urban areas, from 8 to 9 per cent in 2006. Relentless urbanisation is shifting the pattern of poverty, with youth facing the most difficulty, as Ghana struggles to create formal sector jobs and provide services for the growing urban population. © AfDB/OECD 2007

An increasing rate of unemployment and underemployment has been a feature of the labour market in Ghana in recent times. It is essentially a reflection of the low labour absorption capacity of the economy and lack of relevant skills of the majority of the workforce. The slow growth of formal sector employment is also due to the combination of the shrinking role of government in economic activity along with the disappointingly slow growth of the formal private sector. Indeed, the failure of GDP to grow strongly enough and to be sufficiently labour-intensive to absorb the increasing labour force, which has almost doubled since 1984, has been the main cause of unemployment. Overall unemployment is estimated at 18.4 per cent as of 2006. The rate among youth is relatively high at 20 per cent (17 per cent for males, 23 per cent for females) as is the rate in urban areas. There has also recently been growing unemployment among polytechnic and university graduates. The lack of employable skills is cited as the main reason behind the inability of graduates to secure jobs, and this is a real tragedy given the overall scarcity of human capital in Ghana. The rate of underemployment is equally high at 16 per cent, with very little difference between male and female rates. The growing incidence of joblessness and informality in the labour market requires a strong effort from policy-makers to promote appropriate skills development and adopt employmentfriendly economic policies. Government objectives on health matters under the GPRS II continue to be the bridging of equity gaps in access to quality healthcare and nutrition services, ensuring sustainable financing arrangements that protect the poor, improving health infrastructure, and enhancing efficiency in service delivery. Government efforts to improve healthcare delivery appear to have improved both access to healthcare facilities and the actual quality of care. Malaria remains the main cause of mortality and morbidity in Ghana, accounting for about 21 per cent of the under-5 mortality rate and 40 per cent of outpatient morbidity. The government appears to be tackling this problem by making efforts to reduce the African Economic Outlook

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Ghana

burden of malaria. It launched a new Malaria Drug Policy in 2005 and, under its Intermittent Prevention Treatment strategy for malaria, adopted the new amodiaquine-artesunate drugs combination for prevention and treatment. In 2006 the Ghana Health Service changed the recommended dosage of this drug for malaria, following controversy over side effects. In 2006 the government also scaled-up Insecticide Treated Nets (ITNs) distribution across the country. Over 5 million ITNs were procured for distribution and ITN utilisation increased by 32.7 per cent for pregnant women and 31.0 per cent for children aged under-five. In 2006, the government achieved its target of reducing the prevalence rate of HIV/AIDS to 3.1 per cent; the recorded prevalence rate was 2.7 per cent, as more Anti-Retroviral Therapy (ART) sites became operational. By end-2006 the government had a twoyear stock of Anti-Retroviral Drugs.

296

Nonetheless, the exodus of doctors and other health service personnel continues to be a problem for health service delivery. Available data indicate that between 1999 and 2005 around 50 per cent of doctors trained in Ghana left the service. The government has used incentives to try to stem this tide without much success. Incentives include the distribution of saloon cars to doctors working in deprived areas and enhanced salaries and pensions. The government is seeking to increase access to education, improve the quality of education, and raise

African Economic Outlook

gender parity in schools. In its Education Strategic Plan, the government is providing free and compulsory basic education, defined as primary school and Junior Secondary School (JSS). The government’s objective is to achieve Universal Primary education by 2015 and gender parity in primary school by 2008. The extension of the Capitation Grant Scheme in 2005, which covers fees and levies for such items as cultural activities, sports and school development to all basic public schools, has boosted enrolment rates. As a result of these initiatives, enrolment at basic level increased by 16 per cent and gross enrolment rates at primary level grew from 87.5 per cent in 2004/05 to 92.1 per cent in 2005/06. In addition, the Gender Parity Index, by which the government measures gender parity in primary schools, also grew from 0.93 in 2004/05 to 0.95 in 2005/06. In order to ensure equity in the supply of teachers, and to improve the quality of teaching and learning at all levels throughout the country, an effort was made to deploy more teachers to the three regions in the North, thereby reducing the wide regional disparities in pupil/teacher ratios. Meanwhile the Ministry of Education also continued to attract teachers to remote areas by providing incentive packages including bicycles, radios, accelerated promotion and access to training. As an interim measure, the upgrading of untrained teachers continued. In 2006, 5 689 untrained teachers completed the first phase of the Untrained Teacher Training Programme.

© AfDB/OECD 2007

Kenya

Nairobi

key figures • • • • •

Land area, thousands of km2 580 Population, thousands (2006) 35 106 GDP per capita, $ PPP valuation (2006) 1 835 Life expectancy (2006) 49.6 Illiteracy rate (2006) 26.4

Kenya ETHIOPIA

SUDAN

Da

Lokichokio

ou

Lake Turkana

a

Mandera

Moyale

Kalekol Lodwar

El Wak Marsabit

UGANDA Maralal

SOMALIA

Kitale



Kampala

Eldoret Bungoma



Meru



Kisumu

Nakuru

Garissa Kisii

Kericho

Migori

Embu Thika

Narok Machakos

Tana

Magadi



NAIROBI

Makindu Lamu Namanga

TANZANIA

Tsavo

Malindi

town > l million inhabitants

INDIAN

Voi



Arusha

OCEAN

Mombasa

500 000 - 1 000 000

< 100 000 major road



100 000 - 500 000



Lake Victoria

Liboi

Issido Nanyuki

main airport secondary airport

secondary road

commercial port

railway

petroleum port

track

fishing port

0

100 km

I

2005, THE KENYAN ECONOMY, with most sectors recording accelerated growth, sustained the momentum that had started in 2003. Real Gross Domestic Product (GDP) grew by 5.8 per cent in 2005 compared with 4.9 per cent in 2004, and it is estimated at 5 per cent in 2006. This economic growth is expected to be maintained in the medium term. N

Despite the increase of government expenditures and the fiscal deficit of 2005/06, the overall fiscal situation is favourable, as the government succeeded in improving its revenue collection and in keeping the fiscal balance at a manageable level. The fiscal policy for the medium term continues to seek increased spending and revenue while containing the budget deficit at 3.5 per cent of GDP. In addition, public

expenditures are being restructured from recurrent to development sectors (infrastructure, education, health, etc.) with the goal of attaining 7 to Governance problems 9 per cent of GDP on developmentpersist but reforms are sector expenditure in the medium term. beginning to take hold Controlling recurrent expenditure to and the development free up resources for increased of the private sector development expenditure should be is on course. achieved thanks to selected cuts, such as in the civil-service wage bill, and better management of public finances. Monetary policy will continue to aim at maintaining inflation below the official 5 per cent level and at preserving stability in the foreign-exchange market. The monetary authority is on track in the area of 299

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Kenya - GDP Per Capita (PPP in US $)

■ East Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Kenya - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage) 7

3500

6

3000

5

2500

4

2000

3

1500

2

1000

1

500

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and National Institute of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/355447083017

© AfDB/OECD 2007

African Economic Outlook

Kenya

containing inflationary pressures, although the inflation rate was quite high in 2006, driven basically by food and energy prices. Inflation is expected to ease towards the targets in 2007 and 2008. Interest rates were fairly – and unusually – stable in 2005/2006.

300

The Kenyan government has sustained its emphasis on development of the private sector and has taken important measures to enhance the investment environment for private-sector activities. These measures include improving infrastructure – such as the road network (which is still a key challenge), the ports, and rail transport – providing reliable and affordable energy, and developing information and telecommunications infrastructure. The government has also strengthened the financial sector, improved public expenditure and financial management, and privatised state-owned enterprises to enhance Kenya’s external competitiveness and reduce pressures on the budget. In addition, it has eased the legal, regulatory and institutional constraints that affected the private sector adversely and delayed the privatisation process. Constitutional and legal reforms as well as deepening macroeconomic and structural reforms are considered key pillars for attaining the goals of “Kenya Vision 2030” to transform the country into a mediumincome country within 25 years. Although the authorities have increased the democratic space significantly since 2002, governance issues are still hampered by the corruption and political manipulation allowed by inadequacies in the legal framework to fight corruption at high levels in the system. This continues to affect the image of the government amongst development partners, and if it is not contained, it could slow down the pace of economic development that the country has recently realised.

Recent Economic Developments Kenya had 5 per cent GDP growth in 2006, compared to 5.8 per cent in 2005, continuing the buoyant growth that had begun in 2003. The key sectors driving this growth were agriculture, construction and building, manufacturing, tourism, and transport African Economic Outlook

and communications. Overall, the economy withstood the impact of higher oil prices rather well. The economy-wide reform efforts currently underway and the resulting stable macroeconomic environment are expected to generate sufficient momentum for growth to be maintained at about the same rate in both 2007 and 2008 (estimated at 5.3 and 5.1 per cent, respectively). The implementation of the Economic Recovery Strategy for Wealth and Employment Creation (ERS) will be completed by the end of 2007. In the meantime, the government intends to finalise Kenya Vision 2030, which will be the basis for further policy development. It will be based on three pillars – economic, social, and political – and its ambitious goals are: to maintain sustained 10 per cent annual economic growth for the next 25 years; to build a just and cohesive society enjoying equitable social development in a clear and secure environment; and to build an issue-based, peoplecentred, result-oriented and accountable democratic political system. The agricultural sector continues to play a dominant role, contributing significantly to increasing food security, income generation, employment creation and industrial development within the framework of the Investment Programme for the ERS (IP-ERS). The sector accounted for 25 per cent of GDP in 2005 and grew at an annual rate of less than 6 per cent in 2006 compared with 6.8 per cent in 2005. This growth was driven by improved performance in cereals, horticulture and dairy sub-sectors thanks to adequate rainfall in 2005 and 2006, a performance all the more impressive ever though a drought affected the livestock sub-sector in some parts of country in 2005. A number of structural reforms have been implemented since 2003, aimed at improving efficiency and productivity in the coffee, pyrethrum and sugar, and co-operative sub-sectors. These sector reforms include the review and harmonisation of the legal, institutional and regulatory frameworks. The share of budgetary resources allocated © AfDB/OECD 2007

Kenya

Figure 2 - GDP by Sector in 2005

Agriculture

Other services 25.1%

27.3%

Government services

4.5%

13.5% 10.9%

Transport and communications

(percentage)

12.2%

Manufacturing

6.5% Other industry

Trade, hotels and restaurants

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/246703247558

to the agriculture sector was projected to increase sharply from KES (Kenyan shillings) 18.6 billion (5.3 per cent of total resources) in 2005/06 to KES 33.5 billion (7.3 per cent of total resources) in 2008/09. Other incentives initiated in 2006 to promote productivity in the agricultural sector include zerorating of tractor tyres, agricultural tractors and semitrailers for agricultural tractors, as well as transport of unprocessed agricultural and agro-forest produce. Efforts are also being made to strengthen land management and the land-tenure system, support fisheries, forestry and mining, and protect the environment and natural resources. In 2006, the production of major crops displayed mixed performance. Improved weather conditions in the second half of 2006 moderated the adverse effects of the drought experienced during the first quarter of the year. Tea production declined in 2006 by 16 per cent. However, average tea auction prices increased substantially by almost 40 per cent in 2006 as a consequence of reduced supply and improved quality. Similarly, coffee output was almost at par with production in 2005 while the prices increased by 11.2 per cent. In the horticultural sector, flower production improved by 5.7 per cent, while fruit and vegetable production for export decreased by 2 per cent and 1.5 per cent respectively in 2006. Export earnings from the sector registered marginal improvement. The 2006/07 budget proposed tax measures to support the horticultural sector and make its products more competitive by shifting the focus towards more fruit © AfDB/OECD 2007

production. The sugarcane and milk sub-sectors also registered an improved performance in 2006. The government has continued to take measures to attain food security. However, these efforts have been undermined by frequent droughts and/or floods. The self-sufficiency ratio (SSR) for maize ranged between 84 per cent and 106.3 per cent between 2000 and 2005. The import-dependency ratio (IDR) for cereals has been on the decline, ranging from 19.5 per cent to 31.5 per cent between 2000 and 2005. The IDR for maize has consistently stood below 20 per cent. This means the country’s production of maize almost meets domestic demand. Maize production has been increasing as a result of the incentive of good prices offered to farmers. It is estimated to have increased from 32 million bags in 2005 to more than 33 million bags in 2006. Most producer prices for the majority of agricultural commodities recorded a gradual increase during the year, supported by a revival of farmers’ institutions such as the Kenya Co-operative Creameries or the Kenya Meat Commission. The manufacturing sector continued to respond positively to the reforms identified in the 2004-05 IPERS. The reforms include trade liberalisation, financial deepening, facilitating the use of technology by improving licensing procedures aimed at expanding growth and employment-generating capacity in the sector. The key growth targets for the sector for the IPERS period include: achieving an average growth rate of 8.6 per cent annually; increasing employment in medium and small enterprises; and formalising the informal micro- and small-enterprise (MSE) sector. African Economic Outlook

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The manufacturing sector accounted for 14 per cent of GDP in 2005, up from 9.9 per cent in 2004. In 2005, the sector recorded 5 per cent real growth compared with 4.5 per cent in 2004 as a result of increased domestic, as well as external demand. Factors contributing to growth in the sector included tax exemptions on some imports for intermediate consumption in the 2006/07 budget and enforcement of anti-dumping measures within the East African Community (EAC) and Common Market for Eastern and Southern Africa (COMESA) regions. In 2005, however, output was constrained by increases in production costs subsequent to the rise in oil prices, appreciation of the Kenya shilling resulting in lower export earnings and poor infrastructure. In 2006, output from the manufacturing sector improved thanks to increased output from key subsectors. In 2006, the production of beer and cigarettes increased by 7.4 per cent and 21.3 per cent, respectively. 302

Consumption of electricity grew by 5.2 per cent in 2006, in line with the increased level of economic activity. The increase in supply to meet this demand reflected good water supply to hydroelectric dams and increased generation from thermal sources. The government took several measures to improve the business environment and stimulate production

in the manufacturing sector. In the 2006/07 budget, it enhanced the tax incentives first introduced in 2003/04, which included duty waivers on capital goods, plants and equipment. In addition, 17 trading licenses were removed in 2005/06, an additional 118 licenses were marked to be eliminated in 2006/07, together with import duties on selected intermediate inputs. The tourism sector is a major component of the service sector, which accounts for about 50 per cent of GDP and has continued to exhibit rapid growth. This is due in part to measures taken by the government: to foster private-sector partnerships for the development and implementation of a co-ordinated strategy; to attract tourists from a wider range of countries; to diversify tourist attractions; to expand the benefits to the local population; to protect the environment; and to improve quality and standards. In 2006, combined tourism earnings from international and domestic sub-sectors grew by 20 per cent compared with 24.7 per cent in 2005. International arrivals increased to 1.7 million, up from 1.5 million in 2005 and 1.4 million in 2004. In 2006, tourist arrivals from all markets recorded improvements with significant increases from Asia, America and Europe of 7.9 per cent, 14.8 per cent and 13.7 per cent, respectively. This growth is linked to an improved marketing of tourism in non-traditional markets like

Table 1 - Demand Composition 1998

2005

Percentage of GDP (current prices) Gross capital formation Public Private Consumption Public Private External sector Exports Imports

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage changes, volume

16.8 4.9 11.9

16.8 4.6 12.2

15.9 5.0 20.0

12.5 11.5 12.8

8.9 10.0 8.6

90.0 16.5 73.5

93.9 17.1 76.8

4.8 3.8 5.0

3.9 4.1 3.9

4.4 4.2 4.4

-6.8 20.5 -27.3

-10.7 26.7 -37.4

3.8 5.6

4.5 2.2

5.0 2.5

Source: IMF and National Institute of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/005222256585

African Economic Outlook

© AfDB/OECD 2007

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China, India, Japan and the local market. Diversification away from traditional tourism products to new ones has also helped improve performance and future prospects in the sector.

roll-out to rural areas along with aggressive marketing. Safaricom, a mobile provider in which the government is a shareholder, is one of the fastest-growing enterprises in Kenya.

The transport and communications sector accounted for 11 per cent of GDP in 2005, recording real growth of 8.3 per cent in the year and making it one of the fastest-growing sectors in the economy. This rapid expansion was maintained in 2006. In the roadtransport sub-sector, new motor-vehicle registrations increased by 10 per cent in 2006. In the air-transport sub-sector, a combination of factors, including positive knock-on effects from tourism, caused the incoming passengers through major border ports to rise by 7.5 per cent in 2006, while outgoing passengers increased by 6.2 per cent in the same period. Cargo through the port of Mombasa grew by 5 per cent in 2006. The Government has prioritised expansion through the improvement and maintenance of the road network to support growth placed in the 2006/07 budget, improvement of the business climate and the competitiveness of Kenyan products.

The balance sheet of the state-owned Telkom Kenya, the fixed-line provider, is weak. However, the enterprise has recently put out new products and services. Fixed-line connections increased by more than 8 per cent in 2006 representing a 1 per cent increase in the penetration rate for this sector. Telkom has boosted the performance of its existing network by revamping the data-transfer technology known as Asymmetric Digital Subscriber Line (ADSL), as well as by introducing three different prepaid cards with different tariffs and download speeds. A corporate Voice Over Internet Protocol (VoIP) tariff and an Internet dial-up solution are also now offered amongst other products.

Concessioning of the Kenya railways in November 2006 is expected to improve railway transport, which will facilitate faster movement of cargo through the port of Mombasa. Other measures being taken to improve port efficiency include introducing private-sector participation in containerterminal operations, dredging the channel to accommodate larger vessels and introducing 24hour operations. In 2006, further reforms were taken to modernise and upgrade air transport at Jomo Kenyatta International Airport, and other airports and airstrips. This is expected to increase the volume of transit passengers with direct flights from North America and Europe, improve general air safety, increase revenue flow and promote tourism. The telecommunications sub-sector displayed strong performance in 2006 with the number of mobile subscribers estimated to have increased to more than 7 million, up from 5.6 million in 2005. The impressive growth in airtime sales was driven by lowerdenomination prepaid cards and expanded network © AfDB/OECD 2007

The building-and-construction sector realised real growth of 7.2 per cent in 2005, up from 4 per cent in 2004, and continued to record rapid growth in 2006. Cement production, for example, increased by 6.1 per cent in 2006. This was due in part to strong demand for residential housing in urban areas supported by relatively low and stable interest rates and remittances from abroad. Other factors contributing to the sector’s improved performance are the revival of several stalled public-sector development projects and increased budgetary allocation for road construction and rehabilitation activities. In collaboration with the government, international enterprises are undertaking oil exploration along the coastal belt, which is divided into blocks held by several oil enterprises. In 2006, equipment arrived in Mombasa for prospective oil drilling off the Lamu Coast, where an Australian drilling enterprise has estimated that there is a 12 per cent chance of striking oil. The economy experienced several problems in 2006. These included high oil prices, which increased production and transport costs and led to an acceleration of consumer-price inflation, and severe drought that affected the livestock sub-sector adversely, African Economic Outlook

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especially in the arid and semi-arid land (ASAL) areas during the first quarter of the year. Also, during the last quarter of 2006, the country experienced massive floods that displaced both people and livestock in areas prone to flooding, and destroyed roads and bridges in the affected parts of the country. The ravaging floods in the North Eastern and parts of the Coast provinces during the fourth quarter of 2006 led to deaths and infections associated with Rift Valley Fever, as well as the imposition of quarantine and a ban on the slaughtering of livestock in the affected areas. This was followed by immunisation campaigns targeting mainly domestic animals kept by the nomadic communities in these areas. There was no major regional conflict affecting the country in 2006. The situation in Somalia, however, continued to affect the country through an influx of refugees, new cases of diseases such as polio, which had been eradicated, and an increase in the prevalence of small firearms. 304

Macroeconomic Policies In 2006, the government undertook the mid-term review of the 2003-07 ERS to highlight the policy implementations achieved from July 2003 to June 2006. The review also made recommendations on key areas of the economy that need to be addressed in the remaining period of ERS. Fiscal Policy Fiscal policy is guided by the Public Expenditure Review (PER) and the medium-term expenditure framework (MTEF). These establish certain ceilings, ring fence core poverty programmes and imply a strong revenue effort. The growth of total expenditures is to be restrained and the composition of expenditures changed to reduce the share of non-productive recurrent expenditures and increase the share of operations-andmaintenance and capital expenditures. In addition, the domestic debt is not to exceed a sustainable level. The medium-term target for domestic debt is 20 per cent of GDP. African Economic Outlook

The overall budget deficit in 2005/06 was KES 55.2 billion, equivalent to 3.5 per cent of GDP on a commitment basis compared with a surplus of KES 1 billion equivalent to 0.1 per cent of GDP in 2004/05. This deficit mainly reflected the expansionary fiscal policy pursued in 2005/06, which includes a large increase in development spending. The fiscal deficit is projected to decline to 1.4 per cent of GDP by the end of 2007/08. In 2005/06, revenue collection and receipts from external grants amounted to KES 327.8 billion, under the target of KES 360.7 billion. The shortfall was due in part to problems with the implementation of a new customs computer system, which affected the collection of customs duties. Nevertheless, revenue collection and receipts of external grants increased by 7.6 per cent from 2004/05 as a result of strong economic growth. Fiscal receipts as a percentage of GDP rose from 23.8 in 2003 to 24.2 in 2005. The public-sector wage bill as a percentage of fiscal receipts was 58.2 per cent in 2005, down from 59.9 per cent in 2004. Efforts are being made to lower it further through the civil-service reform commission. Public investment financed from domestic resources as a percentage of fiscal receipts improved significantly in 2005, rising to 26.8 per cent from 17.3 per cent in 2004. This improvement appears to have been due to the operation of the Constituency Development Fund (CDF), a programme promoting grassroots development across the board. Differences between actual and budgeted expenditures narrowed in 2005/06 compared with 2004/05, indicating improved budgetary management. Indirect and direct intervention measures have been undertaken to counter the rise of oil prices. One measure was to publish the pump prices of various oil marketers in order to promote consumer awareness and competition. In addition, the state oil enterprise (National Oil Corporation) opened more retail outlets with an aim to increase competition and thus maintain some downward pressure on prices. However, the government has wisely chosen to allow the increase in international oil prices to be fully passed through to domestic prices. © AfDB/OECD 2007

Kenya

Table 2 - Public Finances

(percentage of GDP)

1997/98

2002/03

2003/04

2004/05

Total Revenue and grantsa Tax revenue Grants

21.4 18.4 0.7

20.8 18.1 1.4

22.4 19.0 1.3

22.6 19.4 1.1

23.0 19.0 2.2

22.5 18.6 2.0

22.2 18.4 1.9

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest on public debt Capital expenditure

22.5 20.7 15.7 4.2 4.9 1.7

24.3 20.9 17.6 7.8 3.3 3.2

23.3 20.0 17.6 7.9 2.5 3.2

22.5 19.1 16.9 7.8 2.3 3.3

26.5 20.9 18.5 7.3 2.4 5.5

23.7 19.3 17.0 6.9 2.3 4.4

23.6 19.0 16.6 6.5 2.3 4.5

Primary balance Overall balance

3.8 -1.1

-0.2 -3.5

1.5 -0.9

2.4 0.1

-1.0 -3.5

1.1 -1.2

0.9 -1.4

a. Only major items are reported. Source: Domestic authorities' data; estimates (e) and projections (p) based on authors' calculations.

Monetary Policy Monetary policy is under the responsibility of the Central Bank of Kenya (CBK). It seeks to maintain a rate of inflation that does not exceed that of its trading partners, which was expected to be less than 5 per cent in 2006/07. The measure of inflation, which includes food and oil, rose from 11.9 per cent in June 2005 to 14.6 per cent in November 2006, mainly as a result of increased prices of food and non-alcoholic drinks, and oil. However, the measure of underlying inflation, which excludes food and oil, declined from 8.2 per cent in June 2005 to 4.4 per cent in November 2006. This measure of inflation remained stable in 2006. The Consumer Price Index (CPI) inflation rate is estimated at 14.48 per cent in 2006 but is projected to decline considerably in 2007 and 2008 to stabilise at 3.64 and 3.75 per cent, respectively. In the year to September 2006, the broad money supply (M3) increased by 17.4 per cent compared with 11.8 per cent in September 2005. In this period, currency outside the banking system increased by 15.8 per cent from 5 per cent in August 2005, which was above the 12.1 per cent target. The net foreign assets of the banking system expanded by 27.8 per cent in the year to September 2006 compared with 34.7 per cent in the year to September 2005, while net domestic assets expanded by 13.1 per cent in the twelve months to September 2006, compared with 4.6 per cent in © AfDB/OECD 2007

2005/06 2006/07(e) 2007/08(p)

http://dx.doi.org/10.1787/028710663648

September 2005. This reflected increased credit to the government by the banking system to finance government deficit. Meanwhile, the growth of credit to the private sector slowed for most of the period. In August 2005, the government established a Monetary Policy Advisory Committee (MPAC) with a mandate to advise the CBK on monetary policy. The MPAC worked with the CBK to develop a framework for the Central Bank Rate (CBR), which replaces the 91-day Treasury Bill (TB) as benchmark rate and was launched in May 2006. The implementation of the CBR within the monetary programme targets the quantity of money. The current CBR is 10 per cent, up from the initial rate of 9.75 per cent. Interest rates remained moderate with the 91-day TB discount rate down from a high 8.68 per cent in April 2005 to a low 6.6 per cent in June 2006. The Kenya shilling exchange rates remained fairly stable in 2006, strengthening marginally against the US dollar at KES 72 compared to KES 76 in 2005. The shilling is projected to depreciate in the medium term to 74-75 against the US dollar. The monetary policy for 2006/07 will continue to be directed towards attaining and maintaining underlying inflation below 5 per cent. In line with this goal, M3 is set to grow by 10 per cent by June 2007 while reserve money is also programmed to expand by African Economic Outlook

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10 per cent. With the stable low interest rates, growth of domestic credit to the private sector is set to range between 10 per cent and 12 per cent. External Position The deficit on current account increased to 2.6 per cent of GDP in 2005, compared to 2.2 per cent of GDP in 2004, reflecting in part an increase in the oil bill and moderate growth in non-oil imports, which together exceeded a sizeable increase in export earnings. The deficit is estimated at 2.8 per cent of GDP in 2006 and projected to reach 3.4 per cent in 2007 before easing to 2.4 per cent in 2008. Net earnings from services, which include tourism earnings and unilateral transfers,

increased substantially in 2005 but not enough to match the increase in the visible trade deficit. In 2005, horticulture, tea and coffee continued to be the leading export earners accounting for 49.8 per cent of the total domestic export earnings. Export earnings improved to KES 168.4 billion in January to September 2006, following increased earnings from tea, manufactured goods, horticulture, oil products and coffee exports. The values of tea, coffee and tobacco exports rose by 14.7 per cent, 1.1 per cent and 69.1 per cent, respectively, in January to September 2006, compared with the same period in 2005. While tea and coffee exports fetched higher prices, export prices for some horticulture products declined.

Table 3 - Current Account

306

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor Income Current transfers

-7.2 14.4 21.6 1.0 -1.2 4.1

-7.6 16.2 23.8 3.4 -0.6 5.8

-10.1 16.8 26.9 3.8 -0.8 4.9

-11.6 17.3 28.9 4.0 -0.6 5.5

-10.1 15.3 25.4 3.3 -0.5 4.5

-8.9 15.0 23.9 3.1 -0.4 2.9

-8.2 14.6 22.8 3.3 -0.4 2.9

Current account balance

-3.4

1.0

-2.2

-2.6

-2.8

-3.4

-2.4

Source: Domestic authorities' data; estimates (e) and projections (p) based on authors' calculations. http://dx.doi.org/10.1787/076116124814

The import values of crude oil and oil products increased by 12.1 per cent and 7 per cent, respectively, and jointly accounted for 22.7 per cent of the total import expenditure in 2005. Industrial machinery and road motor vehicles accounted for 17 per cent of the total import bill.

the partner states undertook to eliminate tariff and non-tariff barriers amongst themselves, simplify and harmonise trade formalities, produce and exchange customs and trade statistics and information, all in order to create the most favourable environment possible for the development of regional trade.

The Protocol establishing the East African Customs Union came into force on 1 January 2005. The key objectives of the Customs Union as provided under the Protocol is: to further liberalise intra-regional trade in goods on the basis of mutually beneficial trade arrangements amongst the partner states; to promote efficiency in production within the Community; to increase domestic, cross-border and foreign investment in the Community; and to promote economic development and diversification in industrialisation in the community partner states. To achieve these objectives

In 2005, capital and financial accounts recorded a net surplus of KES 57 862 million compared with a net surplus of KES 18 964 million in 2004. The increase was attributed to increased long-term loans to the private sector, and capital transfers to the general government.

African Economic Outlook

The government’s aim is to reduce the domesticdebt stock from 22 per cent of GDP in 2003/04 to 20 per cent by 2007/08. In addition, the net present value of external debt was to be contained at around © AfDB/OECD 2007

Kenya

27 per cent of GDP for the medium term, thereby leaving the total debt ratio below 50 per cent of GDP. This implies a narrowing of the fiscal deficit (including grants) to about 1 per cent of GDP in 2007/08 from 2.6 per cent of GDP in 2004/05.

The Government has consistently maintained a sound and timely debt-servicing policy. Annual debt servicing charges decreased from KES 114.9 billion in 2003/04 to KES 112.2 billion in 2004/05, while receipts on loan repayments and interest registered a substantial

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

45 40 35 30 25 20 15

307 10 5 0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/105101125116

increase from KES 719.4 million in June 2004 to KES 1.7 billion in June 2005. External-debt-service payments as a percentage of export of goods and services declined to 6 per cent on 30 June 2005 compared with 7.9 per cent a year earlier. This was due to the effect of a decline in external-debt servicing combined with consistent growth in exports of goods and services in the past five years. External debt dropped from KES 443.2 billion in June 2004 to KES 434.5 billion in June 2005. The proportion of multilateral creditors in total external debt declined to 59.6 per cent at the end of September 2006. Kenya has not benefited from debt cancellation under the Heavily Indebted Poor Countries Initiative because its level of debt is considered to be sustainable. © AfDB/OECD 2007

Structural Issues Recent Developments To improve accountability and efficiency in the management of public corporations and enhance the role of the private sector as the engine of growth and poverty reduction, the government has initiated a number of reform measures. These include: drafting the Privatisation Bill in 2003, which is currently in parliament; introducing various reforms for restructuring, rationalisation and good corporate governance in public enterprises; identifying candidates for divestiture and privatisation and preparing strategies and programmes for this process; and implementing reforms covering budgeting, financial management, African Economic Outlook

Kenya

internal audits and performance contracts for state enterprises. Moreover, 16 state enterprises were put on performance contract, effective from 1 October 2004, and Kenya railway concessioning was completed in December 2006. Prospective reforms include privatising Kenya Ports Authority, including concessioning of container terminals, bulk handling and conventional cargo, concessioning roads and other public works, continuing the liberalisation of the telecommunications sector and initiating the process for the privatisation of Telkom Kenya. In the financial sector, the role of the state in the economy will be reduced through privatisation and/or restructuring public enterprises and state-owned banks. The Microfinance Bill will be operationalised to improve the supervision of deposit-taking institutions. In addition, reforms in the insurance sector are to be strengthened, and a strategy for development finance institutions is to be developed. 308

The Governance, Justice, Law and Order Sector reform programme, referred to as GJLOS, is now in an accelerated phase of implementation as a four-year medium-term Strategy ending in June 2009. GJLOS will focus on improving the anti-corruption architecture by enhancing the investigative and prosecutorial capacity of the legislature, as well as by strengthening other institutions in the criminal and civil justice systems. A medium-term anti-corruption strategy with measurable performance indicators is to be implemented. GJLOS will address the systematic enhancement of publicsector integrity and accountability mechanisms in public institutions through the enforcement of codes of conduct and result-driven service charters. Reforms to strengthen public-expenditure management aim at improving service delivery in the key priority areas of health, education, infrastructure and agriculture. The reforms will focus on: meeting all 16 Public Expenditure Management Assessment and Action Plan (PEMAAP) benchmarks by 2008/09 (on 31 December 2005, only 6 out of 16 benchmarks had been met); reducing the discrepancy between approved budgets and budget outturns; and addressing the main causes of budget reallocations during the African Economic Outlook

course of the year. From 2006/07 onwards, budget reallocations are to be limited to no more than 8 per cent and will be disallowed for new programmes. No reallocations involving core poverty programmes will be tolerated. In addition, a Public Procurement and Disposal Bill has been enacted and efforts are now geared towards operationalising the autonomous Public Procurement Oversight Authority and making sure that it is run efficiently. Public-service reforms aim to re-establish control over the wage bill, address capacity constraints in key ministries, and promote the creation of a more efficient public service. In this regard, the government has: introduced new wage-setting guidelines for public employees; announced its intention to streamline the terms and conditions of service for top management in the government and state enterprises; taken steps to strengthen capacity at all levels of government, particularly in ministries essential to the realisation of the ERS, such as the Ministry of Finance; and committed to restructure a number of key ministries, including the ministries of Roads and Public Works, Education, Health and Agriculture. The government identified in its IP-ERS the restoration and expansion of infrastructure (transport, water, energy, telecommunications and information technology) as one of the main pillars and challenges for its economic recovery programme. In this regard, the share of resources going to physical infrastructure is projected to rise from 19.2 per cent in 2005/06 to 21.6 per cent in 2008/09 with priority going to: expanding and improving maintenance of the road network and other public works; increasing access to water resources; and increasing the availability, reliability and affordability of energy. The challenges facing the sector include expanding the road network; reducing the rehabilitation and maintenance backlog; strengthening road safety and controlling overloading, and expanding private-sector management and financing. For roads, activities include: formulation of a longterm road-sector strategy and a multi-agency model for © AfDB/OECD 2007

Kenya

managing responsibilities and financing for all types of roads; rationalisation of the number of agents responsible for rehabilitation, construction and development of urban roads under the Kenya Roads Board Act; completion of a road inventory and condition survey study; reducing the audit backlog for the road-levy fund and improving public information on the use of the fund; establishing a new road-safety authority; enforcing axle load control limits; and launching a national road-safety campaign. Selected targets for the IP-ERS period include rehabilitation of 2 815 kilometres under the Roads 2000 Programme, reconstruction of 150 kilometres of trunk roads per annum and the concessioning of up to 1 208 kilometres of trunk road during 2004-07.

to boost growth in the sector. To improve service delivery and efficiency in the public sector, the government has established operational information and communications technology units in ministries, installed local area networks in Government buildings and implemented rural telecommunications projects by the Ministry of Information and Communications.

To ensure efficient and secure air transport, security measures at airports are being improved, the construction of a perimeter fence and the installation of an intrusion-detection system are ongoing, while the refurbishment of the airport and civil-aviation facilities has commenced.

The authorities have redefined the role of the state from producer to facilitator in order to make the private sector the engine of growth through preparation of a private sector development strategy (PSDS) paper spelling out the reforms needed to enhance efficiency and international competitiveness. The PSDS paper was launched in January 2007. An action plan detailing short-and medium-term measures to improve the investment climate has been finalised, as well as a national export strategy action plan in five key sectors for implementation starting in 2005/06.

In the telecommunications sub-sector, the government is to make a public offering in 2007 for Safaricom shares, to be traded at the Nairobi Stock Exchange. In addition, Telkom Kenya is also undergoing a major reorganisation aimed at strengthening its balance sheet, by purging it of bad debts amongst other actions. The process of selling two of its loss-making subsidiaries, namely Gilgil Technical Institute and the Kenya College of Communications Technology, was initiated in 2006. The awarding of a license to an additional operator to operate in both fixed-line and mobile-telephony networks is expected to lower prices and boost competition against the state-owned operator Telkom Kenya, as well as mobile-service providers Safaricom and Celtel. The government also allowed all enterprises in the sector to offer the entire range of telecommunications services. Further liberalisation, significant investment in an e-government initiative and zero rating of VAT on computer equipment, parts and accessories are expected © AfDB/OECD 2007

To maintain the competitive edge of the port of Mombasa, its operations are to be privatised while the port itself will remain the property of the state, which began operating 24 hours per day in February 2007. Equipment is to be modernised and a Maritime Sector Policy paper finalised. In addition, two new ferries will be purchased to increase safety.

A number of measures to strengthen the financial system and create a predictable environment for privatesector development are being implemented. These reforms include: setting up the Bank Restructuring and Privatisation Unit in the Ministry of Finance to develop and implement restructuring reforms for state-owned banks; enacting the Micro Finance and Savings and Credit Co-operatives Bills by parliament; capacity building to fight money laundering and for Combating the Financing of Terrorism (CFT). These latter include: gazetting the National Task Force on Anti-Money Laundering (AML) and CFT in 2003; drafting the AML and Proceeds of Crimes Bill; drafting the Suppression of Terrorism Bill (2003) to criminalise the financing of terrorism; and modernising the financial system with, amongst others, the drafting of a specific bill on Electronic Money Transfer, the amendment of the Banking Act and Central Bank Act to transfer all African Economic Outlook

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regulatory and supervisory roles from the Ministry of Finance to the CBK, and the introduction of a new regulation tightening loan provisioning and classification.

310

Reforms in the agricultural sector aim to promote productivity growth and lower the costs of agricultural inputs, particularly amongst smallholders and subsistence farmers, who account for an estimated 70 per cent of marketed agricultural production. The reforms include: restructuring and rationalising the network of agricultural-research institutes by consolidating operations into the Kenya Agricultural Research Institute; strengthening the link between farmers’ demands, extension provision and the direction of research, and increasing the productivity of public investment; deepening agricultural financial services to ensure that poor farmers have access to credit and insurance; putting in place reforms to improve competition in input distribution and marketing, and enforcing the law against fraudulent practices of input supplies and marketing agents; reducing transport costs through improved rural roads and reduced fuel taxes and electricity costs; improving access to information through strengthened communications; giving support to co-operatives, private investors and other institutions to undertake necessary investments in marketing and value addition; formulating a national land policy to address land use and administration, land tenure, and land delivery systems; reviewing the law of succession to address gender imbalances in land; reassessing foodsecurity policies and introducing pro-poor reforms; amending the Coffee Act to allow growers to sell coffee outside the auction and establishing an agency to operate processing, marketing and input distribution; and supporting plans for the rehabilitation and development of irrigation systems to support the revitalisation of the cotton and rice sectors. Access to Drinking Water and Sanitation Kenya is not well-endowed with water resources. Its annual surface-water and ground-water potential is 19.6 million m3 and 0.6 million m3 per year, respectively. This is less than 600 m3 per capita and well below the norm of 1000 m3 per capita, which describes a situation of water scarcity. Factors threatening these water sources African Economic Outlook

include: frequent droughts and floods, which reduce water catchment; rapid population growth, which leads to the destruction of water-catchment areas through land conversion and fragmentation; pollution from chemical pesticides and fertilizers on agricultural land, as well as industrial wastes and raw sewage leaching into surface and ground water. The government of Kenya created the Ministry of Water and Irrigation (MWI) in 2002 to consolidate the responsibility for the management and development of water resources. Its mandate is to protect, harness and develop the country’s water resources to ensure the availability of high-quality water to all. The main institutions for the water and sanitation services (WSS) sectors are the MWI, the Water Services and Regulation Board (WRSB), the Water Resources Management Authority (WRMA) and the Water Services Trust Fund (WSTF). Other institutions include the water-services boards, water-services providers and the Water Appeals Board (WAB). These institutions are co-ordinated by the MWI, which has the leadership role for the WSS sector. Water operators are private/commercial enterprises. The role of small and medium-sized organisations for water services in small towns and peri-urban areas is to provide water and sewerage services to users. They connect water users to the trunk lines of the main water system provided by the water-services provider and sell the water to households and other users. The water and sewerage departments within the municipality or local authority have been licensed to operate commercially as waterservices providers and as water and sanitation enterprises. The different institutions and operators are regulated under the Water Act of 2002. In order to address the challenge of managing its water resources to satisfy sectoral demands, Kenya adopted its first National Water Resources Management Strategy (NWRMS) in 2003. The NWRMS provides a clear, accountable and transparent roadmap for assessing, maintaining, enhancing, developing and managing fresh-water resources, using an integrated approach and on a sustainable basis. Extensive investment is needed to remedy the low © AfDB/OECD 2007

Kenya

level of development of water resources. In addition, it is necessary to reverse catchment degradation and control pollution. There is no data on the average cost of access to water and sanitation services. However, this information is expected to be provided by the Kenya Integrated Household Budget Survey which was undertaken in 2005/6, the data of which is now being analysed. At present, the proportion of the population with access to improved drinking-water coverage in Kenya is about 50.9 per cent and the sanitation coverage is 81 per cent. The current water-supply coverage in urban and rural areas is 75.5 per cent and 39.3 per cent, respectively, while sanitation coverage is 94.8 per cent and 76.6 per cent in urban and rural areas, respectively. The government’s targets to meet the Millennium Development Goals (MDGs) by 2015 as indicated in the ERS are 80 per cent and 96 per cent for nationwide coverage of safe water supply and improved sanitation, respectively. For the urban and rural areas, the watersupply targets are 96 per cent and 66 per cent, respectively, while for sanitation they are 96 per cent and 89 per cent, respectively. The targets for WSS MDGs were planned and set for each sector by the Ministry of Planning and National Development, which is co-ordinating the monitoring of the MDGs together with a roadmap for their achievement. Depending on the availability of funds for investment in water projects, the planned targets are likely to be achieved. The progress rate in relation to the goals for access to drinking water and sanitation (WSS) is higher compared to other MDGs thanks to the early establishment of an integrated approach to water issues. Moreover, the ongoing rehabilitation of water systems throughout the country has improved the access to water. The main obstacles and challenges to WSS are inadequate finance and lack of institutional capacity. Problems include: inadequate plants and equipment for borehole drilling and dam construction; ageing WSS schemes of 20-40 years ago that need a complete © AfDB/OECD 2007

overhaul; need for more efficiency in the delivery of water services and improvement of revenue collection; difficulties in mobilising resources for the WSTF to implement community schemes; inadequate resources to rehabilitate and expand WSS infrastructure, leading to poor maintenance of these systems; and the demand for services exceeding their design capacity. Most of the water is not accounted for, due to the obsolete and dilapidated state of water infrastructure and to the increasing incidence of illegal abstractions. Resources for the rehabilitation and expansion of water and sewerage infrastructure have been inadequate, and some water mains have been damaged by careless construction practices. Customers have resisted paying for water because of the general lack of accountability in the water sector. This is now beginning to change as the water-services providers continue raising public awareness of the importance of paying for water, and revenue collected by the water-providing enterprises has been increasing. Reforms are driven by the National Policy on Water Resources Management and Development (1999), the NWRMS of 2003 and the National Water Services Strategy and Investment Plan (2003). The Water Act of 2002 created the legal framework for the implementation of these policies. The key principles of the reform are articulated around the separation of regulatory functions from services delivery, separation of ownership of assets from responsibility for operation and maintenance, the introduction of performance targets and commercial principles, the ring fencing of water-services revenues to allow the collected revenue to be ploughed back and the redeployment of existing staff to the new institutions. Furthermore, it is government policy to devolve policy implementation to communities, the private sector and sector stakeholders. This approach is detailed in the Strategy for Performance Improvement in the Public Service and in the policy on the reforms and privatisation of public enterprises. In this arrangement, the role of the ministry will be directed at policy formulation, implementation, co-ordination, support in resource mobilisation and regulation. This new thrust is reflected in the Water Sector Strategic Plan. African Economic Outlook

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Kenya

Currently, MWI gives higher priority to water supply than to sanitation services. The MWI deals with sewerage, bearing in mind that other sanitation issues are being handled by the Ministry of Health. The fear is that if most of the resources are directed towards the provision of water supply while neglecting sanitation services, the environmental-sustainability MDG might not be achieved. Synergies do exist, however, as sanitation services are also provided by other stakeholders, such as the Ministry of Health.

312

A study is expected to be commenced soon to determine the total amount of investment required for an efficient WSS infrastructure. The major actors in financing the water sector are the government and donors/development partners, mainly through revenues generated from water charges, government budgetary allocations, loans and grants. Multilateral financial institutions give loans and grants to water projects, while the New Partnership for Africa’s Development (NEPAD) water and sanitation programme provides technical advice. Multi-stakeholder participation in the WSS sectors is ensured through the Sector Wide Approach to Planning (SWAP). Donor funds increased significantly in 2006 to KES 16.5 billion. The main donors were the Swedish International Development Agency, the Danish International Development Agency, the African Development Bank, the World Bank, the French Development Agency, the Arab Bank for Development in Africa, Japan International Cooperation Agency, and the UN Human Settlement Programme UN-HABITAT. A number of projects are currently planned, including the Nile River Basin project for Efficient Water Use for Agricultural Production, the ongoing restructuring of the MWI headquarters, and the rehabilitation of water and sewerage in Nairobi, supported in large part by the Africa Water Facility. The government budget for the MWI increased from KES 3 billion in 2001/02 to KES 11 billion in 2006/07, with development expenditure for the water sector increasing from KES 3.2 billion in 2004/05 to KES 6 billion in 2005/06. Further institutional changes are also needed. A policy on the management of transboundary water African Economic Outlook

resources is wanting but currently being developed in the context of new projects in the planning and of the Nile Basin Initiative. A national WSS monitoring and evaluation mechanism is also lacking. WSS issues are monitored and evaluated by the implementing institutions – the MWI or the Ministry of Health, for instance. Reports are provided regularly and published periodically. There is nonetheless transparency in the award of contracts, with no known political interference in water management.

Political Context and Human Resources Development One of the major indications of the determination to pursue good governance has been Kenya’s commitment to the African Peer Review Mechanism. Kenya completed the peer review process at the 5th Summit of the APR Forum in Banjul, the Gambia in June, 2006. The National Rainbow Coalition (NARC) government promised to deliver the new constitution within 100 days of its taking office, but failed to do so. The draft supported by the government was defeated by the supporters of the opposition party in the 21 November 2005 national referendum, and it appears likely that constitutional reform will not materialise before the next general election. There was some realignment amongst the political parties after the reconstitution of the cabinet soon after the government lost the constitutional-referendum vote in November 2005. The formation of a Government of National Unity involved part of the original NARC, as well as some members of parliament (MPs) from the opposition parties. MPs from the NARC rebel wing of the Liberal Democratic Party (LDP) were left out of the new governing coalition. NARC-Kenya (NARC-K) was launched on 3 June 2006 with a huge show of power featuring the Vice President and half of the cabinet in attendance. In July 2006, by-elections were occasioned by the death of five MPs in a plane crash. NARC-K won three of the five vacant seats, beating LDP and Kenya African © AfDB/OECD 2007

Kenya

National Union (KANU) rivals in an election that some considered a sign of the direction the next general election will take. NARC-K is closely associated with the government, although the president has never declared direct support for the party. KANU, together with the LDP, had campaigned against the proposed constitution and both have now formed a coalition party, the Orange Democratic Movement Kenya (ODMK), to challenge the current government. Currently, the Political Parties Bill 2006 is awaiting debate in parliament. The bill, if passed, will pave way for political parties to receive funding from the treasury. In an effort to improve governance and reduce the perception of being a corrupt regime, measures are being taken to strengthen key institutions – including the Office of the Attorney General (AG), The Director of Public Prosecutions, the Judiciary and the Kenya Anti-Corruption Commission (KACC) – that are on the front line of the war on corruption.These measures include: hiring lawyers and special prosecutors from the private sector; reviewing terms and working conditions of the legal staff in the AG’s chamber; increasing the number of judges and anticorruption courts; and implementing various governance and anti-corruption strategies.

Efforts to improve the quality of free primary education are continuing. These include: financial management and accountability in schools; rationalising the deployment of teachers; targeting tuition scholarships to poor and orphaned children; expanding and improving educational facilities countrywide; and providing adequate teaching and learning materials in schools. These measures have resulted in a significant improvement in a number of indicators. The percentage of primary-school graduates enrolling in secondary school increased from 47 per cent in 2002 to 57 per cent in 2006, and a target of 70 per cent has been set for 2007. The number of students enrolled in universities increased from 71 349 in 2001/02 to 89 979 in the 2005/06 academic year. However, notable problems subside, including the misappropriation of funds by headteachers, inadequate physical infrastructure, a low teacher-pupil ratio and the sustainability of the school feeding programme, especially in ASAL areas. 313

In addition, the national security loan contracts awarded by the Department of Defence have been audited and investigated and the reports tabled by the Controller and Auditor General as well as the Public Accounts Committee. These contracts are also under investigation by the KACC.

The authorities continued reorienting policy towards preventive healthcare provision, while ensuring efficiency and effectiveness in healthcare service delivery countrywide. Reforms implemented in 2006/07 include: improving healthcare procurement procedures and accountability systems, as well as strengthening supervision capacity of medical supplies in rural heath facilities in order to improve access to drugs and medical supplies. The allocation of resources to the health sector was increased from 8.6 per cent of total government expenditures in 2005/06 to 9.4 per cent in 2006/2007 to promote the achievement of the MDGs.

The Government continued to improve the delivery of services at the local level as a way of alleviating poverty mainly through the increase of devolved funds. This included the Constituencies Development Fund (CDF), the Local Authorities Transfer Fund (LATF) and the Road Maintenance Fund (RMF), amongst others. In 2006/07, the CDF was increased by almost 40 per cent from the statutory requirement of 2.5 per cent of ordinary revenues to about 3 per cent. Similarly, the LATF and RMF were increased by a comparable 34 per cent and more than 50 per cent, respectively.

These resources were used to fund, amongst others, HIV/AIDS interventions, healthcare infrastructure and affordable drugs. The government, in collaboration with non-governmental organisations, set up mobile medical programmes targeting vulnerable groups such as those with disabilities and people living a nomadic life. The government supplements the health budget for anti-retroviral drugs using money provided through the treasury from the Global Fund while the Ministry of Health is responsible for its distribution. The enactment of the Sexual Offences Bill in July 2006

© AfDB/OECD 2007

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Kenya

will also help to support the fight against the spread of HIV/AIDS. The HIV and AIDS Protection and Control Act, 2006, was enacted in December 2006. The Act provides for the protection and promotion of public health and for the appropriate treatment, counselling, support and care for persons infected or at risk of HIV and AIDS infection.

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The infant-mortality and the under-five-mortality rate are estimated at 77 and 115 per 1 000 live births, respectively. The Kenya Demographic and Health Survey 1998 indicates a wide disparity of under-five mortality across regions, with low mortality in the central part of the country while the rest recorded high mortality rates. Efforts to reduce child mortality have been hampered by a number of factors, including: a decline in levels of immunisation coverage against the six childhood diseases; recurring incidence of hunger and the resultant protein-energy malnutrition amongst children; widespread incidences of malaria, diarrhoea and acute respiratory infections, which mainly have an impact on children; the HIV/AIDS epidemic and related opportunistic infections; low literacy levels and low mothers’ education levels in many parts of the

African Economic Outlook

country; inadequate access to sustainable clean-water sources and sanitation facilities; lack of access to health services in many parts of the country; and insufficient resources, including trained health workers, equipment, drugs, etc. There were a few incidents of polio outbreaks, a disease that was last detected in Kenya more than 22 years ago. This was suspected to be caused by the influx of refugees from the neighbouring countries. The target of creating at least 500 000 jobs annually has continued to remain a challenge to the government. The economy has been generating an average of 471 000 jobs annually, most of which were in the informal sector. In 2004 and 2005, employment creation was short of targets by 16.6 and 41.1 thousand jobs, respectively. This situation may improve somewhat, following the establishment of a Youth Enterprise Fund established to provide young people with access to credit for starting or up-scaling small or medium-sized enterprises, developing their entrepreneurial skills and/or creating job opportunities.

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Madagascar

Antananarivo

key figures • • • • •

Land area, thousands of km2 587 Population, thousands (2006) 19 105 GDP per capita, $ PPP valuation (2006) 920 Life expectancy (2006) 56 Illiteracy rate (2006) 29.3

Madagascar

M

ADAGASCAR’S ECONOMY FELL INTO A DEEP recession

after the 2001 political crisis and shrank by 12.7 per cent in 2002. It soon bounced back, however, with growth of 9.8 per cent in 2003 and further expansion in 2004 (5.3 per cent), 2005 (4.6 per cent) and 2006 (4.8 per cent). The recovery was fuelled by the strong performance of the primary and secondary sectors and further reforms to bolster the opening up of the economy, improve macroeconomic stability and governance, and combat poverty more effectively. Macroeconomic policy since 2002 has been based on maintaining stability to encourage growth and

reduce poverty. The government has focused on reform of the budget and public procurement, more effective monitoring of public finances and continued efforts to reduce the share of customs duties in budget revenue. Elections for president in Economic recovery is expected December 2006 and for to be sustained based on the parliament in 2007 should performance of the secondary encourage the government and tertiary sectors which to stick to this course. benefited from fiscal and Adoption of programme macroeconomic reforms. budgets and a serious war on corruption should greatly improve management of public finances.

317 Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: IMF and local authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/638420028046

© AfDB/OECD 2007

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Madagascar

Recent Economic Developments

318

Despite good performances in 2005 by agriculture, tourism, construction and, to a lesser extent, exports, real GDP grew only 4.6 per cent, down from 5.3 per cent in 2004 and well below the 2005 budget’s forecast of about 7 per cent. This outcome was mainly due to higher world oil prices, expensive electricity and frequent blackouts caused by the financial crisis at the national power and water company Jirama, which hurt the productive sectors, especially industry. Although growth was up slightly in 2006, it is further threatened by persistent structural problems linked to public finance management, slow reform of the public sector, governance issues and a poor business climate that discourages private investment. The expiry of the African Growth and Opportunity Act (AGOA) preferences for Madagascan exports to the United States will not help matters. The government wants to use all the opportunities provided by its membership of the Common Market for Eastern and Southern Africa (Comesa) and the Southern African Development Community (SADC). The tertiary sector, which accounts for more than half of GDP, was the star performer in 2005 with 6.2 per cent growth, mostly due to booming transport, telecommunications, banks, insurance and services. Extension and modernisation of the country’s roads opened up isolated productive regions and linked them to markets for agricultural and industrial items. Despite the threat posed by chikungunya fever, the tourism sector still managed to contribute to growth, and

energetic promotion of Madagascar as a tourist destination led to the opening of eight new hotels in the first quarter of 2006. The government is encouraging the sector with a tourism master plan (TMP) and giving higher status to the national tourism office. The primary sector, which accounts for about a third of GDP, grew a modest 3.3 per cent in 2005 (up from 3.1 per cent in 2004). Its best performer was agriculture, where rice production increased thanks to good weather and the improvement in growers’ access to microfinance and inputs, especially fertiliser. Great efforts were also made to upgrade agricultural infrastructure such as dams and irrigation channels, expand crop areas and teach growers about new production methods. Sector growth is expected to slow to 2.1 per cent in 2006 because of poor rainfall and costlier energy. The secondary sector (a bare 16 per cent of GDP) performed least well in 2005, growing only 3 per cent (less than half the 6.6 per cent recorded in 2004). It grew 4.7 per cent in 2006 but was hit by the end of the Multifibre Arrangement (MFA) at the beginning of the year, higher oil prices, frequent power cuts and sluggish industrial output, especially in the free zones. Industrial activity outside the free zones grew nearly 12 per cent in 2005 due to good results in construction materials (up 13.5 per cent), construction (+18.8 per cent) and electrical appliances (+25 per cent). The government wants to revive and diversify the sector by quickening the pace of Madagascar’s integration in the SADC and encouraging the sugar industry.

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/381578235225

African Economic Outlook

© AfDB/OECD 2007

Madagascar

Pending the development of a mining sector, which could be based on oil and diamonds, the economy continues to rely heavily on traditional products. World prices for coffee soared in 2005 to $0.56 a bag (up from $0.37 in 2004), boosting the value of the country’s coffee exports by 62.5 per cent. In contrast, vanilla prices slumped 84 per cent in 2005, cutting export earnings by three-quarters, despite a 50 per cent rise in the volume exported. The export price of cloves improved by 20 per cent, but earnings fell sharply as volume exports were more than 45 per cent lower. Madagascans still depend on rice, and efforts to increase food security were expected to boost output of paddy rice by 15 per cent in 2006 (to 3.93 million tonnes). The 3.42 million tonnes produced in 2005 were not enough to meet local demand, and the government had to import rice during the dry season at a subsidised price. Consumer prices for rice in rural markets fell in early 2005 despite more expensive energy and averaged about 900 ariary per kilogram at the end of the year. The food security policy is also reflected in fish-farming, which grew 2.8 per cent in 2005 due to restocking, production of alevin and the introduction of forgery-proof fishing permits to protect fish stocks and regulate the industry better. Efforts to improve livestock quality included importing 9 000 doses of selected animal semen, local production of 7 055 doses and vaccinating 77 per cent of cattle. Consumption of oil products fell slightly (0.6 per cent) in 2005, but that of electricity grew 3 per cent. Mining advanced in 2006 with a 9 per cent increase in chromite production and planned investment by Qit Madagascar Minerals to extract ilmenite (titanium ore) in the Tolagnara (formerly Fort Dauphin) region. Other investment is being negotiated with the Dynatec/Sumitomo consortium to mine nickel and cobalt at Ambatovy. Madagascar also earned about 6 billion ariary in 2005 from exports of precious stones. In all, mining yielded 339 million ariary in royalties for the government, as against 212 million in 2004. Oil exploration in the Mozambique Channel by Madagascar Oil may boost revenue from 2009. Tourism continued to expand in 2005, and eight new hotels opened in the first quarter of 2006. Visitors © AfDB/OECD 2007

were up more than 21 per cent on 2004, generating 19 per cent more revenue (367.7 billion ariary, compared with 308.3 billion in 2004). Major investments are planned to convert sites in the south to up-market tourist destinations. Rail transport of goods grew strongly (about 30 per cent), contrasting with the poor performance of road transport, held back by higher oil prices and a sluggish industrial sector, and the even weaker performance of sea transport, which declined more than 11 per cent year-on-year, mainly due to lower imports of capital goods. Banking and insurance continued to grow, thanks largely to greater public access to microfinance, whose use increased from 4 per cent of households in 2000 to 7.6 per cent in 2005. New technology also prospered, especially in fixed and mobile telephony, which gained 50 per cent more subscribers in 2005 year-on-year. Banking should grow by 6.9 per cent in 2006 (+6.6 per cent in 2005), and microfinance providers are expected to serve an increasing percentage of potential customers (15 per cent in 2005) and also improve the loan satisfaction rate (50 per cent in 2005). The goal in telecommunications is to expand national phone coverage, which was still only 3.2 per cent in 2005. Overall economic activity in 2006 was helped by a 14.8 per cent rise in gross investment. Public investment was fairly in tune with the priorities of the poverty reduction strategy paper (PRSP), despite the fall in its GDP share to 9.3 per cent in 2005 (10 per cent in 2004) and changes in execution procedure for government spending. Public investment should rise (to 10.8 per cent of GDP) in 2006 to support infrastructure and the social sector, followed by a renewed fall in the medium term. Private investment has steadily risen, to 16.7 per cent of GDP in 2005 (14 per cent in 2004), and should reach 18.2 per cent in 2006. It is expected to increase further in the medium term if the business climate improves and macroeconomic policy is stabilised. Public consumption, despite a smaller share of GDP in 2006 (8.6 per cent, down from 9 per cent in 2005), should increase in 2006 due to the rise in capital expenditure. Private consumption has also risen, and the gradual fall in inflation (to an expected 5 per cent in 2009) should boost household purchasing power. African Economic Outlook

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After the expiry of the MFA and the drop in raw material prices, goods exports fell 11.2 per cent in 2005, to 1 675.7 billion ariary (from 1 864.5 billion in 2004). Imports rose about 5 per cent, to 2 817.6 billion ariary (2 684.3 billion in 2004), mainly because of greater imports of subsidised rice. Abolition of customs duty exemption for imported capital goods in the last quarter of 2005 cut the inflow of such goods in 2006 to 464 billion ariary (from 736 billion in 2005) and caused a drop in public and private investment in productive activity. Customs duties and import taxes are to be combined in a single tax category. The expiry of the MFA in

2005 and of the third-party provision of AGOA (the last stage of the preferences process for Madagascan exports to the United States) in 2007 will hurt the Madagascan economy. To soften the blow, the government is finalising the 2007-11 Madagascar Action Plan (MAP) to replace the PRSP and setting clear quantitative targets based on the national development vision “Madagascar, Naturally” and the Millennium Development Goals (MDGs). The MAP will spell out the government’s development aims, enable it to respond to opportunities arising from globalisation and make the country’s forecasting and planning more effective.

Table 1 - Demand Composition 1998

2005

2006(e)

Percentage of GDP (current prices)

320

(percentage of GDP) 2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

14.4 7.5 6.9

26.0 9.3 16.7

14.8 20.0 12.0

8.5 6.0 10.0

7.4 3.0 10.0

Consumption Public Private

93.8 8.0 85.9

91.4 9.0 82.4

3.3 1.4 3.5

4.3 8.8 3.9

5.0 5.0 4.9

-8.2 21.4 -29.7

-17.3 28.2 -45.5

5.6 8.1

3.7 4.4

4.1 4.8

External sector Exports Imports

Source: National Statistics Institute data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/610120035362

Macroeconomic Policies Fiscal Policy Government revenue increased due to streamlining of the tax system, better tax and customs collection, and, in part, the abolition in September 2005 of customs exemptions for imported capital goods. This income was not enough to cover expenditure, however, owing to the reductions in duty on emergency rice imports. Total revenue (excluding grants) in 2005 was 1 102.8 billion ariary (10.9 per cent of GDP), up from 982.4 billion in 2004 (12 per cent of GDP), with an expected further increase to 1 340 billion ariary (11.3 per cent of GDP) in 2006. African Economic Outlook

Public spending was held to 21.3 per cent of GDP in 2005 and was geared mostly towards investment in infrastructure, health and education. It rose to an estimated 21.7 per cent of GDP in 2006. Capital expenditure also rose, by about a quarter over 2005, to more than 1 290.4 billion ariary (11 per cent of GDP), 1 004 billion of it funded by debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. To avoid the spending overruns, particularly in budgetary spending, that occurred in 2005 after pay rises for civil servants, the government has adopted programme budgets and set up budgetary and financial discipline councils. Systematic analytical audits of spending will be conducted, and ministries will have to submit monthly spending plans so that the treasury © AfDB/OECD 2007

Madagascar

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Grants

14.1 9.8 3.5

15.4 10.0 5.1

20.3 10.9 8.2

16.7 10.4 5.7

17.0 10.6 5.8

16.1 10.4 5.1

15.1 10.4 4.1

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

19.9 10.6 7.8 4.1 2.7 8.2

19.6 10.1 7.9 5.4 2.2 7.8

25.2 12.6 9.7 4.9 2.9 12.5

21.3 11.0 8.3 4.5 2.6 10.3

21.7 10.4 8.3 4.3 2.2 11.2

21.0 9.7 8.1 4.1 1.6 11.3

20.2 9.3 7.8 4.0 1.4 10.9

Primary balance Overall balance

-3.1 -5.8

-2.0 -4.2

-2.0 -4.9

-2.0 -4.7

-2.6 -4.7

-3.2 -4.8

-3.6 -5.1

a. Only major items are reported. Source: Ministry of Finance and Economy data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/800857142766

can match them to expected revenue and financial flows. A new information system for monitoring expenditure will be introduced in 2007 along with new public procurement rules. Money freed up under the Multilateral Debt Relief Initiative (MDRI) will go exclusively to poverty reduction and will be monitored accordingly. Despite problems in cutting expenditure, the government hopes to end the 2006 budget period with a deficit (including grants) equal to 4.7 per cent of GDP. To reduce it further, administrative and tax measures are planned to increase the tax burden to 10.7 per cent in 2006 (10.1 per cent in 2005). This rate is far too low, and the country will have to increase it gradually in order to offset (with more stable budget revenue) the abolition of customs duties scheduled as part of Madagascar’s membership of SADC and Comesa. The tax on oil products was raised in January 2006, by 66 per cent on petrol and 178 per cent on diesel. Steps are also planned to improve management and collection of VAT, after cutting the average rate from 20 to 18 per cent and unifying it into a single rate. The tax administration and its data and assessment system will be made more efficient.

declined to 11.4 per cent in 2006 (from 18.4 per cent in 2005) due to a sizeable fall in the price of consumer staples, while the prices of other goods remained tied to higher world oil prices and electricity rates and to depreciation of the ariary. To limit the excesses caused by the supply-side shocks, the BCM kept in place in 2005 the restrictions it introduced in 2004 to curb growth of the money supply. This more cautious monetary policy, controlling the sources of money creation, involved keeping the BCM’s intervention rate at 16 per cent and the reserve requirement at 15 per cent. Since banks found themselves in a situation of excess liquidity early in the year, these measures were reinforced in April by exclusion of banks’ cash in hand from the calculation of the reserve requirement.

Monetary Policy

Loan policy in 2005 was to encourage primary banks to finance the private sector, and loans to business, especially to importers of oil products, rose 22 per cent during the year. Financial markets did well in the first half of 2006 with renewed auctioning of treasury bonds, which allowed non-bank financial institutions to buy them as well and enabled the government to finance the deficit in a more sound manner while tapping at source into some of the excess bank liquidity.

Like other central banks, Banque centrale de Madagascar (BCM) has the job of ensuring stability of prices, the currency and the exchange rate. Inflation

The government hopes to bring inflation down to 5 per cent in the medium term, but the double-digit rates of the past five years (except in 2003) could

© AfDB/OECD 2007

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Madagascar

persist for the next few years, especially if drought exerts inflationary pressure by reducing hydroelectric energy output and future harvests. The inflationary trend may also last because of rising water and electricity prices. To curb money creation, the government also hopes to use liquidity controls such as tenders and repurchasing. Treasury repayments will also reduce the government’s debt. The nominal effective exchange rate fell by 9 per cent between April 2005 and April 2006, which allowed the real rate to sink below the level it reached before the 2004 devaluation. The government wants to keep the floating rate, limiting BCM intervention to smoothing out large rate fluctuations and meeting targets for foreign exchange reserves (the target for 2006 was the equivalent of 2.9 months of imports).

322

goods imports fell somewhat from the 2004 figure because of the abolition of customs exemptions, while the terms of trade deteriorated as world oil prices rose. Reduced foreign grants and loans in 2005 helped keep the balance-of-payments deficit at about the same level.

External Position

The government streamlined customs duties by combining them in three tariff bands (of 5, 10 and 20 per cent). In addition, Madagascar recently joined the SADC and wants to use all the opportunities it provides for agriculture and tourism. The country also belongs to Comesa, whose members are considering a common external tariff. Madagascar will have to phase out its customs duties, which will be abolished under these regional agreements, and find more reliable sources of revenue. As well as using current foreign aid, the government plans to call on the European Union for substantial help in funding the MAP.

The current account deficit was 10.1 per cent of GDP in 2005, with the sharp drop in vanilla prices, a fall in shrimp exports because of overfishing and the end of the MFA all substantially reducing export earnings. The deficit is expected to reach 16.8 per cent in 2006 because of a big rise in total imports (to 5 167 billion ariary, from 4 598 billion in 2005). Goods exports fell in 2005 (to 1 798 billion ariary from 1 853 billion in 2004) but are expected to rise to 1 986.4 billion in 2006, while goods imports, which rose slightly in 2005, should reach 3 159.6 billion. The trade deficit is thus set to increase to 13.3 per cent of GDP in 2006 (from 9.5 per cent in 2005). Capital

The total external debt was 69.7 per cent of GDP ($3.5 billion) in 2005, 80 per cent of it bilateral and multilateral. The debt situation in 2006 seems sustainable due to cancellation of nearly $2.4 billion in debt under the HIPC Initiative and the MDRI. Analysis of its viability shows that the main debt indicators, which were already satisfactory in 2005, would fall substantially in 2006, and that the country’s stock of debt would be cut by some 70 per cent by the end of the year. The government’s strategy for controlling future debt involves the use of soft loans and curbing domestic debt by gradual withdrawal from the banking sector and repayment of its commercial debt.

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-4.0 14.0 18.0 -3.8 -2.0 2.3

-4.0 14.4 18.4 -5.4 -1.5 5.5

-10.0 22.7 32.7 -6.3 -1.5 7.5

-9.5 17.8 27.4 -3.5 -1.6 4.5

-13.3 16.3 29.6 -6.0 -1.3 3.9

-12.8 16.0 28.8 -5.9 -1.2 3.8

-12.9 15.6 28.5 -5.8 -0.9 3.5

Current account balance

-7.5

-5.4

-10.3

-10.1

-16.8

-16.1

-16.2

Source: Central Bank data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/024776006677

African Economic Outlook

© AfDB/OECD 2007

Madagascar

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

Source: IMF.

323 http://dx.doi.org/10.1787/322880454002

Structural Issues Recent Developments Madagascar is one of the world’s poorest countries (ranked 146th out of 177 in the UN Development Programme’s 2006 Human Development Report), and its economic development is held back by lack of local savings, outdated economic and social infrastructure, very unequal and arbitrary application of rules nationwide and, in recent years, frequent and extensive power cuts by the state water and electricity monopoly Jirama, which is in acute financial and structural crisis. The country’s weak structures are illequipped to manage public finances and withstand external shocks, including wildly fluctuating prices for products such as oil and vanilla. The government has asked the International Monetary Fund (IMF) to help, through a new poverty reduction and growth facility (PRGF) agreed on in July 2006 to support its 2006-08 programme for economic growth, budget consolidation, and reduction of poverty © AfDB/OECD 2007

and vulnerability to external shocks. The authorities have also asked the IMF to apply its Trade Integration Mechanism (TIM) to help them cope with the expiry of the MFA and AGOA. Madagascar has received IMF technical assistance since 2005 to help with management of tax revenue and public finances and with a financial sector assessment programme (FSAP). It has also had help in recent years with tax and customs policy and administration. Other major steps to clean up public finances have included computerising procedures under an integrated system of managing public finances and combating corruption through a national anti-corruption council and an independent anti-corruption office. Reform of procurement procedures resulted in new regulations in 2006. Most prices have been liberalised, and the bold introduction of 99-year leases aims to reassure foreign investors about access to industrial and agricultural land. Thirty-five of the 47 state firms due to be privatised were turned over the private sector in 2005 and 2006, including the phone company Telma and the northern railway company RNCFM. Divestment of Air African Economic Outlook

Madagascar

Madagascar was suspended, however, and that of Aéroports de Madagascar (Adema) is not complete. Others due to be privatised are either being reorganised (such as the sugar company Sirama) or being turned into shareholding firms so some of their assets can be sold off. In 2007, the government plans to prepare for privatising the southern railway and the port of Mana Kara by getting the World Bank to pay for upgrading infrastructure to ensure the line is financially viable, and to franchise out the 12 airports run by Adema.

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The government is paying special attention to Jirama because of its huge effect on the entire economy. A variety of measures have been taken to deal with its structural and financial problems, including franchising it and revising its rates. A private management contract to have the firm operated under a lease arrangement has been drafted with World Bank help. Electricity prices rose 93 per cent in 2006 and a thorough restructuring plan has been submitted to the funding agencies. The government is also pulling out of watersupply operations. The government wants to complete the entire privatisation programme in 2007 and 2008 but is meeting strong resistance from trade unions and from squatters blocking settlement of land issues and delaying the divestment process. Good transport infrastructure encourages agriculture and fisheries by linking these sectors to markets and helping to reduce poverty, especially in the rural south, where 39.7 per cent of the country’s poor live. One of the pillars of the infrastructure development strategy is thus to improve transport in the countryside, where it is very important. The government is speeding up a road project in Toliara province (upgrading highway RN 1 bis), repairing infrastructure damaged by cyclones and, with the help of the African Development Bank (AfDB), completing the surveying of RN 9, which will allow the country to present its development partners in 2008 with an integrated road project. RN9 will be crucial to success of the PRSP, since it will be a major link between the fisheries project area and the outskirts of Bas-Mangoky and Manombo with the port of Tuléar. Achievements in 2006 included a maintenance plan for 4 500 kilometres of metalled roads and 3 700 African Economic Outlook

of unsurfaced roads, expansion of meteorological infrastructure and assistance, and upgrading sections of railway (70 kilometres in the north and 40 in the south). Two agencies, one for roads and the other for road transport, have been set up to regulate transport and encourage competition between hauliers. Opening up the economy, political stability and streamlining visa and work-permit formalities have improved the business climate. A commercial arbitration law was passed in 2005, along with a code of conduct for judges encouraging them to open private practices. These reforms, as well as better performance by the banking sector and privatisation of two banks, have helped boost private investment. The government and the World Bank have nearly completed an investment climate assessment (ICA) and are hoping for good results from current decentralisation and devolution of procedures and practices in the country’s 22 regions. However, the private sector is still hampered by poor basic infrastructure, overly expensive factors of production, lack of long-term financing and structural flaws in the banking system. Arbitration procedures are still drawnout and inadequate, and the poor qualifications, pay and working conditions of judges are still causing problems. Madagascar dropped one place (from 148th to 149th) between 2005 and 2006 in the World Bank’s 2006 Doing Business Index, which measures the business climate. It jumped an impressive 28 places in the ranking for business creation, but dropped 36 places in the labour law facilities category. The government’s opening of a one-stop shop has reduced bottlenecks and costs due to bureaucratic delays. The authorities also intend to continue modernising business laws (already well under way through a business law commission) and build a suitable legal and institutional framework to promote public-private partnerships. The government will have to sort out the land issue (a major obstacle in the key agriculture and tourism sectors) if more foreign direct investment (FDI) is to be attracted. About 90 per cent of farmers own their land, but only 8 per cent have proper deeds to it. This hampers partnership with foreigners and reduces the property market, along with access to loans, for which land is often used as security. © AfDB/OECD 2007

Madagascar

The financial system comprises the BCM, seven commercial banks, various microfinance institutions, insurance companies, and pension and retirement funds. Reforms have begun in this sector as well, to liberalise it and make it more efficient. Special attention has been given to making the BCM more independent from the government. The banking system remained profitable and well-funded in 2005 and should grow 6.9 per cent in 2006 (+ 6.6 per cent in 2005). Government debt to the banks fell by 27.5 per cent in 2005 (to 294.1 billion ariary from 405.8 billion in 2004) and should drop by another 73 billion ariary in 2006. Solvency and liquidity indicators improved, and banks had far fewer non-performing loans. Two laws were passed to monitor and regulate credit institutions and mutual finance bodies. A banking and financial supervision commission was set up and prudential management standards introduced. Steps were also taken towards privatising state banks and boosting the interbank exchange market. Despite these reforms, much remains to be done in financial intermediation, diversifying financial products and broadening access to financial services. With World Bank and IMF help, the government completed a review of the financial sector in 2005 that identified its weaknesses and provided the basis for a programme to build capacity and boost technical assistance. To encourage savings, which are expected to increase 15 per cent in 2006, the government, with support from the Millennium Challenge Corporation, is encouraging savings banks and facilities to expand in rural areas and wants to strengthen the payment system to cut delays, set up a nationwide clearing-house for credit institutions and draw more of them into the formal banking system. Steps have also been taken to expand and decentralise the financial market so that large towns and cities can issue bonds, especially for small investors. Despite its huge potential, agriculture is struggling to expand in the face of obstacles such as bad agricultural infrastructure and transport, which prevents the emergence of serious commercial farming. The low technical capacity of farmers, lack of access to credit, poor training and the poor organisation of the sector also hold it back. Agriculture has a key part to play in © AfDB/OECD 2007

the fight against poverty, so the government, as part of its “Madagascar, Naturally” development vision, wants to double agricultural output between 2004 and 2009. Urgent measures were taken in 2005 to combat forest fires, reduce by a quarter the area burned and replant 50 000 hectares a year with mostly high-quality species which could earn foreign exchange. Prevention of forest fires, reforestation and improved weather forecasting are crucial aspects of the management and preservation of the country’s natural resources. The same is true of improving rural living conditions, which can be done by supplying primary healthcare, education and better access to drinking water and sanitation. A policy of sustainable management and use of fish stocks has been started, with the introduction of forgery-proof inland and marine fishing permits and the restocking of water courses. Sustainable management of forests and protection of wetlands and marine and coastal eco-systems is being pushed thanks to Madagascar’s signing of the Ramsar Convention on Wetlands and the Nairobi regional convention. A network of protected areas (Système d’aires protégées de Madagascar – SAPM) was set up in 2005 to protect plant and animal life and develop eco-tourism. Better regulation of the gem and gem-cutting sub-sectors has been introduced. These measures have been completed by a new mining code and a law governing major mining investments as part of a project on governance of mineral resources (Projet de gouvernance des ressources minérales – PGRM) and Madagascan membership of the Extractive Industries Transparency Initiative (EITI). Access to Drinking Water and Sanitation The country’s water resources are shrinking due to climate change, uncontrolled use and alarming damage to the environment through organic pollution and forest fires. The sector also suffers from non-integrated water management, lack of well-structured coordination, a large number of operators and institutions whose activities overlap and cause wastage, government domination and a low rate of satisfaction of water and sanitation needs. African Economic Outlook

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The PAEPAR drinking water and rural sanitation project (Projet d’alimentation en eau potable et assainissement rural) aimed to build the capacity of the government, private sector and local communities to supply water and sanitation sustainably and effectively. The $17.3 million project, funded by development partners and the World Bank, covered the 1998-2005 period. The government has switched from a pilot approach for the sector to a programme budget approach. PAEPAR also facilitated $100 million of new rural projects funded by the AfDB. They included installing 627 wells with hand pumps and 320 gravity systems, with local communities helping to pay for them in cash and in kind. About 300 gravity systems and 350 equipped wells can be installed in the country each year. Average distances from water sources have been reduced from three kilometres to 500 metres and water-drawing time by 40 minutes per journey, which has increased consumption and noticeably reduced water-borne diseases in the project areas. The project also encouraged use of family latrines and introduction of the Diorano-WASH public-private partnership programme to get people to wash their hands with soap. These results have been welcomed by the partners, as diarrhoeal illnesses are the second biggest cause of morbidity in Madagascar, affecting 51 per cent of all children under five. About 2.5 million Madagascans are infected with bilharzia, and 60 per cent of children’s deaths are due to polluted water and bad sanitation. Under the integrated water resource management strategy (Gestion intégrée des ressources en eau – GIRE), a national water and sanitation authority was established (Autorité nationale de l’eau et de l’assainissement – ANDEA), which since 2003 has monitored drinking water quality. Since there are no facilities yet to treat sewage and industrial effluent, ANDEA monitors the environment and compliance with environmental standards. The institutional reforms in the sector also include, for reasons of efficiency and recovering costs, the establishment of regional and local water and sanitation departments to ensure good management of existing infrastructure and reduce unaccounted-for water to a minimum. Customers will have to pay part of the cost – an annual per capita $70 for water and $10 for sanitation. Over the 2005-09 African Economic Outlook

period, development partners will also be working on capacity building and the development of rural water supply and sanitation infrastructure. In 2005, 29.88 per cent of Madagascans had access to drinking water (66.53 per cent in urban areas and 15.63 per cent in the countryside). Sanitation access was 52 per cent (73.3 per cent urban and 44.2 per cent rural). The south of the country was worst off. In 2006, these figures are expected to be 36 per cent for drinking water at national level (67.16 per cent urban and 19.13 per cent rural) and 58.10 per cent for sanitation (76.36 per cent urban and 58.10 per cent rural). About 400 delivery systems were planned, but only 106 were built in the first half of the year (an execution rate of 27 per cent). Some 4 000 new latrines were to be installed, and 3 000 are already in place. With the lessons it learned from PAEPAR, the government adopted a national water and sanitation access programme (Programme national d’accès à l’eau potable et à l’assainissement – PNAEPA) in 2005 to move towards achieving the MDGs. The government has promised access to improved water for 72 per cent of the population by 2015 and better sanitation for more than 50 per cent. PNAEPA funding rose from $10.6 million in 2004 to $14.6 million in 2005, 40 per cent of it from local sources. Clean water was supplied to about 148 000 people in 2004 and 222 000 in 2005, compared with only 50 000 in 2001. A national sanitation policy and strategy (Politique nationale et stratégie pour l’assainissement – PNSA) was drawn up in 2006 and will be presented to the government for approval. An action plan for the entire water and sanitation sector has also been drafted and put in place. The overall programme for 2005-15 will be implemented through sub-programmes. The energy and mines ministry has drafted a nationwide mediumterm expenditure framework (MTEF) for 2006-08. A first sub-programme, presented to aid donors in February 2005, covers seven of the country’s 22 regions and will be jointly funded by the government, local people and the African Development Fund. © AfDB/OECD 2007

Madagascar

Political Context and Human Resources Development Madagascar has emerged from a long period of state control of economic and political affairs that led in 1996 to the introduction of reforms to open up the economy and reverse rapidly declining per capita income. A transition crisis delayed them, but after the election of President Marc Ravalomanana in 2002, stabilisation efforts resumed with support of development partners. The country reached the decision point under the Enhanced HIPC Initiative and then completion point in 2004. Ravalomanana was re-elected in December 2006, and parliamentary elections are due in 2007. Fourteen opposition parties fielded presidential candidates and called on the international community to ensure the honesty of the poll and the vote-counting. The media, which is genuinely free, provided full coverage of the elections, including clashes during the campaign. The government intends to step up the fight against corruption, reform the civil service, promote the use of democracy and the rule of law, and start administrative reforms to increase access to public services through greater decentralisation and devolution. The Millennium Challenge Account ranks the country as its main beneficiary because of its good performance in governance. Madagascar scores high among African countries in respect for women’s rights. The population is practically at gender parity in terms of completion of primary education (42.4 per cent for men and 41.5 for women), but more women are unemployed than men, and women earn lower wages when they have equal qualifications. The main goals of education policy are ensuring basic education for all and good quality teaching at all levels, but results are far short of this. Net enrolment of children aged 6 rose from 67 per cent in 2000 to 96.5 per cent in 2006, but the dropout rate is still very high. Gross enrolment of children aged 11-14 was only 27 per cent in 2005 and of those aged 15-18 only 7 per © AfDB/OECD 2007

cent. These are some of the lowest rates in the world, beneath the sub-Saharan average of 30 per cent for the 11-14 age group and 13 per cent for those aged 1518. The pupil/teacher ratio in primary schools improved from 59 per teacher in 2005 to 52 in 2006. Only 309 of every 100 000 inhabitants were in higher education in 2006, compared with an average of 300 in lowincome countries and 1 400 in neighbouring Mauritius. The number is expected to rise to 358 in 2007 and 407 in 2008. The share of the education budget in the national budget has been falling since 2004 (when it was 20.2 per cent), to 19 per cent in 2005 and 16.5 per cent in 2006. Universities have suffered most from these budget cuts because their investment spending has dropped sharply, from 12.4 per cent of education’s total investment spending in 2005 to 5.6 per cent in 2006. Basic education’s share of the sector budget fell from 82.8 per cent in 2005 to 78.9 per cent in 2006. The predominant diseases in Madagascar are still malaria, diarrhoeal illness, acute respiratory infections, bilharzia and sexually-transmitted diseases (STD). Government health priorities for 2006 focused on improving access to neighbourhood healthcare, promoting mother/child health and stepping up the fight against infectious diseases and HIV/AIDS. Maternal mortality is still high, at 469 for every 100 000 live births, but child mortality below the age of five fell from 94 per thousand in 2004 to 88 in 2006. A total of 63 basic healthcare centres were built and equipped in 2005, adding to 197 existing ones, and 511 doctors, 43 dentists and 669 paramedics were hired. The battle against infectious diseases targeted leprosy and malaria. HIV/AIDS incidence is only 1 per cent among the general population but still more than 5 per cent among those engaged in high-risk behaviour. The government and its partners have drafted a national HIV/AIDS action plan because of this danger of greater infection. An epidemic of chikungunya fever in 2006 affected tourism as well as the general population. Based on growth projections of 4.8 per cent in GDP and 2.8 per cent in population in 2006, poverty was estimated at 67.5 per cent (72.3 per cent in the countryside and 50.3 in urban areas). These are poor figures compared with other African countries, but African Economic Outlook

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328

showed improvement over the 2005 poverty rate of 68.7 per cent (73.5 per cent rural and 52 per cent urban). This improvement is probably due to better public access to basic social services and to infrastructure. The June 2006 PRSP implementation report noted a major impact of economic growth on poverty reduction. The strong 5 per cent average annual growth between 1997 and 2001 brought poverty down to below 70 per cent, though the gap between rich and poor continued to widen. Poverty is still mainly rural. The “Madagascar, Naturally,” target for 2020 puts the rural economy at the centre of poverty reduction efforts and aims to double agricultural production and exports over five years, boost textile exports by half in five years and 200 per cent over 10 years, raise agro-food production by half in five years and 150 in 10 years, and increase tourist arrivals from 160 000 in 2003 to 400 000 in 2008 and 800 000 in 2013. These efforts will succeed only if agricultural and fishing production and productivity increase significantly, especially in the south, to improve food security and income, which are the only ways to reduce poverty sustainably in the countryside.

African Economic Outlook

The PRSP’s priorities have not changed. After it was updated in June 2005, the goals of “Madagascar, Naturally” were incorporated in it so as to highlight efforts to achieve the MDGs.The PRSP will be completed in 2007 and succeeded by the MAP until 2011. Labour policy priorities focused in 2006 on implementing the national employment policy and the labour law. Creation of a national jobs and training monitoring centre (Observatoire malgache de l’emploi et de la formation – Omef) was an important milestone in analysing and planning the labour market. Five regional Omef branches were opened in 2006, as well as two tripartite regional labour councils and three regional committees to combat child labour. Unemployment was 2.7 per cent in the formal sector, according to Omef, with 75 per cent of the labour force working in the informal sector. Only 3 802 jobs were created in 2006 (15 000 were planned), and 15 807 people received vocational training.

© AfDB/OECD 2007

Malawi

Lilongwe

key figures • • • • •

Land area, thousands of km2 118 Population, thousands (2006) 13 166 GDP per capita, $ PPP valuation (2006) 653 Life expectancy (2006) 40.8 Illiteracy rate (2006) 35.9

Malawi

M

countries in the world without a violent internal conflict. While 2005 presented a number of severe challenges, including a major food-security crisis where close to half the population required emergency food support, Gross Domestic Product (GDP) growth rebounded strongly in 2006. A well-managed response to the food crisis by the government and donors ensured timely and large-scale imports of maize in the large quantities required. Good rains in the 2005/06 growing season, coupled with an improved distribution of subsidised fertilizer resulted in a bumper maize crop and improved yields in almost all major agricultural commodities. Continuing budget discipline and macroeconomic stabilisation has won Malawi plaudits from the International Monetary Fund (IMF) and development ALAWI IS AMONG THE POOREST

partners. The attainment of the completion point of the Highly Indebted Poor Countries (HIPC) Initiative in September 2006 was a Maize production remains landmark event. The proceeds the key to food security from the debt relief will facilitate and good harvests are implementation of the country’s reassuring but the economy pro-poor development strategy. needs to diversify and Much is now being made of sopoverty remains persistent. called “second generation” reforms, and the challenge for Malawi is to capitalise on progress made in 2006 to ensure that solid foundations are laid for growth and development in the years ahead. In this regard, addressing the longer-term infrastructural constraints that hamper trade, tackling the inhospitable legal operating environment for the private sector and re-invigorating the privatisation 331

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Malawi - GDP Per Capita (PPP in US $)

■ Southern Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Malawi - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage) 10

8000

8

7000

6

6000

4

5000

2

4000

0

3000

-2

2000

-4

1000

-6

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and National Statistics Office data; estimated (e) and projections (p) based on authors' calculations. http://dx.doi.org/10.1787/773174774225

© AfDB/OECD 2007

African Economic Outlook

Malawi

process are matters of some urgency. Malawi has made reasonable progress in providing access to safe drinking water and improving sanitation. However, the high cost of capital and poor management continues to hamper adequate investment in maintaining and rehabilitating water and sanitation infrastructure.

Recent Economic Developments Real GDP growth rebounded to 8.4 per cent in 2006 as the Malawian economy recovered from a drought-induced crisis that had slowed growth to 2.2 per cent in 2005. Growth is expected to continue at the more moderate pace of 4.8 and 5.1 per cent in 2007 and 2008, respectively.

332

A large component of growth in 2006 represented recovery of agricultural production from the dismal performance in 2005, when drought in the growing season resulted in a 9.3 per cent drop in agricultural output, with the smallholder component of Malawi’s agriculture sector contracting by 11.7 per cent. In 2006, the agricultural sector as a whole and the smallholder component in particular bounced back, growing at 11.8 and 14.2 per cent, respectively. Good rains in the 2005/06 growing season resulted in substantially better yields for almost all crops. Maize production is central to the economy of Malawi, and the success or failure of the crop is crucial for national food security and has a major impact on overall economic performance. A combination of good rains in 2005/06 and the successful implementation of a

fertilizer-subsidy programme led to an impressive 87 per cent increase in maize production compared with the previous year. The total estimated production of 2.35 million metric tonnes was in excess of Malawi’s requirements of 2.18 million metric tonnes for consumption, seed requirements and replenishment of the Strategic Grain Reserve, leaving a net surplus of 250 000 tonnes for export. The immediate impact of the bumper harvest was that fewer than 900 000 Malawians required food aid in 2006 ahead of the 2007 harvest – the lowest figure in four years. The government intends to distribute 150 000 tonnes of subsidised fertilizer during 2006/07 at a total cost of MWK (Malawian kwachas) 5.5 million (about one-third of the total agriculture budget). Smallholder maize and tobacco farmers (in rural areas only) are entitled to one 50-kilogramme bag of fertilizer at a price of MWK 950. In previous years, the importation and distribution of the subsidised fertilizer was limited to parastatal enterprises only – the Agricultural Development and Marketing Corporation (ADMARC) and the Smallholder Farmers Fertilizer Revolving Fund of Malawi – and this policy, together with uncertainty surrounding the extent and/or timing of the subsidy had seriously undermined private-sector producers of fertilizer. The 2006/07 subsidy is being implementing through a coupon system, which has allowed limited participation of the private sector. Tobacco is the mainstay of Malawi’s economy and exports of this cash crop account for more than 50 per cent of foreign-exchange earnings. For the same reasons as in the case of maize, tobacco production also recovered

Figure 2 - GDP by Sector in 2005 Government services Private social services 8.7% Finance, insurance and business services 2.2% 6.4% Transport and communications 5.7%

23.5% Distribution

Agriculture 34.6%

1.6% 3.1%

Construction

(percentage)

2.3% 12%

Mining and quarrying

Manufacturing Utilities

Source: Authors’ estimates based on National Statistics Office data. http://dx.doi.org/10.1787/088668750758

African Economic Outlook

© AfDB/OECD 2007

Malawi

strongly with the production of 109 800 tonnes in the 2005/06 season, up from 72 500 tonnes in the 2004/05 season, an increase of 52 per cent. Nonetheless, continuing weaknesses in the prices offered on the floors of Malawi’s tobacco-auction markets disappointed farmers, and led to an ugly war of words in the press between President Mutharika and the multinational tobacco buyers. Changes in the international terms of trade for tobacco spell an uncertain future for Malawi’s main crop, yet attempts to diversify Malawi’s economy away from reliance on tobacco have had only very limited results. Farmers suspect that the low prices offered by buyers result from collusion. This is due to the fact that although all tobacco is sold through auction, the vast majority of tobacco is bought by just two buyers. The Government of Malawi has resisted attempts by buyers to shift towards contract-farming, which would reduce uncertainty for farmers and provide for improved yields through the provision of direct extension services to growers. A recent World Bank study has highlighted a number of institutional problems facing Malawi’s tobacco sector, and there is significant evidence to suggest that producers bear the weight of sector inefficiencies, conflicts of interest and governance failings. Sugar has become increasingly important to the economy of Malawi and exports reached $46.9 million in 2006. The major determinant for increased export revenues was a rise in Malawi’s quota in the lucrative European Union (EU) market. In recent years, Malawi has also managed to make inroads into non-preferential markets in Kenya, Tanzania and Egypt, where prices are barely a quarter of those earned in the EU and the United States. This demonstrates the competitiveness of growing sugar in Malawi, and indeed the proposed reforms to the EU sugar protocol announced in late 2005 (envisaging a 36 per cent drop in the price of sugar within the EU) are unlikely to trouble Malawi’s sugar industry as much as other Africa, Caribbean and Pacific country producers. Starting in 2009/10, the EU sugar market will be tariff- and quota-free for all Least Developed Country producers under the terms of the Everything But Arms initiative, and hence there is great potential to increase production and exports of sugar to what will still be a market with restricted access. © AfDB/OECD 2007

Production of groundnuts, paddy rice, sorghum, millet, pulses, cassava and sweet potatoes all recorded improved yields in 2005/06 of a similar order of magnitude to that seen in the tobacco and maize subsectors. Only cotton experienced declining output in 2005/06. Malawi’s manufacturing sector is small and accounts for just 11 per cent of GDP, down from a high of 32 per cent in 1992. The manufacturing sector is also inward-looking as shown by the fact that only 14 per cent of output is exported. Evidence from the recently completed Investment Climate Assessment (ICA), 2006, of Malawi, which surveyed 306 manufacturing firms throughout Malawi, suggests that Malawi possess a comparative advantage in the region in terms of lowcost labour. In terms of total factor productivity, however, that is, taking into account the relative costs and returns to both labour and capital together, Malawi’s cost advantage evaporates. The ICA survey responses suggest that macroeconomic instability is the biggest perceived constraint to private-sector performance, followed by access to finance, problems in the supply of electricity, the availability of skilled workers, crime and corruption. While Malawi is not endowed with mineral resources on the scale of neighbouring countries, there is significant potential for natural-resource extraction to play a meaningful role in the economy. Very high transport costs, together with insufficient power capacity, have tended to render Malawi’s known mineral deposits unprofitable to develop. Work on a study of the commercial feasibility of extracting uranium oxide from deposits in Kayelekera in the far north, however, is at an advanced stage. Changes in the international environment for nuclear power have driven up uranium prices, and the mean average of various estimates suggests that once extraction is operating at full capacity in 2008, uranium could become Malawi’s second biggest export after tobacco, and account for 20 per cent of exports and 5 per cent of GDP. Regarding the components of final demand, growth of private investment was weak in 2006 and public investment declined. Yet the share in GDP of gross African Economic Outlook

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Malawi

Table 1 - Demand Composition 1998

(percentage of GDP)

2005

2006(e)

2007(p)

2008(p)

Percentage of GDP (current prices)

Percentage changes, volume

GGross capital formation Public Private

13.1 8.6 4.4

11.0 7.3 3.7

-0.2 -1.5 2.4

24.6 26.1 21.7

11.1 7.4 18.2

Total Consumption Public Private

92.3 14.4 77.9

122.9 16.8 106.1

6.6 6.0 6.7

1.2 6.5 0.3

3.6 6.6 3.0

-5.4 32.1 -37.5

-33.9 26.7 -60.6

-6.5 -7.3

5.6 1.1

4.7 4.7

External Demand Exports Imports

Source: National Statistics Office data; estimates (e) and projections (p) based on authors' calculations. http://dx.doi.org/10.1787/182164856054

334

capital formation in the public sector has consistently exceeded capital formation in the private sector. In 1980, Malawi was managing to invest 25 per cent of GDP, while savings were running at 17 per cent of GDP. More recently, however, the overall investment share in GDP has been about half of that. Maintaining annual growth rates of 6 per cent and above would be required to achieve meaningful poverty reduction in Malawi, which in turn would require investment of an intensity, not least in the private sector, much higher than that possible with investment funds provided by development partners. Nonetheless, the outlook is for strong growth in the volume of both public and private investment in 2007 and 2008 as the government directs more funds into capital expenditure and anticipated increases in foreign inflows materialise.

Macroeconomic Policies The Mutharika administration has invested significant political capital in restoring macroeconomic stability, something that had eluded Malawi in previous years. Progress since 2003/04 has been relatively good, and fiscal discipline was maintained during the 2004/05 and 2005/06 budgets. This progress was rewarded by the restoration of the Poverty Reduction and Growth Facility support from the IMF in August 2005, and more recently by the attainment of irreversible debt relief under the HIPC Initiative in September 2006. African Economic Outlook

Fiscal Policy Malawi’s recent fiscal-policy objectives have been to return the primary balance to surplus and to reduce the overall deficit so as to permit a reduction of domestic debt. This policy has been implemented through tight controls on recurrent expenditures. Despite the devastating effects of the food crisis in 2005/06, fiscal objectives were broadly achieved. As a result of good performance of the Malawi Revenue Authority aided by an increase in grants, total revenue increased to 44.1 per cent of GDP up from 37.5 per cent in 2004/05. Malawi has been heavily dependent on outside assistance throughout its history, and it is highly unlikely that this will change in the short or even medium term. Development assistance accounted for 42 per cent of expenditure in the 2006/07 budget. While the government has placed agriculture, irrigation and infrastructure as key budget priorities in order to support economic growth, donor spending is still overwhelmingly in the social sectors. As of March 2006, some 51 per cent of aid was classified as supporting “social development”, 12 per cent supporting “good governance” and only 13 per cent each in support of “sustainable economic growth” and “infrastructure,” respectively. Increased revenue facilitated a significant increase in total expenditure and net lending in 2005/06, much © AfDB/OECD 2007

Malawi

Table 2 - Public Finances

(percentage of GDP)

1997/98

2002/03

2003/04

2004/05

2005/06 2006/07(e) 2007/08(p)

Total revenue and grantsa Tax revenue Grants

21.7 16.4 4.2

26.7 17.0 6.7

34.7 19.5 12.2

37.5 22.0 12.5

44.1 21.8 19.2

41.6 21.2 17.6

39.7 20.7 16.0

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

28.5 24.0 19.8 7.6 4.2 3.0

38.3 30.9 24.0 6.8 6.9 7.4

42.5 31.4 20.8 6.5 10.6 11.1

43.1 31.8 23.1 7.5 8.7 11.1

47.1 34.2 27.6 7.5 6.6 12.0

43.1 28.2 23.4 7.2 4.8 14.7

46.4 29.5 25.9 7.1 3.6 16.8

Primary balance Overall balance

-2.6 -6.8

-4.8 -11.6

2.8 -7.8

3.1 -5.6

3.6 -3.0

3.3 -1.5

-3.1 -6.7

a. Only major items are reported Source: Reserve Bank of Malawi data; estimates (e) and projections (p) based on authors' calculations. http://dx.doi.org/10.1787/586171146528

of which was needed because of an escalation in the cost of maize and fertilizer imports. Nonetheless, the fiscal outturn improved thanks to debt reduction and the consequent reduction in interest payments. This enabled the government to make some headway towards reducing the domestic debt. Having peaked at 25 per cent of GDP in 2003/04, domestic debt is estimated to have declined to 20 per cent of GDP by the end of fiscal year 2005/06, and is projected to fall to 16.5 per cent in 2006/07. For the first time in several years, the government was able to retire some domestic debt at the same time as it cleared arrears to almost all small creditors and a sizeable amount of arrears to the publicutility companies. Recent progress notwithstanding, domestic debt continues to constitute a large burden on government resources. Political pressures on government spending and the country’s vulnerability to external shocks could easily reverse achievements in bringing domestic debt under control.

by about two percentage points. This was a welcome step in further reducing the cost of finance to the private sector which had faced interest rates as high as 45 per cent in 2004. Monetary policy however remained tight in 2006 as the Reserve Bank used open market operations to reduce liquidity.

Monetary Policy

External Position

One of the principle objectives of the Reserve Bank of Malawi is to achieve and then maintain inflation at single-digit levels. This policy is anchored by a reserve money target requiring periodic adjustments to base interest rates. Progress in controlling inflation allowed the Bank to reduce the base rate from 25 to 20 per cent in November 2006. And the interest rate spread between commercial bank lending and deposit rates narrowed

Malawi’s trade performance has deteriorated continually, contributing to a steadily worsening current-account deficit. Little change is expected in 2007 (see Table 3) but in 2008, improvements in services, grants and net factor payments are expected to cause the current account to improve despite little change in the balance of trade in goods. The main reason behind the dismal situation is an export

© AfDB/OECD 2007

The Reserve Bank’s policies and the improved food availability in 2006 were significant in moderating consumer-price inflation, which fell to 13.4 per cent in 2006, down from 15.6 per cent in 2005. Food inflation in particular fell sharply in 2006, to 4.2 per cent, with improved food availability, down from 17.2 per cent in 2005. On the assumption of favourable weather conditions and with the mitigating effects of the irrigation programme that the government has put in place, inflation is projected to decline further to 8.2 per cent and 7.2 per cent in 2007 and 2008, respectively.

African Economic Outlook

335

Malawi

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor Income Current transfers

2.3 30.3 27.9 -7.7 -2.2 -0.8

-14.2 24.6 38.8 -8.5 -1.9 9.9

-16.4 26.3 42.6 -8.8 -2.4 15.1

-18.3 24.2 42.5 -9.8 -1.9 14.4

-22.1 22.0 44.1 -8.9 -1.4 13.6

-21.3 22.2 43.5 -8.8 -1.3 12.1

-22.1 21.9 44.0 -9.0 -0.9 19.1

Current account balance

-8.5

-14.7

-12.5

-15.6

-18.9

-19.3

-12.9

Source: Reserve Bank of Malawi; estimates (e) and projections (p) based on authors' calculations. http://dx.doi.org/10.1787/635587417684

336

performance that has remained essentially flat for the past seven years. Sustained export growth in real terms has not been achieved; when the performance of one sector has improved, the performance in other sectors has worsened. A new bilateral trade agreement with Mozambique (signed in December 2005) and a renegotiated agreement with Zimbabwe (signed in July 2006) present opportunities for improved export performance with two of Malawi’s main trading partners. Average export prices for tobacco at the border fell from $2.29 in 2005 to $2.22 in 2006. This weakening of the international market for tobacco is at least part of the reason for the lower prices for leaf tobacco on the auction floors that attracted so much attention during the year. The volume of tobacco exports in 2006 actually increased marginally, rising from 121 700 tonnes to 122 600 tonnes in 2006. Gross tobacco export revenue fell, however, from $279 million to $271.7 million due to lower prices. The performance of tea exports improved slightly in 2006 as average prices increased slightly, up to $1.13 per kilogramme in 2006 from $1.10 per kilogramme in 2005, and stable volumes translated into a small increase in gross export receipts. Tea regained its position as the second most important export product for Malawi in 2004 and remained in that position in 2006 with total export revenues of $48.5 million. The sugar sector recorded a strong performance during 2006 as rising prices and rising volumes translated into a significant increase in export revenues. African Economic Outlook

Average export prices rose from $0.46 to $0.49 per kilogramme while export volumes increased from 88 800 tonnes to 95 400 tonnes. Total export receipts were $46.9 million. Cotton exports continued to decline in 2006, falling from $15.6 million in 2005 to $7.6 million in 2006. Average export prices fell slightly from $1.06 to $0.97, but the major cause of declining revenues was a continued drop in volumes. Export volume in 2006 was 7 800 tonnes, down from a high of 25 600 tonnes in 2004. Garments exports also declined slightly in 2006. Undoubtedly, the expiration of the Multifibre Arrangement – the World Trade Organisation Agreement on Textiles and Clothing – in January 2005, which has made the US African Growth and Opportunity Act market more competitive, had an impact. The Malawian garment sector may remain under pressure in the coming years given the uncertainty surrounding the future of the South African market under the Malawi, Mozambique, the United Republic of Tanzania and Zambia – Southern African Customs Union agreement. Despite problems in accessing the US and EU markets due to difficulties in ensuring that Malawi horticultural products pass sanitary and phytosanitary regulations, Malawi actually enjoys positive trade relations with most partners in the developed world. The main difficulties with accessibility are with nearer trading partners in the region, principally South Africa, Mozambique and Zimbabwe. © AfDB/OECD 2007

Malawi

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

700

600

500

400

300

200

100

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF.

337 http://dx.doi.org/10.1787/077702230168

In line with expectations, the kwacha depreciated gradually during the first half of 2006 falling from around MWK 124 per $ to around MWK 140 per $ by the middle of the year, when inflows of tobacco earnings stabilised the currency. The depreciation had the effect of slowing growth in import demand somewhat, as a result of which international reserves were expected to increase somewhat and to be sufficient to cover two months of imports by the end of 2006. It is official policy to operate a more transparent and flexible exchange-rate regime. As a result of the HIPC and Multilateral Debt Relief Initiatives, the net present value of external debt declined from 229 per cent of exports at the end of 2005 to 32 per cent at the end of September 2006. HIPC debt relief can be seen as a massive vote of confidence in Malawi’s fiscal management, but the impact in financial terms is more limited given that the greater part of the country’s debt burden is kwachadenominated domestic debt. © AfDB/OECD 2007

Structural Issues Recent Developments Improvements in macroeconomic performance and budgetary discipline have resulted in improvements in the private-sector-enabling environment. Similarly, the greater private-sector focus in the Malawi Growth and Development Strategy (MGDS) represents a clear improvement on the previous Malawi Poverty Reduction Strategy, which provided only scant coverage of private-sector issues. However, addressing the longerterm infrastructural issues that hamper trade such as high transport costs and the poor quality of utilities will take more time. Similarly, while the government has made commitments to improving the investment climate, its signals have been mixed and dialogue between the public and private sectors remains weak. As in many developing countries, the legal operating environment for private-sector enterprises in Malawi African Economic Outlook

Malawi

is rather inhospitable. Enterprises face numerous hurdles in terms of red tape, regulations and requirements in carrying out everyday business activities. By the World Bank – International Finance Corporation Doing Business indicators, Malawi is ranked 96th out of 155 countries, and 9th out of 36 countries in sub-Saharan Africa. While such qualitative surveys only give an indication of the enabling environment for business, it is clear that the private sector in Malawi suffers from a heavy regulatory burden.

338

Excessive regulation creates obstacles to the process of market development by raising the costs of business entry and growth. In particular, excessive regulation and inadequate institutions for property rights and the rule of law create barriers to transition from the subsistence and very small-scale economy to the modern more productive sector. Many entrepreneurs in Malawi remain trapped in the informal private sector due to the high costs of formalisation. Such enterprises are therefore not able to grow and benefit from economies of scale or access the additional benefits of formalisation, such as access to commercial-bank finance and businessdevelopment services. Malawi’s private sector is characterised by a “missing middle” with very few enterprises in between the micro-enterprises sector and larger companies. Malawi’s privatisation programme continues to be implemented, although at a very slow pace. In 2006, the government took a number of key steps to reform and restructure Malawi’s parastatal enterprises. The highlight was the privatisation of Malawi Telecommunications Limited (MTL) in January 2006. Despite a “stop-start” process, legal challenges to the sale of MTL and significant political opposition to the process, the government finally agreed to the sale of 80 per cent of MTL to a consortium led by Press Corporation for $30.7 million. Ownership of MTL will remain in domestic hands, although technicalmanagement services will be provided by a unit of Deutsche Telecom. Malawi has one of the lowest fixedline telecommunications density rates in Africa and it is expected that independent private-sector management will be able to expand the provision of telecommunications services. African Economic Outlook

Restructuring of the ADMARC also moved to an advanced stage during 2006. The intention of the government is to separate the ADMARC into two distinct parts: a public-sector, service-delivery part, and a private-sector, commercially independent part. In addition, the loss-making Malawi Development Corporation was liquidated in 2006 and ceased all operations. The government is currently negotiating with the private sector and the World Bank for the establishment of a new Malawi Development Fund, which would focus on providing support to small and medium-sized enterprises. The drafting of a policy for public-private partnerships (PPPs) began in late 2006 with a view to establishing a PPPs unit in the Ministry of Finance tasked with facilitating private-sector investment into public infrastructure. Access to Drinking Water and Sanitation Malawi is a country that has recently begun to experience a certain degree of water stress due to its high population density. Its renewable water resources per capita are estimated to be 1374 m3 in 2003-07. Clearly, the sector requires careful management, but a comprehensive programme does not yet exist. The expansion of irrigated agriculture in order to reduce the effects of weather shocks on agricultural output is a key component of the government’s development plans, and it is not yet clear how water and sanitation for household purposes will be affected by this approach. Formal water and sewerage services in Malawi are provided by five government-owned, parastatal water boards for Blantyre, Lilongwe and the Northern, Central and Southern regions. All five water boards are lossmaking and are generally characterised by weak governance and political interference. Access to safe drinking water is one of the key MDGs and an area where Malawi has made reasonable progress in recent years. Data from the 2004/05 Integrated Household Survey shows that 66.4 per cent of households in Malawi have access to an “improved water source” © AfDB/OECD 2007

Malawi

(defined as being piped into the dwelling, piped outside, from a communal standpipe, or from a hand pump, borehole or protected well). This is slightly above the average for sub-Saharan Africa (58 per cent), but more progress will be required for Malawi to meet the MDG

target of 75 per cent of all households having an improved water source by 2015. Piped water supplies are the most common form of water supply in urban areas, but much less prevalent in rural areas where boreholes and protected wells are the main source of drinking water.

Table 4 - Proportion of Households with Access to Safe Water and Distribution of Households by Main Source of Drinking Water, 2005 Household proportion with access to Piped into improved dwelling water source

Source of drinking water Piped outside / Hand pump / Unprotected communal borehole / well standpipe protected well

River, spring, lake and other

Malawi Urban Rural

66.4 85.1 63.9

2.2 12.6 0.8

17.7 62.3 11.7

46.5 10.2 51.4

25.4 11.1 27.3

8.2 3.8 8.8

North Centre South

63.7 54.3 74.9

0.5 0.5 3.7

13.1 9.2 24.2

50.1 44.6 47.0

24.2 38.6 16.9

12.1 7.1 8.2

Source: Integrated Household Survey 2005. http://dx.doi.org/10.1787/005151087878

339 The same survey indicates that 61.9 per cent of households in Malawi have access to improved sanitation facilities (defined as being either a flush toilet, a ventilation-improved (VIP) latrine or a traditional latrine with a roof ). This is significantly above the

36 per cent coverage average for sub-Saharan Africa. As with access to potable water, access to improved sanitation is higher in urban areas. Some 16.9 per cent of all households have no toilet facilities.

Table 5 - Proportion of Households with Proper Toilet Sanitation and Distribution of Households by Type of Toilet Facility, 2005 Household proportion with access to improved sanitation

Type of toilet facility Flush toilet

VIP latrine

Traditional latrine with roof

Latrine None without roof

Other

Malawi Urban Rural

61.9 78.3 59.7

2.8 14.0 1.2

1.8 3.9 1.5

57.4 60.4 56.9

20.9 18.8 21.2

16.9 2.9 18.8

0.3 0.0 0.3

North Centre South

53.7 63.9 62.0

0.8 1.4 4.0

0.9 1.0 2.5

52.0 61.5 55.5

35.0 15.1 22.3

11.1 20.7 15.4

0.2 0.3 0.3

Source: Integrated Household Survey 2005 http://dx.doi.org/10.1787/401167277433

The MGDS (Malawi’s new national development plan, launched in 2006) addresses water and sanitation issues as a key sub-theme under the infrastructure © AfDB/OECD 2007

component of the strategy. The medium-term expected outcome listed in the strategy is to increase access to water to within 500 metres for all people by 2011, thereby African Economic Outlook

Malawi

ensuring that the basic water requirements of every Malawian are met while the country’s natural ecosystem is preserved. The main water and sanitation strategies for achieving this expected outcome, as listed in the MGDS document include: empowering national authorities to manage water resources using integrated water-resource management approaches; establishing good monitoring systems; improving the quality of surface and ground water and developing a system for pollution control; improving sustainable access to water supply and sanitation in urban, peri-urban and rural areas by, amongst others, establishing water-supply and sanitation systems using demand-responsive and demand-driven approaches; establishing contingency water-supply reserves and sanitation backups; and integrating rural water supply with participatory hygiene and sanitation approaches.

340

Lack of resources has undoubtedly had a negative impact on the ability of water boards to invest in maintaining water and sanitation infrastructure. Lack of power-generating capacity and frequent blackouts also have an impact on the delivery of water services where water has to be pumped. The poor performance of the Blantyre Water Board in particular has become a major political issue, partly due to private-sector frustration over the intermittent supply of water, which is especially damaging to Malawi’s food-processing industries. However, poor management is probably the most significant factor in the poor performance of Malawi’s water boards. Some 50 per cent of Blantyre Water Board’s piped water is “unaccounted for”, and reducing the share of this by even a fraction would have a significant impact on the board’s ability to reinvest. Although the backlog of unpaid bills by publicsector customers is being gradually addressed by the Ministry of Finance, the lack of operational independence and continued political interference means that it will be some time before public- and private-sector customers will be treated equally.

Political Context and Human Resources Development Political issues continue to dominate the national agenda and divert high-level attention from addressing African Economic Outlook

the more serious development challenges that Malawi faces. President Mutharika was elected in May 2004 under the auspices of the United Democratic Front (UDF) party but within a year had left the party and established a new Democratic Progressive Party (DPP), allegedly due to UDF opposition to his anti-corruption campaign. The annual fertilizer subsidy remains one of the most political contentious issues in Malawi, and the successful delivery of the subsidy will probably be one of the most important determinants for Mutharika’s re-election prospects in 2009. Although by-elections in late 2005 and early 2006 produced the first six directly elected DPP members of parliament (MPs), Mutharika continues to govern without a parliamentary majority. This has made it difficult to pass legislation, and has held up the budget process and created a large backlog of parliamentary bills awaiting approval. The impeachment motion launched by opposition MPs in October 2005 fizzled out, but the legal wrangling surround the use of Section 65 of the constitution, which provides for the Speaker to declare vacant the seat of any opposition MP who has crossed the floor to side with government, hangs over government operations. With GDP growth averaging below 3 per cent (below 2 per cent since 2000), this has translated into a modest 1 per cent increase in per capita income over the past ten years. Malawi has a highly unequal income distribution, with a Gini coefficient of 50.3. The proportion of the population with income less than $1 per day was 54.2 per cent in 1997/98 and has hardly changed since the last household survey was undertaken in that year. Social indicators are also very poor. Malawi’s maternal-mortality rate is currently 984 maternal deaths per 100 000 live births and is also one of the highest in the world. The national adult-literacy rate is still low at 63 per cent. It is higher amongst males (76 per cent) than females (50 per cent). The overall youth literacy rate is 76 per cent, which is higher than the adult literacy rate. Interestingly, there is not much disparity between © AfDB/OECD 2007

Malawi

the literacy of young females and males. The primary gross enrolment ratio is 137 per cent. The rate is significantly higher for boys (144 per cent) than for girls (130 per cent). These high enrolment numbers indicate that a large proportion of primary school pupils are over age for their grade. This could partly be explained by delayed enrolment and high drop-out as well as high repetition rates. The 2004 Malawi Demographic and Health Survey found that 8 per cent of children aged 5 to 14 worked for non-household members. About 40 per cent of these children work without pay. Amongst children who help around the house with household chores, 68 per cent do these chores for an average of less than 4 hours per day and 2 per cent work for 4 or more hours per day. Overall, older children and children in rural areas are more likely to be working. Girls are more likely than boys to do domestic work. It is particularly worrisome that a recent International Labour Organisation survey found that at least 71 per cent of children were in the worst form of child labour. Malawi, like the rest of southern Africa, has very high levels of HIV prevalence. HIV prevalence at rural clinics increased from 12.1 per cent in 1999 to 14.5 per cent in 2003. Much remains to be done for behavioural

© AfDB/OECD 2007

change to take place in Malawi. In 2004, only 5 per cent of women and 15 per cent of men who had sex in the past year reported having used a condom during their last sexual intercourse with any partner. At 1.8 per cent, condom use is alarmingly low amongst married women. This may point to the difficulty that women face in negotiating the use of a condom with their husband. Better-educated persons are more likely to use condoms. For example, while 2 per cent of women with no education used a condom the last time they had sexual relations with any partner, the corresponding proportion for women with secondary or higher education is 14 per cent. The proportions for men are 6 and 27 per cent, respectively. The total fertility rate for women aged 15 to 49 has declined from 7.6 births per woman twenty years ago to 6 in 2004. Contraceptive use, especially use of modern methods, has continued to rise since the early 1990s and is one of the principal causes of the fertility decline. The prevalence of modern contraceptive methods amongst married women aged 15 to 49 has increased from 7 per cent in 1992 to 33 per in 2004. The most popular contraceptive methods amongst married women are injectables, followed by female sterilisation and oral contraceptives.

African Economic Outlook

341

.

Mali

Bamako

key figures • • • • •

Land area, thousands of km2 1 240 Population, thousands (2006) 13 918 GDP per capita, $ PPP valuation (2006) 994 Life expectancy (2006) 49 Illiteracy rate (2006) 81

Mali

M

ALI’S ECONOMIC GROWTH OUTLOOK

remains favourable. After recording a 6 per cent growth rate in real gross domestic product (GDP) in 2005, growth in 2006 is estimated at 5 per cent and is expected to be around 4.7 per cent per year in 2007 and 2008. This expansion would be due mainly to higher output in the mining sector and a big increase in food-crop production. The good prospects are also explained by a rising domestic demand helped by private and public investment, especially in 2006.

A new strategic growth and poverty-reduction paper (DSCRP) has been drafted for 2007-11: the second generation of the strategic framework for the fight against poverty (CSLP) Despite a slowdown in cotton should reinstate the production, the primary sector deficiencies identified in the grew in volume by 5.1 per cent first. Amongst these, were a thanks to good weather and lack of explicit consistency locust-prevention programmes. amongst the CSLP, the sectorial and regional strategies, and the state budget.

345 Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Mali - GDP Per Capita (PPP in US $)

■ West Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Mali - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

3500

14 12

3000 10 2500

8 6

2000

4 1500 2 0

1000

-2 500 -4 0

-6 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and national statistics and information-technology service (DNSI) data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/888638117441

© AfDB/OECD 2007

African Economic Outlook

Mali

Recent Economic Developments

the continent’s third biggest gold producer after South Africa and Ghana. The sector is attracting more and more investors. In 2005 alone, 102 mining permits were granted, 87 of them for gold. Given the exonerations authorised under the mining code, however, the sector makes a relatively limited contribution of around 40 billion CFA francs to tax revenues. There are possibilities for diversification into phosphates, lithium, bauxite and iron, and the Baraka Mali Venture consortium and its Mauritanian, European and Australian partners have signed a so-called productionsharing agreement for 5 of the 15 oil-prospecting blocks in the north of the country. First production is expected in 2008 although oil-transportation arrangements have yet to be decided.

In 2005, the primary sector recorded a 5.1 per cent growth in volume. Total food crop production (millet, sorghum, rice and corn) stood at 3 367 200 tonnes in 2005/06, representing an increase of 18.4 per cent, which was higher than the 16.3 per cent increase in the previous agricultural season. Groundnut production was virtually stable at 212 200 tonnes These good results can be explained by more favourable climate conditions and the anti-locust measures taken by the government, as well as by implementation by the authorities of the programme for the development of irrigated zones and the distribution of improved varieties of rice and maize.

346

Cash-crop farming remains dominated by cotton. Production in this sub-sector in the 2005-2006 season is estimated to be 8.3 per cent down on 2005/06 at 536 700 tonnes. This reduction in cotton production is related to a drop in the purchase price to producers, which fell from 210 to 160 CFA francs per kilogramme. The livestock sector showed real growth of 4.3 per cent, reflecting the better condition of pastures in 2005. Traditionally, animals are sold live on the principal markets of the sub-region but mainly in Côte d’Ivoire.

The secondary sector represented 16.2 per cent of GDP in 2005, when it showed a real increase of 6 per cent compared with 2.7 per cent in the preceding year. The increase in the growth rate is the result of a good performance by the construction sub-sector. The manufacturing industry was in recession, however. The industrial sector remains modest in size, accounting for less than 5 per cent of the 243 enterprises declared and registered in the 2003 census. It is confronted with a difficult business climate – the World Bank’s Doing Business 2006 report ranks Mali 146th out of 155 countries – and with competition from the informal sector which makes use of counterfeiting and fraud (motorcycles, tyres, etc.). The cost of factors such as electricity and transport also constitutes a handicap. Mali’s needs in electricity are

Gold production rose 10 per cent to an estimated 49.1 tonnes as a result of higher output at the Morila mine and the start of activity at the Loulo mine in November 2005. New reserves were also brought into production in the south and west of the country in late 2005, and two new mines, Tabakoto and Kalana, were due to open in 2006/07. Since 2005, Mali has become

Figure 2 - GDP by Sector in 2005

(percentage)

Other services Government services

Transport, storage and communication

Wholesale and retail trade, transport and other services

Agriculture

7% 22.1%

11.5% 5.4%

16.1%

13% 6.3%

Construction, electricity, gas and water

9.9%

Manufacturing

Livestock, forestry and fishing

8.6% Mining

Source: Authors’ estimates based on DNSI data. http://dx.doi.org/10.1787/714548378835

African Economic Outlook

© AfDB/OECD 2007

Mali

currently higher than its share of production from the Manantali dam. The withdrawal of Énergie du Mali’s principal shareholder, the Bouygues group’s Saur International, in October 2005 illustrates Mali’s difficulty in defining an energy policy. Agro-industry represents about 45 per cent of all the country’s industrial activity. The sector is characterised by the presence of big importers in virtual monopoly positions. Huilerie Cotonnière du Mali (Huicoma), which produces cotton oil, is the country’s biggest agro-food producer. Other notable manufacturers are the Compagnie malienne de développement des textiles (CMDT) and the textile producers Comatex and Bakatex (formerly Itema), which use less than 10 per cent of the CMDT’s production. Only beverages production is relatively diversified with two mineral-water plants (Le Lido SA and Diago), a brewery (Bramali) and four plants producing sodas and fruit juices. Only one flour mill, Grands moulins du Mali (GMM), is active in Bamako. There are also one confectionery, three plants producing pasta and biscuits, a large number of small bakeries and several milk-processing plants. In 2004, President Amadou Toumani Touré declared that he wanted to make agro-industry the priority of his investment programme. A market could, therefore, open up for foreign investors, notably in the fields of fruit and vegetable processing and sugar production. The Markala sugar project aims to develop the cultivation of sugar

cane in the Ségou region and promote construction of a processing plant. The public-private capital enterprise Sukala plans to bring into service another new sugar plant in 2007. Sustained activity in the construction and energy sub-sectors has boosted growth in the secondary sector despite the expected drop in production in the manufacturing industry. The continued implementation of major programmes in the fields of health, education and rural infrastructure are largely responsible for high growth in the construction sector. In 2006, there were plans to build asphalt roads in the Malian interior (26 billion CFA francs) as part of efforts to improve access to the country, to continue construction of the administrative centre (7 billion CFA francs) and to build the Gao bridge (5.9 billion CFA francs). The tertiary sector should benefit from the continued extension of the mobile-telephone network through investments by Malitel and Ikatel (Orange), the creation of a new airline (Cam) and the development of the activities of the rail enterprise Transrail SA. Banque régionale de solidarité (BRS Mali) and Banque Atlantique Mali should also expand their activities in 2006. On the demand side, investment growth in the private sector fell slightly from 2004 to 2005 despite the opening of the Loulo gold mine and growth in

Table 1 - Demand Composition 1998

(percentage of GDP)

2005

Percentage of GDP (current prices)

2006(e)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

19.8 7.4 12.4

21.1 7.0 14.2

10.0 10.0 10.0

5.4 5.2 5.5

5.7 5.0 6.0

Consumption Public Private

87.9 18.7 69.1

82.7 17.1 65.6

2.1 7.0 1.1

3.4 5.6 2.9

4.3 5.6 4.1

-7.7 21.3 -28.9

-3.8 24.8 -28.6

9.0 6.4

6.2 3.3

5.0 5.2

External sector Exports Imports

Source: IMF and DNSI data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/011762076355

© AfDB/OECD 2007

African Economic Outlook

347

Mali

homebuilding, encouraged by intense activity on the part of real-estate enterprises in the major cities. In 2006, investment, specially in the private sector, is expected to recover slightly. Growth in total consumption slowed down from 4.9 per cent in 2004 to 1.7 per cent in 2005 following a poor agricultural season. The slowdown in final demand, in which domestic consumption represents about 80 per cent, continued in 2006.

Macroeconomic Policies Fiscal Policy

348

Total revenues and grants are estimated to have risen 12.3 per cent from 621.6 billion CFA francs in 2005 to 698.2 billion CFA francs in 2006. Revenues alone increased 5.7 per cent to 535.7 billion CFA francs. The trend is the same for tax revenues, which increased 5.3 per cent to 470 billion CFA francs in 2006. The tax burden stood at 14.6 per cent, 0.8 per cent less than in 2005, supposing that no extra effort was made by the tax-collection services. The level of the tax burden is below the 17 per cent minimum set by the Economic Community of West African States (ECOWAS). Grants were up 41.3 per cent in 2006 at 162.5 billion CFA francs.

Total expenditure and net loans rose 13.5 per cent from 712.3 billion CFA francs in 2005 to 808.8 billion CFA francs in 2006. Current expenditure increased 8.6 per cent in 2006 over the previous year to 457.8 billion CFA francs. Capital expenditure in 2006 was up 33 per cent from 268.1 billion CFA francs in 2005 to 356.6 billion CFA francs. The wage bill was expected to rise 8.1 per cent from 137.8 billion CFA francs in 2005 to 149 billion CFA francs in 2006. The deficit in the state’s financial operations, on a commitment basis and excluding grants, stood at 48.9 billion CFA francs at the end of June 2006, 3.4 billion CFA francs more than the deficit for the same period the preceding year. The state of public finances was even worse than initial forecasts. On the basis of available data, however, the execution of the budget, on a commitment basis and excluding grants, resulted in a reduced overall deficit in 2006 compared with 2005 and was expected to remain stable in 2007 and 2008. This development is essentially due to higher capital expenditure, itself linked, notably, to the increase in available resources resulting from the forgiveness of debt due to the IMF within the framework of the Multilateral Debt Relief Initiative (MDRI). The level of execution of current expenditure remained virtually stable from one year to another, while capital expenditure increased in 2006. Tax revenues also

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsª Tax revenue Other revenue Grants

20.0 12.8 2.0 5.2

21.9 14.2 3.0 4.7

21.2 14.9 2.3 3.9

21.6 15.5 2.1 4.0

22.7 15.5 2.1 5.1

22.6 15.5 2.1 5.0

22.4 15.7 2.1 4.5

Total expenditure and net lendingª Current expenditure Excluding interest Wages and salaries Goods and services Interest Capital expenditure

22.3 11.2 10.5 3.5 3.6 0.7 11.3

23.2 14.4 13.7 4.3 4.4 0.8 8.9

23.8 14.9 14.3 4.6 5.2 0.7 9.2

24.8 14.7 14.0 4.8 5.0 0.6 9.3

24.4 14.9 14.3 4.6 5.4 0.6 9.7

24.4 14.7 14.2 4.5 5.3 0.5 9.6

24.9 14.9 14.6 4.6 5.5 0.3 9.8

Primary balance Overall balance

-1.6 -2.3

-0.6 -1.3

-1.9 -2.6

-2.5 -3.2

-1.1 -1.7

-1.3 -1.8

-2.2 -2.5

a. Only major items are reported. Source: IMF and DNSI data; estimates (e) and projections (p) based on authors’ calculations.

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© AfDB/OECD 2007

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progressed in 2006 in relation to the same period the preceding year. In line with Mali’s 2006 convergence programme, revenue forecasts are based on the computerisation of the tax services, which should improve the recovery of value added tax (VAT). In addition, measures introduced at the end of 2005, notably the abolition of tax exemptions for new vehicles, the introduction of simplified tax arrangements for small enterprises and the abolition of tax exemptions for the Banque nationale de développement agricole (BNDA) should produce their full effect in 2006. There are also plans to reduce or suspend taxes on imports from the West African Economic and Monetary Union (WAEMU) and, in line with the decree adopted in December 2005, to introduce a new mechanism for fixing the prices of hydrocarbons, based on world prices and in line with community legislation on the taxation of imported oil products. At the level of tax authorities, implementation of the tax-service action plan will be reinforced as will the system for on-site accounting auditing. Expenditure policy will direct external aid towards investment. Investment expenditure on internal resources will aim above all to increase allocations to education, health, infrastructure and the strengthening of institutional capacities. Monetary Policy Monetary and credit policy is run at regional level by the Central Bank of West African States (CBWAS), the principal objective of which is to preserve the parity between the CFA franc and the euro and control inflation. Monetary policy in the zone is therefore rigorous in the same way as that of the European Central Bank and backed by an appropriate level of international reserves. The only difference lies in the fact that the CBWAS takes into account the economic situation of its member countries in determining its monetary policy. The forecasts at the end of December 2006 indicated an increase in money supply following an increase in net external assets and internal credit. Money supply was estimated to be 902.8 billion CFA © AfDB/OECD 2007

francs at the end of December 2006 – up 7.3 per cent on its level at the end of 2005. Credit to the economy was estimated at 564.5 billion CFA francs in 2006, 14.5 per cent higher than in 2005. This trend is the result of a considerable increase in ordinary loans. In Mali, the net external assets of the monetary institutions rose 27.9 billion CFA francs to 492.4 billion CFA francs at the end of June 2006 against the previous month. This increase is essentially due to the 26.5 billion CFA francs increase in the assets of the central bank. On an annual basis, the net external position of the monetary institutions increased by 110 billion CFA francs. Outstanding internal credit stood at 375.5 billion CFA francs at the end of June 2006 compared with 397 billion CFA francs the preceding month. This situation resulted from the 24.2 billion CFA francs improvement in the net position of the government. On an annual basis, internal credits to the economy recorded a 23.6 billion CFA francs or 4.8 per cent fall. 349 Affected by the increase in the prices of food, oil products and transport, the average inflation rate was 3.3 per cent between January and May 2006, compared to 5 per cent for the same period in 2005. Revised forecasts indicate that there was a further reduction in this figure over the rest of 2006, which was linked to the expected improvement in cereal production and government initiatives to reduce the price of essential goods and services such as water and electricity. Average inflation in 2006 is estimated at 2.1 per cent compared to 1.6 per cent in 2005, according the CBWAS. External Position Mali’s foreign trade has been marked by a reduction in its current account, excluding official transfers, which stood at 6.3 per cent of GDP in 2005. This movement is the result of an increase in exports, notably a 46 per cent increase in sales of gold, resulting from higher prices and production. In 2006, according to the International Monetary Fund (IMF), the terms of trade should improve by 14 per cent as the strong increase in gold prices compensates for the rise in the price of imported oil. Gold represented 65 per cent of total African Economic Outlook

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Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

0.3 19.4 -19.1 -9.1 -1.7 3.9

-1.4 22.0 -23.4 -6.1 -3.8 4.9

-2.3 19.6 -21.9 -5.8 -3.9 3.9

-2.3 20.3 -22.5 0.0 -4.0 4.1

1.8 24.8 -23.0 -1.8 -3.6 3.7

3.4 25.0 -21.6 -1.8 -4.4 3.1

1.9 23.8 -21.9 -2.0 -5.3 3.1

Current account balance

-6.6

-6.4

-8.2

-2.2

0.0

0.3

-2.2

Source: CBWAS and IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/362681712882

350

exports in 2005. The state is seeking to improve the external balance by implementing policies and structural reforms aimed at improving the efficiency and the competitiveness of the cotton and banking sectors. The expected improvement in the terms of trade should produce a revival of exports, hence a reduction of the current balance of payments deficit. In October 2005, the government launched a programme to promote competitiveness and diversification in agriculture through the processing and marketing of marketgardening products such as tomatoes, mangoes and green beans for the European and American markets. The increase in the price of oil, which makes air freight more expensive, could represent an obstacle to the development of these export lines. On 23 June 2004, Mali concluded a new programme within the framework of the Poverty Reduction and Growth Facility (PRGF) which provided it with 9.33 million in special drawing rights for 200407. In 2003, the World Bank adopted a country assistance strategy for Mali for 2004-06, which should yield $400 million in aid, 30 per cent of which in the form of grants. Mali reached the completion point under the enhanced Heavily Indebted Poor Countries Initiative (HIPC) in February 2003. In March 2003, the country reached agreement with the Paris Club to cancel all its eligible debt. Mali started to benefit from HIPC resources in 2000. In the course of 2000-04, it obtained 112 billion CFA francs, distributed as follows: 2.6 billion CFA francs in 2000, 23 billion CFA francs in 2001, 27.5 billion CFA francs in 2002, African Economic Outlook

30.1 billion CFA francs in 2003 and 28.6 billion CFA francs in 2004. With 68.5 per cent of its debt owed to multilateral creditors, Mali is amongst the countries benefiting from the cancellation of their debt to multilateral institutions decided by the G8 heads of state in July 2005. The debt is considered sustainable, given that the stock of external arrears was completely absorbed in 1994 and, since then, all repayments dates have been respected, for interests as well as for capital. The stock of internal debt was also totally cleared at the end of 1999, and there has been no accumulation since that date. Debt cancelled under the MDRI in 2006 is estimated to have come to 1 085.2 billion CFA francs, to which the 20.5 billion CFA francs cancelled under the HIPC Initiative should be added. As a result, the total amount of debt outstanding should be reduced to 745.7 billion CFA francs and the ratio of debt outstanding to GDP is estimated to have been brought down from 60 per cent in 2005 to 23.2 per cent in 2006 and debt servicing to no more than 4 per cent of exports. According to the 2006-08 multi-year programme, outstanding debt, excluding relief, is projected to increase from 1 736 billion CFA francs in 2006 to 1 811 billion CFA francs in 2007 and 1 843 billion CFA francs in 2008. For this period, 87.7 billion CFA francs of additional resources are expected, distributed as follows: 25.9 billion CFA francs in 2006, 26.6 billion CFA francs in 2007 and 26.2 billion CFA francs in 2008. The expected resources will be budgeted for the completion of poverty-reduction projects. © AfDB/OECD 2007

Mali

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

120

100

80

60

40

20

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF.

351 http://dx.doi.org/10.1787/152414452866

Structural Issues Recent Developments A number of reforms have been undertaken in the public sector, which show the commitment of the state of Mali to the process of good governance. The report of the general controller, whose job it is to verify the regularity and sincerity of public-revenue and expenditure data, contained the conclusion of the enquiries carried out between 2004 and 2006, notably with regard to VAT collection and repayment, customs duties and associated taxes, hydrocarbons and public contracts. With regard to the collection and repayment of VAT and associated taxes, the inquiries brought to light a significant reduction in state revenues, amounting to 13 billion CFA francs. At the same time, civil society has begun organising itself so as to be able to contribute to the fight against corruption and financial delinquency. Various associations have come into being, including, amongst others: i) Transparency Mali; ii) the national watch for the fight against corruption; and iii) the Malian network of journalists against corruption. © AfDB/OECD 2007

In October 2005, the government undertook a study of the system of benefits and bonuses linked to wages so as to evaluate incentive systems. The study was due to be completed for December 2005. A report on the revision of criteria for the allocation of social-security resources was finalised in October 2005. An actuarial study of the Caisse de Retraite du Mali (CRM) publicsector pension scheme showed that, in the absence of reform, the operating deficit will rise to an unsustainable level. Following consultations with employer and employee organisations, an inter-ministerial committee proposed to the higher civil-service council in May 2006 a series of reforms aimed at progressively reducing the CRM’s financial deficit in the medium term. Given the potential impact of these reforms on medium-term budget prospects, the state has committed itself to submitting relevant legislation to the National Assembly for the necessary reforms with a view to re-establishing financial balance at the CRM by 2010. The government has also begun implementing a medium-term action plan to improve the management of public finances, notably by limiting tax exemptions African Economic Outlook

Mali

accorded under the mining and investment codes. The government has committed itself for 2006-08 to reinforcing audit capacities, supervising public contracts and accounting for expenditure at regional level. It also plans to extend the public treasury’s computer network and to enlarge coverage of budget accounts.

352

The state is also pursuing its privatisation policy with the objective of expanding the role of the private sector in the economy and, at the same time, reinforcing budgetary policy. The government has committed to completing the privatisation of the CMDT by 2008. It has drawn up a new schedule, which puts back full privatisation of the enterprise from 2006 to 2008 so as to better prepare producers and the private sector for the fundamental changes to come. A new mechanism for fixing producer prices came into effect in May 2005, in time for the 2005/06 season. On 6 March 2006, the council of ministers opted for a zoning system involving the establishment of four private-sector ginning enterprises. The operational scheme was due to be submitted to the council of ministers in September 2006. After numerous difficulties, the privatisation of Huicoma, which was authorised by a law passed on February 27 1988, was finalised. The Malian state decided to sell the enterprise to a Malian investor for 9 billion CFA francs in what was the principal advance in the privatisation field in 2005. The plan for the privatisation of the Société des Télécommunications du Mali (Sotelma) was finalised by the government under the aegis of the telecommunications regulatory commission. The sale of a 51 per cent capital stake of the enterprise had been due to take place in 2004 but was finally postponed and should now take place in 2007 at the latest. It is important to note that Sotelma and its mobile telephone subsidiary Malitel are to be privatised together and sold to the same buyer. The water and energy sectors have been in crisis since 2005. They are run by a single supplier, EDM SA, which was sold to the Bouygues group in 2000. In October 2005, however, the Bouygues-group enterprise African Economic Outlook

Finagestion decided to withdraw from the enterprise’s capital through the sale of its stake to its partners in EDM, i.e. the Aga Khan Fund for Economic Development subsidiary Industrial Promotion Services (IPS/WA) and the state of Mali. This decision followed divergences between the government and the private concessionaire regarding price levels and energy-supply development plans, and the investment projects associated with them. The “re-nationalisation” of the two sectors took effect after the final meeting of the Finagestion board. For EUR 200 million, the state of Mali recovered the majority stake in EDM, which rose from 40 per cent to 66 per cent. At the moment, the enterprise is having difficulty supplying electricity and water to its 250 000 subscribers. EDM is also grappling with massive fraud and a considerable level of unpaid bills. Trafficking of metres and illegal tapping of water and electricity are estimated to have caused the enterprise losses totalling EUR 10 million (7 billion CFA francs) in a single year. As for arrears, they are estimated at around EUR 15 million (10 billion CFA francs). EDM management intends to carry out checks followed by wide-ranging communication campaigns to persuade the public not to engage in fraud. With regard to the restructuring of the banking system within the framework of the financial sector development project (PDSF), the planned privatisation of the Banque de développement du Mali (BDM SA) and the Banque internationale du Mali (Bim SA) have suffered numerous delays. A new timetable for the privatisation of the Bim was adopted in November 2004 following the completion of a period under provisional administration and the appointment of a new management team. Originally planned for early 2005, privatisation of the Bim has been delayed and could be undermined altogether for the simple fact that no Malian bank is able to present a credible bid. A call is due to be made for bids for the state’s shares in the Bim. As for the BDM, the intention was to carry out a joint sale of the shares held by the state and the CBWAS once the two shareholders had agreed on a common course of action. Restructuring of the Banque de l’Habitat du Mali (BHM) with the support of the World Bank is also planned. In November 2005, the government recapitalised BHM by converting deposits © AfDB/OECD 2007

Mali

into equity. The government also initiated an audit of the non-performing loans of all commercial banks with the aim of drawing up a plan for restoring the balance sheets of credit establishments. Mali has great tourist potential. According to available statistics, the country has 244 accommodation establishments providing 3 927 rooms and 5 066 beds. The government intends to develop the country’s hotel network, notably, through projects to build an Accor group Ibis hotel in Mopti in 2005 and extend the Résidence Komé in Bamako. A law passed on 3 June 2002 offers particular advantages to tourism enterprises, including exemption from professional tax, commercial tax and customs duties on equipment. At institutional level, different decrees have been passed with the aim of increasing tourist frequentation by 2007. The recently created airline enterprise Compagnie aérienne du Mali (Cam) was due to offer flights from Paris from the end of 2005. The state has undertaken major investments in infrastructure. Numerous projects, which have already been financed, have been programmed for 2005-10. With European Union financial support, Mali has begun rehabilitating the road corridors leading to the principal ports of the sub-region – Dakar, Nouakchott and Conakry. Alongside these major road projects, 2 000 kilometres of internal roads, 670 of which financed by the World Bank, were due to be delivered by 2006. Following the same logic of improved access to the country, a road authority was set up with the aim of putting road maintenance into the hands of the private sector. Work by public-sector bodies has been stopped and current maintenance transferred to privatesector enterprises. Access to Drinking Water and Sanitation Mali has great water-resource potential in the form of perennial surface water, non-perennial surface water and underground water. These resources are very largely superior to the country’s needs and, subject to their being well-managed, should, therefore, be able to meet those needs in due course. The resources are, however, very unevenly distributed over the country. © AfDB/OECD 2007

Under the terms of the sub-regional action plan for Integrated Water Resource Management (IWRM), the government has set up an institutional mechanism at the national level for the definition and implementation of IWRM. Local committees and agencies will be in charge of managing water basins with strong participation by the local populations. As part of this process, a Malian national water partnership was set up in 2003 as an association for social mobilisation, information sharing, training and action for the application of IWRM principles. It is the focal point of the Global Water Partnership in Mali. The national strategy for the development of the supply of drinking water and sanitation (AEPA) in rural and semi-urban areas in Mali, which was adopted in March 2000, constitutes the basic framework for all programmes and projects in the sector. Through the 1999 sectoral policy letter for drinking water and electricity and the March 2000 ordinance on the organisation of the public-sector drinking-water service, the government expressed its intention to disengage the state from operational activities in favour of reinforcing its planning and regulatory capacities and serving as a provider of support and advice to those involved. Thus, the state has transferred its powers as provider of public drinking water and sanitation to the local authorities but maintains an important role in order to urge that the prices for these services should be set to cover their economic cost. In July 2006, 301 communes had benefited from these transfers of power. More than 250 management-delegation contracts had been signed between municipalities and operators, which in their great majority are formal user associations. The water code adopted in January 2002 sets out the procedures for managing and protecting resources by defining the rights and obligations of the state, local authorities and users. It recommends the establishment of public water-service development funds and sets up a national council, regional and local councils, and water-basin councils, which are in charge of giving opinions and making proposals on water-resource management and development projects. Apart from the different policy components elaborated since more than 10 years ago, the central feature of the government’s African Economic Outlook

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Mali

current strategy is the national water-access plan (PNAE), which was drawn up in 2003 and which was supplemented in 2004 by a water-access initiative, which itself was partly inspired by the African Development Bank. At the start of 2005, the government had the idea of setting up an agency to oversee project execution, the Agence malienne pour l’eau et l’assainissement (Amepa), which is relatively autonomous from a budgetary and statutory point of view and which was to take over a large part of the present functions of the national hydraulics department (DNH). This new institution should simplify and accelerate project implementation procedures without municipalities’ losing their role of promoter.

354

The whole of the water sector is placed under the responsibility of the Ministry of Mines, Energy and Water (MMEE), the operational structure for which is the DNH. The MMEE is responsible for interministerial co-ordination and all policies in the sector. It has the role of supervising the development and management of water resources so as to assure coverage of the country’s needs, of completing studies and development work, and of conserving and protecting all surface and underground water, except for agricultural water schemes. Responsibility for sanitation, on the other hand, is shared amongst the DNH, the Ministry of the Environment and the Ministry of Health. The DNH has the task of drawing up national policy in the hydraulics field and of assuring co-ordination and technical control through its regional and sub-regional, and other dependent services. These latter contribute to implementation of national policy and to nationaland regional-level planning for the development of the public drinking-water service in co-operation with the local authorities, who serve as promoters for the service. In rural and semi-urban areas, the DNH is the principal protagonist through its regional and sub-regional branches, the regional water and energy departments (DRHE) and the sub-regional water and energy service (SSRHE), even if all of them are not operational. An institutional framework for the public drinking-water service in rural and semi-urban areas has been tested and set up after much consultation with representatives of all the different stakeholders in the sector. African Economic Outlook

In certain large cities – only 16 are involved – the principal protagonist is EDM SA, which is also in charge of energy distribution but over a wider area. Regulation of drinking water supply in urban areas has been put by the state in the hands of the regulatory commission for electricity and water (CREE). The coverage rate is very uneven from a geographical point of view. Certain regions are penalised by heavy constraints such as isolation and low population density, which make the organisation of upkeep and maintenance services extremely problematic, whether for hand pumps or small networks. The rate of access to tap water, which stood at 6.4 per cent in 2001, had risen to 8.6 per cent in 2005. The rate of access to drinking water at standpipes rose from 7.23 per cent to 8.5 per cent during the same period. That of access to drinking water from the EDM network rose from 13.6 per cent to 17.1 per cent for the period. In urban areas, the access rate increased from 50.9 per cent to 56.7 per cent. Thus, the rate of access to drinking water in all urban and semi-urban areas progressed from 58.7 per cent to 70.2 per cent between 2001 and 2005 and in rural areas at from 46.4 per cent to 64.3 per cent. Taking into account the different levels of access stated above, the national coverage rate for drinking water rose overall from 49.9 per cent in 2001 to 66.1 per cent in 2005. The only data available regarding access to sanitation services are those gathered by the 2001 demographic and health survey, EDS III. This survey showed that 62 per cent of households use very meagre sanitary installations: 10 per cent use improved latrines and 23 per cent do not have toilets at all. The difference in rates of access is very marked between urban (30 per cent) and rural (2 per cent) areas. As regards collective liquid sewerage systems, the only areas with access to these are the centres of Bamako and Koulouba, and the industrial zone and a small part of the city of Ségou. Mini-networks of small-diameter sewers have also been developed. As for financing, individual sanitation remains the favoured option. Most financing, therefore, is provided by families. The state does, however, provide financing © AfDB/OECD 2007

Mali

for mini-sewerage systems through the Office Malien de l’Habitat. About 139 million CFA francs were invested in this way in the mini-sewerage systems of Bankoni and Baco Djicoroni. To this can be added investment for the construction of mini-sewerage systems in Djenné and Timbuktu. For the minisewerage systems, micro-financing institutions, sanitation co-operatives and economic interest groupings have been included in the financing, management and cost-recovery schemes. The major problem is the very low cost-recovery level, which stands only at around 20 per cent. According to an estimate by the French engineering firm Hydroconseil in 2005, the investment required to reach the Millennium Development Goals is about $47 million per year. At operational level, however, Mali’s great water resource potential is increasingly diminishing under the effect of a deterioration in the country’s physical environment. Deficiencies also need to be dealt with in terms of adaptation of the institutional and legal framework. They concern: i) overlapping responsibilities amongst departments belonging to different ministries and amongst services within a single ministry; ii) insufficient concertation amongst the structures responsible for planning water supply and country planning, again due largely to overlapping responsibilities; and iii) failure to prioritise the different actions carried out. Mali has made great investment efforts in recent years but infrastructure is still inadequate, particularly with regard to small supply networks for towns of more than 2 000 inhabitants. Until now, donors have carried out operations sporadically without real co-ordination amongst them. More than 20 bilateral and unilateral technical and financial partners are involved in financing in the sector. A major national rural infrastructure programme, the Pnir, part of which is devoted to drinking water and sanitation, is currently being implemented. The Pnir is to cover the 2001-10 period. The first phase, for 2001-05, was financed by the International Development Association and the Malian government. © AfDB/OECD 2007

This first phase provided amongst other things for the creation of 1 300 modern water points, the rehabilitation of 800 wells and the construction of 25 simplified water supply systems in the Kayes, Koulikoro, Sikasso and Ségou regions. Out of a total $138 million drawn on for the first phase of the programme, $25.2 million were allocated to drinking water and sanitation in rural areas. In 2006, the supervisory council of the Agence Française de Développement approved a EUR 6.1 million subsidy for Mali to finance a drinking-water-supply and sanitation project for semi-urban population centres in the south of the country, where more than 5 000 people live. The project should enable standpost users to obtain 15 litres of water per person per day and those with individual supply lines 40 litres per day.

Political Context and Human Resources Development The political situation, though stable, is marked by the excitement of the preparations for the 2007 presidential election. In 2006, the political parties had already declared their intention to present candidates for the country’s supreme office. This pre-election sensitivity was behind the government’s sharp reaction to Mali’s being ranked 175 out of 177 countries in the United Nations Development Programme’s Human Development Index. In normal circumstances, this would have been a non event. Under decentralisation plans, the government has opted for administrative reform through the establishment of local and regional authorities to serve as decentralised bodies. The aim is to render them responsible through elected bodies for project conception and management and to make them promoters for regional and local development. Implementation of the CSLP II will serve as an opportunity to focus on the difficulties that are hampering the decentralisation process. As part of its efforts, the government adopted in April 2005 an action plan to improve and modernise the management of public finances, called PAGAMGFP. African Economic Outlook

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Great progress has been made in providing basic education. Between 2002 and 2005, the gross enrolment rate for boys and girls rose 9.66 points, from 64.4 per cent to 74 per cent and that of girls alone 9.7 points, from 53.7 per cent to 63.4 per cent. Boys’ literacy level remained much higher than that of the girls as a result of the weight of social and cultural factors. The teacher-pupil ratio was constant between 2002 and 2004 at 57 pupils per teacher. In 2005, it diminished by 3 points to 54 pupils per teacher. This positive progression was the result of major investments in education infrastructure and significant recruitment of contract teachers.

356

The fulfilment of CSLP objectives in the domains of health and population has been satisfactory. There was a major extension of DTCP3 vaccination coverage of children under 1 year old, which rose from 75 per cent in 2002 to 91 per cent in 2005, and the proportion of the population living within 5 kilometres from a working health centre rose from 44 per cent to 50 per cent during the same period. The main constraints encountered in the implementation of the Prodess II sanitary and social development programme are, amongst others, delay in application of the decree on the transfer of jurisdiction and resources from the state to local authorities, shortage of qualified personnel and the absence of a formal operational framework for the maintenance of equipment and infrastructures. To improve access to housing, the government has instituted an urban planning and housing policy, which has resulted in the drafting of an urban planning master plan (SDU) and a national housing programme (PNL), as well as the establishment of three institutions of reference: i) the Banque de l’habitat du Mali (BHM), specialised in financing for housing; ii) the Office malien de l’habitat (OMH), another housing finance structure in charge of supporting BHM in its policy of reduction of the cost of purchasing housing; and iii) the Fonds de garantie hypothécaire du Mali, in charge of providing mortgage guarantees and of refinancing banks and financial institutions in the housing domain. As part of the government’s effort to promote youth employment, 2 000 volunteers have been given African Economic Outlook

internships in the public services. The primary sector continues to be the biggest provider of jobs, however, accounting for 83.4 per cent of the employed working population, while the second and tertiary sectors employ 4.1 per cent and 12.5 per cent of workers respectively. The employment situation in Mali, particularly that of the young, remains a major government concern. Strong demographic growth – about 2.2 per cent per year – is accelerating the flow of young people into the labour market, while growing urbanisation, fed by rural depopulation and the return of emigrants is generating a high demand for jobs. At the social-development level, major efforts have been made to set up facilities, equipment and legislative and regulatory provisions in favour of the handicapped. Support is being given to the elderly so they can access basic social services such as health care and social welfare through the implementation of a national plan. Major initiatives have been taken to help the needy, notably in the form of income-generating activities, medical care and school enrolment of children in difficult circumstances. The goals set by CSLP II in the health field are those set out in the 10-year plan for sanitary and social development (PDDSS) and the current second 5-year programme for sanitary and social development (Prodess II). Amongst these can be mentioned: i) an improved geographical access to essential health services and availability of qualified human resources; ii) constant availability of medicine, vaccines and quality consumables at low prices throughout the country; iii) reduction for the poor of the cost of medical care in particular, vaccination, prenatal care and family planning, and free treatment of children’s diseases; iv) reform of hospital and research facilities; and v) reinforcement of the institutional capacities of the Ministry of Health and health-care facilities in general. The strategies decided for implementation of the PDDSS are: i) geographical access to health services; ii) better availability and management of human resources; iii) better health-service use, performance and quality; and iv) protection of household income and availability of essential medicines. © AfDB/OECD 2007

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The social development programme adopted by the government in 2005 has as its principal aim to contribute to public well-being by reducing sources of social distress and instability with a view to achieving sustainable human development. Fulfilment of the objectives of CSLP II in this sector should result in: i) greater solidarity towards the neediest and most underprivileged sectors of society; ii) improved social-protection coverage for the whole population; iii) better access for the neediest to basic social services and micro-financing; iv) social mobilisation; and v) promotion of community health. In Mali, the prevalence rate of HIV/AIDS remains low: according to the health and demographic survey EDSM III, it was 1.7 per cent in 2001. Faced with the

spread of HIV/AIDS, Mali has undertaken numerous institutional reforms with a view to strengthening the measures to fight the pandemic. These efforts have resulted in: i) the institution of an executive secretariat responsible for implementing, monitoring and evaluating the national policy; ii) the adoption of a policy declaration; iii) the establishment of a high national council for the fight against AIDS (HCNLS); iv) the creation of sectoral and regional committees to combat AIDS; v) modification of the composition of the HCNLS and its attachment to the country’s presidency; vi) adoption of the national strategy framework for the fight against HIV/AIDS; vii) a commitment to provide anti-retroviral (ARV) drugs to all AIDS victims free of charge; and viii) the promulgation of an HIV/AIDS law text on 26 July 2006.

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Mauritius

Port-Louis

key figures • • • • •

Land area, thousands of km2 2 Population, thousands (2006) 1 256 GDP per capita, $ PPP valuation (2006) 14 519 Life expectancy (2006) 72.8 Illiteracy rate (2006) 15.6

Mauritius

M

progress in transforming its economy from a low-income country to a middle-income country based primarily on the production and exports of sugar and textiles. This progress was made possible by a combination of sound macroeconomic and structural policies, steady investments in economic and social infrastructure, and preferential access to the European Union (EU) market under the sugar protocol and to world markets under the Multifibre Arrangement (MFA). This has enabled Mauritius to make important progress towards achieving several of the Millennium Development Goals (MDGs). In 2006, Gross Domestic Product (GDP) growth is estimated to have been 3.9 per cent, up from 1.2 per cent in 2005 due to strong growth in tourism and some recovery in the textile sector. Growth is expected AURITIUS HAS MADE CONSIDERABLE

to accelerate to 5 and 5.4 per cent in 2007 and 2008, respectively, as efforts to diversify the economy begin to bear fruit. The country’s economic Economic and financial and social progress is now under policy reforms in the 2006/07 threat from three external trade budget will boost economic shocks. The first of these shocks growth but increased exports was a consequence of the end are required to reduce high of the MFA on 1 January 2005. and persistent current The second was the decision account deficits. by the EU to cut its guaranteed sugar import price and hence reduce the price of sugar imported from Mauritius by 36 per cent over the fouryear period 2006–09. The third shock was the recent rise in world energy prices. These developments have 361

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: Central Statistical Office data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/203034275123

© AfDB/OECD 2007

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Mauritius

led to a period of low growth, high and persistent fiscal and current-account deficits, rising public debt and high unemployment. To remedy this situation, the government has included a number of ambitious reform measures in its 2007 budget, which was released in June 2006. The proposed measures are intended to consolidate fiscal performance and improve public-sector efficiency, trade competitiveness and the investment climate, and to democratise the economy through an empowerment programme. Most of the measures have already been converted into law through the 2006 Finance Act as well as other legislation.

of 5.2 per cent in 2005, the construction industry recovered in 2006, growing by 5 per cent thanks to the construction of new hotels and the implementation of projects under the Integrated Resort Schemes (IRS). Growth in the tourism sector slowed down in 2006 compared with its formidable performance in 2005. Growth in 2006 would have been even stronger had it not been for the outbreak of chikungunya fever1, which reduced the number of tourist arrivals from France and Réunion. The financial-services sector also did well in 2006. The economy is forecast to grow by about 5 per cent in 2007. Exclusive of sugar, the growth rate is estimated at 5.3 per cent. Sugar production is estimated at about 550 000 tonnes. The tourism sector is forecast to grow by 7.3 per cent, with tourist arrivals estimated at 850 000.

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In 2006, the Mauritian economy exhibited real GDP growth of 3.9 per cent, considerably better than the 1.2 per cent registered in 2005. With the exclusion of sugar, the growth rate was estimated at 5.1 per cent. The sugar industry declined by 3.8 per cent, with sugar production at around 500 000 tonnes, down from 519 816 tonnes in 2005. The main contributors to growth were the industry groups involved in transport, storage and communications, financial intermediation, wholesale and retail trade, and real estate, renting and business services. In 2006, the export processing zone (EPZ) sector witnessed positive growth led primarily by recovery in the textile sub-sector. After a contraction

The agricultural sector currently accounts for 5.4 per cent of nominal GDP and is dominated by sugar production, with the value added by the sugar sector accounting for almost 52 per cent of the total value added in the agricultural sector. Sugar production has not fared well in recent years, falling by 19.2 per cent in 2002. After a slight recovery in 2003 and 2004, sugar production is estimated to have decreased sharply from 572 316 tonnes in 2004 to 519 816 tonnes in 2005, or the equivalent of 9.2 per cent in 2005. This dismal performance has been blamed on the adverse climatic conditions that prevailed in March, April and May 2005, the excessive rainfall in September, and the dry weather during the last months of the year. The total

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on Central Statistical Office data. http://dx.doi.org/10.1787/276875663232

1. Chikungunya is a rare form of viral fever spread by mosquitoes

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area harvested for sugarcane declined from 69 698 hectares in 2004 to 68 351 hectares in 2005, whereas the average yield of sugarcane per hectare decreased from 75.76 tonnes in 2004 to 72.92 tonnes in 2005. The rate of sugar extraction fell from 10.85 per cent in 2004 to 10.44 per cent in 2005. Sugar exports have also declined in recent years. In 2005/06, sugar exports stood at 521 210 tonnes, compared with 564 020 tonnes in 2004/05. Of total sugar exports, 96 per cent, or 502 860 tonnes, were directed to the EU under the Sugar Protocol. In spite of the lower export volume, the contribution of sugar exports to total domestic exports increased from 22.1 per cent in 2004 to 25 per cent in 2005. To reverse these unfavourable trends, the government has announced restructuring plans for the sugar sector in the 2006/07 budget. Since 2006, the sugar industry has been hit by a 36 per cent price reduction on all the sugar to be exported to the EU. The price reduction is to be phased in during the four-year period 2006-09. As a result, the sector is undergoing contraction and restructuring, which is likely to lead to diversification in the mediumto-long term. To help the sugar sector, the government has instituted a restructuring plan for the next ten years, which will cost MUR (Mauritian rupees) 24.5 billion, or $732.8 million2. The government plan seeks to encourage the diversification of sugar production into higher-value-added sugar (refined sugar). The plan will also use sugar by-products for the production of electricity and ethanol. In addition, the government seeks to reduce costs by instituting a programme to consolidate plantations into larger, more efficient units and to support investment in irrigation. The government has presented a Multi-Annual Adaptation Strategy - Action Plan 2006-2015 to the EU in an effort to seek increased financial support for the restructuring of the sugar industry. The plan identifies several action plans to reduce costs, increase revenue, maximise the use of by-products and alleviate debt burdens. The objective of the Multi-Annual Adaptation Strategy - Action Plan is to transform the

sugar industry into a cane cluster that will provide different types of sugar and use the by-products, such as bagasse for electricity generation or molasses for the production of ethanol and other value-added spirits. Small sugar farmers are to receive incentives and assistance in forming larger units in order to improve their productivity and reduce their production costs. In addition, the Mauritius Sugar Authority has earmarked MUR 500 million (nearly $15 million) to be used for stone and rock clearance, irrigation, improved agricultural practices and to provide better sugarcane varieties. MUR 276 million ($8.3 million) of the MUR 500 million ($15 million) have been committed to the purchase of equipment for the Sugar Planters Mechanical Pool Corporation. Another part of the government’s plan for diversification of the sector is to build a “seafood hub” project. The purpose of the project is to develop Mauritius into a regional centre for the storage, processing and distribution of seafood and to offer repair and servicing facilities for fishing vessels. The government believes that the project will be one of the country’s most promising new growth sectors. Its foreign-exchange earnings are expected to double to MUR 10 billion ($299.1 million) in the next few years. In addition, the project is expected to create about 5 000 new jobs. To realise this objective, new fishprocessing plants are required. Foreign direct investment (FDI) is already flowing into this project as a longestablished Anglo-Mauritian enterprise, Ireland Blyth Limited, has announced plans to build a new MUR 300 million ($8.97 million) fish-meal factory in the country to replace its existing plant. The manufacturing sector consists of sugar milling, EPZ and other kinds of manufacturing. The manufacturing sector contracted in real terms by 5.5 per cent in 2005, compared with a growth rate of 0.3 per cent in 2004. In 2005, the sugar-milling sector accounted for 19.7 per cent of total value added in the economy. The same year, the EPZ sub-sector recorded a negative growth of 12.3 per cent following a decline of 6.8 per

2. Mauritian rupees were converted to $ using the exchange rate of MUR 33.432/$ prevailing on 1 January 2007.

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cent in 2004. This was due to the dismantling of the MFA and the ending of the textile trade quotas on 1 January 2005, as well as to fierce competition with lowcost-textile producing countries such as China, India and Bangladesh. The total output of EPZ contracted by 5.9 per cent in 2005. However, the EPZ sector was estimated to have registered a 3 per cent growth in 2006 after four years of decline. The sugar-milling sub-sector declined by 9.2 per cent in 2005, compared with the 6.5 per cent growth rate of 2004. The non-sugar-milling and non-EPZ sub-sectors recorded zero growth in 2005 as opposed to the 6 per cent growth rate of 2004. The main EPZ markets in 2005 were the United Kingdom, France and United States while the main countries of origin for EPZ imports were India, China and France. Employment in the EPZ sector declined further by 1 091 or 1.6 per cent, from 68 022 in December 2004 to 66 931 in December 2005.

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The sharp output contraction in the manufacturing sector, especially in the EPZ sub-sector, was also due to the dismantling of the MFA. This has eroded the country’s preferential access to EU and United States (US) markets. Many textile enterprises have closed down or have had to adapt to the loss of preferential treatment. This has led to labour downsizing and factory consolidation. To offset these developments, the government has introduced measures to improve the country’s competitiveness and intensify its diversification efforts. A number of measures in the 2006/07 budget were aimed at overhauling the framework of incentives as well as reducing distortions and biases. From 2006 to 2009, tariffs will be liberalised and Mauritius will be turned into a duty-free country. The incentive regimes for the EPZ and non-EPZ enterprises have been unified and all corporate taxes have been set at a neutral 15 per cent. These incentives will then be phased out over the next three years. A second phase of the programme will address the high costs of services. To restore global competitiveness, existing sectors, such as sugar, textiles, or clothing, are being encouraged to modernise and restructure, with government support when necessary. The government hopes to diversify into new activities such as information and communications technology (ICT), financial services, specialty tourism and land-based ocean activities. African Economic Outlook

The tourism sector performed relatively well in 2006, with an estimated real growth of 3.6 per cent, compared with a 5.6 per cent growth rate in 2005. Excluding France and Réunion, the sector registered strong growth of 17 per cent. Tourist arrivals from France and Réunion were down sharply as a reaction to negative press information on the outbreak of the chikungunya fever, which hit the islands of the Indian Ocean, including Mauritius. Tourists arriving from South Africa increased by 21.1 per cent, while those arriving from the United Kingdom (UK) increased by 7.3 per cent. Tourist arrivals fell by 0.6 per cent, from 70 793 in November 2005 to 70 394 in November 2006, while gross tourism receipts increased by 35.5 per cent, from MUR 2.472 billion ($73.94 million) in November 2005 to MUR 3.349 billion ($100.17 million) in November 2006. In cumulative terms, from January to November 2006, tourist arrivals reached 691 967, representing an increase of 3.2 per cent from the 670 544 arrivals registered in the corresponding period of the previous year. Tourism receipts for January to November 2006 increased by 24.2 per cent to reach MUR 28.007 billion ($837.73 million), compared with the MUR 22.550 billion ($674.50 million) registered for the corresponding period in 2005. The government is projecting gross tourism receipts of MUR 31 billion ($927.26 million) in 2007. This will represent a 17 per cent increase from 2006, which will be due partly to the rapid depreciation of the Mauritius rupee. January, February and December 2006 were good months for tourist arrivals and tourist receipts collected during this period contributed significantly to the gross tourist receipts for the year. The government’s main objective in the tourism sector is to increase tourist arrivals to 2 million by 2015. To achieve this objective, the government has implemented a guarded and selected liberalisation policy for international airlines and is promoting investment in new hotels and other facilities, which will generate employment. Virgin Atlantic Airlines has announced that it will start operating a twice-weekly service from London in November 2007. Other airlines are also expected to obtain rights to make flights to © AfDB/OECD 2007

Mauritius

Mauritius. Ten new hotels are to be constructed within the next two years. The government intends to make the diversification of source markets an important element in its strategy to develop the tourism sector by reducing its dependence on the French market, which accounted for 29 per cent of the number of tourist arrivals in 2005. In addition, the government has already begun implementing the IRS, which involves the construction and sale of luxury villas with attached amenities. This project looks very promising, as inferred from the number and scale of approved projects and those currently awaiting approval. In the medium term, the sector will also include shopping and conference facilities. Funding for the Mauritius Tourism Promotion Authority was considerably increased in the 2006/07 budget. To date, the industry has depended largely on up-market tourism for its rapid growth. This policy has been criticised, as it is believed to deprive the larger population of active participation in the industry. To remedy this situation, it has been suggested that the government should democratise the sector in order to attract different types of tourists. In addition, the government has been called upon to encourage an integrated approach to the development of the sector, which would include the creation of tourist villages. This will not only assist in maximising the earnings potential of the industry but will also have a jobcreating effect on low-skilled workers. In addition to tourism, the government is actively promoting other industries such as the financial-services sector and the ICT sector. The financial-services sector, including real estate and business services, accounted for 15.5 per cent of total value added in 2005. The financial sector grew by 7 per cent in 2005, up from 4.3 per cent in 2004 with the insurance sub-sector growing by 5 per cent in 2005, the same growth rate experienced in 2004. This was due to a 9.4 per cent growth rate in offshore banks, 2.3 per cent in commercial banks and 10.2 per cent in other financial institutions. In 2006, the financial-services sector is estimated to have recorded a growth rate of 7.4 per cent. Prospects for the growth of the offshore financial sector are considerable and could be captured if significant © AfDB/OECD 2007

efforts are made to improve the attractiveness of the sector, such as setting up bilateral tax agreements with emerging economies and ensuring that the necessary supporting human-resource developments are in place. The ICT sector has been growing fast and has considerable potential for creating jobs. The ICT sector focuses on business-process outsourcing, software development and call centres, and it is expected to boom. This sector was estimated to have registered a growth rate of 7.1 per cent in 2006. Since 2001, Mauritius has invested heavily in stateof-the art telecommunications, and has focused on offshore e-commerce development. This is part of the government’s effort to turn the country into an information-technology free-trade zone that will provide digital parks across the island. The digital parks are designed to offer state-of-the art technological facilities that meet the needs of information-technology (IT) businesses. IT enterprises that choose to be located in Mauritius will be able to take advantage of a new submarine-cable optic-fibre connection linking Portugal to Malaysia via the island. To nurture the development of the IT sector, the government has established an Infocom Development Authority, which is responsible for the promotion of investments in information technology and which also regulates the sector. In addition, the government has been providing a series of fiscal incentives to both foreign and domestic businesses. Furthermore, IT enterprises located in Mauritius will also be provided with electricity at preferential rates, the opportunity to buy property and land, and permanent resident status. The Indian government has been assisting in this e-development initiative and has provided a credit line of $100 million to finance the development of the Mauritius CyberCity. Construction of the CyberCity began in 2004 and is part of the greater Ebene CyberCity project, which is intended to attract foreign IT enterprises to Mauritius. The Cyber Tower, a central feature of the Ebene CyberCity, was inaugurated in April 2005, and the new offices of the offshore management enterprise International Financial Services (IFS) in the Ebene CyberCity were inaugurated in April 2006. The CyberCity has attracted about 25 operators so far. African Economic Outlook

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Table 1 - Demand Composition 1998

(percentage of GDP)

2005

2006(e)

Percentage of GDP (current prices)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

25.8 6.3 19.5

21.6 6.3 15.3

12.5 30.4 5.0

7.0 5.0 8.0

7.3 4.0 9.0

Consumption Public Private

75.1 13.7 61.3

84.4 14.8 69.6

2.0 6.8 1.2

4.3 -0.7 5.2

3.7 1.8 4.0

-0.8 65.7 -66.5

-6.0 59.9 -65.9

5.4 5.4

5.5 5.1

3.1 1.4

External sector Exports Imports

Source: Central Statistical Office data; estimates (e) and projections (p) based on authors' calculations. http://dx.doi.org/10.1787/588381354853

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Located at a 15-minute drive from Port Louis, it has free-zone status and offers tax advantages to its occupants. The entire CyberCity is wired with optic-fibre and copper cables to provide high speed international bandwidth on tap. Nevertheless, in spite of the huge investments in the sector, the IFS promotion agency has not done enough to position the island at the forefront of the developing e-commerce sector internationally. To facilitate further growth, the government is formulating a National ICT Strategic Plan to lay out its strategy to transform Mauritius into a “Cyber” Island. The ICT sector is likely to provide a boost to productivity in the economy generally. ICT can also help the government with its plans to set up a biomedical hub in Mauritius. Two Indian enterprises are already assisting the government in the project to develop medical tourism. Upon completion, the project will provide high-tech treatment for foreigners and Mauritians. The government is keen to tap into the growing international demand for medical services and to provide integrated tourist packages covering health care, welfare and relaxation. Promoting Mauritius as an international medical centre will go beyond health care to include the manufacturing and assembly of medical equipment, pharmaceutical research, medical outsourcing and telemedicine, and a number of tax exemptions for medical equipment were announced in the 2006/07 budget. African Economic Outlook

The share of aggregate consumption was 84.4 per cent in 2005, compared with 75.1 per cent in 1998. Aggregate consumption was estimated to have grown further in 2006 by 4.9 per cent in real terms and is projected to continue to grow by an average of 4.3 per cent per year in 2007-08. The growth in aggregate consumption for 2006 implies that there has been an improvement in the living standards of Mauritians despite the severe difficulties that key sectors of the economy have experienced in recent years. Improvement in the standard of living has been made possible by the satisfactory level of investment, which was 21.6 per cent of GDP in 2005 and is estimated to have increased by 12.5 per cent in 2006. More importantly, even though the share of private investment was 15.3 per cent of GDP in 2005, down from 19.5 per cent in 1998, it still represents more than 70 per cent of total gross capital formation.

Macroeconomic Policies Fiscal Policy The economy is estimated to have registered an overall fiscal deficit of 5 per cent of GDP in 2005/06, after having recorded fiscal deficits of 5.4 per cent of GDP and 6.3 per cent of GDP in 2004/05 and 2003/04, respectively. © AfDB/OECD 2007

Mauritius

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Grants

19.8 17.0 0.2

20.0 17.3 0.2

20.3 17.5 0.4

19.9 18.5 0.2

20.1 18.2 0.3

20.4 18.7 0.2

20.5 18.9 0.1

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

21.5 20.5 16.8 6.8 3.7 2.8

26.4 21.0 16.8 6.3 4.3 4.7

25.6 21.0 17.0 6.6 4.0 4.3

24.9 21.0 17.0 6.4 4.0 3.5

25.4 21.4 17.7 6.3 3.8 3.6

25.1 21.4 17.2 6.1 4.2 3.6

24.9 21.2 16.8 5.8 4.4 3.7

Primary balance Overall balance

2.0 -1.7

-2.1 -6.3

-1.4 -5.4

-1.0 -5.0

-1.6 -5.3

-0.5 -4.7

-0.1 -4.4

a. Only major items are reported Source: Ministry of Finance data; estimates (e) and projections (p) based on authors’ calculations.

Total revenue and grants decreased slightly from 20.3 per cent of GDP in 2004/05 to 19.9 per cent of GDP in 2005/06. This was due to a decline in grants. Tax revenue, on the other hand, increased from 17.5 per cent of GDP in 2004/05 to 18.5 per cent of GDP. The increase in tax revenue was essentially due to increases in corporate taxes and value-added taxes, even though the rise in tax revenue was partly offset by declines in customs duty and excise duties. Taxes on income (including profits and capital gains), taxes on goods and services, and taxes on property increased by 28.1 per cent, 3 per cent and 15.5 per cent, respectively. The increase in revenue from corporate taxes accounted for 86.9 per cent of the increase in revenue from taxes on income, profits, and capital gains. Net revenue from VAT increased 9.4 per cent in 2005/06. One way the government may be able to increase revenue is to institute a gradual liberalisation of the price of sugar on the local market, which is highly subsidised by the sugar industry3. This will reduce revenue losses to the government. Non-tax revenue composed mainly of property income and fees, charges, and sales also rose by 25.9 per cent in 2005/06, reflecting mainly earnings on overseas investments by the Bank of Mauritius. Total expenditure and lending (minus repayments) declined from 25.6 per cent of GDP in 2004/05 to

http://dx.doi.org/10.1787/113505808154

24.9 per cent of GDP in 2005/06. Current expenditure remained unchanged at 21 per cent in 2005/06, while the major components – interest and wages and salaries – also remained unchanged. The share of wages and salaries decreased slightly from 6.6 per cent of GDP in 2004/05 to 6.4 per cent of GDP in 2005/06. On the other hand, the share of capital expenditure in GDP declined from 4.3 per cent in 2004/05 to 3.5 per cent of GDP. As a result of higher government expenditures in 2005/06 as compared with total revenue, the overall central government balance registered a deficit of 5 per cent of GDP. This is a decline from the 5.4 per cent of GDP figure that was recorded in 2004/05. The budget deficit was financed from domestic sources, including both the bank and non-bank sectors. Financing from the central bank resulting in an expansion of the money supply was also positive. In terms of instruments, only medium and long-term securities were used to finance the budget deficit Mauritius’s public debt was estimated to have declined from 58.2 per cent of GDP in 2005 to 57.9 per cent of GDP in 2006, reflecting a reduction in the fiscal deficit in 2006. This means that the scale of government borrowing was much less than the previous

3. Since 1995, the Mauritius Sugar Syndicate has been importing and selling sugar on the local market at prices determined by the Syndicate, which are lower than the import price

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year. Internal public debt accounted for 92.4 per cent of total public debt in 2006. The proportion of shortterm debt in total internal public debt has decreased steadily from 85.8 per cent in 2003 to 52.9 per cent in 2006. Monetary Policy

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During fiscal year 2005/06, the Bank of Mauritius (BoM) tightened its monetary policy stance by raising its interest rate on two occasions by an initial increase of 50 basis points from 10 per cent to 10.5 per cent in August 2005 and by a further 100 basis points to 11.50 per cent on 7 December 2005. The increases in the interest rate were intended to contain inflationary pressures in the economy driven largely by a sustained rise in energy prices, a large build-up of excess liquidity and government borrowing arising from financing the persistent fiscal deficits. The annual rate of inflation was estimated at 8.9 per cent in 2006, a sharp increase from the rate of 5 per cent recorded in 2005. The rise in the rate of inflation was due largely to the removal of subsidies on flour and rice that was announced in the 2006/07 budget, the depreciation of the Mauritian rupee, rising freight costs and soaring energy prices during the year. Inflation is projected to decline to about 5 per cent in 2007, since some of the contributing factors were just one-time occurrences. The interest-rate increase was also intended to preserve the attractiveness of key rupee-denominated financial instruments, because the value of the rupee deteriorated in relation to the major international currencies. Moreover, the interestrate increase helped to contain emerging-demand pressures in the foreign-exchange markets. The banks adjusted their rupee deposits, advances and lending rates in line with changes in the discount rate, but this did not seem to have much of an effect on short-term market interest rates. Thus, the money supply returned to a double-digit growth rate of 11.2 per cent, from

a single-digit rate of 8.5 per cent in 2004/05. Following its Article IV consultation with the International Monetary Fund (IMF), the BoM has indicated a willingness to manage liquidity more actively. A number of banking developments occurred in 2005/06 as the BoM continued to implement the Banking Act of 2004, which made it easier for banking business to be carried out under a single banking license4. The BoM issued a “Guideline on Segmental Reporting under a Single Banking License Regime” to banks in June 2005, which provided, amongst other things, for the reporting of banking activities under Segment A and Segment B and the treatment of specific deposit liabilities for the cash-reserve ratio requirement. Other key banking developments involve the Mascareignes International Bank Limited, which merged with the Banque des Mascareignes Limitée. RMB (Mauritius) Limited ceased all banking operations. HSBC Bank (Mauritius) Limited was granted a banking license and started operations in August 2006. Barclays Bank was also allowed to issue bonds to the public. External Position The current account of the balance of payments deteriorated significantly to record a deficit of 7.4 per cent of GDP in 2006, up from 5.2 per cent of GDP in 2005. The deterioration was largely due to a worsening trade balance, which was to some extent offset by the combined surpluses in services and current transfers. The worsening trade balance was caused by high imports driven by a higher import bill for oil products and a sharp increase in the imports of telecommunications equipment. Both items were responsible for more than 50 per cent of the increase in total imports. In 2007, Air Mauritius plans to purchase two new aircraft. This will lead to an increase in the import bill

4. The Banking Act 2004 removed the distinction between Category 1 banks (commercial banks) and Category 2 banks (offshore banks) and provided for banking business to be conducted under a single license regime. All banks are now free to transact in all currencies, including the Mauritian rupee. Segment B relates to the banking business that gives rise to “foreign-source income”. All other banking business is classified under Segment A. Banks reported their statement of assets and liabilities based on segmental reporting for July 2005 together with a comparative statement for June 2005.

African Economic Outlook

© AfDB/OECD 2007

Mauritius

and will have an adverse impact on the trade balance, which is projected to reach 16.2 per cent of GDP. In contrast, the surplus on the services account of the balance of payments is projected to increase at a sustained pace of 8.4 per cent of GDP, due mainly to higher surpluses on the travel account. The worsening trade deficit in 2006, which was partly blamed on high imports, was also due to weak growth in export earnings. Export revenue could therefore improve significantly if Mauritius could take advantage of the many opportunities it could derive from its membership in its regional bodies, such as the Southern Africa Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA). COMESA has already established a Free Trade Area and is working towards the creation of a Customs Union, which Mauritius is actively supporting. Mauritius is negotiating the establishment of an Economic Partnership Agreement (EPA) with the EU as a member of the Eastern and Southern Africa (ESA) group. Mauritius is also pursuing a policy of tariff liberalisation in order to foster the “duty-free island” concept. Even though Mauritius does not need to harmonise external tariffs within a future COMESA Common External Tariff (CET), Mauritius could still become a member of both the SADC and COMESA Free Trade Areas, giving support to the COMESA CET, while keeping a network of free-trade agreements with countries bordering the Indian Ocean (e.g. India and Malaysia) as well as with the EU. Mauritius can also increase its export earnings through continued benefit from the US African Growth and Opportunity

Act (AGOA), which ensures the country‘s preferential access to the US market for certain products. Mauritius is therefore actively campaigning for further extension of AGOA. Mauritius also signed a Trade and Investment Framework Agreement with the United States in 2006. In 2005/06, net inflows of FDI amounted to MUR 1.564 billion ($46.78 million), compared with outflows of MUR 61 million ($1.82 million) in 2004/05. As a result, gross FDI in Mauritius reached MUR 4.683 billion ($140.08 million) in 2005/06. This was due largely to investments in the tourism sector, which also reflected the significant developments in the IRS and the banking sector. Disinvestments from Mauritius were quite considerable, amounting to MUR 3.119 billion ($93.29 million) in 2005/06, which was partly due to non-residents’ disposal of shares in the banking and commercial sectors. Direct investment abroad by residents recorded net outflows of MUR 986 million ($29.49 million) in 2005/06 as against net outflows of MUR 826 million ($24.71) in the previous fiscal year. Gross FDI by Mauritian residents amounted to MUR 1.783 billion ($53.33 million) in 2005/06 and was addressed mainly to the tourism sector in Maldives and Seychelles, the manufacturing sector in Madagascar and the agricultural sector in Mozambique. As a result, direct investment registered net inflows of MUR 578 million ($17.29 million) in 2005/06, compared with net outflows of MUR 887 million ($26.53 million) in 2004/05. The net international reserves of the Bank of Mauritius comprise the net foreign assets of the banking system, the foreign assets of the government and the

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-5.6 43.7 49.3 4.8 -0.6 2.3

-5.3 33.7 39.0 6.6 -0.5 0.9

-9.1 31.3 40.4 6.7 -0.2 0.8

-12.7 34.1 46.8 6.7 -0.1 1.0

-16.3 32.8 49.1 7.9 -0.1 1.1

-16.2 32.0 48.3 8.4 -0.1 1.1

-19.8 31.5 51.3 9.0 -0.1 1.1

Current account balance

0.8

1.7

-1.8

-5.2

-7.4

-6.8

-9.7

Source: Bank of Mauritius; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/163225034450

© AfDB/OECD 2007

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Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

370

Source: IMF. http://dx.doi.org/10.1787/266241827673

country’s reserve position in the IMF. Net international reserves increased from MUR 53.932 billion ($1.62 billion) at the end of June 2005 to MUR 61.974 billion ($1.86 billion) at the end of June 2006 (an increase of 14.9 per cent in nominal terms). The level of net international reserves of the country at the end of June 2006 represented about 7.4 months of imports based on the value of the import bill for fiscal year 2006 excluding imports of aircraft, compared with 7.7 months of imports at the end of June 2005. The end-of-June 2007 level of international reserves of the country has been estimated as the equivalent of 6.8 months of imports. The country’s external public debt fell from MUR 9.2321 billion at the end of June 2005 to MUR 8.6484 billion at the end of June 2006. This was due to a decline in both foreign loans and foreign investment in treasury bills. In spite of the decline in total external debt, the debt-service ratio of the country increased from 6.5 per cent in 2005 to 8.4 per cent in 2006. African Economic Outlook

Structural Issues In recent years, the Mauritian economy has been affected by a number of problems including low economic growth, high unemployment, widening fiscal and external deficits, and excessive public debt. These problems have been compounded by the impact of the “triple shock”, namely: the EU decision to cut its guaranteed sugar import price, which is expected to lead to a 36 per cent decline in the price of sugar imported from Mauritius in the course of 2006-09; the end of the MFA on 1 January 2005; and the recent increase in international energy prices. To tackle these challenges, the government announced 40 bold reform measures in the 2006/07 budget. The reforms were designed to make the economy more open and flexible, as well as to provide new controls on public spending by overhauling the outdated tax and publicspending system. Most of these measures have been transformed into law by the Finance Act of 2006, while other policies are in the process of being legislated. The measures include the following: a) a © AfDB/OECD 2007

Mauritius

Business Facilitation Act has been passed, aimed at improving the business climate in Mauritius by simplifying procedures for incorporating business, opening up the economy to foreign investors, reducing bureaucratic procedures and streamlining regulations that affect business start-ups; b) it has been made easier to obtain work and resident permits; c) the procedure for acquiring property for business development has also been simplified; d) in order to improve trade competitiveness, the government is currently implementing a phased tariff reduction with the aim of eventually achieving a duty-free country by reducing the top ad valorum tariff rate from 65 to 30 per cent and reducing average tariffs by 2 per cent; e) the tax and regulatory regimes for EPZ and nonEPZ enterprises have all been unified, except for labour regulations; and f ) the international private leased circuits (IPLCs) have been reduced by 20 to 35 per cent in order to turn the country into an ICT Free Trade Zone5. The high unemployment rate of 9.6 per cent in 2006 was partly due to the rigidity of the country’s labour market. The labour laws provide a high level of worker protection and make it difficult to dismiss workers. Real wages are also very high. Furthermore, the labour markets are segmented. Labour-law reforms are therefore being contemplated. These reforms include abolishing the National Tripartite Commission and replacing it with a National Wage Council. Wages would be linked to productivity, and the degree of job protection would be reduced. The various labour markets would be integrated into one regime with the same rules and procedures for all. In the area of fiscal policy, changes in personal and enterprise taxation have been announced. The government plans to eliminate many complex exemptions, tax abatements and allowances, and to reduce the number of tax brackets. These reforms are intended to lead to a flat-rate regime system with a single personal and enterprise tax rate of 15 per cent by July

2009. These changes are designed to simplify the taxadministration system significantly and to reduce the scope for tax fraud, and consequently to bring about a higher rate of revenue collection. Proposed reforms of the government’s land policy are intended to ensure that more land is made available to non-sugar producers. For some time, farmers have been encouraged to move into agro-industry-based activities such as food processing. As a result, pickles and fruit juices are now being processed in Mauritius. Some land is also being used for flower production. Having strengthened its framework for managing environmental risks, the government is better prepared to assess whether the major reforms being contemplated might have important environmental impacts. To manage environmental risks, the Environment Protection Act now mandates the maintenance of a list of activities that require short or full environmental impact assessment (EIA). For the mini- or short EIA, a preliminary report is required, which can be approved by the Director of the Department of Environment after stakeholders have been given sufficient time to present their views. To deal with the activities responsible for heavy pollution, a full EIA is required. In the case of waste-water projects, the Department of Environment monitors the impact of waste water on marine pollution. The problem of waste water is becoming increasingly important in the tourism sector with the development of the IRS scheme. To deal with the problem of improper disposal of plastic bags, fines are now levied on those found throwing plastic bags on the streets. Access to Drinking Water and Sanitation Water in Mauritius is mainly available from underground and surface sources (mainly rainfall), and it is collected in reservoirs around the island. Water comes 52 per cent from boreholes and 48 per cent from the surface. Mauritius has an average annual rainfall of 2 100 millimetres and an annual volume of freshwater of 3 900 million m3 of which only 33 per

5. The IPLC service enables connection between two points either by fibre or satellite. Mauritius Telecom can offer IPLC on the basis of bilateral agreement with other carriers or on a full-circuit basis from its Point of Presence in Paris. The service is used mostly by service providers, public operators and foreign carriers.

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Mauritius

cent is captured. Unfortunately, this volume of water is unequally distributed due to the land topography, thereby requiring the use of dams and reservoirs. In normal climatic conditions, Mauritius has a storage capacity of one year. Water consumption per capita is about 160 litres per day and if all sectors are included, it amounts to 250 litres per day.

372

Several institutions are involved in the production and distribution of water. They include the Central Water Authority (CWA), which, according to the CWA Act, is responsible for the control, development and conservation of water resources and also for the treatment and distribution of water to domestic, industrial and institutional consumers. The legislation also entitles the CWA to carry out operations relating to sewerage and irrigation. A second institution involved in the water sector is the Water Resources Unit (WRU), which is located in the Ministry of Public Utilities and is responsible for developing water policy and for carrying out studies to determine water requirements. It is currently working on a Water Act. The third institution involved in the water sector is the Waste Water Management Authority, which is responsible for sewerage operations. The achievements of Mauritius in providing access to drinking water and sanitation have gone well beyond the MDGs. More than 99.6 per cent of the population has access to safe drinking water while 99.9 per cent of the population has access to improved sanitation services in both the urban and rural areas. As regards the supply of drinking water, the CWA mobilised an average of 525 000 m3 of potable water daily in 2003, of which 78 per cent was sold to domestic

subscribers and the rest to government institutions and commercial enterprises. The demand for water from 1995 to 2003 increased cumulatively by 32 per cent. Since then, water demand has been increasing by an average annual rate of 3 per cent. The number of subscribers has also been growing by a steady 2.8 per cent. According to the CWA forecast, water requirements during 2007-08 and 2009-10 will amount to 550 000 m3 and 565 000 m3 respectively. Table 4 shows water consumption by type of client. Domestic consumption accounts for the highest consumption of water (77.5 per cent). A significant portion of water is used for irrigation purposes. These latter account for 60 to 70 per cent of the impounded raw water, which is available mainly from boreholes and some reservoirs. In Mauritius, the regularity of water supply is determined by seasonal factors. During the normal season, 87 per cent of households have access to 24hour water supply. The other households have a supply varying from 10 to 18 hours. Water supply is rationed during the May-November dry season and some regions receive a minimum of 10-hour water supply a day. However, due to climatic changes, the dry season has now lengthened to December, thereby adding extra pressure on the water supply. The domestic water supply throughout the island is generally safe for consumption. To ensure that this is the case, the CWA has two fully equipped laboratories that comply with World Health Organisation (WHO) standards. The Ministry of Health also monitors regularly the quality of water meant for consumption.

Table 4 - Water Consumption by Type of Client Type of client Domestic Government Commercial users Hotels Industry Agriculture (treated)

(percentage)

Share of water consumed 77.5 5.5 6.3 4 5.2 1.5

Source: Central Water Authority. http://dx.doi.org/10.1787/573052505400

African Economic Outlook

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Mauritius

The cost of water is very low, MUR 9.95 ($0.30) per cubic metre, or less than MUR 0.01 ($0.0003 ) per litre. The average price of water for domestic purposes is much less, MUR 5 ($0.15) per cubic metre. This rate, subsidised up to 75 per cent, is made possible mainly through a cross-subsidy system. The government purchases water at MUR 17 ($0.51) per cubic metre. Private-sector commercial users are charged MUR 16 ($0.48) per cubic metre, hotels pay MUR 29 ($0.87) per cubic metre and vegetable growers pay MUR 7 ($0.21) per cubic metre. Borehole users are licensed and charged MUR 0.50 ($0.015) per cubic metre. New connections to the water network for households are completed in a maximum of 15 days. The water tariff is increased every five years and the decision to do so is vested in the Ministry of Public Utilities. Unaccounted, or non-revenue, water consumption (about 47 per cent) is attributed to a number of factors and usages. Some operators such as the Fire Services are authorised users and have access to free water amounting to 5 to 6 per cent of available water. However, 35 per cent is attributed to pilferage and 7 per cent to leakages as a result of old pipes (more than 50 years old). There is, however, an ongoing plan to reduce the level of unaccounted water to a level of 25 per cent For the past 20 years, the CWA has invested an average of MUR 350 million ($10.47 million) annually in the water and infrastructure system in order to maintain a regular supply of water in the country. The main focuses have been on mobilising water resources from underground sources as well as surface sources, extending the water-supply network and increasing storage and treatment capacity. The WRU is planning to invest in new projects such as the Bagatelle Dam, which is to supply the capital city with water, especially during the dry season. Another dam, Chamarel, will supply the western coast. The total cost of this investment is estimated at $10 million. The CWA has access to various loans to finance its projects. At present, a number of projects are being financed by the African Development Bank (ADB) Group, the European Investment Bank (EIB), the © AfDB/OECD 2007

Kuwait Fund, the French development fund Caisse Française de Développement (CFD), the Saudi Fund and the Arab Bank for the Economic Development in Africa (BADEA). The water sector faces a number of challenges. The first is how the CWA can reduce non-revenue water from 47 per cent to 25 per cent. To do this, the CWA has developed an action plan and has developed a project for 2007-11 costing MUR 890 million ($26.69 million) aimed at renewing old pipes and water meters. The reduction of pilferage is being monitored by a fraud squad. The second challenge is how to mobilise more surface water by investing in major projects such as dams. This is the result of the high water demand, which has caused Mauritius to reach its limit in terms of underground water resources exploitation. A number of ongoing ground water exploration programmes are being instituted across the island in order to satisfy demand. According to the United Nations Development Programme (UNDP) Human Development Report, Mauritius is already facing a situation of water stress because it has a supply of 1 083 m3 per person per year (based on actual population), which is below the norm of 1 700 m3 per person per year. According to the same sources, Mauritius is expected to suffer from water scarcity by 2020 with a projected supply of 974 m3 per person per year (based on a projected population of 1 335 000). Although the figures can be interpreted in various ways, they provide an indication of the problems that Mauritius may face in the future regarding water supply. Some recorded statistics, which tend to substantiate this trend, show that there has been a drop of 8 per cent in available water resources over the last 30 years in Mauritius. The WRU is therefore developing plans to mobilise additional water resources. The fourth challenge faced by the CWA is that of capacity building and how to keep pace with new technology. In order to encourage training, the CWA is using 1 per cent of its total investment funds for capacity building. With respect to sanitation services, almost 99.9 per cent of the population has access to proper sanitation African Economic Outlook

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Mauritius

in their homes in both urban and rural areas. Regarding the treatment of waste water, only 25 per cent of households are currently connected. The treatment of waste water is carried out by the Wastewater Management Authority (WMA), which was established as a corporate body under the Wastewater Management Authority Act. Its main responsibilities are the collection, treatment and disposal of wastewater. This organisation operates under the aegis of the Ministry of Public Utilities. Each household is connected to the sanitation network wherever sewerage networks exist. Those connected are the only ones whose bills are annexed to their water bills and pay the equivalent of their water bill in rupees. The government has committed to spend MUR 6 billion in the next six years to reach a sanitation connection level of 50 per cent.

Political Context and Human Resources Development 374 Since attaining independence in 1968, Mauritius has been a stable democracy with regular free elections, a free press, the rule of law and a positive human-rights record. The head of state of Mauritius is the President, who is elected for a five-year term by the National Assembly, the unicameral Mauritius Parliament. The National Assembly comprises 62 members elected directly by popular vote, with between 4 and 8 further members appointed from “best losers” election candidates to represent ethnic minorities. The government is headed by the Prime Minister and a Council of Ministers. The most recent general elections were held on 3 July 2005 in all the 20 mainland constituencies as well as the constituency covering the island of Rodrigues. Observers of the international community judged the elections free and fair. The Labour Party, the largest party in the Alliance Sociale, won a substantial majority in Parliament. This majority helped the new government implement bold and radical economic reforms, which were announced in the 2006/07 budget that was presented in June 2006. However, the reforms include the imposition of controversial tax increases and the removal of subsidies on rice, flour and other essential commodities. African Economic Outlook

Although Mauritius was rated as one of the least corrupt countries in Africa in the Transparency International Corruption Perception Index of 2005, there has been an increase in the incidence of corruption in recent years. Given this perception, the government has reiterated its commitment to fighting corruption. To this end, legislation was enacted in September 2005 to reform the practices and management of the Independent Commission Against Corruption (ICAC). However, action has yet to be taken to deal with the issues raised in the audit director‘s report on government finances for 2004/05, which was published in November 2005 and severely criticised the management of government finances. This lack of action has undermined the government’s credibility and commitment to fighting corruption. In terms of regional relations, the government will continue to participate in negotiations with the EU to set up a free-trade agreement for members of the SADC before the Cotonou Agreement expires in 2020. The government will also continue negotiations with India on the Comprehensive Economic Cooperation and Partnership Agreement aimed at consolidating the excellent relations between the two countries. However, Mauritius may have to accept changes in the highly advantageous clause in their double-taxation-avoidance agreement. The government will also seek to develop links with China. In terms of fostering democratic governance, Mauritius has made considerable progress in promoting the protection of human rights since its independence. In 2005, it launched its National Human Rights Strategy. The government of Mauritius has established a number of national human rights institutions including the National Human Rights Commission, the Office of the Ombudsperson for Children and an Ombudsperson. The country has ratified all major United Nations (UN) international human-rights instruments with the exception of the International Convention for the Protection of the Rights of all Migrant Workers and Members of Their Families. Nonetheless, the Second Optional Protocol to the International Covenant on Civil and Political Rights, the Optional protocol to the Convention on the © AfDB/OECD 2007

Mauritius

Elimination of All Forms of Discrimination against Women and the Convention on the Rights of the Child have not been ratified yet. Gender mainstreaming is now receiving new impetus. In August 2005, the government of Mauritius, in collaboration with the UNDP and the International Labour Organisation, started a three-year programme titled Capacity Building for Gender Equality and Empowerment of Women. The programme is aimed at an environment that will ensure the development of policies, legislation, financial and economic mechanisms in Mauritius to promote gender equality in social, economic and political spheres as well as to empower women. Achievements in gender have so far included a substantial increase in the representation of women in parliament. Of the candidates nominated by each major group in the current parliament following the July 2005 general elections, 16 were women and 12 of these candidates were elected (11 directly and 1 woman through the “best loser” system). This raised the representation of women in parliament from 5.7 per cent, or 4 women, in the outgoing parliament, to 17.1 per cent in the new legislature. Although Mauritius has made important progress in achieving the MDGs, the country still faces several challenges, including dealing with pockets of poverty in an economic environment beset by low job creation. While no national poverty line has been established, it is estimated that around 12 per cent of the population live in poverty. The figure is much higher for Rodrigues, where about 37.5 per cent live in poverty. One way that the government can make significant progress in addressing poverty is to promote social participation, cohesion and create well-being for all citizens. This includes fostering stronger participation of women in

© AfDB/OECD 2007

economic and political decision-making processes. The special measure announced in the 2006/07 budget, which was intended to democratise the economy, will ensure greater participation and social cohesion through the creation of an Empowerment Programme. The programme will spend MUR 5 billion ($150 million) over 5 years, which is a step in the right direction. The programme will focus on supporting workers in transition and supplying land for social housing and small businesses. It will also provide finance and technical support for small and medium-size enterprises. Progress on the MDGs, as based on the 2003 Status Report (the latest available), showed that Mauritius had made significant progress in the social sector. With respect to education, primary school is now compulsory and free. Both boys and girls have the opportunity of attending primary schools, and the primary-school enrolment ratio attests to this. Mauritius has met the target for universal primary education. The maternalmortality rate has also decreased and is comparable to that of the developed countries. This target was reached in 2000. Investment in the health sector would ensure that the maternal-mortality rate does not deteriorate over time until 2015. The child-mortality target was also on track with low rates observed in recent years. HIV/AIDS is not a serious problem in Mauritius. However, an increase in new cases has recently been reported, and this has become a matter of concern to the government. The government has therefore stepped up its awareness campaign and is providing the necessary care and support for those already affected by the disease. The prevalence rate of HIV/AIDS amongst the adult population, aged 15 to 49, was estimated at 0.6 per cent in 2005. Women aged 15 to 49 with HIV/AIDS were estimated at less than 1 000.

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.

Morocco

Rabat

key figures • • • • •

Land area, thousands of km2 447 Population, thousands (2006) 31 943 GDP per capita, $ PPP valuation (2006) 5 804 Life expectancy (2006) 70.7 Illiteracy rate (2006) 47.7

Morocco

M

OROCCO’S ECONOMIC PERFORMANCE

improved markedly in 2006 and the outlook for 2007 is favourable. Growth reached 7.3 per cent in 2006, well above the forecast 5.3 per cent a year earlier, but is expected to slow down to 3.1 per cent in 2007. In 2006, investment grew at 5.3 per cent; unemployment fell significantly to below 10 per cent from 11.1 per cent in 2005, while inflation increased only modestly to 3.3 per cent in 2006, in response to high oil prices. The government managed to reduce the budget deficit to 5.6 per cent of GDP excluding privatisation receipts (4.1 per cent otherwise) in 2006, compared with 6 per cent in 2005; the deficit is expected to remain about the same in 2007 and 2008. The public debt to GDP ratio decreased from 75 per cent of GDP in 2005 to 70 per cent of GDP in 2006.

Since his coronation in 1999, King Mohammed VI has prioritised poverty reduction and job creation. To this end, the Moroccan A reform programme aims authorities introduced wideto enhance growth and to ranging policy reforms in improve human development 2005 and 2006 to diversify indicators in the context the economy and raise of a mostly favourable political productivity, notably the and economic environment. Plan Emergence. This plan aims to raise growth by 1.6 per cent per annum over the next ten years, leading to the creation of an additional 440 000 new jobs. Morocco has signed several Free Trade Agreements, including one with the United States and one with Turkey, and is currently negotiating one with Europe. 379

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: IMF and local authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/318764308825

© AfDB/OECD 2007

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Morocco

However, regional co-operation with the MENA region and Africa is still very weak. Although the latest official growth and unemployment figures show impressive improvements, further reforms of the legal system, the administration and the labour market are required to extend these gains.

Recent Economic Developments

380

Led by agriculture, economic growth jumped to 7.3 per cent in 2006, up from 4.2 and 2.1 per cent in 2004 and 2005 respectively, the highest since 1998. Stabilisation of agricultural output after this exceptional performance in 2006 is expected to entail a slowdown in growth in 2007 to 3.1 per cent. Over the longer term, the relationship between agricultural output and economic growth is weakening gradually, with the secondary and tertiary sectors gaining more weight in the country’s output. Non-agricultural output growth has been quite steady at 4.9 per cent in 2006 and 5.3 per cent in 2005, and is expected to be 5.2 per cent in 2007, with the latter aided by the distribution sector, which is forecast to grow at 5.8 per cent. The primary sector registered exceptional growth of 30.6 per cent in 2006. Cereal production reached an unprecedented 90 million quintals but is expected to fall back to 65 million quintals in 2007. Livestock also recorded a strong performance, which should be reinforced by policies to improve vaccination, sanitation, irrigation and crop diversification. A three-year

restructuring programme has been put in place that includes the replacement of cereals with less waterdemanding, fruit-bearing trees. Exports of fruits and vegetables, however, are suffering as a result of strong competition from countries like Egypt and Turkey. According to the Office des Changes (exchange office), the volume of citrus fruit and tomato exports fell by 12.6 per cent and 14.5 per cent respectively in 2006. Fish production decreased by 2 per cent in the year ending October 2006 following the decline in pelagic fishing which accounts for 82.1 per cent of total fish production in Morocco. The value of exports of fish products nonetheless rose by 8.4 per cent during this period, with canned fish, shellfish and fresh fish exports increasing by 5.3 per cent, 1.8 per cent and 1.3 per cent respectively. Despite the late start of the agricultural campaign, the primary sector outlook for 2007 is for continued strong growth of 6.8 per cent, due to the policies outlined above and others such as subsidies for seed purchase and storage and low interest-rate loans to finance agricultural campaigns and investments. The secondary sector continued its positive trend in 2006, growing at 4.9 per cent compared with 5.3 per cent in 2005. Industrial production rose by 4.7 per cent. The metal, metalworking and electronic industries recorded solid growth. Exports of electronic components grew by 10.4 per cent in 2006, up from 2.1 per cent in 2005.

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on National Statistics Office data. http://dx.doi.org/10.1787/801611104560

African Economic Outlook

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Morocco

Thanks largely to Europe’s imposition of new quotas on ten categories of Chinese products, the textile and leather sector recovered in 2006 with 14 per cent growth rate, after the downturn experienced in 2005 as a result of the phasing out of the Multi Fibre Arrangement (MFA) in January 2005, which granted Asian textile exports unlimited access to Morocco’s traditional markets. In addition, Morocco is taking advantage of its proximity to the EU and the United States to attract a growing number of European and American multinational producers. Moreover, the recent decision of the European Council to extend the cumulation of origin system to Mediterranean countries could also be an advantageous opportunity. The new preferential trade agreements signed by Morocco, combined with upgrading to highervalue added product lines should help Moroccan producers to cope with Chinese competition. On the other hand, the entry of new European countries such as Bulgaria and Romania into the EU in January 2007 is expected to put further competitive pressures on Moroccan manufacturers.

sector was bolstered by public investment in roads, ports and housing developments, as well as the boom in tourism. For the year ending October 2006, cement sales were up 8.7 per cent, compared with 4.8 per cent during the same period the previous year. The government intends to construct 100 000 housing units per year to resolve the problem of shantytowns that have grown around the country’s main cities. Private construction companies are carrying out the building under government contracts, with various tax breaks, subsidies and other incentives.

Mining activity recorded a slowdown in 2006, with the volume of phosphate exports declining 0.8 per cent, following an increase of 18.4 per cent in 2005. Rising prices of phosphates, however, pushed up the value of exports of phosphates, phosphoric acid and manures by 10.6 per cent, 7.2 per cent, and 30.7 per cent respectively.

The government’s tourism strategy is paying dividends. Banque Marocaine du Commerce Extérieur (BMCE) and a consortium of AttijariWafa Bank and Groupe Banques Populaires (GBP) each launched investment funds amounting to 2.5 billion dirhams. Foreign investment is flowing into the country’s tourism sector, with Gulf developers alone having announced investments of $14 billion over ten years, in major tourist destinations such as Marrakech and Tangiers. The construction of four out of seven planned new resorts is underway and a $1.4 billion preliminary agreement for the development of the Taghazout station near Agadir has been signed. The number of tourist arrivals in the year ending October 2006 increased 15.2 per cent, up from 11.8 per cent over the same period in 2005. By the end of November, the number of tourists reached 5.875 million, including 2.645 million Moroccans living abroad. Almost 40 per cent of these tourists originated from France, and 21 per cent from Spain. The main destination cities remain Agadir, Marrakech and Casablanca, which recorded an increase of hotel nights of 45 per cent, 29 per cent and 11 per cent respectively. The increase in the number of tourists translated to a surge of 23.9 per cent in tourism receipts to 43.3 billion dirhams at the end of October 2006. Airline traffic consequently also rose, with the number of international passengers increasing by 18 per cent to reach almost 6 million. This should further be improved by the arrival of two international low-cost airlines, Easy Jet and Ryanair in 2006, along with the newlycreated Moroccan low-cost airline Jet 4 You.

The service sector grew 5.8 per cent in 2006, with all major sectors performing well. The construction

The communication sector also expanded in 2006, and should be boosted further by the entry of the third

The other industrial sectors recorded more moderate growth, such as the food processing and chemical sectors, with 1.7 per cent and 6 per cent growth rates respectively, for the year ending June 2006. High oil prices led to a downturn in oil refining of 9.2 per cent for the year ending October 2006. However, new refineries are scheduled to be operational in 2008, which should enhance the competitiveness of the sector. Increased imports of electrical energy from Algeria and Spain supplemented growth in electricity production by 8.6 per cent in order to respond to growing demand from households (14.1 per cent) and businesses (10.1 per cent).

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mobile operator, Wana, in early January 2007. The other two operators recorded an increase of 24.2 per cent in subscriber numbers to 14.9 million at the end of the third yearly quarter. 3G licences were also granted to the three telecoms operators in July 2006. The number of Internet subscribers also increased by 73 per cent compared with the same period in the previous year. Offshoring and IT activities are expected to grow by a record 18 per cent, supported by various government incentives and by the opening of the Casablanca shore (Casashore) site in March 2007. This site, which provides incentives and state-of-the art equipment and technologies, is already attracting major companies such as BNP Paribas, Axa, Tata Consulting Services, Cap Gemini, GFI Informatique and Renault. By 2015, the sector is expected to employ 30 000 people and contribute $500 million to the country’s GDP.

Domestic demand in 2006 benefited from good performance in the primary sector, which accounts for 45 per cent of the country’s workforce, as well as from strong inward remittances and an improvement in employment levels. Private demand continues to be the primary driver of the country’s economy, with 8.9 per cent growth. Households’ purchases of durables increased, as reflected by the 20.8 per cent growth in consumer loans, and car sales grew at 31 per cent. Public consumption growth slowed to 4.1 per cent however, reflecting the effect of the early retirement scheme enacted by the government to reduce the public sector wage bill; public consumption is expected to decelerate further in 2007 to 3 per cent. Investment continued to grow at around 6 per cent, but is expected to slow to 4.5 per cent in 2007 before picking up to reach 7 per cent in 2008.

Table 1 - Demand Composition 1998

382

2005

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage of GDP (current prices)

Percentage changes, volume

Gross capital formation Public Private

26.0 3.2 22.8

30.3 2.9 27.3

5.9 6.9 5.8

4.5 5.0 4.4

7.0 6.9 7.0

Consumption Public Private

77.7 16.7 61.0

75.9 19.2 56.6

9.3 4.1 10.6

2.5 3.0 2.3

3.4 3.0 3.6

-3.7 24.4 -28.1

-6.1 31.6 -37.8

7.3 8.7

4.9 2.7

6.5 4.1

External sector Exports Imports

Source: Haut Commissariat au Plan data; estimates (e); and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/783432504442

Macroeconomic Policies Fiscal Policy Morocco’s fiscal policy has been improving steadily over the past few years. The large deficit recorded in 2005 was mostly the result of the erstwhile cost associated with the early retirement plan that was put in place by the government to reduce its wage bill. Overall spending increased consequently by 17 per cent last year to reach 34 per cent of GDP in 2005. African Economic Outlook

Overall receipts remained strong at an estimated 23.4 per cent of GDP in 2006, down slightly from the high of 23.9 per cent in 2005. The government’s efforts to improve tax collection and the strong economy significantly boosted revenues. Direct tax receipts grew by 14.8 per cent, driven by a 28.8 per cent increase in corporate taxes collection, reflecting strong corporate profit growth. Income taxes, however, only grew at 2.1 per cent for the year ending October 2006 compared with a strong 17.5 per cent growth in the same period from the previous year, partly as a result of the early © AfDB/OECD 2007

Morocco

retirement scheme. Changes to the tax code, notably the decrease in the tax rate applied to high income taxpayers from 44 per cent to 42 per cent starting in January 2007, could further lower revenues. Direct taxes are expected to increase by 1.2 per cent in 2007 to reach the equivalent of 9.2 per cent of GDP and 43.9 per cent of total tax receipts. Overall, the revenue to GDP ratio is expected to edge downward to 23.2 per cent. Indirect tax receipts rose 12.2 per cent in 2006 owing to increases of 23.9 per cent and 12.5 per cent in value added tax (VAT) proceeds linked to domestic demand and imports respectively. These are forecast to increase by 8.8 per cent and 8 per cent in 2007, to reach 12 billion dirhams and 16 billion dirhams respectively. Stamp and registration duties also increased by 11.9 per cent, driven by good performance in the construction sector, and these are expected to reach 7.3 billion dirhams in 2007. Customs duties on the other hand remained broadly stable following the tariff reductions in compliance with the various trade agreements that have been signed by Morocco; customs revenues are expected to decline by 5.8 per cent in 2007. Total indirect taxes are nevertheless expected to increase 6.1 per cent in 2007 to reach 44.2 billion dirhams thanks to enlargement of the fiscal base, with the conversion to formal and taxable status of part of the informal sectors.

Non-fiscal revenues declined by 0.6 per cent in 2006, partly as a result of the decline in privatisation receipts, despite the sale to Altadis of the remaining 20 per cent of Régie des Tabacs, the former state tobacco monopoly, as privatisation receipts were less than half the expected level. The government privatisation plan for 2007 is also behind schedule with the sale of Compagnie marocaine de navigation (Comanav) and Société marocaine du thé et du sucre (Somathès) still waiting to be launched. The contribution of privatisation receipts to government revenues is expected to slow down in the medium-term to about 2 billion dirhams per year. State revenues were also supported in 2006 by 4.5 per cent growth in receipts from state monopolies and other state activities, and the balance on other special accounts. Receipts from state monopolies are expected to fall 10.7 per cent in 2007. Reductions in government expenditure from the early retirement scheme were somewhat offset by large subsidy payments, especially on petroleum products. Overall public expenditure declined to 29 per cent of GDP in 2006 from 29.9 per cent in 2005, and should remain steady in 2007. Government spending is dominated by current expenditures, with government investment in recent

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenues Grants

21.8 20.4 0.0

21.7 19.8 0.1

22.5 20.2 0.3

23.9 21.8 0.3

23.4 21.4 0.3

23.2 21.1 0.4

22.8 20.7 0.4

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

29.0 25.7 21.1 10.2 4.6 4.0

26.5 22.2 18.5 11.2 3.6 4.3

27.0 23.1 19.6 11.3 3.5 4.0

29.9 26.5 23.2 11.9 3.3 3.5

29.0 25.6 22.3 11.5 3.3 3.5

28.9 25.4 22.2 11.3 3.2 3.5

28.5 24.9 21.7 11.1 3.1 3.6

Primary balance Overall balance

-2.5 -7.1

-1.2 -4.8

-1.0 -4.5

-2.7 -6.0

-2.4 -5.6

-2.5 -5.7

-2.5 -5.6

a. Only major items are reported Source: IMF data estimates (e); and projections (p) based on authors’ calculations.

© AfDB/OECD 2007

http://dx.doi.org/10.1787/823511858187

African Economic Outlook

383

Morocco

384

years only accounting for about 3 to 4 per cent of GDP, or a tenth of total spending. Wages and salaries of civil servants account for almost half of current expenditures, but declined from 11.9 per cent of GDP in 2005 to 11.5 per cent in 2006, and are expected to fall again slightly as a percentage of GDP in 2007 and 2008.

bank tightened policy, thus bringing nominal interest rates up. Inflation is expected to slow down in 2007 to a range between 2.1 per cent and 2.8 per cent. The favourable balance of payments entailed a 29 per cent increase in net foreign assets from July 2005 to July 2006.

Subsidy payments amounted to 11 billion dirhams in 2006, the equivalent of 2.3 per cent of GDP. These almost doubled at the end of the third quarter of 2006 relative to the previous year, as a result of failure to fully index domestic petroleum prices to world oil prices despite several upward adjustments over the year. Food prices are also subsidised and insulated against fluctuations against world market prices. For 2007, subsidies are, however, expected to fall to 8.3 billion dirhams, or 1.6 per cent of GDP.

The exchange rate remains pegged to a basket of currencies dominated by the euro, the currency of Morocco’s main trading partner, despite growing rumours of a move towards a “more flexible” exchange rate. Reflecting the strong appreciation of the euro against the dollar in 2006, the dirham decreased by 0.4 per cent in value against the European currency, but gained 1.75 per cent against the dollar.

The overall fiscal deficit decreased slightly in 2006 to 5.6 per cent of GDP from 6 per cent in 2005, and are expected to remain at around that level during the next two years. With interest on public debt declining slightly as a percentage of GDP over this period, the primary balance will stabilise at around 2.5 per cent of GDP.

Exports rose in 2006, but at a slower rate than imports and GDP, such that exports-to-GDP fell slightly from 18.1 to 17.6 per cent while imports-to-GDP rose from 31.8 per cent to 32.8 per cent. As a result, the trade deficit surged from 13.7 per cent of GDP in 2005 to 15.2 per cent in 2006. The trade deficit is expected to recede to about 14.5 per cent of GDP during the next two years. The large surpluses in services, mainly tourism, and remittances, generally more than offset the trade deficit in recent years, such that Morocco tends to run a current account surplus. In 2006, this surplus dwindled to almost zero from 1.6 per cent of GDP in 2005, but it is expected to bounce back to 1.3 per cent in 2007 and 2.3 per cent in 2008. The current account surplus, along with rising GDP, has entailed a steady fall in the external debt to GDP ratio from over 50 per cent in 2000 to under 30 per cent in

Monetary Policy The autonomy of the central bank Bank Al Maghrib (BAM) was enhanced in 2006, with BAM adopting an inflation targeting strategy and improving the transparency of its monetary policy. Inflation increased from 0.9 per cent in 2005 to 3.3 per cent in 2006, reflecting mainly higher energy prices. As a result, real interest rates fell to negative levels until the central

External Position

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-7.8 17.8 25.7 4.2 -2.6 5.8

-8.7 17.6 26.3 5.3 -1.6 8.2

-11.5 17.6 29.1 5.8 -1.2 8.6

-13.7 18.1 31.8 7.3 -1.0 9.0

-15.2 17.6 32.8 8.0 -0.9 8.2

-14.6 17.5 32.0 8.4 -0.8 8.3

-14.5 17.1 31.6 9.2 -0.8 8.4

Current account balance

-0.4

3.2

1.7

1.6

0.1

1.3

2.3

Source: IMF data estimates (e); and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/112063214587

African Economic Outlook

© AfDB/OECD 2007

Morocco

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

Source: IMF.

385 http://dx.doi.org/10.1787/702066348001

2006, with a further decline to below 25 per cent forecast in 2008. The best export performers in 2006 were phosphates and textiles; fish and electronic components exports also increased. Booming domestic demand led to a 10 per cent rise in imports in 2006. Rising oil prices pushed up the energy bill by 13.2 per cent to reach 37.1 billion dirhams for the year ending October 2006, despite a decline in the volume of oil imported.

Structural Issues Recent Developments Having embarked on the path of trade liberalisation and amplification of its economy, Morocco is fully aware of the need to accelerate structural reforms and improve infrastructure. A wide-ranging reform programme has been launched by the authorities to © AfDB/OECD 2007

achieve enhanced growth and improve human development indicators. Nevertheless, it remains to be seen whether the new initiatives will be more successful than previous reform efforts, which have lagged due to the government’s reluctance to tackle some politicallysensitive issues, such as labour-market rigidities and protected industries. The initiation of the Plan Emergence, which was formulated in late 2005, is probably the major event of 2006. This plan is aimed at both improving competitiveness in traditional industrial sectors (textile, food processing and fisheries) and supporting the emergence of newer sectors (offshoring, automotive parts, electronic components and aeronautics). It is hoped that the resulting export boom will yield an additional 1.6 per cent increase in annual GDP growth over the next ten years, reduce the trade deficit by 50 per cent and create 440 000 new jobs. To achieve these ambitious objectives, the government has proposed a series of actions over the short- to medium-term. These include the establishment African Economic Outlook

Morocco

of several industrial zones in a number of cities around the country, dedicated to the outsourcing of automobile manufacturing, and production of electronics components for automobiles, airplanes and medical care. These should generate 12 billion dirhams in export revenues and create 55 000 new jobs by 2015.

386

To develop offshore services in Morocco, the authorities will focus on human resources development and on the creation of dedicated zones with state-ofthe-art infrastructure in order to attract international companies. One such zone is “Casashore” which should be operational in March 2007. Office rents at EUR 8 per square metre, corporate tax holidays for the first five years, low sales taxes and import duties at 2.5 per cent, are among the incentives offered at the site. The government also signed a contract programme with the APEBI, the IT professional association in September 2006, to promote the development of IT activities in the country. Overall, the development of business processes outsourcing in Morocco should produce more than 2 billion dirhams in additional revenues by 2010. The government continued the privatisation programme initiated in 2003. Seventy out of 114 entities initially listed for sale were privatised by late 2005, generating 76.7 billion dirhams in receipts for the government. Additional proceeds amounting to 4.6 billion dirhams were received in 2006, with the sale of the remaining 20 per cent of Régie des Tabacs to the Spanish group Altadis and 100 per cent of Somathès. In 2007, the government expects to collect an extra 4.5 billion dirhams from privatisation activity, notably from the sale of 4 per cent of the telecom operator Maroc Telecom through the stock exchange, and the concession of DRAPOR, its port maintenance company, along with the sale of 78.8 per cent of Comanav, the state shipping company. Agriculture faces strong challenges with the expansion of the economy and the arrival of foreign products on the Moroccan market. Consequently, the authorities have designed a plan to improve competitiveness in the sector, through improved irrigation, regulation and land tenure. Irrigated land African Economic Outlook

is set to increase by 10 000 hectares per year to help the country cope with frequent droughts. Waterdemanding crops such as cereals will gradually be replaced by fruit-bearing tree crops such as olives, dates and almonds, with the government subsidising up to 80 per cent of the cost of seedlings and reducing interest rates on equipment and campaign loans to 5.5 per cent and 5 per cent respectively. In order to make the most of its privileged geographic location, Morocco intends to become a regional investment and trade platform between Europe, the United States, the countries of Southern Europe and Sub-Saharan Africa. The country has therefore invested heavily in infrastructure over the past few years, and these efforts will be intensified in the near future. The authorities plan to triple the rate of highway construction from 50 kilometres per year to 160 kilometres in order to ease traffic, not only between Moroccan cities but also cross-border between the country and its neighbours. In addition, a 550 kilometre bypass linking the Tanger Méditerranée port to the city of Saidia in the North is planned. To enhance the competitiveness and dynamism of its private sector, the Moroccan government has put in place a series of measures to encourage greater lending to small and medium size enterprises (SMEs), and to create an additional 200 000 jobs by 2008. The authorities launched the Moukawalati programme of SME finance, thus providing state guarantees and financial, legal and technical coaching services. The programme aspires to create 30 000 new enterprises and 90 000 new jobs by 2008, targeting potential entrepreneurs below 45 years of age who are unemployed but wish to start their own venture with an investment of up to 250 000 dirhams. Further development of the Moroccan private sector also depends on the government’s actions to reduce the costs of energy, finance and taxes, to improve labour laws, to lessen the burden of bureaucracy and enhance the transparency of judicial processes. The Moroccan financial sector is regarded as one of the most developed in North Africa, following the wave of reforms during the 1990s, and more recently © AfDB/OECD 2007

Morocco

a new law granting greater autonomy to BAM, and aligning Morocco’s prudential regulations with the Basle II requirements. There are currently fourteen commercial banks in the country, most of which are partially owned by French banks. The largest private sector banks are Attijariwafa Bank and BMCE, which are diversifying into countries such as Tunisia, Senegal and Algeria. The largest bank in terms of market share is the state-controlled Crédit Populaire du Maroc (CPM), which holds 27 per cent market share and reported assets worth $11.1 billion in 2005. The remaining semipublic banks (CIH, CAM, BNDE and BMAO) are in the process, at varying speeds, of being transformed into universal providers, thus enhancing competition in a market that is so far largely dominated by three banks, namely CPM, Attijariwafa Bank, and BMCE. Access to Drinking Water and Sanitation Water and sanitation accessibility are major concerns in Morocco. Since independence, successive governments have attached importance to these issues in their development programmes. However water is still an issue of considerable importance to the Moroccan authorities in a context where the country’s water resources are relatively scarce and are constantly threatened by droughts. Drinking water has become scarce in some regions, including large cities, with the country having experienced four droughts during the 1990s alone. In the early 1970s, the late King Hassan II launched a barrage strategy for all Moroccan basins and rivers which aimed to irrigate up to 1 million hectares. This policy led to progress in developing the country’s water resources, yet significant disparities persist in the distribution between basins, and the prospects for 2020 suggest increasing scarcity as the population grows. In the early 1980s, the country introduced management procedures at hydrographic basin level. Administrative structures were then created to establish the basis for a global water management policy, taking into consideration surface and ground waters, their quantity and quality aspects, as well as water-users, as part of this same approach. © AfDB/OECD 2007

In 1995, a water law was promulgated. This represented a major advance, through the creation of regional River Basin Authorities to manage water resources at local level. The Office National de l’Eau Potable (ONEP) is responsible for overseeing national water policies. It also is in charge of sewerage facilities in some cities, but not in rural areas. Municipalities are responsible for rural sanitation, but they lack both the financial and technical capacity to successfully complete their task. As a result, hygiene and sanitation are often deficient in rural areas. Major funding from the World Bank and the African Bank for Development is supplemented by aid from other institutions [UNDP, FAO, UNICEF, USAID, the Arab Fund for Economic and Social Development (AFESD), the Islamic Bank and OPEC] and nations (Japan, Belgium and Italy). The National Initiative for Human Development launched by King Mohammed VI in May 2005 emphasises the importance of water for sustainable economic growth. In this respect Morocco has embarked on implementing a series of strategies in the effort to increase access to water in both urban and rural populations. In the last ten years, 14 million additional users (nearly half of the population) have been connected to drinking water supplies. Specific policies have been implemented by the operators Lydec in Casablanca (Suez), Redal in Rabat and Amendis in Tanger and Tetouan (Veolia) in order to provide water connections to low-income families in peri-urban settlements. Production capacity has been multiplied by 5 and reached 55 m3 per second in 2003. During the same period the population connected to potable water soared from 2.8 million to 13.5 million. The connection ratio to drinking water increased by 1 per cent per year over the period 1992-2002. ONEP expects to achieve 92 per cent access to potable water in urban areas by 2007. The connection ratio is expected to reach 100 per cent by 2015. Access to water in rural areas is much more restricted than in urban areas. This is mainly due to the dispersion of the rural population. The “Programme d’Approvisionnement Groupé en Eau Potable des African Economic Outlook

387

Morocco

Populations Rurales” (PAGER), launched in 1995, raised the access to water ratio of rural areas to 55 per cent in 2003. This ratio is expected to increase by 3 per cent per year to reach 100 per cent access by 2015, with an interim target of 92 per cent ratio before the end of 2007.

388

Regarding sanitation services, urban areas have witnessed significant progress in comparison with rural provinces. Sanitation coverage is low relative to Morocco’s level of per capita income. Morocco still has one of the lowest rural water supply and sanitation access rates in the Middle East and North Africa, averaging 56 per cent for rural water supply and only 35 per cent for rural sanitation. To address these issues, the Moroccan government has developed the Rural Water and Sanitation Project, funded by a $60 million World Bank loan, $4.42 million of which is dedicated to hygiene promotion and sanitation. The World Bank has also provided technical assistance to the Moroccan government through the Sanitation, Hygiene and Wastewater Support Service (SWAT) to increase coverage, enhance reliability, and improve hygiene education. Although this technical assistance and the subsequent work by ONEP have contributed to a better understanding of rural hygiene and sanitation needs, rural access to sanitation and water remains below that of other countries in the region.

Political Context and Human Resources Development Morocco’s political situation remains stable, with King Mohammed VI remaining popular despite the continuing problems of poverty and unemployment.

African Economic Outlook

The risk of terrorism from Islamic radicals and the continuing tensions with Algeria over the Western Sahara are at present not serious enough to disrupt the mostly favorable political and economic environment. To facilitate access to education, medical services and transportation, as well as create job opportunities for rural populations, the government launched the first “Programme National des Routes Rurales” (PNRRI) in 1995 to build approximately 11 000 kilometres of rural roads. By 2004, the programme had completed 10 600 kilometres of roads, pushing the road accessibility ratio up to 54 per cent. A second ten-year programme was subsequently implemented in 2005 to build 15 500 kilometres of roads and reach an accessibility ratio of 80 per cent by 2015. The “Programme d’Electrification Rurale Global” (PERG) seeks to provide electricity to two million rural households in 34 000 villages by 2007, up from 400 000 households in 1994 when the programme first started. In order to meet the Millennium Development Goals (MDG) set for 2015, the Moroccan authorities have designed a wide-ranging programme to improve social conditions in the country. Substantial progress has been made towards poverty reduction, education, and infant mortality reduction Millennium Development Goals. In May 2005, King Mohammed VI launched the “Initiative Nationale pour le Développement Humain” (INDH) programme to reduce inequality and poverty, and improve human development in the country. The priorities include slum clearance and public housing in cities, as well as modernisation of agriculture, as discussed previously.

© AfDB/OECD 2007

Mozambique

Maputo

key figures • • • • •

Land area, thousands of km2 802 Population, thousands (2006) 20 158 GDP per capita, $ PPP valuation (2006) 1 957 Life expectancy (2006) 41.8 Illiteracy rate (2006) 48.3

Mozambique

M

OZAMBIQUE HAS ACHIEVED IMPRESSIVE economic

Since mega-projects generate limited spillover effects on the rest of the economy and contribute relatively little to job creation and tax revenue, broad-based growth remains a major challenge. Although the 2006 bumper agricultural production and the favourable prospects for the next harvest season can be expected to improve rural incomes Continued expansion in and maize stocks, construction and the coming agricultural performance on stream of Mega projects is remains erratic and boosting growth in Mozambique vulnerable to climatic while a second wave of reforms shocks. Securing sustainable is aimed at reducing poverty. agricultural development requires a clearer sectoral strategy and complementary policies. Similarly, the lack of a coherent strategy to promote industry inhibits the country’s potential in agro391 processing, light manufacturing, and tourism.

expansion since the end of the civil war. Over the past five years, growth averaged 8.9 per cent, spurred by foreign-financed “mega-projects” and large aid inflows. The economy is estimated to have expanded by 7.9 per cent in 2006, supported by investments in the extractive industry, favourable harvests, and continuing infrastructure rehabilitation projects. On the basis of continued expansion in construction and the coming on stream of investment projects, including Moma Titanium Minerals, growth is expected to reach 7.3 per cent in 2007 and 6.8 per cent in 2008. Further improvements in transport, especially railways and ports, and in energy provision are essential for the successful implementation of pending mega-projects in the extractive industry.

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Mozambique - GDP Per Capita (PPP in US $)

■ Southern Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Mozambique - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

8000

14

7000

12

6000 10 5000 8 4000 6 3000 4 2000 2

1000

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and National Institute of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/137432776810

© AfDB/OECD 2007

African Economic Outlook

Mozambique

392

The country’s development strategy is framed in the Plano de Acção para Redução da Pobreza Absoluta II (Action Plan for the Reduction of Absolute Poverty II – PARPA II) for 2006-09, which aims at reducing the incidence of poverty from the current 54 per cent to 45 per cent in 2009. To achieve this target, the government is consolidating macroeconomic stability and undertaking a second wave of structural reforms, encompassing the public sector, fiscal policy, governance, and the business climate. The implementation of a computerised integrated budget and treasury management system (e-SISTAFE) has contributed to improved public expenditure management. Revenue collection has increased moderately too. To boost revenue further, it will be necessary to broaden the tax base, especially in the extractive and informal sectors, and to strengthen tax administration. The government is committed to improving the transparency of special tax regimes for mega-projects and to reducing fiscal exemptions for new ones. In line with the PARPA target, the government is increasing spending in priority areas (to 65 per cent of total expenditure) and undertaking huge infrastructure rehabilitation projects. This increase in spending will be comfortably financed by rising aid inflows and, to a lesser extent, by resources freed up by the Multilateral Debt Relief Initiative (MDRI). Nevertheless, progress in other structural reforms has been slow. Despite the large reduction in the number of days needed to register a new company, deep-seated constraints to private-sector development remain, notably the weak judicial system. In addition, institutional and capacity bottlenecks lead to very poor

performances in basic health services (HIV/AIDS antiretroviral therapy [ART] coverage), and in water (rural water supply and sanitation). Better human resource management, more predictability of funds from the central government, and greater clarity in the processes of decentralised planning and budgeting should be key priorities in order to ensure the successful implementation of the PARPA.

Recent Economic Developments Mozambique has been one of the world’s most rapidly growing economies over the past five years, with much of the impetus coming from reconstruction efforts and extensive foreign investment in projects based on natural resources. In 2005, GDP increased by 6.2 per cent in real terms. This increase was led by industry, which expanded 7.8 per cent, mainly due to mining and electricity. The service sector followed, also growing strongly at 7.6 per cent. Agriculture and fishing registered a modest growth rate of 1.6 per cent. Real GDP is estimated to have risen by 7.9 per cent in 2006, with 10.9 per cent growth in agriculture and strong performance (15 per cent) in the extractive industry. In 2005, agriculture and fishing accounted for 20 per cent of GDP, but 78.5 per cent of total employment. While fishing benefited from a strong rebound, agricultural output suffered from a drought

Figure 2 - GDP by Sector in 2005 Other services Finance and business services Government services 3.3% 5.4% 6.6% Hotels and restaurants 1.2%

(percentage)

Agriculture and fishing 19.7% 0.9%

Transport and communications

16.4%

12.8%

Mining and quarrying Manufacturing

5.9% 21.2% Trade

6.4%

Electricity and water

Construction

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/514310354573

African Economic Outlook

© AfDB/OECD 2007

Mozambique

in some regions. In 2006, abundant and regular rainfall and the timely provision of agricultural inputs contributed towards the best harvest over the last five years, triggering a strong recovery of agricultural production (6.5 per cent growth). It is estimated that cereal production reached 2.1 million tons (maize alone accounting for 1.5 million), which was 10 per cent higher than the previous season. Outputs of pulses and cassavas are estimated to have risen by 10 and 14 per cent, respectively. Notwithstanding this progress, the authorities assessed the domestic cereal deficit at 565 000 tons, mainly due to the lack of wheat and rice. Assuming favourable weather conditions and the adequate provision of inputs and extension services, a 12.2 per cent increase in agricultural output is expected in 2007, led by rice and maize production. The production of cash crops (cashew nuts, cotton, sugar and tobacco) also rebounded in 2006, although agricultural diversification remains limited. Sugar remains the leading sector. After an extraordinary 2005 harvest, the best for three decades, sugar-cane production decreased in 2006 by about 3 per cent, due to lowerthan-expected rains in Marromeu and Mafambisse. Cashew nut production more than doubled between the 2004 and 2005 seasons, attaining 104 000 tons, reflecting in part a peak in biological productivity. Production is estimated to have fallen in 2006 to around 62 800 tons, but is projected to increase gradually over the following five years. New production areas are being developed in the south. Cotton production declined 15 per cent to 78.5 thousand tons in 2005, but increased to around 110 thousand tons in 2006. Tobacco registered an impressive 30 per cent increase in output in 2005, but declined slightly in 2006 and is expected to level off in 2007. Fishing accounts for about 2 per cent of GDP. In 2005 the sector rebounded by 3.6 per cent after experiencing a 3.8 per cent contraction in 2004. Aquaculture and traditional fishing were the main drivers of growth, as industrial and semi-industrial fishing declined by 13 per cent, mainly due to a 65 per cent reduction in the tuna catch. Following the expansion of prawn-farming areas, aquaculture © AfDB/OECD 2007

production doubled. The authorities expect fishing to grow by 3.3 per cent in 2006 and 3.5 per cent in 2007. Growth in livestock, which accounts for 1.6 per cent of GDP, remains disappointing, as the sector is diseaseprone and suffers from inadequate feeding. Industry’s share of GDP expanded sharply from 16 per cent in 1996 to 26 per cent in 2005; this increase is largely due to mega-projects in the extractive industry sector. Nevertheless, due to high capital intensity, profit repatriation, and fiscal incentives, the mega-projects generate relatively minor benefits in terms of employment, transport linkages, and foreign-currency earnings. Manufacturing expanded by 8.5 per cent in 2005 and an estimated 5.7 per cent in 2006. The Mozal aluminium smelter in Maputo Province, created with a $2.1 billion investment by Australian and South African interests, now accounts for half of manufacturing output, and has made Mozambique one of the world’s leading exporters of aluminium. Mozal’s output edged up to 555 000 tons in 2005 compared with 549 000 in 2004. The feasibility studies for further expansion (Mozal 3), which would increase capacity by an additional 250 000 tons per year by 2009, were completed. The food, beverages, and tobacco subsector is the second-largest manufacturing sub-sector. Sugar and molasses production each fell an estimated 1 per cent in 2006, due to lower-than-expected cane production. Ethanol fuel production is still very limited, although the government plans to develop both bioethanol and biodiesel programmes. Petromoc has signed a co-operation agreement with South-Africa’s Cofamosa to invest $150 million in an ethanol plant in Moamba which will use sugar-cane. The Portuguese group Nutasa is building a similar plant in Maputo. The government’s decision to promote domestic tobacco-processing by stipulating that growers’ use of the most favourable land would be subject to the condition that they constructed processing plants led Alliance One International to close down its operations and withdraw from the country. Mozambique Leaf Tobacco, a subsidiary of the American Universal Leaf Africa Company, was awarded Alliance One International’s concession, and opened the first greenleaf processing plant in the country in May 2005. African Economic Outlook

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Mozambique

After expanding by 11 per cent the previous year, output from the extractive industry sector is estimated to have increased by about 15 per cent in 2006, with a strong rebound in coal production following the modernisation of the Chipanga-IX mine. The sector is expected to expand further with the construction of the Moatize coal project and thermal power plant. The Brazilian Companhia Vale do Rio Doce, which has already invested approximately $80 million in the project over the last two years, has delivered the feasibility studies to the government and should start production in 2010. The development of the mine requires rehabilitation of the Beira-Tete railway and the construction of an export terminal at Beira port. The Moma Titanium Minerals Project, which will produce more than 750 000 tonnes of mineral sands a year, is almost completed, and production should start in 2007. The Irish firm Kenmare Resources has already announced that it intends to expand Moma’s capacity in the second half of that year. Sasol plans to double its gas production in Mozambique in the coming years,

while new petroleum exploration began in 2006 in the northern Rovuma Basin. The construction sector is heavily influenced by mega-projects. This sector expanded by 3.8 per cent in 2005. A new cement factory in Nampula is expected to alleviate the shortage of cement. A stronger expansion in construction is expected in 2006 and 2007, due to the implementation of several public-investment projects, especially the construction of the Zambezi Bridge, and the start of new mining projects. The service sector, which generates about 46 per cent of GDP, grew by 7.6 per cent in 2005, led by 15 per cent growth of transport and communications. The Minister of Transport and Communications announced plans to review the telecommunications law and the possibility of clearance for a third cellulartelephone operator to compete against state-owned M-Cell and Vodacom. A second fixed-line operator is likely to be licensed before the end of 2007.

394 Table 1 - Demand Composition 1998

2005

(percentage of GDP) 2006(e)

Percentage of GDP (current prices)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

24.2 9.8 14.5

29.9 12.5 17.4

27.5 45.0 15.0

15.0 15.0 15.0

11.7 8.0 15.0

Consumption Public Private

93.2 10.4 82.8

82.0 12.9 69.1

2.3 8.6 1.6

3.3 6.2 3.0

5.3 5.0 5.3

-17.4 10.5 -27.9

-11.9 30.9 -42.9

6.7 6.7

6.7 3.9

6.2 7.1

External sector Exports Imports

Source: IMF and National Institute of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/612366457406

The government’s large-scale infrastructure programme, investments in the extractive industry, and high mineral exports were the main motors of growth in 2006. Development projects, notably in donor-supported transport infrastructure rehabilitation, led to a jump of about 45 per cent in public capital expenditure in 2006. Due to other large infrastructure projects, especially in urban renewal and road African Economic Outlook

rehabilitation, public investment is expected to continue to grow by 15 per cent in 2007 and 2008. The expansion in construction that accompanied the new wave of mega-projects and the continued influx of foreign investment have led to a 15 per cent growth of private investment in 2006; private investment is projected to remain strong in 2007 and 2008. Thanks to the results of the mega projects, extractive-industry exports have © AfDB/OECD 2007

Mozambique

increased dramatically over recent years, and are expected to continue to grow substantially in the next two years.

Macroeconomic Policies

of 65 per cent expenditure execution rate in the priority areas fell just short of target, at about 62 per cent. Nevertheless, investment at the district level improved in the second semester. Public-sector wage expenditures increased considerably, reflecting the recruitment of teachers and health workers.

Fiscal Policy Mozambique’s development strategy for the next five years is detailed in the Plano de Acção para Redução da Pobreza Absoluta II (PARPA II) for 2006-09. The PARPA II’s main objective is to reduce the incidence of poverty from the current 54 per cent to 45 per cent in 2009. To achieve this target, the government plans to continue its efforts to consolidate macroeconomic stability and to implement a second wave of structural reforms, encompassing the public sector, fiscal policies, governance, and the business climate. Compared to the earlier development strategy (PARPA I) with its strong focus on investment in social sectors, the new PARPA places more emphasis on promoting growth and the modernisation of the economy, and points to decentralisation and development at the district level as key objectives. PARPA II calls for greater investment in economic sectors, especially agriculture and infrastructure, and for creating a favourable business climate, especially for small and mediumsized enterprises. Foreign assistance, which already finances more than 40 per cent of the government’s expenditures, is expected to rise further. To improve aid effectiveness and accountability, the government and donors have agreed on a series of indicators and targets in the areas of public finance, governance, HIV/AIDS, education, and justice. The 2006 mid-year joint review between the government and donors in September 2006 noted that the overall performance of fiscal policy was encouraging. A new computerised system for recording expenditure (e-SISTAFE) was implemented in a number of ministries, enabling improved monitoring of expenditures in priority sectors. 57 per cent of expenditures were in the priority sectors of health and education, surpassing the 50 per cent target; the goal © AfDB/OECD 2007

Public-sector reform was given fresh impetus, first with the creation of the new National Civil Service Authority which reports directly to the President of the Republic, and second, through the preparation of Phase II of the Public Sector Reform Programme (20062011), which focuses on strengthening the decentralisation process. Equal allocations of about $300 000 per district were made during 2006, although execution was lower than expected, owing to delays in issuing the guidelines on permissible uses of these funds. Some ambiguities remain over the division of revenue and spending responsibilities; the effective absorptive capacity of local agencies is also a major problem. To clarify the decentralisation strategy, a proposal to formulate the National Decentralisation Policy and Strategy was prepared in March 2006. Progress was also made with the preparation of the National Decentralised Planning and Financing Programme (PPFD); also, the Administrative Tribunal (TA) performed district audits in four provinces. On a negative note, the government’s rising indebtedness to construction contractors, linked to delays in refunding VAT, remained a major problem in 2006. An assessment of the magnitude of the problem is being carried out for the road sector, and donors have decided to finance an audit to determine the size of the accumulated debt. At 11.8 per cent, Mozambique’s tax revenue to GDP ratio remains much lower than that of its neighbours and than the average of 24 per cent for sub-Saharan Africa. Efforts to increase domestic revenue, which were already substantial in 2005, continued in 2006, and were partly reflected in the collection of corporate tax and VAT. Some progress was made in improving the collection of tax arrears, strengthening tax administration, and broadening the tax base. Nevertheless, the establishment of the Central Revenue African Economic Outlook

395

Mozambique

Authority (ATM), which was expected for September 2006, was delayed. The prospects of widening the tax base further suffer from special tax regimes for mega-projects, including preferential corporate tax rates, tariff exemptions, and tax deductions for social and environmental expenditures, all of which lack transparency. In this respect, donors and the government are reviewing the fiscal impact of these projects. The government is also considering joining the Extractive Industries Transparency Initiative (EITI), but needs first to assess its ability to comply with the associated obligations. Overall, the fiscal situation improved in 2006. The substantial increase in government spending in priority

areas, and in particular in transport rehabilitation, was mostly covered by large aid inflows and, to a lesser extent, by resources freed up by the Multilateral Debt Relief Initiative. High spending on poverty-reduction projects, including infrastructure, is expected to continue in the medium term, and to be mainly financed by rising aid inflows. Revenue collection is expected to improve further in 2007 and 2008, reflecting the full implementation of the Central Revenue Authority. Discussion over the fiscal contribution of mega-projects will continue, with the aim of renegotiating the tax regime and reducing fiscal exemptions for new investment. Despite the gradual improvement in revenue mobilisation and in the growth of grants, the overall deficit is expected to deteriorate slightly, reflecting high spending on public-

Table 2 - Public Finances

396

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Grants

19.5 10.5

22.4 12.0 9.5

20.2 11.7 7.5

20.0 11.8 6.3

23.0 11.8 9.8

23.9 11.8 10.7

24.1 11.8 11.0

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

21.8 11.5 10.5 4.5 1.0 9.8

26.9 14.7 13.6 6.8 1.2 11.7

24.7 14.5 13.5 6.9 1.0 9.4

22.2 13.6 12.9 6.8 0.8 8.1

25.1 13.6 12.9 6.6 0.8 10.5

26.7 14.0 13.0 6.7 1.0 11.6

26.8 14.3 13.3 7.1 0.9 11.8

Primary balance Overall balance

-1.4 -2.4

-3.3 -4.5

-3.5 -4.5

-1.5 -2.3

-1.3 -2.0

-1.8 -2.8

-1.8 -2.7

a. Only major items are reported Source: Ministry of Finance and Planning and IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/744777686373

sector wages and in priority social sectors, as well as large development projects in road rehabilitation and urban renewal. The deficit is therefore expected to average 2.8 per cent of GDP in 2007 and 2.7 per cent in 2008. Monetary Policy The Bank of Mozambique has successfully stabilised inflation, following hyperinflation in the early 1990s, by restraining broad money growth. Inflation averaged 6.4 per cent in 2005, compared to 12.3 per cent in 2004. For 2006, the Central Bank fixed a target of 15 per cent for broad money growth, with a target of 7.5 per cent African Economic Outlook

for average inflation. Nevertheless, inflation registered a steep increase in the first quarter. The combined effect of rising petrol and food prices led to a surge in inflation from 3.2 per cent in May 2005 to 17 per cent in April 2006. In response, monetary policy was tightened through open-market operations in the first half of the year, pushing up the Treasury Bill rate to 17.5 per cent in May 2006, an 8 percentage-point increase since October 2005. A restrained monetary policy, stable international oil prices, the appreciation of the metical, and a favourable agricultural season all contributed to the © AfDB/OECD 2007

Mozambique

deceleration of inflation in the third quarter of the 2006, reaching a low of 10.6 per cent in August. However, it accelerated again to 12.7 per cent in September, reflecting rising food prices at the start of the lean season from October to March. Inflation then edged up in the last months of 2006, mainly owing to the seasonal price hikes, so that it averaged 12.6 per cent for the year. Monetary policy is expected to remain tight in 2007 and 2008, with inflation targets of 5.9 per cent and 5.1 per cent for 2007 and 2008, respectively. Despite weaker oil and food inflationary pressures, increased government spending and domestic consumption are forecast to exceed target levels, at 8.1 per cent and. 5.7 per cent in 2007 and 2008, respectively. The authorities are committed to a flexible exchangerate regime, and in January 2005 they introduced a foreign-exchange auction system. In response to various shocks such as large oil-import transactions, the currency experienced considerable volatility in 2005 and 2006, reflecting the thin foreign-exchange market. To cushion volatility and depreciation pressures, the Bank of Mozambique introduced an exchange-rate band in the inter-bank foreign-exchange market in the last quarter of 2005. Since June 2006, the currency has remained fairly stable against the US dollar. The Ministry of Planning and Finance instituted a redenomination of the currency, with new metical bank notes equivalent to 1 000 of the old notes. From 1 July 2006, the new and old notes circulated concurrently; the old notes were fully withdrawn by the end of the year. Commercial banks will exchange old notes against new ones until 31 December 2007. External Position Mozambique’s current account deficit rose to 10.8 per cent of GDP in 2005 from 8.6 per cent in 2004. The trade balance deteriorated in 2005 as exports, which increased from $1.50 billion to $1.75 billion, rose less than imports (from $2.03 billion to $2.47 billion). A surge in aluminium export prices and © AfDB/OECD 2007

volumes boosted exports in 2006. Preliminary data suggest that merchandise exports reached $1.75 billion in the first nine months of 2006 (up 39 per cent compared with the same period in 2005), offsetting a 24 per cent growth in imports. The new projects in the extractive industry sector are forecast to boost imports of capital goods in 2007 and 2008, thus causing a deterioration in the trade balance, since their contribution to export growth takes time to develop. Gross international reserves increased from 4.6 months of imports of goods and services in December 2005 to 5.1 months at the end of June 2006. Mega-projects play a major role in Mozambique’s trade, accounting for about 72 per cent of exports and 17 per cent of imports. Base metals are the leading export, accounting for about 60 per cent of export revenue. Aluminium from the Mozal project is the single largest earner of foreign exchange. However, since the smelter uses imported alumina as raw material, its contribution to the net trade balance is limited. Natural gas (associated with the Sasol pipeline to South Africa) is the second-largest export item (14.3 per cent). Other major exports include fish and crustaceans (5 per cent), cotton (3.5 per cent), tobacco (2.5 per cent) and sugar (2.2 per cent). Mozambique’s imports are dominated by mechanical and electrical machinery, vehicles, and iron and other inputs used by mega-projects. Despite an improved harvest, the country remains a substantial importer of cereals, especially wheat and rice. Preferential exports to the European Union (EU) benefited from the additional Everything But Arms (EBA) sugar quota awarded to Mozambique as the result of other Least Developed Countries (LDCs) being unable to meet their allocations for the year ending June 2006. Sugar exports are expected to grow 35 per cent in volume and 32 per cent in dollar terms. About half of sugar exports benefit from preferential market access agreements, with prices set above those in the world market. A major concern for the sugar industry is the reform of the EU sugar regime and the associated 36 per cent African Economic Outlook

397

Mozambique

reduction in the guaranteed price over the period 2006/07-2009/10. Given the relatively small quota allocated to Mozambique within the Sugar Protocol and the fact that the reference price will still be higher than the international price, the immediate impact of the reform will not be dramatic. A more serious concern is the longer-term competitiveness of the industry once the international sugar market is liberalised. Starting from September 2009, the EU will grant unlimited duty-free access to all LDCs, thus offering an opportunity to expand market access for Mozambican producers. To seize this opportunity, investment is needed to expand production and achieve greater economies of scale.

398

The three-year fishing agreement with the EU, which gave access to Mozambican waters to European fishing vessels in exchange for fees from each vessel and a 4 million euros annual compensation fund, expired in 2006. The renegotiation of the agreement reached a standstill over the EU’s proposal to exclude some less-profitable species. Frozen fish and crustaceans – mainly shrimps and prawns – generated export revenues of $84.3 million in 2005. However, the sector has been at risk since a recent EU inspection revealed serious sanitary problems, due to declining human and financial resources allocated to supervision. Prawns farmed by one aquaculture enterprise operating in Beira were banned from Europe. An emergency plan was launched to tackle this problem. Mozambique’s principal export market is the EU, to which 100 per cent of Mozal’s aluminium is exported, reflecting Rotterdam’s role as a hub for the transshipment of aluminium. Other important export destinations include South Africa, Zimbabwe, and Malawi. The largest source of imports is South Africa, followed by the Netherlands, Portugal, India and the United States. Two major processes will shape the country’s trade policy in the coming years, notably regional integration and the negotiation of an Economic Partnership Agreement (EPA) with the EU. Mozambique’s membership of the Southern African Development African Economic Outlook

Community (SADC) means that a schedule of tariff reductions will be imposed on intra-regional imports beginning in 2008, and leading to the complete elimination of tariffs by 2015. In January 2006, the government reduced the maximum tariff rate from 25 to 20 per cent on imports from SADC countries and submitted a proposal to the Assembly to extend this measure to all trading partners. Negotiations with Zambia for a preferential trade agreement were concluded, but a final agreement has not been signed. The negotiations for the EU-SADC EPA, which began in 2002, entered a new round in September 2005, and are scheduled to be completed in late 2007. The objectives of the EPA include liberalised trade between SADC and the EU in the longer term, and EU support for trade capacity building in the medium term. At present, Mozambique benefits from nonreciprocal tariff-free access to the EU under the EBA initiative for LDCs. Although the EU has made a commitment to grant EBA to LDCs in an open-ended manner, it is not clear yet how the special status will be treated under EPA’s reciprocal liberalisation principle. EPA negotiations are at a standstill, mainly because of: the overlapping memberships of participating countries in different regional trade blocs; the role of South Africa (which already has a bilateral trade agreement with the EU and a customs union with other four SADC members); and the issue of special treatment for LDCs. Abundant natural resources have made Mozambique one of the magnets for foreign direct investment (FDI) in southern Africa. The stock of FDI attained $2.4 billion in 2005. Following the completion of mega-projects in 2003, FDI inflows slowed down, declining to $108 million in 2005 compared to $337 million and $245 million in 2003 and 2004, respectively. Inflows are expected to increase again as new projects in mining and tourism start. The expansion of Mozal and Corridor Sands are amongst the largest potential investments. BHP Billiton, owner of Mozal, has taken over the Corridor Sands titanium project from WMC Resources in 2005. The development of both projects will be heavily influenced by the outcome of negotiations on long© AfDB/OECD 2007

Mozambique

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor incomea Current transfers

-14.5 6.2 20.6 1.0 -5.4 4.5

-14.5 21.8 36.3 -1.2 -4.1 4.9

-9.0 25.5 34.5 -4.7 -5.8 5.5

-10.6 25.6 36.2 -4.5 -6.1 5.3

-6.4 29.3 35.7 -1.4 -4.7 4.1

-8.1 27.5 35.6 -1.4 -9.5 4.8

-9.7 25.7 35.5 -1.6 -9.2 5.0

Current account balance

-14.4

-15.1

-13.9

-15.9

-8.5

-14.2

-15.6

a. Factor income is included in services. Source: IMF and Bank of Mozambique data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/181467010311

term power-supply contracts. Moreover, given BHP Billiton’s partnership with Rio Tinto, the future of the Corridor Sands project will also depend on the latter’s decision to pursue the development of its own titanium project in Madagascar. Mozambique is among the world’s largest recipients of Official Development Assistance (ODA). Disbursed net ODA (including from non-DAC donors) amounted to about $1.3 billion in 2005, a 3.2 per cent increase in nominal terms with respect to 2004 (about 1 per

cent in real terms), yielding a very high aid-to-GNI ratio of 21 per cent. Assistance mainly consisted of grants (78 per cent of the total), and was largely for general budget support. Direct budget and sectoral support in 2006 amounted to $297.5 million and is expected to rise to $583 million in 2007. Co-ordination among donors is exemplary. Mozambique’s stock of foreign debt stood at $4.7 billion in December 2005, a 7 per cent increase over 2004; 54.5 per cent of this debt was owed to

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

160

140

120

100

80

60

40

20

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/843507303745

© AfDB/OECD 2007

African Economic Outlook

399

Mozambique

multilateral creditors. The biggest share of the bilateral debt is held by non-Paris Club countries. In 2006, the country benefited from significant debt relief. The Multilateral Debt Relief Initiative (MDRI) cancelled debt of about $1.6 billion (of which, $1.3 billion by the World Bank), while the Japanese government provided full debt relief, amounting to $60 million. Portugal has expressed its intention to cancel commercial debt too. These operations should bring down the net present value of the debt from 25 per cent to 12 per cent of GDP. Debt service, which amounted to $24 million in 2005, fell to about $21 million in 2006, or a mere 1.6 per cent of export revenue. The government has also decided to buy back its remaining outstanding commercial debt, amounting to $175 million.

Structural Issues Recent Developments

Notwithstanding this progress, there remain serious problems related to corporate governance and lack of competition. A weak judicial system has been largely ineffective in resolving commercial disputes and protecting intellectual property rights. Counterfeited goods are widely found in the streets, damaging legitimate producers and tax revenues. Dominant incumbents and lack of competition in the service sector are often mentioned as a major constraint on private-sector development. The mingling of politics and business also contributes to the hostile business climate. Business representatives complain about high severance payments and the difficulty of layoffs, as well as restrictions on hiring expatriates. The Labour Consultative Commission, a tripartite forum with representatives from government, trade unions, and the employers’ associations, agreed on a draft reform proposal in early 2006. The draft was later unilaterally amended and watered down by the Minister of Labour, and has not yet been submitted to Parliament for approval.

400 In order to promote and diversify foreign investment, the authorities are pursuing the development of special or “Rapid Development Zones” (RDZ) in the Niassa province, Nacala district, Mozambique Island, Ibo Island, and the Zambezi Valley. Investments in these zones are exempt from import duties on certain goods and from real property transfer taxes, and are granted an investment tax credit of 20 per cent of total investment. Also, a feasibility study for a free trade zone in the Nacala district has been launched. Despite these incentives, few firms have settled in the Belulane industrial park in Maputo. Businesses claim that operating costs are too high. The World Bank’s Doing Business report classified Mozambique as having one of the world’s least conducive environments for business in 2005. The government is committed to tackling some of the shortcomings. The National Assembly has approved major revisions to the outdated commercial code. In the light of the new code and of complementary legislation, the procedures for company registration have been simplified, so that the time required for registration has fallen from 90 days to only a few days. African Economic Outlook

Following the agreement reached in November 2005 with Portugal, the government paid a first instalment of $250 million to acquire 67 per cent of the Cahora Bassa Hydroelectric (HCB) plant, raising its stake in the company to 85 per cent. The government is obligated to remit an additional $700 million, which threatens to increase the country’s foreign debt substantially. The authorities claim that HCB will raise all the necessary financing itself, thus avoiding an increase in government indebtedness. Another important development within the energy sector was the signature of a Memorandum of Understanding with the Export-Import Bank of China for an investment of $2.3 billion in the new Mepanda Nkua Dam and 1 300-megawatt hydro-electric plant on the Zambezi River, which are to be completed in 2011. Progress on privatisation has slowed down, since the remaining state-owned enterprises are mostly public utilities. In 2006 the Tanzanian firm METL bought Texmoque, a large state-owned textile factory in Nampula which had ceased operations in 1994. METL has promised to invest $20 million in new equipment and resume production in 2007. © AfDB/OECD 2007

Mozambique

The government has pledged $500 million to improve infrastructure, and especially to upgrade the port of Maputo by 2008. A specialised sugar terminal was opened in September 2006, and this is expected to double the sugar exports originating in the region being trans-shipped through Maputo. Construction of the Zambezi Bridge, linking the north and south of the country and budgeted at around $14.4 million, started in 2006, and should be completed by the end of 2009. The South African shipping company Grindrod has taken a 12.2 per cent share in the Maputo Port Development Company, and has announced that it will invest up to $25 million to upgrade the Matola Coal Terminal’s capacity from 1.7 to 6 million tons per year. Access to Drinking Water and Sanitation Water-resource management is extremely important in Mozambique, in the light of the country’s vulnerability to natural disasters (drought and floods), and of its dependence on neighbouring up-river countries for more than 50 per cent of its surface water. Some 14 million Mozambicans – nearly 75 per cent of the total population – rely on groundwater supply. Wells have an average depth of 50 metres, so allowing the use of hand pumps. With the approval of the Water Law in 1991, the National Directorate of Water (DNA) within the Ministry of Public Works and Housing (MOPH) was given the central role in water management. Following the publication of the National Water Policy in 1995, responsibility for implementation resides with a number of semi-autonomous regional and sectoral bodies. Over the last ten years, major progress has been made in water management. The 1995 Water Policy established the principle of delegated management, creating the basis for private-sector participation in urban utilities. Under this framework, two new institutions were created: the Water Regulatory Council (CRA) is responsible for economic and other regulation of water systems that are under delegated management, while the Investment and Assets Fund for Water Supply

(FIPAG) owns the infrastructure in urban areas that is either managed or leased by private operators. For all other urban areas, as well as for rural areas, DNA retains full control of water systems. Data on the population’s access to water is unreliable and out of date1. Current official figures report both urban and rural water-coverage rates of about 40 per cent. According to the latest household survey, however, rural water access is only 27 per cent, while urban water access is much higher, at 64 per cent. The MDG target is to reach 78 per cent by 2015 in urban areas and 56 per cent in rural areas. Also, according to government estimates, the proportion of the population with sanitation is about 35 per cent in urban areas and 33 per cent in rural areas. The MDG target is set at 80 per cent and 50 per cent access for urban and rural sanitation, respectively. Despite the progress that has been registered over the past ten years in encouraging and regulating private participation in urban water-supply, achieving the MDG targets remains a challenge. At present, budget execution in the water sector is less than 50 per cent. According to the UNDP Human Development Report, government financing of water-supply and sanitation will have to increase to $7 million per year (from its current $2 million level) if the targets set for 2015 in MDG Number 7 are to be met. Effective water management also requires capacity building at the local level, and more predictable financing from donors and the government. The accumulation of debts to construction contractors which has already been mentioned is delaying the realisation of some of the major projects in the sector. The vast majority of foreign aid to rural water and sanitation is channelled through project financing. Only one donor currently provides general budget support to water, but donors and the government are working towards more harmonised support to the sector by improving planning, monitoring, reporting, auditing, and procurement procedures. The coordinating mechanism in the sector features monthly

1. The quality of data on water access is expected to improve with the new census to be carried out in 2007.

© AfDB/OECD 2007

African Economic Outlook

401

Mozambique

Consolidation of the Delegated Management Framework (DMF): increases in connections, coverage, and water availability The key reason for Mozambique’s success in attracting investment into water systems has been the strategy of delegating operations to the private sector, coupled with economic regulation by the Water Regulatory Council, which balances consumer and commercial interests. In 1999, the government awarded a 15-year lease contract for Maputo and a 5-year management contract for Beira, Quelimane, Nampula, and Pemba to the private company Águas de Moçambique (ADM), whose major shareholder is Águas de Portugal. Overall, ADM operates reasonably well and will have to concentrate efforts to reduce non-revenue water and improve customer services. In 2004, as a result of noticeable improvements in water management in these five cities, the government decided to expand the delegated management framework to southern cities. The water-supply systems of Inhambane, Maxixe, XaiXai, and Chokwe were integrated and delegated to the Dutch company Vitens. In 2006, a further expansion of delegated management contracts took place in the central region. Donors in 1999 secured to FIPAG funds in the order of 115 million dollars for financing expansion and maintenance of the water supply network. Funds from investments have risen since then to 175 million dollars in 2004 and are currently at 365 million dollars. Further investments are under negotiations with the World Bank. 402 Increased investment has led to a significant improvement in the coverage, reliability of supply, and water quality in the five cities monitored (Maputo, Beira, Quelimane, Nampula and Pemba). Daily water availability has risen from about 10 hours in 2000 to 16.5 hours in 2006 – which is, however, still below the African average of 17 hours. In 2007, connections are forecast to increase to about 122 000 in the five cities (about 34 per cent higher than in 2000), which translates into 645 000 people covered. Despite improvements, water losses remain a major problem, and are on an upward trend. In the five cities, the average loss is over 50 per cent, well above the African average of 39 per cent. This poor performance is attributable to physical losses in the distribution network and illegal connections and commercial losses associated to poor metering. Rehabilitation works are under way in all cities but tangible results are yet to be seen. In the cities of Beira, Quelimane, and Nampula the replacement rate of old pumps is less than 50 per cent. meetings of a Water Working Group of donors and government representatives.

Political Context and Human Resources Development The 2004 presidential and legislative elections – the third to take place since the end of the civil war in 1992 – brought Armando Emílio Guebuza to the presidency and maintained the Frente de Libertação de African Economic Outlook

Moçambique (Liberation Front of Mozambique – FRELIMO) in power. The party has had an uninterrupted hold on power for 30 years, during 18 of which Guebuza’s predecessor, Joachim Chissano, held power. Although President Guebuza heralded the fight against corruption as a major goal of his mandate, to the point that in the new FRELIMO constitution it is a party-member duty to fight corruption, not a single major corruption case has been brought to © AfDB/OECD 2007

Mozambique

court. The 2006 mid-year joint review between the government and donors highlighted the absence of progress in implementing the government’s AntiCorruption Strategy. Various reports on governance released in 2006 also pointed to alarming levels of corruption, lack of accountability, and the deficiencies of the justice system. The delays in prosecuting the two high-profile murders associated with the Banco Austral corruption case are a major source of concern for donors and civil-society organisations. A forensic audit for the Banco Austral case was completed, but its findings have not been disclosed. The government has agreed to set up a high-level working group that will include two donor representatives and representatives from the Ministries of Finance and Justice, to move the case forward. Provincial elections are scheduled for 2007, to be followed by municipal elections in 2008, and presidential and parliamentary elections in 2009. The Parliament passed a bill to set up directly elected Provincial Assemblies, whose role will be to approve the programmes of the provincial governments and monitor their implementation. Independent groups of citizens (and not only registered political parties, as is the case for parliamentary elections) may also propose candidates to stand for provincial elections. FRELIMO’s Ninth Congress did not produce dramatic changes. It confirmed President Guebuza’s leadership and the popularity of the Prime Minister within the Party. While literacy rates remain very low, educational and health indicators have improved dramatically in recent years. However, a slowdown or even a reversal of these positive trends is expected, due to the impact of HIV/AIDS. According to the mid-2006 government-donors’ joint review, primary-school enrolment has substantially improved. The net schooling rate for primary education (EP) in 2006 was 90.3 per cent overall (against a target of 85 per cent) and 87.5 per cent for girls (against a target of 82 per cent). The gross EP completion rate was 33.7 per cent for both sexes (against a target of © AfDB/OECD 2007

34 per cent) and 27.2 per cent for girls (against a target of 28 per cent). Education accounts for 22 per cent of the government’s expenditure. Thanks to the proper implementation of e-SISTAFE, the expenditure execution rate improved to 46.6 per cent in 2006. Nevertheless, the current expenditure execution rate, excluding salaries, was only 38 per cent, and the investment expenditure was a meagre 22.6 per cent, due to delays in disbursements from the central to the local level. In order to secure a more predictable flow of funds and increase foreign assistance for education, in early 2006 the Ministry of Education (MINED) and donors signed a Memorandum of Understanding on the Fundo de Apoio ao Sector da Educação (Education Sector Pool Fund – FASE). The FASE ‘pooled fund’ is financed by several bilateral agencies supporting the education sector, and is managed by the MINED at national and provincial levels. The objective of the FASE is to finance a portion of the MINED’s priorities as presented in the Education Sector Strategic Plans (1999-2003 and 200408). In addition, donors and the government signed an agreement for the funding of the Vocational Education Reform Programme (PIREP). According to the PARPA II, the funds allocated to the education sector are expected to grow by 6.5 per cent in real terms per year over the period 2007-09, with an emphasis on the recruitment of new teachers and the construction of new schools. The health sector registered moderate progress in terms of expansion and access to services, as well as a slight improvement in budget execution. (In the first semester of 2006, global execution was 37.8 per cent, compared to 32.9 per cent in 2005.) Vaccination coverage and physician consultations per capita were on target for 2006 – vaccination of infants 0-11 months was 92 per cent (annual target 2006: 95 per cent), and there were 1.2 consultations per inhabitant (annual target 2006: 0.94). Despite these improvements, the Mozambican health sector is faced with serious challenges. Health indicators are generally lower than in neighbouring African Economic Outlook

403

Mozambique

South Africa, Malawi, Tanzania, Zambia, and Swaziland. It is estimated that only half of the population has access to basic health services. The last available figures show that 15 per cent of all children die before reaching the age of five years, the most common cause of death being malaria. According to the World Health Organization (WHO), 1 out of 16 women die as a result of childbirth. Significant disparities in the availability and quality of health services are observed amongst provinces, the situation being particularly poor in rural areas. Even though the number of staff has increased over the last years, the number of health professionals per inhabitant is among the lowest in the world. About 12.7 per cent of government expenditures are devoted to health, and according to the PARPA II, the allocation to health is expected to grow by 3-4 per cent per annum in real terms over 2006-09, mainly for new rural hospitals, health centres, and training institutions for primary health-care workers.

404

Donors are increasingly funding health through a Sector-Wide Approach (SWAp). Most of the funds are channelled through three common funds: a general health fund, a common fund for health services in the provinces, and a common fund for medicines and medical equipment; these funds are administered by

African Economic Outlook

the Mozambican Ministry of Health (MISAU), and are used for the implementation of the Mozambican National Health Sector Strategic Plan. The HIV/AIDS pandemic is the biggest challenge for the country. The HIV/AIDS prevalence is 16.2 per cent, the tenth-highest in the world, and the country has one of the fastest-growing rates, with an estimated 500 new HIV infections each day. Some provincial prevalence-rates exceed 20 per cent, with a peak of about 30 per cent along the Beira Corridor. Increased political commitment, rising financial resources from the National AIDS Council (CNCS), and better harmonisation and alignment of donorsupported projects provide some hope for progress. Nevertheless, the national response is insufficient due to inadequate human resources and lack of coordination. To date, only 10 per cent of people in need of ART receive treatment and less than 5 per cent of pregnant women living with HIV or AIDS receive the full course of prophylaxis for the prevention of motherto-child transmission. It is widely acknowledged that the role of CNCS as the co-ordinating authority for HIV/AIDS must be strengthened.

© AfDB/OECD 2007

Namibia

Windhoek

key figures • • • • •

Land area, thousands of km2 824 Population, thousands (2006) 2 052 GDP per capita, $ PPP valuation (2006) 17 377 Life expectancy (2006) 46.4 Illiteracy rate (2006) 15

Namibia

0

150 km

N

AMIBIA HAS EXPERIENCED SEVERAL YEARS of moderate

economic growth, due mainly to strong performance in diamond production and prudent macroeconomic policies. Growth averaged 4.5 per cent a year over the period 2000-05, and is expected to reach 4.8 per cent in 2006 and 2007 and 4.9 per cent in 2008. However, the Namibian economy is poorly diversified, relying heavily on extractive mining for export earnings and fiscal revenue, and is thus exposed to large and unpredictable fluctuations in commodity prices. Although Namibia has the continent’s fifth-highest per capita income and the eleventh-highest Human Development Index, it faces daunting social challenges, including high rates of rural poverty (of about 42 per cent), large income disparities (the Gini coefficient of 0.6 is among the worst in the world), and a serious

HIV/AIDS epidemic. HIV/AIDS prevalence averages 19.7 per cent (2004) and has contributed to reducing life expectancy at birth from 53.9 years in 1970-75 to 48.6 years in 2000-05. The most damaging Alongside a stable and open structural impact of apartheid political and economic in Namibia was to exclude the environment exist high rates majority of the people from of rural poverty, large income the productive economy, and disparities, and a serious this has stifled HIV/AIDS epidemic. entrepreneurship and professional development among the black population. Affirmative action and Black Economic Empowerment (BEE) programmes have been implemented in an attempt to kick-start a process of accelerated 407 transformation by providing previously disadvantaged

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Namibia - GDP Per Capita (PPP in US $)

■ Southern Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Namibia - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

10000

8

9000

7

8000 6 7000 5

6000 5000

4

4000

3

3000 2 2000 1

1000

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and Central Bureau of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/741302441458

© AfDB/OECD 2007

African Economic Outlook

Namibia

groups with the opportunities necessary for them to participate in the country’s economic development. Early indications, unfortunately, are disappointing. Also, it has been alleged that most opportunities – for instance in fishing concessions – have benefited only a small number of well-connected people. In the construction industry, where preferential procurement practices could potentially benefit black contractors, the superior competitiveness of Chinese companies is an additional constraint. This situation is exacerbated by skills shortages. Ten per cent of all positions are either occupied by people who lack the right skills or else remain unfilled, while the unemployment rate is 36.7 per cent (in the broad sense, according to the Labour Force Survey 2004). Despite the high share of expenditure on education, the quality of education is low.

408

The stable and open political environment, sound macroeconomic policies, and favourable growth momentum combine to create a window of opportunity for undertaking the structural reforms necessary to spread the benefits of growth more widely. This will certainly be necessary if recent and forecast short-term GDP growth rates are to be raised in line with the ambitious targets set in Namibia’s Vision 2030.

Recent Economic Developments Namibia’s economy is small and closely linked to that of South Africa. GDP growth has exhibited considerable fluctuations, having averaged 3.1 per cent over 1998-2001, then accelerating to 5.6 per cent in 2002-04, and slowing to 4.6 per cent in 2005-06. Growth is forecast to average about 4.8 per cent and 4.9 per cent in 2007 and 2008, respectively. The recent acceleration of growth was made possible by increased global demand for minerals, reflected in high international prices for key export commodities such as diamonds, uranium, zinc, copper and gold. The economic structure has remained fairly stable over the past decade, with services contributing some 55 per cent

of value added. Business confidence is strong, as shown by the consecutive records reached by the IJG1 Business Climate Index produced monthly by the Windhoekbased Institute for Public Policy Research (IPPR), which in September 2006 rose by 2.6 points to 139.5 points. The mining industry accounts for some 9 per cent of GDP, and is dominated by diamond extraction, which accounts for roughly 8 per cent of GDP and has made Namibia the world’s seventh-largest producer by value in 2005. Cutting and polishing of diamonds also contribute to economic activity. NamDeb, a 50/50 joint venture between the Government of the Republic of Namibia (GRN) and De Beers, is the largest diamond firm. Various non-diamond operations include: Ongopolo (which re-opened around 2000 under new management); Rosh Pinah; Skorpion (2003/04); and UraMine (2006), which started production recently. Rössing is expected to operate at full capacity in the next couple of years, while Langer Heinrich will start production soon; a third uranium deposit was also launched at the beginning of 2007. Petroleum exploration licenses were issued in August 2005 to BHP Billiton, Hunt Oil and Neptune. Although the share of mining in GDP has declined from the 1990 high of 20 per cent, it still accounts for 45 per cent of foreign-exchange earnings and roughly a third of fixed capital formation. Expenditures on mineral exploration reached N$477 million in 2005, its highest level in ten years and 50 per cent higher in real terms than in 1995. Nonetheless, direct employment has halved since independence (to 7 400 people), reflecting the switch from labour-intensive onshore diamond extraction to capital-intensive marine operations, which represented 52 per cent of 2005 production. Tax revenue from mining has been highly variable and difficult to forecast. While tax revenue from diamonds has never fallen below 6 per cent of total tax revenue and averages approximately 8 per cent of total revenue, non-diamond mining has only accounted for an annual average of 1 per cent of tax revenue over

1. IJG (Irwin, Jacobs, Greene) Securities (Pty) Ltd is one of Namibia's financial service providers.

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Figure 2 - GDP by Sector in 2005 Other services 2.4%

Government services

Real estate and business services

Agriculture, forestry and fishing

11.9% Mining and quarrying

20.6%

9.3% 11.4%

10.2% 4.5%

Financial services

(percentage)

8%

2.4%

11.2%

Transport and communications

Manufacturing

4.2% Electricity, gas and water 3.9% Construction

Wholesale and retail trade

Restaurants, bars and hotels

Source: Authors’ estimates based on Central Bureau of Statistics data. http://dx.doi.org/10.1787/658621448877

the past ten years. This mainly reflects a tax formula applied in 1992, whereby the higher the rate of profit, the higher the rate of tax. However, this formula was open to abuse, and it failed to deliver a significant amount of tax revenue to the treasury. Even after the introduction of a new flat tax rate in 2000, the nondiamond sector’s contribution to fiscal revenues has remained relatively modest. Diamond production rose by 50 per cent on a yearon-year basis in the third quarter of 2006, following an expansion of 28.1 per cent in the second quarter of the year. Although receipts for diamond exports declined between the first and second quarter of 2006, they have continued to represent the largest item in total merchandise export earnings, accounting for about 36 per cent. Offshore diamond production in 2006 is estimated to have reached a record one million carats, thanks to the use of advanced marine prospecting and mining technology, whereas the relative share of onshore production is declining. Overall, diamond production expanded to more than two million carats in 2006 for the first time and is forecast to increase further in 2007. NamDeb is promising ten million carats by 2010 and so new production records should be reached in the coming years. In January 2007, De Beers and the Government of Namibia also concluded negotiations started in November 2005 on the renewal of the fiveyear contract. Namibia succeeded in boosting its local cutting and polishing industry by increasing the share of NamDeb production destined for local sales; however, De Beers will maintain supply control over the so-called “specials”, i.e. diamonds of 10.8 carats and bigger. © AfDB/OECD 2007

Manufacturing, which accounts for 11 per cent of GDP, recorded negative growth in 2005/06, owing to the poor performance of fish processing. Over the past few years, the authorities have been trying to develop the manufacturing sector. The opening of the Ramatex apparel factory in Windhoek in 2003 was expected to attract new international investments to the Export Processing Zones (EPZ). Namibia, however, has suffered from the phasing-out of the Multi-Fibre Agreement and the number of new jobs for Namibians in the textile industry has been far below expectations. Other large industrial firms, such as dairies, are also suffering from the high value of the currency and competition from South Africa and China. The share of agriculture in GDP has fallen continually since independence, and currently hovers around 6.8 per cent. This sector is dominated by meat products such as beef, mutton and goat meat. Thanks to record rainfall experienced in 2005, agriculture grew by 10 per cent. Good rainfall continued in 2006, but nevertheless, a decline in the number of livestock marketed during the year resulted in a contraction of about 6 per cent in the first three-quarters of 2006. Farmers had to postpone the selling of some of their livestock for purposes of restocking after the good rainfall, despite high meat prices. Despite almost unlimited farmland, the country’s geological and climatic conditions make it difficult to generate enough income for the 1.2 million Namibians who rely on farming for their livelihood and who are mostly living in communal areas. Food demand exceeds African Economic Outlook

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supply, with imports of staple food from South Africa and Zambia filling the gap. Poor marketing, the small size of the domestic market, and the inability to add processing value and penetrate foreign markets all act as additional constraints on agricultural development. Meat remains the major export product. Other exportoriented farming products have developed recently in the south, especially grapes, pearl millet/mahangu and horticultural products. Fishing is also a strong contributor to GDP, accounting for about 5.6 per cent, but it exhibits a

strong cyclical pattern since it is influenced by weather conditions, energy prices, and the exchange rate. After two consecutive years of contraction, the sector recovered gradually in 2005/06, although a four-week closed season for hake was imposed in October 2006 for the first time, and a closed area was also introduced, prohibiting vessels from fishing in depths of less than 200 metres. These actions followed from surveys that revealed mixed results. Most fish caught in Namibia are exported to Spain, although efforts are now under way to find new export markets in Asia, especially for species such as abalone.

Table 1 - Demand Composition 1998

410

2005

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage of GDP (current prices)

Percentage changes, volume

Gross capital formation Public Private

25.8 7.7 18.1

25.6 7.6 18.0

7.3 8.0 7.0

5.5 -5.0 10.0

8.7 5.0 10.0

Consumption Public Private

87.3 31.5 55.8

81.1 29.4 51.7

4.2 7.0 2.7

0.0 -1.3 0.7

3.1 5.0 2.2

-13.1 45.0 -58.0

-6.6 35.1 -41.8

7.5 7.4

10.0 1.8

6.2 5.1

External sector Exports Imports

Source: Central Bureau of Statistics data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/488560331871

Among services, tourism stands out in terms of contribution to export earnings, although the contribution of government services in much higher. Tourism (represented by hotels and restaurants) contributes 3.7 per cent of GDP and 4.7 per cent of total employment, although the indirect contribution (as recorded by the Tourism Satellite Accounts) is estimated to be equivalent to 16 per cent of GDP and 17.7 per cent of total employment. Tourism is estimated to have grown by 21 per cent in the first three-quarters of 2006, with visitor-arrival growth being positively affected by the worldwide publicity generated by the presence in the country of wellknown Hollywood stars. The real estate market is also showing moderate growth, which, combined with new infrastructure investment, is providing support to the construction industry. African Economic Outlook

Growth in Namibia has been driven by exports and private investment in the mineral sector. In 2005, for the third year running, mining investment at N$477 million outstripped government investment by a wide margin. Over the period 2006-08, other significant investments are expected to boost growth, including: the continuous introduction of new technologies for mining diamonds; the development of new uranium mines; and the development of the Kudu Gas Field and subsequent construction of the gasfired power plant. In tandem with increased investment, imports of capital goods are expected to grow, although their increase will be more than offset by record diamond and uranium exports. After increasing substantially in 2006, government consumption and investments are expected to contract slightly in 2007, reflecting the tighter budgetary stance adopted in order to compensate © AfDB/OECD 2007

Namibia

for the anticipated fall in international taxes (Southern African Customs Union revenue – SACU revenue). It is also expected that there will be little growth in private consumption, mainly due to the weak performance of traditional agriculture.

Macroeconomic Policies Fiscal Policy Vision 2030 is meant to define the national development strategy, which will then be translated into a series of five-year National Development Plans (NDPs). The Medium-Term Expenditure Framework (MTEF) sets the budgetary priorities for government spending and ought to be in line with the NDP. However, the coherence among these three documents is weak. The Vision 2030 emphasises industrial development; while the NDP focuses more on pro-poor growth. The MTEF is based on three pillars: a) consolidating macroeconomic stability through prudent fiscal policies and maintaining a credible peg to the South African rand; b) promoting pro-poor growth by stimulating consumption and promoting industrial diversification; and c) further combating poverty by injecting substantial resources into health and education, as well as by grant-based transfers (such as non-contributory social pensions).

On balance, the government has pursued a prudent fiscal policy, reducing the deficit from 7.5 per cent of GDP in 2003/04 and 3.6 per cent of GDP in 2004/05, to 1.1 per cent in 2005/06. This improvement was due to cuts in government recurrent expenditures on goods and services, a drop in capital expenditure and efforts to increase revenue collection and broaden the tax base. In 2006/07, the budget is expected to exhibit a surplus, of 2.2 per cent of GDP, for the first time since independence. Nevertheless, a closer look shows that the improvement was due more to higher revenue than to continued expenditure restraint. An unexpected windfall of SACU receipts, which accounted for 40 per cent of total revenue and grants, offset the growth in the publicsector wage bill which reflects the continuous growth in government personnel. Namibia’s growing pool of civil servants makes up 4.3 per cent of the population and their salaries represent more than 40 per cent of total expenditures and account for more than 14 per cent of GDP, which is well above the average of African countries. An additional boost to the government’s revenue came from receipts (N$648 million) from the partial privatisation of the mobile phone company, Mobile Telecommunications (MTC). The volatility associated with SACU receipts means that the government needs to diversify its sources of revenue and undertake substantial efforts to improve sustainable revenue collection. The government also

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Grants

36.0 31.9 0.0

28.2 25.0 0.0

30.6 28.0 0.0

30.0 27.6 0.0

36.4 32.6 0.0

30.4 26.7 0.0

29.8 26.1 0.0

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

40.1 35.1 32.5 18.4 2.6 4.8

35.7 30.0 27.5 14.8 2.5 4.5

34.2 28.9 26.3 14.8 2.7 4.5

31.1 27.2 24.5 13.5 2.7 3.9

34.2 29.1 26.2 14.6 2.9 4.1

32.7 27.9 24.9 14.1 3.0 3.8

32.1 27.7 24.7 13.9 3.0 3.8

Primary balance Overall balance

-1.4 -4.0

-5.0 -7.5

-0.9 -3.6

1.6 -1.1

5.1 2.2

0.7 -2.2

0.6 -2.3

a. Only major items are reported Source: Ministry of Finance data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/370835576322

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needs to re-orient spending away from wages and subsidies towards priority sectors, namely, health, education and infrastructure. To this end, in the 2006 Article IV consultation the IMF recommended that the authorities enhance tax administration and revise the structure, quality and remuneration of the civil service. In the MTEF for 2006/07-2008/09, the government has introduced a number of reforms to strengthen tax administration and improve revenue collection, including a system of rewards and penalties for line ministries to encourage them to make greater efforts to collect revenues for the services they deliver. Another important measure includes the clamping-down on tax evaders through targeted forensic audits. On the expenditure side, the authorities have put in place an Integrated Financial Management System which will improve the management of all the transactions between the Ministry of Finance and line ministries.

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Regarding sectoral allocations, education will receive about 26 per cent of the total operational budget for the MTEF period, of which personnel expenses account for two-thirds and health will receive 10 per cent (in line with the target set by African Union – AU – Ministers of Health), constituting an increase of 23 per cent compared to the 2006/07 budget. Most of the funds will be channelled to improve antiretroviral treatment for victims of AIDS/HIV and to hire 105 expatriate nurses to work in Namibia in 2007 and 2008. Financial transactions which include transfers, such as social pensions, contributions to Medical Aid Funds and subsidies to loss-making State-Owned Enterprises (SOEs), will remain the second mostimportant spending category, accounting for 14 per cent of total budget. To reduce the SOEs’ drain on the state budget, the government has undertaken to tighten the rules under which subsidies are disbursed. Defence will continue to receive substantial additional resources in the budget, with its overall allocation rising to 9 per cent of total spending, representing the fourth-largest category after education, finance and health. Despite the government’s efforts to improve revenue collection, reduce non-priority spending and contain wage growth, the 2007/08 and 2008/09 budgets are African Economic Outlook

projected to result in deficits of 2.2 per cent and 2.3 per cent, respectively. This is mainly explained by an expected fall in SACU receipts by more than 6 per cent of GDP. The reduction of the fiscal deficit over the past few years has led to stabilisation of the public debt at about 33 per cent of GDP. The authorities have fixed an ambitious target of reducing the debt/GDP ratio from 33 per cent to 25 per cent by the end of the decade. Monetary Policy Namibia is a member of the Common Monetary Area (CMA), which also includes South Africa, Lesotho and Swaziland. Like other small CMA members, Namibia’s monetary policy is determined by the peg to the South African rand. Each CMA member has its own Central Bank and maintains responsibility for foreign exchange transactions within the territories. A bilateral agreement with South Africa requires Namibia to fully back its currency with foreign exchange reserves. This peg also links Namibia to South Africa’s inflationtargeting framework, requiring the two inflation rates to converge to the South African Reserve Bank range of 3 to 6 per cent. Nevertheless, since mid-2005, inflation has been rising. The annual rate for December 2006 was about 6.1 per cent, the highest not only for the year, but since August 2003 (6.7 per cent) compared to a low rate of 0.9 per cent in May 2005. The increase is mainly due to increases in transport prices until the end of the second quarter (reflecting high international crude oil prices), food inflation, strong domestic demand and a weaker exchange rate. Imports account for 80 per cent of the CPI (Consumer Price Index) basket. Mirroring development in the CPIX (Consumer Price Index excluding interest rates on mortgage bonds)of South Africa, which is the major source of Namibia’s imports, inflation averaged 5.1 per cent for the year, compared to 2.2 per cent in 2005 and is expected to remain around this level in 2007 and 2008. To counteract the build-up of inflationary pressures, the Monetary Policy Management Committee of the © AfDB/OECD 2007

Namibia

Bank of Namibia increased the bank rate by 150 basis points, to 8.5 per cent, from June to October 2006. This tightening was in line with similar action taken by the South African Reserve Bank (SARB). Owing to continued inflationary pressure, the Bank of Namibia increased the Bank rate by another 50 basis points to 9 in December 2006, following an identical rise in the discount rate by the SARB. At this level, the intervention policy rate became the highest since October 2003, when the rate was 8.25 per cent.

Institutions Supervisory Authority Act which should encourage the development of investment vehicles offering investors the same returns as those expected outside the country. External Position

As sentiment towards emerging markets deteriorated in May/June 2006, and as concerns mounted over South Africa’s large current-account deficit, the currency depreciated by about 20 per cent, reaching a low of N$7.91 to the US$ in early October 2006. Softer prices for commodities such as gold and platinum have also helped to push the currency lower. Although a lower exchange rate means higher costs for imports from outside the CMA, it may improve the prospects for non-traditional exports and increase the profits of traditional exports. Towards the end of the year 2006, the currency appreciated again and hovered around N$7.10 to the US$ and N$9.3 to the euro.

About 80 per cent of total imports come from or through South Africa, which absorbs only 30 per cent of exports. The European Union (EU) represents the main export market, in particular the United Kingdom (diamonds) and Spain (as end and transit destinations for fish). Namibia is also actively taking advantage of the African Growth and Opportunity Act (AGOA), with several apparel manufacturers from Asia – actually forming one company with one or two subsidiaries (Ramatex) – which are investing in assembly facilities; at full production, these facilities are expected to generate annual exports of goods valued at over $100 million. AGOA has created over 6 000 jobs and has led to investment in infrastructure, especially in support of the textile and garment industry. The United States also represents an important source of heavy equipment and machinery imports.

Namibia is characterised by a high private-savings rate, mainly reflecting pension contributions from public-sector employees. In fact, the assets of pension funds and insurance companies are equal to GDP. The overwhelming bulk of these funds have been channelled to South Africa’s financial market due to the lack of investment opportunities in Namibia. In order to retain more of these funds in Namibia, the government is drafting an amendment to the Namibian Financial

Economic Partnership Agreement (EPA) negotiations with Southern African Development Community (SADC) countries, including Angola, Botswana, Lesotho, Mozambique, Namibia, Swaziland and Tanzania, were opened in July 2004. Botswana was appointed to co-ordinate the overall efforts of the SADC EPA configuration and to prepare negotiating positions, while each SADC EPA member state has been assigned a negotiation issue or issues to co-ordinate.

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-8.4 35.4 43.8 -4.6 3.1 12.8

-10.3 28.0 38.3 3.8 1.3 10.2

-5.0 31.9 36.8 2.4 1.2 11.7

-9.4 27.0 36.4 2.7 1.2 11.2

-7.3 28.5 35.8 2.3 1.0 14.0

-5.3 29.3 34.6 2.4 1.1 12.1

-4.4 29.8 34.2 2.2 1.2 10.1

Current account balance

2.8

5.1

10.2

5.7

10.0

10.3

9.1

Source: IMF and Bank of Namibia data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/707438272131

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Namibia is in charge of trade facilitation and development co-operation. In March 2006, the SADC EPA group presented this adopted framework document to the European Commission (EC), setting out the principles, objectives and key elements that define their new approach to the EPA negotiations.

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The Southern African Customs Union (SACU) has recently engaged in a round of Free Trade Agreement (FTA) negotiations with other countries and regional blocs. Agreements concluded include those with the European Free Trade Association (EFTA) and the Southern Common Market (MERCOSUR); these now await incorporation into the national laws of the individual countries concerned. The SACU-United States FTA, however, has been put on hold due to disagreements over several issues, including “new issues” such as investment, government procurement and competition. This agreement will now be replaced by a less comprehensive version known as the Trade and Investment Co-operation Agreement (TICA). Agreements with India and China are imminent. Namibia’s transactions with the rest of the world

are characterised by a small deficit in goods and a small surplus in services. Nevertheless, since 2006, booming exports in diamonds, gold, zinc and copper – reflecting higher international prices – have narrowed the trade deficit. In addition, a surge in SACU receipts has resulted in a strong improvement in the current-account surplus. The growth in mineral exports is expected to continue in 2007 and 2008, further improving the trade balance. The current account is also expected to benefit from increased tourism revenue and higher receipts from investment abroad. Foreign direct investment (FDI) is heavily biased towards the mining sector, which attracted 65 per cent of major projects in the 2003-06 period. In manufacturing, most Asian FDI has been short-lived. Rhino Garments shut down in 2005, while Ramatex has used the threat of doing the same to win new concessions from the trade unions and the government (in particular in the area of environment controls). A revision of the investment legislation is currently under way, in order to define better the role of tax incentives – which, in the case of Ramatex, included

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

30

25

20

15

10

5

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/178643760831

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© AfDB/OECD 2007

Namibia

a reduced corporate rate and a VAT exemption for equipment purchase – and also to integrate trade, FDI and EPZ promotion. This process is proceeding in tandem with the discussion of the second Investor Roadmap that has identified the major hurdles to FDI in Namibia. The recently established Agricultural Trade Forum should also play a key role in raising awareness and attracting investment towards the production and export of products in which the country has a comparative advantage, such as cotton seed, hides, karakul pelts, raisins, beer, fish, cattle meat and wool.

government will continue issuing bonds on the domestic market to finance its budget.

Structural Issues Recent Developments Due to its small population of about 2 million, the legacy of infant-industry protection, and a history of racially-tinted colonialism, the economy of Namibia is characterised by low competition, high regulation, and diffuse rent-seeking. The government has embarked on a process of regulatory reform in order to infuse much-needed competition, but the results achieved so far have been disappointing.

Namibia’s status as a middle-income country does not facilitate access to concessional finance. In fact, donors’ support is declining. External grants through the budget dropped from 1.5 per cent of the revenue in 2005/06 to 0.6 per cent in 2006/07. Those funds are exclusively from the EU and are destined for rural water investments and rural roads. The Dutch and British development co-operation agencies ceased their operations in 2006. Interestingly, though, Namibia was deemed eligible for United States Millennium Challenge Account assistance in the 2006 and 2007 selection rounds, under the lower middle-income category. The country is expected to receive about $450 million over the next five years to finance projects in the following areas: education, livestock, tourism, green scheme, indigenous natural products and roads. There are concerns in the donor community about the effective absorption capacity of such a significant flow of resources, and many fear that Millennium Challenge Account (MCA) aid could crowd out the activity of existing donors.

State-owned enterprises (SOEs) play a dominant role in the economy. According to the latest available annual reports covering fiscal years 2003/04 and 2004/05, the ten largest SOEs had a total turnover equal to N$4 357 million and recorded total profits equal to N$46 million, compared to GDP of N$38 400 million in 2005. The list includes eight profit-making SOEs (Telecom Namibia, NamPower, TransNamib, the Roads Contractor Company, NamWater, Namport, Nampost and Namibia Airports Company) and two loss-making ones (Air Namibia and Namibia Wildlife Resorts). The return on assets ratios are very healthy for non-regulated monopolies (such as the telecom and postal services providers), while the two loss-making SOEs have negative net asset values recorded in their books. Only NamPower has an international credit rating.

In December 2005 Fitch Ratings awarded Namibia an investment-grade rating of BBB- for long-term foreign-currency risk, F2 for short-term foreign-currency risk, and BBB for long-term domestic-currency risk, while the overall country rating was set at A-. This reflects an improvement in the perceived creditworthiness of the government, since prices at which government securities were previously traded indicated a far less favourable assessment of risk. Despite the possibilities of tapping international capital markets offered by the favourable sovereign credit rating, the

So far, the government has taken a very cautious approach towards SOE reform. No privatisation has been concluded so far and in fact the term itself has not been used in the Budget speech since 1999. Air Namibia and the state-owned television and publishing enterprises (which includes NamZim, the joint venture with the Government of Zimbabwe which publishes the Sunday Times), received sizeable budgetary support in 2006/07 (N$153 million and N$78 million, respectively), while NamPower received a N$250 million transfer to strengthen its balance sheet

© AfDB/OECD 2007

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in advance of the massive N$7 billion Kudu gas-topower project. In order to improve SOE governance, an ad hoc Act was finally gazetted in September 2006, although it remains unclear whether operational responsibilities will rest with the newly established Central Governance Agency or an SOE Governance Council which will act as the representative of the state and report to the cabinet committee.

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Regulatory reform has also been proceeding very slowly. For public utilities, monopoly provision is still the rule and Namibia does not have independent regulatory agencies, although a number of separate regulatory commissions has been established in line ministries such as Mines and Energy, and Information and Broadcasting. In mobile telephony, Namibia Telecom has been operating the only company, MTC, since 1995, first with Sweden’s Telia as a strategic equity partner and most recently with Portugal Telecom. A second mobile telephony license was awarded in 2006 and the new operator, Powercom, a joint venture between NamPower and Telenor of Norway, will start operating the Cell One brand in 2007. In December 2006, Telecom Namibia finally launched a high-speed Internet service, while MTC is expected to launch 3G services in 2007. Namibia does have a competition law and policy (the Competition Act was enacted in 2003), but due to budget and capacity constraints the Competition Commission has not begun operating. However, the Commission is definitely on the budget list for the 2007 financial year, so it is likely that it will start this year. Partly due to the heavy role of the public sector, investors’ perception of the investment climate has deteriorated in recent years, as reflected in Namibia’s slipping-down in a number of international competitiveness rankings. Skills shortages, restrictive labour laws, and shallow financial markets are widely mentioned factors. Namibia has a serious deficit in different technical professions, a problem that is aggravated by restrictions on work permits and the haphazard application of existing rules. Moreover, legislation makes labour dismissal very cumbersome and exceedingly long, and this obviously discourages employers from hiring new staff. Labour laws also African Economic Outlook

include very generous provisions for annual holidays and other special leaves (for medical and compassionate reasons). Cognizant of these problems, government tabled new legislation to Parliament in late 2006 which includes transferring dismissal procedures from courts to tripartite arbitration tribunals. As in neighbouring South Africa, affirmative action to increase the participation of Historically Disadvantaged Individuals (HDIs) has been introduced since the late 1990s. The policy of Black Economic Empowerment (BEE) places a premium on increasing the participation of HDIs in the equity of Namibian businesses, and thus, on the transfer of assets, although other criteria such as the share of positions filled with HDIs are also included. Black Namibians currently account for 25 per cent of all executive directors, 45 per cent of all senior managers, and 78 per cent of all middle managers. BEE was particularly successful in the fishing industry around 2001-02, although it is questionable whether local partners contributed much in terms of technical support and facilitating access to markets. In 2006, in the single largest BEE deal so far, Old Mutual South Africa transferred part of its shares to its black employees, church groups, and a special trust. The 2006-09 MTEF includes a target for Namibian ownership in the mining sector of up to 33 per cent. While efforts to redress the discriminatory legacy of the past are to be welcomed, this policy carries the risk of stifling entrepreneurship and perpetuating a culture of rent-seeking. A policy mix that improved the terms of financing of small and medium-sized enterprises (SMEs), and assisted micro-finance institutions and accompanied their scaling-up – so ultimately easing the burden of doing business in Namibia – would carry much greater potential in terms of BEE. Land reform is another policy domain where progress has been slow. Fifty-two per cent of land in Namibia is held under freehold (commercial) title, while the remaining 48 per cent is communally held. At independence, the commercial land area, which represents 74 per cent of the potentially arable land, was owned by less than 4 100 people, mainly white commercial farmers who made up less than 0.2 per cent of the total population. To date, access to agricultural © AfDB/OECD 2007

Namibia

land in Namibia for formerly disadvantaged citizens has been facilitated by the state, and by market-assisted acquisition schemes based on the willing seller, willing buyer principle. The government initiated a National Resettlement Programme (NRP) whereby people were resettled on state-acquired freehold farms. In addition, the Agricultural Bank of Namibia has put in place an Affirmative Action Loan Scheme to provide financial assistance to communal farmers for the procurement of commercial land. Between 1990 and 2005, these two programmes redistributed 4.5 million hectares (against a target of 9.5 million hectares) or 12 per cent of freehold land in the country, benefiting some 2 200 families. Since April 2004, state-led acquisition has been supplemented with expropriation in the public interest. As an initial action, some 25 farms were identified. Since then, the negotiations and the legal process have continued, and three farms have been acquired. The objective is to redistribute 15 million hectares by 2020. The Namibian government is considering ways of improving its land-reform programme, which has not only been slow, but has also had a negative impact on agricultural production. A Permanent Technical Team was created during 2003 in order to review the existing legal and policy framework, and the economic, financial, and environmental sustainability of land reform. According to the analysis of the Team released in 2005, the land reform process lacks transparent and quantifiable indicators, and contains no provision for adequate support services. An assessment on the outcome of the process revealed that emerging commercial farmers received little back-up support to enable them to become economically self-sustainable. Most farmers cannot survive without a supplementary income. This is mainly due to skill shortages, implementing new farming practices, start-up capital and breeding stock, access to operating credit, equipment, and access to information and advice; and also to poorly maintained farm infrastructure. The team recommended therefore that the government should: improve the screening and selection of beneficiaries; involve civil society in the reform © AfDB/OECD 2007

process; encourage community-driven resettlement; and favour farm workers. In addition, the team identified the support services necessary for emerging commercial farmers, including pre-settlement orientation courses, short courses, and other formal training, as well as a mentoring system to enhance linkages between farmers and service providers. Access to Drinking Water and Sanitation Namibia is one of Africa’s driest countries, with annual rainfall equal to 360 mm and an annual evaporation of 3 400 mm. The annual amount of water available is equal to 422.5 million m3 per annum, with a geographically uneven distribution of resources. In particular, high-growth agglomerations such as Windhoek and the coastal towns of Swakopmund and Walvis Bay experience severe water shortfalls that require considerable capital investment to increase supply. Groundwater is the single largest natural source of water, accounting for 40 per cent of freshwater. Perennial rivers and ephemeral rivers each provide roughly 30 per cent of freshwater. Reclaimed water provides about 1 per cent of freshwater. According to the World Health Organization (WHO), about 98 per cent of urban population had access to improved drinking water in 2004, while 50 per cent had access to improved sanitation coverage. In rural areas, about 81 per cent were estimated to have access to improved drinking water. This represented a substantial improvement compared to 1990, where only 42 per cent of people had access. Not much progress has been achieved in sanitation, since still only 13 per cent of the rural population had access to improved sanitation coverage, compared to 8 per cent in 1990. Overall, although progress in sanitation has been moderate, Namibia is ahead of schedule in meeting the MDG on access to drinking water. From a total of 57 per cent of people having access to drinking water in 1990, the percentage increased to 87 per cent in 2004, which is ahead of the target of 78 per cent. Freshwater supply is provided by four types of agents. Agricultural self-providers are the largest suppliers (45 per cent) and deliverers to end-users (47 per cent). African Economic Outlook

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Namibia

NamWater was set up in 1997 as a commercialised water corporation under the supervision of the Ministry of Agriculture, Water and Forestry. It accounts for 40 per cent of all abstraction and delivers 22 per cent of all water to municipalities, industries, mines and the Directorate of Rural Water Supply. Lower government bodies, including municipalities and rural authorities, account for 12 per cent of supply and 29 per cent of deliveries. Finally, a small (although increasing) share is provided by mining enterprises.

418

As is the case in most other countries, households use less than 12 per cent of all water abstracted. Piped water is the source of drinking water for 99 per cent of urban households and 58 per cent of rural households. However, a significant proportion of households in rural areas draw their drinking water from flowing streams/rivers or stagnant sources. Non-revenue water (including administrative, physical infrastructure losses and metering errors) accounts for a low share of NamWater resources, but losses are much higher for most municipalities. Municipalities with non-revenue water of 20 per cent or higher account for 37 per cent of municipal water distribution, while in seven towns, non-revenue water exceeds 60 per cent. The 2000 National Water Policy White Paper sets the policy and strategy for water resources management and water services. The White Paper addressed the need to separate the roles of water supply, water resources management and regulatory supervision. The water sector is the responsibility of the Ministry of Agriculture, Water and Forestry, whereas the Ministry of Health and Social Services is responsible for the sanitation sector. Enacted in 2004 to replace the outdated Water Act 54 of 1956, the new Water Bill established a national regulatory board, consisting of five members appointed by the Minister of Agriculture, Water and Forestry. Cost-recovery mechanisms have been introduced gradually since the mid-1990s by NamWater. This has certainly contributed to the improved management of

water demand among urban users, but irrigation, livestock, and mining still enjoy an important subsidy, since depreciation and operating costs are excluded from the tariff formula. According to a 2006 survey, mining also appeared to have switched from paying tariffs that were substantially in excess of cost in 1999, to receiving large subsidies in 2001/02. A process started in 2005 to update NamWater’s system of cost allocation according to different schemes: this may result in a better alignment of costs and tariffs, and in a more transparent allocation of subsidies to different classes of users. An important aspect of water-pricing policy at the municipal level is the effective collection of revenue. Detailed data on the costs and user charges levied by municipalities are not available. In many cases, local authorities are not up to date with the processing of their annual statements. A 2005 survey of a few local authorities determined that payment levels vary from 40 per cent to 85 per cent of the monthly accounts processed. A number of towns are in arrears to NamWater for their bulk water purchases, due to failure to collect payments from local users. In February 2005, the outstanding service accounts of local authorities were estimated to represent debts of well over N$400 million. To fight the problem of outstanding arrears on user accounts, in 2003 some towns started installing prepayment water meters. This measure met with widespread criticism by civil-society organisations and was plagued from the beginning by the high incidence of faulty equipment. An alternative mechanism, consisting of communal-level water committees that collect money from different households for the use of shared taps and toilet facilities, has proved more successful, although this mechanism is not yet widely used. In terms of the affordability of water services, survey data based on water tariffs in 2003/04 and 2004/05 show that low-income families or pensioners with an income of less than N$600/month cannot afford to use 6 m3/month, which is regarded as baseline water use for an urban family of five with full water services2. In

2. In the residential plot of Tsumeb, 64 per cent of the population has an income of N$400 or less. Note that income distribution in Namibia is very skewed. The per capita income for the 25 per cent households with the lowest income is about N$1 600, compared to almost N$150 000 for the 2 per cent households with the highest income.

African Economic Outlook

© AfDB/OECD 2007

Namibia

rural areas, the situation is likely to be worse. The nonpayment of accounts leads to a vicious circle, where both NamWater and local authorities need to increase their tariffs to compensate for the non-payment of accounts. This practice makes services more unaffordable to the poor in Namibia. In both Windhoek and Rehoboth, the intention of the City Council is to subsidise low-income households to make baseline water consumption (40 litres/ person/day) available at a lower price. The lower tariff for basic water consumption might be affordable for low- or no-income earners. However, all households pay

monthly basic service fees irrespective of consumption. This service fee is slightly higher than the consumption fees for the minimum of 200 litres per day, and hence doubles the monthly bill. Windhoek currently applies a rising block tariff: each month, the first 6 m3 are provided at a subsidised rate, while in the 6-to36 m3/month range, the tariff is at cost-recovery levels. For consumption over 36 m3/month, the tariff is set at long-term marginal cost. There is a general consensus within municipalities and at NamWater that the strategy adopted in South Africa of providing free water up to a consumption of 6m3/month is ineffective, as it creates enormous problems for municipalities in covering the

Sustainable water supply in Windhoek The municipality of Windhoek is served by three dams which are operated by NamWater. 50 boreholes contribute about 4 per cent of total water supply, while the Goreangab Reclamation Plant provides an additional 27 per cent. The plant was built in 1968 and upgraded from 8 000 m3/day to 21 000 m3/day in 2001. Windhoek was one of the first cities in the world to introduce direct recycling of effluent for drinking purposes. Purified effluent is also provided to consumers for landscape gardening. Extensive water-quality monitoring programmes are in place to ensure the required level of water quality after each treatment process, as well as the quality of the water finally supplied to the City of Windhoek. The City of Windhoek signed a performance-based Private Management Agreement with Windhoek Goreangab Operating Company (WINGOC) in 2002. WINGOC has three shareholders, viz. Veolia Water, Berlinwasser International and WABAG. The water-resource planning year runs from May to April, spanning the rainy season. During May of every year, after the rainy season, the Department of Water Affairs, in conjunction with NamWater, plans the integrated use of the resources. During 2005/06, the Goreangab Reclamation Plant was operated at around 70 per cent of capacity. Due to abundant supplies in the dams, the Department was able to rest the well field and limit abstraction from the boreholes to 1 million m³. The sustainable supply of water to the city remains the top priority of the Department. The Department is also in charge of wastewater collection and treatment, mostly for re-use. The Gammams Water Care Works, where the bulk of the sewage is treated, was first built in the 1960s, and has been upgraded a number of times. Some of the infrastructure components are fairly old, and serious problems are being experienced in dealing with the amount of sludge at the plant. In an effort to ensure sustainability for water demand in a context of scarcity, the municipality of Windhoek introduced water-demand management in 1994. The strategy concentrates on changing consumer habits by increasing public awareness of the importance of saving water, and on the implementation of a block tariff system that applies a steeply rising water cost with increasing consumption. Some other measures include: the reduction of residential plot sizes; the implementation of legislation to address water conservation in Windhoek; and improved maintenance and technical measures to reduce leaks. In 2006, unaccountedfor water was 10.3 per cent, a very good indicator compared to other municipalities.

© AfDB/OECD 2007

African Economic Outlook

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Namibia

costs of supply (240 out of 273 are facing serious financial problems), and it increases water wastages. The municipally of Windhoek practices integrated water management, and also provides an example of the successful use of unconventional sources of additional water. Technological advancements have allowed the implementation of innovative publicprivate partnerships in the reclamation of water (see Box).

Political Context and Human Resources Development

420

Namibia enjoys political stability, and a multi-party system is in place. In the 2004 national elections, the dominance of the South West African People’s Organisation (SWAPO), which has been the ruling party since independence in 1990, was confirmed. SWAPO won 76 per cent of the vote, and the new President Hifikepunye Pohamba was elected with 76.4 per cent of the vote. The new administration has made the fight against corruption the cornerstone of its policy. While Namibia ranks relatively well among African countries in Transparency International’s annual ranking, a number of recent scandals, including those at Avid Investment and the Offshore Development Company, raised concerns in the business community and civil society that SWAPO’s seemingly impregnable position may have turned the government into an instrument at the service of the party. Moreover, while the fragmented opposition does not represent a serious threat to SWAPO, the government party suffers from deep factional divisions. Namibia is characterised by one of the highest levels of income inequality in the world. The Gini coefficient is 0.6, according to preliminary results from the Namibia Household Income and Expenditure Survey (NHIES) 2003/04. While this represents an improvement from the 0.7 reported in the previous NHIES 1993/1994, Namibia still ranks among the most unequal countries in the world. The 10 per cent of households with the highest income account for nearly half of the total income in the country. The incidence of poverty varies African Economic Outlook

among functional groups and also according to the economic dualism which characterises the economy; 42.2 per cent of the rural population is estimated to live below the national poverty line, compared to 6.7 per cent for the urban population. In urban areas the per capita income is about three times higher than in rural areas. An example of the differences among functional groups is that the incomes of commercial farmers are eight times higher than those of subsistence farmers. Despite the large share of expenditure allocated to education – between 20 and 26 per cent of the budget over the past 15 years – the net enrolment rate is only 52 per cent at the secondary level, compared to 95.7 per cent at the primary level, and efficiency is low. Several factors hamper the efficiency of the educational system: as an inheritance of the pre-independence period, the northern regions perform badly, since teachers are not adequately trained, the pupil-teacher ratio is higher compared to the central and southern regions, and the infrastructure is much less developed. This divide applies also to rural and urban areas. In addition, the quality of teaching in scientific subjects is low compared to other subjects, and there is only one technical school in the country. In order to remedy the inequalities caused by the colonial past, the government has initiated a far-reaching reform of its education and training sector in the context of Vision 2030. Apart from free and universal basic education, Vocational Education and Training (VET) has been regarded as key to providing the skilled workers and employees needed for industrialisation. Already in 1994, the Namibian Government introduced the National Vocational Training Act to regulate its VET system. Today, more than ten years later, its ambitious expectations have not been met. Major problems that the Namibian VET system faces include: a mismatch between skills supplied and skills demanded; low intake and output of graduates; high failure rates in national trade tests; high unit costs; and inefficient management. Due to the lack of efficiency and effectiveness in the education and training sector in general, the government, with the support of the World Bank, has initiated the Education and Training Sector © AfDB/OECD 2007

Namibia

Improvement Programme (ETSIP), in order to improve the delivery and results of education and training. The ETSIP strategic framework covers the period 200520. Major objectives include: improving equality in skills provision, reducing teachers’ absences, and raising school enrolment rates. The success of the reform will depend on improved co-ordination between the various education departments (basic, secondary, and higher education), and on a well-functioning evaluation and monitoring mechanism. In addition, one of the major challenges and requirements for successful reform is the increased involvement of the private sector in all aspects of the training system, ranging from the provision of training to management of the VET system. For this, it is crucial to provide incentives for firms to provide on-the-job training. The first HIV/AIDS cases were reported in Namibia in 1986, and the Ministry of Health and Social Services estimates that 230 000 adults and children were living with HIV/AIDS at the end of 2001. According to the 2004 Sentinel Survey, Namibia exhibits an adult infection rate of 19.7 per cent. In turn, life expectancy at birth declined from 53.9 years in 1970-75 to

© AfDB/OECD 2007

48.6 years in 2000-05. Aside from the human aspects, the economic and social costs of the epidemic are enormous. According to a recent IMF study, slippages in counteracting the current spread of the epidemic could reduce real GDP growth by one percentage point in the period 2006-11. In an effort to control the epidemic, plans have been developed consecutively from 1990 onwards. The Third Medium Term Plan (MTP III) for the period 2004-09 benefited from significant support from co-operating partners, and made possible a reduction in drug prices. The MTP III takes a “results-based” management approach to achieving nationally and internationally agreed targets in terms of prevention, access to treatment, care, and support services. The number of beneficiaries of antiretroviral therapies could reach 50 000 by 2009, compared to an initial target of 25 000. The shortage of adequate human resource capacity to manage and implement the national response in a well co-ordinated manner remains a major challenge. In this respect, a National Human Resource Planning Task Force has been created to develop training capacity across the country in order to combat the spread and impact of HIV/AIDS.

African Economic Outlook

421

.

Niger

Niamey

key figures • • • • •

Land area, thousands of km2 1 267 Population, thousands (2006) 14 426 GDP per capita, $ PPP valuation (2006) 750 Life expectancy (2006) 41.8 Illiteracy rate (2006) 71.3

Niger

G

ROWTH, WHICH HAD REACHED

7.1 per cent in 2005, slowed to 3 per cent in 2006. The strong performance in 2005 indicated a revival in economic activity following the 0.6 per cent decline recorded in 2004. This was primarily due to the high level of rainfall in 2005, which enabled a satisfactory cereal harvest although less abundant than initially forecast. The December 2005 Francophonie Games in Niamey brought about a recovery in construction activities and an increase in secondary activities. The 4 per cent growth forecasts for 2007 and 2008 are hardly optimistic

as they amount to just a 1 point increase in per capita GDP. Compared with 2005, when several street demonstrations had taken place to protest against food shortages and to demand free distribution of food products, 2006 was on the whole Limited growth opportunities peaceful. Higher growth would restrained hesitant domestic require a stronger performance and foreign investors, in the primary sector of both although the global rise subsistence and cash crops, in uranium demand against the background of is a positive development. increased access to irrigation.

425 Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Niger - GDP Per Capita (PPP in US $)

■ West Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Niger - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

3500

8

3000

6

2500 4 2000 2 1500 0 1000

-2

500

0

-4 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: National statistics institute and IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/666207447801

© AfDB/OECD 2007

African Economic Outlook

Niger

Recent Economic Developments Agriculture continues to dominate Niger’s economy even though less than 12 per cent of the country is arable. Farming practices tend to be low-intensity and mostly manual, take place in small-scale family plots almost exclusively aimed at self-sufficiency and still use highly traditional techniques. Nearly all cultivated land is devoted to rain-fed crops, mostly millet, sorghum and cowpea, and to a lesser extent, cassava. The majority of production – 85 per cent – is for on-farm consumption. Groundnuts and cotton, which in the past were sizeable export crops, now only contribute marginally to the economy. The uncertainty of the rains, on which agriculture in Niger remains largely dependent, the ongoing drought and poor soil are all factors limiting agricultural productivity. Millet, the most drought-resistant cereal, accounts for almost twothirds of total agricultural production.

426

There was a serious food crisis in 2005, triggered by a particularly harsh drought and locust invasions that reduced the 2004 harvest and made the traditional lean period of summer 2005 particularly difficult. The 14 per cent contraction of cereal production in the 2004/05 harvest led to a cereal deficit of a little more than 220 000 tonnes, leading to a famine situation that affected more than 3 million Nigeriens. This cereal crisis was aggravated by a rarefaction of grazing lands, which decimated a significant proportion of livestock in the northern zones, and a strong drop in rural income. Emergency food aid primarily directed towards the sections of the population deemed particularly at risk was implemented. In 2006, however, the rainy season, which started late, was particularly favourable for the country’s crops, particularly in the south. Good supplies of cereals in local markets contributed to lowering prices. After contracting by 23.7 per cent in 2004/05, food crops in Niger rose by 37.2 per cent during the 2005/06 agricultural season to reach 3 741 200 tonnes. Finally, it is expected that seedcotton production will rise by 4.1 per cent to reach 10 400 tonnes. Livestock is the second largest export sector (after uranium). This traditional activity, subject to extensive African Economic Outlook

exploitation due to nomadism, suffers from a lack of professionalism and, for lack of access to veterinary products, from a nearly total absence of health monitoring of the herds. Processing activities remain embryonic due to inadequate infrastructure (transport vehicles, cold-storage slaughterhouses). Livestock is thus primarily exported as such, particularly to Nigeria, which is both an easily accessible and large market, to Libya and to the Maghreb countries. A quintessential mining country, Niger has abundant deposits: uranium and coal in the north, iron, phosphates and gold in the west. Gold production began in 2004, but its contribution to the economy remains small. The country also has hydrocarbon resources but their exploitation can only be envisaged in the medium term. In June 2005, Niger and Algeria signed a 12-year oil exploration contract for the Kafra site, near Agadez, in the north of the country. Uranium extraction fell by 8.6 per cent in 2005 to 3 million tonnes. On average, the Akouta mining enterprise, COMINAK, carries out two-thirds of production. Niger granted a uranium exploration license to three Chinese enterprises run by the China National Nuclear Corporation in Teguidda (a 1 953 square kilometre concession) and Madouela (1 872 square kilometres) in the region of Agadez. Niger’s uranium industry has been dominated for several years by a French enterprise, the Compagnie générale des matières nucléaires (Cogema), but since May 2006, the government has been trying to bring Canadian uranium-mining enterprises into the country. After Canada and Australia, Niger is the third largest producer of uranium in the world and nearly all of its production is exported to France and Japan. Deep changes are taking place in the uranium sector, related to the ongoing restructuring of the AREVA group, to the revival of the nuclear sector and to the active search for new deposits. In anticipation of the exhaustion of its open-cast mine in Tamou, the Société des Mines de l’Aïr (SOMAÏR) began developing the Artois mine. In 2004, in order to promote the mining potential of the country, the government granted new exploitation permits to Canadian and Chinese enterprises for the mining of © AfDB/OECD 2007

Niger

gold (93 tonnes of reserves) and coal (50 million tonnes of reserves) resources. The main gold mine currently in operation, Samira, has an expected annual production of around 20 tonnes in the coming five years. The Société des Mines du Liptako operates on this site under a partnership with the Canadian enterprises Semafo and Etruscan, which hold 80 per cent of the capital, the remaining being distributed amongst the Niger state and private operators. Niger’s subsoil holds many other resources, both exploited (like coal) or awaiting exploitation (like the phosphate deposits in the region of Ader or the oil and gas reserves in the region of Agadez, near Lake Chad). The

government wants to improve the contribution of the mining sector to the national economy and to public finances. Hence, the mining law ordinance number 93-16 dated 2 March 1993 was modified by Law N° 2006-026 of 9 August 2006 fixing new application procedures of the mining law. The main features of the modifications are related, amongst others, to: i) the affirmation of the principle of establishing an agreement for each exploration permit; and ii) the institution of dividing mines into areas and parcels by the mining administration, both for exploration permits and for the authorisation of smallscale exploitation.

Figure 2 - GDP by Sector in 2005

(percentage)

Government services Agriculture

19.4% 30.2%

Trade, transport and services

23%

9.5% 1.2% 1.9% Livestock 5.9% 2.6% 6.2% Forestry and fisheries Construction Mining Electricity, gas and water Handicrafts

427

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/203625766323

The industrial sector remains poorly developed and concentrated on a few sub-sectors (food products, textiles, construction and public works). The small number of significantly-sized enterprises explains why a large proportion of the needs of the population are met by imports mostly coming from Nigeria, with which Niger has a common border of 1 500 kilometres. The majority of enterprises are in the informal sector, posing a permanent problem in terms of taxation, both for the enterprises working in the formal sector as for public finances. In Niger, the industrial index increased by 13.2 per cent in the first seven months of 2006, compared with the corresponding period in 2005. This result mirrors the solid performance of the manufacturing and extraction industries, the production of which rose by 15.5 per cent and 22.8 per cent, respectively. The development of the manufacturing industries is due to the activity in the food and beverage sub-sector, which increased by 84.2 per cent. © AfDB/OECD 2007

The primary, secondary and tertiary sectors all contributed to growth in 2006, by 0.4, 0.5 and 2.6 percentage points, respectively. In terms of demand, growth was fed by a 7.2 per cent increase in the investment recorded in 2006, which followed a 22.7 per cent increase in 2005 thanks to improved external trade. The dynamism of investment in 2005 is attributable to a 25.7 per cent increase in public sector investment linked to the expected strong increase of investments on the basis of expected foreign funds and by the special programme of the president of the republic. The 5.5 per cent increase in private investment could be attributed to works undertaken for the 5th Francophonie Games, to the extension of road and electricity networks and to household construction activities. In terms of foreign trade, the latest estimates indicate a volume increase of 6.7 per cent for imports and of 2.5 per cent for exports in African Economic Outlook

Niger

Table 1 - Demand Composition 1998

2005

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage of GDP (current prices)

Percentage changes, volume

Gross capital formation Public Private

17.6 4.0 13.6

18.9 5.3 13.5

7.2 5.0 8.0

6.1 3.6 7.0

6.1 3.6 7.0

Consumption Public Private

91.9 18.5 73.4

92.7 15.0 77.7

3.5 7.5 2.8

4.2 5.2 4.0

4.0 2.6 4.3

-9.5 18.7 -28.1

-11.6 20.9 -32.5

2.5 6.7

2.4 5.3

2.6 4.9

External sector Exports Imports

Source: National statistics institute data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/508700282684

2006, which is below the 7.8 per cent recorded in 2005. Furthermore, sources for growth of Niger’s economy are extremely limited and both national and foreign potential investors are adopting a wait-and-see policy even though the recovery of world demand for uranium is a positive factor. 428

Macroeconomic Policies Fiscal Policy In 2005, the main budget balances deteriorated, less so, however, than in 2004. The overall balance in 2005 (on a commitment basis, excluding grants) was -1.8 per cent of GDP, against -3.5 per cent of GDP in 2004. The state of public finances brought about a worsening of the overall balance (on a commitment basis, excluding grants) in 2006 compared with the overall balance of June 2005. It stood at 55.5 billion CFA francs at the end of June 2006, compared with 59.5 billion CFA francs at the same moment in 2005. The situation is the result of a fall in total revenue, which went from 17.1 per cent to 15.3 per cent, and of an increase in overall expenditure, up from 18.9 per cent to 19.3 per cent. The overall balance (on a commitment basis, excluding grants) is estimated to have worsened in 2006 compared with 2005. This deterioration is expected to continue in 2007 and to lessen in 2008. Placing public finances on a sounder footing should continue through the rationalisation of expenditure African Economic Outlook

and the improvement tax collection. Widening of the tax base should, in particular, continue to be a priority. Niger’s 2007 general budget is balanced at 498.4 billion CFA francs, having grown by 9.08 per cent from 2006. Domestic revenue rose by 2.87 per cent and investment expenditure grew by 11.11 per cent over the 2006 forecasts. On the whole, the fiscal policy defined by the 2007 budget law is a logical progression from the ambitious option taken through the 2006 budget in favour of increased mobilisation of domestic resources and public expenditure, and the continued implementation with the state’s own resources of important development programmes aimed at improving people’s lives. More specifically, in order to reach the 2007 domestic tax goals, some new fiscal measures were proposed under the framework of the strategy for domestic tax mobilisation adopted by the Ministry of the Economy and Finance in collaboration with development partners. These measures consist notably of introducing a boarding tax on air transport, increasing the number of excise duty stamps for vehicles not used for public transport and to increase tax stamps from 100 to 150 CFA francs. The goals of the 2006-08 multi-annual convergence, stability, growth and solidarity programme in terms of tax revenue consist notably in increasing domestic resources by reinforcing the capacity of the collection entities, widening the tax base and reducing the scope of exemptions. To this end, a number of additional tax and administrative measures have been laid out. © AfDB/OECD 2007

Niger

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Grants

15.2 8.3 5.6

15.8 10.3 5.2

17.9 11.4 6.1

17.1 10.7 6.0

15.3 10.8 4.1

14.7 10.7 3.6

15.1 10.7 3.9

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

18.2 12.2 10.6 3.9 1.6 6.0

18.7 10.8 9.6 3.9 1.2 7.8

21.5 11.6 11.0 4.0 0.6 9.8

18.9 9.8 9.2 3.7 0.6 9.1

19.3 10.1 9.8 3.6 0.3 9.3

19.1 10.1 9.8 3.5 0.3 9.0

18.8 9.9 9.5 3.4 0.4 8.9

Primary balance Overall balance

-1.3 -3.0

-1.7 -2.9

-3.0 -3.5

-1.2 -1.8

-3.7 -4.0

-4.1 -4.4

-3.4 -3.8

a. Only major items are reported. Source: National statistics institute data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/747665782108

Amongst others, these include: i) introducing a fixed tax on the transit and/or re-export of tobacco and cigarettes; ii) introducing a fixed tax on land ownership on buildings in towns; and iii) improving collection of taxes and levies through stricter control. The state had already issued bonds for 15 billion CFA francs in November 2005, resorting to the non-banking sector (banking systems outside of Niger) for a total of 12.5 billion CFA francs. In terms of public expenditure, the goal is to gear it to the priority sectors of the poverty-reduction strategy (infrastructure, education, health and rural development) while ensuring that total expenditure remains within budget resources. It should be noted that in reference to the agreement signed on 16 September 2005 with Niger’s main trade-union federations, the government had committed to recruiting 2 000 state officers beginning in 2006. In preparation, the government conducted a review of its workforce, which permitted it to realise that fictional, or even deceased civil servants were still listed on the payrolls, with salaries and allowances being regularly transferred to their bank accounts. The mere savings achieved by eliminating these irregular payments hence allowed the state to recruit 3 000 officers, rather than 2 000. Monetary Policy Monetary and credit policies are conducted at the regional level by the Central Bank of West African © AfDB/OECD 2007

States (CBWAS) and aim at preserving CFA franceuro parity and controlling inflation. The monetary policies practised in the region are thus strict, reflecting those of the European Central Bank (ECB), with a appropriate level of foreign reserves. The only difference is that in its monetary policy, the CBWAS takes into account the economic situation of its member countries. It remains alert to changes in their economic and financial situation, particularly to the impact of oil prices on domestic prices, to the performance of harvests, to the trend of credits to the economy and to liquidity. In Niger, the net foreign assets of the monetary institutions amounted to 122.6 billion CFA francs at the end of June 2006, up from 114.2 billion at the end of May 2006, which is an increase of 8.4 billion CFA francs, related to the 11.5 billion CFA franc increase in the CBWAS assets, partly offset by a fall of 3.1 billion CFA francs in bank assets. From one year to the next, net external assets increased by 83.9 billion CFA francs. Outstanding internal debt stood at 168.5 billion CFA francs in June 2006 compared with 170.6 billion CFA francs in May 2006, which represents a fall of 2.1 billion CFA francs, or 1.2 per cent. The government’s net position improved by 0.1 billion CFA francs. Credits to the economy recorded a drop of 2.0 billion CFA francs to level at 145.0 billion in 2006. Compared with June 2005, they grew by 33.8 billion CFA francs or 30.4 per cent. The money supply reached 277.1 billion CFA francs in June 2006 from 269.4 billion one month earlier, which is an increase African Economic Outlook

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of 7.7 billion, or 2.9 per cent. Overall liquidity increased through annual slippage by 49.6 billion CFA francs, or 21.8 per cent. The aim will be to continue implementing the cautious community monetary policy in compatibility with the goals of boosting economic activity and price stabilisation. To accompany this policy, the state will withdraw gradually from the banking sector, which will allow the private sector to gain proper access to resources in order to finance investments.

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The inflation rate reached an average of 2.3 per cent at the end of 2006, compared with 6.9 per cent at end 2005. Prices are expected to ease in the cereal markets thanks to imports from Nigeria and stocks built up at the end of the 2005 harvest being released for consumption. On this basis, inflation should come out to an average of 1.4 per cent in 2006. This rate – largely below the community ceiling of 3 per cent fixed by the West African Economic and Monetary Union (WAEMU) – should be maintained if the State continues to make sure that markets are regularly stocked with convenience goods and that food-security stocks are regularly built, all assisted by a cautious monetary policy of the Central Bank.

External Position Exports in Niger are dominated by uranium products, and agricultural and pastoral products. These are dependent on the fluctuations in world prices and in rainfall. In addition to these main export products,

the industrial production of gold, which began in 2005, will henceforth be featured as exports, which started at the beginning of 2006. Imports show a preponderance of food purchases, attesting to the country’s lack of food self-sufficiency. These last two years, trade increased strongly in both volume and value. After the terms of trade deteriorated in 2004, the situation stabilised in 2005 with the revaluation of uranium prices having offset the increase in the price of oil. The country’s landlocked position results in very high transportation costs, which contribute to deepening the deficit in the balance of payments: in 2005, the latter reached 10.1 per cent of GDP, excluding official transfers, and 7.8 per cent, including these transfers. Uranium, which Niger has exported for several decades, remains the country’s leading export product: the growth recorded in 2004 reflected volume increases whereas that observed in 2005 was linked to the rise in the selling price (from 21 000 to 23 100 CFA francs per kilogramme). Uranium exports, which accounted for 30 per cent of the value of all exports in 2005, could grow in 2006-07 as mining enterprises take advantage of the rise in prices on international markets to sell their stocks and production surpluses. More recently, the country has begun to export gold. Gold exports, practically confidential in 2003, rose to 33.5 billion CFA francs. According to International Monetary Fund (IMF) projections, they could stimulate export receipts to the tune of 35 billion CFA francs in 2006 and 2007. Other export products include cash crops (green beans, yellow nutsedge,

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-3.0 16.9 19.9 -5.9 -1.2 2.9

-5.3 13.2 18.5 -5.2 -0.5 4.0

-5.5 15.7 21.2 -6.1 -0.5 4.6

-8.0 15.5 23.5 -6.0 -0.4 6.7

-6.4 17.9 24.3 -5.6 -0.4 6.2

-4.9 18.5 23.5 -4.7 -0.3 4.7

-4.3 19.1 23.4 -5.5 -0.2 2.6

Current account balance

-7.2

-7.0

-7.5

-7.8

-6.2

-5.2

-7.4

Source: Central bank data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/507842572804

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cotton, sesame, groundnut oil, gum arabic, etc), fishfarming products, as well as re-exports. France is by far Niger’s primary customer. In fact, nearly all of uranium exports were allocated to France, while Spain and Japan, which are other destinations for uranium produced by the local subsidiaries of AREVA, recorded no movements in 2005. For 2006-08, the government’s policy will be to promote exports of all products for which Niger possesses real comparative advantages. To achieve this, the awareness-raising and incentives policy for the diversification, increase and improvement of national production will be continued, notably through the ministry in charge of foreign trade and the chamber of commerce. These measures should make it possible, amongst others: i) to bring the average annual increase in exports to 5.2 per cent for 2006-08; ii) to limit the annual average increase in imports to 2.5 per cent; and iii) thus gradually to reduce the current account deficit on the balance of payments, including grants, to 6.2 per cent of GDP in 2006 and to 5.2 per cent in 2007. For 2008, the deficit is estimated at 7.4 per cent. Regarding imports, Niger remains highly dependent externally for its supply of basic foodstuffs, energy and industrial products. The recent progression in Niger’s imports is due to the increase in the cost of oil supplies and to cereal purchases connected to the country’s food problems. In two years, from 2003 to 2005, Niger’s oil bill increased by 166 per cent whereas volumes remained constant. Over the same period, the value of cereals purchases tripled for a doubling of volumes (from 200 000 to 400 000 tonnes): in 2005, Niger purchased 285 000 tonnes of rice for 47.8 billion CFA francs. On the other hand, despite a 10 per cent recovery in value in 2005, the purchase of other consumer goods has fallen from its 2003 level: basic food products such as oils and fats, dairy products, flour and sugar are the largest purchases. Manufactured products account for only a small fraction. After noticeably increasing between 2003 and 2004, equipment imports barely evolved in 2005. France remains Niger’s leading supplier with a stable market share of around one-sixth of external © AfDB/OECD 2007

purchases. In 2005, Côte d’Ivoire recovered second place (with a 10 per cent market share) from the United States the previous year, while Nigeria is in third place with an apparent market share of 6.3 per cent, a figure that does not account for goods entering the country outside of customs control. With the increased demand for cereal, several Asian countries are no amongst the principal suppliers to Niger. Imports increased in 2006 and should also increase in 2007 due to growing demand for equipment and intermediary goods for infrastructure projects. The cost of imports, which amounted to 15 per cent of the value of exports in 2005, increased in 2006 in the wake of rising oil prices. The current account should benefit from the Multilateral Debt Relief Initiative (MDRI) and should gradually see its balance improve. Current transfers, stimulated by foreign aid following the food crisis of 2005, could contract in 2007-08, while still remaining in strong surplus. The openness of Niger is evident in the search for economic, commercial and military co-operation with neighbouring countries. Niger is a member of the WAEMU, the Economic Community of West African States (ECOWAS) and the Conseil de l’Entente (Council of Accord or Council of Understanding). It is also a member of the Autorité Liptako-Gourma (instituted in 1971 joining Burkina Faso, Mali and Niger in the aim of developing and promoting regional resources), of the Niger Basin Authority and of the Lake Chad Basin Commission. After the June 2004 expiry of the $76 million agreement under the Poverty Reduction and Growth Facility (PRGF) concluded in December 2000, on 31 January 2005 the executive board of the IMF approved a new three-year programme covering 200507 for $9.4 million under a new PRGF. At the end of the first review and to help the country cope with the food crisis, the IMF raised the amount of the programme to $37.5 million in November 2005 and proceeded with an immediate disbursement of $15.4 million. Following the March 2006 IMF mission, the executive board approved the second review of the PRGF and the disbursement of a second African Economic Outlook

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$8.6 million tranche. Total annual aid of the World Bank is of the order of $70 to $80 million, distributed between budget aid and project aid. In 2005, the African Development Bank (AfDB) granted Niger $18 million in budget aid. Finally, under the 9th European Development Fund (EDF) 2000-07, Niger benefits from National Indicative Programmes (NIPs) worth EUR 211 million (compared with EUR 136 million for the 8th EDF 1995-2000). According to the World Bank, Niger’s external debt amounted to $1 949 million at end-2004, up by 6.5 per cent over 2003. This debt, which is long-term and concessionary, 85 per cent of which is multilateral, accounted for 55.5 per cent of GDP in 2004 compared with more than 90 per cent three years earlier. The completion point of the Enhanced HIPC (Heavily Indebted Poor Countries) Initiative was reached on 12 April 2004. All of Niger’s debt with the Paris Club ($197 million) was cancelled on 12 May 2004.

Following the July 2005 decision of the G8 heads of state, Niger was to have its debt with multilateral institutions cancelled. Niger is eligible for the MDRI, like the 16 other countries (12 of which are African) that have reached the HIPC completion point and are automatically admitted to the programme. The amount of relief accorded under the MDRI will be deducted from the country allocations of the International Development Association (IDA), which will mean a decline in new financing to a level equal to the MDRI debt relief. This mechanism aims to counteract the ethical hazards and concerns for fairness usually generated by debt cancellation. For 2007-08, the government has committed to observing cautious debt management by falling back mostly on concessionary loans and by neither contracting nor guaranteeing any short-term foreign debt.

432

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

100 90 80 70 60 50 40 30 20 10 0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF and World Bank. http://dx.doi.org/10.1787/532217214311

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Structural Issues Recent Developments Recent structural developments reflect a clear will by Niger’s state to modernise the country with the support of the international community and development institutions. Despite its landlocked position, the country has agreed to measures that will eventually contribute significantly to improving the economy. In terms of road networks, the AfDB group approved on 27 October 2006 a loan and a grant totalling $41.07 million to finance the Dori-Tera road upgrade and to facilitate transport in the OuagadougouDori-Tera-Niamey Corridor. The aim of this project is: to improve the service level of the community roadnetwork structure with a view to encourage commercial trade in the ECOWAS/WAEMU integration corridors and thus promote trade between the states in the Liptako-Gourma region; to reduce the general cost of cross-border transport; and to contribute to reducing poverty in the region. To reach these objectives, 91 kilometres of double-layer surfaced road between Dori and Tera is to be constructed, with a 7 metrewide carriageway and 1.5 metre shoulders, 22 kilometres of connected municipal road networks in double-layer surfacing are to be improved (also 7 metres wide with 1.5 metre shoulders) including 11 kilometres in the town of Dori and 11 kilometres in Tera, and, lastly, to connect 60 kilometres of improved rural earth roads to the main artery. The AfDB loan, totalling 12.71 million Units of Account (UA) ($18.76 million), and the grant of 15.11 million UA ($22.31 million) will finance 90 per cent of the total project cost. The government of Burkina Faso, Niger and the WAEMU will cover the remaining 10 per cent. In addition, the People’s Republic of China decided to finance the construction of a second bridge over the River Niger in Niamey. In the realisation agreement of this project signed on 18 July 2006, China allocated an envelope of CNY 20 million (EUR 1 980 million) and an interest-free loan of CNY 30 million (EUR 2 977 million) to finance the construction of this second bridge. The Kennedy © AfDB/OECD 2007

Bridge, built by the United States in the 1970s, is the only existing passage from the centre of Niamey to the right bank of the river, where numerous residential areas and several institutions are located, including the country’s sole university. It is also unavoidable for passengers wishing to travel to Ghana and Benin (through Burkina Faso), the ports of which are vital for landlocked Niger. Narrow and dilapidated, the Kennedy Bridge suffers from enormous traffic jams during rush hours. The construction projects connected to the 5th Francophonie Games organised at the end of 2005 accelerated the development of road networks that year. The improvement of roads is certain to contribute to strengthening food security by facilitating access by the poor to the socio-economic infrastructure to market surplus harvests. The privatisation programme has been delayed despite the institution of a national public procurement commission in 2004. For NIGELEC, the electricity utility, the government adopted a privatisation scheme envisaging a 51 per cent capital sale under a single 25year concession. For SONIDEP (oil products), after a first unsuccessful call for tender in 2003, by April 2004 only 6.9 per cent of its capital had been sold to members of the oil products local distributors group, Groupement Nigérien de Distributeurs de Produits Pétroliers. Given the slowness of the process, in 2005 Niger’s authorities decided to review the privatisation strategy of these two enterprises with the help of the World Bank. Structural reforms are focused on the implementation of a priority plan developed following the Public Expenditure and Financial Accountability Review. They are also directed at restructuring the financial sector, which should lead to the division of the national postal services and savings institution, the Office national des postes et de l’épargne, into two entities, one in charge of managing postal services and the other of financial services. In addition, the state’s withdrawal from the capital of Crédit du Niger is also continuing. Concerning public-sector reform, in October 2006, Niger’s government resolved to test, for two years, the system of workdays with no breaks in public and paraAfrican Economic Outlook

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public administrations, local government, and public and private enterprises. This initiative aims at reinvigorating the administration by rationalising working hours and improving public-sector productivity and efficiency. In July 2006 it was announced that Niger would benefit from a loan of $19.23 million (EUR 15.1 million) from the AfDB group to finance a project for the development of water resources for agriculture in the south-west of the country. This fiveyear project in the regions of Dosso and Tillabéri aims at ensuring better water management through the completion of ten hydroagricultural projects and the reinforcement of twelve additional projects. It should make it possible to develop 1 200 hectares of floodplain cultivation and 680 hectares of irrigated cultivation, and to reclaim almost 9 500 hectares of degraded land. Access to Drinking Water and Sanitation 434 Niger is a vast and arid country situated in the Sahelo-Sudan zone (with less than 800 millimetres of rainfall per annum). Surface water resources, primarily constituted by the River Niger, are relatively large, even if less than 1 per cent is exploited. Around 20 per cent of renewable groundwater are exploited, with large technical constraints in certain regions (the productive water sheets are deep and thus costly to reach). Niger rates well on the whole in terms of water resources on the national scale. Institutionally, the most active departments in terms of water management and sanitation are the Ministry of Hydraulics, Environment and the Fight against Desertification (MHE/FAD), the department of water resources, the department of new works, the department of inventory and management of hydraulic works and the department of hydraulic infrastructure, charged with supplying drinking water throughout the country outside of urban centres, the department of the environment, the department of research and programme planning, and the environmental assessment and impact studies bureau. The MHE/FAD supervises the implementation of the national water programme African Economic Outlook

in collaboration with other concerned ministries. Compliance with quality standards, arbitration of conflicts and the defence of consumer interests fall under the remit of the multi-sectoral regulation authority, a joint body independent from the state. Under the decentralisation laws, towns are theoretically responsible for water and sanitation, but decentralisation is advancing slowly and towns are still only marginally involved in these areas. Outside of the activities of the national water authorities, the Société du Patrimoine des Eaux du Niger (SPEN) and the Société d’Exploitation des Eaux du Niger (SEEN), the majority of water services are delivered by user organisations or village water committees. There are enormous capacities to be developed locally. Although some urban communities can begin to take charge of water and sanitation services, rural communities will remain absent from the sector for some time. Water rates have risen since 1999, from 196 CFA francs (average price per m3) in 1999 to 244 CFA francs in 2005. Over the same period, the rate applied to the social sector using standposts and the poorest households, increased by 10.43 per cent, from 115 to 127 CFA francs. For the administration, the increase is around 42.4 per cent, while the rate applied to industry and business increased by 39.45 per cent. These price increases, in part, aim to reduce the financial deficit of the national water enterprise, the Société Nationale des Eaux (SNE), assessed at about 5 billion CFA francs, and in part to enable investments to improve the quality of service and ensure access to drinking water to the greatest number possible. This inflationary trend should continue so that the SPEN can consolidate its financial position. In urban areas (around 50 towns), it is estimated that 70 per cent of the population has access to drinking water and around 60 000 families are connected to distribution networks. In the rest of the country (rural areas and small towns that are not serviced), coverage is estimated at 50 per cent on average (2004 estimate by the International Secretariat for Water published in their Blue Book). The national rate of access to potable water would be thus around 59 per cent, which means 6.7 million people are excluded from service. In terms © AfDB/OECD 2007

Niger

of sanitation, the rate of access depends on the level of service considered: in large towns, most families have access to a sanitation device, but it is rarely “improved” (for the most part, it is a traditional latrine), while in rural areas, very few families have any sort of sanitation device of any description. It is estimated that only 15 per cent of Niger’s population have access to proper sanitation, with very great disparities between rural areas and large towns. To reach the Millennium Development Goals (MDGs) of access to drinking water, by 2015 the coverage rate should be 80 per cent. In terms of sanitation, a national coverage rate of 50 per cent must be reached, which presupposes the construction of around 400 000 public and household latrines. On 18 July 2006, the World Bank announced an additional $10 million IDA financing to broaden the water sector project (launched in 2001) aimed at restoring water distribution systems in small towns in Niger. In May 2006, Saudi Arabia granted Niger 3 billion CFA francs (more than EUR 4.5 million) to finance the construction and restoration of around 100 potable water wells in three regions. A previous programme that cost an estimated 11.3 billion CFA francs (more than EUR 17 million) wholly financed by Saudi Arabia enabled the drilling of 800 modern wells in several rural areas in Niger. Scheduled investments by funding agencies for 2001-07 are estimated at around 98 billion CFA francs ($23.3 million) per annum. These investments are repartitioned as $12.5 million for urban hydraulics, $10.5 million for rural hydraulics and $0.36 million for sanitation in urban areas. An examination of these figures indicates that the investment necessary for fulfilling the MDGs (estimated at $36 million per annum, or almost 2 per cent of GDP) is more or less in place for urban projects, but that only two-thirds are met for rural ones. On the other hand, very few resources have been earmarked for meeting the sanitation MDGs, whether rural or urban, and this lag will be increasingly difficult to make up. Thus, the state and international funding agencies should concentrate their efforts on sanitation. © AfDB/OECD 2007

Particularly since 2001, several reforms have focused on the potable-water sector. These have had three aims: i) the privatisation of the SNE through a partnership between the public sector and a private operator – supplying water to urban centres is henceforth under the remit of the SPEN, while exploitation, transport and distribution of drinking water is under that of the SEEN, a private enterprise; ii) the implementation of the water-sector project, with $76 million financing – this project aims at restoring water production and distribution facilities in urban and semi-urban areas and at improving their technical performance; and iii) reestablishing the sub-sector’s financial health in order to ensure its financial independence. The sector’s production has risen by 6 per cent on average since 2001, although some areas are still experiencing water-supply problems. For these areas, solutions such as sinking additional wells must be envisaged and financing for them must be sought. To attain the MDGs in terms of access to drinking water and sanitation, Niger must overcome several major challenges, the largest of which is improving the institutional framework by strengthening the link between the water and sanitation sectors, and the Poverty Reduction Strategy Paper (PRSP). In this context, it is necessary to increase the effective demand for water and sanitation services in local communities (population’s capacity to pay for services) in order to ensure their financial sustainability.

Political Context and Human Resources Development Niger’s political scene has been recently marked by tension between President Mamadou Tandja and Prime Minister Hama Amadou. The latter has announced that he will run for the 2009 presidential elections, at the end of the current presidential term. Political disagreements could emerge from this declaration and affect the unity in government operations, all the more so as President Tandja owes his re-election in 2004 to the support of other political parties – the Convention Démocratique et Sociale African Economic Outlook

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(CDS) in particular – which were given posts in the government. The principal opposition party, the Parti Nigérien pour la Démocratie et le Socialisme (PNDS), could see its popularity increase from the political fallout of the food crisis that raged in the country in 2005 and the social unrest that followed.

436

Some of Niger’s non-governmental organisations (NGOs) and organisations put the “dead country” (pays mort) movement into action in August 2006, the second in one month, to protest against living conditions and difficulties of the population in accessing social services. This movement was planned by the Coalition contre la vie chère au Niger (coalition against the high cost of living in Niger), which includes several NGOs, organisations and local unions, and by the Coordination Démocratique de la Société Civile du Niger (CDSCN ). These two organisations had already launched several strikes and protests in 2006, in addition to the “dead city” days on 22 March and 6 July that same year, calling for a reduction of at least 35 per cent in the price of hydrocarbons, a reduction of at least 50 per cent in medical and school fees and a reduction of at least 40 per cent in the prices of water and electricity. In July 2006, a committee empowered to negotiate with these organisations was set up. On 29 July, the CDSCN cancelled a “dead city” action in Niamey in order to avoid clashes with militants from the coalition parties in power who had organised a march in support of the government bringing tens of thousands of people together on the same day. All of these demonstrations and strikes in June and July 2006 to protest against soaring prices and the reduction of public services signalled as much the disapproval of government policies as the problems that the country faces due to its low level of development. These social disturbances have not, however, seriously affected the stability of the government. The role of the opposition should remain characterised by respect for the higher interest of social cohesion in Niger. The food situation has improved compared with the same period last year, but according to the latest information supplied by the Early Warning System in August 2006, areas of local food insecurity remain. On 2 September 2006, a survey revealed 32 zones with African Economic Outlook

relatively good food security and 28 zones in a disturbing situation. These latter are found in the regions of Tillabéri, Dosso, Zinder, Tahoua, Maradi and Agadez. In all, 839 357 people face extreme food insecurity, marked by consumption of famine food, sale of production material and reduction in the number of daily meals. In terms of nutrition, the preliminary findings of the 2006 demographic and health survey (EDSN/MICS III) indicate that the level of chronic and acute malnutrition in children under the age of five is 50 per cent and 30 per cent, respectively, higher than when the same study was carried out in 2000 (when levels were 39.6 per cent and 14.1 per cent). Moreover, the 36th epidemiological week was marked by a rise in admissions in certain nutritional recovery centres. During this same period, the national health information system registered a combined total of 117 788 children under the age of 5, 11 730 of which suffered from a serious form of malnutrition. To deal with this food and nutritional problem, the government and its partners have taken several preventative and relief measures. Amongst others, these include: i) treatment of malnutrition cases in nutritional recovery centres; ii) targeted distribution of food supplements to children at risk; iii) sale of cereal at low prices; iv) targeted free distribution of supplies; and v) “work for food” and “money for food” strategies. In order to improve the nutritional treatment of children, the World Health Organisation (WHO) trained 48 regional trainers in 2006 and made available paediatric kits to treat malnourished children in regional hospitals in Maradi, Tahoua and Zinder. The health problems in Niger are common to all of western Africa: malaria, tuberculosis and diarrhoea are amongst the most deadly diseases. In Niger, however, these problems are complicated by malnutrition, which affects almost 50 per cent of the population each year. Measles, cholera and sleeping sickness remain widespread in some areas of the country. According to the United Nations Human Development Index, Niger has only three doctors per 100 thousand inhabitants, and only 16 per cent of the 600 000 births take place in a hospital facility. © AfDB/OECD 2007

Niger

Furthermore, 20 per cent of these children could die before the age of five and in one case out of two, death would be due to malaria. In April 2006, Niger’s government voted a law introducing free access to health services for pregnant women and children under the age of five. The government is also working to create a social fund to finance its programme of free healthcare, but it is suffering from a lack of funds. A consultation and a treatment today cost 500 CFA francs for a child and 1 000 CFA francs for an adult. These sums are high for the residents of a country considered one of the poorest in the world. Niger’s authorities have thus set out healthcare and antimalnutrition programmes, which, according to

government statistics, reach half of the population. According to the WHO, annual public health expenditure by Niger’s government is $5 per capita. While this figure is less than the $35 per capita that the WHO considers necessary for basic health services in poor countries, health expenditure accounts for 12 per cent of GDP in Niger, which makes Niger the country in West Africa that invests the most in public health. On the whole, it is possible to confirm that the serious public-health problems that Niger faces are henceforth a concern for the country’s political authorities, but it must also be noted that lack of funds prevents them from making real progress in terms of care.

437

© AfDB/OECD 2007

African Economic Outlook

.

Nigeria

Abuja

key figures • • • • •

Land area, thousands of km2 924 Population, thousands (2006) 134 375 GDP per capita, $ PPP valuation (2006) 1 070 Life expectancy (2006) 44 Illiteracy rate (2006) 28.1

Nigeria

N

on its farreaching economic reform programme, the National Economic Empowerment and Development Strategy (NEEDS), aimed at accelerating economic growth, reducing poverty, and achieving the Millennium Development Goals (MDGs). The reform programme received a significant boost in December 2006 when the IMF reviewed and approved the two-year Policy Support Instrument (PSI) for Nigeria. The PSI is intended to help the government maintain prudent macroeconomic policies, strengthen financial institutions, and create a conducive environment for robust private-sector development. IGERIA CONTINUES TO MAKE PROGRESS

The reform efforts have led to significantly-improved macroeconomic results, with a modest GDP growth

and lower inflation. Real GDP growth in 2006 was estimated at 5.3 per cent, and inflation decelerated to 8.6 per cent from around 18 per Reform has improved cent in 2005. Progress has also been macroeconomic policies, made in the areas of financial-sector strengthened financial reform, debt management, foreign institutions, and created reserves accumulation, exchange a more business-friendly rate stability, and the fight against context. corruption. Notwithstanding these positive developments, the Nigerian economy is still confronted with many serious challenges, notably the high level of poverty, inefficient delivery of social services, high youth unemployment, poor infrastructure facilities, and widespread insecurity and crime. All of these problems lower the quality of life and undermine the business environment. 441

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: Domestic authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/423743843388

© AfDB/OECD 2007

African Economic Outlook

Nigeria

Strengthening the reform process is clearly necessary. The most immediate concern is that pre-2007 election spending could erode some of the gains, as past experience suggests. A successful conduct of the 2007 elections and a smooth transition of power would mark the first democratic transition in the history of Nigeria. Moreover, political stability is essential in order to consolidate the achievements of the past few years. The recent increases in world oil prices have enabled the government to pay off its remaining external debt, following the 60 per cent debt relief (amounting to about $18 billion) offered to Nigeria by the Paris Club of creditor nations. At the end of 2006, the Nigerian Parliament approved an expenditure of $1.4 billion to liquidate the external debt owed to the London Club of non-sovereign creditors. The fiscal space created by the debt relief and high oil prices is expected to be used to finance investment in infrastructure and povertyreduction programmes. 442

The 2006 census results estimated the Nigerian population at 140 million, an increase of around 50 million over the 1991 census. The census outcome indicating that the north accounts for 53.4 per cent of the population has proved very controversial. Many southerners dispute the finding that the north is more populous than the south, while northerners applaud the results. These population figures are of great practical importance, as they influence the distribution of government revenues.

Recent Economic Developments The performance of the Nigerian economy in recent years has benefited both from the high world price of oil and the efficiency gains resulting from economic reforms. Real GDP growth rate averaged 6 per cent during the period 2002-06. This solid growth rate, however, still falls short of the NEEDS target rate of 10 per cent required to achieve many of the MDGs. Moreover, after peaking at about 10 per cent in 2003, real GDP growth slowed to 6.5 per cent in 2005 and to 5.3 per cent in 2006, due to the disruptions in oil production in the Niger Delta. On the other hand, nonoil sector growth has been encouraging. Real non-oil GDP grew by 8.9 per cent in 2006 and 8.6 per cent in 2005. In contrast, oil output contracted by 4.7 per cent in 2006, after the very weak growth of 0.5 per cent in 2005. Growth is expected to improve to 7 per cent in 2007, largely due to increased oil production as stability is restored in the Niger Delta, and to an anticipated increase in public investment on infrastructure. In 2008, economic growth is expected to return to its recent average of about 6 per cent as oil output stabilises1. The main drivers of growth in the non-oil sector were telecommunications, general commerce, manufacturing, agriculture, and services. The communications sector in Nigeria has boomed in the

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/141527352238

1. The Central Bank of Nigeria forecasts GDP growth in 2007 at 7.9 per cent, but this seems be optimistic, as it is based on a best-case scenario regarding the 2007 elections, oil production and oil prices, improvements in electric power supply, etc.

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last five years, with growth averaging around 30 per cent per annum, driven largely by the expansion of Global System for Mobile Communications (GSM) services. Large inflows of foreign direct investment (FDI) have played a crucial role. The stock of telecommunications FDI jumped from $50 million in 1999 to $7.5 billion in 2005. The number of mobile phone lines has increased from less than 0.25 million in 1999 to nearly 20 million in 2005, with tele-density attaining 15.7 lines per 100 inhabitants. The tremendous progress made in telecommunications has contributed to an overall improvement in the business climate, benefiting the manufacturing sector in particular. In both 2005 and 2006, the manufacturing sector grew by more than 9 per cent per annum. The agricultural sector has also performed remarkably well, with an average growth rate in 2005 and 2006 exceeding 7 per cent.

The loss of competitiveness of Nigerian industry appeared during the oil-boom period of the early 1970s with the resulting real appreciation of the exchange rate2, which led to a surge in imports. The inability to compete with imports can also be traced to high costs of production caused by poor infrastructure and a deficient business environment. The problems include: power shortages, poor transport infrastructure, widespread insecurity and crime, lack of access to finance, corruption, and inefficient trade-facilitation institutions. The woefully inadequate electricity supply is generally judged to be the most critical constraint, for example by the World Bank’s investment climate survey3. With incessant power cuts in Nigeria, manufacturers rely increasingly on expensive generators. This problem is particularly acute for small and medium-sized enterprises (SMEs).

The contribution of the non-oil sector increased from 61.2 per cent of GDP in 2005. Although manufacturing has strengthened in recent years, the sector still accounted for less than 5 per cent of GDP in 2006. The low share of the manufacturing sector in GDP reflects long-standing problems of competitiveness.

Total investment was estimated to have increased to 23.9 per cent of GDP in 2006, up from 20.9 per cent in 2005, as both public and private investment grew strongly. Overall investment is projected to continue to increase impressively in the next two years in both the oil and non-oil sectors.

Table 1 - Demand Composition 1998

2005

(percentage of GDP) 2006(e)

Percentage of GDP (current prices)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

26.2 11.3 14.9

20.9 9.4 11.5

22.9 30.1 17.0

19.8 25.0 15.0

12.0 12.0 12.0

Consumption Public Private

78.6 11.9 66.7

57.9 21.2 36.7

6.2 4.3 7.1

6.2 5.9 6.4

5.2 5.4 5.1

-4.8 33.2 -38.0

21.2 55.2 -34.0

-4.0 15.2

3.1 8.1

2.3 6.9

External sector Exports Imports

Source: Domestic authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/653414784814

2. This is symptomatic of the Dutch Disease syndrome: an alteration in the relative price of the tradable sector (agriculture and manufacturing) resulted in the appreciation of the local currency (naira), thereby leading to a decline in non-traditional exports and a surge in imports. 3. See Salisu (2006), “Determinants of Firm Performance in Nigeria: Evidence from Investment Climate Survey Data”, paper presented at the African Economic Research Consortium (AERC) biannual workshop, Nairobi, Kenya, 2-7 December.

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Macroeconomic Policies

however, recorded a deficit of 2.7 per cent of GDP, following a deficit of 1.1 per cent of GDP in 2005 and a surplus of 1.5 per cent of GDP in 2004.

Fiscal Policy In conformity with the NEEDS agenda, Nigeria maintained prudent macroeconomic policies. Fiscal policy is based on a Medium-Term Expenditure Framework (MTEF) prioritising expenditure towards the attainment of the MDGs. In 2006 fiscal policy prioritised infrastructure development. Nigeria’s consolidated federal, state, and local revenues averaged around 43 per cent of GDP during 2004-2006, with oil and gas contributing about 80 per cent. Consolidated expenditure accounted for 33 per cent of GDP over the same period, thereby giving rise to a very large consolidated fiscal surplus of about 10 per cent of GDP per annum. The federal budget,

Around 570 billion naira (approximately $4.4 billion or 3.5 per cent of GDP) was withdrawn from the oil stabilisation fund in 2006, and shared between all the three tiers of government (federal, state and local governments) in accordance with the revenue allocation formula. This amount represented a shortfall of about 3.2 per cent in projected oil revenues, caused by disruptions in production in the Niger Delta. The use of the stabilisation fund to finance the budget is worrying at a time of high oil prices. Unless the social crisis in the Niger Delta is resolved, oil production will continue to be disrupted. Increased domestic revenue mobilisation from the non-oil sector, particularly through value added taxes (VAT) and company income taxes (CIT), is therefore a priority.

Table 2 - Public Finances

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(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total Revenue and grantsa Tax revenue Oil revenue

17.5 7.2 10.2

37.1 8.3 28.1

43.1 7.3 35.2

43.3 6.2 36.6

42.1 6.6 35.1

38.9 6.4 32.1

37.3 6.2 30.7

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

25.5 8.1 4.9 2.0 3.2 10.3

37.1 11.8 8.6 4.9 3.2 9.5

33.2 9.8 7.4 4.3 2.4 7.5

32.6 10.8 7.8 4.0 2.9 6.7

32.3 10.0 8.3 4.1 1.7 8.1

33.8 10.0 8.4 4.2 1.7 9.4

35.2 9.9 8.4 4.1 1.5 9.8

Primary balance Overall balance

-4.8 -8.0

3.2 0.0

12.3 9.9

13.6 10.7

11.5 9.8

6.8 5.1

3.6 2.1

a. Only major items are reported Source: Domestic authorities’ data, estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/221567223481

Monetary Policy Nigeria’s monetary policy aims at promoting price stability. Inflation declined from double digits in 2005 to 8.5 per cent in 2006, in spite of a strong growth in monetary aggregates. The broad money supply (M2) grew 29 per cent in 2006, much higher than both the 16 per cent recorded in 2005 and the NEEDS’ mediumterm target of 15 per cent for the period 2004-07. The decline in food prices in 2006 and the rise in money African Economic Outlook

demand help to explain the decline in inflation in the face of a growing money supply. In 2006, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) introduced a new interest-rate determination scheme. The new framework establishes an interest-rate spread of three percentage points above and below a short-term Monetary Policy Rate (MPR) set by the CBN. The upper limit is the REPO (repurchase agreement) rate at which the CBN © AfDB/OECD 2007

Nigeria

lends to banks. The lower limit represents the interest rate which the central bank pays on overnight deposits by other banks at the CBN. The MPR for 2006 was fixed at 10 per cent, and so the lending and deposit rates were 13 per cent and 7 per cent, respectively. Hence the new monetary framework represents an interestrate-targeting system, as opposed to the previous system where interest rates were determined by the market. The new framework has been criticised for a number of reasons. First, the interest spread is too large and excessively penalises banks that need to borrow reserves. This could lead to bank failures. In other countries, the central bank interest-rate spread is normally between 0.05 and 0.50 per cent. Also, since the REPO rate sets the floor for bank lending rates, the new policy will raise the cost of capital to the productive sector. One of the goals of monetary policy in Nigeria is to maintain a competitive but stable exchange rate. The average rate stood at 128 naira per dollar for 2006, compared with the average rate of 131 naira per dollar in 2005. Even so, the exchange rate is uncompetitive, given the disparity between the official and the parallel market rates. In 2006, the central bank introduced the Wholesale Dutch Auction System (WDAS) as the main mechanism for exchange-rate determination and foreign-exchange management. The WDAS allows the CBN to engage in active trading with authorised dealers. The key objectives of the WDAS framework are to foster a unification of exchange rates between the official and inter-bank markets, and to reduce the premium

in the bureaux de change. Indeed, the implementation of the WDAS has helped to narrow the premium between the official and bureau-de-change rates from 13.6 per cent in February 2006 to an average of 7.6 per cent in the first six months of its operation. External Position Nigeria’s external position is heavily influenced by developments in the international oil market, as the country is both a major exporter of crude oil and an importer of petroleum products. Although Nigeria is the world’s eighth-largest exporter of crude oil, it imports 90 per cent of domestically consumed petroleum products4. Overall, of course, exports of crude oil greatly exceed imports of petroleum products, so Nigeria is a large net exporter of oil. The average price of crude oil increased from $39 per barrel in 2004 to $55 per barrel in 2006. These high oil prices have entailed large merchandise trade surpluses of 24.7 per cent of GDP in 2004, 27.6 per cent in 2005, and an estimated 22.1 per cent in 2006. Merchandise trade surpluses have outweighed deficits in services, so that Nigeria has recently had substantial current-account surpluses averaging 8 per cent of GDP over 2004-2006; the surplus is expected to remain at around the same level of 8 per cent in the next two years. It is also noteworthy that long-term capital inflows, both foreign direct and portfolio investments, increased

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor Income Current transfers

8.2 30.6 22.4 -9.5 -2.2 1.2

13.4 41.1 27.7 -9.1 -14.4 3.6

24.7 51.8 27.1 -8.3 -16.2 3.9

27.6 53.3 25.7 -6.8 -12.2 3.4

22.1 49.6 27.6 -6.1 -11.1 3.1

19.6 45.7 26.0 -4.5 -8.8 2.6

18.0 43.6 25.6 -4.4 -7.1 2.3

Current account balance

-2.4

-6.5

4.0

12.0

8.0

8.9

8.8

Source: Domestic authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/534840434802 4. One of the problems of the Nigerian economy is the incessant shortages of refined petroleum. The country’s four refineries are bedevilled by maintenance problems. Shortages occur especially during major festivities, such as Christmas and “Eid” periods.

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significantly due to the banking-sector reform (consolidation) programme and other measures taken to improve the business climate. Combined foreign direct and portfolio investment was estimated to have increased to $7.4 billion in 2006, up from $6.4 billion in 2005. In an attempt to attract additional FDI, the government has recently established a One-Stop Investment Centre to facilitate procedures for foreign investors. Nonetheless, much still remains to be done to improve the investment climate.

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Nigeria continues to play an important role in regional (Economic Community of West African States – ECOWAS), continental (African Union – AU) and international trade agreements. On the regional front, the ECOWAS customs union is viewed as a step towards an economic and monetary union with a single currency under the West African Monetary Zone (WAMZ). It should be noted that the Francophone countries within ECOWAS have a long history of monetary union, with a single central bank and single currency, the CFA franc. Efforts are underway to

establish a second single currency for the Anglophone countries within ECOWAS, with a specified timeframe for merging the two monetary institutions. ECOWAS is one of the regional groupings in Africa which is negotiating the Economic Partnership Agreement (EPA) with the European Union (EU). The EPA aims not only at creating a comprehensive free-trade area between ECOWAS and the EU, but also offers opportunities for addressing key development challenges facing the region. EPAs also raise concerns, however, about loss of government revenues and competitiveness of importcompeting industries, given the reciprocal nature of the liberalisation. It is planned that the EPA negotiations will be concluded at the end of 2007 so that the agreed protocols will come into effect in January 2008. It is however unlikely that the EPA negotiations will be concluded by 2007 due to the sheer number of unresolved issues. Nevertheless, obtaining yet another WTO (World Trade Organization) waiver on the current trade preferences accorded by the EU to African, Caribbean and Pacific (ACP) countries under the Cotonou Agreement may prove very difficult,

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

Source: IMF. http://dx.doi.org/10.1787/547856317125

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particularly given the concerns and opposition of the Latin American countries. At the continental level, Nigeria continues to chair the Heads of State and Government Implementation Committee of the New Partnership for Africa’s Development (NEPAD), and it has played an influential role in moving forward the NEPAD agenda. Internationally, Nigeria plays an active role in the United Nations and is an influential member of the Africa Group at the WTO. Nigeria’s stock of foreign reserves increased sharply from $28 billion in 2005 to $49 billion in 2006, despite the repayment of over $12 billion to the Paris Club of creditors, and around $1.4 billion to the London Club. The huge foreign reserves and the savings on debtservicing, along with related budget surpluses, relaxed the balance of payments and fiscal constraints on boosting investment in infrastructure and povertyreduction programmes.

Structural Issues Recent Developments In addition to consolidating macroeconomic stability, the NEEDS programme aims at improving the business environment, strengthening the financial sector, promoting private investment, and creating jobs, especially in the non-oil sector. Recent developments in these areas include accelerating the privatisation process, reforming the tax system, liberalising trade, improving infrastructure, and fighting corruption. Measures for reforming the tax system have included the restructuring of the Federal Inland Revenue Service (FIRS) in order to improve revenue collection, broaden the tax base, and address tax evasion and avoidance. Efforts have also been made to strengthen inter-agency co-ordination on revenue collection, as well as to

simplify and harmonise tax procedures. The auditing powers of FIRS were also reinforced, and a tax-policy unit was created in the Ministry of Finance. Privatisation remains critical to the government’s reform agenda. Some of the achievements in 2006 included: the privatisation and unbundling of the Power Holding Company of Nigeria (PHCN) into 18 companies and the setting up of a power regulatory commission5; the sale of the Port Harcourt refinery; the privatisation of 11 oil-service companies; an Initial Public Offer (IPO) for the government’s remaining 49 per cent share of Transcorp Hilton Hotel; and the concessioning of the Central Railways Corporation. Trade policy reforms included the adoption of the five-band customs tariff under the Common External Tariff (CET) of ECOWAS and the elimination of the prohibition list, in line with ECOWAS convergence criteria. The reform of the Nigeria Customs Service was initiated, through fast-tracking of at least 40 per cent of the value of trade. The government also introduced a system for monitoring and evaluating the spending of debt-relief savings in MDG-related sectors, such as health, education, power, water, roads, and agriculture6. As noted above, a one-stop investment centre was introduced to attract foreign direct investment. The government continued its civil-service reform programmes by restructuring ministries and stateowned enterprises. The civil-service reforms have succeeded in eliminating around 60 000 “ghost-workers” and other workers, resulting in extra savings of nearly 1 per cent of non-oil GDP. Following the recent banking-sector reform (the consolidation exercise), the Nigerian banking sector has become stronger and sounder. Indeed, 20 out of the 25 Nigerian banks were in the top 100 banks in Africa in 20067, and 17 Nigerian banks were in the top 1 000 banks in the world, as opposed to none in 2005. Banking dominates capitalisation in the Nigerian Stock Exchange (NSE), and it is responsible for the recent

5. Three of the 18 PHCN companies were scheduled for privatisation in the first quarter of 2007. 6. Quarterly reports of spending in these sectors are being produced.

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phenomenal growth of the NSE. Total bank assets increased by 104 per cent in 2006, while the ratio of non-performing credits declined to 9.5 per cent in 2006 from 19.8 per cent in 2005. The monetary authorities also introduced a fast-track programme for the registration of microfinance banks and bureaux de change, and a comprehensive roadmap for the development of the entire financial system is to be launched in the first half of 2007.

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The Nigerian government has, over the years, introduced a number of financial assistance schemes for small and medium-sized enterprises (SMEs), including the Small and Medium Industries Equity Investment Scheme (SMIEIS). These programmes, however, yielded limited success for a variety of reasons, including the failure to remedy other deficiencies in the business environment, most notably inadequate infrastructure and corruption. In the past two years, however, a number of policy actions were taken to restructure the SMIEIS. First, the coverage of the scheme has been expanded to include all business activities except general commerce and financial services. This means that non-industrial enterprises in sectors such as agriculture, housing, transport and utilities can be funded by the scheme. Subsequently, the name of the scheme was changed to SMEEIS (Small and Medium Enterprises Equity Investment Scheme) to reflect the expanded focus. Second, the upper limit of banks’ equity investment in a single enterprise was raised to 500 million naira, from 200 million naira previously. Despite this ambitious set of structural reforms and some improvements, progress has been uneven. Nigeria’s ranking in the 2007 Doing Business Indicators improved only slightly from 109th to 108th. The extent of the government’s commitment remains uncertain, and will be tested by the upcoming elections. The overall official unemployment rate declined from 18 per cent in the 1990s to 5.3 per cent in 2006. However, the aggregate unemployment figure masks

considerable variation according to age and regional categories. For instance, in 2006, youth unemployment was 14 per cent and the urban unemployment rate was 20 per cent. The South-South geopolitical region has the highest rate of unemployment, at nearly 24 per cent. Under-employment is also a serious problem in Nigeria. Total underemployment in 2006 stood at 20.2 per cent; while the figures for rural areas and the South-South region were 20.5 per cent and 26.2 per cent, respectively. Access to Drinking Water and Sanitation Nigeria is endowed with surface water resources including rivers, streams, lakes, and wetlands which provide a source of drinking water for a large proportion of the population in areas with limited public watersupply facilities. Rainfall, which constitutes a significant source of freshwater, is highly variable across the different regions of the country, ranging from about 250 mm in the extreme north to over 500 mm in the south. The urban and peri-urban populations, however, rely heavily on underground water resources. Nigeria has a policy on national water resources called the Master Plan: this provides a framework for integrated water-resources planning, development, and management for the period 1995-2020. The first review of the plan was carried out in 2006. Nigeria shares three major river/lake systems with neighbouring countries, requiring bilateral and multilateral co-operation through regional bodies such as the Niger Basin Authority (NBA) and the Lake Chad Basin Commission (LCBC). The Federal Ministry of Water Resources represents Nigeria in these international bodies. Recently, the NBA held an extraordinary session in Abuja to consider a regional report on the River Niger. Similarly, efforts were taken by the LCBC to halt the disastrous reduction of the water surface of Lake Chad, from 25 000 square kilometres in 1964 to less than 2 000 square kilometres at present. One such initiative involved the transfer of

7. 4 Nigerian banks were in fact in the top 10 banks in Africa, and 17 were in the top 40.

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water from River Ubangi in the Democratic Republic of Congo to Lake Chad. The agency charged with the overall responsibility for water supply and sanitation in Nigeria is the Federal Ministry of Water Resources. A number of projects were completed recently, and new ones are being planned. Between 2000 and 2005, the government completed the development of 1 519 motorised boreholes and 3 552 hand-pump boreholes to cater for the water needs of 24.5 million people. In 2004, the Federal Ministry of Water Resources procured and distributed water-related equipment to states and local governments. In 2004, contracts worth 10 billion naira were awarded for the drilling of 3 250 additional motorised boreholes and 1 579 hand-pump boreholes. New ongoing projects included 482 primary hydrological stations, 50 groundwater monitoring boreholes and hydrological mapping for effective waterresource administration, and 42 small- and mediumscale dams. Water pricing in Nigeria differs across the country, but in all situations, water is generally subsidised. In urban and peri-urban areas, water charges are based either on the volume of water consumed or on a flat rate. In most rural areas, however, water is often supplied to the population free of charge. Water scarcity is a common phenomenon in many towns and cities in Nigeria, and this compels people to buy water from private water vendors. The proportion of unaccountedfor water varies across different regions, with the national average being estimated at around 40 per cent. Public spending on water supply increased substantially from a mere 7.3 billion naira in 1999 to 80 billion naira in 2006. Priority was accorded to the completion of the Gurara Water Project for Abuja – the federal capital – and its environs. Huge investments were also proposed for the construction of dams in various parts of the country, including the Owiwi Dam, Shagari Dam, Ile-Ife Dam, Jada Multipurpose Dam, Kashimbila Dam Project, and the Galma Multipurpose Dam. Similarly, significant funds are being provided for various irrigation and water-supply projects nationwide. © AfDB/OECD 2007

Nigeria’s water infrastructure has suffered from years of poor maintenance, and the lack of sanitation also constitutes a serious public-heath problem. The government launched a National Water Supply and Sanitation Policy aimed at addressing these problems through: the completion of hydrogeological mapping of the country and the establishment of water-quality laboratories; intensifying the rehabilitation and reactivation of the River Basin Development Authorities (RBDAs) and existing urban water-development schemes; encouraging private-sector participation in the development and supply of water; and expanding and improving rural water-supply systems. The international development agencies play a key role in Nigeria’s water sector. Some of the principal participants include the United Kingdom’s Department for International Development (DFID), the United Nations, the African Development Bank (AfDB), the World Bank, Japan International Cooperation Agency (JICA), the government of China, and the European Commission (EC). The AfDB is assisting the Federal Ministry of Water Resources to prepare a national Rural Water Supply and Sanitation (RWSS) programme. The World Bank assisted the Small Towns Water Supply and Sanitation Programme (STWSSP), which is a comprehensive initiative for improving water supply and sanitation in more than 4 000 small towns in Nigeria. This initiative focuses on community ownership and management of water supply and sanitation facilities. The World Bank also assisted the National Urban Water Sector Reform Project, aimed at increasing access to piped-water networks in urban areas. This project has four main components: system rehabilitation and expansion; public-private partnership; capacity building and project management; and policy reform and institutional development. Furthermore, the World Bank assisted in the development of National Guidelines for Regulating Water Supply and Sanitation, and in analytical studies on dam safety. With respect to access to water supply, the proportion of the population with access to potable water rose from 30 per cent in 1999 to 65 per cent in 2006. A breakdown of the 2006 figure shows that 67 per cent coverage had been achieved for state capitals, African Economic Outlook

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60 per cent for urban areas, 50 per cent for semi-urban areas, and 55 per cent for rural areas. In terms of access to sanitation, around 40 per cent of the population had access to basic sanitation in 2006, which is up from 34.2 per cent in 1990. The Millennium Development Goals (MDGs) target for Nigeria is to increase access to clean water to 68 per cent of the population, and also to increase access to basic sanitation to 70 per cent by 2015. On current trends, Nigeria is likely to meet the target on access to water supply, but not the target on sanitation.

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A number of obstacles militate against the efficient exploitation of Nigeria’s water resources. One such obstacle is the lack of co-ordination between the various agencies involved in the management, quality control, and monitoring of water projects. There is also the problem of lack of adequate project preparation, which has led to project abandonment and failure. Related to this is the problem of a poor maintenance culture, as well as corruption and economic mismanagement. Another important problem is the lack of adequate funding of water resources development. Although the amounts devoted to water resources development have increased in recent years, these are inadequate relative to the other sectors of the economy and also relative to the amounts required to enable the country make good progress towards achieving the waterrelated MDG.

Political Context and Human Resources Development Political developments in 2006 included: the impeachment of four state governors; attempts at constitutional review to change the tenure of elected officials; a bitter feud between the President and the Vice-President; the registration of new political parties; and party conventions to elect candidates for the 2007 general elections. Many of these developments resulted in a number of legal battles. The impeachment process of the state governors was so seriously flawed that the Supreme Court of Nigeria suspended all the Chief Judges of the affected states. The apex court also reversed the impeachment of the Oyo State Governor African Economic Outlook

and ordered his reinstatement. Similarly, an Appeals Court annulled the impeachment of the Anambra State Governor. The bitter rivalry between the President and the Vice-President led to open accusations and counteraccusations. The animosity intensified when the VicePresident helped to thwart a constitutional review which would have allowed the President to run for a third term in office – referred to as a “third term” project. Following a report from the Economic and Financial Crimes Commission (EFCC), the VicePresident was charged with misappropriation of resources of the Petroleum Technology Development Fund (PTDF). A high court, however, quashed the charges on the grounds that the EFCC report was flawed. The feud between Nigeria’s top two officials intensified in December 2006 with a legal battle over whether the Vice-President can remain in office after having joined a party (Action Congress) other than the one under which he was elected (People’s Democratic Party). In addition, there were inter- and intra-party squabbles arising from the selection of the candidates for the 2007 elections. Many of the candidates emerged through so-called consensus rather than election, and in some cases the process was manipulated to exclude people who opposed the “third term” agenda. All of these conflicts could cast doubts on the legitimacy of the 2007 polls. There were also concerns about the risk of technical flaws in the electronic voting process of the Independent National Electoral Commission (INEC), and widespread allegations of voter-card fraud and other irregularities. In spite of all these concerns, however, the INEC has reiterated its determination to conduct free and fair elections and to oversee a successful transfer of power in 2007. For President Obasanjo, in particular, a smooth transition would earn him a unique place in the annals of Nigerian history as being not only the first leader to transfer power from a military to a democratically elected government in 1979, but also the first to oversee a successful democratic transition. It will be a rare feat, not only in Nigeria, but also in Africa as a whole. © AfDB/OECD 2007

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Nigeria has made some progress in the fight against corruption, as evidenced by the work of both the Independent Corrupt Practices and other related offences Commission (ICPC) and the Economic and Financial Crimes Commission (EFCC). In the past two years, the EFCC has recovered more than $5 billion; it has also successfully prosecuted 82 people, including high-profile public figures such as a former chief of police, government ministers, and an impeached state governor. In February 2007, the EFCC published the names of 135 politicians, including 82 opposition candidates and 53 from the ruling party, considered unfit to hold public office because of corruption. Nigeria’s progress has been recognised in the Transparency International’s 2006 Corruption Perceptions Index rankings, where Nigeria ranked 142nd out of 163 countries, which is considerably better than in previous years when Nigeria was at or near the bottom, as in 2005 when it was ranked 155th out of 158 countries. Nigeria’s progress on social and human development indicators is rather mixed, and more needs to be done in all areas to achieve many of the MDGs on these indicators. For example, in 2006, Nigeria’s place in the Human Development Index (HDI)8 ranking of the United Nations Human Development Report fell one place, to 159th out of 177 countries. Nigeria’s HDI is below the average for sub-Saharan African countries. Infant mortality (per 1 000 live births) declined to 101 in 2005, from 140 in the 1970s. Similarly, the under-five mortality rate (per 1 000 live births) declined from 265 to 197 during the same period. In 2006, the government conducted a core welfare indicator survey which showed that 55.1 per cent of the population had access to medical services, with a much higher access rate found in urban areas (70.9 per cent) than in rural areas (47.8 per cent). The survey also revealed that 67 per cent expressed satisfaction with medical services. Here again, the rate was higher for urban communities (75.1 per cent) than for rural (62.7 per cent).

The government has made significant progress towards addressing the HIV/AIDS pandemic. The HIV/AIDS prevalence rate declined to 4.4 per cent in 2006, down from 5.8 per cent in the preceding year. The targets for 2007 are to reduce the prevalence and incidence rates by 50 per cent of both sexual transmission and mother-to-child transmission of HIV, to ensure 100 per cent access to antiretroviral drugs, and to ensure that at least 30 per cent of health institutions in the country are able to offer effective care for, and control of, HIV/AIDS. The National Action Committee on AIDS (NACA) has continued with its strategic focus on treatment as well as prevention through advocacy, and information and education campaigns. The government has also started to address some of the problems that have bedevilled the education system by increasing spending on education. Universal Basic Education (UBE), aimed at providing free education for all pupils at the primary and juniorsecondary school levels, was expected to raise the primary-school enrolment rates. The total gross primaryschool enrolment rate increased from 98 per cent in 2000 to 120 per cent in 2005, whilst the total secondaryschool enrolment rate rose marginally, from 34 to 36 per cent, during the same period. Although school enrolment ratios have recently increased for both boys and girls, there is a considerable gender gap at all levels. For instance, the primary-school enrolment rate in 2004 was 132 per cent for boys, as opposed to 107 per cent for girls. The secondary-school enrolment rate was 40 and 32 per cent for boys and girls, respectively. A 2006 government survey data also revealed a wide disparity between the male adult literacy rate (74.6 per cent) and the female adult literacy rate (56.8 per cent). Thus, on current trends, Nigeria may not be able to achieve the gender-related MDG. Nigeria’s Gender-related Development Index (GDI), which captures inequalities in achievement between men and women, is 0.443, which ranks Nigeria 82nd out of 136 countries.

8. The HDI is a composite measure of three elements of human development: life expectancy (capturing a health profile), education (measured by school enrolment and adult literacy), and standard of living (proxied by purchasing power parity income).

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Nigeria has made great strides in reducing poverty levels. According to a recent survey, the proportion of people living below the poverty line declined from 70 per cent in 2000 to 54.4 per cent in 2006. Rural areas bear the brunt of poverty, with the poverty rate in excess of 63 per cent. Nevertheless, income inequality is higher in urban areas than in rural areas; the Gini coefficients for urban and rural areas in Nigeria are 0.554 and 0.529, respectively. According to the government core welfare indicator survey, 32 per cent of households in Nigeria perceived their economic situation as being worse in 2006 than in the previous year, whilst over 39 per cent felt

that their economic situation had improved. A slightly higher proportion of rural households (41.7 per cent) than households in urban areas (34.5 per cent) perceived their economic situation in 2006 as being better than in the preceding year. Crime and insecurity in Nigeria continue to pose serious threats to the business climate and individual well-being. However, results from the 2006 survey showed some indications of moderate progress, with 47 per cent of households reporting an improvement in security, against 20 per cent reporting a deterioration.

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Kigali

key figures • • • • •

Land area, thousands of km2 Population, thousands (2006) GDP per capita, $ PPP valuation (2006) Life expectancy (2006) Illiteracy rate (2006)

26 9 230 1 672 44.4 35.1

Rwanda

R

in rebuilding its economic and social infrastructure since the end of the 1994 war. Its achievements towards establishing nationwide security and a less corrupt government are acknowledged by most international donors. Real GDP grew by, 6.3 per cent in 2005 and is estimated to have increased by 4.3 per cent in 2006. More robust growth is expected over the 2007-08 period based on strong performances in the mining and construction sectors. While Rwanda’s recent economic performance has been encouraging, growth in output has not been strong enough to make a significant impact on poverty reduction. According to a preliminary report on poverty and living conditions in Rwanda, carried out in 2005/06, the proportion of individuals in abject poverty declined from 60.4 to 56.9 per cent WANDA HAS MADE CONSIDERABLE PROGRESS

over the 2000/01-2005/06 period. Access to health services has improved and the government is likely to achieve the Millennium Tax revenue has increased Development Goals (MDGs) but so must private aimed at reducing maternal and investment to achieve higher child mortality. In the education growth rates and the sector, increases in gross primary transformation of agriculture. education and net primary school enrolment are contributing to making the target of universal primary education achievable by 2015. The government has also had substantial success in reaching the MDGs related to gender parity in primary education and containment of the spread of HIV/AIDS. In order to accelerate growth and make a lasting impact on poverty, the government is in the midst of 455

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: IMF and local authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/261576673650

© AfDB/OECD 2007

African Economic Outlook

Rwanda

launching a new Economic Development and Poverty Reduction Strategy, (EDPRS), which is to follow the just completed Poverty Reduction Strategy Paper (PRSP). The EDPRS is expected to focus on ways to stimulate broad-based economic growth which are not covered in the PRSP. The EDPRS, which will be launched in 2007, provides a comprehensive analysis of the causes of poverty and focuses on six pillars: i) the transformation of the agricultural sector as an important objective to reduce poverty; ii) human development through improved education and health; iii) economic infrastructure; iv) human resources and capacity building; v) private sector development; and vi) good governance.

Recent Economic Developments

456

Real GDP growth in 2006 is estimated to have been 4.3 per cent, down from 6.3 per cent in 2005. This GDP growth performance has been due to the healthy performance of the agricultural sector, which grew by 5.8 per cent in 2005. In 2006, agricultural output is expected to maintain its robust growth rate. This is particularly due to the fact that ample rainfall was expected in Rwanda. Growth in the economy has also been supported by the healthy performance of the mining sector and, to a lesser extent, the construction sector. Growth in the manufacturing sector on the other hand was not as strong as in 2005 due to a number of factors ranging from regional competition, to high electricity prices and interruptions in the supply of energy.

The agricultural sector accounted for 43.1 per cent of total real domestic product in 2005. Agriculture remains the backbone and most important sector of the Rwandan economy. It provides the primary subsistence livelihood for 90 per cent of the population of 9.2 million. However, the agricultural sector has undergone minimal structural transformation over the years resulting in low productivity Agriculture in Rwanda is susceptible to the vagaries of the climate, due to the absence of sufficient irrigation and water storage systems. To address this problem, the Rwandan Ministry of Agriculture has introduced a number of medium-term measures to increase food production. First, the government intends to carry out a large scale study into the potential for rolling out a national irrigation system across Rwanda. Secondly, given that inadequate rainfall has been a major cause of poor harvests in recent years, the government is seeking the means to provide irrigation by working on hillside rain water catchment and household level irrigation methods. Thirdly, the government has plans to reclaim swampland in order to facilitate a major increase in rice production. Rice was chosen as a government priority crop in 2004, because of its limited vulnerability to rainfall and its suitability for planting in marshlands. Fourthly, the Ministry of Agriculture has instituted an ongoing programme to reduce soil erosion. In 2005, 37 per cent of the arable land was covered in the programme, followed by 50 per cent in 2006. Finally, the Ministry of Agriculture is working on several projects, including a livestock development programme, with the assistance of an NGO. The project

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/722744888848

African Economic Outlook

© AfDB/OECD 2007

Rwanda

has already provided fifteen thousand additional head of cattle, which were distributed to farmers in 2005. In 2005, growth in Rwanda’s industrial sector was a strong 11.1 per cent and appears to have been robust in 2006 as well. Manufacturing has led the way in the industrial sector with 18 per cent growth in 2005. The largest sub-sector within manufacturing was the food beverages and tobacco sector which is estimated to have experienced strong growth in 2006 as well, due, in part, to the granting of additional licenses for the brewing of alcoholic products. The performance of the other sectors was mixed for several of the larger industries. In 2005, the production of sugar increased by a sizable 61.3 per cent, electricity by 28 per cent, soft drinks by 28.8 per cent and beer by 19.3 per cent. On the other hand, cement production declined by 6.5 per cent while textiles decreased by 13.2 per cent. Cigarette production rose by 4.7 per cent. The

production of beer and soft drinks accounted for over 70 per cent of total manufacturing output. The growth in these components was attributable to increased demand for these products. Furthermore, the relative stability of the Rwandan franc during the year made it easier for producers to import raw materials. Growth in the services sector was estimated at about 6 per cent in 2005, primarily driven by the information, communication and technologies (ICT) sector and the finance and tourism sectors. In the finance subsector, growth in private sector credit was over 20 per cent during the year. Within the tourism sub-sector, the number of non-resident foreign visitors grew by 23 per cent in 2005. However, the total number of visitors to national parks fell in 2005, due to a reduction in the number of visits by Rwandan nationals. Nevertheless, the number of foreign visitors continued to increase. Tourism revenues grew by around 12 per cent in 2005.

Table 1 - Demand Composition 1998

2005

2006(e)

Percentage of GDP (current prices) Gross capital formation Public Private

457

(percentage of GDP) 2007(p)

2008(p)

Percentage changes, volume

14.8 6.8 8.0

19.0 10.1 8.8

4.8 -4.0 15.0

17.9 30.0 6.2

7.9 9.5 6.0

Consumption Public Private

100.9 9.7 91.2

99.4 12.6 86.8

5.2 5.5 5.2

4.8 3.9 4.9

4.6 3.9 4.6

External sector Exports Imports

-15.7 5.6 -21.3

-18.4 11.4 -29.8

6.6 8.5

5.5 7.2

6.7 4.5

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/888040616351

Total gross capital formation was 19 per cent of GDP in 2005 and is estimated to have increased by 4.8 per cent in 2006. Total domestic investment has recovered to its pre-war levels and is satisfactory when compared with that of the other countries within the sub-Saharan region. Since long-term sustainable growth requires private investment, the strong growth in private gross capital formation registered in 2006 and expected for 2007 and 2008 augurs well for the future. © AfDB/OECD 2007

Macroeconomic Policies Fiscal Policy The government achieved an overall surplus of 0.7 per cent of GDP in 2006 with the addition of grants. This is as a result of a strong increase in revenues and grants which were recorded at 28.2 per cent and 29.2 per cent of GDP in 2006 and 2005, respectively. African Economic Outlook

Rwanda

458

However, the government recorded a fiscal deficit of 13.4 per cent of GDP excluding grants. The increase in revenue was due to an increase in tax collection. Taxes, as a share of domestic product, rose significantly from 12.9 per cent in 2004 to about 14.7 per cent in 2005 The strong performance in tax revenue can be attributed to the comprehensive tax reforms undertaken in recent years as well as the strong improvement in tax administration and compliance. The tax reform was based on an increase of the “pay as you earn” (PAYE) tax base as well as strong 2005/06 performances in the collection of domestic taxes such as direct taxes and VAT. The robust performance in domestic taxes indicates that the revenue structure is gradually shifting from international trade taxes to more stable sources of domestic taxes such as income taxes and VAT on goods and services. The weak growth in international taxes in recent years is partly due to the flow of COMESA goods. Improved taxpayer compliance, tax administration capacity, training of staff, targeted technical assistance and the provision of computer systems and hardware have helped the tax administration to maximise revenue collection while steadily reducing the cost of tax collection. To improve further tax compliance, the government is looking at strengthening taxpayer education and service delivery functions. Government expenditure including net lending grew strongly and accounted for 27.5 per cent of GDP

in 2006, compared to 28.5 per cent in 2005. Both current and capital expenditures grew robustly, with the former (excluding interest) accounting for 17.8 per cent of GDP and the latter accounting for 9 per cent of GDP in 2006. This was an improvement compared to 2005 when the level of exceptional expenditures had risen almost 94 per cent compared to a year earlier, and transfers had increased by 42.7 per cent. This was due to the introduction of the fiscal decentralisation law and the receipt of an increased allocation by certain districts. Net lending in 2005 was considerably lower than in 2004 as the government sought to repay the external loans of its public enterprises. Arrears payments in 2005 decreased compared to 2004. Domestic revenue collection increased again in 2006, reflecting strong economic growth and improvements in the performance of the Rwanda Revenue Authority. However, the rate of increase was nowhere near the significant gains achieved in 2004 and 2005. This indicates that the government’s spending plans for the 2006 budget were based on the continued support of its development partners since external grants continued to account for about 50 per cent of government revenue. A fiscal surplus (including grants) of 0.7 per cent of GDP is estimated in 2006; excluding grants this surplus becomes a fiscal deficit of 13.4 per cent. With the exclusion of grants, deficits of 13.3 per cent of GDP and 14.7 per cent of GDP are projected for 2007 and 2008.

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Grants

15.9 10.1 5.3

19.2 10.3 8.0

25.8 12.8 11.9

29.2 13.6 14.1

28.2 13.3 13.4

27.6 13.1 13.1

27.9 12.9 13.6

Consolidated expenditurea Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

18.9 12.1 11.2 4.7 0.9 6.8

20.2 13.8 13.0 4.6 0.8 6.2

26.1 15.9 14.8 4.6 1.1 8.5

28.5 17.9 17.1 4.3 0.9 10.1

27.5 17.8 17.0 4.1 0.8 9.0

28.8 17.2 16.6 4.0 0.6 10.9

28.9 16.9 16.4 3.9 0.5 11.4

Primary balance Overall balance

-2.0 -3.0

-0.2 -1.0

0.9 -0.2

1.6 0.7

1.5 0.7

-0.5 -1.1

-0.4 -1.0

a. Only major items are reported. Source: Domestic authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/208776177301

African Economic Outlook

© AfDB/OECD 2007

Rwanda

Monetary Policy Monetary policy in Rwanda is conducted by the National Bank of Rwanda (NBR). Rwanda does not participate in a regional monetary union. The objective of monetary policy is to achieve price and exchange rate stability. Energy prices experienced a significant increase of 45.4 per cent in 2005, driven by price increases in fuel and lubricants, electricity and charcoal. Despite the slowdown in inflation in 2005, money supply increased by 16.5 per cent in 2005 reflecting significant increases in the volume of net foreign assets within the banking system. Net foreign assets increased by 28.7 per cent, while credit to the economy increased by 18.6 per cent. The high growth of the money supply, which is higher than the inflation rate and real growth combined, was due to an improvement in the monetisation of the economy, caused by an expansion in the activities of the savings and credit co-operatives and other microfinance institutions. The inflation estimate in 2006 was 6.5 per cent

liquidity of the banking system due to the significant volume of external resources, the good performance of the export sector and an increase in private transfers resulted in an appreciation of the Rwandan Franc (RWF). The RWF appreciated by 2.4 per cent to the dollar, 10.9 per cent to the Euro and 14.1 per cent to the British pound. The real appreciation of the RWF thereby affected the country’s export diversification strategy by weakening the external competitiveness of Rwanda’s export products The gross official reserves of the central bank increased from $14.5 million in 2004 to $408 million in 2005 due to the significant volume of the external resources of the banking system. This covered 7.1 months of imports of goods and services. Gross official reserves are estimated to have increased to $418.4 million in 2006, implying an import cover of 6.8 months of goods and services. External Position 459

During 2005, the banking system experienced excess liquidity. As a result, bank demand for foreign exchange was not enough to absorb the liquidity created by the expansion of local government expenditure. This prompted the NBR to engage in monetary intervention by increasing treasury bill issues in order to absorb the excess liquidity in the banks, while at the same time increasing NBR’s reserves. Although the significant issue of treasury bills by the NBR put some pressure on interest rates, they did not rise significantly above the reference level but it was enough to have an adverse effect on credit to the private sector. The

Rwanda’s current account deficit, excluding official transfers, decreased slightly from 19.4 per cent of GDP in 2005 to around 19.1 per cent of GDP in 2006. No significant change is expected in 2007 and 2008 and the current account deficit, excluding official transfers, is projected to average about 20.1 per cent of GDP. Total exports increased from $97.9 million in 2004 to $125 million in 2005 and are projected to have increased to $137 million in 2006. Coffee is currently the most important export crop in Rwanda, with tea coming a close second. In 2005, coffee and tea together

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-8.6 3.2 11.8 -7.1 -0.4 9.8

-9.9 3.7 13.6 -7.6 -1.8 8.7

-9.7 5.4 15.1 -7.5 -1.8 16.3

-10.7 5.8 16.5 -7.8 -1.3 16.2

-10.5 6.0 16.4 -6.8 -1.1 14.2

-10.1 5.7 15.8 -6.3 -0.6 12.0

-10.0 5.7 15.7 -4.1 -0.6 11.1

Current account balance

-6.2

-10.6

-2.8

-3.5

-4.2

-5.0

-3.6

Source: Domestic authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/882345613456

© AfDB/OECD 2007

African Economic Outlook

Rwanda

accounted for 50 per cent of export receipts. The coffee harvest declined in 2005 because the coffee trees needed to regenerate after the bumper harvest in 2004. There was a substantial improvement in the average price of coffee, around 71.8 per cent, leading to a substantial rise in the export value of Rwandan coffee. The price of tea remained stable at $1.6/kg, while growth in the value of tea exports rose from $21.6 million in 2004 to $24.4 million. This was due to a larger tea harvest. Cassiterite and coltan both accounted for about 30 per cent of exports. There was a significant increase in the value of cassiterite exports which increased from $15.9 million to $ 17.9 million as a reduction in price was compensated by an increase in volume. A robust increase in production, coupled with a reasonable increase in price, enabled the exports of coltan to rise from $13 million in 2004 to $29.8 million in 2006. The total value of Rwanda’s exports of goods swelled by $23 million, with wolfram contributing $2.6 million, while re-exports contributed $17 million and other

products contributed $3.2 million. Imports soared over the 2004-05 period rising from $275.9 million in 2004 to an estimated $440.5 million in 2005, representing an increase of 29.9 per cent. As a result, Rwanda’s trade deficit increased from 9.7 per cent of GDP in 2004 to 10.7 per cent of GDP in 2005. The trade deficit is estimated to have been 10.5 per cent of GDP in 2006 and is expected to remain at about the same level in 2007 and 2008. In April 2005, Rwanda reached the completion point of the Enhanced Highly Indebted Poor Countries’ (HIPC) Initiative. As a result, Rwanda became eligible for debt relief of $1.4 billion in nominal terms under the Multilateral Debt Relief Initiative (MDRI). Total external debt, after relief, is projected to be $354 million by the end of 2006, which compares to $1.5 billion by the end of the previous year. In terms of GDP, this represents a decrease from 70.7 per cent in 2005 to 14.8 by the end of 2006.

460

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

Source: IMF. http://dx.doi.org/10.1787/201835431743

African Economic Outlook

© AfDB/OECD 2007

Rwanda

Structural Issues Recent Developments Rwanda is now engaged in an ambitious privatisation exercise. This follows years of strong government involvement in many aspects of the economy. The government is now embracing the private sector with deliberate and systematic policy. Private businesses, schools, universities and tour farms are now competing with state-owned enterprises. The government’s privatisation programme started with the enactment in 1996 of Law No.2 on Privatization and Public Investment. As of end-December 2006, 70 out of a total of 104 public enterprises have been privatised, four have been removed from the list and 14 remain to be privatised. In addition, the management of two other companies had been contracted out. Most of the privatised enterprises were small, with a few exceeding $1 million in sale price. The privatisation of the telecommunication company, Rwandatel, is the largest to have taken place. Rwandatel was bought by Terracom Sarl, a US Company, for $20 million. Several enterprises have also been liquidated. The assets of three of these enterprises have been sold for $2 million. The enterprises which are at an advanced stage of privatisation in 2006 include three rice factories (Rwamagana, Gikonko and Bugarama), which were attributed to three co-operatives. The buyers have entered into a joint venture with an Australian economic operator who will invest $1.5 million to rehabilitate and modernise the Rwamagana and Gikonko rice factories. In addition, the two tea plantations and factories of Rubaya and Nyabihu, in the West Province and the Hotel Regina of Gisenyi as well as the Guest House Urumuli Lodge of Byumba in the hotel and tourism sector have been sold. Others were the cement factory of Rwanda (CIMERWA), the Gatumba mine concession, some SMEs, notably two banks, the Stateowned mining company REDEMI, and the State’s 30 per cent stake in Bralirwa, a brewery which is one of the largest businesses in the country. The privatisation exercise has increased government revenue and freed up resources. More important, the private sector firms have made huge investments of capital and technical know-how which benefit Rwandans. © AfDB/OECD 2007

The most ambitious public sector reform currently being undertaken by the Government of Rwanda is the widespread programme of reform of the national public finance management system, which includes an expansive decentralisation process. The purpose is to enhance the government’s ability to use public expenditure to achieve its objectives for growth and poverty reduction established in Vision 2020 and the EDPRS. The government’s 2007 budget was released in November 2006. Infrastructure, communications and transport have been accorded the highest priority, followed by energy, water and sanitation, soil protection and Community Development Fund (CDF) infrastructure. In transport and communication, Rwanda plans to reinforce international trade by modernising the road, river and lake networks. Major modernisation projects to be carried out by 2015 are the Kanombe and Bugesera airports and the Kigali-Isaka railway. In terms of river and lake transport development, the government plans to make Lake Kivu and other lakes like Akagera navigable. The rehabilitation of road, river, lake and air transport is crucial to the country’s economy in view of the high cost of transport. The Rwandan government considers the development of the private sector a key element in its economic development and poverty reduction strategy. The government believes that the private sector should be the engine of the economy’s growth. Rwanda’s private sector is small but growing. The sector consists of family businesses, small and medium-sized enterprises (SMEs), a few large companies and co-operatives. The Rwanda Private Sector Federation (RPSF) is playing an important role in building a successful Rwandan private sector, as is the centre for the support to small and medium-sized enterprises (CAPMER). RPSF nurtures the private sector, providing business development services and working together with other stakeholders to promote the creation and development of SMEs. According to the World Bank’s “Doing Business Index” for Africa, Rwanda has a relatively good business African Economic Outlook

461

Rwanda

climate in comparison to its East African neighbours and is in first place in the index for business creation. Business procedures in Rwanda are quick and efficient, although the cost is significantly higher than elsewhere. Registering property in Rwanda is also easy. The small number of procedures required allows for faster processing at relatively modest cost. Rwanda is ranked as less business friendly in terms of employment practice, however, coming second only to Tanzania for employment rigidity and second to none for redundancy costs. The enforcement of contracts in Rwanda is still difficult.

462

In the financial sector, there were several developments in the supervision and regulation fields in 2005 which aimed to improve the sector’s efficiency. Several new licenses were issued to Micro Finance Institutions (MFI). In addition, following agreement on the Financial Sector Assessment Programme (FSAP) with the World Bank and IMF, the central bank is taking steps to strengthen banking supervision. In particular, amendments to banking law were submitted to parliament in September 2006 with the objective of bringing the legal framework for banking supervision into line with international practices. To help improve agricultural performance, the government has elaborated a strategic plan to reform and promote the sector. The objectives of the plan are: i) to reinforce professionalism and specialisation; ii) to select export and other priority crops and to regionalise their production so as to reduce production costs and optimise comparative advantages; and iii) develop partnerships with the private sector so as to encourage its participation in agricultural transformation. In the field of national resource management, a new land law called “the organic law” was finally adopted by parliament and signed into effect in 2005. The law exempts agricultural land from taxes. Progress has also been made in land planning and management through better mapping and the creation of a land use database and this has led to less bureaucracy in acquiring title deeds. In the environment area, the “environment organic law” was adopted by parliament and the law establishing the Rwandan Environment Management Authority is currently being debated in the Senate. African Economic Outlook

Access to Drinking Water and Sanitation Rwanda can be characterised as a country subject to water stress with a supply of renewable water per capita of 1 104 m3 in the period 2004-07. The government of Rwanda has progressively sought to improve water supply and sanitation management since 1999, when it held the first consultation on water and sanitation in the country. A revised National Water Policy was adopted in 2004. Programmes have been developed and prioritised within the Economic Development and Poverty Reduction Strategy, (EDPRS), and targets developed for the MDGs by 2015. The national water and sanitation strategy is best illustrated in the government’s dynamic new policy, whose objectives are i) to increase access to safe drinking water; ii) to extend access to sanitation services; iii) to manage the water resources in a sustainable and integrated manner and; iv) to reinforce human and institutional capacity. Responsibilities will be delegated to communities and districts. Decision-making will be decentralised; restricting the focus of the central government to planning, regulation, promotion, monitoring and oversight. With active community participation at all stages of the project cycle, the government wants to ensure a demand-driven approach. The 2005/06 Integral Survey on Households’ Living Conditions (EICV2) survey concluded that 64 per cent of the population had access to safe drinking water in 2005, while access by the urban and rural population to safe water was estimated at 66 per cent and 57 per cent, respectively. With respect to improved sanitation services, the rate of access in 2005 is estimated at 8 per cent for rual areas and 10 per cent for urban areas. The government of Rwanda has identified water and sanitation as one of its top priorities in its Vision 2020 programme and Economic Development Poverty Reduction Strategy (EDPRS). It aims to increase the rate of access to drinking water for both urban and rural populations by 85 per cent by 2015, and 100 per cent by 2020. With respect to sanitation services, the objective is to increase the rate of access for both urban and rural areas to 65 per cent in 2015 in keeping with © AfDB/OECD 2007

Rwanda

the MDGs and to provide universal access to improved sanitation by 2020. It is estimated that $820 million will be needed to achieve the MDGs. As a step in that direction, Rwanda’s public investments in water and sanitation doubled in 2006 from an already reasonable level of about 1 per cent of GDP in 2005. In a bid to mobilise external resources, a joint task force has been setup around the water and sanitation sector strategy. With the government already having doubled its budgetary commitments to the sector, there

is strong donor support led by the World Bank, the African Development Bank (AfDB), the UK Department for International Development (DFID) and the Dutch and Belgian governments among others. The AfDB for example has recently committed $18 million for rural water supply and sanitation initiatives. The government has also streamlined Electrogaz, a national water and utility agency, and agreed a five-year contract for its management with a private sector operator in an effort to reduce costs and improve service delivery.

Table 4 - Household Access to Drinking Water and Sanitation by Source/Type (percentage) City of Kigali

Other Urban

Rural

National

Drinking water source Free public standpipe Protected spring Purchased from vendor Electrogaz Subtotal

5.4 5.0 53.1 18.0 81.6

25.5 12.3 26.5 9.5 73.7

29.9 22.7 8.8 0.2 61.6

27.7 20.5 13.6 2.3 64.2

River/stream/lake/pool Unprotected spring Bore hole Plain well Other Subtotal

5.7 4.7 6.3 0.5 1.2 18.4

12.7 4.6 7.0 1.1 0.8 26.3

19.4 10.2 6.0 1.6 1.1 38.4

17.8 9.3 6.1 1.5 1.1 35.8

100.0

100.0

100.0

100.0

80.3 11.6 2.1 6.0 0.1

63.1 26.9 7.0 2.8 0.1

55.1 37.7 6.7 0.2 0.3

57.7 34.8 6.4 0.8 0.3

100.0

100.0

100.0

100.0

Total Sanitation facility type Enclosed pit latrine Open pit latrine None Flush toilet Other Total Source: EICV2 (December 2006).

http://dx.doi.org/10.1787/171831430166

Political Context and Human Resources Development One of the major indications of Rwanda’s determination to pursue good governance has been its commitment to the African Peer Review Mechanism (APRM). Rwanda completed the peer review process at the 5th Summit of the APR Forum in Banjul, the Gambia, in June 2006. © AfDB/OECD 2007

In order to bring service delivery and democratic processes closer to the grass-roots, the government introduced and implemented a new territorial and administrative policy in 2005. The policy reduced the number of provinces from 11 to five, the number of districts from 106 to 30, and the number of sectors from 1545 to 450. Coupled with progress on governance and decentralisation, these changes facilitated the organisation of the local and municipal elections in February 2006. African Economic Outlook

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Pursuing the process of healing and reconciliation, the government officially reversed its long-standing support for the death penalty and decided to push for its abolition in 2006. A bill to that effect was passed in January 2007 which will save the lives of more than 600 people convicted of genocide. At regional level, the Congolese government’s efforts against the anti-Rwandan government militia based in Democratic Republic of Congo have somewhat reduced tension between the two countries. There are also increasing signs of rapprochement with Uganda. There was the possibility of a visit by the president of Uganda in early 2007 to strengthen relations. Despite ethnic tensions, relations with Burundi are also warmer than at any period since independence. Both governments have a shared interest in bringing peace to their countries.

464

In the field of governance, there have been a number of achievements in recent years. A primary one has been activation of the second phase of the government’s five-year decentralisation programme, which is intended to enhance the population’s participation in decisionmaking processes. It will allow for a better allocation of resources in favour of local government. Disbursements from the Common Fund, one of the main sources of financing to the districts, were, however, below expectations. This hampered the efficient running of the rural administrations since the rural districts could not mobilise sufficient resources to run their operations given their lack of an adequate local economic base to generate their own revenues in order to support administrative overheads. Other achievements include: a national summit organised by the National Unity and Reconciliation Commission (NURC) in May 2004, to bring 1 000 Rwandans together to review progress in reconciliation and debate the way forward; elaboration by the NURC of a new action plan in July 2004; the training of more than 720 community volunteers around the country to help NURC promote reconciliation at local level; and, in June 2006, the release for country-wide consultations of a draft National Policy on Unity and Reconciliation. In spite of its record on governance, the Rwandan government’s international standing and its support African Economic Outlook

from Western countries have waned because of concerns about political liberty at home and the government’s controversial involvement in the east of the DRC. These concerns have also been echoed by the 2005 report of the African Peer Review Panel of Eminent Persons (APR Panel) on Rwanda, which was gentler on the government than previous documents have been. However, the APRM still called for the political scene to be more open to competing ideas. Nevertheless, donors commend the government for its relatively good record on poverty reduction and economic governance reforms. Rwanda continued to make progress on gender issues and on poverty reduction. The country’s first Interim Poverty Reduction Strategy Paper (IPRSP) in 2000 hardly addressed any gender issues, even though women accounted for some 60-70 per cent of the postgenocide population. The 2000 paper glossed over women’s needs in the post genocide era. Today, more than a decade after the genocide and despite the government’s efforts, Rwanda ranks 122nd out of 140 countries in the 2005 UNDP gender-related development index. This shows that there is still more work to be done in order to narrow gender gaps. Nevertheless, the PRSPs launched in 2002 and 2004 and the current EDPRS are among the most gendersensitive documents ever produced. The systematic mainstreaming of gender issues in these papers and the commitment of the Rwandan government to their attainment is promising. Nevertheless, major challenges still exist. Some of these challenges include: lack of integration of gender in policies, programmes, laws and projects; lack of gender expertise at all levels; insufficient development of gender-related performance indicators: the continuing weak socio-economic and political status of women; insufficient gender-specific data in all areas and a lack of action on gender issues on the part of institutions. In order to address these challenges, the government has been pursuing a number of key policy objectives since 2004. First, it is seeking to ensure that gender problems are systematically integrated in government policies and sectoral programmes at local and national © AfDB/OECD 2007

Rwanda

level. It has put into place mechanisms aimed at coordinating and popularising gender policies. Gender focal points, equipped with knowledge on gender integration, are already operational in ministries and other institutions. Gender promotion strategy databases have been created to allow for an effective system of follow-up and evaluation using gender-specific data. Secondly, to promote a legal framework guaranteeing gender equality and equity in all aspects of life, existing legislation relating to women has been revised and new laws for the promotion of women’s equality have been proposed. Public awareness campaigns are improving comprehension of the laws; new programmes for the promotion of women are operational; the capacities of women’s councils and associations have been strengthened through the provision of suitable working facilities. Thirdly, there is a need to establish mechanisms to co-ordinate the work of all the principal figures involved in the promotion of gender equality and the strengthening of women’s capacities. Although poverty remains pervasive in Rwanda, some progress has been made in reducing it, notably in the domains of health, education and HIV/AIDS. According to a preliminary poverty update report conducted over the period 2005-06, poverty has declined due to growth in consumption per capita in real terms at an average rate of 3 per cent. Based on comparable measures of consumption and poverty lines, the surveys indicated that the proportion of individuals in poverty declined from 60.4 to 56.9 per cent over the period 2000/01-2005/06. Extreme poverty also declined. While poverty has decreased, economic growth in recent years has been associated with an increase in inequality. The Gini coefficient, which measures inequality, has increased from 0.47 to 0.51, suggesting that growth was unequally distributed. Poverty declined most in urban areas in proportional terms. In the rural areas, poverty declined from 66.1 per cent to 62.5 per cent. Progress in rural areas is critical to having an overall impact on poverty since 90 per cent of the poor inhabit the rural areas. Uneven distribution, coupled with high levels of inequality, moderated the impact on poverty reduction. The ownership of many durable © AfDB/OECD 2007

goods has increased, although many items remain rare. Poorer households increasingly own such basic items as radios. Some 53 per cent of households now own a radio, although only 6 per cent own a telephone. The proportion of the population living in femaleand widow-headed households has declined. Poverty levels in these groups are higher than average, but have declined by more than in the population as a whole. Notable improvements have also been made in health, education and housing. In the health sector, the frequency of medical consultations has increased marginally, despite a rise in the incidence of reported illness. However, the use of ante-natal services has increased significantly and differences in utilisation between poorer and less poor households have narrowed. Some 47 per cent of individuals are now covered by health insurance, the vast majority by mutual insurance arrangements. This seems to have substantially reduced out-of-pocket payments for health care. Users are satisfied with government services. Satisfaction is highest in district administrations with respect to primary education and health services. Satisfaction is lowest, however, on drinking water supplies. Significant progress has been made in education. Enrolment in primary schools has increased substantially from 74 to 86 per cent over the period 2000/012005/06. Both the urban and rural populations have witnessed an increase in enrolment rates. However, many children in primary schools are above the official primary school age range, due to late entry and delays in their schooling. A small fraction of children complete primary education and go on to secondary education. The secondary school net enrolment rate has shown only a small increase over the period, from seven to 10 per cent. In the rural areas, only 8 per cent of children aged 13 to 18 years are in secondary education. Household expenditure on primary school students has remained roughly constant after adjustment for inflation at an average RWF1 845 per student per year. Uniforms are the largest single element of educational expenditure. The cost of secondary schooling is much higher, with households spending an average of around RWF68 000 each year on secondary school students. African Economic Outlook

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Rwanda

Wealthier households spend much more than poorer households on secondary schooling.

466

In housing, the survey revealed that the number of dwellings has increased by 280,000 during the period 2000/01-2005/06. The increase has between roughly equal proportionately between the different zones, comprising the City of Kigali and other urban and rural areas. However, the number of dwellings in other urban areas has increased at a slightly faster rate. The roofing material used by households provides a good indication of their status. Corrugated iron roofs are found mostly in urban areas. Ninety-seven per cent of households in the City of Kigali have a corrugated iron roof compared with 55 per cent in other urban areas. In other urban areas, another 32 per cent of households use tiles for their roofs, while, in rural areas, 50 per cent use tiles, 40 per cent corrugated iron and the others thatch. The use of tiled roofs has slightly increased in Rwanda and that of thatch fallen. Corrugated iron roofs still accounted for 44 per cent of all roofing materials during the period of the survey, however. The prevalence rate of HIV-positive people among adults aged 15-49 in Rwanda is now 3.1 per cent. The prevalence rate is higher among women (3.6 per cent) than men (2.3 per cent). In the same vein, the prevalence is considerably higher in urban areas (7.3 per cent) than in rural areas (2.2 per cent). About 200 000 HIV-positive Rwandans needed antiretroviral (ARV) drugs last year, according to the Treatment and Research Aids Centre (TRAC). Of these, around 50 000 HIV needed urgent treatment, although only 3 200 or 1.6 per cent of those in need were able to get access to ARV drugs. The Government is urging Rwandans to undergo voluntary HIV testing since it has plentiful supply of ARV drugs. Health centres are used by TRAC to detect HIV early within the population. The population can communicate with TRAC through hotlines. TRAC is concerned, however, that many parents do not take their children for HIV

African Economic Outlook

testing. TRAC runs 256 health centres nationwide which provide ARVs and 234 other health centres involved in the prevention of mother-to-child HIV transmission. TRAC is faced with a shortage of personnel to administer HIV medication in various health centres. It also has a problem ensuring that vulnerable HIV positive people get adequate food. Labour-market reform is also quite high on the government’s agenda. It has been engaged on labour market reforms since 2003 in an attempt to achieve two main objectives. One is to tackle the inherent skills deficiency in the labour force and the other is to ensure Rwanda’s integration in the East African Community (EAC) by bringing its skills level up to that of other community members. As a first step in the reform process, the government has drawn up an employment policy. This has been accompanied by the establishment of a national labour council, comprising stakeholders from the ministries, women’s organisations, trade associations, NGOs and others, who meet regularly to discuss and make recommendations on issues pertaining to trade unions and the labour market in general. In addition to the policy, the government is revising the existing labour code to provide a conducive legal and regulatory environment for private investors. It is giving priority to labour and employment policy, strategic planning and an accompanying action plan, women’s employment, the labour code, skills auditing and vocational training centres. Some of the reforms in these areas have been completed but others are still in progress. Unemployment is not a serious problem in Rwanda. However, pockets of unemployment exist among unskilled people. Among skilled people, there is no shortage of work. Indeed, there is competition for their services from the Democratic Republic of Congo and Uganda. To tackle what unemployment there is, the government is in the process of creating a vocational training centre with the aim of training people particularly for middle management jobs.

© AfDB/OECD 2007

Senegal

Dakar

key figures • • • • •

Land area, thousands of km2 197 Population, thousands (2006) 11 936 GDP per capita, $ PPP valuation (2006) 1 735 Life expectancy (2006) 56.8 Illiteracy rate (2006) 60.7

Senegal

A

5.5 PER CENT IN 2005, growth might only have barely reached 3 per cent in Senegal in 2006, owing to a conjunction of unfavourable factors. These include difficulties encountered both by the agricultural and industrial sectors and the rising cost of energy. Congestion in Dakar, which already posed serious problems, has been exacerbated during approximately the last two years by the simultaneous implementation of several large-scale road works. This has not contributed to facilitating private-sector activity. The uncertainties preceding the presidential election of 25 February 2007 brought about additional difficulties. Certainly, a recovery in growth is expected in 2007 (5.6 per cent) with lower energy prices and the resolution of some of the problems encountered in FTER REACHING

2006, beginning with the crisis in the chemical enterprise, Industries Chimiques du Sénégal (ICS). Beyond the conjunctural Problems in agriculture dimension of these difficulties, the and industry, as well as problems Senegal faced in 2006 reflect increased energy costs, its vulnerability and structural led to disappointing weaknesses. Of note in particular, is GDP growth. the lack of buoyancy of its export sectors – groundnuts, fishing and phosphates – on the international level. These weaknesses could themselves be attributed to a lack of diversification in the economy and a business environment still too unfavourable to investment, and particularly, to foreign direct investment. In this context, the development of new 469

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Senegal - GDP Per Capita (PPP in US $)

■ West Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Senegal - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage) 7

3500

6

3000

5

2500

4

2000

3

1500

2

1000

1

500

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and national sources data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/252616550808

© AfDB/OECD 2007

African Economic Outlook

Senegal

sectors is difficult, although possible, as a few examples in the domain of new information technology attest. Growth then remains fragile in Senegal, which, as in 2002, is facing an economic crisis, albeit to a lesser degree. Insufficiently strong and regular growth in turn explains the slow progress in sanitation and social sectors, notably towards the Millennium Development Goals (MDGs). In fact, and despite a positive intermediate evaluation of the implementation of the Interim Poverty Reduction Strategy Paper (I-PRSP), progress on the sanitation and social fronts remains inadequate.

470

Aware of these weaknesses, the government announced a number of strategies and action plans designed to stimulate and stabilise growth at around 7 per cent. The backbone of this series of measures is constituted by the Accelerated Growth Strategy (AGS), based on the identification of promising clusters for the Senegalese economy and on the improvement of the business environment, and the PRSP-II, both unveiled in 2006. However, the fulfilment of the AGS could appear much too ambitious, given the number of goals listed and, above all, the difficulties encountered in 2006. For example, the same year the AGS was presented, a condition as fundamental as reliable and affordable energy did not exist. The effective implementation of these strategies, that is, defining them coherently and developing a clear vision of what is realistic, should thus be central in the activities of the government resulting from the 2007 election.

Recent Economic Developments The Senegalese primary sector, which accounted for approximately 14.4 per cent of GDP in 2005, experienced a difficult year in 2006. With the notable exception of cotton (6 per cent growth), nearly all crops recorded lower production despite overall satisfactory rainfall. Agriculture suffered from insufficient supply of fertilizers, which was linked to the difficulties of the ICS. More structurally, it suffered from a falling trend in yield, reflecting the declining quality of available seeds and soil degradation. African Economic Outlook

Within this framework, estimates at end-2006 counted on a 24 per cent contraction in cereal production. The groundnut sector, which drives the Senegalese economy, recorded production of 494 000 tonnes in 2006, which is a 30 per cent drop and well below the average of the last five years. This fall attests to the structural difficulties of Suneor (formerly Sonacos, Société Nationale de Commercialisation des Oléagineux du Sénégal), the largest enterprise in the country milling groundnuts and processing crude edible oil. Suneor was privatised in 2003 but it is still heavily supported by the Senegalese state. Upstream, suppliers of inputs to groundnut producers benefit from a very large public subsidy (5 billion CFA francs, around EUR 7.62 million). Prices offered to producers are also highly subsidised. Thus, in 2006, the producer price of 150 CFA francs per kilogramme of groundnuts included 40 CFA francs of public subsidy (representing a total of 9 million CFA francs), with Suneor having assessed that it could not be competitive on the international market by offering a price above 110 CFA francs. Still, the price of 150 CFA francs remains unattractive for producers. Suneor’s inability to offer higher prices is certainly due to low international prices, but it is also due to the uncompetitive nature of the enterprise, which suffers from obsolete grinding equipment and precarious finances. In this context and invoking the World Trade Organization (WTO) safeguard clause, Suneor is calling for the maintenance of the high customs protection from which it benefits for its crude-oil refining activities. It argues that only this protection enables it to maintain the profitability of its refining activities, which in turn make it possible to offset the losses of its milling activities. At end-2006, a technical and financial audit of Suneor was underway in order to determine if the WTO safeguard clause, which was to expire in March 2007, was justified. Whatever the outcome, Suneor’s modernisation and eventual diversification towards other oils, the development of groundnuts for consumption, and the strengthening of cross-professional entities are imperative. Fisheries, another driving force of primary sector, also had a difficult year: cumulative off-loadings for the © AfDB/OECD 2007

Senegal

Figure 2 - GDP by Sector in 2005

(percentage)

Agriculture, Forestry and Fishing

Government services 19.6%

14.4%

Mining and quarrying 0.9% 2.3% Gas, electricity and water 13.9%

Other services

Manufacturing

19.7% 4.6% 9%

Transport and telecommunications

Construction

15.6% Wholesale and Retail trade

Source: Authors’ estimates based on Department of Economic Studies and Forecasts (DPEE) data. http://dx.doi.org/10.1787/501803408051

first nine months of 2006 were down by 17.7 per cent over the same period in 2005. The sub-sector suffers from structural depletion of halieutic resources due to overexploitation. In 2006, it also suffered from the high price of fuel and possibly from the amplification of illegal emigration, which is significant amongst young fish workers. In this gloomy context, the government launched a wide-reaching initiative, the Reva (return to agriculture) plan, designed to re-energise the agricultural sector, henceforth a priority. The government sees agriculture as the engine for Senegal’s economic renewal, less for its weight in the GDP than for the number of households depending on it. This change in government priorities – agriculture was not initially high amongst its concerns – also signals a desire to keep in the country young people who might be tempted by emigration. Reva provides for the establishment of agricultural zones of excellence heavily equipped with technical production methods and irrigated land, some of which will be aimed at export, and others at food selfsufficiency. This plan is set out as the set of different actions expressing the priorities listed in the AGS, in the agriculture, forestry and pasture framework law (LOASP) of May 2004 and in the PRSP-II presented in 2006. Indeed, the aims of Reva are in line with the food-security issues outlined in the PRSP-II. That said, at end-2006, the link between the objectives of Reva and those of the AGS was still far from perfect. The plan has also met with scepticism due to its highly administrative and proactive nature, its great ambition (“the return to agriculture”) and the amplitude of funds to be raised (237 billion CFA francs in the 2006-08 © AfDB/OECD 2007

pilot phase). Above all, the Reva plan makes only marginal progress on the path to socially difficult but imperative reforms to modernise Senegalese agriculture and fisheries, in particular the reform of land laws provided for in the LOASP and reforms for the efficient regulation of the over-sized small-scale fishing sector that is exhausting the country’s halieutic resources. More generally, the Reva plan hesitates between the development of competitive, productive and exportoriented agriculture and the promotion of food security, thus risking a contradiction impossible to manage. The secondary sector (21.7 per cent of GDP in 2005, including construction) failed to make up for the weakness in the agricultural sector. It posted a contraction of 6.6 per cent during the first three quarters of 2006 over the same period in 2005. The key subsector of phosphates was particularly damaged by the catastrophic financial situation of the ICS, which at end2006 posted 65 billion CFA franc in annual losses and 215 billion in debts (80 billion of which was held by the local banking sector). These difficulties adversely affected both exports and the state budget, and led to concerns about the stability of the local banking system. Added to these problems were those of the energy sector: cumulatively, over the first nine months of 2006, chemical industries recorded a 51.6 per cent fall compared with the same period in 2005 due to the drop in oil-refining activity. For its part, electricity generation was riddled with numerous load sheddings in 2006. These problems arose out of the difficult financial situations of the oil-refining enterprise Société africaine de raffinage (Sar) and the national electricity utility, Senelec, which can themselves be attributed to an African Economic Outlook

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Senegal

Table 1 - Demand Composition 1998

(percentage of GDP)

2005

2006(e)

2007(p)

2008(p)

Percentage of GDP (current prices)

Percentage changes, volume

Gross capital formation Public Private

15.5 5.1 10.4

23.7 8.1 15.6

6.1 10 4.0

5.1 7.0 4.0

5.1 7.0 4.0

Consumption Public Private

91.1 12.8 78.3

91.5 13.9 77.8

7.6 14.0 6.7

3.3 0.4 3.8

5.4 4.4 5.6

-6.6 27.7 -34.3

-15.4 26.1 -41.5

-9.4 6.8

9.8 2.3

2.4 4.0

External sector Exports Imports

Source: DPEE data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/432752372853

472

incomplete pass-through of the rise in oil prices to consumer prices for electricity and butane, and to a price structure that is not adapted to fluctuations in world oil prices. Compensatory government subsidies were both inadequate (only covering around 50 per cent of Senelec and Sar’s foregone earnings) and disbursed late. A dispute between Senelec and the American independent power producer GTI also penalised electricity generation. Finally, the chief drivers of economic activity were construction and the tertiary sector (44.3 per cent of GDP in 2005). The former (cumulative growth of 9.9 per cent over the first nine months of 2006) was sustained by ambitious public-investment programmes and by non-residents’ transfers, which continue to feed property demand, particularly in Dakar. This contributed to the buoyancy of services (20.8 per cent growth in turnover), whether in telecommunications, real-estate services or insurance. Only trade suffered from the erosion of household purchasing power linked to the difficulties in agriculture, with trade margins down 3.4 per cent. The conjunction of unfavourable factors in 2006 and its very strong negative impact on the contribution of exports to growth was only partly offset by the good performance of public and private consumption and by vigorous public investment. The effects of this latter on the local fabric remain limited, as it was mostly African Economic Outlook

foreign public-works enterprises that benefited from large state infrastructure contracts. Sector difficulties, worsened congestion in Dakar and pre-electoral uncertainties all weighed on private investment. Domestic demand was sufficiently robust against the backdrop of a weak increase in national revenue to corrode the national savings capacity and to make the deficit much deeper, estimated at 13 per cent of GDP in 2006. Overall, the economy should not grow more than 3 per cent in 2006. However, the Senegalese economy could rebound in 2007, when growth could reach 5.6 per cent. The cash-flow problems of ICS are on the way to being solved: the state has reassured the banking sector by guaranteeing its debt and an agreement for the enterprise’s durable financial rescue will necessarily have to be concluded between the chief shareholders, the Indian Farmers Fertiliser Cooperative Limited (IFFCO) on the one hand, and the Senegalese state on the other. In the energy sector, a recovery is in sight: the dispute between Senelec and GTI was on the point of being resolved at the end of 2006, while the second unit of the Kounoune power station should be commissioned in 2007. Since October 2006, Sar and Senelec have also been authorised to pass on, gradually, to consumers the rises in the price of oil. In 2007, and in the longer term, the continuation of large projects under the Organisation of the Islamic Conference (OIC) and the implementation of ambitious © AfDB/OECD 2007

Senegal

investments scheduled under the AGS and PRSP-II should sustain domestic demand. PRSP-II financing amounts to 3 553 billion CFA francs (approximately EUR 5.416 billion) between 2006 and 2010, 1 736 billion CFA francs of which are already to have been granted under the 2006-08 three-year publicinvestment programme. To this could be added the start of work on the industrial and technological platform in Diamniadio if the financing earmarked under the Millennium Challenge Compact funded by the United States is obtained in 2007. The country’s capacity to absorb all of these investments, however, remains questionable. The 7 per cent growth objective set out in the PRSP-II for the coming years is thus highly ambitious.

Macroeconomic Policies Measured against the West African Economic and Monetary Union (WAEMU) convergence criteria, Senegal’s performances are traditionally the best in the sub-region. In 2005, the country fulfilled seven of the eight criteria: only its current deficit of 8.4 per cent of GDP was above the 5 per cent ceiling. Notably, it is the only WAEMU country to have respected the higher than 17 per cent tax-to-GDP ratio criterion by posting 19 per cent. Still, in 2006, its performance deteriorated: the criteria for current deficit, basic fiscal balance and non-accumulation of domestic payment arrears were not expected to be met.

Fiscal Policy Although the Senegal’s fiscal position actually remains healthy, the country has nonetheless experienced a strong deterioration in public finances at end-2005 and in 2006. Yet, public revenue performed well: for the whole of 2006, total revenue and tax revenue are expected to be, respectively, at the level of 960 and 927 billion CFA francs, a 9 per cent increase in each, compared with 2005. This rise is due to the exceptional increase in indirect taxes, which accounted for one-third of revenues during the first nine months of 2006, particularly customs duties (17.3 per cent growth) and value-added tax on imports (15.4 per cent). These exceptional results are due to the soaring price of crudeoil imports as well as to an increase in the volume of refined products arising from the problems encountered by Sar. Enterprise-tax revenues remained stable, against the backdrop of the implementation of the reduction of the tax rate applied to enterprises from 33 per cent to 25 per cent, thus attesting to progress made in widening the tax base. In reality, the sizeable drifts in the execution of the 2006 finance act can be attributed to public expenditure. For all of 2006, expenditure is estimated to have risen by more than 19 per cent over 2005, and current expenditure is expected to have increased by 23 per cent. Human-resources expenditure rose significantly in 2005 and 2006 (5.7 per cent of GDP in 2007 against 5.2 per cent in 2004). Current expenditure was

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenues and grantsa Tax revenue Grants

18.3 14.9 2.8

20.0 17.0 1.9

20.5 17.5 2.1

21.1 18.8 1.7

21.8 19.4 1.7

21.8 19.3 1.8

21.8 19.4 1.8

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

18.6 10.4 9.3 5.4 1.2 6.6

21.6 13.3 12.2 5.1 1.1 8.5

23.1 13.1 12.0 5.2 1.1 9.7

24.3 13.9 13.0 5.6 0.9 10.0

27.2 15.9 15.2 5.7 0.8 10.9

26.1 14.9 14.0 5.6 0.9 11.0

26.2 14.8 13.9 5.5 0.9 11.3

Primary balance Overall balance

0.9 -0.3

-0.5 -1.6

-1.5 -2.6

-2.3 -3.2

-4.7 -5.5

-3.4 -4.3

-3.5 -4.4

a. Only major items are reported. Source: DPEE data; estimates (e) and projections (p) based on authors’ calculations.

© AfDB/OECD 2007

http://dx.doi.org/10.1787/356552653348

African Economic Outlook

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Senegal

significantly higher than the amount initially approved in the 2006 finance act. This strong rise in current expenditure is principally due to consumer price subsidies for electricity and butane, which amounted to 103 billion CFA francs, or nearly 10 per cent of the state’s resources (against 5 per cent in 2005 and 1.5 per cent in 2004). It could also be put down to the 2003/05 programme to recruit 15 000 civil servants, the implementation of which carried over to 2006, as well as to unscheduled re-evaluations of the wages of certain categories of state employees. In 2006, the state budget also had to bear a strong increase in investment expenditure, estimated at 14.2 per cent.

474

This drift in public expenditure resulted in a strong deterioration of the fiscal balance. Not only should the basic fiscal deficit, as defined by WAEMU, be in the order of 2.2 per cent of GDP in 2006, but the overall deficit, including grants, could reach 5.5 per cent in 2006 (7.5 per cent of GDP excluding grants), rising from 3 per cent in 2005 (4.7 per cent excluding grants). In addition, this deepening deficit is accompanied by an accumulation (difficult to assess precisely) of non payments and arrears on domestic debt that might have reached between 0.5 per cent and 1 per cent of GDP in 2006. In 2007, the overall fiscal deficit is expected to contract to 4.3 per cent of GDP in spite of increased expenditure on personnel and investments, the amounts of which voted in the 2007 finance act are much greater than those contained in the 2006 finance act (+16.4 per cent and 6.3 per cent, respectively). This contraction is partly explained by a lightening of the burden of the public subsidies for the price of electricity and butane. Since the second quarter of 2006 – and belatedly – the increase in energy prices is effectively being passed on gradually to the consumer. Since October 2006, the price of electricity has been adjusted upwards by 15 per cent per month and the price of butane by 15 CFA francs per month. At the same time, the price structure of oil products (including gas at the pump) was reviewed and is now propped on a new reference market (Northwest Europe) that is more representative of the behaviour of the oil market from which Senegal is supplied. Against this backdrop, the activity of importing African Economic Outlook

unprocessed hydrocarbons should once again become profitable. In 2007, improvement of the fiscal position will also depend on the resolution of the crisis in ICS, since the state has guaranteed the enterprise’s bank debt. Management of public finances in Senegal has made significant progress over the last years. The tax base has continuously grown and tax revenues, which accounted for 16 per cent of GDP in 2001, are now more than 19 per cent of GDP. The proportion of current expenditure in the budget shrank from 69 per cent in 2001 to 60 per cent in 2006, while capital expenditure increased measurably (from 31 per cent to 40 per cent of the budget between 2001 and 2006). These adjustments are in line with the government’s ambitious investment programmes, notably defined in the framework of the previously mentioned threeyear public investment programme. The concentration sectors identified in the latter and in the PRSP-II are agriculture, energy, road transport, water and sanitation, as well as housing, health and education. Further, in June 2003 the authorities adopted two action plans to improve budget procedures, one for financial management (CFAA) and the other for public procurement (CPAR), both supported by development partners who made their implementation a condition for increased disbursement of public development aid (PDA) in the form of budget support. However, although advances have been made in this domain, reform of budget procedures remains timorous overall, as highlighted by the 2006 public-expenditure review conducted by the World Bank. To the credit of the authorities, authorisation of expenditure has now been decentralised to six technical ministries, and the spreadsheet of the state’s financial operations is now produced more rapidly thanks to the computerisation of expenditure management (with the Sigfip system). Frameworks for medium-term sector expenditure, though imperfect, have been drawn up for the education, justice, health, environment, agriculture, livestock and tourism sectors. On the other hand, afterthe-fact control of budget execution, whether internal (by the audit authority) or external (by parliament), remains almost non-existent. For example, never once has a bill regarding budget rules been submitted to © AfDB/OECD 2007

Senegal

parliament. Moreover, the government has not respected its commitments in this area to development partners. The latter also showed concern over financing outside of normal frameworks (the three-year investment programme, in particular), infrastructure investments and the proliferation of para-governmental bodies (Apix, Anoci, etc.) that have no clear legal standing and nonetheless receive budget transfers. Finally, they regretted that at the end of 2006, the new publicprocurement code had still not been adopted. Monetary Policy Senegal belongs to the CFA franc zone and its monetary policy is thus set by the Central Bank of West African States (CBWAS). Aside from the developments in the activity and prices in the WAEMU zone, CBWAS decisions are largely influenced by the pegging of the CFA franc to the euro, and thus by European Central Bank decisions. In line with the tightening of monetary policy in the euro zone since end-2005, the CBWAS increased its key interest rates on 24 August 2006 for the first time since 22 March 2004, bringing its discount rate from 4.5 per cent to 4.75 per cent, and its repurchase rate from 4 per cent to 4.25 per cent. The impact of the word increase in energy costs on inflation in Senegal was contained by public price subsidies for electricity and butane. In this environment, the rise in the harmonised index of consumer prices should be close to 2 per cent in 2006 (against 1.7 per cent in 2005), that is, in compliance with the WAEMU convergence-criteria ceiling of 3 per cent. Nonetheless, household spending for those most exposed to soaring

oil and gas prices rose significantly, all the more that the administered prices for goods sold in shops such as butane were not respected. Thus, the price of transport increased by 17.7 per cent during the first nine months of 2006, that of gas by 9 per cent, and that of liquid fuels by 21.6 per cent. The evolution of prices in 2007 will depend on the cost of energy, but should remain close to 2 per cent. The weak increase in credits to the economy (3 per cent) between December 2005 and September 2006 is partly explained by the gloomy economic environment. External Position The problems encountered by the driving forces of the Senegalese economy, particularly the sectors that contribute significantly to exports (phosphates, fisheries and groundnuts) combined with the rising cost of energy imports to further deepen the trade deficit, which rose by 127 billion CFA francs over 2005 to reach 19.3 per cent of GDP in 2006 (against 15.4 per cent in 2005). In fact, exports fell by nearly 5.5 per cent in 2006, those of ICS plummeting from some 100 billion CFA francs under normal circumstances to 30 billion CFA francs. Imports grew by 5.5 per cent in 2006. This deficit in the balance of goods was partly offset by a rise in recorded current transfers, notably private ones, of 80 billion CFA francs. In all, the current deficit widened from 8.4 per cent of GDP in 2005 to 12.9 per cent in 2006. The evolution of Senegal’s current account is a subject of concern. Certainly, the aggravation of external imbalances in 2006 was due to a conjunction

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-5.9 19.6 25.5 -0.4 -1.7 3.4

-11.8 18.3 30.1 -0.3 -2.0 7.7

-12.3 18.9 31.2 -0.3 -2.0 8.6

-15.4 17.9 33.2 -0.4 -1.6 8.9

-19.3 15.8 35.0 -0.5 -1.5 8.3

-17.3 15.8 33.0 -0.4 -1.4 7.9

-17.6 15.0 32.5 -0.5 -1.1 7.5

Current account balance

-4.6

-6.4

-6.1

-8.4

-12.9

-11.1

-11.8

Source: CBWAS data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/488064882125

© AfDB/OECD 2007

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of highly unfavourable factors, specifically detrimental to the country’s external performance. In 2007, the current deficit could be reduced to around 11 per cent of GDP if ICS exports recover and if oil prices remain at their level of end-2006. The fact remains that Senegal’s trade deficit has more than tripled as a percentage of GDP since the end of the 1990s, a progression that points to the weak fabric of the local economy, starting with its poor diversification. The sectors that drive Senegalese exports (groundnuts and fisheries) are becoming exhausted and/or are not supported by dynamic international demand. They are thus confronted with badly positioned world prices (groundnuts and phosphates). With weak national savings, this deterioration also underscores the importance of the public-investment effort. It is thus imperative that growth relays should be identified that will channel the foreign resources necessary to finance the country’s development. Recovery of the tourism sector should be a priority, for example (particularly holiday tourism) while the emergence (already visible) of new activities should be encouraged, in information technology, for example. The current deficit was more than financed by the combination of debt relief, in particular 34 billion CFA francs obtained for 2006 under the Multilateral Debt Relief Initiative (MDRI), and new public and private financing. In 2006, net public financing was 272 billion CFA francs, while private financing amounted to 283 billion CFA francs, 73 billion of which was foreign direct investment (FDI). This latter remains modest as GDP ratio (1.5 per cent), and financing of the large current account deficit is highly dependent on public development aid: net external public financing accounted for almost 65 per cent of the current deficit in 2006. Thus, not only must the current deficit be reduced, but the entry of foreign investors liable to invest should be facilitated by an improved business environment. In the context of weak FDI, the existence of a large current account deficit could lead to the country’s debt dynamics’ being questioned again in the future. On this subject, the improvements recorded in the past years have been spectacular: in 2006, Senegal benefited from African Economic Outlook

debt relief totalling 1 026 billion CFA francs under the MDRI. This resulted in its outstanding foreign debt being reduced from 1 855 billion CFA francs at end2005 to 860 billion CFA francs in September 2006 (or around 17.8 per cent of GDP end-2006, against 41 per cent of GDP end-2005). Moreover, the country’s financing profile is strongly concessionary: the average rate of concession of the existing debt stock is close to 33 per cent, in compliance with the commitments made to development partners; on average, it is also long-term (29 years) and characterised by a high average deferral of 7.2 years. As such, debt servicing is less than 1 per cent of GDP. The sustainability evaluation most recently conducted by the Word Bank and the International Monetary Fund (IMF) was positive, anticipating public debt of 26 per cent of GDP by 2026, though it stressed the risks induced by a succession of very large current account deficits. Relations between Senegal and development partners are good and the country is the region’s biggest recipient of PDA ($440 million in 2005) after Ghana. It has successfully completed the debt discharge process under the Heavily Indebted Poor Countries (HIPC) Initiative, having reached its completion point in April 2004. Senegal is no longer under an IMF programme since April 2006. The sluggishness of reforms in some areas, for instance in the area of transparency in budgetary procedures and public procurement, explains the weakness of budgetary support to Senegal: it only accounts for 5 per cent of PDA allocated to the country (against 25 per cent of that allocated to Ghana, for example). Development partners have proven reluctant to increase this volume rapidly without greater transparency in public finances. For the same reason, the World Bank has delayed the release of the second phase of a poverty-reduction budget support, whereas the improvement of budgetary procedures will certainly be a key element in a nonfinancial monitoring arrangement that the authorities are seeking to negotiate with the IMF at the start of 2007. This arrangement, an IMF Policy Support Instrument, is important because, at end-2006, several bilateral donors held it as a condition for disbursing © AfDB/OECD 2007

Senegal

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

90 80 70 60 50 40 30 20 10 0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF and authors’ calculations.

477 http://dx.doi.org/10.1787/861271227242

funds. In parallel, the review of 2006 public expenditure has highlighted the very poor co-ordination of development partners in Senegal. While unified action frameworks exist (as for the water domain) or are being developed (for education), they are scarce and only one project out of four financed by PDA is jointly financed. Progress must also be made by development partners in terms of forecasting the resources put at the disposal of the Senegalese authorities to enable better medium-term budget programming.

Structural Issues Recent Developments Senegal is going through a very dynamic period regarding structural reforms. All the same, even if improvements have taken place, notably in the business environment and infrastructure, the process is proving to be more-or-less chaotic. The pre-electoral climate, combined with the economic difficulties the country is confronting, has certainly contributed to this situation. © AfDB/OECD 2007

The privatisation process in Senegal was initiated immediately following the 1994 devaluation and in 2005, practically all of the large transactions had been realised. The last of these, Sonacos, which became Suneor in January 2007, launched operations as a private enterprise in March 2005. Only the privatisation of Senelec – scheduled for 2006 – is unresolved having been postponed owing to difficulties in the local energy sector. Senelec, which was privatised in 1999 and renationalised in 2000, is currently suffering from serious cash-flow problems in large part due to the increase in the price of oil and the impossibility of passing it all on to consumers. This situation has resulted in serious electricity-supply problems in Dakar and led to frequent load sheddings throughout 2006, which seriously impaired the industrial fabric and led to significant interruptions in production. In October 2006, the managing director of Senelec resigned, and it is expected that relations between the new management and private suppliers (including GTI with whom Senelec has accumulated debts) will African Economic Outlook

Senegal

improve, in keeping with the sector policy promised by the government. The Senelec crisis also affected Sar, charged with importing, processing and distributing oil products in the country. Senelec’s arrears, the rising price of crude oil and a badly adjusted oil-price structure all explain why Sar could not be supplied with raw materials and had to cease its refining activities (which were producing a deficit) for ten months, causing a severe shortage of gasoline and butane throughout the country. Against this background, Senelec received temporary permission to buy refined gasoline directly on international markets.

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Furthermore, access to energy services remains a problem in Senegal despite an increasing rate of rural electrification, which rose from 6 per cent in 2000 to 12.5 per cent in 2004. The forecast for the coming three years is for production capacity to expand, with increased production at the Manatali plant and the construction of two new power stations at Fellou and Gouna. The Islamic Development Bank has also signed an agreement worth 19 billion CFA francs (nearly EUR 29 million) for the construction of a new 60 megawatt power station in Dakar. In 2006, Senegal launched a series of large public works in transport, notably on major roads leading into the capital. The widening, with new intersectionfree road junctions, of the VDN (northern distribution road), the major road linking Dakar to its suburbs, is planned for the OIC in 2008. Other works have been scheduled to make the RN 1 (called “la Pénétrante”), the sole road giving access to the Dakar peninsula, into a widened toll freeway. It has also been planned to renew the access roads to Dakar’s new districts, particularly Ngor, Yoff and the Almadies. These works did not fail to affect the life of Dakar residents by rendering traffic around the city very difficult and hindering life in the capital, where 80 per cent of economic activity is concentrated. The second phase of the urban mobility programme, Pamu-II, will be discussed in 2007 and implemented in 2008. It sets out the reactivation of Dakar’s rail transport, linking the capital to its suburbs (the “blue train”) as well as the development of public transport. The construction of a new international airport is still on the agenda, as is African Economic Outlook

the construction of roads linking Dakar and Bamako (Mali) and Senegal to Guinea. The business environment is perceived today as one of the chief obstacles to the development of the Senegalese private sector, in particular with continued administrative obstacles to the creation and operation of enterprises, the slowness and uncertainties of legal and judicial procedures, and the difficulties in access to financing and real estate. The latter is still lacking a solid legal framework. Improvements have certainly been observed for some of the indicators of the World Bank survey, Doing Business, particularly for closing business and paying taxes. The enterprise tax rate has thus been revised from 33 per cent to 25 per cent. Senegal’s ranking, however, remains disappointing (146 out of 175 countries ranked). With a view to improving the business environment, a new government-contracting code – subjecting all government contracts to rules of transparency and instituting tender bidding for every contract – has reached the signature stage by the president of the republic. It follows up on the code promulgated in 2002 but its content – completed after eight years of work – was already outdated on publication. Hence, and given the dissatisfaction of the private sector and civil society with its anti-corruption measures, its review was initiated. This led to concerted consultation with all concerned parties, including partners such as the World Bank and the Agence Française de Développement (AFD). Approval of the code remains one of the prerequisites for any agreement with the IMF and the World Bank. The Senegalese financial system exhibited its weakness in 2006 following the cash-flow problems in the country’s largest enterprises, and, as a result, the magnitude of bad bank debts. The situation was remedied near the end of 2006, when the government began to reimburse Senelec’s debts and guaranteed ICS’s bank loans. Otherwise, the financial system remains characterised by the abundance of liquidities and has grown with three new banks that began operations in 2006. Still, despite the expansion of the financial system, access to credit remains restricted, especially for small enterprises and the informal sector. © AfDB/OECD 2007

Senegal

Long-term credit still accounts for only 5 per cent of all credits to the economy. Access to Drinking Water and Sanitation Senegal has large water resources (surface and groundwater) but it must address a distribution problem, as these resources are either far from the large centres of consumption or are difficult to harness to meet population needs. Thus, water management is featured amongst the key challenges for the country and for its strategy of human and economic development. Improving access to water has been a government priority since 1995, when the strategic orientations were formulated and included in the first PRSP of 2002. In line with the poverty reduction strategy, the government’s sector policy is targeted at improving the access to water of the poorest. It has set up a system of differentiated pricing for water consumption through individual connections as well as a huge programme of social connections. Between 1996 and 2005, the government put up 105 000 individual social connections in the peri-urban zones of Dakar. The aim is for 88 per cent of the population of Dakar and 79 per cent of households in other towns to be equipped with an individual connection by 2015. Nonetheless, 24 per cent of the inhabitants of Dakar and 43 per cent of the residents of other urban centres still only have access to standpipes, where the price of water is as much as four times higher than with an individual connection. In the poor districts of Dakar, water consumption is no more than 30 litres per person per day, or half of the average consumption of Dakar as a whole. In rural areas, the Pepam programme (national drinking water and sanitation programme), planned to massively expand as from 2005 a pilot programme for the management of rural motorised wells (Rogefor) that was initially implemented between 1996 and 2004 with financial assistance of the AFD. The programme focuses on collective wells, each of which will be capable of supplying several villages or a total of 3 000 people. It also envisages the appropriation of the management and maintenance of water points by local communities, the withdrawal of the state and an increasing role for © AfDB/OECD 2007

the private sector, particularly in terms of maintenance and repairs. The stated aim is to obtain by 2015 a coverage rate of 82 per cent and individual daily consumption of 35 litres. The sub-sector of urban sanitation, previously the domain of the national water enterprise, Société nationale d’exploitation des eaux du Sénégal (Sonees), is now managed by a public independent body, the Office national de l’assainissement du Sénégal (Onas), that was specifically set up for this purpose by a 1996 reform. Before the Onas, only five cities possessed a sanitation system; there was no clear perspective as to how the sector would develop, and its financial viability was weak and based on resources that were largely insufficiently for its needs. Since the institution of the Onas, the situation has improved significantly in terms of expanding the network, renewing equipment and putting in place household connections (with 63 000 individual connections set up in the peri-urban zones). Still, huge financial problems remain: the proportion of water fees devoted to financing Onas barely covers 65 per cent of its needs. The ongoing and extended effort to improve coverage, which is based on exemplary co-ordination between the various agencies, clear aims, a long-term perspective and a successful public-private partnership, has enabled the country to post a national access rate of 70 per cent at the beginning of 2007, one of the highest in sub-Saharan Africa. This gives hope that Senegal will reach the MDG for water by 2015. Nonetheless, disparities between urban and rural areas persist, with respective access rates of 90 per cent and 64 per cent in 2004. This variation is related to the overwhelmingly urban focus of the sector reform. As a result, in 2004, nearly all of the urban population had access to a source of drinking water, in 71 per cent of cases through individual connections (76 per cent for Dakar) and for the rest through standpipes. In contrast, the development of the rural sector is the subject of neither formal plan and schedule nor strategic vision. Thus, 64 per cent of the rural population had access to drinking water in 2004, but only 10 per cent had an individual connection, the rest being supplied by standpipes and protected wells. Consumption per African Economic Outlook

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Senegal

Successful Reform of the Water Sector in Urban Senegal The deep financial crisis of the water enterprise, the Société nationale d’exploitation des eaux du Sénégal (Sonees), provoked by excessively low prices and a weak rate of invoice recovery, was the impetus behind the 1995 reform. This entailed a vast institutional change, separating the activities of sanitation and drinkingwater supply, and establishing a partnership amongst the state, a public enterprise, the Société nationale des eaux du Sénégal (Sones), and a private enterprise, the Sénégalaise des eaux (SDE), as well as the implementation of a succession of investment programmes. The financing of new infrastructure was covered for the most part by development partners, under the water-sector project (1995/2001) and its successor, the long-term water-sector project (2002/07). In 2005, a new sector policy and a new investment programme (of 241.4 billion CFA francs) were set out under the Programme national d’eau potable et d’assainissement du millénaire (Pepam). They cover the renewal of the network and the construction of social connections, as well as the development of a new series of so-called “second generation” institutional reforms, aiming to address the challenges raised by the sanitation and expansion of Dakar.

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From the institutional perspective, the law of 7 April 1995 replaced the Sonees with two separate enterprises, governed by two different types of contracts: on the one hand, the Sones is a public enterprise linked to the state by a concession contract, the prerogatives of which are approving three-year investment programmes and to be the contracting authority for the new investments; on the other hand, the SDE is a private enterprise (belonging to the French group Saur) charged with the technical and commercial exploitation of the network through a contract with the state and the Sones. This contract is rounded out by a performance contract with the Sones. Given its success over the last ten years, the management contract with SDE was renewed in 2006 for five years, with the goals of financial stability and improving access to water for the poorest. The success of this public-private partnership can be primarily attributed to three factors: the choice of a suitable institutional framework; the introduction of appropriate incentives; and the important role played by the state, which was able to gain the confidence of its partners. The SDE invests in renewing the distribution network under its contractual obligations, but it is also motivated to do so by the higher profits the enterprise will earn from increased user consumption. The main actors were also careful to establish good dialogue, with an implementation control committee conducting a biannual review of contracts based on an assessment of the SDE’s performance. This assessment is constructed from 18 indicators set out in the performance contract between SDE and Sones. The fulfilment (or non-fulfilment) of objectives fixed for each of these main indicators entails financial rewards or sanctions for the enterprise (a type of bonussurcharge system). This system has brought about an improvement in the efficiency of SDE, which increased its client base by 69 per cent between 1996 and 2005. At the start of 2007, it posted a proportion of water produced/volume sold of 80.5 per cent (68.2 per cent in 1996), a network profitability rate of 80 per cent (the target is 85 per cent) and financial balance since 2003. Finally, the state was careful to take a strong role in regulation and co-ordination and honoured it commitments, particularly in settling invoices, enabling the SDE to have a 98.3 per cent invoice recovery rate. Furthermore, the administration was care to apply necessary and planned rate adjustments set out in the contract between it and the Sones. A series of new measures expected under Pepam, christened “second generation reforms”, are being examined. These include the development of organisation and institutional frameworks for water and sanitation, the implementation of a new pricing system that would increase the resources devoted to sanitation, and the search for new water-supply sources for the principal urban centres to replace the costly exploitation of Lake Guiers.

African Economic Outlook

© AfDB/OECD 2007

Senegal

person and per day is 25 litres, below the level recommended by the World Health Organisation. With access to sanitation in the order of 56 per cent in urban areas in 2004, the goal of 78 per cent coverage by 2015 appears difficult to achieve. In rural areas, 28 per cent of the population were without access to sanitation infrastructure in 2004; 40 per cent had access to simple latrines, and barely 17 per cent to ventilated latrines. The goal by 2015 is to raise this figure to 50 per cent. In view of the enormous lag developed in the subsector, sanitation has become a priority for the

government, and it occupies a central position in the Pepam. This increased interest has been formalised by the institution of a ministry of sanitation and by the allocation of greater budgetary resources to investment expenditure. A price study is also being carried out under the second generation reforms, a sanitation code is being drafted and a performance contract between the Onas and the state being drawn up. The Pepam strategy in urban areas is to focus on the construction of individual rather than collective connections, these latter being more costly and dependent on an urban plan. In rural zones, the programme allows for the construction of 355 000 independent household connections and 3 360 public lavatories.

The Differential Pricing System The pricing system put in place following the reform is differentiated, with prices varying according to the capacity of users to pay. In fact, a single category of user is the net contributor to the system, that of “nonhousehold” users (public administrations, schools, industries, etc.), which consume 27 per cent of the overall volume and provide 41 per cent of the revenue. In contrast, market gardeners are highly subsidised, and there is a very low social price for household users for all consumption equal to or less than 20 m3. Overall, the prices applied reflect the reality of the cost of service, permitting the water sector to break even and making Senegal an example for other African countries. Prices have risen by 3 per cent each year and have been frozen since 2003, but a review process is underway with a view to raising prices beginning in 2008.

Political Context and Human Resources Development Abdoulaye Wade was re-elected as president of Senegal in the first round of elections in February 2007. While it would appear since the 2000 election that democratic change-over is an accepted part of Senegalese society, the political climate hardened considerably in the months preceding the election. Significant tension followed several episodes of violence, threats and arrests against various political opponents, including the principal rival of the president, the former prime minister and mayor of Thiès, Idrissa Seck, now president of the Front Pour le Progrès et la Justice. Further, the decision of the party in power, the Parti Démocratique Sénégalais (PDS) to postpone the legislative elections of April © AfDB/OECD 2007

2006 in order to combine them with the presidential election elicited great protest. This date change, officially argued by the desire to reallocate the funds earmarked for the organisation of the elections to compensate the victims of the 2005 floods, was perceived by part of the population as a political manoeuvre. Government detractors argued that the real motive of this decision was to allow the PDS to emerge from a period rendered difficult by internal dissension and by the negative impact on the government of problems in the industrial and energy sectors. At the beginning of 2007, the legislative elections were again postponed without further clarification, following a High Court ruling striking down a presidential decree regarding the distribution of local members of parliament, which had been contested by the opposition . African Economic Outlook

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Despite a 2004 agreement signed between the government and separatist rebels, the Mouvement des Forces Démocratiques de Casamance (MFDC), peace has not yet been consolidated in Casamance and awaited negotiations have twice been postponed. In August 2006, the Senegalese army launched a military campaign against the rebels of Salif Sadio, the head of the MFDC, leading to new confrontations in the region. Occasional clashes continue as well as refugee movements to neighbouring countries, particularly Gambia. The president of the regional council of Ziguinchor, Oumar Lamine Badji, was murdered by unknown assailants in December 2006, in the middle of Aïd el-Kebir, the Muslim feast of sacrifice.

482

Senegal has historically experienced large waves of emigration abroad, particularly to Europe. On this subject, 2006 was an exceptional year with this movement taking on unprecedented proportions: the number of illegal immigrants to the Canary Islands reached 30 000, sparking diplomatic tension with Spain, which was resolved by the repatriation of several hundred emigrants. In response, the Senegalese government announced the June 2006 launch of the Reva project, while the new PRSP also includes the development of income-generating activities and employment opportunities in small urban centres. It remains to be seen whether these activities will be able to offer a real alternative for young Senegalese prepared to undertake a highly dangerous journey towards a hypothetical better future. In addition to the high price paid in human lives, this exodus seriously risks hampering the development of a country already strongly limited by human resources in key sectors. On the other hand, the flow of emigrant workers represents an essential source of funding through foreign remittances. Living conditions remain very hard in Senegal, where poverty is endemic and affects 48.5 per cent of the population (62.5 per cent in rural areas). Despite a sustained pace, growth remains insufficient for reaching the MDG of cutting the poverty rate in half by 2015. And, although the incidence of poverty decreased by 16 points between 1994 and 2004, inequalities have deepened at the same time that progress in social indicators is proving slow and inadequate. African Economic Outlook

The government approved the new PRSP for 200610, which was strengthened by the recommendations of work commissions responsible for progress and midcourse evaluation reports of the previous PRSP. Four strategy lines were decided. The first, already included in the I-PRSP, focuses on the generation of wealth and growth in favour of the poor, and includes the AGS. The second focuses on accelerating access to basic services and reflects the priorities and objectives already included in the I-PRSP. The third aims at promoting social protection, risk prevention and management, and replaces the strategy line of improving the lives of the vulnerable sectors of the population. The last focuses on good governance and on decentralised and participative development. Although public expenditure devoted to social sectors, particularly education and health, is sizeable (50 per cent of the state budget according to the new PRSP), its effectiveness remains weak judging by the slow progress that has been recorded. Above all, these sectors appear crippled by the limited and inadequate quality of available human resources. Amongst other things, this results in worsening disparities between rural and urban areas in access to social services. With a 37.8 per cent literacy rate amongst adults, the majority of the Senegalese population is still illiterate. Resources allocated to education have continued to increase to the point of reaching, in 2005, almost 40 per cent of the state budget. As a result of this effort, undeniable progress has been made, particularly in primary education. Between 2000 and 2005, the number of functional schools grew from 4 751 to 6 460, which is a 36 per cent increase, and the gross enrolment rate rose constantly, from 69.4 per cent to 82.5 per cent for the same period. Still, these improvements remain inadequate: access to teaching is difficult for a great majority of the population owing to the distance to schools, the high cost of schooling and problems in obtaining the school material necessary for learning. The quality of teaching remains mediocre due to the lack of qualified personnel and their insufficient supply in light of the education demand, as attested to by the very high number (55) of pupils per teacher. This is certainly the © AfDB/OECD 2007

Senegal

source of a high primary-school repeater rate (14 per cent in 2005), the low enrolment rates (less than the average for sub-Saharan Africa) and a significant dropout rate (46.1 per cent). Since 2000, the government’s sector development strategy for education is part of a ten-year education and training programme called the Programme Décennal de l’Education et de la Formation, which is part of the poverty-reduction strategy. In the framework of the MDGs and the 2003 Rome Declaration on the effectiveness of aid, initiatives have been put in place to improve the sector strategy and to initiate true cooperation between the government and its partners in this domain. In 2005, for the first time, the government drew up a medium-term sector expenditure framework called the Cadre de dépenses sectorielles de moyen terme. For their part, development partners are focusing on establishing with the relevant ministries a framework for co-operation and co-ordination including, amongst other things, the institution of a joint fund to ensure the consistency of initiatives in which several development partners are associated. In this context, and following the assessment of the government sector strategy in 2006, the country was judged eligible for the Education for All – Fast Track Initiative, which aims at fulfilling the MDGs in terms of access to primary school and universal completion of elementary schooling by 2015. In the health sector, resources are increasing and in 2005 these constituted 10 per cent of the national budget. Though these resources were employed to recruit qualified personnel (515 officers in 2005), the sector remains highly constrained by the insufficiency

© AfDB/OECD 2007

of health and social infrastructure and by the inadequacy of the services offered. Health workers are very poorly distributed throughout the country, with doctors unwilling to leave the capital or other major urban areas. In this context, access to care in isolated areas and for the poorest remains difficult: the Senegalese household survey Esam-II shows that only 57.4 per cent of the population is located less than 30 minutes from a health service. Despite everything, progress has been made these past few years in the area of maternal and child health. According to the 2005 demographic and social survey, EDS-IV, in 2004/05, 93 per cent of pregnant women received care during their pregnancy, while this rate was 87.5 per cent in 2001/02. The maternal mortality rate fell from 540 per 100 000 live births to 434 per 100 000 between 1992 and 2004 and infant mortality fell from 68 to 61 per thousand live births. Within the expanded vaccination programme, the rate of vaccination against the main childhood diseases grew from 44.7 per cent in 2004 to 80 per cent in 2003. Senegal has an HIV/AIDS prevalence rate of 0.7 per cent (EDS-IV), one of the lowest in sub-Saharan Africa. This was made possible by an early and effective prevention strategy, which from the beginning of the epidemic was careful to get relays involved, such as traditional healers, within the different communities. In all likelihood, this measure contained both the spread of the virus as well as discrimination against HIVpositive individuals. To confront the threat of a pandemic, the government has facilitated access to antiretroviral treatment since 2003.

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.

South Africa

Pretoria key figures • • • • •

Land area, thousands of km2 1 221 Population, thousands (2006) 47 594 GDP per capita, $ PPP valuation (2006) 12 857 Life expectancy (2006) 45 Illiteracy rate (2006) 17.6

South Africa

T

S OUTH A FRICA highlights both the buoyancy of its economic performance and the increasingly risky environment with which it is confronted. By South African standards, the country experienced high real GDP growth in 2005 and 2006 at around 5 per cent, fuelled mainly by booming consumption and vigorous investment. The emergence of a black middle class, boosted by the Black Economic Empowerment (BEE) measures, and increased social expenditures are stimulating private consumption and, in turn, the services and construction sectors. By contrast, gold mining and agriculture are largely underperforming owing to structural bottlenecks and diminishing prospects. As a result of growing incomes, South Africa is experiencing significant tax overruns, with the fiscal deficit shrinking to a mere 0.3 per cent of GDP in 2005/06 and an estimated HE MOST RECENT HISTORY OF

0.4 per cent in the following years. The strong growth is also leading to increased imports and a widening current account deficit, estimated at 4.6 per cent of GDP in 2006. The current account Steady growth based on internal deficit mostly reflects demand in 2006 caused a currentstructural factors which account deficit, underlining the are limiting export need to hasten structural reform. competitiveness and constitute a major challenge for policy makers. Inputs are costly, especially in telecoms and transport, adversely affecting all other industries. Poverty remains very high, as do crime figures and HIV/AIDS statistics. Although declining, unemployment remains at around 26 per cent (and close to 40 per cent if the discouraged unemployed 487 are included).

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices)

Source: IMF and local authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/645266545018

© AfDB/OECD 2007

African Economic Outlook

South Africa

In May and June 2006, the turbulence of emerging financial markets affected South Africa, pushing the rand to a depreciation of some 20 per cent. South Africa was one of the most impacted emerging markets due to its large current account deficit and, possibly, perceived, heightened political risk. The domestic financial system was not damaged, however, highlighting the increased resiliency of the South African economy. The South African Reserve Bank (SARB) and the fiscal authorities are working together to dampen domestic demand. The SARB raised interest rates by 200 basis points in the last six months of 2006 while the government is keeping expenditure growth under control. The government is making some efforts to tackle structural bottlenecks: the Accelerated and Shared Growth Initiative for South Africa (ASGISA) programme is aimed at identifying and remedying the binding structural constraints to long-run growth.

488

The short term outlook continues to be largely positive, with investment, both public and private, expected to replace consumption as the engine of growth. Growth rates are therefore expected to remain high at around 4.5 per cent in 2007 and 2008. The outlook could be clouded, however, by international risks associated with rising interest rates in the United States, fresh oil price increases, a downturn in raw materials markets and domestic uncertainty regarding the succession of President Thabo Mbeki (selection of the next ANC president is scheduled for the end of 2007).

Recent Economic Developments In 2006, real GDP growth remained at around 5 per cent after 5.1 per cent in 2005. Growth was led by domestic demand-driven sectors (construction, manufacturing and services), while export-oriented sectors (agriculture, mining) lagged behind. The primary sector was a drag on growth in the first three quarters of 2006. Agricultural output fell by 14.9 per cent over the period due to low crop prices, notably of maize. However, a rebound in food prices in the second half of 2006 helped reinvigorate production in late 2006. African Economic Outlook

The mining sector contracted in the first nine months of 2006 by 3.4 per cent after recording a lacklustre growth rate of 2.3 per cent in 2005. In the same year, gold production receded by 13 per cent to 297.3 tons, its lowest level since 1923. These poor performances point to the structural difficulties of a sector that remains vital to the South African economy: both directly (7.3 per cent of GDP, 6.2 per cent of non-agricultural formal sector and 30 per cent of exports of goods) and through major induced and multiplier effects. The mining industry undoubtedly suffered from the appreciation of the rand against the US dollar up to July 2005 but it was subsequently unable to reap the benefits of higher rand-denominated metal prices (which rose 66 per cent between July 2005 and June 2006) and, in particular, a bull gold market. The industry reported a sharp 32.7 per cent decline in fixed investment in real terms between early 2004 and early 2006. As a consequence, South Africa slipped from fourth to seventh position in country rankings for exploration spending. The internal capital investment survey of the South African Chamber of Mines points to red tape and regulatory uncertainties, associated in particular with the Mining Charter, Royalty Bill, legal titles and mining prospecting rights, as the main constraints on mining activity. The Chamber estimates that these constraints are responsible for a ZAR 10 billion annual reduction in capital investment in mining. The sector is also confronted with constraints in rail and port capacity and rising water and transport costs. However, the comprehensive restructuring of the industry carried out in recent years and rising international prices are expected to result in a recovery in production in 2007 and beyond. The labour-intensive construction sector showed 13.2 per cent growth in the first three quarters of 2006 and reported a 22 per cent increase in employment, equivalent to 87 000 new jobs. Manufacturing experienced a 4.2 per cent growth in the nine months to September 2006. The highest rate of manufacturing capacity utilisation in 35 years was reported in June 2006 at 86.3 per cent, while the Investec Purchasing Managers Index (PMI), which measures confidence in the manufacturing sector, reached a record high in July 2006. Similarly, services benefited from vibrant domestic © AfDB/OECD 2007

South Africa

Figure 2 - GDP by Sector in 2005

(percentage)

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/247765010430

demand, growing 5.9 per cent over the first three quarters of 2006. As a result of sustained vigorous growth, services contributed 66.4 per cent of GDP in 2005 compared to 60 per cent in 1994. Following the weakening of the rand and interest rate hikes in 2006, a rebalancing of growth in favour of export-oriented manufacturing industries and away from domestic-demand-driven sectors is anticipated in 2007. On the other hand, import-competing domestic industries should remain dynamic thanks to the delayed effect of depreciation of the rand. All the components of domestic demand proved vigorous in 2006 with real increases in final consumption expenditure by households and government of 4.2 per cent and 7.2 per cent respectively and a 10.6 per cent jump in gross capital formation. As a result, gross fixed investment reached an all-time high of 18.7 per cent of GDP in the third quarter of 2006, up from 15 per cent of GDP in 2002. Household consumption has been boosted by higher real disposable income and outstanding consumer confidence: the FNB/BER Consumer Confidence Index registered the longest continuous period – 10 quarters – of positive consumer expectations since 1994. Confidence and consumer spending have been supported by subdued inflation and a strong rand. They have also been bolstered by a 6 per cent increase in private sector real wages in 2005, substantial personal income tax relief over the past five years, rising government transfers, and a 5 per cent increase in employment since the beginning of 2005, equivalent to almost 350 000 jobs. The emergence of a growing black middle class, aided by black empowerment programmes, also contributed to the © AfDB/OECD 2007

vitality of consumption. Targeting a lucrative and vibrant domestic market, cash-flush local corporations have undertaken large fixed investments, supplemented by rising public investment. Finally, domestic demand has been fuelled by an accommodating monetary policy and strong credit expansion. Inexpensive credit allowed household consumption to exceed disposable income: 2006 marked the first episode of “dissaving” by South African households since 1984. 489 Overall, South Africa’s national savings rate fell to a historical low of 13 per cent in first quarter 2006, which was reflected in a dramatic widening of the current account deficit to 6.1 per cent of GDP in the first quarter – its highest level since 1994 – and 4.6 per cent over the year as a whole. The strength of the rand up to mid-2006 did not help exports and undoubtedly contributed to this deficit. Monetary tightening in the second half of 2006, along with depreciation of the rand and rising inflation should dampen consumer spending, especially for durables and semi-durables which are very currency- and interest rate-sensitive. Combined with the prudent medium-term fiscal strategy unveiled in October 2006, these factors should help narrow the current account deficit. Yet, the latter is expected to remain large, between 4.6 and 5 per cent of GDP, as investment continues to be buoyant over the next four to five years. Investment is forecast to expand by around 10 per cent annually under the impact of preparations for the 2010 FIFA World Cup and large-scale infrastructure and social project spending by the government and state-owned enterprises such as Transnet and Eskom. These public African Economic Outlook

South Africa

Table 1 - Demand Composition 1998

(percentage of GDP)

2005

2006(e)

Percentage of GDP (current prices)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

16.8 5.8 11.0

17.7 4.9 12.9

10.6 15.0 9.0

9.9 12.0 9.0

9.9 12.0 9.0

Consumption Public Private

82.1 18.8 63.3

83.7 20.2 63.5

4.9 7.2 4.2

4.2 5.0 3.9

4.5 5.0 4.3

1.1 25.7 -24.5

-1.5 27.1 -28.6

2.2 5.3

2.3 4.9

2.1 6.1

External sector Exports Imports

Source: Statistics South Africa data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/388260456467

490

investment programmes are expected in turn to leverage complementary private sector investments. Although investment constitutes a small share of GDP and exhibits lower import content than consumption, the import leakage of large investment programmes such as those planned by Eskom and Transnet is far from negligible. The Industrial Development Corporation estimates it at ZAR 53 billion out of overall capital outlays totalling ZAR 134 billion. The widening of the current account deficit in 2006 underlines some of the structural weaknesses of the South African economy. Growth in South Africa is limited by supply-side bottlenecks and external constraints. Potential growth and export orientation has admittedly increased over the last five years, owing to improved macroeconomic policies, trade liberalisation and structural reforms, including the restructuring of the manufacturing sector since 2003. Yet, potential growth in South Africa is estimated at only four to 4.5 per cent, and, although up from about 3 per cent in the late 1990s, is still below the level needed to make a major dent in poverty and unemployment. Investment rates of below 20 per cent of GDP, themselves attributable to insufficient savings and foreign direct investment, are low by emerging market economies’ standards. As a result, the availability of critical infrastructure is insufficient and the quality of service is poor. Inadequate investment, along with African Economic Outlook

limited competition, explains the high costs of services, particularly transport and telecommunications, and of intermediate inputs, in steel and chemicals for instance. The ASGISA initiative aims to address these problems and to lift average growth to 6 per cent over the 2010-14 period. It is estimated that achieving this target will require an increase in investment to 25 per cent of GDP by 2014. Based on a realistic scenario of investment growth of 10 per cent, however, reaching an investment ratio of over 22 per cent by then promises to be a challenge and, in the period to 2010, growth looks unlikely to exceed 5 per cent.

Macroeconomic Policies Fiscal Policy Prudent policies have resulted in a dramatic consolidation of South Africa’s fiscal position since 1996. Budget deficits have recently hovered in a range between 1.5 per cent of GDP in 2004/05 and 0.4 per cent in 2006/07, while national government debt has been scaled back from 45.3 per cent of GDP in late 2001 to 34.8 per cent in the second quarter of 2006. The country now enjoys a good international credit standing: its long-term foreign currency debt is rated investment grade by S&Ps (BBB+), Moody’s (Baa1) and Fitch (BBB+). The risk premium on South Africa’s © AfDB/OECD 2007

South Africa

Table 2 - Public Finances

(percentage of GDP)

1998/99

2003/04

2004/05

2005/06 2006/07(e) 2007/08(p) 2008/09(p)

Total revenue and grantsa Tax revenue

24.7 24.0

23.8 23.3

25.1 24.6

26.3 25.8

26.3 25.7

26.2 25.7

26.2 25.7

Consolidated expenditureab Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

28.5 26.9 21.3 10.8 5.6 1.6

27.7 26.6 22.9 9.5 3.7 1.2

27.8 26.6 23.1 9.4 3.5 1.2

29.1 27.5 24.2 9.8 3.3 1.7

29.0 27.3 24.3 9.6 3.0 1.8

28.8 26.9 24.1 9.4 2.8 1.9

28.7 26.7 24.1 9.4 2.6 2.0

Consolidated balanceb Main budget balance

-3.9 -2.7

-3.9 -2.3

-2.7 -1.5

-2.8 -0.3

-2.8 -0.4

-2.6 -0.4

-2.5 -0.5

a. Only major items are reported. b. Includes expenditure by national and provincial government, social security funds and selected public entities. Source: : South African National Treasury data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/706773153276

long term foreign currency debt reached an all time low 68 basis points in February 2006 and widened to a mere 115 basis points in July 2006, following the May-June 2006 turbulence in emerging markets. This risk premium narrowed again to 98bps in October 2006. In short, the government has a significant margin for increasing public expenditures. As in 2004/05, the budget deficit turned out to be far lower in 2005/06 at 0.3 per cent of GDP than the expected 3.5 per cent of GDP. The situation is likely to repeat itself in the following years with a likely closing of the fiscal deficit. The unexpectedly low deficit in 2006 was due to very strong revenue growth of 13.5 per cent in 2006, far above anticipated 4.5 per cent growth, and almost double GDP growth. Indirect taxes (VAT in particular) grew 14.5 per cent, while personal income and corporate tax receipts showed an 18.1 per cent increase. The surge in tax revenues has been driven by dynamic domestic demand but also by structural factors1, namely the continued broadening of the tax base, partly attributable to a progressing formalisation of the economy, and the strong tax compliance efforts made by the South African Revenue Services in recent

years. Despite tax relief for individuals and a tax amnesty for small businesses, the tax revenue to GDP ratio has risen from 21.2 per cent in 1996/97 to 26.2 per cent in 2006/07. The cyclical component of this rise in tax revenues is fairly small, according to the IMF2. At the same time, expenditures (capital outlays included) turned out to be broadly in line with the initial budget forecast. For the future, the government is aiming to increase the share of investment in public expenditure. Public investment is forecast to rise by 9.8 per cent annually from 2005 to 2009, so as to prepare the 2010 FIFA World Cup, improve public service delivery and achieve the priorities set out in the ASGISA. Capital outlays are set to reach 7.2 per cent of total expenditure and 2.2 per cent of GDP by 2009/10 compared to 4.5 per cent and 1.2 per cent respectively in 2004/05. Priority sectors are public works, housing, water, education and health services (including a hospital revitalisation programme). They will be supplemented by massive investment planned by Eskom in electricity generation and electrification, as well as significant spending by Transnet, aimed at improving the quality and efficiency of the country’s rail network, major ports and harbours.

1. Tax revenues in South Africa have been consistently higher than expected by government in recent years. 2. 'South Africa: Selected Issues', September 2006, IMF Country Report No. 06/328

© AfDB/OECD 2007

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While increasing the share of capital expenditure, the government aims to keep total expenditure below 30 per cent of GDP, by restraining the growth of current expenditure in line with GDP. In particular, the wage bill and transfers to households are expected to remain stable as a share of GDP. The roll-out of the government social grant programme is nearing completion and its impact on the budget is flattening out. There are no clear indications that the initiative will be extended further as the government intends to avoid the emergence of a dependency culture and to prevent the financial cost of the scheme from spinning out of control. In other words, spending plans by the fiscal authorities continue to strike a sensible balance between fiscal stability and social objectives. This strategy should result in narrow fiscal gaps over the period to 2009-10 – no higher than 0.5 per cent of GDP. Yet fiscal policy remains expansionary when cyclically adjusted, with a structural deficit estimated by the IMF at 2 per cent of GDP.

492

The authorities make the case for a prudent fiscal stance by stressing that the scope for increasing tax revenues further is limited because all feasible measures to improve tax compliance have already been undertaken. Cautious expenditures plans are also underpinned by a realistic assessment of South Africa‘s capacity for absorption, skill constraints and limited administrative capacities at the municipal and provincial levels. The government also stresses the need for coordinating fiscal and monetary policies to relieve pressure on the current account, slow growth to its potential rate and dampen inflation. Monetary Policy Monetary authorities were confronted with rising inflation in 2006: in September 2006, the Consumer Price Index (CPIX) inflation rate reached 5.1 per cent – its highest level in two years – and averaged 4.9 per cent over 2006 as a whole. Inflation could again be at the top of the targeted 3 to 6 per cent band in 2007, averaging out at about 5 per cent. The increase in inflation is attributable largely to strong domestic demand resulting in high capacity utilisation (86.2 per cent in June 2006, 88.6 per cent in durable goods) and in growth exceeding its long term potential. As a African Economic Outlook

result of labour-market pressures, growth in unit labour costs accelerated in the formal non-agricultural sector to 7.6 per cent in the year to the first quarter 2006. In addition, rising prices of imported goods (oil in particular), transport and food, at a rate well above 6 per cent, drove the overall inflation index up. The rise in the price of inputs, energy and labour were easily passed on to consumers. The growth in credit to the private sector has been consistently higher than 20 per cent since January 2006 and reached a record 25.3 per cent in September 2006, as the SARB accommodated the increase in money demand accompanying growing nominal GDP. Previously disadvantaged sections of the population which were entering the credit market for the first time in 2005 and 2006 largely accounted for the sharp increase in credits. Monetary policy was the most expansionary since 1994: from April 2005 to June 2006, the repurchase rate of the central bank stood at an all-time low 7 per cent. The inflationary pressures were compounded by the sharp 20.6 per cent depreciation of the rand between April and October 2006 and ensuing pass-through effects. Global factors, such as the tightening of US monetary policy and concerns about a drop in international investors’ appetite for emerging markets assets played a role in the weakness of the rand. The rand proved particularly vulnerable to the sell-off of emerging markets’ assets due to very large current account deficits and declining prices for key South African export commodities in 2006. However, the rand bounced back later in the year to such an extent that overall depreciation in 2006 was only 8.6 per cent. The challenge now faced by the monetary authorities is to keep inflation in check, to engineer a soft landing of the economy and in due course to narrow the current account deficit and reduce the rand’s instability. Achieving these objectives requires that the SARB tread a fine line between a too soft monetary response and the risk of a hard landing. In other words, the tightening of the monetary stance must dampen domestic demand while avoiding a crash on the property market, which is vulnerable to interest rate swings due to a high volume © AfDB/OECD 2007

South Africa

of mortgage debt at variable interest rates. Also, the central bank intends to dampen damaging interestrate volatility. The strategy so far has consisted in a gradual tightening of the monetary stance: policy interest rates were raised in June 2006 for the first time in almost four years. Tightening in 2006 reached 200 basis points overall. This strategy started to bear fruit in early 2007. Despite the depreciation of the rand and the rise in inflation in 2006, stable nominal wage settlements in the third quarter 2006 and an inverted interest rates curve are indications that expectations regarding inflation remained stable. Also, as real interest rates rise, domestic demand and credit were expected to slow down in early 2007. Combined with softening international oil prices in early 2007, the latter developments improved the inflation outlook and led the SARB’s monetary policy committee not to raise interest rates further on 15 February 2007.

Development Community (SADC) – European Union (EU) EPA negotiations (it had previously been only an observer), even though trade between South Africa and the EU is already governed by the Trade, Development and Cooperation Agreement (TDCA) which came into force in January 2000. Botswana, Lesotho, Namibia and Swaziland (BLNS) make the case for special treatment of their sensitive products. The European Commission (EC) made it clear however that South Africa could not benefit from such special treatment and would remain subject to the existing TDCA regime. In turn, South African trade officials rule out such a possibility. Also, the aim of the SADC EPA group is that in due course all its members (and not only its least developed members – Angola, Mozambique and Tanzania) should benefit from an Everything But Arms (EBA) access to the EU market, even though this is unlikely to be endorsed by the EC.

External Position

In 2005 and 2006, vibrant domestic demand combined with the lagged effects of the strong rand to boost imports. At the same time, the value of oil imports has been driven up by high prices. Overall, the value of imports increased by about 17 per cent in 2006. Exports, especially in manufacturing, grew less rapidly at 14.8 per cent, hampered as they were by the effects of the strong rand, while local producers tended to serve the booming domestic market instead of expanding their market shares abroad. As a result, the country’s merchandise trade deficit widened from 0.8 per cent of GDP in 2005 to 1.3 per cent in 2006.

The trade liberalisation programme pursued by South Africa since 1994 has resulted in a more open economy: the import penetration ratio was estimated at an all-time high of 25.1 per cent in 2006 while the exports-to-GDP ratio (including services) increased from 22 per cent in 1994 to an estimated 23.8 per cent in 2006. However, upstream sectors are over-protected. The tariff structure is also too complex with too many tariff bands and spikes. In March 2006, the SADC Economic Partnership Agreement (EPA) Group proposed that South Africa became a full participant in the Southern African

The widening gap in services also contributed to growth in the current account deficit in 2006 to 4.6 per

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

1.4 21.7 20.3 -0.2 -2.4 -0.6

2.1 23.2 21.1 -0.2 -2.8 -0.5

-0.1 22.4 22.5 -0.6 -2.0 -0.7

-0.8 22.8 23.6 -0.7 -2.0 -0.7

-1.3 23.8 25.1 -0.9 -1.8 -0.7

-1.5 23.5 25.0 -0.9 -1.7 -0.6

-2.3 22.4 24.7 -0.7 -1.5 -0.5

Current account balance

-1.8

-1.3

-3.4

-4.2

-4.6

-4.6

-5.1

Source: South African Reserve Bank data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/756403288572

© AfDB/OECD 2007

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Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services)

494

Source: IMF. http://dx.doi.org/10.1787/272684865441

cent of GDP – its highest level since 1982. Nevertheless, the latter was comfortably financed by portfolio capital inflows in the first three quarters of 2006, despite turbulence in emerging markets, and international reserves actually increased. But reliance on volatile capital inflows remains a source of vulnerability and a shift from portfolio to foreign direct investment (FDI) would be desirable. FDI inflows remain disappointing, however. Despite the volatility of the rand and of South Africa’s vulnerability to capital outflows, the authorities remain committed to liberalising capital controls and, in particular, to gradually lifting remaining ceilings on outflows. Their objective is to replace quantitative limits on outward investment with prudential regulations for institutional investors. This strategy is made possible by an increasingly comfortable stock of international reserves, which increased from $18.7 billion in January 2006 to $21.5 billion in October. As a result, reserve coverage of imports of goods and services rose from 7.9 weeks in 2003 to 14 weeks. Also, the ratio of gross foreign reserves (including gold) in the economy to gross external short-term debt African Economic Outlook

stood at 157 per cent in March 2006, up impressively from 71 per cent in December 2003. Hence, despite a ratio of reserves to imports relatively low by emerging markets standards, improving liquidity ratios have enabled South Africa to easily withstand the turmoil on emerging markets in 2006 and helped to retain the confidence of international investors. South Africa’s foreign debt was just 18.8 per cent of GDP in 2006 compared to 29.4 per cent in 1999 and an ever increasing share of it is rand denominated (43.8 per cent in the first quarter of 2006 compared to 37.5 per cent one year before). Debt service accounted for 8.8 per cent of export revenues in 2005.

Structural Issues Recent Developments With the macroeconomic situation stabilised and creditworthiness restored, the South African authorities are now focusing on structural obstacles to growth © AfDB/OECD 2007

South Africa

and on equity. Despite the remarkable transformation undergone by the South African economy, the level of employment creation remains disappointing. With the ASGISA program unveiled by president Mbeki in February 2006, the South African authorities are pursuing the objective of halving poverty and unemployment by 2014. The document identifies six key constraints and related policy measures to address them: a) the cost, efficiency and capacity of infrastructures, b) the shortage of suitably skilled labour, c) barriers to market entry and competition, d) the regulatory environment and the burden on small and medium-sized businesses, e) deficiencies in government organisation, capacity and leadership, and f ) the level and volatility of the exchange rate. ASGISA has been criticised as unfocused by some analysts. The authorities submitted their programme for review by experts from the Harvard Center for International Development3. Although generally supporting its approach, these experts lamented its excessive reliance on capital accumulation and its neglect of labourmarket issues. Reflecting government policies, transport infrastructure is improving. In line with the exportoriented strategy of the country, port development has become a priority. This is consistent with the importance of maritime transport for South Africa, which handled 96 per cent of imports and exports in 2005. The stateowned monopoly Transnet is allocating half of its ZAR 32 billion investment budget to restructuring and expanding port facilities in the coming five years. Although delayed, the deep water port in Coega is expected to start operating in early 2008. By end-2006, the Coega industrial development zone had attracted some 10 investors, including aluminium company Alcan which is investing some ZAR 16 billion in an aluminium smelter. The 2010 World Cup is also generating investment in infrastructure. Some ZAR 15 billion have been earmarked by central government (and similar contributions are expected from other spheres of

government) for construction and upgrading of stadiums. After investing ZAR 3 billion in infrastructure over 1999-2003, Airports Company South Africa (ACSA) has allocated a further ZAR 5 billion for the period up to 2009 for upgrading airport terminals and runways. The O.R. Tambo Airport (Johannesburg International Airport) is already the busiest airport in Africa, with 13 million passengers in 2005 and 200 000 flight arrivals and departures. In 2006, six new airlines joined the 100 or so already present at JIA. JIA is also a major freight hub with more than 320 000 tons of cargo moved in 2005 – 7 per cent more than in 2004. The much-delayed construction of the Gautrain fast rail link finally started in mid-2006. The first segment, linking the airport to Johannesburg, is to be completed by June 2010 for the World Cup and the remaining link between Johannesburg and Pretoria by 2011. To date, it represents the largest publicprivate partnership (PPP) signed on the African continent. The ZAR 21 billion contract for a 15-year concession was under negotiation for 15 months before it was finally signed in September 2006 by Gauteng province and the Bombela consortium led by Bouygues Construction and RATP International. The project is expected to provide transport for 60 000 to 70 000 passengers daily. In response to criticisms, the project has been further integrated in the existing transport system (with commuter trains, buses and with large car parking areas) and safety measures have been upgraded. However, the Gautrain project remains only a partial answer to the huge Johannesburg-Pretoria commuting problem, which concerns over 6 million commuters a day. The upgrading of infrastructures and public services is limited by the limited capacities of local governments and skill shortages. This is a real challenge for the central authorities, given their commitment to increase provincial and local budgets by 58 per cent over the next three fiscal years. Several mechanisms have been developed to promote training and capacity building in local government. Technical assistance is provided

3. http://www.cid.harvard.edu/southafrica/index.html

© AfDB/OECD 2007

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by the Treasury in the fields of planning, budgeting and financial management. Also, the Development Bank of Southern Africa (DBSA) has started providing aid in basic service delivery through the deployment of experts in municipalities with the greatest needs (Siyenza Manje initiative). In March 2006, in order to tackle the mismatch of skills, the Deputy President launched the Joint Initiative for Priority Skills Acquisition (JIPSA). It focuses on skill development through improved alignment between higher education programmes and the needs of the public and private sectors, incentives for the repatriation of skilled South African expatriates and recruitment of retired experts.

496

Faced with very weak export performance since 1960 by international standards and a low level of export sophistication compared to its GDP level, the South African authorities are seeking to strengthen trade and industrial policy. The new national industrial policy framework attempts to better coordinate, focus, monitor and evaluate industrial policies so as to increase their impact. Fourteen priority sectors have been identified, with particular emphasis initially on business services and tourism. The authorities are aiming to diversify away from minerals and mineral-processing, while intensifying industrialisation and higher value activities in new areas of global growth. To that end, they are deploying a mix of incentives (including fiscal), large infrastructure investment and financing of priority sectors. They are also encouraging industrial development zones (ex. Coega). So far, however, there is a lack of co-ordination among the proliferation of initiatives. The approach of targeting certain sectors, while large unresolved economy-wide structural bottlenecks remain, is questionable. In that respect, the authorities are seeking to enhance competition through trade liberalisation and import tariffs on steel have been removed recently. A new competition law is under review by the Department of Trade and Industry. Strengthening competition is especially needed in telecommunications, the cost of which remains a major concern for investors in South Africa. Even though South Africa ranks first in sub-Saharan Africa in terms of fixed line coverage (10 per 100 inhabitants), this ratio African Economic Outlook

is weak among emerging countries and even deteriorating. It is partly compensated by a high mobile phone penetration, with 31 million registered users and 65 mobiles per 100 inhabitants. The country has been trying to open the fixed line sector to competition since 2000 with the establishment of the Independent Communications Authority of South Africa. However, competition is only just developing with the entry in August 2006 of a second fixed-line operator, Neotel, led by the Indian group Tata. The new company has announced a ZAR 1 billion investment plan over the next 10 years to develop the network. A new Electronic Communications Act was also adopted in parliament in April 2006 to allow attribution of licences for both mobile and fixed systems. Besides the three existing mobile operators, three additional telecom groups are expected to benefit from the new act to offer some mobile phone services, which should help put further pressure on prices. Some uncertainties remain, however, notably regarding use of the West Africa / South Africa / Far East underwater high speed cable for which Telkom has a monopoly. The market opportunities created by the emergence of the black middle class and large infrastructure projects are stimulating FDI. FDI is also facilitated by a sound governance and legal system. Some six major new investments worth a total ZAR 45 billion, notably in the retail, financial services and transportation sectors, are in the pipeline. Despite progress in diversification, FDI in South Africa is likely to remain concentrated on primary products and natural resource-intensive industries for some time. Domestic private investment is also picking up with new developments, notably shopping malls, in townships. Obstacles to higher foreign and domestic investment include the relatively small national and regional markets, factor costs (with the notable exception of electricity) and lack of skills. The overall business environment is characterised by a continuous improvement in investor and consumer confidence, fuelled by rising growth. However, the selection of the new ANC president in 2007 is putting some pressure on the investment climate. Jacob Zuma, a possible successor to President Thabo Mbeki, has been critical of the government’s liberal economic policies. His © AfDB/OECD 2007

South Africa

accession to power might slow the pace of reforms, notably in the labour market, but would probably not dramatically reverse the government’s policies. High crime rates also remain a detriment to the attractiveness of the country, even though improvements are appearing. The Police Service’s crime statistics released in September 2006 show a drop in the overall crime rate by 11.3 per cent between April 1994 and March 2006. Serious crimes also appear to have peaked. Nevertheless the number of serious crimes remained high at some 2.17 million in 2005/06, and some of them, including homicides, residential robberies and most of all drug-related crimes are still on the rise. The authorities have set a target of reducing “contact crimes”

by 7 to 10 per cent per year and are consequently strengthening the police. South Africa’s Black Economic Empowerment (BEE) programme continues to be an issue for debate in the country; although it is official government policy. There are encouraging signs that the black middle class is expanding thanks to affirmative action, particularly in the public sector. The government’s official Codes of Good Practice on BEE, which will shape the racial transformation of South Africa in the coming decade, were gazetted early February 2007. The codes are the blueprint for implementation of government’s “Balanced Scorecard” (the range of measures businesses must undertake).

Table 4 - The Balanced Scorecard Elements

Definition

Weighting

Compliance Targets

Ownership

Voting rights

20 points

25% +1 vote

Management control

Representation in management

10 points

40% to 50%

Employment Equity

Weighted employment equity

15 points

43% to 80%

Skills Development

Skill development expenditure

15 points

3% of payroll

Preferential Procurement

Procurement from black-owned and empowered enterprises

20 points

70%

Enterprise Development

Investment in black-owned and empowered enterprises

15 points

3% (Net Profit After Tax)

Socio-Economic Development

Industry specific initiatives

5 points

1% (Net Profit After Tax)

Source: Authors based on DTI. http://dx.doi.org/10.1787/373031608003

Companies must score in each of the seven categories, including equity transfer or ownership. The exceptions are: multinationals which can prove that it is their standard practice not to have outside shareholders in subsidiaries; businesses with a turnover of less than ZAR 5 million which are excluded completely; businesses with a turnover of between ZAR 5 million and ZAR 35 million which can chose five elements of the scorecard to comply with. However, any company wishing to do business with government will have to comply with the broad-based BEE scorecard. Part of any such companies’ “preferential procurement” compliance is to buy goods and services from other companies which comply with the codes, creating a cascade effect which will affect all but the smallest firms. Apart from its impact on small businesses, © AfDB/OECD 2007

questions remain about the extra regulatory burden of complying with a fairly complex set of rules. The financial system remains sound and regulation is improving. At the end of June 2006, the capital adequacy ratio of the banks (regulatory capital over risk-weighted assets) stood at 12.4 per cent, well above the required 10 per cent. Asset quality also improved with non performing loans at 1.2 per cent of total loans compared to 1.5 per cent end of 2005. The most significant risk to the banking sector today lies in increasing household mortgage debt in a context of rising interest rates. Bank credit to households increased from 33 per cent of total credit in June 2005 to 43 per cent in June 2006. However, the number of insolvencies has steadily declined since 2003 and household debt African Economic Outlook

497

South Africa

service remains low, making it unlikely that loan defaults would be widespread enough to cause systemic problems. Strengthened bank supervision, and enhanced bank risk management systems, notably to comply with the Basel II agreement, have also reduced the risk of a banking crisis. Access to Drinking Water and Sanitation

498

South Africa is a semi-arid country, with rainfall well below the world average and unevenly distributed; available water resources are used very intensively. No fewer than 458 dams were commissioned between 1950 and 2000, initially for irrigation purposes but subsequently also for the provision of drinking water. These facilities were not initially located near population centres and therefore required heavy investment in piping. Water is also very inefficiently used with 60 per cent of available supply consumed by agriculture, which only accounts for 4 per cent of GDP. Water pollution remains an issue in a country in which agriculture, mining and energy are major sectors. With demand growing, South Africa faces a serious risk of shortages by 2020. To meet the challenge, the country is investing primarily in water use efficiency programmes (especially in the domestic and agricultural sectors) and secondarily in additional supply via recycling, desalination and new infrastructures. At the end of the apartheid regime in 1994, South Africa inherited a backlog of some 15 million people with no access to safe water supply and more than 20 million with no access to sanitation services, most of them in the former homelands. The newly elected government instituted an overhaul, with the Department of Water Affairs and Forestry (DWAF) at the centre of the new system. The 1994 White Paper on Community Water Supply and Sanitation, the 1997 Water Services Act and the National Water Act of 1998 established the objective of access to basic water and sanitation services for all while ensuring environmental sustainability as well as economic efficiency. A 2001 White Paper introduced a free basic water allotment of 25 litres per day per person. The constitution vests the responsibility for water and sanitation services in local government. National government, however, is provided with the regulatory function. African Economic Outlook

Despite the official adoption of a decentralised approach to managing water and sanitation issues, the sector remains highly centralised with the DWAF overseeing both service provision and the institutional and policy framework. This reflects capacity constraints at the municipal level but also some reluctance on the part of the DWAF to relinquish its control. There is also very little co-operation with the private sector. The number of public-private partnerships fell to only three after the termination of the management contract between the municipality of Johannesburg and Suez affiliated JOWAM in March 2006. The government has shown a clear reluctance to transfer substantial responsibilities to private operators. Overall, the country has made considerable progress in improving access to safe water and sanitation, especially considering the rising population: a total of 21.4 million people have been given access to improved water supplies since 1994, bringing the percentage of people without access from 39.9 per cent to 7 per cent. Meanwhile, 9 million people have been provided with improved sanitation, raising the percentage of people with access from 49 per cent to 69 per cent. In 2003, the DWAF established the Strategic Framework for Water Services, which set targets of universal access to water by 2008 and to sanitation by 2010, well ahead of the MDG targets of 80 per cent with access to water and sanitation by 2015. In practice, however, while South Africa will easily reach the MDG water supply target by 2015, it will find it difficult to meet the sanitation target and provision of a universal service is likely to take even longer. After the remarkable progress of the last decade, tackling the remaining backlog of 5 million people without services represents a much more difficult challenge as this population is mostly rural and dispersed. Better rural access to water services will require substantial improvement in municipalities’ managerial and engineering capacities. At the same time, urban water and sanitation systems are in urgent need of better maintenance. While government focuses mostly on the development of new infrastructure, maintenance of older networks, which today are between 50 and 100 years old, is neglected. All these problems mean that © AfDB/OECD 2007

South Africa

it will be difficult to raise access levels much in the coming years. Even though it remains largely state-owned, the sector is seeking financial sustainability but faces low willingness to pay on the part of population, partly as a result of historical resistance in the townships to the apartheid regime, and, in the case of smaller municipalities, limited collection capacity. Smaller municipalities face huge challenges in terms of covering operational and maintenance costs in a context of high poverty levels, existing free access to basic water services and plans on the government’s part to phase out subsidies after five years. On the other hand, some of the bigger municipalities such as Johannesburg are seeking innovative financing schemes.

Political Context and Human Resources Development South Africa’s standing continues to rise on the African continent as well as in the international arena. In 2007, the country starts a two-year term on the United Nations Security Council. It has also become chair of the G20 forum of industrialised and developing economies. However, with the election of the next ANC president approaching, internal politics is moving under the spotlight. The March 1 2006 municipal elections gave expression to a rise in popular discontent fuelled by a perception of limited progress in the provision of public services at local level, the slow pace of improvement in the majority of the black population‘s living conditions and pervasive unemployment. Rising dissatisfaction is putting pressure on the ANC coalition, deepening the divide between the current leadership and the left wing represented by the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP). The coming selection of the ANC president in December 2007 prior to presidential elections in 2009 is exacerbating the tensions which have been further fuelled by the twists in the Zuma affair. After Jacob Zuma, then deputy president, was dismissed by President Mbeki in 2005 on allegations of fraud and © AfDB/OECD 2007

corruption and further indicted with rape charges, his political prospects as future ANC president seemed very slim. However, his case changed dramatically in September 2006 when the corruption charges against him were dismissed for lack of proof and he was acquitted of rape. Zuma is back in contention for the ANC presidency, a post which is virtually certain to lead to the presidency in 2009. Despite the trials, support for him has grown, especially among the unions and the communists which see in him the most credible alternative to the current business-oriented government. Between 1995 and 2005, South Africa’s population increased from 41.5 million to 46.9 million while average household size fell from 4.7 to 3.7 people. Demographic pressure, combined with a rise in the number of households and migration to urban areas, has partly offset the government’s efforts to improve delivery of public services. For example, even though 2.5 million new formal housing units were built between 1995 and 2005, the proportion of households living in formal housing decreased from 72.9 per cent to 69.8 per cent and informal settlements mushroomed. This trend is making it increasingly difficult to meet demand for electricity and water services. Despite the creation of 1.2 million jobs in the formal sector (excluding agriculture) between March 2001 and March 2006, the growth of the labour force has prevented unemployment from being significantly reduced and real wages from being increased. From 1995 to 2005, the active population rose by 65 per cent and the number of unemployed people increased by 168 per cent, from 1.6 million to 4.4 million. The stubbornly high unemployment rate also stems from the apartheid legacy of skill mismatch and inequalities. Nevertheless, encouragingly, the unemployment rate has started to decline in recent years, from a high of 30.2 per cent in 2002 to 25.6 per cent in March 2006. Earnings inequality rose sharply during 1995-1999 and remained high but stable over 2000-04. South Africa’s efforts to stimulate export-led growth have yielded limited gains in employment and incomes for unskilled workers due to the capital-intensive nature of exports. Clearly, skill development remains a key African Economic Outlook

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South Africa

priority and South Africa rightly devotes almost one fifth of budget spending to education. The government’s efforts are directed at learners via the extension of free schooling, which is due to be made available to 40 per cent of learners in 2007, and teachers via improved qualifications. Rising inequalities co-exist with the emergence of a black middle class. According to Cape Town University’s Black Diamond marketing survey, the number of black households earning more than ZAR 154 000 a year increased by 368 per cent between 1998 and 2004. From next to nothing in the early 1990s, the middle class had grown to 10 per cent of the black adult population or 2 million individuals by 2004 and is currently growing at a rate of 50 per cent per year. Three quarters of the black middle class still live in the townships and the remaining quarter commute from the suburbs to the townships where they visit family and friends over week-ends. 500

In rural areas, though, little has changed. With only four per cent of land owned by the black population (compared to a target set in 1994 of reaching 30 per cent by 2015), land reform has made slow progress. The authorities are adopting a more pro-active policy, moving away from the initial approach based on voluntary transactions to relying more on expropriations and compensations. A total of 5.4 million people are HIV-infected in South Africa, including 16.2 per cent of 15-49 year old adults and one third of young women aged 25 to 29, according to the 2005 South African National HIV survey commissioned by the Nelson Mandela Foundation. Some 2.2 million people were estimated to have died of AIDS by July 2006. The number of

African Economic Outlook

dead in 2006 alone reached 350 000. Statistics also suggest that the epidemic is still worsening, even if at a slower rate. As a result, life expectancy has fallen from 57 years in 1995-2000 to under 50 in 2006. To tackle the tremendous challenges raised by the disease, South Africa has put in place a large anti-retroviral treatment plan, in which some 134 500 people have been enrolled through the public sector and a further 80 000 people by the private sector and NGOs. However, enrolment remains well short of needs with some 500 000 adults estimated to be still without access to treatment. More importantly, there are signs that the government is reversing its approach to HIV/AIDS. Following the uproar created by the South African display of vegetable “treatments” at the Toronto AIDS conference in August 2006 and under the pressure of NGOs (notably Treatment Action Campaign) and of 81 leading scientists who called for the sacking of controversial health minister Manto Tshabalala-Msimang, the cabinet formed an inter-departmental committee to oversee the government’s response to the epidemic. Deputy President Phumzile Mlambo-Ngcuka, who heads the committee, has already made her mark through strong statements and symbolic gestures such as meeting AIDS specialists and walking arm in arm with TAC activists. The HIV/AIDS strategic plan for 2007-2011, due in December 2006, was postponed to March 2007 to allow for broader participation, notably by civil society. The two key objectives of the plan are a 50 per cent reduction of the new infection rate by 2011 through increased prevention and the extension of treatment, care and support to 80 per cent of the HIV-positive population. This policy reversal provides for greater availability of drugs and will encourage the population to make more use of conventional treatment, thus opening the way to much-needed progress.

© AfDB/OECD 2007

Tanzania

Dodoma

key figures • • • • •

Land area, thousands of km2 945 Population, thousands (2006) 39 025 GDP per capita, $ PPP valuation (2006) 594 Life expectancy (2006) 46.5 Illiteracy rate (2006) 30.6

Tanzania

T

ANZANIA’S

is consolidating and although the recent harsh drought caused food shortages and impaired electricity generation, economic activity has remained resilient. Real GDP growth was 5.7 per cent in 2006 and is expected to pick up to 6.8 per cent in 2007 and to 7 per cent in 2008 as increased investment begins to drive growth. This reflects confidence in the economy and shows a positive outlook for sustained growth. Improvement in economic management is delivering relatively low inflation despite the adverse impact of the drought. The external sector has benefited from improvements in exports and considerable debt relief under the Multilateral Debt Relief Initiative. However, government finances still suffer from under-performance ECONOMIC

IMPROVEMENT

in domestic revenue mobilisation as a result of weakness in tax administration. Economic growth is Challenges also remain in tackling sustained and structural impediments to growth, in improvements in tax particular the persistent power crisis. administration will Much remains to be done, too, in enhance progress tackling the poor business environment towards fiscal stability and enhancing private-sector participation in the economy. On the political scene, the government would do well to tackle the perceived high level of corruption to complement the improving economic environment. Furthermore, improving water management and sanitary services is a major challenge. Although Tanzania is generally well endowed with 503

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Tanzania - GDP Per Capita (PPP in US $)

■ East Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Tanzania - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

3500

8

7

3000

6 2500 5 2000 4 1500 3 1000 2 500

1

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and domestic authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/338683128411

© AfDB/OECD 2007

African Economic Outlook

Tanzania

water resources, there is a great variation in water availability throughout the country. There is the possibility of continued water shortages as population growth reduces water availability. Sanitation services remain inadequate in the country with only a very small proportion of the population in both the urban and rural areas enjoying access to proper sanitary services. The problem of the poor state of sewerage services is exacerbated by inadequately developed pollution control and solid waste management.

Recent Economic Developments

504

Tanzania’s economy has continued to perform well in spite of the prolonged drought that has caused food shortages and a scarcity of water for electricity generation over the past three years. In 2006, real GDP growth remained resilient at 5.7 per cent, just below the annual average of about 6 per cent over the 2000-05 period. Growth is expected to pick up strongly to 6.8 per cent in 2007 and further to 7 per cent in 2008, driven mainly by higher investment from both the private and public sectors. Economic activity in 2006 was constrained by the drought, which had a negative impact on agricultural production, with agricultural output expanding by an estimated 4.5 per cent compared with 5.2 per cent in 2005. The negative effect of the drought was felt especially in domestic production of cereal crops, which declined by an estimated 4 per cent in 2006, resulting in a sharp deterioration in the security of food supplies.

The government was consequently forced to distribute a considerable amount of grain from its strategic grain reserves, thus reducing the country’s stock of grain reserves to 16 000 tonnes at the end of June 2006 from 113 000 tonnes at the end of June 2005. The government has put in place measures since 2006 to avert the unending food crisis and to enhance agricultural productivity. These include streamlining and simplifying the regulatory environment, improving the functioning of the legal system and addressing human resource constraints. Other ongoing support services to the agricultural sector include provision of subsidies for the transportation of fertiliser to the main cereal producing regions, increased funding for agricultural research and extension services, and the strengthening and rationalisation of the export credit guarantee scheme. Estimates for 2006 suggest that the industrial sector continued to achieve rapid growth of 7.4 per cent, albeit below the 10.6 per cent recorded in 2005. The industrial sector’s share in GDP rose to 16.9 per cent in 2005. The industrial sector’s rapid growth was due to strong performances in manufacturing, construction, and especially mining and quarrying. Mining and quarrying output grew in real terms by 15.7 per cent in 2006, the fifth consecutive year with increases of more than 14 per cent. Growth in the construction sector rose to 11.9 per cent after remaining at around 11 per cent for three years in a row, while growth in manufacturing output rose to 9 per cent from 8.6 per cent in 2005. However, the

Figure 2 - GDP by Sector in 2005

(percentage)

Public administration and other services 8.8%

Finance and business services 12.1% Transport and communications

Trade, hotels and restaurants

4.4%

46.1%

Agriculture

11.6% 5.7%

Construction Electricity and water

1.6% 6.8% 2.8% Mining and quarrying Manufacturing

Source: Authors’ estimates based on Ministry of Planning, Economy and Empowerment data. http://dx.doi.org/10.1787/172536545421

African Economic Outlook

© AfDB/OECD 2007

Tanzania

drought-induced power crisis in the country continues to hamper industrial activity.

to finance projects that centre on Tanzania’s history, such as the slave trade route.

Tanzania’s services sector continues to achieve healthy growth rising by an estimated 7 per cent in 2006 with the tourism and hotel/restaurant sub-sectors leading the growth. These sub-sectors remain healthy as Tanzania continues to enjoy the status of destination of choice for tourists in East Africa. In 2006 the number of tourists to the country rose by an estimated 7.1 per cent with tourists’ receipts also increasing by an estimated 6.7 per cent. This followed heavy advertising of Tanzania’s tourist attractions by the Tanzania Tourist Board and the country’s embassies. A major attraction of the tourist trade is Antiquities Tourism, which continues to see increases in numbers and has very good prospects in the years ahead. This follows the agreement entered into in 2005 by Sweden and Tanzania

The expenditure composition of Tanzania’s GDP (see Table 1) reveals a changed outlook, with investment from both the public and private sectors beginning to grow significantly – a factor that is expected to underpin faster growth in 2007 and 2008. The share of gross capital formation in GDP has grown in recent years, mainly because of rising public investment. Both public and private investment are expected to expand rapidly in the next few years as government capital expenditure increases and anticipated increases in foreign inflows materialise. Nonetheless, it is incumbent on the government to increase momentum in enhancing the business environment in order to maintain the confidence of private investors in the economy.

Table 1 - Demand Composition 1998

2005

(percentage of GDP) 2006(e)

2007(p)

2008(p)

505 Percentage of GDP (current prices)

Percentage changes, volume

Gross capital formation Public Private

16.2 3.3 12.9

22.2 9.1 13.1

8.8 7.0 10.0

10.4 8.0 12.0

15.0 15.0 15.0

Consumption Public Private

98.5 7.8 90.7

85.3 7.3 78.0

3.9 3.9 4.0

6.3 3.9 6.4

5.4 3.9 5.5

-14.7 13.4 -28.1

-7.5 22.9 -30.4

5.7 4.0

3.0 8.9

3.0 8.3

External sector Exports Imports

Source: Ministry of Planning, Economy and Empowerment data, estimates (e) and (p) projections based on authors’ calculations. http://dx.doi.org/10.1787/517643747584

Macroeconomic Policies Tanzania has been implementing an IMF Poverty Reduction and Growth Facility (PRGF-III) that came to an end in December 2006 after being extended from August 2006. In what is considered a graduation from PRGF programmes, the government intends to adopt a Policy Support Instrument (PSI) programme with the Fund, under which Tanzania will continue with efforts to maintain macroeconomic stability and implement structural reforms aimed at improving the financial © AfDB/OECD 2007

sector and the business environment to promote investment. PSI programmes were designed by the IMF for countries that have been pursuing reforms with the Fund’s support but which may no longer need its financial assistance, given their good record in economic reform, yet would still benefit considerably from its advice. When Tanzania adopts the PSI, it will be the third country in Africa after Nigeria and Uganda to do so. African Economic Outlook

Tanzania

Fiscal Policy The key challenge to Tanzania’s fiscal policies has remained under-performance in domestic resource mobilisation, resulting from weak tax administration, which leaves many loopholes for tax evasion, as well as the non-integration of the informal sector into the tax base. In addition, domestic revenue mobilisation suffers from numerous tax exemptions; for example, it is estimated that 20 per cent of potential customs duties are exempted. The government’s medium-term fiscal strategy addresses these problems and is making some progress. In addition to ongoing reforms in tax and customs administration, the government is implementing measures to improve expenditure planning and management capacity. The government’s goals focus on fiscal prudence, compliance with public procurement regulations and intensification of the fight against corruption.

506

Further improvements in expenditure controls are envisioned at the local government level to reduce expenditure arrears and ensure that funds provided to Local Government Authorities (LGAs) are used for the intended purposes. The government is also working to improve expenditure management, by addressing the problem of large idle government balances in commercial bank accounts that should be spent, and to strengthen its expenditure tracking and monitoring. The government has also strengthened the link between

budgetary resource allocation and the National Strategy for Growth and Reduction of Poverty (NSGRP) priorities through the rolling out of the Strategic Budget Allocation System (SBAS) to local government authorities in addition to government ministries, departments and agencies that were already using the system. The 2005/06 budget suffered from unplanned additional costs associated with transfers to the Tanzania Electric Supply Company (TANESCO) to deal with the power crisis, procurement and distribution of food aid, and higher than anticipated pension outlays, following the start of payments of pensions to former employees of the defunct East African Community (EAC). The budget deficit in 2005/06 was mitigated by improved revenue collections resulting from the ongoing tax and customs administration reforms being implemented by the Tanzania Revenue Authority. In 2005/06, tax revenue increased to 12.7 per cent of GDP from 12.4 per cent the year before, in spite of the temporary waivers of import duty on cereals and VAT on petroleum imports to, respectively, avert the food supply crisis and curb the rapid increases in the domestic price of fuel. Tax reforms are expected to yield further improvements in 2006/07. The expenditure performance in 2005/06 reflected substantial restraint in the face of the unexpected events

Table 2 - Public Finances

(percentage of GDP)

1997/98

2002/03

2003/04

2004/05

2005/06 2006/07(e) 2007/08(p)

Total Revenue and grantsa Tax revenue Grants

14.5 11.4 2.3

18.3 11.0 6.2

18.7 11.7 6.1

21.3 12.4 7.6

20.4 12.7 6.5

22.0 13.0 7.8

22.1 13.1 7.8

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

16.7 12.2 7.5 5.5 4.7 3.6

19.9 14.9 13.9 4.0 1.0 5.0

22.2 15.8 14.9 4.0 0.9 6.4

25.9 17.0 15.9 4.2 1.1 8.8

26.5 18.5 17.1 4.3 1.4 7.9

26.4 17.6 16.3 4.0 1.2 8.9

26.3 16.9 16.1 3.9 0.8 9.4

Primary balance Overall balance

2.6 -2.1

-0.6 -1.6

-2.5 -3.5

-3.5 -4.6

-4.6 -6.0

-3.2 -4.5

-3.4 -4.2

a. Only major items are reported. Source: Ministry of Planning, Economy and Empowerment data, estimates (e) and (p) projections based on authors calculations. http://dx.doi.org/10.1787/076138050382

African Economic Outlook

© AfDB/OECD 2007

Tanzania

described above. Government expenditure rose to 26.5 per cent of GDP but capital expenditure fell, as a result in part of delays in disbursements of pledged foreign assistance to the government. The government plans to reverse the declining development expenditure with sharp increases in infrastructure spending in 2007 and 2008 in the energy sector, to diversify power generation sources, and in the transport and communications and water sectors. However, reliance on donor funds for these investments continues to pose the main challenge for their attainment.

rising only marginally from 15.1 per cent in September 2005 to 15.4 per cent in June 2006.

The overall fiscal deficit increased to an estimated 6 per cent in 2005/06, but is projected to decline to around 4 per cent of GDP in 2006/07 and 2007/08 (see Table 2) thanks to expected increases in foreign aid and relief arising from the Multilateral Debt Relief Initiative (MDRI).

Following the adoption of East Africa Community (EAC) Customs Union (CU) in January 2005, a timetable was approved in April 2006 for launching a common market by 2010. Tanzania and the other EAC partner states thus remain committed to liberalisation to enhance competitiveness, by, among other things, strengthening mutual trade integration. Implementation of various reforms in the context of EAC-CU regulations is scheduled for review in 2010. At the moment the government of Tanzania is working on lowering existing non-tariff barriers within the EAC-CU relating to standardisation, quality assurance, and metrology.

Monetary Policy Price stability remains the central objective of the Bank of Tanzania (BoT). This objective was challenged in 2006 after a considerable build up of liquidity arising mainly from an expansionary fiscal stance related to election expenditure and from relief initiatives that were supported by large inflows of official development assistance following the protracted drought. In 2006 a tighter monetary stance from the BoT, coupled with high demand for credit in the economy, drove up interest rates on the government’s treasury bills. The rate on the 91-day Treasury bill rose from 12.5 per cent in September 2005 to 13.4 per cent in June 2006. However, commercial bank rates remained reasonably stable, with the average commercial bank lending rate

Drought-induced food price increases in 2006 helped push up the annual average inflation rate to 7 per cent from about 4 per cent in 2005. In the expectation of better harvests and continued monetary restraint, the annual rate of inflation is projected to fall to about 6 per cent in 2007 and 2008. External Position

Exports of goods and services have continued to exhibit robust performance since 2002 as a result mainly of the increase in export volumes of coffee, tobacco and cotton. Similarly, there has been an increase in the price of almost all traditional exports in the world market except for tea and cashew nuts. The share of traditional exports (coffee, cotton, tea, cashew nuts, cloves, sisal, and tobacco) in total merchandise exports rose to 21.2 per cent in 2006 from 20 per cent in 2005. In 2006 traditional and non-traditional exports grew

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-9.5 7.0 16.5 -5.4 -1.3 5.1

-7.0 11.8 18.8 2.2 -1.6 5.4

-8.9 12.9 21.8 1.4 -1.6 5.1

-10.5 13.3 23.9 0.5 -1.6 4.1

-10.6 15.1 25.8 3.2 -1.4 3.6

-11.3 14.5 25.7 2.6 -0.5 4.6

-12.8 13.5 26.3 2.2 -0.3 4.5

Current account balance

-11.0

-1.0

-3.9

-7.6

-5.2

-4.5

-6.4

Source: Domestic authorities data, estimates (e) and (p) projections based on authors calculations. http://dx.doi.org/10.1787/530410221802

© AfDB/OECD 2007

African Economic Outlook

507

Tanzania

508

by about 19 per cent and 12 per cent respectively. In respect of non-traditional exports, manufacturing exports showed a significant increase, although gold continued to contribute the largest share in total nontraditional exports. Traditional exports continued to benefit from an easing of structural constraints, including improvements in roads, access to inputs and extension services, as well as favourable commodity prices. Traditional exports have also gained from both price and volume increases, with increase in volumes consequent on availability and timely usage of agricultural inputs.

In 2006 the exchange rate of the shilling against the US dollar depreciated by about 11.3 per cent. While the Central Bank continued to allow the exchange rate to be market-determined, it nevertheless had to intervene to smooth excessive fluctuations in the exchange rate caused by fluctuations of foreign exchange inflows and outflows. Gross international reserves fell to the equivalent to 4.4 months of imports by the end of June 2006 from 7 months in June 2005 even though in nominal terms the value of gross international reserves remained broadly unchanged at about $2 billion.

Imports of goods and services in all categories have also continued to grow. Oil and food imports have risen rapidly since 2005 because of higher world prices and growing demand for food imports to meet domestic demand. Because imports have grown faster than exports and current transfers have been lower than projected, the current account balance remains precarious, with its pressure contributing to a continued depreciation of the shilling.

As a result of the considerable debt relief extended to Tanzania during 2005/06, the external debt sustainability indicators continued to improve. As at the end of December 2005, Tanzania’s total external debt amounted to $7.93 billion, which represented a decrease of 1.1 per cent over the level at the preceding year. The decrease was largely the result of debt relief accrued under the Heavily Indebted Poor Countries (HIPC) arrangement. At the end of 2005, Tanzania had

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

120

100

80

60

40

20

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/873733043286

African Economic Outlook

© AfDB/OECD 2007

Tanzania

received debt relief amounting to $406.8 million. Tanzania will continue to benefit from the MDRI under which it is expected to get debt relief amounting to $4.83 billion, of which $336 million owed to the IMF was cancelled in December 2005. The International Development Association (IDA) and the African Development Fund (AFD) have also approved significant MDRI debt relief to Tanzania. The Government continues negotiations with remaining bilateral creditors under the Paris Club, namely Brazil and Japanese Agencies, as well as Non-Paris Club Creditors.

A large part of activities in the private sector in Tanzania operates informally. A 2005 diagnostic report of the Property and Business Formalisation Program in Tanzania (PBFT), estimated that as much as 98 per cent of businesses are still classified as informal enterprises. Factors that hinder formalisation of businesses include cumbersome regulatory and administrative procedures that contribute to the high cost of doing business. A new forum for policy dialogue between the private sector and the government has been established, which is expected to facilitate action by government in addressing impediments to private sector development.

Structural Issues

In 2005 the government established a Regulations Unit, charged with the responsibility of managing and supervising implementation of the Business Environment Strengthening for Tanzania (BEST) programme. The BEST programme aims to reduce the cost of doing business in the country. It seeks to: eradicate administrative and procedural barriers; improve the quality of public services, including resolution of commercial disputes; and enhance the capacity of the private sector in advocating a better business environment. The programme has facilitated the preparation of the Business Activity Registration Bill and land mortgage regulations to facilitate the use of land as security for accessing finance. In 2005 the government also completed preparation of the Private Sector Competitiveness Project, the objective of which is to enhance the capacity of the private sector to respond to viable opportunities in local and foreign markets, improve access to finance, and strengthen the business environment.

Recent Developments While Tanzania has been able to maintain progress towards macroeconomic stability, the country is still faced with the daunting challenge of raising the incomes of its people and reducing poverty. Considerable challenges remain in overcoming structural constraints to development, including improvement of infrastructure services in the energy, water, transport and communication sectors as well as in fostering local entrepreneurial capacity through improvement of the regulatory environment. Tanzania fares poorly on measures of the business climate, such as the World Bank’s Doing Business survey in which it ranks 142nd out of 175 countries. The government has signalled its determination to tackle some of these structural constraints. In 2006, the government focused its efforts mainly on the energy crisis caused by the drought-induced decline in power generation capacity. The major undertaking in this regard involves the Power Sector Reform Strategy with its financial recovery programme for the national energy utility company TANESCO. In the transport sector, the government finalised in December 2006 the Medium-Term Transportation Infrastructure Investment Plan. The government is also implementing various support initiatives for economic empowerment of local entrepreneurs and for improving the business environment for private-sector activity. © AfDB/OECD 2007

Privatisation of public enterprises continues, with completion scheduled for December 2007. The Public Sector Reform Commission (PSRC), which is responsible for managing the privatisation exercise, is to complete the privatisation of the remaining 36 public enterprises over the next year. Some of the major public enterprises still to be privatised include the National Insurance Corporation, the Tanzania Zambia Railways Authority (TAZARA), commercial units of Tanzania Ports Authority (excluding the container terminal that has already been leased), and the power utility African Economic Outlook

509

Tanzania

TANESCO. In 2006, 11 more enterprises were privatised and 126 non-core assets sold, for a total of 322 enterprises and 647 non-core assets divested as at end December 2006. The government is using the privatisation programme to facilitate development of local capital markets by selling to the public, through the stock exchange, government shares in previously divested enterprises.

510

Although Tanzania’s financial sector is healthy, it remains small in relation to the requirements of the growing economy. The financial sector is dominated by the banking sector with most branches concentrated in the capital city, Dar es Salaam. Consequently the authorities are implementing a second generation Financial Sector Reform Programme (FSRP) to strengthen the contribution of the financial sector to investment and economic growth. In 2006, the Bank of Tanzania Act and the Banking and Financial Institutions Act (BFIA) were passed. These acts reinforce central bank autonomy and accountability and strengthen the legal framework of the financial sector. Access to Drinking Water and Sanitation Tanzania is endowed with adequate water resources for industrial and domestic use, including power generation. It is estimated that about 5.5 million of the country’s 94 million hectares are covered with fresh water resources, including three Great Lakes that border the country and inland lakes. The three lakes that border the country and whose waters are shared with neighbouring countries are Lake Victoria (the second largest freshwater lake in the world), Lake Tanganyika (the second deepest lake in the world), and Lake Nyasa. Inland lakes include Rukwa, Eyasi and Manyara. There are also major rivers flowing into the lakes and the Indian Ocean and underground water is another important source of water in both rural and urban settlements. While water resources are deemed abundant, there is a great variation in water availability throughout the country, which can be explained by differences in topography, rainfall pattern and climate. About one third of Tanzania receives less than 800 millimetres of rainfall per annum and is considered to be arid or semi-arid. African Economic Outlook

Further, Tanzania experiences a long dry season normally extending from June to October, which tends to affect river flows and since 2001 its severity has led to a drop in levels in water reserves. Environmental degradation and pollution of water in catchments areas and limited investment in the collection and distribution of water to areas far from water sources also explain the variability in coverage of supply of water. Current estimates show that the amount of water resources available for human use in the country is 89 cubic kilometres equivalent to 2 700 m3 a head per year, well above the 1 700 m3 requirement per person deemed to be adequate. Nonetheless, there is the possibility of future water shortages in Tanzania. The population is projected to reach 59.8 million by 2025, which implies that the amount of water available per person will decline by about 45 per cent to 1 500 m3 a head, below the 1 700 m3 threshold. Climate change has meant that Tanzania has been receiving inadequate rainfall since 2001, which in turn has led to reductions of water levels in various catchments. Inadequacy of rainfall also meant that not enough water could be harnessed in the major water reservoirs for electricity generation thus creating the twin problems of water and energy shortages in the country. About 43 per cent of water resources in Tanzania are shared with other countries. In the case of the Great Lakes, Lake Victoria is shared with Kenya and Uganda; Lake Tanganyika is shared with Burundi, Zambia and the Democratic Republic of Congo; and Lake Nyasa is shared with Malawi and Mozambique. Water uses are diverse, including domestic, industry, agriculture and livestock, wildlife and hydropower supply. In Tanzania it is estimated that 80 per cent of installed electricity generation capacity relies on hydropower, something that tends to fuel competition and conflicts of interests among water users. A strong mechanism for water resources management is thus indispensable if conflicts among users within and between countries sharing the waters are to be avoided and it is to be ensured that the resources are used sustainably for human development. Conflicts are also likely where individual countries’ water use plans are not co-ordinated for trans-boundary waters. © AfDB/OECD 2007

Tanzania

In August 2003 the Tanzania parliament ratified a protocol providing guidelines for the establishment of institutions to manage common water resources in South African Development Community countries. Tanzania’s water ministry is collaborating with countries sharing river Zambezi waters in establishing a River Zambezi Commission that will manage sustainable use of the basin’s waters. Tanzania is also establishing a commission in collaboration with Mozambique’s water ministry for overseeing sustainable use of the Ruvuma Basin waters. During 2005/06 Tanzania and other countries sharing water from the Nile continued to manage use of water through the Nile Basin Initiative (NBI) which is an interim institution established for this purpose. The process of establishing the permanent Nile Basin Commission is in its final stages, including the required assessment of water use needs in the country. In collaboration with Kenya and Uganda, Tanzania continued implementation of the first phase of the Lake Victoria Environmental Conservation Project. The project is one of the collaborative initiatives of the East African Community intended to assess the extent of pollution in lake waters and their sources so that collective measures can be implemented to address the problem. Development of the water sector is governed by the Water Sector Policy (WSP), the most recent of which was issued in 2002. Although the sector is liberalised, the Ministry of Water retains responsibility for development, review and further improvement of water and sanitation policy; and for facilitating, co-ordinating and monitoring development of water and sanitation services to the public. It is estimated that access to water in rural areas in 2005/06 improved to 53.7 per cent, up from 49 per cent in 2000 and 53.5 per cent in 2004, while urban water supply coverage is estimated to have gone up to 74 per cent in 2005/06 from 68 per cent in December 2000 and 73 per cent in June 2004. In respect of the coverage of sewerage services, the current estimated rate is 17 per cent in urban areas, unchanged since 2003, after rising from 10 per cent in 2000. At the same time, pollution control and solid waste management systems are not yet adequately developed to protect © AfDB/OECD 2007

public health, well-being and the environment. As a result, Tanzanians suffer from water-borne diseases such as cholera and from other diseases such as bilharzia, malaria, scabies and trachoma, which are prevalent in areas with poor sanitation facilities. The government’s objectives under the NSGRP for water are to raise the level of provision to 80 per cent of the population in rural areas and to 90 per cent in urban areas by 2010. In respect of the provision of sanitation services, the objective is to increase the proportion of the urban population with improved sewerage services to 30 per cent from the current 17 per cent and to increase coverage of people with access to basic sanitation countrywide to 95 per cent by 2010. The growth rate of provision of water and sewerage services is, however, still very low at about 1 per cent in urban areas and 0.2 per cent in rural areas during 2005/06. Considerable challenges therefore remain for the government in expanding water and sanitation services in rural and urban areas. 511 To address the challenges involved in increasing access to water and sanitation services, the government has been implementing a number of initiatives. The major focus of these has been to increase access to clean and safe domestic water, especially for the rural population, and to protect water catchment areas from pollution and degradation. The initiatives include capacity building to manage use of water in the water basins; involving communities in managing and developing water sources; collaboration with local government authorities in managing water use and development through formulation and enforcement of by-laws; establishment of water projects and undertaking assessment of existing water sources to establish the extent of pollution and/or degradation taking place in water catchment areas.

Political Context and Human Resources Development With three peaceful multiparty elections since 1995, Tanzania remains a good example of a deepening democratic political entity providing peace and political African Economic Outlook

Tanzania

stability. To ensure that this peace and tranquillity is preserved, the government undertook additional measures to strengthen public security and safety during 2006 through the establishment of a new Ministry for Public Security. Furthermore, measures to enhance accountability and fight corruption in the public sector continued to be implemented by the Prevention of Corruption Bureau (PCB) and other government institutions.

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In 2006 the government launched the second National Anti-Corruption Strategy Action Plan (NACSAP II) that incorporates interventions at both the central and local government levels. A new anticorruption bill that integrates all anti-corruption international agreements ratified by Tanzania was expected to be submitted to the parliament in February 2007; this bill also strengthens the capacity and effectiveness of government in this area, particularly with respect to the prosecution powers of the PCB. With the support of the World Bank and other donors, the government is also intensifying its efforts to implement its comprehensive Legal Sector Reform Programme. In addition the government plans to build the capacity of oversight institutions as well as of the media and civil society as part of its efforts to increase their effectiveness in ensuring accountability and thereby discouraging corruption. This initiative will be implemented through a programme supported by the Millennium Challenge Corporation of the US Government. In July 2006, an anti-money laundering bill was submitted to Parliament for a first reading. Among the key issues in this Bill is a proposal for the establishment of a Financial Intelligence Unit (FIU) to monitor and report questionable financial transactions to the relevant authorities. Other actions against corruption pursued by the government include strengthening the procurement function in public institutions. As part of its initiative to improve the quality of life and well-being through empowerment, the government continued to implement policies and programmes for the enhancement of women’s participation in economic and political life during 2006. Following amendment of the National Constitution and electoral laws to increase women’s representation in leadership positions, African Economic Outlook

the number of women in Parliament increased further to 29.5 per cent in 2006, up from 21.7 per cent in 2005. Amended electoral law requires a 30 per cent representation of women in parliament. Currently, 97 of the 319 parliamentarians are women, 22.7 per cent (22 parliamentarians) of whom were elected and the other 78 per cent (75 parliamentarians) were appointed for special seats. The number of women ministers and deputy ministers has also increased by 8.6 per cent compared with the previous cabinet. Currently, 15 of the 59 cabinet members are women. The female adult literacy rate as a percentage of the male rate continued to improve, rising to 80.2 per cent in 2006, up from 80 per cent since 2003. With further improvement in women’s participation in economic and political activities, the 2006 United Nations Development Programme (UNDP) Gender Empowerment Index (GEM) for Tanzania in the Human Development Report (HDR) is estimated at 0.597, which puts Tanzania at 36th out of 75 countries, compared to its 42nd position out of 80 countries in HDR 2005. Further improvement in mainstreaming gender into development is also visible through the Gender Development Index (GDI) ranking where Tanzania occupies the 80th position in 2006 compared to its 127th position out of 177 countries in HDR 2005. Despite these gains, Tanzania remains one of the poorest countries in sub-Saharan Africa. The government’s first review of poverty in 2006 notes that progress in reducing income and non-income poverty is very slow, especially in areas outside Dar es Salaam. This is explained in part by the slow recovery from the adverse effects of weather shocks. Tanzania ranked 64th in the UNDP’s Human Poverty Index (HPI-1) of 102 developing countries in 2004. The HPI-1 focuses on the proportion of people below a threshold level of human development—life expectancy, education, and income. With respect to health indicators, the most recent Demographic and Health Survey (DHS, 2004), shows that Tanzania achieved a decline in mortality rates for both infants and children under five since the last survey in 1999, in comparison to the stagnation in the © AfDB/OECD 2007

Tanzania

same indicators experienced during the 1990s. The DHS (2004) estimates that average infant mortality rate over 2000-04 was about 68 per 1000 live births, a considerable improvement from the rate of 99 deaths per 1000 live births between 1994 and 1999. The DHS also reveals a considerable decline in the under five mortality from 156 per 1000 live births in the period 1995-99 to 112 per 1000 live births in the period 2000-04. During 2006 the government continued to strengthen programmes to control and prevent malaria, tuberculosis and leprosy, HIV and AIDS, and to improve reproductive and child health services. Nonetheless, a significant proportion of child deaths in the country continued to be the consequence of preventable diseases, including malaria, pneumonia, diarrhoea, malnutrition, complications arising from low birth weight and HIV/AIDS. Furthermore, improvement in health outcomes continued to be limited by inadequate financing, infrastructure and accessibility of health facilities, and by human capacity and logistical weaknesses. HIV/AIDS continues to pose a grave threat to public health. Available epidemiological surveillance data suggest that there were 188 400 new cases of HIV infection in 2005 amongst which 97 000 were women and 91 000 were men, up from 188 100 new cases in 2004. HIV infection rates are estimated at 12 per cent in urban areas and 5.8 per cent in rural areas in 2005, but with considerable variations among individual regions. Infection rates among men and women are estimated to have remained more or less unchanged at around 7.7 per cent and 6.3 per cent respectively, with an overall average of 7 per cent for the country. Partly as a result, life expectancy at birth is only 47 years. The Tanzanian government continues with implementation of the National Multi-Sectoral Strategic Framework (NMSF), which plans to address HIV/AIDS in a comprehensive manner so as to reduce the prevalence rate and increase in new infections. In 2005 the government prepared guidelines on HIV/AIDS control in the public sector, providing clear guidelines on procedures for care and support to people living with HIV/AIDS and also improving on education on © AfDB/OECD 2007

HIV/AIDS. Plans are underway to increase the number of centres providing anti-retroviral drugs to HIV/AIDS patients from the existing 96 centres as of December 2005, as well as to increase the registration of people with HIV/AIDS into the National Care and Treatment Plan to increase their access to free drugs. In the education sector, the government has continued with implementation of various programmes to boost education at all levels. Based on the Ministry of Education and Culture’s (MoEC’s) Basic Education Statistics, the gross enrolment ratio (GER) for primary education increased further to 109.9 per cent in 2005 from 106.3 per cent in 2004 and 105.3 per cent during 2003. Similarly, the net enrolment ratio (NER) in primary schools increased to 94.8 per cent in 2005 from to 90.5 per cent in 2004 and 89 per cent in 2003. In 2006 GER and NER rose again, to 112.7 per cent and 96.1 per cent respectively. The gap in primary school enrolment between boys and girls, however, increased slightly during 2005, with girls accounting for a 48.9 per cent share of total enrolment during the year, down from 49.9 per cent in 2004. It is expected that the gender enrolment gap will be reduced and eventually disappear with the implementation of initiatives to increase female access to education. Efforts to recruit and train more teachers made possible an improvement in the teacher pupil ratio to 1:56 in 2005 from 1:58 in 2004. Following the start of the Secondary Education Development Programme (SEDP), the number of government secondary schools in the country increased by about 45 per cent in 2005 to 1 202 secondary schools. The number of private secondary schools also went up by 18.6 per cent to 543. In effect these initiatives facilitated an improvement in the transition rate from primary to secondary schools to around 49 per cent, up from an average of about one third in 2003 and 2004.

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.

Tunisia

Tunis

key figures • • • • •

Land area, thousands of km2 164 Population, thousands (2006) 10 210 GDP per capita, $ PPP valuation (2006) 8 844 Life expectancy (2006) 73.9 Illiteracy rate (2006) 25.7

Tunisia

I

N JANUARY 2008, TUNISIA WILL EXPERIENCE a major

event in the form of the free entry of European industrial goods on to its home market. Since the signature of its association agreement with the European Union (EU) in 1995, Tunisia has been preparing itself to meet international competition and has been trying to preserve its competitiveness through performance upgrade programmes and structural reforms. The stakes are high. For Tunisia, it is a question of integrating itself into the global economy and attracting more foreign capital so as to maintain market shares and preserve jobs. In 2005, unemployment affected 14 per cent of the active population. The challenges the country will have to meet are substantial. Although the principal macroeconomic indicators indicate good performances, Tunisia must significantly improve its business and

investment climate, and economic and political governance and ensure the solidity of its banking and financial system. Structural reform and economic and political liberalisation are Growth prospects are good advancing only slowly. The but massive skilled-youth country has fallen three unemployment – a mismatch places in the World Bank’s between education Doing Business Index, and the needs of the labour from 77th position in 2005 market – is a worry. to 80th in 2006. From an economic development point of view, growth prospects remain favourable. The growth rate of real gross domestic product (GDP) was 4.2 per cent in 2005 and should rise to 5.8 per cent in 2006 and 2007. Expansion is due essentially to increased 517

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Tunisia - GDP Per Capita (PPP in US $)

■ North Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Tunisia - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

12000

7

6

10000

5 8000 4 6000 3 4000 2

2000

1

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and local authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/644730458417

© AfDB/OECD 2007

African Economic Outlook

Tunisia

agricultural production, the recovery of non-textile manufacturing industry and, above all, to the new dynamism of the commercial services sector and telecommunications in particular. The expectation of good performances to come arises from higher domestic demand resulting from sustained private consumption and a recovery in investment in production. Despite this strong performance, inflation increased in 2006. The consumer price index rose by 2 per cent in 2005 but 4.5 per cent in 2006. This rise was essentially due to the increase in oil prices but also to the pressure of domestic demand and the gradual depreciation of the exchange rate, which resulted in inflation being imported. Tunisia must also cope with major public finance constraints, since two thirds of its budget is devoted to paying salaries and reimbursing the public debt.

518

Tunisia also began some years ago a programme of gradual liberalisation of its capital account and is moving towards a regime of total convertibility of the national currency. These reforms are hardly making any progress, however, and they have little chance of being realised if they are not accompanied by modernisation and development of the monetary and exchange markets and establishment of new inflation targets.

Recent Economic Developments Real GDP growth was 4.2 per cent in 2005 and rose to 5.8 per cent in 2006 thanks to the return to normal levels of agricultural production and

confirmation of the solid performance of services and industrial production. In the XIth plan, covering the 2007-11 period, priority has been given to increasing economic growth to 6.5 per cent per year and creating jobs. The strategic sectors are new information and communication technologies, the engineering and electrical industries and high added value industries such as chemicals, bio-chemicals and agro-industry. The government also intends to support conversion in the textile sector from sub-contracting to joint-contracting and to increase agricultural production in such areas as olive oil and bioculture which have not yet reached their EU quota levels. The poorer performance of the economy in 2005 was due to negative growth in two sectors making intensive use of non-qualified labour – agriculture and textiles, clothing and leather. In 2005, agricultural activity was hit by inadequate rainfall and experienced negative growth of 5.4 per cent. The fall in agricultural production was particularly apparent in cereals, production, down by 10.6 per cent, and olive oil, production of which fell 53.6 per cent - from 280 000 tonnes in 2004 to 130 000 tonnes in 2005. Even so, excluding agriculture and fishing, economic growth remained virtually stable in 2005 at 5.6 per cent, compared with 5.5 per cent in the preceding year. In 2006, moreover, growth in agricultural production returned to a more usual level of 6.6 per cent, thanks to better climatic conditions and higher EU quotas for olive oil, potatoes, tomatoes and figs. Generally, however, Tunisia does not attain its

Figure 2 - GDP by Sector in 2005

Agriculture, forestry and fisheries

Other services 11.4% Government services

(percentage)

13.1%

Mining 5.1% 1.5%

14.9%

19.7% Transport and communications

Energy

Manufacturing

11.2% 17.3%

5.9% Construction

Trade, hotels and restaurants

Source: Authors’ estimates based on Institut National des Statistiques data. http://dx.doi.org/10.1787/362443630743

African Economic Outlook

© AfDB/OECD 2007

Tunisia

quotas for agricultural products. The first reason for this is that there is no real agricultural policy and that the bulk of production is consumed domestically. The second reason is the low level of production, agricultural yields and quality, particularly quality control. Tunisia is also a major importer of cereals, particularly durum wheat for making bread and couscous which is supplied by the United States, Canada and the EU. The fishing sector is concentrated in the Sfax area around the Gulf of Gabès. It employs 25 000 people. In 2005, 108 000 tonnes of fish were caught, compared with 109 800 tonnes in 2004. Coastal fishing catches were stable at about 27 000 tonnes. Tunisia is trying to restrict excessive coastal fishing through a system of satellite surveillance. It also wants to develop activity further towards the northern part of the country and on the high seas and is in the process of modernising its refrigeration capacities so as to improve access to the European market. Fishing is the second biggest source of foreign currency after olive oil. For some years, the mining sector has been losing momentum under the effect of declining reserves and volatile international prices. It accounts for 4 per cent of GDP but activity declined by 2 per cent in 2005. It should stabilise at 2.4 per cent in 2006. The Compagnie des Phosphates de Gafsa (CPG) operates seven open air quarries and an underground mine to produce 8 million tonnes of phosphates annually, a total which puts Tunisia in fifth place among producer countries. In the energy field, real growth was 24.7 per cent in 2006, compared to 46.5 per cent in 2005. Annual oil and gas production was 3.3 million tonnes of oil equivalent. Reserves are estimated at 42 billion tonnes. On average, Tunisia exports 2.5 million tonnes of crude oil annually and imports more than 1 million tonnes. It covers only 46 per cent of its needs but exploration of other potential reserves is continuing. Several offshore exploration projects are in progress and many multinationals such as BG (British Gas) Tunisia and Shell have made major investments in this field. A law passed in November 2006 has enabled the national company ETAP to obtain operator status, allowing it to carry out exploration work in Tunisia and © AfDB/OECD 2007

abroad. In June 2005, a new field with an output of close to 19 500 barrels per day or 8 per cent of total national production was brought on stream. Although definitive figures have not been released, Tunisia should have seen significant increase in its oil production in 2006. In March 2006, moreover, tenders were invited for the construction and operation of a second crude oil refinery. This refinery, which will have a capacity of at least 120 000 barrels daily, is to be managed under a 30-year concession. In the natural gas field, production has also increased significantly following the investment by BG in 1996 of $600 million in production around the Gulf of Gabès. Proven natural gas reserves were estimated at 60 million tonnes of oil equivalent in 2002 but exploration is continuing. In 2005, production covered 64 per cent of domestic consumption. Imports matched exports at around 566 million cubic metres. The trans-Mediterranean pipeline, which transports gas from Algeria to Italy via Tunisia, has enabled the country to increase imports and consumption in line with the national energy strategy. In 2005, the Société Tunisienne d’Electricité et de Gaz (STEG) connected an additional 45 000 households to the national distribution network. In 2006, the manufacturing sector was in second place after services and represented 19 per cent of GDP. It registered a growth rate of 7 per cent thanks to the good performance of the engineering and electrical industries (up 13.3 per cent), and food processing (up 13.5 per cent). The textile, clothing and leather sector, on the other hand, fell victim to unfavourable developments at global level with the end of the MultiFibre Agreement (MFA), the conclusion of numerous partnership agreements between the European Union and central and eastern European countries and China’s membership of the World Trade Organisation (WTO). The sector contracted by 3 per cent in 2005 and by 2.5 per cent in 2006. With the loss of the tariff protection which enabled it to export 80 per cent of its products to Europe, Tunisia has had to cope with the end of quotas and stiff competition from Chinese products. In the years to come, the sector’s growth will also be affected by keen internal competition resulting from the free trade agreement between Tunisia and the European Union. Before the end of the MFA the textile African Economic Outlook

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Tunisia

Table 1 - Demand Composition 1998

2005

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage of GDP (current prices)

Percentage changes, volume

Gross capital formation Public Private

26.9 6.2 20.7

23.4 7.4 16.0

1.7 2.1 1.4

7.3 7.0 7.5

9.0 7.0 10.0

Consumption Public Private

76.4 15.6 60.8

79.3 15.5 63.8

3.0 0.9 3.4

5.7 4.3 6.0

6.3 5.0 6.6

-3.3 43.0 -46.4

-2.6 48.0 -50.6

1.5 1.0

5.4 5.0

4.2 6.7

External sector Exports Imports

Source: Institut National des Statistiques data ; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/814456541301

520

sector represented about 50 per cent of Tunisian exports, revenues of €3 billion per year, 250 000 jobs and 2 000 companies. According to the textile technical centre Cettex, about 6 000 jobs disappeared between the second half of 2005 and the first half of 2006. This figure was nevertheless lower than the 100 000 job losses forecast by the World Bank. Non-manufacturing industries nevertheless continued to progress, thanks to growth in the building and civil engineering sector where growth was 8.7 per cent in 2006. Services contributed 54.8 per cent to current GDP in 2006 compared to 55.2 per cent in 2005. These percentages are forecast to grow to 60.5 per cent in 2011 and 63.9 per cent in 2016. The tertiary sector is the principal jobs reservoir. The growth rate was 10.7 per cent in 2005 and was forecast to reach 9.7 per cent in 2006. Within this sector, the share of telecommunications, which represented a relatively low 5.3 per cent share of GDP in 2006, is the most dynamic component. It showed growth of 27 per cent in 2005 and 21 per cent in 2006. As the engine of the Tunisian economy, tourism represented 6.5 per cent of GDP in 2006 and registered growth of 7.6 per cent, compared to 10.4 per cent in 2005. In 2005, a record 6.4 million visitors and 36.3 million overnight stays were recorded, lifting tourism revenues to a total of 2.6 billion. These revenues are African Economic Outlook

nevertheless modest compared to those of such Mediterranean competitors as Turkey, Morocco and Egypt. To improve the situation, Tunisia is actively diversifying the tourism products and markets it offers. With 1 600 kilometres of coastline, Tunisia has sought to modernise its ports to benefit from the boom in cruise tourism in the Mediterranean. A terminal dedicated to cruise tourism is under construction in the port of La Goulette. Tunisia is also going into ecotourism. It is counting on the diversity and the richness of its landscapes and its archaeological sites to develop this new form of tourism which combines the discovery of the country’s natural beauty with the development of cultural ties and respect for the environment. The development strategy adopted by Tunisia is based on the use of exports and domestic demand as engines of growth. Domestic demand makes a major contribution to nominal GDP growth. In 2005, it accounted for 4.4 per cent of 7.2 per cent total growth. This growth is principally attributable to consumption and, to a lesser degree, investment, which is estimated to have made a more modest 1.1 per cent contribution to growth. Public consumption is relatively high. It represented 15.5 per cent of GDP in 2005. As for gross capital formation, it grew at a lower rate than that of GDP, to give an investment level of 23.4 per cent. In 2007 and 2008, growth levels should increase and that of private investment in particular. © AfDB/OECD 2007

Tunisia

Macroeconomic Policies Fiscal Policy The budget deficit is estimated at 3 per cent of GDP in 2006 – 0.4 per cent more than in 2005. It should stay at 3 per cent in 2007 and is forecast to increase to 3.3 per cent in 2008. The increase in the 2006 deficit is principally due to the impact on the budget of the increase in oil prices, which resulted in additional subsidies representing 0.7 per cent of GDP. To limit the effect of consumer subsidies on oil products, the government increased the price of oil at the pump and encouraged energy savings in all sectors. Between February 2005 and July 2006, the price of oil products increased six times to give an overall increase of close to 30 per cent. Oil product prices should be completely deregulated in the years to come. Fiscal revenues are under pressure from the increasing share of revenues represented by export sectors enjoying a favourable tax regime, the fall in customs revenues caused by free trade agreements and the privatisation of profit-making public sector companies. All these factors pose challenges to be met. The share of tax revenues in GDP is set to fall regularly - from 25 per cent in 2005 to 24.2 per cent in 2006, 24 per cent in 2007 and 23.9 per cent in 2008. Tunisia’s commitment to trade liberalisation is also posing a

number of problems related to the capacity of the economy to find alternative revenue sources to make up for the fall in customs duties. Moreover, offshore companies, which focus partially or wholly on exports, benefit from a wide range of advantages which weigh on the state budget via tax exemptions, customs facilities and the financing of transport costs. All these considerations have persuaded the government to seek compensation through the imposition of other duties and taxes on the consumption of local products and services such as telecommunications. In 2007, the government is planning to widen the scope of taxation on company revenues, while at the same time reducing the rate of taxation from 35 per cent to 30 per cent and even 20 per cent for companies listed on the stock exchange. It is also looking to simplify value added tax (VAT) by abolishing the 29 per cent rate, facilitating loan repayment facilities and reviewing tax incentives available to priority and offshore businesses. Spending stands structurally at a high level with two major categories: salaries which represent more than 12 per cent of GDP and debt servicing, which accounts for 2.9 per cent of GDP. In 2006, increases in domestic petrol prices reduced the cost of subsidies but many products, particularly foodstuffs such as bread, milk, cereals and oil, are still subsidised. It is, nevertheless, proving difficult to reduce the wage bill, given the needs of the health and education sectors for more

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Other revenues (including oil) Grants

31.4 15.5 5.7 0.4

24.3 14.7 5.9 0.2

24.8 14.8 5.8 0.2

25.0 15.3 6.0 0.2

24.2 15.1 6.1 0.2

24.0 15.1 6.1 0.2

23.9 15.2 5.9 0.2

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

32.0 25.0 21.9 11.2 3.1 6.5

27.4 18.8 16.0 12.3 2.8 8.1

27.1 19.4 16.6 12.1 2.8 7.4

27.6 20.2 17.3 12.3 2.9 7.1

27.1 20.5 17.7 12.2 2.9 6.5

27.0 20.3 17.6 12.1 2.7 6.6

27.3 20.4 17.7 12.3 2.7 6.8

Primary balance Overall balance

2.5 -0.6

-0.3 -3.2

0.5 -2.3

0.3 -2.6

-0.1 -3.0

-0.3 -3.0

-0.7 -3.3

a. Only major items are reported. Source: Budget data ; estimates (e) and projections (p) based on authors’ calculations.

© AfDB/OECD 2007

http://dx.doi.org/10.1787/202872872564

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Tunisia

522

better qualified and better paid senior staff. In July 2006, moreover, minimum salaries were increased by around 3 per cent. The guaranteed minimum wage (SMIG) rose from 224.224 dinars to 231.296 dinars and the daily agricultural salary (SMAG) was increased by 0.22 dinars. These increases were also applied to retirement pensions and state payments to people without resources. As for the public debt, although the budget situation is viable, it needs to be reduced to less than 50 per cent of GDP in the medium term to allow budget constraints to be relaxed. The government is using part of its receipts from privatisation to repay certain loans with the aim of reducing outstanding public debt from 58.4 per cent of GDP in 2005 to 55.6 per cent in 2006 and 54.5 per cent in 2007. Medium and long-term external debt is to be brought down from 54.4 per cent to 48.3 per cent and 46 per cent over the same period.

however, that the current phase of controlled floating is an intermediate stage which should lead in the normal course of events to a full floating exchange rate and total convertibility of the dinar. The most optimistic scenarios, however, do not see this measure being adopted before 2010. The phase of total liberalisation of portfolio investment and investment by Tunisian companies abroad looks likely to be delayed until the monetary and financial system has been strengthened, modernised and restructured via mergers and privatisations.

Monetary Policy

The association agreement signed with the EU in 1995 provided for the creation of a free trade zone in 2008. At that time, European industrial products will come on to the Tunisian market without duties, while Tunisian industrial products have been able to enter the EU market free of duty since 1998. In 2007, negotiations on the liberalisation of trade in agricultural products and fish, of services and of company establishment rights should resume. Greater openness towards the outside world is one of the principal components of the development strategy of Tunisia, which has recently completed numerous trade agreements. In 2006, a free trade agreement with Turkey came into force and several other agreements were adopted, including the pan-European cumulation system of rules of origin. To soften the effects of the end of the MFA on the economy, Tunisia was given an exemption which allows it to export clothing produced in Tunisia using intermediate products originating from countries participating in the cumulation system, which is to say member countries of the EU and the European Free Trade Association (EFTA) and Turkey. The cumulation system will be extended to countries which have signed the Agadir Agreement when this comes into force, which should in principle be before the end of 2007. This agreement should establish a free trade zone between Tunisia, Morocco, Jordan and

From the monetary policy point of view, price stability is the principal objective of the Banque Centrale de Tunisie (BCT), which now has available a system for fine-targeting inflation. Calculated on the basis of the consumer price index, the inflation rate stood at 2 per cent in 2005 but increased to 4.5 per cent in 2006. This increase was due largely to an 8.9 per cent increase in fuel prices and a 9.2 per cent increase in the price of construction materials but also to imported inflation resulting from the depreciation of the national currency in relation to the dollar. Faced with these inflationary tendencies, the BCT sought to absorb excess liquidity in the financial system in September 2006 by raising its official market rate from 5 per cent to 5.25 per cent and its obligatory reserve rate from 1.5 per cent to 3.5 per cent. Inflation should be reduced to 2.7 per cent in 2007 and 2.3 per cent in 2008. As regards the exchange rate, the government sought until the end of the last decade to target the real effective exchange rate. Since 2000, however, the BCT has limited its interventions on the exchange rate market. The greater flexibility this has allowed has resulted in depreciation of the exchange rate and greater export competitiveness. The government takes the view, African Economic Outlook

On the commercial banking side, private sector financing was for many years channelled into priority sectors such as tourism. The result was that there was over-investment in these sectors with high levels of bad debts. External Position

© AfDB/OECD 2007

Tunisia

Egypt. Tunisia and Morocco have signed cooperation agreements in the fields of transport, seismology and agriculture. A commercial and economic cooperation agreement was also signed by Tunisia and the United Arab Emirates at the start of 2006. Tunisia and China concluded a scientific and technological agreement. This provides for cooperation in the production of nuclear energy, the management of arid regions, marine technology and textiles. Tunisia is actively involved in the process of integrating the Maghreb countries into the Arab Maghreb Union (AMU) despite certain political differences and the similarity of the products exported by the Maghreb countries. In 2006, Tunisia also strengthened its bilateral agreements with Malta. Both countries are members of the “5+5 dialogue”, the forum of cooperation formed by five Maghreb countries and five southern European countries involved in the Euro-Mediterranean process. Financial cooperation with the EU has been positive for Tunisia, which has seen funds totalling €946 million come into the country between 1995 and 2006. This represents an average of €90 million worth of subsidies per year, over and above credit accorded by the European Investment Bank (EIB), of which Tunisia is one of the principal beneficiaries. Between 2000 and 2006, Tunisia received nearly €240 million per year. In 2006, €155 million was made available for micro-lending, electricity production and sanitation projects. The EU is by far Tunisia’s biggest trading partner, accounting for two thirds of direct foreign investment, three quarters of foreign trade and 80 per cent of public development aid. During the last six years, the volume of trade with the EU has doubled to reach €14.7 billion, compared

to €7.5 million when the partnership agreement was signed in 1995.However, the agricultural products exported to the EU are not reaching their quota levels. In 2006, the level of takeup of the quotas was 79 per cent for olive oil, 60 per cent for citrus fruits, 50 per cent for wine, 34 per cent for flowers, 13 per cent for potatoes and five per cent for apricots. The low level of exports is essentially attributable to insufficient production but also to relatively high transport costs, particularly for flowers. Other factors such as nonrespect of standards, traceability, grading, storage conditions and failure to meet export market hygiene and other requirements also act as a brake on the development of exports. Tunisia ended 2005 with a deficit of €2.1 billion, representing 6.8 per cent of GDP and down on the 8.6 per cent of GDP registered in 2004. In 2006, however, the deficit deepened again to 7.4 per cent of GDP. It is expected to reach 9.1 per cent of GDP in 2008 following the opening of the Tunisian market to international competition. Textile exports fell 4.2 per cent in the first half of 2006 – the biggest fall since the end of the MFA in January 2005. The statistics for the second half of 2006 were more encouraging, however, thanks to the return of a large part of Tunisia’s customers in response to late deliveries and quality problems in the Far East. The deficit was also the consequence of an increase in imports of oil products and capital equipment. Tourist revenue increased only slightly in 2006 but enough to put the balance of services into surplus at 5.6 per cent of GDP and to compensate for the trade deficit in the current account balance. Transfers have

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income Current transfers

-10.9 28.9 -39.7 7.5 -0.4 0.4

-9.1 32.1 -41.2 6.2 -4.4 4.4

-8.6 34.3 -42.9 5.9 -5.4 6.1

-6.8 36.6 -43.4 5.8 -6.0 5.9

-7.4 36.4 -43.8 5.6 -5.2 5.8

-7.4 36.2 -43.6 5.0 -4.8 5.3

-9.1 35.3 -44.4 5.1 -4.8 5.3

Current account balance

-3.4

-2.9

-2.0

-1.3

-1.2

-1.9

-3.4

Source: IMF data ; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/242501118760

© AfDB/OECD 2007

African Economic Outlook

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Tunisia

also increased strongly in recent years and notably revenue transfers from Tunisian expatriates. In 2005, they stood at 1.8 billion dinars (more than €1 billion) – 1.4 per cent more than in 2004. The second biggest source of foreign exchange after tourism, these transfers represented 5 per cent of GDP. Nearly 89 per cent of repatriated assets come from European countries, which account for 83 per cent of the Tunisian community abroad, amounting to 934 000 people or 10 per cent of the Tunisian population. From a direct foreign investment point of view, Tunisia is attracting unprecedented interest from the monarchies of the Gulf. Their investments in services, tourism and banking have more than doubled in recent years. In 2005, they represented more than 200 million dinars (€120 million), 53 per cent more than in 2001, when they totalled 97 million dinars (€58.2 million). In 2006, Arab capital accounted for more than 20 per cent of all investment. In the financial sector, the Arab investment banks are expanding. Several of them have

opened new subsidiaries, such as the Banque TunisoSaoudienne de Financement or the Banque TunisoQatarienne. The United Arab Emirates group Abou Khater is also to invest $5 billion in a 250 hectare sports centre in the Tunis region. Reduction of external debt is another priority at a time when the foreign loans contracted by the state represent nearly two thirds of the total public debt. In this way, about $1.5 billion generated by the privatisation of Tunisie Telecom should serve to help pay off the external public debt, which was estimated at $19.2 billion or 69.5 per cent of GDP by the International Monetary Fund (IMF). Despite this relatively high ratio in relation to countries with a comparable sovereign credit rating, debt service remains at a relatively stable level at about 15 per cent of exports. Since 1994, Tunisia has been classed among the safest emerging countries for international borrowing and benefits from the top borrower rating.

524

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

70

60

50

40

30

20

10

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: World Bank and IMF. http://dx.doi.org/10.1787/708713312608

African Economic Outlook

© AfDB/OECD 2007

Tunisia

Structural Issues Recent Developments The government, which aims for higher growth levels in an increasingly open economy, sees private sector development as a challenge to be taken up. At the same time, a more dynamic private sector depends on the development of the institutions and improvements to the business climate and, in these two fields, reform is stagnating. Great efforts were made to reduce companies’ production costs in the form of faster trade liberalisation and simplified customs and administrative procedures through computerisation. In 2006, Tunisia was in first place among African countries for competitiveness and 30th position worldwide, after being rated 37th in 2005, according to the global competitiveness index developed by the World Economic Forum. However, this index takes into account the relatively good performance of macroeconomic indicators in Tunisia. The World Bank’s Doing Business Index, on the other hand, indicates that Tunisia has fallen three places, dropping from 77th position in 2005 to 80th position in 2006. In the same way, Transparency International’s corruption perception index shows that Tunisia’s position has deteriorated over the last two years. In 2005, the country was 43rd out of 158 countries. In 2006, it fell to 51st out of 163 countries. The business climate has lost ground, therefore, above all in authorisation management, guarantee acquisition, investor protection and tax payments, for which Tunisia is among the lowest classed at international level. The business environment could therefore be markedly improved, notably through a reform of the judicial system which seems to be fundamental. Foreign investment could be encouraged by the elimination of the need for prior authorisation for the acquisition of small and medium-sized companies and for the purchase and renting of land and premises in industrial and tourist areas. The current offshore regime should be replaced in 2008 by a Euro-Mediterranean regime, which will provide less generous fiscal allowances than the existing ones. The current regime runs counter to the rules of the World Trade Organisation (WTO), © AfDB/OECD 2007

which forbids export subsidies. The disappearance of the offshore regime should most affect the textile sector which is its principal beneficiary. There are about 2 500 offshore companies in Tunisia. They are 66 per cent owned by private foreign capital and devote 80 per cent of their production to export. In general, private investors are hampered by the weight of bureaucracy and very difficult access to financing and credit. At the end of 2005, 3 410 companies out of a total 10 000 had joined the modernisation programme. Among these, 2 200 had received approval for modernisation plans, generally comprising updating of equipment, reorganisation of production systems, personnel training and quality control, for a total cost of 3.4 billion dinars ($2.6 billion). Most companies are satisfied with the renovation programme, although some have delayed implementation of their investment plans because of the economic situation, financial problems or administrative obstacles. The privatisation programme began in 1987 but has accelerated over the last decade. During the 198794 period, 48 companies were privatised for receipts totalling $134 million. By comparison, between 1995 and 2005, 194 companies were sold to the private sector for a total of $1.8 billion. In 2006 alone, the government received $2.25 billion from the sale of a 35 per cent stake in Tunisie Telecom to Dubai TecomDig. It was the biggest privatisation ever carried out in Tunisia. Set up in 1995, Tunisie Telecom has 1.2 million fixed network subscribers and 2.5 million mobile telephone subscribers. It shares the market with Tunisiana, which belongs to the Egyptian group Orascom and is the only private GSM operator in Tunisia. The government’s decision not to give Tunisie Telecom a stock exchange listing nevertheless disappointed those who argued fervently for a more liberal approach. In 2007, the airline Tunisair should be privatised. In July 2006, Tunisia obtained 115 million dinars (€69 million) in Arab financing for the construction of a natural gas-powered, combined cycle 400 megawatt electric power station near Gabès in the south east of the country. The financing represents about one third African Economic Outlook

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of the estimated 360 million dinar ($216 million) cost of the power station. An agreement has also been signed with India for construction of a plant for the production of phosphoric acid for the Indian market. The capital of the Société Tuniso-Indienne des Engrais (Tifert) stands at €54 million, while total investment planned comes to €134 million. The new company will have an annual production capacity of 360 000 tonnes of phosphoric acid and should be operational by the end of 2009.

526

The financial sector also saw major changes in 2006. The statutes of the Central Bank have been reformed and its role modified. Indicators relating to bad debt have improved. During 2005, the level of unproductive loans fell from 23.75 per cent to 21 per cent and the ratio of doubtful loans held by the public sector banks dropped from 27.4 per cent in 2004 to 22.1 per cent in 2005. At the same time, provisions for bad debt increased slightly from 45.8 per cent in 2004 to 46.4 per cent in 2005 and 48.4 per cent in 2006. The objective is to reach a level of 70 per cent in 2009. The government is looking to improve management at the public sector banks through privatisation and mergers between existing bank, restructuring nonproductive loans in the tourism sector and reducing the level of doubtful loans to 10 per cent by 2009. Access to Drinking Water and Sanitation With three quarters of its territory in arid to semiarid zones, Tunisia is a country with a water deficit. Its resource potential has nevertheless shown remarkable development. Available water resources rose from 2.6 billion m³ in 1990 to 4.1 billion m³ in 2005. Several new hydraulic infrastructures – 11 big dams and 11 hill barrages – are programmed for construction over the next few years with a view to increasing water supply. The country’s needs in water are estimated at 4.85 billion m³ per year, however, and exceed supply. To make good the deficit, the Tunisian authorities have adopted a water resource management strategy based on the following principles: i) re-use of treated sewage for agriculture; ii) re-use of drainage water; iii) development of water saving techniques in order to avoid losses between production and use and, above African Economic Outlook

all, waste. The authorities are making a ongoing effort to modernise drinking water supply lines and distribution networks, to improve sanitary accessories such as taps and flushing systems, to educate users and particularly big consumers such as hotels and companies in water conservation and to revise water tariffs through the use of rates which rise progressively according to the quantity consumed. The drinking water and sanitation sector is entirely in public sector hands. It is highly centralised but has produced good performances. Only 18.2 per cent of water was not accounted for in 2004 and more than 99 per cent of bills were paid, while all Tunisian towns and cities had permanent access to drinking water. Drinking water and sanitation pricing is not used as a means of resource distribution or demand regulation. It is considered rather to be a component of cost recovery but also as an instrument for helping the poor to gain access to the service. In this way, water pricing does not cover costs and this above all in lower consumption bands. The origin of tariff changes and even the composition of the tariff are not always communicated to users. The tariffs applied to drinking water and sanitation are differentiated according to type of usage – domestic, industrial or tourist – and by consumption band. The single bill which is sent to subscribers to the water and sanitation services comprises services provided by several organisations. Water is provided by the Société Nationale de Distribution des Eaux (Sonede), sanitation by the Office National de l’Assainissement (ONAS) and the government collects the taxes. The water and sanitation charges are split into a fixed part and a part which varies according to the volume of water consumed. The fixed part is supposed to cover the cost of maintaining the network. The last tariff revision dates back to 23 February 2003, which itself followed a five-year price freeze. This revision had a marginal effect on the fixed element and had no impact on the lowest consumption bands in line with the social aid principle. For other consumption bands and usage types, the fixed price was increased at intervals. The level of the variable part of the tariff is set according to the quantity of water consumed via five bands based on consumption in cubic metres. The tariffs applied © AfDB/OECD 2007

Tunisia

rise progressively according to usage type. This differentiation of tariffs by consumption band and type of use has made it possible for some users to be subsidised by others. ONAS’s financial results are in structural deficit and have suffered a deterioration which has been critical since 2002. The deficit represented 35 per cent of turnover in 2004 compared to 18 per cent in 2002. ONAS’s income comes essentially from user fees, the contribution of which to cost recovery is low as a result of the tariff freeze. The principal operating costs are debt repayments and personnel charges. The contribution of the state to the financing of ONAS’s activity is insufficient to carry out major investment programmes, finance operations and meet rehabilitation needs. This problem risks affecting the quality of service provided by ONAS. For each cubic metres of water evacuated, the state grants an indirect subsidy to each user to enable ONAS to cover its operating charges. In 2004, this contribution represented 56 million dinars or 64.9 per cent of user charges. This contribution is a major one in so far as it exceeds the average price of a cubic metre of waste water paid by households. With regard to drinking water, a revision of the structure of the tariff table has enabled Sonede to balance its finances and even generate a surplus. The cost of drinking water is low up to a consumption of 70 m³. The share of sanitation in the overall bill varies from 21 per cent to 46 per cent for domestic users and varies from 32 per cent to 42 per cent and 49 per cent for industrial users according to whether the level of pollution is low, medium or high. In the tourist sector, however, it exceeds the share of drinking water at 54 per cent. An Institut National des Statistiques study of household spending carried out in 2000 showed that the water bill represented 0.93 per cent of total spending per person, which is well below the generally accepted level of 3 per cent. In Tunisia, access to drinking water and sanitation is a priority and the corresponding Millennium Development Goal objective has already been attained. © AfDB/OECD 2007

Between 1990 and 2005, the number of people without access to these services was reduced by half. All inhabitants of towns and conurbations have healthy drinking water. In rural areas, the access level was 88.4 per cent in 2005 and 91.6 per cent in 2006. In urban areas in 2006, 98.5 per cent of households were connected to drinking water and, in rural areas, 53.4 per cent were connected. The number of people benefiting from these services in 2006 was 9.9 million, of whom 3.2 million live in rural areas, compared with 7.5 million in 1994. In urban areas Sonede and in rural areas,the rural engineering department are responsible for providing water and ensuring that the population has access to this resource. With regard to sanitation, ONAS has the task of equipping all towns and cities and rural areas with collection networks and sewage treatment stations. In 2004, 208 million m³ of waste water were collected by the public sanitation networks and 193 million m³ were treated in 71 sewage stations. In 2004, six additional communes were covered and the number of sewage stations increased from 514 to 553. Investment is essentially financed by the state. The level of connection of households to the network rose from 59.9 per cent in 1994 to 80.9 per cent in 2006. In urban areas, the number of households connected to the ONAS network rose from 0.67 million in 1994 to 1.25 million in 2005, representing 5.3 million people on the basis of 4.24 persons per household. In July 2006, Tunisia was granted a World Bank loan of $66.8 million for a sanitation project in the western part of Tunis and for the improvement of waste water re-used for irrigation. The European Investment Bank (EIB) also granted Tunisia a 68 million dinar (€40 million) loan for sanitation projects in five areas close to Tunis and in several towns in the southern and eastern parts of the country.

Political Context and Human Resources Development Despite some signs of liberalisation such as the freeing of certain prisoners and the authorisation given to the president of the Tunisian human rights league to visit prisons and detention centres, Tunisia has African Economic Outlook

527

Tunisia

performed poorly in terms of political governance and freedom of expression. In June 2006, a resolution was voted by the European Parliament expressing concern over the state of human rights and liberties in Tunisia. The parliament asked Tunisia for explanations concerning the banning of the congress of the Tunisian human rights league and acts of violence committed against league activists and Tunisian magistrates. The country will have to resolve this paradoxical situation in which gains in economic and social development outstrip its performance in the fields of civil liberties and political rights. The majority of Tunisians see the lack of political liberties as the price to be paid for social and economic stability and development and for the priority the government is able to give to education, health and measures to combat poverty.

528

During the last two decades, Tunisia has made tangible efforts to reduce poverty. The poverty level has diminished constantly. From 12.9 per cent of the population in 1980, it fell to 4.2 per cent in 1990. The poor have benefited, moreover, from direct and constant state assistance, notably in the form of aid to families in need. Despite the great progress realised, however, disparities persist, above all between regions (the coastal regions produce much better results than those in the interior) and different socio-economic categories, particularly in the fields of education and employment. Despite the efforts made by the government to reduce unemployment, it remains at a particularly high level at an estimated 14 per cent of the active population in 2006. The government is confronted, moreover, by an ever increasing number of job seekers and, in particular, an annual flow of 50 000 young university graduates. Forty per cent of graduates between the ages of 20 and 24 are unemployed. At the same time, employers complain that there are not enough qualified, competent candidates for jobs, particularly those requiring specialised skills. The authorities have responded by setting up courses to facilitate the entry of young graduates into the working environment. They plan to introduce greater flexibility into the employment market to facilitate labour redistribution in line with the structural changes taking place in the Tunisian economy. They are counting, too, on the African Economic Outlook

capacities of the young to create companies in different sectors, helped by state aid in the form of exemptions from social security charges and other employment costs during the first two years of the life of small and medium-sized companies. Health and social security indicators showed improvement in 2005. Life expectancy at birth increased from 73.4 to 73.5 years between 2004 and 2005. The number of inhabitants per doctor fell from 1 150 in 2002 to 1 013 in 2005 and should come down to 1 000 in 2006. The infant mortality rate also fell from 22.1 per 1 000 in 2002 to 20.2 per 1 000 in 2005. The social security cover provided by the different regimes for workers expanded from 86 per cent of the workforce in 2003 to 89 per cent in 2005. Over the last three years, public investment in medical equipment has amounted to €150 million, virtually all of it for imports. This spending has made it possible to equip all regional hospitals with dialysis units, acquire sophisticated scanners, invest in laboratories, renovate material in operating theatres, buy cardio-vascular equipment and equip the national neurological institute with microscopic surgery equipment. Tunisia has made praiseworthy efforts in the education field. The share of public education spending in relation in GDP rose from 6.8 per cent in 2002 to 7.6 per cent in 2006. This effort has made it possible to achieve school attendance levels of close to 100 per cent, with equal boy/girl levels in primary and secondary cycles, and has reduced the illiteracy rate from 31.7 per cent in 1994 to 22.9 per cent in 2004. Higher education has seen rapid growth because the number of students has tripled over the last 10 years and university registrations are expected to rise for the next eight years. Tunisia has responded to this trend with innovative programmes such as that for the creation of higher institutes for technical studies (ISETS). There remains much to be done, however, particularly with regard to the quality and relevance of the teaching. The higher education system needs to respond to the growing demand without sacrificing the quality which is necessary to improve Tunisia’s competitiveness. In recent years, additional resources have been allocated to adult education and there are currently more than © AfDB/OECD 2007

Tunisia

5 000 literacy centres in operation. Between 2004 and 2005, 190 000 people became literate. Despite considerable progress in guaranteeing the right to education, problems resulting from disparities between regions and environments and between the genders and socio-professional categories persist. The country

must also deal with the effects of demographic transition in the education field in the form of growing teacher shortages in primary schools, rapid growth in the student population and the poor correlation between training and the needs of the employment market in an economy increasingly open to the outside world.

529

© AfDB/OECD 2007

African Economic Outlook

.

Uganda

Kampala

key figures • • • • •

Land area, thousands of km2 241 Population, thousands (2006) 29 857 GDP per capita, $ PPP valuation (2005/06) 1 562 Life expectancy (2006) 51.1 Illiteracy rate (2006) 33.2

Uganda

U

GANDA CONTINUES TO MAINTAIN its standing as one

of East Africa’s relatively successful economies, combining low inflation with high economic growth. This was achieved in spite of the slowdown in the fiscal year 2005/06, when real GDP grew by 5.3 per cent, compared with 6.7 per cent in 2004/05. The slowdown is largely attributable to the prolonged drought, which affected agricultural production and reduced hydroelectricity output, with negative effects on manufacturing. In the absence of continued drought, real GDP is projected to bounce back to 6 per cent in 2006/07, which is still short of the target growth rate of 7 per cent. As has been the case in the past few years, sound macroeconomic management and pro-market reforms,

supported by large inflows of official development assistance (ODA), helped to sustain growth. Indeed, the outcomes of the March Sound macroeconomic 2006 general elections eased management and pro-market the political uncertainty in reforms, plus substantial ODA, the country, leading to the helped sustain growth, though resumption of ODA from governance problems, including international donors. corruption, are resurfacing. The 2006 elections, which were the first multiparty parliamentary and presidential elections in Uganda in 25 years, saw President Yoweri Museveni and his party remain in power. Although the elections were preceded by a volatile campaign period, Uganda’s political climate is now stabilising. However, the security situation in northern and western Uganda remains a source of concern. 533

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Uganda - GDP Per Capita (PPP in US $)

■ East Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Uganda - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

3500

8

7

3000

6 2500 5 2000 4 1500 3 1000 2

1

500

0

0 1999/2000

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06(e)

2006/07(p)

2007/08(p)

Source: IMF and local authorities’ data; estimates (e) and (p) projections based on authors’ calculations. http://dx.doi.org/10.1787/052444120611

© AfDB/OECD 2007

African Economic Outlook

Uganda

In spite of these security concerns, progress has been made towards improving economic wellbeing, as demonstrated by increased per capita income, better health services, including a huge reduction in HIV/AIDS infection rates, higher literacy rates and increased life expectancy. However, poverty and inequality appear to be increasing. Recent surveys indicate that the level of corruption remains high, but the government is taking appropriate measures to improve governance.

Recent Economic Developments

534

The Ugandan economy has continued to grow rapidly in recent years. Real GDP growth in the 2005/06 fiscal year was close to the 5.5 per cent average recorded over the past six years. Growth in 2005/06 was largely driven by the strong performance of the services sector, which grew at 9.2 per cent, up from 8.7 per cent in 2005, led by road transport, telecommunications, financial services, tourism and air travel. Telecommunications has been the fastest growing subsector as a result of substantial increases in the number of mobile phone subscribers, largely the consequence of an ineffective telecommunications infrastructure in terms of land lines. The prolonged drought conditions in most parts of the country adversely affected the performance of the agricultural sector, reducing its growth rate to only 0.4 per cent – the lowest annual growth in agriculture since 1991/92. The declining trend in the growth rate of agricultural production could act as an obstacle to

poverty reduction efforts as income and asset inequality widens. But recently improved weather has brightened prospects for agriculture, although the outbreak of foot and mouth disease in cattle highlights the continuing problem of crop and livestock diseases. In the case of industrial production, electricity shortages led to a sharp deceleration of growth from 10.8 per cent in 2004/05 to 4.5 per cent in 2005/06. Power outages led to production cuts and 24-hour shift work patterns, or to the use of diesel generators, which have substantially increased costs of production. High oil prices combined with low prices for Uganda’s commodity exports also adversely impacted economic performance. On the other hand, the recent discovery of oil reserves in the country has generated optimism. The services sector’s share of GDP rose steadily from over 41 per cent in 2000/01 to nearly 46 per cent in 2005/06. In contrast, agriculture, which had accounted for the bulk of domestic output during the past four decades, saw its share decline from 40 per cent in 2000/01 to 33.4 per cent in 2005/06. The share of industry has remained steady at around 20 per cent over the past five years. Agriculture, which provides food security and supports rural livelihoods, is constrained by heavy concentration on low-value crops and limited processing of raw produce. In addition, agriculture is constrained by limited access to support services such as crop and veterinary extension services and food processing technology; inadequate infrastructure (e.g. transport, electricity and water); lack of market information; and proliferation of local taxes.

Figure 2 - GDP by Sector in 2005/06

(percentage)

Other Agriculture

18.2% 33.4% General government Transport and communications Tourism

4.2% 8.3% 3.2% 11.3%

Wholesale and retail trade

9.9%

1.4%

Construction

0.9% Mining and quarrying 9.4% Manufacturing

Electricity and water

Source: Authors’ estimates based on local authorities’ data. http://dx.doi.org/10.1787/302741068763

African Economic Outlook

© AfDB/OECD 2007

Uganda

Table 1 - Demand Composition 1997/98

(percentage of GDP)

2004/05

2005/06(e)

Percentage of GDP (current prices)

2006/07(p)

2007/08(p)

Percentage changes, volume

Gross capital formation Public Private

16.2 4.8 11.3

24.9 5.0 19.9

20.1 11.9 22.4

11.8 11.7 11.8

10.7 7.8 11.4

Consumption Public Private

94.3 12.9 81.4

92.1 14.4 77.6

6.5 9.6 5.0

4.9 3.1 5.1

5.1 3.1 5.4

-10.5 9.9 -20.4

-17.0 13.8 -30.7

1.8 13.6

3.2 6.8

3.4 6.6

External sector Exports Imports

Source: Domestic authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/033627865084

Recent growth has been led by private investment, which accounted for nearly 20 per cent of GDP in 2004/05 (Table 1). Much of the increase in private investment in Uganda is in industrial and residential construction. The share of private investment in construction nearly doubled from 8.8 per cent of GDP in 2000/01 to 15 per cent of GDP in 2005/06.

Macroeconomic Policies Macroeconomic policies in Uganda have three key objectives: i) low inflation and stable interest and exchange rates; ii) increasing credit to the private sector; and iii) enhancing the international competitiveness of exports.

Following the successful completion of an IMF Poverty Reduction and Growth Facility (PRGF) programme in January 2006, the Ugandan government has recently agreed to a three year Policy Support Instrument (PSI) programme, whereby the IMF provides surveillance and technical assistance, but no funding. The PSI will monitor progress towards achieving the goals set forth in the Poverty Eradication Plan (PEAP) — usually known in other countries as a Poverty Reduction Strategy Paper (PRSP). Fiscal Policy The Ugandan government has over the years succeeded in maintaining prudent fiscal policies. But the overall management of the budget is threatened by

Table 2 - Public Finances

(percentage of GDP)

1997/98

2002/03

2003/04

2004/05 2005/06(e) 2006/07(p) 2007/08(p)

Total revenue and grantsª Tax revenue Grants

15.8 10.0 5.3

19.1 11.2 7.0

22.3 12.0 9.6

20.9 12.1 8.3

19.7 12.6 6.5

18.6 12.6 5.5

17.7 12.6 4.5

Total expenditure and net lendingª Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

16.3 9.6 8.6 3.4 1.0 6.6

23.5 13.9 12.5 5.2 1.5 9.7

23.8 14.7 12.7 5.2 2.0 9.0

21.6 13.5 12.0 5.1 1.6 8.1

21.8 13.3 11.9 5.1 1.5 8.6

21.8 12.7 11.4 5.0 1.3 9.2

21.8 12.6 11.0 4.9 1.5 9.3

Primary balance Overall balance

0.5 -0.5

-2.9 -4.4

0.5 -1.5

0.9 -0.7

-0.7 -2.1

-1.8 -3.1

-2.6 -4.1

a. Only major items are reported. Source: Domestic authorities’ data, estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/017782237343

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536

periodic pressures for supplementary expenditures and higher domestic interest costs. The overall fiscal balance, excluding grants, improved marginally in 2005/06, with the budget deficit declining to 9.2 per cent of GDP, down from 9.9 per cent of GDP in the preceding year. This improvement in the fiscal balance is consistent with the policy of achieving gradual reductions in budget deficits over the medium term. However, if grants are included, the fiscal deficit increased from 0.7 per cent of GDP in 2004/05 to 2.1 per cent of GDP in 2005/06 (Table 2). The outlook for 2007 and 2008 was for a further deterioration in the fiscal position as a result of exhaustion of domestic sources of revenue.

authorities is how to alleviate the impact of liquidity sterilisation on the exchange rate of the shilling and on export competitiveness.

The government’s commitment to increasing the share of the national budget funded through domestic resources has been made more difficult by the implementation of the East Africa Customs Union, which came into force in January 2005. The drop in tariffs accompanying the customs union reduced customs revenue by over 80 billion Ugandan shillings in 2005/06, and further losses are expected in 2006/07.

A noteworthy recent development is the convergence between the ‘headline’ inflation and the ‘underlying’ inflation rates. While underlying inflation hovered around 4 to 6 per cent between April 2005 and September 2006, headline inflation declined from 12 per cent to 6 per cent during the same period. This significant decline in the headline inflation rate is largely the consequence of a decline in food crop prices, which more than offset the increase in prices of other goods and services in the consumer basket. The decline in food crop prices can be attributed to increased supplies thanks to improved weather conditions in most food crop growing areas.

Monetary Policy One of the primary objectives of monetary policy in Uganda is to contain inflation below 5 per cent and progress has been made towards achieving this objective over the past few years. The Bank of Uganda (BoU) also conducts monetary operations with a view to minimising instability in the money and foreign exchange markets1. Sterilised intervention is practised through a combination of sales of treasury bonds, treasury bills and foreign exchange. The BoU also uses repos (repurchase agreements) as an instrument to smooth out unexpected liquidity in the short run. The BoU also makes use of rediscount rate and bank rate adjustments. In 2006 the broad money supply, M2, grew by 10.3 per cent, below the 13.8 per cent recorded in 2005, due mainly to the sterilisation of excess liquidity. However, a major issue confronting the monetary

The average rate of inflation for 2005/06 was 5.3 per cent, marginally higher than the target rate of 5 per cent, largely because of the effects of the continued rise in the world price of oil on petrol pump prices and transport fares. The BoU’s tight monetary policy has succeeded in containing the inflationary pressures to the point where underlying inflation in 2005/06, at 4.4 per cent, was much lower than the 6.4 per cent recorded in 2004/05.

Interest rates in 2005/06 were generally lower than in the preceding year. For example, the yield on the three-year bond fell from 15.5 per cent in June 2005 to 13.5 per cent in March 2006. Similarly, the effective yields on the 91-day, 182-day, and 364-day treasury bills in April 2006 averaged 7.9 per cent, 8.4 per cent and 10 per cent respectively, all lower than the corresponding rates in the same period in 2005. The government expects that its comprehensive strategy for domestic debt management will make possible a reduction in interest costs. By contrast, the weighted average lending rates of commercial banks in Uganda remained high throughout

1. Bank of Uganda Monthly Economic Report, September 2006.

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2005/06. The government has cited the following factors for such an outcome in the banking sector2: i) the large size of the government’s fiscal deficit, which gives commercial banks the option to invest in low-risk government securities rather than lend to the private sector; ii) the perceived high risk of lending to the private sector, especially agriculture, and the absence of a credit reference bureau; iii) lack of competition and dynamism among commercial banks which are content with servicing stable ‘niche’ market segments; and iv) high operating costs from modernisation, expanding outreach and the low income base of customers. Uganda operates a flexible exchange rate policy, with the Ugandan shilling allowed to fluctuate freely in line with economic fundamentals. However, where necessary the BoU intervenes to smooth short-run volatility. The Uganda shilling depreciated 4.8 per cent from June 2005 to March 2006. The depreciation was largely caused by strong corporate demand for dollars. This prompted the BoU to intervene in the foreign exchange market to restore stability. External Position Uganda’s external position is healthy. The overall balance of payments (BoP) in 2005/06 registered a surplus of $235 million, similar to that recorded in the previous fiscal year. The BoP surplus was largely a result of the favourable capital account balance, which helped to offset the current account deficit. Indeed, the capital account balance surplus increased from $369 million in 2004/05 to $452 million in 2005/06. Much of the

capital account surplus can be attributed to higher inflows of foreign direct investment (FDI), which increased to $260 million in 2005/06, up from $245 million in the previous fiscal year. In contrast, the current account balance has consistently recorded a deficit. In 2005/06, the deficit including grants increased to $218 million (2.8 per cent of GDP), up from $134 million (1.5 per cent of GDP) in the previous fiscal year, moving closer to the sustainability threshold of 5 per cent. However, if official grants are excluded, the current account deficit in 2005/06, at 6.8 per cent of GDP (Table 3), may be unsustainable. Developments in the current account balance largely reflect fluctuations in merchandise trade, which have been characterised by widening deficits in recent years. In 2005/06, the trade deficit increased to $1.014 billion, up from $837 million in 2004/05, an increase of 21 per cent. The growth in the trade deficit was essentially the result of higher growth in imports than in exports. While imports grew by 16.5 per cent between 2004/05 and 2005/06, exports grew by 11.6 per cent during the same period. Much of the increase in total exports was due to the rise in export unit prices, up by 17.4 per cent in 2005/06. Uganda continues to depend largely on a few agricultural exports, especially coffee, fish, tea and cotton, and thus remains vulnerable to external shocks to terms of trade. Exports of coffee increased from $145 million in 2004/05 to $180 million in 2005/06,

Table 3 - Current Account

(percentage of GDP)

1997/98

2002/03

2003/04

2004/05 2005/06 (e) 2006/07 (p) 2007/08 (p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor Income

-7.4 7.0 14.5 -3.1 -1.3

-9.9 8.1 18.1 -4.1 -2.8

-9.6 9.4 18.9 -3.4 -2.1

-10.5 10.0 20.5 -3.9 -2.0

-10.7 10.6 21.2 -4.0 -1.7

-11.0 10.2 21.2 -3.6 -1.6

-11.4 9.9 21.2 -3.3 -1.4

Current transfers Current account balance

4.8 -7.1

11.1 -5.7

13.9 -1.3

14.1 -2.3

9.6 -6.8

8.6 -7.5

9.9 -6.2

Source: Domestic authorities’ data, estimates (e) and projections (p) based on authors’ calculations http://dx.doi.org/10.1787/774337527773 2. Government of Uganda Budget Statement 2006/07.

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largely because of the strengthening of the world price of coffee. Indeed, coffee export prices reached a peak of $1.70 per kilo in January 2006 before stabilising at $1.50 per kilo by September 2006. Non-coffee exports increased marginally, from $642 million to $697 million during the same period, mainly as a consequence of increases in the volumes and unit prices of fish exports. In spite of the deterioration in the current account, Uganda’s foreign reserves in 2005/06 increased by over $75 million, mainly thanks to debt relief arising from the Heavily Indebted Poor Country (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI). Uganda’s foreign reserves in 2005/06 covered 6.6 months of imports of goods and services.

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The HIPC initiative has undoubtedly contributed to the reduction in Uganda’s external debt burden. Measured as a percentage of exports, external debt service declined from 15.4 per cent in 2004/05 to 13.1 per cent in 2005/06. This figure does not include the debt relief received from the MDRI, which cancelled

100 percent of Uganda’s debt owed to the African Development Bank, the International Monetary Fund (IMF), and the World Bank. Full implementation of the MDRI will reduce the country’s stock of external debt by about 65 per cent. Regional integration constitutes one of the cornerstones of Uganda’s trade policy. The government has continued to consolidate its participation in regional integration activities with the objective of facilitating trade and investment in the East African Community (EAC). On 1 January 2005, the East African Community Customs Union, consisting of Uganda, Tanzania and Kenya, was launched, marking the beginning of a new phase in the development of the community. Burundi and Rwanda joined the EAC in 2006 as full-fledged members. The year 2005/06 witnessed a substantial increase in the convertibility of all three East African Community currencies. Attempts are under way to implement the East African crossborder payments system. In addition, in an effort to ensure financial sector stability in the region, the three

Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

250

200

150

100

50

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/248053578035

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East African Community central banks have adopted risk-based supervision which will strengthen the financial sector and help mobilise and channel resources to productive sectors. The focus is now on delivering tangible benefits of regional integration. The critical factors for successful integration exist in the sizeable market of over 90 million people with a total GDP of $30 billion in the region. The Monetary Policy Coordinating Committee of the central banks of the partner states was mandated to work on a strategic plan and a road map to ensure a single currency for East Africa by December 2009. The Community Customs Union Management Act, enacted in 2004, contains provisions for governing trade in goods in the community partner states, including bonded warehouses and export processing zones. In addition, it specifies prohibited and restricted imports and exports within the customs union. It also sets out legal guidelines on the application of preferential treatment for goods imported under the Common Market for East and Southern Africa (COMESA) and Southern African Development Community (SADC). The Protocol on Free Movement of Persons, Labour Market, Services and Right of Establishment and Residence was due to be concluded by 2006, while that on a common market is expected by December 2007.

are in various stages of divestiture. The Kinyara Sugar Works and the Dairy Corporation are in advanced stages of divesture while the Mandela Stadium Concession, Stanbic Bank and National Insurance Corporation initial public offerings will be completed in 2006/07. Nevertheless, the business climate continues to be rated as rather unfavourable by the World Bank’s Doing Business indicators. The government is considering amendments to ease barriers to investment, and is establishing a clear policy on land use to allow flexible and full utilisation of idle land. The government is preparing an Investment and Free Zones Bill to provide legal backing to the establishment of export processing zones. Uganda recognises that the development of small and medium sized enterprises (SMEs) is crucial for employment and entrepreneurship. Currently, about 1.5 million people, nearly 90 per cent of the non-farming active population, are employed in micro and small enterprises. The government has since 1987 implemented a number of policy measures under the Economic Recovery Programme to create an enabling environment primarily for SME development. A Small-Scale Enterprise Policy Unit (MSEPU) has been established in the Ministry of Finance, Planning and Economic Development (MFPED). This unit is responsible for the co-ordination of all efforts to promote SMEs.

Structural Issues Recent Developments The government of Uganda remains committed to structural reforms, aimed at improving the investment climate and increasing productivity. Past reforms have removed institutional bottlenecks that hindered the development of the private sector, but investment has yet to respond to the desired level. The government is also committed to a broad-based private sector-led growth of the economy, through reform and privatisation of parastatals. By the end of April 2006, 128 divestitures had been completed using various modes of privatisation. Twenty-four public enterprises

Micro-finance is the main form of finance for SMEs in Uganda. The government strategy is to increase the availability and accessibility of micro-finance for the poor, especially farmers and micro and small entrepreneurs. This will be achieved through provision of both direct and indirect support to farmers’ groups and the development and strengthening of savings and credit co-operatives (SACCOs). In 2003 Parliament passed the Micro DepositTaking Institutions (MDIs) Act which created a regulatory system. During 2005/06, three additional MDIs were licensed under the MDI Act, taking the total number to four3. This development led to strong growth

3. The newly licensed MDIs are PRIDE Microfinance Limited, Uganda Microfinance Limited and Uganda Finance Trust Limited.

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in customer deposits and lending by the MDIs in 2005/06. Official unemployment is relatively low, and is found mainly in urban areas, particularly among the most highly educated and amongst women. But underemployment is widespread, affecting 65 per cent of all adults, and 75 per cent of women. Access to Drinking Water and Sanitation

540

Uganda lies almost wholly within the Nile Basin and most of its water resources are shared with other countries. The water resources are governed by a number of agreements and conventions on international waters although not all are ratified. These include the Protocol for Sustainable Development of Lake Victoria and the Lake Victoria Basin Commission (LVBC), East African Community (EAC), Global Water Partnership (GWP), African Water Facility (AWF), Nile Basin Initiative (NBI), and African Ministers Council on Water (AMCOW) programmes. Uganda also participates in international, regional and basin-wide groupings such as the Technical Cooperation Committee for the Promotion of the Development and Environmental Protection of the Nile Basin (TECCONILE), InterGovernmental Agency for Drought (IGAD), Kagera Basin Organisation (KBO) and Lake Victoria Fisheries Organisation (LVFO). The overall responsibility for formulating national water policies in Uganda rests with the Ministry of Water, Lands and Environment (MWLE), implemented by the Directorate of Water Development (DWD) and National Water and Sewerage Corporation (NWSC). At the local government level, the districts, towns, and sub-counties, together with the local communities and non-governmental organisations (NGOs), are responsible for implementing, operating and maintaining water supply and sanitation facilities. Private-sector firms operate under contract to local and central governments. They provide maintenance services to water users in rural and peri-urban areas, and they manage piped water services in the majority of small towns that have piped water. NGOs and Community African Economic Outlook

Based Organisations (CBOs) are active in the provision of water and sanitation services (construction of facilities, community mobilisation, training of communities and local governments, hygiene promotion as well as advocacy and lobbying). In August 2006 the Uganda Water and Sanitation NGO Network (UWASNET) had a membership of 150 NGOs/CBOs implementing projects in the sector. The UWASNET secretariat is supported financially by the government and development partners. The water and sanitation sector has mechanisms for monitoring and evaluation. There are 70 surface watermonitoring stations, 16 groundwater water-observation wells, 112 water quality sampling sites and 18 climatic stations. A water quality and pollution control laboratory has been established and equipped. In addition a Quality Assurance (QA) system has been established, including audits and an external proficiency scheme to ensure performance to international standards and obtain accreditation of the laboratory is in process. Transparency has improved in the award of contracts at the central government level through properly constituted contracts committees. Each of the committees is assisted by procurement secretariats that are supported by trained and qualified professionals. The committees are largely independent of political patronage or interference and report to the Public Procurement and Disposal of Assets Authority (PPDAA). This body has the mandate to oversee and supervise all procurement activities countrywide. Hence there is a large degree of autonomy and independence of decision-making in the procurement process as a result of reforms in the procurement sector that began in 1998. However, the situation is different for contracts awarded by district tender boards, which lack capacity and qualified manpower and are open to political influence from local councillors. A Sector Wide Approach to Planning (SWAP) for the water and sanitation sector was adopted in September 2002. SWAP is a mechanism whereby government and development partners co-ordinate policy and expenditure programmes using a common approach. The rural water and sanitation sub-sector is © AfDB/OECD 2007

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the most advanced in Uganda in terms of SWAP implementation. In 2005/06, the government completed the construction of six water systems4 and construction of water systems is in progress in 13 towns5. In the large towns where the NWSC operates, service coverage improved from 67 per cent in June 2005 to 70 per cent in June 2006. Unaccounted-for water losses improved from 33.8 per cent in June 2005 to 29.3 per cent by June 2006, and new water connections increased from approximately 22 000 in 2004/05 to about 28 000 in 2005/06 as a result of a new streamlined connection policy. In 2005/06 around 550 000 people were provided with improved water supplies. Between January and December 2005, NGOs provided an estimated number of 113 000 people with new water sources (protected springs, shallow wells, boreholes, gravity scheme taps and rainwater harvesting facilities). NGOs are providing considerable assistance for improved water sources. Some of them have demonstrated their ability to innovate (e.g. domestic roof water harvesting, biosand filters, and leverage of household investments). There have also been joint NGO-government collaborative efforts to pilot appropriate technologies. This further illustrates the multi-stakeholder participation in the water and sanitation sector in Uganda. Access to safe water and sanitation remains one of the top priorities of the government. Access to water in rural areas increased from 61.3 per cent in June 2005 to 63.4 per cent by June 2006. The government’s official target is to reach water coverage of 77 per cent in rural areas and 100 per cent of the urban population by the year 2015 with an 80 per cent to 90 per cent effective use and functionality of facilities. Although the actual coverage rate is below the target rate required to achieve the Millennium Development Goal (MDG) on access to water supply, it is well above the East

African average of 42 per cent, and comparable with the African average of 64 per cent. In the case of access to sanitation, the coverage rate in Uganda is 47 per cent, which is above the East African average (27 per cent) and African average (42 per cent), but falls short of the 95 per cent set by the MDGs. On current trends, Uganda is on course to achieving the MDG target on access to water supply, but is likely to lag behind in the case of access to sanitation. Nonetheless, the government is aiming to achieve both of these MDGs as set out in its Sector Investment Plans (SIPs). The total investment requirements for achieving the Water Supply and Sanitation (WSS) MDGs range from $1.5 billion to $1.85 billion in five key sub-sectors: rural water supply and sanitation (43 per cent of the investment requirement), small towns WSS (32 per cent), large towns WSS (16 per cent), water for use in production (3 per cent) and water resources management (6 per cent). The average per capita cost of providing improved water to people in rural areas is $34, with considerable variation between districts. There has been a steady increase in per capita costs arising from a marked reduction in the availability of low cost options such as springs and shallow wells, increased expenditure on overheads (in part as a result of the creation of new districts) and an increase in the cost of other resources (e.g. fuel, construction materials). It is estimated that only 17 out of 53 small towns are able to cover their operation and routine maintenance costs. Funding of WSS comes from both the government of Uganda and donors. In 2005/06, for instance, the total spending on water and sanitation sector was 103 billion shillings, 61 per cent of which was financed by donors. A breakdown of the Medium Term Expenditure Framework (MTEF) allocation by subsectors shows that 47 per cent of it went to urban water supply and sanitation, 40 per cent to the rural sector,

4. The six water systems were constructed in Hoima, Mubende, Bujenje, Bwijanga, Kyatiri and Aduku. 5. The 13 cities are Iganga, Mityana, Mpigi, Kigumba, Apac, Pakwach, Nebbi, Soroti, Kaberamido, Sironko, Sembebule, Nagongera, and Kangumbira.

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4 per cent to water for production, 3 per cent to water resources, and the remaining 6 per cent was reserved for institutional support.

Political Context and Human Resources Development Uganda’s political situation appears to be stabilising following the March 2006 multiparty elections, which saw the incumbent President Museveni returned to office after winning nearly 60 per cent of the national vote. The leader of the main opposition party, Kizza Besigye, came second with 37 per cent of the vote. International observers described the elections as generally free but not fair. The opposition filed a petition, and although the subsequent ruling did not annul the election results it harshly criticised the electoral commission for numerous irregularities.

542

Security problems continue to threaten Uganda’s democracy, in particular the long-running conflict in the north of the country. Concerted efforts by the government to end the insurgency and restore peace in the affected districts have continued but long term security remains elusive. The peace talks between the government and the Lord’s Resistance Army (LRA) meant to end two decades of insurgency in Northern Uganda, mediated by the Southern Sudan government, are yet to yield tangible results. The cease-fire agreement concluded in June 2006 was still holding in early 2007 but the biggest constraint to progress is the International Criminal Court (ICC) arrest warrant against the leaders of the LRA, who consequently refuse to lay down their arms. Transparency International’s corruption perception index (CPI) for 2005 and 2006 shows that corruption in Uganda has marginally improved. Whilst Uganda’s ranking in the corruption league table in both years remained the same, at 105th position, the average CPI score edged up from 2.5 in 2005 to 2.7 in 20066. This lends limited support to results from an earlier national survey, the National Integrity Survey (2003), which revealed some perceived improvement in the area of

governance, but some donors remain concerned about the slow progress in curbing corruption. The Ugandan government has reaffirmed its commitment to good governance as a cornerstone in its fight against poverty, under the National Strategy to Fight Corruption and Build Ethics and Integrity in Public Offices (200407). Implementation of this strategy is, however, fraught with difficulties. Uganda continues to implement its policy of decentralisation, which began in 1993 with a vision of creating a local government system that is democratic, participatory and development-oriented. The decentralisation policy is now part of the constitution and has an elaborate legal framework under the 1997 Local Government Act. Implementation is co-ordinated by the Decentralisation Secretariat in the Ministry of Local Government. The decentralisation policy has been implemented in a wide range of sectors starting with the democratisation of local councils. Democratic elections have been held for office from the lowest unit – Local Council 1 (LC1) – to the highest organ at the district, Local Council 5 (LC5). The policy has provided the framework for implementing a number of government initiatives including the Poverty Eradication Action Plan (PEAP), the Plan for Modernisation of Agriculture (PMA) and the National Agricultural Advisory Service (NAADS). In a review of the policy in November 2004 it was concluded that decentralisation was leading the transformation of the political landscape of the country as local leaders are now chosen through free and fair elections and can be held accountable. The number of districts was raised from 56 to 72 in June 2004, considerably increasing the costs of administration. The government is now encouraging some of the districts to federate but is encountering resistance. It remains to be seen how well the new decentralised structures will operate. For nearly a decade, Uganda has been implementing a highly integrated Poverty Eradication Action Plan

6. The higher the CPI score the less corrupt a country is perceived to be.

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(PEAP). The results from the 2005/06 United Nations Household Survey (UNHS) show that poverty decreased from 56.4 per cent in 1992/93 to 38.8 per cent in 2002/03 and to 31.1 per cent in 2005/06. This represents an absolute decrease in the number of poor people from 9.8 million in 1992/93 to 8.4 million in 2005/06. If the five districts in Northern Uganda (Kitgum, Gulu, Bundibugyo, Kasese and Pader) are excluded, poverty decreased from 55.7 per cent in 1992/93 to 37.7 per cent in 2002/03 and to 28.9 per cent in 2005/06. These figures clearly show that the implementation of the PEAP has helped reduce poverty in Uganda. The results of the 2005/06 UNHS also show that income inequality in Uganda has decreased in recent years. The Gini coefficient, which measures the extent of income inequality, decreased from 0.428 in 2002/03 to 0.408 in 2005/067. However, the improvements in inequality were mainly seen in urban rather than rural areas. Investment in education in recent years has borne some fruit. School enrolments for both boys and girls are quite high and comparable. Primary school enrolment is at 126 per cent for boys and 125 per cent for girls, much higher and more equal across sexes than the regional averages of 106 per cent and 94.7 per cent for boys and girls respectively. But in spite of this achievement primary school completion is very low. The 2005/06 UNHS compared Primary 1 (P1) attendance from the 1999/2000 survey with P7 attendance in the 2005/6 survey. The results show that in 1999/2000 around 1 807 000 children were attending P1 whereas in 2005/06 only 685 000 children were attending P7. This implies a completion rate of only 38 per cent. In an attempt to improve the performance of primary school teachers, the government increased teachers’ salaries by 20 per cent in 2005/06. It has also constructed libraries in 16 non-core primary-teacher colleges. In a bid to enhance equitable access to public universities during 2005/06, 896 students were admitted through the district quota system; 40 students with

“special talent” and 64 special needs students were also admitted. A major expansion of the student population resulted from the introduction of parallel programmes financed privately. To increase access to higher education, government has set up a management committee to create a public university in eastern Uganda which is expected to open in the 2008/09 academic session. Great strides were also made in the field of adult education where the adult literacy rate rose from 65 per cent in 1999/2000 to 70 per cent in 2005/06, mainly because of improvement in rural areas. A further breakdown of the latest figures shows that male literacy rate (77 per cent) is much higher than the female rate (60 per cent). Uganda has also made significant progress in the field of human development. The latest Human Development Index, at 0.508, is higher than the average for the East African region (0.432) and the continental average (0.495). Uganda continues to make progress in service delivery in the health sector. Improvements in primary health care services and construction of new health facilities have improved access to health care, which in turn has improved key health indicators. Infant mortality at 77.5 per 1 000 is lower than the regional (East African) and continental averages of 85.7 per cent and 82.5 per cent per 1 000 respectively. Maternal mortality, at 880 per 100 000, is also marginally below the regional average (882) but well above the continental average (622). However, life expectancy in Uganda has increased from 43.1 years in 2002 to 51.1 years in 2005 thanks to improved health and other social conditions. Uganda has made significant progress in bringing down the prevalence of HIV/AIDS over the years, but a recent national survey showed that prevalence has slightly increased from 6.5 per cent in 2005 to 7 per cent in 2005/06. Clearly, this calls for renewed efforts to combat the HIV/AIDS epidemic.

7. The lower the Gini coefficient, the lower the income inequality.

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.

Zambia

Lusaka

key figures • • • • •

Land area, thousands of km2 753 Population, thousands (2006) 11 861 GDP per capita, $ PPP valuation (2006) 1 167 Life expectancy (2006) 38.8 Illiteracy rate (2006) 32

Zambia

Z

AMBIA’S GROSS DOMESTIC PRODUCT (GDP) grew

by an estimated 5.8 per cent in 2006, as a result of increased copper production, buoyant copper prices, an exceptionally good agricultural performance and a strong expansion in construction. GDP growth is expected to remain around 6 per cent in 2007 and 2008, as a result of increasing investment in mining and high demand for housing which should result in further expansion of construction. In tandem with a favourable economic performance, the macroeconomic fundamentals have improved in recent years. The government has achieved a major fiscal consolidation and undertaken public-sector reforms that triggered the cancellation of $3.9 billion of external debt in 2005. Restored donors’ confidence translated into larger inflows of aid, increasingly as direct budgetary support.

The sharp appreciation of the kwacha experienced in late 2005 and early 2006, coupled with the 2006 bumper harvest, eased inflationary pressure, which averaged 9 per cent - the first time in about 30 years that Zambia has achieved single-digit inflation. Favourable growth in 2006, boosted by copper production Despite the broadly and good harvests, will be favourable assessment by the difficult to sustain and IMF of Zambia’s recent poverty remains persistent. macroeconomic performance in the 2006 Poverty Reduction Growth Facility (PRGF) review, sustaining broad-based growth remains a major challenge. The economy is little diversified and therefore remains highly vulnerable to climatic and terms of trade shocks. Copper mines benefit from substantial 547

Figure 1 - Real GDP Growth and Per Capita GDP ($ PPP at current prices) ■ Zambia - GDP Per Capita (PPP in US $)

■ Southern Africa - GDP Per Capita (PPP in US $)

■ Africa - GDP Per Capita (PPP in US $)

——— Zambia - Real GDP Growth (%) Per Capita GDP ($ PPP)

Real GDP Growth (percentage)

8000

7

7000

6

6000 5 5000 4 4000 3 3000 2 2000 1

1000

0

0 2000

2001

2002

2003

2004

2005

2006(e)

2007(p)

2008(p)

Source: IMF and local authorities’ data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/562232728816

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tax holidays and generate few spill-overs to the rest of the economy. The living conditions of the majority of the population are very unsatisfactory, with about 70 per cent of the population living below the poverty line.

548

The fact that ordinary Zambians are not feeling the benefits of the recent macroeconomic improvements clearly emerged at the September 2006 presidential and legislative elections. Although incumbent President Levy Mwanawasa enjoyed a fairly large margin of victory, the majority of Zambians, and in particular the urban electorate, voted against him, highlighting widespread discontent. The challenge for Mwanawasa’s second and final term will be to ensure that the economic benefits from the copper boom and debt relief will begin to have a favourable impact on ordinary citizens. Major efforts should be made to ensure that the mining sector makes a greater contribution to government revenues. In parallel, the authorities need to make substantial progress in improving the accountability of public expenditure management, and in implementing the decentralisation policy, financial-sector reform and private-sector development initiatives. Expectations were raised with the approval in late 2006 of the Fifth National Development Plan (FNDP) for the period 2006-10 which details the government’s development agenda and poverty reduction programme. Rural infrastructure, agriculture and tourism development constitute the core of this ambitious plan, which, however, has a substantial financing gap. Therefore its implementation will depend on the magnitude of the scaling up of aid.

Recent Economic Developments Over the period 2000-05, growth averaged 4.8 per cent, driven by agriculture, mining activity and construction. A bumper harvest and strong copper output together with sizeable investment, spurred by rising copper prices, strengthened economic performance in 2006, resulting in GDP growth of 5.8 per cent. In 2006, agriculture registered a growth rate of 3.9 per cent. After a 2004/05 season of scant rains and drought that forced the country to rely on external food aid, agriculture registered strong growth in the 2005/06 season. Good climatic conditions resulted in a bumper harvest of maize, the main staple food, of 1.4 million tonnes compared to 800 000 tonnes in the 2004/05 season. Much of the maize was bought by the Food Reserve Agency (FRA) which purchased a total of 400 000 metric tonnes. The favourable response of small farmers reflects the surplus production and the attractive price offered compared with that of private traders. Nevertheless, the FRA has not been able to pay for its purchases and in December 2006 it still owed a large outstanding debt to farmers. This made it difficult for the farmers concerned to purchase inputs for the planting season. Partly to clear outstanding debts to farmers, the FRA exported 95 000 tonnes of maize to Zimbabwe and 5 000 tonnes to the Democratic Republic of Congo (DRC), worth $20 million. As a result, in part, of the continued ban on private-sector exports, maize prices have remained relatively low and stable, which is unusual for the last months of the year.

Figure 2 - GDP by Sector in 2005

(percentage)

Finance institutions and insurance Real estate and business services

8.8% 6.3%

Government services

Agriculture, forestry and fishing 21.4%

8.6% 3.3%

Transport, storage and communications Restaurants, bars and hotels

4.4% 2.8%

10.9%

Mining and quarrying Manufacturing

2.9% 18.7%

11.9%

Electricity, gas and water

Wholesale and retail trade Construction

Source: Authors’ estimates based on National Institute of Statistics data. http://dx.doi.org/10.1787/818022131034

African Economic Outlook

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Zambia

Scant rains characterised the starting of the 2006/07 season. In December 2006, the rainy season in Zambia had generally not yet begun outside the western parts of the country. Nevertheless, by February 2007 most of the country benefited from normal rains with the exception of southwestern Zambia where arid conditions persisted. The commercialisation of production by subsistence and small-holder farmers remains one of the most challenging policy priorities. Farmers lack access to inputs at affordable prices, and credit more generally, and find it difficult to market their products. Therefore, although the National Agricultural Policy 2004-15 calls for promoting private-sector development in agriculture, the government remains heavily engaged in directly supporting small farmers. Through the Fertiliser Support Programme the authorities are providing subsidised fertilisers to small farmers, thought to number about 160 000, in the 2006/07 season. The subsidy, which has been increased from 50 per cent to 60 per cent in 2006 has been criticised by stakeholders for being excessively costly and hindering the emergence of an efficient fertiliser distribution system. Non-traditional export (NTE) statistics indicate that there was a growth of about 25 per cent in 2006 over the previous year, recording earnings of more $650 million. The engineering products sector (copper rods, cables and wires); primary agriculture (cotton, coffee, tobacco and maize); and processed and refined foods (sugar, molasses and wheat flour) contributed to most of the growth. The main markets in 2006 were South Africa, the DRC, Malawi, Zimbabwe, the United Kingdom, the Netherlands, Switzerland, Portugal, Kenya and Germany. Horticulture and floriculture have for long been regarded as highly promising NTE sectors. Since they are highly labour intensive, they are believed to be among the sectors for the government’s Poverty Reduction Programmes (PRPs) in agriculture. The two sectors in the NTE sector are almost 100 per cent export-focused. The floricultural sector employs nearly 4 000 people from 22 flower farms (mostly cut flowers) which are located within a 20 kilometre radius of the © AfDB/OECD 2007

Lusaka International Airport. Zambia currently produces more than 60 varieties of cut flowers (roses). The Netherlands has been the biggest market for Zambia’s roses, accounting for more than 70 per cent of exports. Other important markets are the United Kingdom, Germany and South Africa. Before the collapse of one of the largest producers and exporters of fresh horticultural products, Zambia’s horticultural industry employed more than 16 000 people (mostly women) who worked at every stage in the chain of distribution. After the collapse, the company’s assets were bought by the second-biggest producer and another entrant. This at least restored some confidence among about 5 000 out-growers. The main markets for Zambia’s fresh vegetables are the United Kingdom, South Africa, Germany, the Netherlands, Australia, New Zealand, Norway and France. These sectors are 100 per cent export-oriented and they experienced financial losses as a result of the appreciation of the kwacha against major currencies in the last few months of 2005.In order better to exploit the potential of the horticultural sector, much should be done to improve its domestic value chain as well. At present, fresh produce flows in the country are dominated by a fragmented, small-scale traditional marketing system, characterised by chaotic and insanitary markets with inadequate physical infrastructure. Ultimately, the current system is very poorly suited to linking farmers more closely with consumers to provide an increasingly reliable supply of quality produce. Improved market information and marketing extension is needed more actively to link farmers to wholesale markets. High freight costs arising from high and unstable fuel prices have rendered both sectors uncompetitive in global markets. The use of refrigerated trucks for the South African market has been a better option for the producers. The honey export sector in Zambia is another important agro-food system experiencing emerging structural changes in regional and international markets. This sector affects the livelihoods of more than 12 000 beekeeper households (100 000 people) most of whom live in the North-Western Province. Honey constitutes 50 per cent of these farmers’ incomes and up to 70 per African Economic Outlook

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Zambia

cent of their cash income. Farmers in this area earn less than $0.50 per day and fall well below the international poverty line. Of the honey exported from Zambia 95 per cent is certified organic – Zambia currently exports about 700 metric tonnes of honey and 10 metric tonnes of beeswax each year and most of it is sold in the European Union. Zambia is a surplus producer of honey and could double both its exports and the number of beekeepers. However, infrastructural and other trade-related and supply chain issues must be addressed if this is to be achieved.

550

Copper production increased by 8 per cent in 2006, mainly in response to buoyant world demand reflected in record high prices. Nevertheless, production, at about 492 000 tonnes was 4 per cent down from the original forecast as a result of operational problems experienced at the Konkola Copper Mine (KCM), the largest copper producer, and at the Mopani Copper Mines (MCM), the second largest. Production shortfalls at the biggest mines are expected to be offset by the opening of new mines in 2007 and 2008. Mopani Copper Mines launched the expansion of a smelter which is expected to become Africa’s largest, with total capacity of 850 000 tonnes of copper concentrate per year. A $200 million smelter, with a planned capacity of 150 000 tonnes per year is about to be built by China Non Ferrous Metals Group and will be completed by 2008. In 2007 and 2008 further expansion of copper production will also result from major investments undertaken by Equinox Resources in the Lumwana mine in the North-Western province. Although there was a slowdown compared to the growth rate of 21.2 per cent in 2005, the construction sector registered growth of 9 per cent in 2006, driven by continuing investment in mining, donor-funded work in road rehabilitation and real estate developments. The increasing demand for cement led to investment of $170 million, which will increase production to over 900 000 tonnes within the next three years. The tourism sector continued to record positive growth with an increase in investment and tourist arrivals. The number of tourists in 2006 increased by 3.1 per cent to 670 000 from 650 000 in 2005. Zambia African Economic Outlook

contains 19 national parks and 34 game management areas, covering over 22.4 million hectares, and the largest waterfalls in the world. Much of the tourism in Zambia is concentrated around the Victoria Falls in Livingstone. The Zambian side of the falls has experienced a boom in tourist arrivals in recent years, as many Western airlines have stopped flying to the originally more developed Zimbabwean side and Western tour operators have pulled out of that country. The number of overseas tourists visiting Zambia almost doubled between 2003 and 2005, with the vast majority of those visitors spending some time at the falls. Despite these positive developments, the sector continues to face a number of challenges. First, tourism infrastructure in Zambia is largely underdeveloped, including, telecommunications, transport, and accommodation facilities. Hotel room capacity remains very low although the supply has been growing steadily. Second, resources for the industry’s long-term development are inadequate. Although the Tourism Development Credit Facility (TDCF) was established by the government in 2003 to provide affordable credit to Zambians, the small size of the fund (at K5 billion per year) and the large number of applicants suggest that it is inadequate. Third, although tourism has been identified as a form of rural development, the interests of the local communities have not been fully incorporated into most business models. Fourth, there is inadequate environmental management. While the government and co-operating partners have started rehabilitating park roads and airports - the airport of Livingstone has been recently expanded and will soon be able to receive non-stop flights from Europe – more should be done to stimulate environmentally sustainable growth in the hospitality sector. Three foreign-owned hotels are under construction close to the falls. South Africa’s Legacy Holdings Limited was awarded a Tourism Concession Agreement (TCA) by the Zambia Wildlife Authority (ZAWA) to establish a $260 million golf estate containing two hotels, an 18 hole golf course, marina and 450 chalets a little upstream of the Victoria Falls in Mosi-oa-Tunya National Park. The project, which was estimated to create 1 900 tourist bed spaces, would enable Zambia to compete favourably © AfDB/OECD 2007

Zambia

with Zimbabwe. Livingstone now has slightly over 1 000 beds compared to 3 000 beds in Victoria Falls town on the Zimbabwean side of the Zambezi River. The project was estimated to bring in the country 150 000 tourists per year and make $170 million a year.

the construction of the two hotels but rejected the building of the golf course and the 450 chalets. It rejected much of Legacy Holdings’ environmental impact assessment (EIA) for the project and offered an alternative site for development.

The 220-hectare project would, however, disturb flora and fauna in the heritage site, cut it in two, and disturb the elephant movement corridor, which is an essential part of their range. The project would also severely damage plans for the Kavango Zambezi (KAZA) Transfrontier Conservation Area, one of the most ambitious elephant conservation plans and shared by Zambia, Zimbabwe, Botswana and Namibia.

Legacy Holdings appealed against the ruling to the government through the Ministry of Tourism, Environment and Natural Resources but the government upheld the ECZ’s decision. Legacy Holdings is therefore contemplating the option offered by the ECZ to build on the northern part of the Maramba river.

The United Nations Educational, Scientific and Educational Organisation (UNESCO) warned that such an initiative could lead to the removal of the falls from its list of World Heritage Sites. The project has faced much criticism and opposition from environmentalists, Livingstone residents and generally the majority of Zambians who argue that the massive development within the Victoria Falls would lead to such deregistration. Opposition has also been expressed by the Zimbabwean authorities who claim that their Zambian counterparts have not consulted them on the issue – the Victoria Falls frontier covers Zambia, Zimbabwe and extends to Botswana. The Environmental Council of Zambia (ECZ) accepted

The authorities intend to formulate a National Tourism Development Master Plan, strengthen the overall public sector tourism policy framework and promote local private sector participation. Private gross capital formation was a major driver of growth in 2006, especially in mining and construction and is expected to continue to show rapid growth in 2007 and 2008. The growth of investment will also result in increased imports of capital goods. Copper exports are expected to continue to increase when the new production facilities come on stream in 2007 and 2008. Growth in private consumption appears to have risen in 2006, thanks in part to exceptionally good

Table 1 - Demand Composition 1998

2005

Percentage of GDP (current prices)

(percentage of GDP) 2006(e)

2007(p)

2008(p)

Percentage changes, volume

Gross capital formation Public Private

16.4 8.0 8.4

23.0 7.0 16.0

7.3 -10.2 15.0

12.3 13.0 12.0

10.2 5.0 12.0

Consumption Public Private

93.9 15.8 78.1

79.9 13.7 66.2

7.8 4.0 8.4

6.4 12.3 5.4

4.4 5.0 4.3

-10.3 28.4 -38.7

-2.8 33.9 -36.7

6.2 10.5

4.6 9.5

6.3 5.6

External sector Exports Imports

Source: IMF and Central Statistical Office data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/767456416336

© AfDB/OECD 2007

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agricultural performance. The rate of growth of government consumption accelerated in 2006 in the runup to the presidential and legislative elections. Conversely, domestically-financed public capital expenditure contracted to compensate and to accommodate the revenue shortfall stemming from the impact of the currency appreciation on trade, taxes and grants. Thus, the overall budgetary stance remained prudent.

Macroeconomic Policies

budgetary performance was broadly on track, thanks to the combined effect of reduced debt service following achievement of the Heavily Indebted Poor Countries (HIPC) completion point and lower government borrowing, which declined from 5.2 per cent of GDP in 2003 to an estimated 1.8 per cent in 2006. Overall, budget execution was less successful than in 2005, affected by the re-direction of spending to preparations for the elections and the limited absorption capacity of some sectors, such as health and education. Poor execution also reflected the carry-over of unspent balances from previous years.

Fiscal Policy

552

The FNDP for the period 2006-10, was approved in December 2006. The growth strategy includes supporting rural development, especially in the agricultural sector, encouraging stronger links between agriculture and manufacturing through agro-processing, and stimulating stronger growth in tourism. The broad macroeconomic objectives of the plan are detailed in the Medium Term Expenditure Framework 2007-09 which projects GDP growth of at least 6 per cent in 2007 and 2008, while reducing annual inflation to no more than 5 per cent, and increasing spending under the budget on PRPs by at least 0.5 of a percentage point of GDP a year. The preparation of the plan involved greater consultation among the stakeholders and is more comprehensive compared with the previous PRPs. Nevertheless, the policy measures required to achieve the expected targets, e.g. to improve rural growth, are not clearly defined, and the plan has an aggregate financing gap of about $1.5 billion. This implies an increase in the annual requirement for the FNDP from $550 million to $800 million. The Ministry of Finance intends to rely on increased foreign aid and domestic borrowing to cover the gap. This may pose a challenge to the efforts of limiting domestic borrowing to 1 per cent of GDP in 2007, and 0.5 per cent of GDP in 2008 and 2009. In 2006, the stance of fiscal policy remained prudent in line with the fiscal consolidation efforts undertaken in the past two years. Estimates for 2006 indicate that African Economic Outlook

The kwacha appreciation in late 2005 resulted in a net shortfall in anticipated revenue and grants of 2.5 per cent of GDP in 2006 as a consequence of the reduced kwacha value of donor budget support and of the value added tax (VAT) on imports and customs duty. Nevertheless, the shortfall in revenue was more than offset by the reduction in capital expenditures (by 2.7 per cent compared to the amount budgeted) and the overall deficit is estimated at 2.5 per cent of GDP, compared to the 2.6 per cent originally budgeted. Zambia is highly dependent on donor assistance, which finances some 30 per cent of the government budget. The fiscal discipline achieved in the recent past has earned the government renewed credibility which has led to new donor pledges to increase aid volumes (complementing resources released by debt relief), improve their predictability and provide a greater proportion in the form of direct budgetary support. Budgetary support is expected to account for 22 per cent of grants in 2007, and 25 per cent in 2008, compared to 15 per cent in 2006. Better accountability and improved governance are the key donor conditions for scaling up direct budget support. Thus, further increases in aid are subject to the successful implementation of the Public Expenditure Management and Financial Accounting system (PEMFA) launched in 2005, which is considered key to improving expenditure oversight and strengthening budget execution. Nevertheless, progress in implementation has been slow. A key milestone of the PEMFA, the piloting of the Integrated Financial © AfDB/OECD 2007

Zambia

Management Information System (IFMIS), has incurred delays, partly because of a change in ownership of the local firm originally selected to install the IFMIS. A Spanish provider was then selected in November 2006. In addition, effective implementation of the PEMFA suffers from lack of progress in the decentralisation process and in public service management, the other fundamental pillars of the public-sector reform programme. Much effort is needed to improve the accountability of public spending, particularly as regards the use of the proceeds from debt relief for poverty reduction programmes. In order to improve accountability, a matrix of indicators (Performance Assessment Matrix) has been put in place for review by the government and its development partners every six months. The government’s aid policy and strategy will be approved in 2007, which should help to ensure that Zambia has an appropriate framework for taking the lead in managing and coordinating external assistance. The aid policy is strikingly tough on technical assistance whose modalities in the past threatened local ownership and wants to make it genuinely demand-driven. In response to the new aid policy, donors are preparing a Joint Assistance Strategy for Zambia (JASZ) which reflects a new trend in aid architecture with the development partners focusing their support on a limited number of sectors. The JASZ will be aligned both on the FNDP and the aid policy.

In 2007 and 2008 the government will continue its efforts to cut non-priority expenditures and improve the quality and coherence of spending. Authorities have committed themselves to channelling significant resources towards spending on health and education. Spending on the former (including sizeable investment outlays) is expected to increase to 12.7 per cent and 13 per cent of the budget in 2007 and 2008 respectively, up from 10.7 per cent in 2006. Spending on education is expected to reach 16.8 per cent and 17.3 per cent of the budget in 2007 and 2008 respectively. The challenge will be to improve service delivery at the local level, and increase local authorities’ absorption capacity by achieving concrete progress in the decentralisation process. In order to consolidate the fiscal objectives in the medium term, the authorities recognise the need to generate more revenue (which declined from 19 per cent of GDP in the early 2000s to 16.4 per cent by 2006). Nevertheless, the 2007 budget will be affected by the outcome of the September elections which revealed a strong sentiment for lower taxes. Indeed, pay-as-youearn taxes contribute far more to total tax revenue than do corporate taxes. One priority of the government in 2007 will be to increase tax revenue from the mining sector, which benefits from substantial tax concessions. The main goals would be to raise mineral royalties to 2.5 per cent from the 0.6 per cent which the mines currently pay. It has been estimated that if the tax

Table 2 - Public Finances

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Total revenue and grantsa Tax revenue Grants

24.7 17.4 6.6

25.0 17.4 7.0

23.8 17.5 5.5

23.0 17.0 5.6

21.1 16.4 4.3

21.2 16.3 4.5

22.1 17.1 4.6

Total expenditure and net lendinga Current expenditure Excluding interest Wages and salaries Interest Capital expenditure

29.4 18.2 14.8 5.4 3.4 11.3

30.9 19.5 15.6 8.4 3.9 11.4

26.6 17.9 14.4 7.7 3.5 8.7

25.6 18.7 16.0 7.6 2.7 7.0

23.6 18.2 16.2 7.5 2.1 5.3

23.2 17.7 16.4 7.4 1.2 5.5

23.9 18.1 17.0 7.5 1.1 5.8

Primary balance Overall balance

-1.4 -4.8

-2.1 -6.0

0.6 -2.8

0.0 -2.6

-0.4 -2.5

-0.8 -2.0

-0.7 -1.8

a. Only major items are reported. Source: Ministry of Finance and Economic Development and IMF data; estimates (e) and projections (p) based on authors’ calculations. http://dx.doi.org/10.1787/263510621318

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regime were the same as in Chile, the Zambian government would receive an extra $800 million in revenue annually (12.5 per cent of current tax revenue). However, renegotiations of existing mining agreements are very difficult and subject to the willingness of the individual mining companies to modify the terms. It will therefore take some time to reach a solution. Nevertheless, it will be important to change the tax provisions in new mining contracts. In the short term, the government will try to improve tax administration and collection and broaden the tax base by bringing the informal sector further into the tax net to compensate for a reduction in income taxes. Overall, the budget deficit is expected to decline to 2 per cent and 1.8 per cent of GDP in 2007 and 2008 respectively. Monetary Policy

554

The Bank of Zambia intends to reduce inflation further to the 5 per cent target set in the FNDP by controlling money supply growth, increasingly through open-market operations. Inflation fell sharply in 2006 aided by a bumper harvest – food prices account for about 50 per cent of the consumer price index (CPI). Inflationary pressures were also reduced by the 27 per cent appreciation of the currency experienced in late 2005 and early 2006 which offset to some extent the impact of fuel price increases. Average inflation for 2006 is estimated at about 8.5 per cent, compared with 18 per cent in 2005 and represents the lowest level in the past 30 years. Inflation is expected to average 8.6 per cent and 7.8 per cent in 2007 and 2008 respectively. The emerging inflationary pressures in food prices are expected to be contained by the high inventories and to be offset by lower world oil prices. Possible risks to this positive outlook may, however, stem from increased private consumption, lower than normal rainfall, and possible fiscal policy slippages. The appreciation of the kwacha continued at a moderate pace in the first half of 2006, and mainly reflected greater inflows of foreign exchange stemming from foreign investment, increased exports from mining, and large inflows of official development assistance. In September 2006, the kwacha weakened against the dollar, depreciating by 5.1 per cent as a result of capital African Economic Outlook

outflows prompted by the uncertainty surrounding the elections and a wider global emerging markets sell-off. In the last quarter of the year, the foreign exchange market was characterised by a general depreciation of the kwacha against major currencies with intermittent volatility. In order to moderate the volatility and maintain stability in the value of the kwacha, the Bank of Zambia intervened by purchasing and selling foreign exchange in the market. Nevertheless, despite periods of depreciation, the kwacha appreciated by almost 20 per cent in 2006, to average K3 755 to the US dollar.. Against the background of increased donor support, which is expected to be disbursed during the first nine months of the year, and a projected increase in the output of copper, the current value of the kwacha is expected to be sustainable. The Bank of Zambia will continue to maintain a flexible exchange regime, intervening with open market operations to smooth out undesirable fluctuations. International reserves are adequate, having increased to cover 3 months of imports. Despite improved macroeconomic fundamentals, lending rates remain high at about 30 per cent mainly because of structural constraints on lending experienced by the banking sector. Competition is very low and mainly focused on services. In addition, there is general lack of confidence in sustained low inflation over the medium term. To give a real boost to lending, banking regulations need to be strengthened through, among other things, a revision of the bankruptcy law and better contract enforcement. The government, through the Bank of Zambia, has approved the establishment of the Credit Reference Bureau (CRB) which is being pioneered by the Bankers’ Association of Zambia (BAZ). The CRB was scheduled to begin operations in early 2007. The bureau is aimed at providing lenders in the financial sector with factual information on clients upon which they can make decisions on whether to lend or not. Banks and other financial institutions will be required to submit information about their clients to make it possible to distinguish between good and defaulting borrowers. According to the BAZ, the credit culture has been improving as a result of declining interest rates. The Bank of Zambia believes that the licensing of the CRB will help reduce the cost of doing © AfDB/OECD 2007

Zambia

business and stimulate economic growth through increased private sector borrowing. Also of significance is the introduction of Point of Sale (PoS) and debit cards. External Position Zambia benefits from a variety of preferential market access initiatives, including the European Union (EU) Everything-But-Arms initiative (EBA) and the US African Growth and Opportunity Act (AGOA). Nevertheless, the stringent rules of origin of these schemes, combined with serious domestic supply-side constraints, have so far led to disappointing results. Both initiatives have generated only negligible additional exports for Zambia compared with the pre-existing Generalised System of Preferences scheme. The benefits from the AGOA have been indirect, through increased cotton exports to South Africa, which then exports clothing to the US market. South Africa is the single largest partner country, importing copper, electricity, tobacco, cotton and sugar and exporting to Zambia in return a wide range of capital and consumer goods. Switzerland is the main

OECD export destination although this is due to the fact that it is a trans-shipment point for other destinations. The third largest destination of exports is China (7.3 per cent) which is a major purchaser of Zambian copper. Overall, external developments in 2006 continued to be favourable, boosted by continuing high copper prices and investment in the sector. In volume, copper and cobalt exports grew by 15 per cent in 2006. Copper exports still account for about two thirds of the total, although non-metal exports, mainly cash crops such as cotton, tobacco, flowers and horticultural products, have expanded considerably in the recent past. Although the sudden strengthening of the currency since November 2005 reduced the kwacha value of agricultural exports by 30 per cent, production increased thanks to abundant rainfall in 2006. Imports continued to increase, by 10 per cent in real terms, reflecting sustained demand for capital goods generated by foreign investment and refurbishment in the mining sector and the appreciation of the kwacha. Overall, the trade balance is estimated to have improved substantially, reaching 6.2 per cent of GDP in 2006.

Table 3 - Current Account

(percentage of GDP)

1998

2003

2004

2005

2006(e)

2007(p)

2008(p)

Trade balance Exports of goods (f.o.b.) Imports of goods (f.o.b.) Services Factor income

-4.8 25.2 30.0 -5.5 -6.6

-7.0 25.3 32.3 -5.5 -3.4

1.5 33.2 31.7 -3.9 -7.8

0.4 30.2 29.7 -3.3 -6.4

6.0 31.7 25.7 -3.3 -5.2

4.2 28.1 23.8 -3.5 -8.4

-1.4 23.5 25.0 -3.8 -6.2

Current transfers Current account balance

-0.8 -17.8

-0.1 -16.0

-0.5 -10.7

-0.3 -9.6

-0.3 -2.8

0.0 -7.6

-0.1 -11.5

Source: Bank of Zambia and IMF data; estimates (e) and projections (p) based on authors’ calculations http://dx.doi.org/10.1787/055002870087

The trade balance is expected to deteriorate slightly in 2007 and 2008. Copper export volume should continue to grow strongly at about 10 per cent but lower international prices are expected to lead to a more moderate increase in value. Major obstacles remain to the expansion of non-metal exports which will require improvement of their international competitiveness. Horticulture and livestock have considerable potential but suffer from structural bottlenecks, especially the high © AfDB/OECD 2007

cost of finance and transport and limited certification capacity, which keep production volumes low. Lack of compliance with sanitary and phytosanitary barriers still represents a major obstacle to expanding agricultural exports to the EU and US markets. Zambia’s external debt fell significantly from over $7 billion in December 2003 to less than $1 billion in October 2006 after the attainment of the HIPC African Economic Outlook

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Figure 3 - Stock of Total External Debt (percentage of GDP) and Debt Service (percentage of exports of goods and services) ■ Debt/GDP

——— Service/X

250

200

150

100

50

0 2000

556

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF. http://dx.doi.org/10.1787/637377152781

completion point in 2005 and consequently qualification for debt relief under the Multilateral Debt Relief Initiative (MDRI). Most multilateral co-operating partners have cancelled 100 per cent of Zambia’s debt. The government intends to spend a total of K198.7 billion from the MDRI savings in 2007 to scale up expenditures linked to poverty reduction such as agriculture, water and sanitation, training and infrastructure. As mentioned earlier, the challenge would be to assure that monitoring mechanisms for the use of those savings are in place.

Structural Issues Recent Developments The momentum of Zambia’s structural reform programme exhibited during the HIPC completion period slackened in 2006. Political and financial priorities dictated by the presidential and legislative elections and Zambia’s success in receiving full debt relief probably contributed to the slowdown. Thus, African Economic Outlook

promotion of the private sector, the reform of parastatal enterprises and public-sector reform, especially decentralisation, took a back seat for a good half of the year. Three major state enterprises are currently under negotiation leading to privatisation or commercialisation: Zambia Electricity Supply Corporation (ZESCO); Zambia National Commercial Bank (Zanaco); and Zambia Telecommunication (ZAMTEL). At the end of 2006 the sale of 49 per cent of Zanaco to Rabobank was still awaiting signature by the Attorney General. The closure of the deal was delayed during the election period as the government feared the opposition’s possible politically-inspired claims about possible job losses or branch closures. Such threats would have been unfounded: Rabobank’s business plan for Zambia aims to expand the number of branches, possibly by 20. ZAMTEL, the national telecommunication company, which owns the monopoly of fixed lines, the international telecommunication gateway and Cell© AfDB/OECD 2007

Zambia

Z, one of Zambia’s three mobile operators, will be commercialised but no date has been set. Vested interests associated with its monopolistic status are a key constraint on progress. The government is still pondering the commercialisation strategy but hopes to improve the regulatory framework to address barriers to entry so as to enhance competition in the sector. Problems in commercialising the Zambia Electricity Supply Corporation (ZESCO) continue. While progress was made in the appointment of a new board of directors dominated by private-sector representatives, there are questions about the independence of the board. The chief executive was appointed by the President of the Republic of Zambia and the board by the Minister of Energy and Water Development. Plans are underway to change this so that the board selects the chief executive. Zambia has great potential to become a major exporter within the Southern African Power Pool but ZESCO is experiencing financial problems, foresees a capacity shortfall in two to three years time and is generally under-performing. The private sector (e.g. mobile companies) resort to their own generators rather than wait for ZESCO to expand its network. The privatisation of Maamba Collieries Limited has been approved. The government has mandated Zambia Consolidated Copper Mines - Investments Holdings (ZCCM-IH) to take over the operations but, because of a large debt owed to Invetec this is still pending. A strategic investor has been offered 30 per cent of the Ndola Lime Company (brick and cement) monopoly but a precondition is a large recapitalisation (at least $20 million).There has been no progress on the privatisation of the Indeni Oil Refinery, which is currently running at half capacity and requires fresh capital investment to increase production. So far the plan to attract new capital from a third equity partner (the government and the French oil company Total would dilute their shareholdings to 35 per cent each to attract new investors) has not received any expression of interest. Some elements of the Financial Sector Development Plan are moving forward. The Bank of Zambia’s ability © AfDB/OECD 2007

to supervise bank and non-bank financial institutions has been strengthened and capacity is being built up to move to a fully risk-based approach in 2007. In January 2006 the regulations governing microfinance institutions came into force. There has been slow progress with financially troubled non-bank financial institutions. So far only two investors have taken up equity in the Development Bank of Zambia (DBZ) in which the government will retain a 25 per cent stake. The $2.15 million commited by the International Fund for Agricultural Development (IFAD) in 2005 to recapitalise the National Savings and Credit Bank (NSCB) has not yet been received. The institution is thus exploring new funding sources as it desperately needs to resolve unreconciled balances. Efforts in 2006 to create a more business-friendly environment are shown by agreement on the Private Sector Development (PSD) Action Plan and the adoption of the Zambian Development Agency (ZDA) Act in May 2006, which involves the merger of five agencies in charge of private-sector development. The Action Plan Working Groups – on immigration; administrative barriers; tourism; and public-private partnerships (PPPs) – were approved by the cabinet and the more contentious land reform issue is awaiting approval. A draft legal framework for PPPs is being prepared in collaboration with the South African Development Community (SADC) for February 2007. Success has been registered in a short period in the administrative barriers group where thanks to computerisation and the greater independence of patents and licensing offices in certain provinces, the number of days to register a company fell in November 2006 to five from nine. While most stakeholders seem optimistic about the PSD Action Plan some business representatives criticise it for being too donor-driven and are concerned about the sustainability of the reforms once donor funding has ended. Four donors support the PSD Action Plan through a Joint Financing Agreement ($10 million basket fund for three years) signed in April 2006 with the subsequent release of funds in June. A total of nine donors have signed the memorandum of understanding. The US Millennium African Economic Outlook

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Challenge Account will also allocate $22 million to the PSD action plan in 2007 and 2008 placing especial focus on immigration, administrative barriers and PPPs. In fact, private-sector participation in the PSD initiative through the Zambia Business Forum (ZBF) has been quite strong. ZBF has five representatives on the steering committee and two on the implementation committee, including the Chair. Despite some delays caused by the election, difficulties in deciding who will pay retrenchment costs and government concerns about the liabilities of the five agencies to be merged into the Zambian Development Agency (ZDA), this new agency should be operational in 2007. It is urgent that the ZDA become fully operational since as long as it is not no other institution can follow up on investment matters. It also remains to be seen how independent the ZDA will be since civil servants will sit on the Board.

558

Decentralisation is the least developed pillar of Zambia’s public-sector reform, which dates back to 1993. The Decentralisation Implementation Plan (DIP) was adopted in February 2006 but is not being implemented and government and stakeholders have yet to agree on how to finance it. A memorandum of understanding has been signed with donors and a consensus on the costing and modality – a Decentralisation Trust Fund – should be reached in early 2007. The DIP addresses both fiscal and sectoral devolution in public health, water, and education, where fiscal devolution is clearly the biggest challenge. In the past, local councils have been heavily underfunded and in an ad hoc manner - Zambia’s local councils are among the least funded in Africa at about 2 per cent of the national budget compared to an average of 15 per cent. They have no consitutional right to generate revenue and have severely limited capacity. The government is still undecided where the Department of Decentralisation should be housed. There are proposals to bring it closer to central government, for example in the Cabinet Office. However, it seems that many stakeholders prefer that the Ministry of Local Government and Housing oversee the implementation of the policy and house the secretariat. African Economic Outlook

Access to Drinking Water and Sanitation Zambia has vast water resources in the form of rivers, streams, lakes, and groundwater. However, a pattern of declining rainfall over the years has had a significant adverse impact on rain-fed agriculture. The National Water Policy of 1994, the National Environmental Support Programme, 1994, and the Water Resources Master Plan, 1995-2015, have outlined strategies and comprehensive action plans to develop the water sector to realise its potential for Zambia’s social and economic development. Improving access to drinking water and sanitation, and combating pollution of both surface and groundwater are dealt with through other institutional frameworks. The national budget continues to reflect low government priority in funding the Water and Sanitation Sector, (WSS) shifting most of the burden to local authorities. In the Poverty Reduction Strategy Paper (PRSP) implemented between 2002 and 2004 only 3.5 percent of the budget was allocated to the water sector of which only 32 per cent of the allocation to Rural Water and Sanitation (RWSS) was actually spent. The National Water Policy of 1994 is based on principles of separation of water resources management, under the responsibility of the Ministry of Energy and Water Development (MEWD), from WSS service delivery under the Ministry of Local Government and Housing (MLGH); separation of regulatory and executive functions; devolution of authority to local authorities and private enterprise; and eventually achieving full cost recovery for WSS through user fees. Following the 1994 Water Policy, the 1997 Water Supply and Sanitation Act, established an independent water regulator, the National Water Supply and Sanitation Council (NWASCO), and delegated to local authorities reponsibility to provide water and sanitation in their respective areas. Consequently 50 out of 72 local authorities have established nine commercial water utilities (CUs) in urban areas, which are expected in the long term to be commercially viable. CUs are responsible for service provision to 86 per cent of the urban population; the remaining areas are serviced © AfDB/OECD 2007

Zambia

either by 22 local authorities (13 per cent) or private providers (1 per cent). Commercialisation has been crucial to sustaining improvement in service delivery. Over the years, the CUs have made considerable achievements in extending water supply coverage (from 58 per cent in 2004/05 to 73 per cent in 2005/06), thanks to the support of the Devolution Trust Fund (DTF). The fund is a basket of co-operating partners’ funds which aims at assisting the providers to extend the provision of services to the peri-urban poor (see box). In addition, six out of nine commercial utilities had reached operational cost coverage by the end of 2006. However, this is adversely affected by the non-payment of services by government institutions. Infrastructure funding, in particular in sanitation1, is another major concern and risks jeopardising the current gains in the urban water sector. Besides support from the German government in Southern province and North-Western province, the African Development Bank in Central Province, the World Bank in Lusaka, and the Danish International Development Agency (DANIDA) in Western Province, there is no other significant infrastructure financing in the sector in spite of the very

dilapidated infrastructure and escalating population in urban areas. According to the latest Central Statistical office statistics, Zambia has 62 per cent coverage for drinking water supply (37 per cent rural and 86 per cent urban), and 27 per cent sanitation coverage (13 per cent rural and 41 per cent urban)2. The institutional framework for rural WSS, adopted by the government in 2004, provides a strong basis and key principles for effective management of services, built on devolved authority for RWSS to the local authorities and communities and the WASHE (Water, Sanitation and Health Education) concept to promote sanitation as well as environmental health and the promotion of community management to ensure service sustainability. Despite all these strategies, the rural sector remains largely neglected, in terms of government financing. An attempt to redress this neglect has been made with the development in 2005 of the National Rural Water Supply and Sanitation Programme (NRWSSP), which is the Millennium Development

A Trust Fund to improve service provision in peri-urban areas The Devolution Trust Fund, instituted under the NWASCO, has been financing projects on a pilot scale for CUs to improve water supply since 2003. Funds are provided to CUs to extend their services to the peri-urban poor. A total of about 120 000 people in low-income areas have since benefited in terms of safe and adequate water supply. During the pilot phase, detailed procedures and guidelines were developed to make DTF operations more transparent and accountable. The establishment of the DTF as a basket fund targeting peri-urban and low-cost areas has been lauded as the most significant initiative the government has taken to extend water supply and sanitation services to these areas. Consequently a number of co-operating partners have made financial commitments to support the government achieve this objective. As at end 2006, about EUR8.8 million had been mobilised by the DTF from the Kreditanstalt für Wiederaufbau (KfW), DANIDA, and the European Union (EU) for financing implementation of WSS projects. In the future, there are plans to broaden the DTF mandate to water treatment investment. Nevertheless, the DTF’s scope is limited in that it is not linked to the decentralisation process.

1. The lack of investment in sewerage infrastructure resulted in a reduced sanitation coverage in 2005/06, at about 32 per cent compared to 34 per cent in 2004/05 2. According to the more accurate statistics from the baseline data for the peri-urban areas, the national water supply coverage for urban and peri-urban areas stands at 67 per cent , leaving 33 per cent without access to clean, potable water.

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Goals (MDG) roadmap for RWSS in Zambia. Unfortunately the budget for the NRWSSP and the water sector included in the FNDP, is still very low, at about half the $148 million dollars required for the implementation of the first phase (2006-10). Nevertheless, the NRWSS represents a positive move towards a sector-wide approach (SWAp) which should help to create a strong constituency advocating increased funding for the sector; improve co-ordination and monitoring of sector resources; and help the adoption of policies that favour financial viability and output targeting of the sector. The NRWSSP includes implementation of the WASHE concept through several Area Based Projects (ABP) assisted by different co-operating partners. At present, three ABP are going to be supported by DANIDA ($18 million), the African Development Bank ($25 million) and the Dutch Co-operation Ministry ($18 million) for the next five years. The funds are expected to be channelled directly by the ministry of finance to the local authorities in charge of RWSS planning. To ensure a successful implementation of the NRWSS it will be necessary to move ahead with the decentralisation process to strengthen the institutional and financial capacity within local authorities.

Political Context and Human Resources Development Presidential and legislative elections were held in September 2006, and were declared free and fair by international observers. President Levy Mwanawasa’s ruling Movement of Multi-party Democracy (MMD) retained a large majority in Parliament (81 seats), won 43 per cent of the vote, mainly from rural areas, but incurred heavy losses in urban areas to the Patriotic Front (PF) (804 000 votes). Despite a large parliamentary majority, the MMD faces strong opposition in Parliament from the PF which took over key urban district councils (Lusaka and Copperbelt). The increasing popularity of the PF and its leader, Michael Sata, as well as the creation of new political parties such as the United Liberal Party (ULP), have contributed to a more active political debate in Zambia. African Economic Outlook

President Mwanawasa’s government seems to have heard the warning message from urban areas, where half the population live and is placing renewed emphasis on welfare and employment creation. Sata’s proposals inter alia to expel foreign investors appealed to many Lusaka-based small and medium enterprises that are seeing few benefits from the government’s PSD initiative. Others wanted to register their discontent with the MMD’s perceived failure to bring the fruits of growth to the people and with worsening unemployment. Tansparency International’s 2006 Corruption Perception Index places Zambia in 111th place out of a list of 163 with a score of 2.6 (where zero equals highy corrupt). After three years of investigations and no successful prosecutions, the Anti-Corruption Task Force mandate was scheduled to end in December 2006. Zambia’s widespread petty corruption requires urgent attention. Responsible institutions such as the Anti-Corruption Commission, the Office of the Auditor General (OAG), the police, and the Drug Enforcement Commission are gaining in strength and authority. A draft National Corruption Prevention Strategy was prepared in 2006 and an increase in staff in the OAG from 100 officers to 439 enables representation in most districts. However, they are all insufficiently independent from the executive and their inadequate budgets limit the number of investigations than can be undertaken. If successful, the OAG campaign to build domestic demand for accountability and public awareness of its role, functions and recommendations could increase pressure on the government to respond more swiftly to the Auditor General’s recommendations. The drafting of a new constitution faces continued delays because of weak political will and lack of funding, with much focus on the high cost of the referendum – the last step in the process. Zambians are unlikely to have their long-awaited constitution before the end of the current government in 2011. However, President Mwanawasa in his last term of office may be more favourably disposed towards speeding up the process with support from donors. Civil society is also planning a remobilisation of the population for 2009. But Zambians may be hesitant about taking to the streets © AfDB/OECD 2007

Zambia

again after the government clampdown on the 2002 demonstrations. With the strong economic performance experienced since 1999, the incidence of poverty has declined, but remains high. According to Zambia’s 2004 census 67 per cent of Zambians live below the national poverty line, earning less than K111 747 per month. The World Bank’s 2006 Poverty and Vulnerability Analysis finds there is a continuing fall in life expectancy; a deteriorating stock of human capital; rising malnutrition and ill-health; and continuing high levels of poverty. The World Bank reports that headcount poverty rates range from 62 per cent in rural areas, 40 per cent of whom live in deep poverty, to 45 per cent in urban areas (28 per cent in deep poverty), compared to an average of 70 per cent in 1991. There is a higher incidence of poverty in the Northern province (75 per cent), Luapula (67 per cent) and North-Western province (61 per cent) than in Lusaka and Southern provinces (47 per cent each).

supplies; and high poverty levels all contribute to poor health outcomes. The government’s Basic Health Care Package covers 10 priority areas: free or cost-sharing health services in some areas including, inter alia, child health and nutrition; integrated reproductive health; HIV/AIDS, tuberculosis, sexually-transmitted infections,and malaria; human resources; infrastructure; and equipment. Some improvements in the supply of essential medicines have been registered: health centre stocks improved from 73 per cent in 2002 to 76 per cent in 2004. The FNDP implementation will place emphasis on constructing first level hospitals in the 19 districts which do not already have them.

As demonstrated in the elections, the government is under growing pressure to invest in social welfare and employment creation. Efforts in 2006 through statutory instruments 56 and 57 to establish a minimum wage in Zambia at K500 000 per month for the lowest category of worker are a significant improvement on the previous minimum monthly pay - even if domestic workers are excluded – but not sufficient to cover the monthly cost of basic needs in the country. The Basic Needs Basket for a family of six living in Lusaka in October 2006 was K1 422 950 per month to cover essential food (K463 450) and non-food items.

Zambia is entering its third decade of double-digit HIV/AIDS prevalence, officially at 16 per cent, in 2004. Significant advances have been made by government, co-operating partners, civil society and the private sector in addressing Zambia’s HIV/AIDs epidemic through the National AIDS Council (NAC). However, Zambia has not managed to achieve the overall decrease in prevalence of HIV hoped for in the NAC goal for 2005 (reduction from 19 per cent to 15 per cent in the number of adults aged 15-49 who are infected with HIV). The national target set in 2006 is to reduce infection to below 10 per cent by 2010. About one million Zambians are infected with HIV and 200 000 require anti-retroviral treatment; and the epidemic is estimated to have created over a million AIDS orphans. The lack of human resources to support implementation is a crisis in itself and contributes significantly to the lower coverage of services in Zambia. Local authorities with only limited resources cannot provide a meaningful range of services.

Performance in the health sector has improved only marginally since the adoption of the Millennium Development Goals. Indeed some basic health indicators worsened between 1992 and 2002. The maternal mortality rate increased from 649 deaths per 100 000 live births in 1996 to 729 deaths per 100 000 live births in 2002. Among children under five 47 per cent are stunted and 28 per cent underweight. The HIV/AIDS pandemic; a shortage of health care workers resulting in part from the brain drain; the poor state of health facilities; insufficient drugs and medical

Access to treatment and testing is improving. As of December 2006, about 90 000 people were receiving ARV drugs, compared to about 40 000 a year earlier. The major obstacle to improving ARV provision is a lack of specialised health staff. The number of Voluntary Counselling and Testing Centres reached 500 in 2006 and testing has increased from 9 per cent to 13 per cent. By January 2006, the number of Prevention of Mother to Child Transmission (PMTCT) health facilities had almost doubled to 265 from 136 a year earlier extending coverage to all nine provinces. But there is a worrying

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trend. Despite broad public awareness – in 2005 94 per cent of men and 91 per cent of women knew that HIV/AIDS could be avoided – condom use has dropped, as have their distribution and availability in both urban and rural areas. In respect of the MDGs, Zambia is most likely to succeed in the field of education. Marked success has been recorded for Grades 1-9 since the introduction of free primary education. Enrolment in Grades 1-7 and Grades 8-9 has increased by about 9 per cent annually since 2000. Net enrolment ratios increased from 68.1 per cent in 2000 to 79.4 per cent in 2004, thanks mostly to the significant increase in the number of community schools. However, the gender goal is lagging somewhat with a gross enrolment rate for girls of 86.4 per cent in 2004 compared to 93.2 per cent for boys and completion rates of 65.8 per cent and 78.3 per cent for girls and boys respectively. Despite this progress and the introduction of free primary education for grades 1-7, the poorest families still

struggle to provide schooling for their children. Approximately 15 per cent of Zambian children do not get even the most basic training in literacy through primary education. Accessibility to secondary education remains very limited with a net enrolment ratio in grades 10-12 of only 18.6 per cent. The indirect costs of education in Lusaka, which include school uniforms, books and supplies, greatly exceed the direct costs that must be paid to schools in terms of user, Parent-Teacher Association or project fees. Further commitment and expansion of the Ministry of Education’s bursary programme; school health and nutrition programmes; a campaign in support of the girl child, and allowing pregnant pupils to return to school would all be steps in the right direction. The FNDP foresees significant investment in education over the next four years by allocating over 17 per cent of the budget in an effort to address the numerous remaining challenges, especially the quality of education, retention rates, new school buildings and school books.

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Part Three

.

Statistical Annex

.

Statistical Annex

List of Tables

Methodology Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table10 Table 11 Table 12 Table 13 Table 14 Table 15 Table 16 Table 17 Table 18 Table 19 Table 20 Table 21 Table 22 Table 23 Table 24

Basic Indicators, 2006 Real GDP Growth Rates, 1998-2008 Demand Composition, 2005-08 Public Finances, 2005-08 Monetary Indicators Current Account, 2005-08 Exports, 2005 Diversification and Competitiveness International Prices of Exports, 2000-06 Foreign Direct Investment, 2000-05 Aid Flows, 2000-05 External Debt Indicators Demographic Indicators Poverty and Income Distribution Indicators Access to Services Basic Health Indicators Major Diseases Basic Education Indicators School Enrolment Employment and Remittances Corruption Perception Index Political Troubles Softening of the Regime Hardening of the Regime

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Statistical Annex

Methodology

The table is based on exports disaggregated at 4 digit level (following the SITC3)

on: www.unctad.org/wir). It is the unweighted average of scores of: GDP per capita, the rate of growth of GDP, the share of exports in GDP, telecom infrastructure (the average number of telephone lines per 1 000 inhabitants, and number of mobile phones per 1 000 inhabitants), commercial energy use per capita, share of R&D expenditures in gross national income, share of tertiary students in the population, country risk, exports of natural resources as a percentage of the world total, imports of parts and components of electronics and automobiles as a percentage of the world total, world market share of exports of services and inward FDI stock as a percentage of the world total (Source: UNCTAD, World Investment Report 2006).

Table 8. Diversification and Competitiveness

Table 11. Aid Flows, 2000-05

The diversification indicator measures the extent to which exports are diversified. It is constructed as the inverse of a Herfindahl index, using disaggregated exports at 4 digits (following the SITC3). A higher index indicates more export diversification. The competitiveness indicator has two aspects: the sectoral effect and the global competitivity effect. In order to compute both competitiveness indicators, we decompose the growth of exports into three components: the growth rate of total international trade over the reference period (2001-05) (not reported); the contribution to a country’s export growth of the dynamics of the sectoral markets where the country sells its products, assuming that its sectoral market shares are constant (a weighted average of the differences between the sectoral export growth rates – measured at the world level – and total international trade growth, the weights being the shares of the corresponding products in the country’s total exports); the competitiveness effect, or the balance (export growth minus world growth and sector effect), measuring the contribution of changes in sectoral market shares to a country’s export growth.

The DAC countries are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States and the Commission of the European Communities.

Tables 1 to 6. Where indicated, the figures are reported on a fiscal-year basis. Figures for Egypt, Ethiopia, Kenya, Mauritius, Tanzania, and Uganda are from July to June in the reference year. For South Africa and Botswana, fiscal year 2005 is from April 2005 to March 2006. Table 7. Exports, 2005

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Table 10. Foreign Direct Investment, 2000-05 The UNCTAD Inward Potential Index is based on 12 economic and structural variables measured by their respective scores on a range of 0-1 (raw data are available African Economic Outlook

Table 13. Demographic Indicators Infant mortality rate: under one-year-old child deaths per live birth per year. Total fertility rate: average number of children per woman. Mortality under age 5: probability that a newborn infant would die before the age of 5. Table 14. Poverty and Income Distribution Indicators National poverty line: absolute poverty line corresponding to the value of consumption necessary to satisfy minimum subsistence needs. International poverty line: absolute poverty line corresponding to a level of income or consumption of $1 or $2 a day. Gini index: index measuring the intensity of inequality in income or consumption expenditure © AfDB/OECD 2007

Statistical Annex

distribution. Perfect equality leads to a Gini index of zero and maximum inequality to a Gini index of 100. Share of consumption: share of total consumption for a decile of the population ranked by level of consumption. Table 15. Access to Services The Sanitation coverage is the percentage of the population with access to improved sanitation technologies (connection to a public sewer, connection to septic system, pour-flush latrine, simple pit latrine or ventilated improved pit latrine). The water supply coverage is the percentage of the population with access to improved water supply (household connection, public standpipe, borehole, protected dug well and protected spring or rainwater collection). Table 16. Basic Health Indicators Life expectancy at birth is the average number of years a newborn infant would live under the hypothesis that, during its life, the conditions of mortality remain the same as observed at its birth. Life expectancy at birth with AIDS is the estimated average number of years a newborn infant would live under the hypothesis that, during its life, the conditions of mortality remain the same as observed at its birth in particular the characteristics of AIDS epidemic. Life expectancy at birth without AIDS is the estimated number of years a newborn infant would live under the hypothesis of absence of AIDS during its life. Under nourishment prevalence is the proportion of the population that is suffering insufficient food intake to meet dietary energy requirements continuously. Food availability is the available nutritious food for human consumption expressed in kilo-calories per person per day (note that the recommended daily caloric intake for an active healthy life is 2 100 calories). Public share of total health expenditure is calculated by defining public health expenditure as current and capital outlays of government, compulsory social security schemes, extrabudgetary funds dedicated to health services delivery or financing and grants and loans provided by

© AfDB/OECD 2007

international agencies, other national authorities and commercial banks. Private share of total health expenditure is calculated by defining private expenditure as private insurance schemes and prepaid medical care plans, services delivered or financed by enterprises, outlays by non-governmental organisations and nonprofit institutions serving mainly households, out-ofpocket payments, and other privately funded schemes not elsewhere classified, including investment outlays. Table 17. Major Diseases Healthy life expectancy at birth is the average equivalent number of years in full health a newborn infant would live under the hypothesis that, during its life, the conditions of mortality and ill-health remain the same as observed at its birth. People living with HIV/AIDS is estimated whether or not they have developed symptoms of AIDS. HIV/AIDS adult prevalence is the estimate of the adult population (15-49) living with HIV/AIDS. Malaria notified cases are cases of malaria reported from the different local case detection and reporting systems. These figures should be considered with caution because of the diversity of sources and probable underestimation. The Measles incidence is the number of new cases of measles reported during the reference year. MCV: Measles Containing Vaccine. DTP3: Third dose of Diphtheria and Tetanus toxoids and Pertussis vaccine. Table 19. School Enrolment Gross enrolment ratio: population enrolled in a specific level of education, regardless of age, expressed as a percentage of the official school-age pupils enrolled in that level. Net enrolment ratio: official school-age population enrolled in a specific level of education expressed as a percentage of the total population enrolled in that level.

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Statistical Annex

Table 20. Employment and Remittances

Table 22. Political Troubles

Participation rate: measure of the proportion of a country’s working-age population that engages actively in the labour market, either by working or looking for work. It provides an indication of the relative size of the supply of labour available to engage in the production of goods and services.

• Strikes 0 = non-occurrence, 1 = 1 strike or number of strikers lower than 1 000 (inclusive), 2 = 2 strikes or number of strikers between 1 000 and 5 000 (inclusive), 3 = 3 strikes or number of strikers higher than 5 000.

Total unemployment: proportion of the labour force that does not have a job and is actively looking for work. Inactivity rate: percentage of the population that is neither working nor seeking work (that is, not in the labour force). Table 21. Corruption Perception Index, 2000-06

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The Corruption Perception Index (CPI) is a composite indicator based on surveys of business people and assessments of country analysts. A background paper presenting the methodology and validity of the CPI is available on the Transparency International website: http://www.transparency.org/policy_research/surveys_in dices/cpi/2006/methodology Table 22 to 24. Political Indicators The political indicators were built on information taken from the weekly newspaper Marchés Tropicaux et Méditerranéens according to a methodology first proposed by Dessus, Lafay and Morrisson1. The qualitative information derived from the newspaper were either computed as 0-1 variables with 0 being the non-occurrence of the event and 1 its occurrence or as 4-value indicators (with 0: non-occurrence, 1: occurrence but weak intensity, 2: medium intensity and 3: strong intensity). From these indicators, three main political indexes were constructed: an index of conflicts, a measure of the softening of the political regime and one of its hardening.

• Unrest and violence (number of dead and injured) Dead 0 = none, 1 = between 1 and 10 (non inclusive), 2 = between 10 and 100 (non inclusive), 3 = higher than 100. Injured 0 = none, 1 = between 1 and 50 (non inclusive) or if the number of dead is between 1 and 10, 2 = between 50 and 500 (non inclusive) or if the number of dead is between 10 and 100, 3 = higher than 500 or if the number of dead exceeds 100. • Demonstrations 0 = non-occurrence, 1 = 1 demonstration or number of strikers lower than 5 000 (non inclusive), 2 = 2 demonstrations or number of strikers between 5 000 and 10 000 (non inclusive), 3 = 3 demonstrations or number of strikers higher than 10 000. • Coup d’état and attempted coups d’état Table 23. Softening of the Political Regime • Lifting of state of emergency • Releases of political prisoners • Measures in favour of human rights

1. Dessus, S., D. Lafay and C. Morrisson (1994), “A Politico-economic Model for Stabilisation in Africa”, Journal of African Economies.

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Statistical Annex

• Improvement of political governance (fight against corruption…)

• Violence perpetuated by the police (number of dead and injured)

• Relinquishment of political rehabilitation, return from exile

Dead 0 = none, 1 = between 1 and 10 (non inclusive), 2 = between 10 and 100 (non inclusive), 3 = higher or equal to 100.

persecution,

• Political opening (measures in favour of democracy) 1 = Discussion with the opposition, 2 = Entry of the opposition to power, 3 = Opening of a regime to elections.

• Lifting of bans on press or public debates

Injured 0 = none, 1 = between 1 and 50 (non inclusive), 2 = between 50 and 500 (non inclusive), 3 = higher or equal to 500.

Table 24. Hardening of the Political Regime

• Prosecutions, executions

• State of emergency

• Bans on strikes and demonstrations

• Arrests, incarcerations 0 = non-occurrence, 1 = between 1 and 10 (non inclusive), 2 = between 10 and 100 (non inclusive), 3 = higher than 100.

• Bans on press or public debates

• Additional resources for the police, propaganda or censorship

A principal component analysis was undertaken in order to determine a relevant weight for each qualitative variable within the synthetic indexes.

• Lifting of bans on strikes or demonstration

571

• Closing of schools • Obligatory demonstrations

• Toughening of the political environment (expulsions, dismissals, curfew, and dissolution of political parties)

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African Economic Outlook

Statistical Annex

Weights in “Political troubles” Weights Strike Dead Injured Demonstration Coups d'état and attempts

0.286 0.950 0.958 0.543 0.059

Weights in “Softening of the political regime” Weights Lifting of state of emergency Release of political prisoners Measures in favour of human rights Improvement of political governance Relinquishment of political persecution Political opening Lifting of bans on strikes Lifting of bans on public debates

0.282 0.709 0.373 0.089 0.502 0.373 0.323 0.522

Weights in “Hardening of the political regime” Weights

572 State of emergency Violence perpetuated by the police: Dead Injured Arrests Additional resources for the police Toughening of the political environment Prosecutions, executions Bans on strikes Bans on demonstrations Closing of schools

African Economic Outlook

0.631 0.261 0.423 0.402 0.603 0.253 0.583 0.383 0.292 0.092

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Tables

Algeria Angola Benin Botswana** Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt* Equatorial Guinea Eritrea Ethiopia* Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar Malawi Mali

33 354 16 400 8 703 1 760 13 634 7 834 16 601 519 4 093 10 032 819 4 117 59 320 18 454 807 75 437 515 4 560 79 289 1 406 1 556 22 556 9 603 1 634 35 106 1 791 3 356 5 968 19 105 13 166 13 918

Population (thousands)

Land area (thousands of km2) 2 382 1 247 115 582 274 28 476 4 623 1 284 2 342 2 345 322 23 1 001 28 118 1 104 268 11 239 246 36 593 30 111 1 760 587 118 1 240

574

14 13 76 3 50 281 35 129 7 8 366 12 25 57 35 75 18 39 72 5 138 95 39 45 59 59 30 3 33 111 11

238 821 56 378 10 089 20 431 17 916 5 935 47 286 3 356 4 890 15 558 1 195 5 739 50 764 25 714 1 739 339 493 20 406 4 075 62 952 10 783 3 230 48 400 20 217 1 222 64 428 5 198 .. 71 676 17 570 8 592 13 838

7 160 3 438 1 159 11 611 1 314 758 2 848 6 473 1 195 1 551 1 459 1 394 856 1 393 2 155 4 500 39 623 894 794 7 668 2 076 2 146 2 105 748 1 835 2 903 .. 12 009 920 653 994

Population Density GDP based on PPP valuation*** GDP per Capita (pop/km2) ($ million) (PPP valuation, $)

Table 1 - Basic Indicators, 2006

4, 2 9,0 4,4 7,2 5,9 2,2 3,9 6,6 0,9 9,2 2,2 4,0 1,5 0,7 2,4 4,9 22,9 1,2 4,5 0,4 4,7 4,9 3,5 - 1,2 3,3 1,6 .. 3,4 3,5 2,5 5,3

Annual real GDP growth (average over 1998-2006)

Statistical Annex

African Economic Outlook

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© AfDB/OECD 2007

158 256 943 158 052 426 375 230 160 936 81 679 496 594 992 029 025 306 210 857 861 085

924 320

5 8 47 36 1 39 6 10 29 11 13

11

3 1 31 20 2 14 134 9

30 323

1 026 2 711 802 824 1 267 924 26 1 197 0,455 72 638 1 221 2 506 17 945 57 164 241 753 391

Land area (thousands of km2)

30

3 616 45 25 2 11 145 350 166 61 179 79 13 39 15 59 41 111 62 124 16 33

270 234 404 447 377 819 839 430 270 713 979 378 .. 911 227 935 176 850 301 633 842 724

2 594 649

611 98 5 23 9 90 46 13 29

5

20

9 18 185 39 17 10 143 15

936 519 804 957 467 750 070 672 684 735 034 947 .. 857 655 765 594 562 844 562 167 272 2 844

1 8 1 1 2

12 2 5

1 1 1 1 12

2 14 5 1 8

Population Density GDP based on PPP valuation*** GDP per Capita (pop/km2) ($ million) (PPP valuation, $)

(cont.)

Note: * Fiscal year July (n-1)/June (n) ** Fiscal year April (n)/ March (n+1) *** Purchasing Power Parity. Sources: Population: United Nations, Department of Economic and Social Affairs, Population Division, World Population Prospects, The 2004 Revision. Land area: African Development Indicators, World Bank. GDP: Various domestic authorities; IMF World Economic Outlook and authors' estimates and forecasts.

Africa

Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda* Zambia Zimbabwe

Population (thousands)

Table 1 - Basic Indicators, 2006

http://dx.doi.org/10.1787/673625150313

4,3

.. 3,5 6,5 2,4 5,6 1,8 4,9 5,6 3,7 - 4,8

5,0 4,2 4,6 8,1 4,3 4,0 4,5 6,0 3,7 4,6 0,6 8,0

Annual real GDP growth (average over 1998-2006)

Statistical Annex

African Economic Outlook

575

Algeria Angola Benin Botswana** Burkina Faso Burundi Cameroon Cape Verde Central Afr. Rep. Chad Comoros Congo Congo. Dem. Rep. Côte d’Ivoire Djibouti Egypt* Equatorial Guinea Eritrea Ethiopia* Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar Malawi Mali

5.1 6.8 4.0 14.5 7.3 4.8 4.9 8.4 3.9 6.9 1.2 3.7 -1.7 5.4 0.1 7.6 17.7 1.8 -4.0 3.5 6.5 4.7 4.8 -28.2 3.4 -4.5 … -0.4 3.9 1.1 8.1

1998 3.2 3.2 5.3 7.1 6.2 -1.0 4.1 11.9 3.6 -0.5 1.9 -2.7 -4.3 1.6 3.0 6.1 23.2 0.0 6.0 -8.9 6.4 4.4 4.7 7.6 2.1 0.2 … 0.3 4.7 3.5 5.7

1999

576

2.2 3.0 4.9 7.3 1.9 -0.9 4.2 7.3 1.8 -0.5 1.4 7.6 -6.9 -2.3 0.5 5.4 13.1 -13.1 5.9 -1.9 5.5 3.7 1.9 7.5 0.5 2.6 … 1.1 4.7 0.8 -3.3

2000 2.1 3.1 6.2 9.1 7.1 2.1 4.5 7.1 0.3 11.5 3.3 3.8 -2.1 0.1 2.0 3.5 78.3 9.2 7.7 2.1 5.8 4.2 4.0 0.2 4.5 1.8 … 4.5 6.0 -4.1 12.0

2001 4.7 14.5 4.4 1.6 5.4 4.4 4.0 4.3 -0.6 8.5 4.1 4.6 3.5 -1.6 2.6 3.2 21.3 0.7 1.2 -0.3 -3.2 4.5 4.2 -7.1 0.6 2.9 … 3.3 -12.7 2.1 4.2

2002 6.9 3.3 3.9 9.5 8.0 -1.2 4.0 4.7 -7.6 14.3 2.5 0.8 5.8 -1.7 3.2 3.2 14.1 3.9 -3.5 2.5 6.9 5.2 1.2 -0.6 3.0 2.7 … 9.1 9.8 3.9 7.6

2003 5.2 11.2 3.1 3.4 4.6 4.8 3.7 4.4 1.3 33.7 -0.2 3.6 6.6 1.6 3.0 4.1 32.4 2.0 12.3 1.4 5.1 5.8 2.7 2.2 4.9 4.0 … 4.6 5.3 5.1 2.3

2004

Table 2 - Real GDP Growth Rates, 1998-2008

5.3 20.6 2.9 8.4 7.1 0.9 2.2 5.8 2.2 8.6 4.2 7.7 6.5 1.8 3.2 4.5 6.0 4.8 8.7 3.0 5.0 5.8 3.3 3.2 5.8 2.9 … 3.5 4.6 2.2 6.1

2005 2.9 14.9 4.5 4.2 5.5 6.1 3.5 5.8 3.5 0.2 1.2 6.8 6.5 1.4 4.2 6.8 0.4 1.5 5.9 2.1 4.5 6.1 5.0 4.6 5.0 1.6 … 5.0 4.8 8.4 5.0

2006(e) 5.1 26.9 4.5 4.3 5.4 6.6 4.0 6.5 4.0 2.5 3.0 1.9 6.2 2.4 5.0 6.6 9.4 2.0 6.3 2.0 5.0 5.9 5.0 5.2 5.3 1.4 … 4.6 5.2 4.8 4.8

2007(p)

5.0 17.3 4.8 4.1 5.1 7.1 4.0 7.0 4.3 1.0 4.5 6.6 6.0 2.6 5.6 6.7 17.8 3.3 6.9 2.5 5.0 6.0 5.0 5.8 5.1 2.0 … 4.4 5.5 5.1 4.6

2008(p)

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007

3.4

2.8 6.1 7.7 12.6 3.3 12.6 0.3 8.9 2.5 5.9 2.5 -0.8 … 0.5 4.3 3.3 3.7 -2.3 4.8 3.6 -1.9 0.1 3.1

6.7 2.6 0.5 7.5 3.4 1.1 1.5 7.6 2.5 6.3 1.9 -8.1 … 2.4 3.1 3.5 3.5 2.4 6.1 8.2 2.2 -3.6

1999

3.4

1.8 9.0 1.8 1.9 3.5 -2.6 5.4 6.0 3.0 3.2 4.3 3.8 … 4.2 8.4 2.0 5.1 1.0 4.7 5.4 3.6 -7.3

2000

4.2

2.9 2.6 7.6 13.1 2.4 7.4 3.1 6.7 4.0 4.6 -2.2 18.2 … 2.7 6.2 1.7 6.2 0.2 4.9 4.9 4.9 -2.7

2001

3.6

1.1 1.9 3.3 8.2 6.7 5.3 1.5 9.4 4.1 0.7 1.3 27.5 … 3.7 6.4 2.8 7.2 4.1 1.7 6.4 3.3 -4.4

2002

Note: * Fiscal year July (n-1)/June (n) ** Fiscal year April (n)/ March (n+1). Sources: Various domestic authorities; IMF World Economic Outlook and authors' estimates and forecasts.

Africa

Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda* Zambia Zimbabwe

1998

2004 5.2 5.7 5.2 7.5 6.6 -1.0 6.1 4.0 3.8 5.6 -2.0 7.4 … 4.8 5.2 2.1 6.7 2.3 6.0 5.7 5.4 -3.8 5.4

5.6 4.3 6.1 7.9 3.5 3.3 10.7 0.9 4.0 6.7 -6.3 9.3 … 3.1 4.9 2.4 5.7 5.2 5.6 4.4 5.1 -10.4 4.6

(cont.)

2003

Table 2 - Real GDP Growth Rates, 1998-2008

5.2

5.4 1.2 2.4 6.2 4.2 7.0 6.5 6.0 3.8 5.5 1.2 7.2 … 5.1 7.9 1.9 6.8 1.2 4.2 6.7 5.1 -6.5

2005

5.9

6.3 5.0 3.4 7.3 4.8 4.0 7.0 5.7 5.5 5.6 1.5 6.5 … 4.5 11.3 1.6 6.8 2.9 5.8 6.0 5.8 -4.7

2007(p)

5.7

2.6 5.4 4.8 6.8 4.9 3.9 5.3 4.9 6.5 5.1 2.0 6.5 … 4.4 9.3 1.5 6.6 3.2 5.5 5.9 6.0 -3.3

2008(p)

http://dx.doi.org/10.1787/368601060524

5.5

13.9 3.9 7.3 7.9 4.8 3.1 5.3 4.3 5.5 2.9 4.5 7.4 … 5.0 12.1 1.8 5.7 1.8 5.8 5.4 5.9 -5.1

2006(e)

Statistical Annex

577

African Economic Outlook

African Economic Outlook Gross Capital Formation

2005

External Sector

33.6

43.9

76.8 27.8 72.5 71.7 24.7 27.4 85.3 70.3 71.6 84.2 31.4 81.3 76.8 82.4

Angola

Benin Botswana** Burkina Faso Cameroon Chad Congo Congo. Dem. Rep. Côte d’Ivoire Egypt* Ethiopia* Gabon Ghana Kenya Madagascar

12.0 22.8 21.5 9.9 20.8 13.2 8.3 13.9 12.7 13.8 11.5 15.3 17.1 9.0

24.1

11.8 10.2 25.6 9.5 14.5 17.9 17.0 10.5 6.6 13.4 8.3 17.4 17.0 12.2 16.7

2.8

20.4 8.0 9.1 11.1 4.9 8.7 5.4 3.7 2.7 4.5 12.1 5.8 12.0 4.6 9.3

4.7

9.6 21.6 49.8 9.7 20.4 54.4 87.1 31.6 50.6 30.3 15.8 66.2 36.2 26.7 28.2

72.6

48.0

Percentage of GDP

28.5 35.1 24.3 21.4 26.6 50.2 39.3 44.1 32.6 34.3 32.3 61.8 37.4 45.5

48.0

23.5

Private Public Private Public** Exports Imports

Final Consumption

Algeria

578 2007(p)

2008(p)

3.2 3.1 5.3 3.0 1.6 3.5 9.2 2.4 9.3 5.5 -1.5 7.7 4.8 3.3

21.7

3.4 13.5 15.8 6.1 7.5 7.3 19.1 8.2 -4.3 15.8 17.5 10.2 13.4 15.9 14.8

51.9

6.0 5.0 1.6 9.7 3.4 -1.0 5.8 13.8 2.1 13.1 2.1 2.0 5.9 3.8 5.6

9.6

1.6 5.2 8.7 8.4 4.4 7.0 7.4 25.1 3.3 17.2 10.4 3.2 15.4 5.6 8.1

26.9

5.7

Real Percentage Growth

4.6 2.8 4.5 4.0 4.3 9.6 3.8 2.7 5.8 7.2 2.1 4.6 3.9 4.3

18.1

3.9 7.6 8.3 6.8 6.9 8.3 10.6 29.5 2.1 17.0 3.0 5.0 7.7 12.5 8.5

12.8

8.7

6.0 3.4 12.1 2.2 -0.2 -4.9 7.5 1.8 5.0 5.0 -2.7 4.4 4.5 3.7

30.1

4.1

7.0 4.0 5.5 4.5 6.6 6.1 4.0 2.5 11.0 6.9 1.2 4.5 2.2 4.4

14.8

4.5

Real Percentage Growth

4.9 2.7 5.4 4.1 3.7 6.5 3.4 2.7 7.2 7.3 1.2 6.8 4.4 5.0

21.1

4.0

8.4 7.3 6.4 6.4 7.0 5.0 26.3 6.4 14.2 5.9 3.8 8.7 8.9 7.4

13.7

9.3

6.8 3.3 8.4 2.0 -3.0 5.1 7.8 2.2 2.5 5.2 1.3 4.6 5.0 4.1

7.0

3.7

8.1 3.6 6.8 4.7 5.4 3.8 4.3 3.5 11.8 7.3 0.8 9.5 2.5 4.8

16.1

5.9

Real Percentage Growth

Total Gross Exports Imports Total Gross Exports Imports Total Gross Exports Imports Final Capital Final Capital Final Capital Con- FormaCon- FormaCon- Formasump- tion sump- tion sump- tion tion Total tion Total tion Total

2006(e)

Table 3 - Demand Composition and Growth Rate, 2005-08

Statistical Annex

© AfDB/OECD 2007

Gross Capital Formation External Sector

© AfDB/OECD 2007

51.7 77.7 36.7 86.8 77.8 63.5 78.0 63.8 78.5 66.2

Namibia Niger Nigeria Rwanda Senegal South Africa Tanzania Tunisia Uganda* Zambia

29.4 15.0 21.2 12.6 13.9 20.2 7.3 15.5 14.4 13.7

16.8 17.1 14.8 19.2 12.9 18.0 13.5 11.5 8.8 15.6 12.9 13.1 16.0 16.6 16.0

3.7 14.2 15.3 27.3 17.4 7.6 5.3 9.4 10.1 8.1 4.9 9.1 7.4 4.6 7.0

7.3 7.0 6.3 2.9 12.5 35.1 20.9 55.2 11.4 26.1 27.1 22.9 48.0 13.1 33.9

26.7 24.8 59.9 31.6 30.9 41.8 32.5 34.0 29.8 41.5 28.6 30.4 50.6 27.2 36.7

60.6 28.6 65.9 37.8 42.9

2006(e)

2007(p)

(cont.) 2008(p)

4.2 3.5 6.2 5.2 7.6 4.9 3.9 3.0 6.5 7.8

6.6 2.1 2.0 9.3 2.3

-6.5 9.0 5.4 7.3 6.7 7.5 2.5 -4.0 6.6 -9.4 2.2 5.7 1.5 1.8 6.2

-0.2 10.0 12.5 5.9 27.5 7.3 7.2 22.9 4.8 6.1 10.6 8.8 1.7 20.1 7.3

7.4 6.7 15.2 8.5 6.8 5.3 4.0 1.0 13.6 10.5

-7.3 6.4 5.4 8.7 6.7

Real Percentage Growth

0.0 4.2 6.2 4.8 3.3 4.2 6.3 5.7 5.1 6.4

1.2 3.4 4.3 2.5 3.3 5.5 6.1 19.8 17.9 5.1 9.9 10.4 7.3 11.8 12.3

24.6 5.4 7.0 4.5 15.0 10.0 2.4 3.1 5.5 9.8 2.3 3.0 5.4 4.3 4.6

5.6 6.2 5.5 4.9 6.7

1.8 5.3 8.1 7.2 2.3 4.9 8.9 5.0 7.1 9.5

1.1 3.3 5.1 2.7 3.9

Real Percentage Growth

8.7 6.1 12.0 7.9 5.1 9.9 12.0 9.0 10.7 10.2

11.1 5.7 7.3 7.0 11.7

6.2 2.6 2.3 6.7 2.4 2.1 3.1 4.2 3.1 6.3

4.7 5.0 3.1 6.5 6.2

5.1 4.8 6.9 4.5 4.0 6.1 7.7 6.7 7.1 5.6

4.7 5.2 1.4 4.1 7.1

http://dx.doi.org/10.1787/325822570786

3.1 3.9 5.2 4.6 5.4 4.5 5.5 6.3 5.3 4.4

3.6 4.3 3.7 3.4 5.3

Real Percentage Growth

Total Gross Exports Imports Total Gross Exports Imports Total Gross Exports Imports Final Capital Final Capital Final Capital Con- FormaCon- FormaCon- Formasump- tion sump- tion sump- tion tion Total tion Total tion Total

Note: * Fiscal year July (n-1)/June (n) ** Fiscal year April (n)/ March (n+1). Sources: Various domestic authorities; IMF World Economic Outlook and authors' estimates and forecasts.

106.1 65.6 69.6 56.6 69.1

Malawi Mali Mauritius Morocco Mozambique

Percentage of GDP

Private Public Private Public** Exports Imports

Final Consumption

2005

Table 3 - Demand Composition and Growth Rate, 2005-08

Statistical Annex

579

African Economic Outlook

Algeria Angola Benin Botswana** Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo. Dem. Rep. Côte d’Ivoire Djibouti Egypt* Equatorial Guinea Eritrea Ethiopia* Gabon Gambia Ghana Guinea Guinea Bissau Kenya* Lesotho Liberia Libya Madagascar

41.0 38.0 18.4 36.8 16.8 30.5 18.1 31.2 12.2 12.3 19.9 39.6 16.8 18.2 37.1 20.6 40.5 37.0 20.5 31.4 21.4 27.9 13.6 26.0 22.6 49.5 ... 73.9 16.7

Total revenue and grants

580

29.1 30.1 21.3 35.7 21.7 36.8 14.6 36.3 16.7 13.0 19.9 23.7 19.5 19.9 36.8 30.0 18.1 56.6 25.2 21.9 30.1 30.8 14.4 38.1 22.5 45.2 ... 41.6 21.3

2005 Total expenditure and net lending 11.9 7.9 -2.9 1.2 -4.9 -6.3 3.6 -5.1 -4.6 -0.8 0.1 15.9 -2.7 -1.7 0.2 -9.4 22.3 -19.7 -4.7 9.4 -8.6 -3.0 -0.8 -12.1 0.1 4.2 ... 32.2 -4.7

Overall balance

41.7 35.4 19.0 36.9 19.8 41.4 18.8 34.1 10.8 11.7 20.6 40.1 22.0 17.9 33.7 21.1 44.3 34.7 18.9 31.6 23.0 28.6 15.0 36.1 23.0 58.3 ... 73.9 17.0

Total revenue and grants 28.7 30.0 21.8 37.1 23.1 41.8 14.8 41.2 12.1 13.3 21.8 21.2 23.2 19.9 34.9 30.4 18.5 52.6 26.3 20.9 27.7 32.8 14.0 46.9 26.5 55.5 ... 31.7 21.7

2006(e) Total expenditure and net lending 13.0 5.4 -2.7 -0.2 -3.3 -0.4 4.0 -7.1 -1.4 -1.7 -1.2 18.9 -1.2 -2.0 -1.2 -9.3 25.8 -17.9 -7.4 10.7 -4.8 -4.3 1.0 -10.8 -3.5 2.7 ... 42.1 -4.7

40.1 34.8 19.3 37.0 16.9 33.2 18.1 33.6 11.0 11.5 23.2 38.0 21.1 17.7 29.9 20.8 48.7 37.7 20.8 30.7 28.3 29.2 15.3 29.8 22.5 50.7 ... 75.2 16.1

Total revenue and grants 29.4 28.5 22.0 37.1 22.6 41.7 15.2 37.9 12.2 14.0 23.8 25.7 22.5 19.8 31.2 29.8 16.3 54.0 26.6 23.2 28.5 32.8 13.8 37.9 23.7 52.4 ... 30.0 21.0

2007(p) Total expenditure and net lending

(percentage of GDP)

Overall balance

Table 4 - Public Finances, 2005-08

10.7 6.3 -2.7 -0.1 -5.7 -8.6 2.9 -4.3 -1.1 -2.5 -0.6 12.3 -1.4 -2.1 -1.3 -9.0 32.4 -16.3 -5.8 7.5 -0.2 -3.6 1.4 -8.1 -1.2 -1.7 ... 45.1 -4.8

Overall balance

39.6 32.7 19.5 36.1 17.2 33.3 17.9 34.3 11.3 11.1 24.8 37.6 20.8 17.6 29.3 21.2 49.4 40.2 20.5 30.4 27.4 29.0 15.0 30.1 22.2 48.5 ... 75.0 15.1

Total revenue and grants

29.8 28.9 22.4 36.5 23.1 41.0 15.3 38.4 12.4 14.7 24.6 25.4 22.8 20.0 35.3 29.3 15.4 54.0 25.8 23.2 27.3 32.6 14.1 36.9 23.6 50.0 ... 30.7 20.2

2008(p) Total expenditure and net lending

9.7 3.8 -2.8 -0.3 -6.0 -7.7 2.6 -4.0 -1.1 -3.6 0.2 12.1 -1.9 -2.3 -6.0 -8.0 34.0 -13.8 -5.6 7.2 0.1 -3.6 1.0 -6.8 -1.4 -1.6 ... 44.3 -5.1

Overall balance

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007 30.6

37.5 21.6 26.4 19.9 23.9 20.0 30.0 17.1 43.3 29.2 129.9 21.1 53.5 21.9 ... 26.3 22.0 32.7 21.3 15.4 25.0 20.9 23.0 44.2 28.2

43.1 24.8 33.5 24.9 29.9 22.2 31.1 18.9 32.6 28.5 70.6 24.3 52.4 24.6 ... 26.7 23.8 36.8 25.9 16.2 27.6 21.6 25.6 50.3

2005 Total expenditure and net lending

2.4

-5.6 -3.2 -7.0 -5.0 -6.0 -2.3 -1.1 -1.8 10.7 0.7 59.3 -3.2 1.1 -2.7 ... -0.3 -1.8 -4.1 -4.6 -0.8 -2.6 -0.7 -2.6 -6.1

Overall balance

31.2

44.1 22.7 33.4 20.1 23.4 23.0 36.4 15.3 42.1 28.2 104.1 21.8 51.1 21.1 ... 26.3 24.4 30.7 20.4 15.6 24.2 19.7 21.1 38.0

Total revenue and grants

28.0

47.1 24.4 40.4 25.4 29.0 25.1 34.2 19.3 32.3 27.5 77.9 27.2 53.8 21.6 ... 26.7 24.2 37.0 26.5 18.8 27.1 21.8 23.6 41.2

2006(e) Total expenditure and net lending

Note: * Fiscal year July (n-1)/June (n) ** Fiscal year April (n)/ March (n+1). Sources: Various domestic authorities; IMF World Economic Outlook and authors' estimates and forecasts.

Africa

Malawi Mali Mauritania Mauritius* Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa** Sudan Swaziland Tanzania* Togo Tunisia Uganda* Zambia Zimbabwe

Total revenue and grants Total revenue and grants 41.6 22.6 26.6 20.4 23.2 21.0 30.4 14.7 38.9 27.6 308.7 21.8 48.1 20.1 ... 26.2 30.5 29.4 22.0 16.4 24.0 18.6 21.2 37.4 31.0

-3.0 -1.7 -7.0 -5.3 -5.6 -2.0 2.2 -4.0 9.8 0.7 26.2 -5.5 -2.7 -0.5 ... -0.4 0.2 -6.3 -6.0 -3.2 -3.0 -2.1 -2.5 -3.1 3.2

28.2

43.1 24.4 32.4 25.1 28.9 26.7 32.7 19.1 33.8 28.8 73.2 26.1 52.4 22.6 ... 26.7 27.5 37.1 26.4 18.0 27.0 21.7 23.2 39.2

2007(p) Total expenditure and net lending

(percentage of GDP) (cont.)

Overall balance

Table 4 - Public Finances, 2005-08

2.7

-1.5 -1.8 -5.8 -4.7 -5.7 -5.7 -2.2 -4.4 5.1 -1.1 235.5 -4.3 -4.4 -2.5 ... -0.4 3.0 -7.7 -4.5 -1.6 -3.0 -3.2 -2.0 -1.8

Overall balance

28.5

46.4 24.9 32.0 24.9 28.5 26.8 32.1 18.8 35.2 28.9 68.5 26.2 52.7 22.5 ... 26.7 29.0 37.7 26.2 19.0 27.3 21.7 23.9 43.0

2008(p) Total expenditure and net lending

2.1

-6.7 -2.5 -5.6 -4.4 -5.6 -6.3 -2.3 -3.7 2.1 -1.0 -10.4 -4.4 -4.7 -2.5 ... -0.5 2.9 -8.5 -4.1 -2.0 -3.3 -3.8 -1.8 -5.3

Overall balance

http://dx.doi.org/10.1787/786335886722

30.7

39.7 22.4 26.4 20.5 22.8 20.5 29.8 15.1 37.3 27.9 58.1 21.8 48.0 20.0 ... 26.2 31.9 29.2 22.2 17.0 23.9 17.9 22.1 37.8

Total revenue and grants

Statistical Annex

581

African Economic Outlook

Algeria Angola Benin Botswana** Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt* Equatorial Guinea Eritrea Ethiopia* Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

1.9 23.0 5.4 7.8 6.4 13.5 2.0 0.4 2.9 7.9 3.2 2.5 21.4 3.9 3.5 11.4 5.0 12.4 6.8 -0.2 3.2 15.1 31.1 3.4 10.3 4.0 6.9 2.5 18.4

2005

2.9 10.1 2.4 11.6 2.8 5.0 3.0 3.6 5.6 6.3 3.8 4.0 22.0 2.4 3.0 4.1 5.2 10.9 10.5 1.9 2.0 10.9 25.0 1.9 14.5 4.5 8.0 3.0 11.4

3.3 8.5 1.8 5.8 2.7 3.3 1.8 0.2 3.1 3.0 3.0 2.8 7.4 2.6 3.0 6.4 4.1 10.5 6.0 1.8 3.7 7.2 12.4 2.2 3.6 4.8 7.5 3.5 9.4

3.2 9.3 2.3 5.5 0.3 4.0 2.1 0.3 2.3 3.0 3.0 2.3 7.1 2.9 3.0 6.1 3.7 10.0 5.9 2.2 3.2 6.9 8.1 2.0 3.8 4.5 7.5 3.5 7.7

2006(e) 2007(p) 2008(p)

Inflation (%)

582

African Economic Outlook 1

9 2

1

72.1 83.5 528.3 4.7 528.3 100.9 528.3 88.8 528.3 528.3 396.2 528.3 395.9 528.3 177.7 6.2 528.3 13.8 8.6 528.3 30.0 004.6 225.0 528.3 79.2 6.5 54.9 1.3 868.9

2004

2

9 3

1

73.3 87.2 527.5 5.1 527.5 081.6 527.5 88.7 527.5 527.5 395.6 527.5 473.9 527.5 177.7 5.8 527.5 15.4 8.7 527.5 28.6 072.5 644.3 527.5 75.6 6.4 57.1 1.3 003.0

2005

2

9 5

1

Exchange Rate (LCU / $)

72.7 80.4 524.0 5.8 524.0 031.8 524.0 88.4 524.0 524.0 393.0 524.0 439.7 524.0 177.7 5.7 524.0 15.4 8.7 524.0 28.1 174.5 139.6 524.0 72.2 6.8 58.4 1.3 147.1

2006

Table 5 - Monetary Indicators

4 233.6 481.6 635.6 21.2 588.4 254.5 1 544.5 76.4 122.4 288.8 32.5 653.1 288.1 2 063.4 101.2 553.9 265.5 22.2 51.0 903.6 6.7 29 616.0 2 264.5 53.6 592.5 2.8 6.8 17.1 2 188.9

Level

45.2 12.7 25.5 35.6 18.2 26.6 15.9 77.8 15.9 8.1 20.6 16.9 7.4 22.7 74.8 93.1 5.5 123.8 44.3 18.2 47.0 26.4 14.7 31.2 34.6 27.9 ... 25.9 18.6

% of GDP

4.8 23.1 0.2 44.6 5.9 5.0 1.8 8.4 -4.7 16.5 -2.1 42.5 6.6 -0.9 3.6 5.9 -4.9 1.5 8.5 7.5 9.6 5.6 13.2 1.6 8.3 6.8 6.3 4.1 7.7

Growth 2005/06

Broad Money (LCU billion) 2006

67 586 5 229 769 7 093 495 86 1 271 209 133 293 90 1 198 ... 1 516 103 22 487 2 530 24 1 043 868 100 1 916 99 81 2 235 591 46 47 149 490

36.9 5.7 9.0 22.9 5.3 3.3 4.8 5.1 9.3 3.6 11.2 6.1 ... 3.6 3.7 8.9 15.3 0.6 3.0 6.8 3.9 4.5 1.4 7.6 3.6 5.3 ... 43.8 3.7

Reserves excluding gold ($ million) 2006 Stock at Eq. Months year-end of imports

Statistical Annex

© AfDB/OECD 2007

© AfDB/OECD 2007

8.8

15.7 6.4 12.1 4.9 0.9 6.4 2.3 7.8 17.9 9.2 16.3 1.7 1.0 12.0 … 3.9 8.5 4.8 4.3 6.8 2.0 8.0 18.3 237.8 9.1

13.4 2.1 6.4 8.9 3.3 12.7 5.0 0.8 8.6 9.3 19.8 2.0 -0.4 9.5 … 4.9 7.0 5.0 7.1 2.7 4.5 6.6 8.4 1216.0 9.2

9.5

8.2 7.2 2.1 2.0 8.7 8.0 5.0 5.9 2.3 1.9 8.1 5.7 4.9 5.0 1.9 1.9 6.9 9.6 5.1 5.0 17.2 11.3 2.0 2.0 1.8 2.2 8.3 8.0 … … 5.0 4.5 5.0 4.0 5.9 5.0 6.5 5.8 2.9 3.1 2.7 2.3 5.6 5.3 8.6 7.8 4278.8 8462.1

2006(e) 2007(p) 2008(p)

1 4 5

1

2

9

22

108.9 528.3 265.5 27.5 8.9 581.3 6.5 528.3 132.9 577.4 902.3 528.3 5.5 701.3 … 6.5 257.9 6.5 089.3 528.3 1.2 810.3 778.9 068.7

2004

1 4 22

1

2

10

22

118.4 527.5 265.5 29.5 8.9 428.3 6.4 527.5 131.3 557.8 558.0 527.5 5.5 889.6 … 6.4 243.6 6.4 128.9 527.5 1.3 780.7 463.5 363.6

2005

1 3 133

1

2

11

Exchange Rate (LCU / $)

…

3 6 9

4

1 1

1

…

57.9 804.8 ... 298.2 499.9 47.1 19.9 264.9 037.0 258.3 715.2 570.9 4.5 759.9 ... 037.4 657.5 3.6 287.9 335.1 23.5 323.7 280.5 233.9

136.0 524.0 270.6 31.7 8.8 25.4 6.8 524.0 127.4 551.7 050.2 524.0 5.5 960.7 … 6.8 217.3 6.8 254.1 524.0 1.3 835.1 590.7 912.6 3

Level

2006

Note: * Fiscal year July (n-1)/June (n) ** Fiscal year April (n)/ March (n+1). Source: Various domestic authorities; IMF World Economic Outlook & International Financial Statistics and authors' estimates and forecasts.

Africa

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda* Zambia Zimbabwe

2005

Inflation (%)

Table 5 - Monetary Indicators (cont.)

…

19.4 25.7 ... 153.2 99.3 0.0 46.5 14.1 19.9 19.9 77.2 32.4 120.6 17.6 ... 61.8 19.6 20.9 26.6 28.1 58.3 19.3 16.0 0.0

% of GDP

7.2 -4.4 ... 10.5 5.3 4.8 14.5 6.7 15.4 2.0 21.1 1.4 1.5 4.9 ... 10.7 20.3 3.8 9.0 6.7 5.1 5.8 10.4 54.3

5 1

2

23 2

1

37

1 18 1

116 879 ... 365 574 114 444 289 003 420 29 295 76 174 ... 787 445 354 176 309 120 496 558 …

…

1.4 8.7 ... 5.0 9.4 4.2 2.1 4.3 11.7 11.0 6.0 5.1 1.6 5.1 ... 4.5 3.9 2.0 10.1 3.6 4.7 9.0 2.1 ...

Reserves excluding gold ($ million) 2006 Stock at Eq. Months year-end of imports

http://dx.doi.org/10.1787/034242223177

Growth 2005/06

Broad Money (LCU billion) 2006

Statistical Annex

African Economic Outlook

583

Algeria Angola Benin Botswana* Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt* Equatorial Guinea Eritrea Ethiopia* Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

26 400 14 740 -293 1 088 -525 -182 248 -349 -23 2 295 -77 3 216 -198 2 368 -263 -10 359 5 219 -472 -2 786 4 091 -126 -2 510 76 -18 -2 168 -635 … 18 783 -481

2005 31 756 25 025 -328 909 -586 -280 465 -453 -38 2 471 -93 4 019 -412 2 289 -402 -14 696 8 787 -525 -3 583 4 327 -141 -2 726 77 -20 -2 814 -844 … 32 272 -745

Trade balance ($ million) 2006 2007 34 156 19 586 -334 900 -593 -245 593 -399 -31 2 721 -86 4 642 -468 2 022 -295 -11 986 6 853 -482 -3 234 5 177 -137 -2 532 88 -18 -2 976 -807 … 27 231 -717

584

31 678 25 727 -363 990 -623 -295 401 -504 -40 2 217 -102 4 314 -251 2 338 -481 -19 222 10 545 -570 -3 872 4 317 -148 -3 167 22 -17 -2 783 -873 … 33 052 -809

2008 21 200 4 194 -194 809 -585 -84 -257 -45 -40 290 -17 498 -345 -50 -29 2 911 -898 -7 -983 1 448 -60 -757 -161 -21 -495 -23 … 15 581 -507

28 864 6 837 -226 1 031 -759 -167 64 -72 -47 559 -18 1 641 -404 -331 -31 2 271 -455 -24 -1 488 2 478 -55 -1 145 -144 -16 -811 -53 … 23 484 -906

24 753 7 762 -234 1 387 -777 -170 -201 -113 -53 -544 -24 760 -350 -275 -140 978 1 003 -39 -1 842 1 498 -33 -1 253 -160 -26 -1 071 -134 … 28 810 -936

Current account balance ($ million) 2005 2006 2007

Table 6 - Current Account, 2005-20

24 353 1 424 -274 1 527 -841 -161 -162 -135 -59 -257 -28 892 -304 -363 -221 -3 644 2 194 -46 -2 083 1 651 -45 -1 628 -229 -24 -808 -161 … 30 409 -1 014

2008 21 13 -4 8 -10 -11 -2 -5 -3 5 -5 8 -5 0 -4 3 -13 -1 -9 17 -13 -7 -5 -7 -3 -2 … 40 -10

24 14 -4 9 -12 -17 0 -7 -3 8 -5 19 -5 -2 -4 2 -5 -2 -12 24 -11 -12 -4 -5 -3 -3 … 48 -17

20 13 -4 11 -11 -16 -1 -10 -3 -7 -6 9 -4 -2 -17 1 9 -5 -13 15 -6 -11 -4 -8 -3 -8 … 51 -16

19 2 -5 12 -12 -14 -1 -11 -3 -3 -6 10 -3 -2 -25 -3 17 -5 -13 17 -8 -13 -6 -7 -2 -10 … 51 -16

Current account balance (as % of GDP) 2005 2006 2007 2008

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007 87 381

-494 92 216 -1 095 -10 937 -575 -524 -212 30 439 -292 -56 -1 676 -198 -127 … -3 255 1 293 -76 -1 068 -293 -2 234 -1 003 759 63 93 105

-348 201 755 -1 171 -11 219 -759 -392 -181 29 668 -312 -60 -1 648 -199 -130 … -4 038 4 062 -80 -1 245 -289 -2 626 -1 086 574 -83 84 958

-387 118 757 -1 482 -11 892 -984 -341 -168 29 386 -328 -64 -1 804 -192 -125 … -6 718 4 438 -69 -1 518 -316 -3 415 -1 236 -181 -1

2008

34 427

-324 -119 -934 -324 945 -1 084 349 -252 11 900 -75 -21 -726 -100 -86 … -10 118 -2 919 -35 -955 -313 -360 -198 -695 -500

-315 15 65 -494 1 024 -1 323 755 -190 13 489 -154 -48 -1 068 -21 -101 … -12 383 -1 289 -72 -499 -310 -676 -458 -1 037 -145 53 342

-421 2 -193 -496 97 -760 712 -205 11 001 -117 -46 -1 124 -23 -94 … -11 628 -2 229 -42 -526 -319 -359 -343 -348 42 52 655

2008

41 361

-226 -139 -5 -728 1 893 -1 581 708 -290 14 366 -119 -51 -1 210 -2 -105 … -14 914 -1 520 -70 -746 -328 -1 286 -640 -1 589 -31

Current account balance ($ million) 2005 2006 2007

* Fiscal year July (n-1)/June (n). Various domestic authorities; IMF World Economic Outlook and authors' estimates and forecasts.

62 774

Africa

Note: Source:

-380 -123 -783 -797 -8 086 -721 -573 -259 27 300 -229 -38 -1 322 -261 -127 … -1 887 -1 087 -95 -1 324 -300 -1 963 -885 32 -375

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda* Zambia Zimbabwe

2005

Trade balance ($ million) 2006 2007

Table 6 - Current Account, 2005-20 (cont.)

4

-16 -2 -50 -5 2 -16 6 -8 12 -4 -30 -8 -14 -7 … -4 -11 -1 -8 -15 -1 -2 -10 -11 4

-19 0 2 -7 1 -14 10 -5 9 -5 -61 -11 -3 -7 … -5 -3 -3 -5 -12 -2 -5 -8 -1

3

-13 -2 0 -10 2 -16 9 -7 9 -4 -59 -12 0 -6 … -5 -3 -2 -6 -12 -3 -6 -11 0

http://dx.doi.org/10.1787/686310430456

5

-19 0 -7 -7 0 -8 10 -6 8 -4 -63 -13 -3 -7 … -5 -6 -2 -5 -14 -1 -4 -3 1

Current account balance (as % of GDP) 2005 2006 2007 2008

Statistical Annex

585

African Economic Outlook

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central Afr. Rep. Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

Natural gas, gaseous (5.6%) Oth.non-ferr.metal waste (6.4%)

Bananas, fresh or dried (8.7%) Gas turbines, nes (4%) Cotton,not carded,combed (8.9%) Fish,frozen ex.fillets (12.7%) Crude petroleum (16.7%) Cocoa paste (7.7%) Othr.ferrous waste,scrap (7%) Portland cement, etc. (4.7%) Molluscs (7.6%) Manganese ores,concentrs (6.9%) Groundnuts (peanuts) (7.7%) Wood,non-conifer, sawn (6.7%) Copper ores,concentrates (7.8%) Oth.frsh,chll.vegetables (8.1%) Diamonds.excl.industrial (15%) Natural rubber latex (8%) Spices,ex.pepper,pimento (9%)

Edible nuts fresh,dried (16.5%) Nickel mattes,sintrs.etc (8.1%)

Wood,non-conifer, sawn (14.1%) Trousers,breeches,etc. (6.3%) Wood,non-conif,rough,unt (33.8%) Essential oils (14.2%) Oth.non-ferr.ore,concntr (17.2%) Crude petroleum (12%) Trousers,breeches,etc. (7.2%) Crude petroleum. (10.3%) Sesame (sesamum) seeds (8.7%) Sesame (sesamum) seeds (20.2%) Wood,non-conif,rough,unt (10.6%) Mech.shovel etc.s-propld (9.9%) Manganese ores,concentrs (7.2%) Alumina(aluminium oxide) (17.2%) Cut flowers and foliage (14.2%) Trousers,breeches,etc. (22%) Spec.purpose vessels etc (8.9%) Crustaceans, frozen (13.2%)

Product III

2 1 3 1 1 1 4 4 3 1 3 1 3 7 17 46 1 14 5 1 6 8 3 1 27 4 2 1 14

No. of products accounting for more than 75 per cent of exports

Natural gas, liquefied (13.2%)

Product II

Three main exports, with their share in total exports*

Crude petroleum (67.2%) Crude petroleum (95.8%) Cotton,not carded,combed (55.3%) Diamonds.excl.industrial (88.2%) Cotton,not carded,combed (84.5%) Coffee, not roasted (88%) Crude petroleum (48.8%) Fish,frozen ex.fillets (61.4%) Diamonds.excl.industrial (40%) Crude petroleum (94.9%) Spices,ex.pepper,pimento (57.9%) Crude petroleum (88.7%) Diamonds.excl.industrial (42.6%) Cocoa beans (38.2%) Bovine animals, live (20%) Natural gas, liquefied (15.8%) Crude petroleum (92.6%) Natural gums,resins,etc (17.3%) Coffee, not roasted (47.8%) Crude petroleum (76.7%) Edible nuts fresh,dried (43.5%) Cocoa beans (46.1%) Aluminium ore,concentrat (50.9%) Edible nuts fresh,dried (93.5%) Tea (16.8%) Jersys,pullovrs,etc.knit (29.2%) Ships,boats,othr.vessels (73.9%) Crude petroleum (95.3%) Jersys,pullovrs,etc.knit (19.4%)

Product I

586 Table 7 - Exports, 2005

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007 Fish, frozen ex.fillets (13.5%) Shirts (7.6%) Natural calc.phosphates (5.6%) Zinc, zinc alloy, unwrght. (9.7%)

Tin ores, concentrates (9.8%) Drawing, measuring instrument (7.6%) Fish,fresh,chilled,whole (6.4%) Ships,boats,othr.vessels (11%) Cultivating machnery.etc (4.1%) Fish,frozen ex.fillets (7.8%) Gold,nonmontry excl ores (7.9%) Flavours,industrial use (9%) Copper ores,concentrates (8.6%) Cotton,not carded,combed (18.6%) Insultd wire,etc.condctr (6.7%) Tobacco,stemmed,stripped (7.5%) Cotton,not carded,combed (5.7%) Nickel ores,concentrates (12.3%) Nickel ores,concentrates (2.8%) [17.5%]

Molluscs (24%) T-shirts,othr.vests knit (18.7%) Insultd wire,etc.condctr. (6.8%) Crustaceans, frozen (4.7%) Radio-active chemicals (11.4%)

Ore etc.molybdn.niob.etc (19%) Vessels,oth.float.struct (10.9%) Molluscs (9.8%) Fish,frozen ex.fillets (27.5%) Cocoa beans (7.2%) Bovine animals, live (19.7%) Oth.coal,not agglomeratd (8%) Food preparations, nes (9.3%) Fish fillets,frsh,chilld (9.7%) Natural calc.phosphates (19.8%) Trousers,breeches,etc. (8.7%) Fish fillets,frsh,chilled (24.3%) Cobalt,cadmium,etc.unwrt (7%) Nickel,nckl.alloy,unwrgt (12.6%) Diamonds.excl.industrial (3.7%) [12.6%]

26

4 1 2 10 32 2 5 1 1 3 4 8 3 4 5 39 1 20 15 8 36 5 5 16

http://dx.doi.org/10.1787/413343675072

Sugars, beet or cane, raw (5.3%)

Product III

No. of products accounting for more than 75 per cent of exports

Tea (7.6%)

Product II

* Products are reported when accounting for more than 4 per cent of total exports. ** Figures in [ ] represent the share of Africa in the World export for each product. Sources: PC-TAS 2001-2005 International Trade Center UNCTAD/WTO - UN Statistics Division.

Crude petroleum (49.2%) [18%]

Africa

Note:

Tobacco,stemmed,stripped (59.2%) Cotton,not carded,combed (81.8%) Iron ore,concntr.not agg (51.3%) Sugars,beet or cane, raw (21.4%) Inorganic acid,oxide etc (7.2%) Alum.,alum.alloy,unwrght (73.4%) Diamonds.excl.industrial (39.1%) Radio-active chemicals (79.5%) Crude petroleum (92.2%) Coffee, not roasted (51.9%) Cocoa beans (55.2%) Inorganic acid,oxide etc (38.8%) Fish,prepard,presrvd,nes (44.1%) Diamonds.excl.industrial (62.7%) Sheep and goats, live (34.6%) Platinum (12.5%) Crude petroleum (89.2%) Sugars,beet or cane, raw (14.1%) Gold,nonmontry excl ores (10.9%) Cocoa beans (22.4%) Crude petroleum (9%) Coffee, not roasted (31.1%) Copper;anodes;alloys (55.8%) Tobacco,stemmed,stripped (13.9%)

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and P. Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

Product I

Three main exports. with their share in total exports*

Table 7 - Exports, 2005 (cont.)

Statistical Annex

587

African Economic Outlook

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo. Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

5.3 1.3 1.8 7.5 4.4 1.9 4.5 8.6 2.4 1.5 1.3 1.5 2.4 6.8 49.0 26.3 1.3 14.4 5.3 1.7 5.8 8.2 3.4 1.6 11.3 5.2 2.1 1.4 9.2

2001

588

2.8 1.2 3.3 1.3 6.5 3.2 4.5 5.8 2.0 1.8 2.4 1.4 1.8 5.5 29.8 26.0 1.2 11.7 4.3 1.7 7.2 6.1 3.9 2.8 12.0 5.1 2.5 1.2 8.4

2002 2.4 1.1 3.4 1.3 2.2 2.2 4.4 11.4 3.4 2.1 1.3 1.5 2.8 4.3 17.4 29.3 1.2 18.0 4.3 1.6 9.3 4.9 4.1 2.1 14.9 5.4 2.1 1.2 7.6

2003 1.9 1.0 2.7 1.4 2.1 2.2 3.6 10.5 2.8 1.2 1.4 1.4 3.8 6.0 9.2 25.3 1.1 9.1 4.0 1.7 7.3 4.7 3.7 2.2 16.2 5.1 1.4 1.1 10.7

2004

Diversification index

2.1 1.1 2.9 1.3 1.4 1.3 3.6 2.6 3.5 1.1 2.6 1.3 4.1 5.6 14.8 22.6 1.2 15.4 3.6 1.7 4.6 4.3 3.3 1.1 15.2 5.6 1.8 1.1 12.2

2005 27.6 51.0 -5.2 369.7 9.0 35.2 10.7 8.1 -7.7 477.6 -8.7 35.7 3.5 8.6 -19.5 24.7 61.4 11.0 27.7 13.9 0.1 9.9 6.7 6.0 9.7 25.5 2.6 29.8 0.1

Annual export growth (%) 2001-2005

Table 8 - Diversification and Competitiveness

-1.4 13.5 -8.3 9.7 -7.4 6.9 4.0 -4.9 -1.0 -10.4 -14.5 11.5 5.8 1.1 -3.1 -2.6 10.4 -4.9 -5.6 11.7 -7.5 0.0 -0.7 10.6 -6.7 -10.2 3.5 11.2 -8.7

14.9 23.4 -11.0 488.1 2.2 14.2 -7.4 -1.1 -20.8 473.8 -8.4 10.1 -16.4 -6.6 -30.4 13.1 36.9 1.8 19.2 -12.0 -6.5 -4.2 -6.7 -18.7 2.2 26.1 -15.1 4.4 -5.4

Competitiveness Indicator 1999-2003 (%) Sectoral Global effect competitiveness effect

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007 8.1

2.9 3.2 3.8 12.6 35.3 2.9 7.1 4.6 1.3 2.6 7.0 12.8 2.6 6.8 11.6 33.2 1.7 8.8 19.0 9.3 28.5 6.2 4.2 9.8 8.0

2.9 2.2 3.8 12.2 36.4 2.7 7.2 3.8 1.2 2.8 3.6 13.0 2.8 7.6 6.3 31.2 1.8 13.9 21.0 9.0 29.9 6.5 4.3 7.8

2002

6.3

3.3 1.4 4.1 11.8 36.2 2.3 10.3 1.9 1.3 2.4 2.1 13.4 2.4 4.8 6.7 27.7 1.6 15.7 24.1 12.8 31.0 6.9 5.0 10.7

2003

5.1

3.7 1.2 3.5 10.3 36.2 1.9 7.0 3.0 1.2 1.8 4.2 11.7 3.1 2.6 6.2 25.3 1.5 15.0 22.0 6.7 31.3 6.2 3.6 12.2

2004

Sources: PC-TAS 2001-2005 International Trade Center UNCTAD/WTO - UN Statistics Division.

Africa

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

2001

Diversification index

4.1

2.8 1.5 2.9 9.9 34.7 1.8 5.2 1.6 1.2 3.1 3.0 5.7 3.5 2.5 5.6 23.1 1.3 18.9 18.7 7.6 30.6 5.8 3.1 13.9

2005 -11.9 -4.7 13.3 -5.6 -4.3 -4.1 -0.8 4.6 14.8 41.3 -1.8 -2.8 -5.3 1.3 -4.0 2.1 11.5 -5.9 -2.5 -6.0 -4.0 -3.0 7.3 -2.5 4.5

21.4

http://dx.doi.org/10.1787/306021685644

2.8

3.5 -7.7 -13.6 -7.2 2.5 18.9 60.2 -23.4 -1.7 -50.6 -16.0 -9.9 8.5 19.8 -7.0 -5.0 19.5 20.2 9.5 -6.4 1.5 1.9 11.2 -11.6

Competitiveness Indicator 1999-2003 (%) Sectoral Global effect competitiveness effect

5.7 1.7 13.8 1.4 12.4 28.9 56.5 -4.7 27.3 4.9 -3.7 1.4 17.4 35.2 3.1 11.2 45.1 28.4 21.1 1.7 11.7 13.0 32.7 0.1

Annual export growth (%) 2001-2005

Table 8 - Diversification and Competitiveness (cont.)

Statistical Annex

589

African Economic Outlook

Aluminum Banana (US) Coal (US) Cocoa Coffee (Arabica) Coffee (Robusta) Copper Cotton Fish Meal Gold Groundnut oil Iron ore Lead

($/mt) ($/mt) ($/mt) (cents/kg) (cents/kg) (cents/kg) ($/mt) (c/kg) ($/mt) ($/toz) ($/mt) (c/dmtu) (c/kg)

Unit

590

1 549.14 424.00 33.06 90.58 191.97 91.30 1 813.47 130.22 429.48 279.03 713.67 28.79 45.39

2000 1 444.00 583.30 44.86 106.90 137.30 60.70 1 578.00 105.80 486.70 271.00 680.30 30.03 47.60

2001 1 349.91 528.58 40.02 177.79 135.66 66.18 1 559.48 101.92 605.92 309.97 687.08 29.31 45.27

2002 1 431.29 374.79 ... 175.09 141.54 81.45 1 779.14 139.91 610.71 363.51 1 243.17 31.95 51.50

2003

Table 9 - International Prices of Exports, 2000-06

1 715.54 524.58 ... 154.98 177.40 79.30 2 865.88 136.57 648.58 409.21 1 161.00 37.90 88.65

2004 1 898.31 602.84 ... 153.81 253.22 111.45 3 678.88 121.70 730.96 444.84 1 060.44 65.00 97.64

2005

2 569.90 677.24 ... 159.19 252.21 148.93 6 722.13 126.66 1 166.33 604.34 970.23 77.35 128.97

2006

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007 ($/mt) ($/bbl) ($/mt) ($/mt) (cents/kg) (cents/kg) (c/kg) (cents/kg) (c/kg) (c/kg) ($/mt)

($/CM)

Source: World Bank, Global Commodity Price Prospects, March 2007.

Maize Oil (crude) Palm oil Phosphate (rock) Rubber (Malaysia) Sugar (EEC) Sugar (free market) Sugar (US) Tea (Avg. 3 auctions) Tea (Mombasa) Tobacco

Logs Cameroon

Unit

88.53 28.23 310.25 43.75 69.12 57.71 18.04 44.45 187.62 202.86 2 976.21

275.43

2000

89.60 24.35 285.70 41.80 60.00 52.86 19.04 47.04 159.80 151.70 3 011.00

266.10

2001 ...

... 105.37 28.85 443.25 38.00 105.60 59.72 15.63 47.37 151.66 154.36 2 646.10

... 99.27 24.97 390.25 40.38 77.06 54.92 15.18 46.14 150.60 149.21 2 744.50

111.80 38.30 471.33 40.98 ... 66.97 15.80 45.47 168.56 155.42 2 740.20

2004

2003

2002

Table 9 - International Prices of Exports, 2000-06 (cont.)

121.85 65.39 478.35 44.21 ... 64.56 32.59 48.76 187.21 195.23 2 740.00

...

2006

http://dx.doi.org/10.1787/418061547318

98.67 54.43 422.08 42.00 ... 66.54 21.79 46.93 164.71 147.75 2 790.00

...

2005

Statistical Annex

591

African Economic Outlook

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

592

438 1 113 1 065 634 882 1 081 879 2 146 1 672 3 505 1 449 -24 60 44 14 45 64 21a 57 31 403 418 391 346 23 6 15 29 14 19a 12 0 0 0 -2a -1a 0 0 0 0 0 18a 32 9 12 14 20 19 1 5 6 3 - 13 6a 115 460 924 713 478 705a 0 1 0 1 0 1a 166 77 137 323 668 402a 23 82 117 158 15a 1 344a 235 273 213 165 283 192a 3 3 4 14 39 23 1 235 510 647 237 2 157 5 376 108 945 323 1 431 1 664 1 860a 28 12 20 22a -8a 11a 135 349 255 465 545 205a - 43 - 89 30 206 323 300a 2a 24a 44 35 43 -1a 166 89 59 137 139 156 10 2 30 83 98 102a 1 0 4 4 2 10a 111 5 28 82 46 21 31 28 27 42 53 47 21 8 3 372a 207a 194a 141 - 133 145 142 -354 261 83 93 8 95 53 48a

FDI inflows 2000 2001 2002 2003 2004 2005

($ million)

18 9 100 20 15 29 4 2 1 2 380 43 0 1 2 0 0 0 - 12 28 7 1 1 0 0 0 1 0 0 0 ... ... ... 4 6 6 -2 1 -2 8 -5 -4 0 0 0 51 12 28 -4 4 0 0 0 0 0 0 0 25 4 - 32 5 5 5 0 0 0 … 5 7 ... 0 1 0 0 7 ... ... 0 780 - 313 386 98 175 - 136 ... ... ...

14 258 24 35 0 -1 206 - 39 2 -9 0 ... 36 ... ... ... 0 .. 0 ... ... ... 2 ... ... ... 23a -26a 0 0 21 159 0 ... 0 0 0 0 - 57 5a 7a 10a 0a 0a ... ... 1 -8 2 4 0 0 80a 92a 63 - 271 ... ...

23 29a 0 57 -3a … … … … … … … … -4a 0 92 … 0 0 -28a 13a 0a … -4a 10 … 186a 138 …

FDI outflows 2000 2001 2002 2003 2004 2005

Table 10 - Foreign Direct Investment, 1999-04

4.0 4.2 4.9 198.3 62.2 -1 6.4 8.1 2.5 23.7 19.2 17.8 3.4 1.3 1.6 0.0 -2.6 -0.8 0.0 0.0 0.7 6.4 6.9 5.9 2.0 -7.5 3.4 49.7 45.9 64.5 3.1 0.0 3 33.8 56.7 26.4 22.3 1.3 106.9 12.8 15.5 10.1 18.3 47.1 26.4 2.0 16.8 33.6 258.2 285.3 304.2 13.1 -3.9 5.4 34.2 32.2 11.6 14.2 17.6 15.6 -1.6 2.2 23.1 7.8 5.6 6 23.1 24.1 23.9 13.5 4.8 27.5 3.5 1.8 0.8 9.6 9.9 8.4 967.9 340.8 304.9 5.2 -12.2 8.6 10.8 4.8 4.2

65 80 136 70 129 … 109 … … … … 99 140 126 … 81 … … 125 103 108 110 133 … … … … 41 135

FDI inflows / GFCF 2003 2004 2005 2004

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007

* The potential index is based on 12 economic and policy variables. See note on methodology for further details. Note: a UNCTAD estimates. Source: UNCTAD, World Investment Report 2006.

1 159

1 885

1 054

15.8

427

1 573 -2 557

9 627 20 027 12 994 18 513 17 199 30 672

19.1

…

http://dx.doi.org/10.1787/600636668030

11.8

132 122 122 … 89 97 88 131 96 124 … 111 … 139 … 72 123 … 112 130 69 115 134 141

Africa

-0.4 1.6 10.5 15.8 1.4 33.3 1.0 1.8 8.7 22.1 20.0 8.4 15.7 23.2 4.1 2.3 20.5 31.2 2.4 2.3 -7.6 32.4 4.3 2.9 54.7 114.9 15.4 15.2 … … 2.3 15.8 35.8 52.2 13.8 -3 19.9 19.1 13.6 10.7 10.1 12.1 14.7 16.3 18.0 18.6 1.2 13.5

2.1 17.2 81.9 4.9 23.1 44.9 11.4 4.0 32.4 1.5 4.8 3.6 92.3 2.3 … 2.8 41.8 -25.7 24.4 9.9 10.0 14.5 16.0 0.4

… 2a … 48 174 … -12 3a 200 0 0 30a 8 … 0 68 0 21 0 -10a 13 … … 1

... 2 ... 9 54 0 -5 -2 172 0 0 34 9 ... 0 399 0 0 0 2 7 ... ... 3

... 5 4 17 1 ... 13 3 60 100 0 0 3 - 13 -1 -4 169 94 0 0 0 0 1 -7 8 9 ... ... 0 0 271 -3 180 0 0 17 - 18 0 0 0 -7 0 6 - 28 ... ... ... 8 4

-1a 3a 26 34 6 4a 82 122 244 132 101 159a 40 92 118 214a 5a 115a 266 - 28 32 63 14 24 471 2 875 534 2 429 1 070 2 933 139 255 347 337 245 108 188 365 182 149 226 349 8 23 5 11 20 12a 1 310 1 277 2 040 2 171 2 127 3 403 8 4 3 5 8 8 4 3 3 1a -2a 7a 63 32 78 52 77 54a 24 65 48 58 37 82 39 10 2 3 26 27 21a 24a 0 0 0 -1a 888 6 789 757 734 799 6 379 392 574 713 1 349 1 511 2 305 91 51 90 - 61 60 -14 282 467 430 527 470 473 42 64 53 34 59 49a 779 486 821 584 639 782 181 151 185 202 222 258 122 72 82 172 239 259 23 4 26 4 9 103

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

... ... 1 1 -1a ... -6 32 20 32 0 0 - 10 - 22 0 7 167 261 0 0 0 0 3 13 8 8 ... ... 0 0 565 1 352 0 0 - 11 1 0 0 - 6 - 13 5 4 ... ... ... ... 0 0

FDI inflows / GFCF 2003 2004 2005 2004

FDI outflows 2000 2001 2002 2003 2004 2005

($ million) (cont.)

FDI inflows 2000 2001 2002 2003 2004 2005

Table 10 - Foreign Direct Investment, 1999-04

Statistical Annex

African Economic Outlook

593

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt 1 Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya* Madagascar

201 302 238 31 335 93 379 94 75 130 19 33 177 351 71 328 21 176 686 12 49 600 153 80 510 37 67 0 322

2000

African Economic Outlook 1

1

1 1

328 414 216 37 471 172 656 92 60 228 32 57 175 068 78 237 20 230 297 72 60 649 249 59 391 76 52 0 369

234 493 295 28 507 227 899 143 51 247 24 69 5 416 254 79 987 21 316 1 594 -11 63 957 240 145 521 79 107 0 539

314 1 145 385 47 614 362 772 140 110 321 25 115 1 824 160 64 1456 30 263 1 819 40 65 1 362 280 77 664 106 213 0 1 248

ODA net total, All donors 2001 2002 2003 2004

224 283 272 29 390 137 486 77 66 185 27 74 243 169 58 1 256 13 281 1 104 9 53 641 281 59 462 56 38 0 374

594

1

1

1 1

371 442 349 71 660 365 414 161 95 380 25 449 828 119 79 926 39 355 937 54 58 120 182 79 768 69 236 24 929

2005 66 189 191 24 228 41 213 70 53 53 11 23 103 250 42 1 139 18 112 379 -12 15 376 93 42 293 22 24 0 139

2000

($ million)

63 179 144 24 221 55 357 49 48 73 10 30 143 159 28 1 090 13 151 367 -8 13 387 122 30 270 29 16 0 146

123 286 140 37 230 85 436 43 40 67 11 41 351 831 37 1 124 14 121 489 49 18 406 126 26 288 30 27 0 126

169 372 196 27 266 121 756 90 32 96 11 34 5 009 281 37 775 18 185 1 033 -41 20 479 135 98 320 33 70 0 225

235 1016 210 32 331 186 572 91 55 163 14 48 1 165 197 39 1 176 23 177 1 025 24 12 897 178 29 471 35 163 0 685

ODA net total, DAC countries 2001 2002 2003 2004

Table 11 - Aid Flows, 2000-05

290 258 207 52 339 181 336 104 62 167 17 1 360 1 034 151 54 659 30 226 1 202 30 15 603 128 39 495 39 149 17 500

2005 64 107 49 8 103 52 169 25 22 76 8 10 74 100 20 135 3 55 292 23 32 221 57 39 212 16 44 0 184

2000 107 104 126 3 155 82 131 29 18 112 16 45 100 10 30 104 1 127 709 17 38 251 160 29 186 28 23 0 229

63 129 73 2 196 87 220 50 20 159 17 15 824 236 39 83 7 96 774 22 40 238 117 34 93 48 25 0 245

68 122 100 2 238 106 143 53 19 151 13 35 406 -28 39 84 3 131 528 30 40 465 105 48 199 47 36 0 315

80 131 175 17 282 176 199 49 55 155 12 68 659 -37 27 260 6 90 757 16 54 456 102 48 194 72 50 0 564

ODA net total, Multilateral 2001 2002 2003 2004

71 183 142 19 319 184 77 56 33 213 8 89 793 -32 23 238 9 132 706 24 43 503 54 40 260 30 87 4 429

2005

Statistical Annex

© AfDB/OECD 2007

© AfDB/OECD 2007 21 362

376 466 344 24 486 2 201 134 297 294 354 26 445 8 353 191 505 343 22 1 230 51 265 710 639 199 1 554 26 801

517 543 238 -15 539 1 037 146 457 308 335 38 447 9 304 174 641 613 34 1 704 50 298 976 589 186 2 107 29 418

501 568 181 38 707 1 246 173 541 578 488 33 1 055 10 360 200 628 992 22 1 761 69 328 1 198 1 125 187 2405 35 212

575 691 190 32 652 1 286 123 515 6 437 576 32 689 19 343 236 700 1 829 46 1 505 87 376 1 198 945 368 2176

2005

10 373

269 300 82 12 293 624 97 106 84 175 18 288 3 116 56 354 90 3 779 52 150 578 486 193 970

2000

10 160

196 209 81 8 342 720 77 114 108 149 22 224 8 167 88 313 108 4 944 28 184 386 274 149 1047

314 272 136 -18 336 697 110 245 200 213 25 314 5 208 114 477 332 13 966 46 208 587 592 161 1758 19 158

225 257 147 4 217 1661 85 114 215 199 19 243 4 225 102 375 232 7 903 39 145 466 360 178 1341 13 362

19 318

308 328 83 15 394 731 124 306 315 217 22 755 6 163 140 459 848 7 1 029 52 231 684 746 166 1944

ODA net total, DAC countries 2001 2002 2003 2004

($ million) (cont.)

ODA : Official Development Assistance. DAC : Development Assistance Committee of the OECD. * Libya was classified by the DAC as a recipient country for ODA from 2000 to 2004 and re-included in the classification in 2005. Source: OECD Development Assistance Committee 2007.

Note:

16 447

Africa Total

15 489

404 351 267 21 518 931 109 256 168 299 38 413 13 343 148 428 181 29 1 269 43 377 790 349 162 1196

ODA net total, All donors 2001 2002 2003 2004

Malawi 446 Mali 359 Mauritania 211 Mauritius 20 Morocco 419 Mozambique 876 Namibia 152 Niger 208 Nigeria 174 Rwanda 321 São Tomé and Principe 35 Senegal 423 Seychelles 18 Sierra Leone 181 Somalia 101 South Africa 487 Sudan 220 Swaziland 13 Tanzania 1 019 Togo 70 Tunisia 222 Uganda 817 Zambia 795 Zimbabwe 176 Africa Unspecified 1154

2000

Table 11 - Aid Flows, 2000-05

24 717

322 378 125 22 289 771 99 256 5 966 292 18 440 8 130 146 486 1 472 20 871 59 269 704 836 179 1816

2005

4 817

171 61 129 7 130 253 54 103 89 146 17 139 8 65 44 132 31 10 243 16 71 233 308 -16 172

2000

6 011

197 130 187 6 142 207 31 141 62 150 16 189 5 174 45 113 63 22 330 11 193 402 74 17 137 7 400

201 272 105 3 157 337 33 212 109 121 12 136 3 92 60 163 278 20 738 2 95 388 -8 25 345

9 914

192 241 97 25 244 511 34 235 264 271 12 299 3 196 60 168 119 14 730 16 95 512 377 20 460

1 0269

251 313 66 10 309 513 23 259 471 284 13 249 11 213 90 213 315 26 622 27 105 492 109 189 359

2005

http://dx.doi.org/10.1787/477345650642

7 301

142 155 199 20 135 537 47 180 81 155 7 191 4 125 44 128 60 12 331 9 77 238 277 21 174

ODA net total, Multilateral 2001 2002 2003 2004

Statistical Annex

African Economic Outlook

595

African Economic Outlook

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt. Arab Rep. Equatorial Guinea Eritrea Ethiopia Gabon Gambia The Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Libya Madagascar

Country

5 3

8 3 1 5

6 2

28

5 11 12

1 1

17 12 2 1 1 1 6

185 353 103 103 861 426 200 834 268 592 266 904 057 306 439 949 253 620 703 578 615 655 262 002 031 721 … 574 670

2005

Total ($ million)

77 57 28 0 16 20 73 0 35 17 28 52 71 51 35 83 59 31 24 89 12 13 46 35 43 17 … … 15

Of which: Multilateral Bilateral (as % of total) 2005 2005 9 40 0 63 0 0 5 41 4 0 0 28 0 20 0 6 0 0 1 1 12 12 0 0 5 8 … 43 3

2005

Private

Debt outstanding, at year end

14 3 72 37 84 80 22 59 61 83 72 20 29 29 65 11 41 69 75 10 76 75 54 65 52 75 … … 82

596 16.7 37.6 48.3 11.1 33.2 178.4 37.2 84.8 92.1 27.1 72.0 99.0 155.7 75.2 61.9 32.2 3.6 63.9 58.9 29.8 133.3 80.9 99.0 332.2 26.9 49.1 … 14.4 72.8

2005 8.0 31.6 20.9 9.8 17.3 152.7 3.0 86.2 87.3 22.2 71.1 71.2 62.4 83.1 59.0 29.2 2.7 61.5 55.1 21.5 126.3 93.1 95.7 317.4 17.9 46.6 … 11.4 32.0

2006 7.4 27.3 20.7 9.8 19.7 140.7 3.8 86.7 83.4 22.7 55.8 73.8 53.5 54.1 65.2 26.1 2.2 74.4 54.4 18.6 118.4 91.6 83.3 296.6 19.1 45.9 … 9.9 34.8

2007

Total debt outstanding (as % of GDP)

Table 12 - External Debt Indicators

6.7 25.1 20.7 9.9 22.6 128.5 4.8 86.7 79.8 23.3 50.0 67.3 48.1 48.5 79.6 23.2 1.8 78.6 51.7 14.2 110.9 88.7 72.9 276.6 20.1 44.7 … 9.4 36.8

2008 12.4 10.7 14.8 12.0 7.2 41.6 15.4 18.4 0.0 0.9 8.5 11.7 6.9 1.3 10.1 9.7 0.2 41.7 4.9 3.7 27.6 5.8 12.3 14.5 7.1 12.5 … … 10.3

2005

14.9 4.2 15.3 12.7 4.8 44.7 14.5 18.0 0.0 1.8 7.7 5.8 9.5 2.2 9.9 8.6 0.2 39.0 5.1 7.1 24.8 6.6 13.6 13.3 6.6 9.3 … … 10.6

2006

3.6 5.3 13.8 13.1 4.3 32.8 6.8 18.9 … 1.0 21.5 5.5 10.1 0.0 8.8 10.9 0.1 37.4 4.6 17.7 28.2 1.2 14.0 12.2 7.0 9.4 … … 2.9

2007

3.8 4.7 13.4 13.5 4.4 30.0 6.8 20.1 … 1.3 19.7 5.3 8.7 0.0 9.8 7.3 0.1 39.5 4.5 10.0 30.7 1.4 14.0 10.4 6.9 8.8 … … 2.9

2008

Debt Service (as % of Exports of goods and services)

Statistical Annex

© AfDB/OECD 2007

© AfDB/OECD 2007 324 579

11 355 3 421 2 325 896 14 356 5 053 1 327 1 702 20 479 1 511 259 3 515 467 628 … 46 209 27 700 583 6 358 1 537 16 744 3 896 4 131 4 969

2005

30

81 75 62 12 35 46 … 80 12 90 59 67 10 53 … 1 14 52 62 53 31 89 55 35 44

19 25 30 80 35 43 … 20 78 10 41 0 55 43 … 10 70 37 30 47 38 11 45 16

Of which: Multilateral Bilateral (as % of total) 2005 2005

Sources: IMF, World Economic Outlook ; GDF Online Database, Worldbank

Africa

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

Country

Total ($ million)

26

0 0 8 8 30 11 75 0 10 0 0 33 35 4 … 89 16 11 8 0 31 0 0 49

2005

Private

Debt outstanding, at year end

110.6

546.6 62.9 124.2 14.3 24.4 74.1 21.7 52.8 20.7 70.4 368.0 40.0 67.3 51.8 … 19.3 100.6 22.9 50.5 72.9 58.4 46.2 56.8 110.6

2005

(cont.)

2007 165.6 27.4 42.5 12.0 19.6 63.1 24.1 49.5 3.2 15.6 327.4 18.4 65.8 46.8 … 18.8 67.2 22.1 25.3 57.6 51.3 17.8 5.0 20.3 20.3

2006 181.4 26.7 51.2 13.4 20.9 61.0 21.9 52.9 3.5 12.7 348.8 18.0 64.1 48.0 … 19.3 76.7 22.4 61.5 65.4 58.0 41.7 4.2 62.0 62.0

Total debt outstanding (as % of GDP)

Table 12 - External Debt Indicators

23.8

165.5 31.7 41.1 10.7 17.8 53.1 24.7 47.8 2.9 18.4 304.9 18.4 64.9 45.2 … 17.8 64.9 21.9 24.6 51.2 50.2 19.2 5.7 23.8

2008

20.8

17.4 5.4 6.7 6.4 13.3 22.6 2.5 7.9 17.0 20.2 29.9 7.2 4.6 14.9 … 8.4 4.9 … 7.1 8.3 15.5 14.7 6.7 20.8

2005

7.7

16.4 3.6 2.0 4.1 10.4 18.3 3.4 7.9 1.6 6.0 54.0 5.2 5.0 3.2 … 8.5 2.6 … 102.9 6.6 15.7 195.7 2.0 7.7

2007

7.2

15.9 3.4 2.3 3.6 11.4 19.0 3.9 7.9 1.8 5.4 43.0 4.9 5.3 6.2 … 8.5 2.2 … 2.5 5.8 15.5 9.9 2.6 7.2

2008

http://dx.doi.org/10.1787/375017428145

16.3

16.6 4.2 4.8 4.8 11.1 18.4 3.0 8.0 1.9 6.5 57.5 6.9 8.2 10.8 … 8.8 3.0 … 5.1 6.7 17.1 31.1 2.1 16.3

2006

Debt Service (as % of Exports of goods and services)

Statistical Annex

597

African Economic Outlook

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

African Economic Outlook

4 79 1 1 22 9 1 35 1 3 5 19

75

4 59 18

4 10

354 400 703 760 634 834 601 519 093 032 819 117 320 454 807 437 515 560 289 406 556 556 603 634 106 791 356 968 105

60.5 38.0 46.9 53.0 19.0 11.0 53.7 58.4 44.3 26.2 36.9 54.8 33.4 46.3 85.0 42.4 50.9 21.3 16.5 85.7 26.2 46.8 37.3 36.4 42.7 18.4 48.5 87.2 27.3

101.9 97.3 101.8 96.9 101.2 95.7 99.1 92.5 95.4 98.0 100.7 98.5 98.5 103.3 100.0 100.5 98.1 96.6 99.0 99.3 98.4 102.5 105.2 97.7 100.5 87.3 99.6 106.4 99.0

Total Urban Sex ratio population population (males per (thousands) (% of total) 100 females) 2006 2006 2006

33 16 8 1 13 7 16

598

1.6 2.5 3.0 1.7 2.8 1.1 2.3 2.3 2.1 3.1 2.8 3.3 2.3 2.6 3.0 1.9 2.4 2.5 2.7 2.6 3.3 2.3 2.5 2.8 2.5 1.1 6.6 2.0 3.0

1.5 2.8 3.2 0.3 3.1 2.8 1.9 2.3 1.4 3.4 2.7 3.1 2.7 1.7 2.2 1.9 2.3 4.2 2.5 1.8 2.9 2.2 2.2 3.0 2.2 0.2 2.0 2.0 2.8

Population growth rate (%) 2000-05 2005-10 32.3 131.8 99.1 44.3 116.8 100.3 91.4 25.6 94.2 112.4 50.3 68.9 113.7 114.7 85.6 31.4 96.0 58.5 92.6 52.4 69.8 57.0 98.5 112.7 63.9 60.3 134.0 17.2 72.7

Infant mortality rate (per 1000) 2006

Table 13 - Demographic Indicators

2.4 6.5 5.5 3.0 6.4 6.8 4.2 3.4 4.7 6.7 4.4 6.3 6.7 4.6 4.6 3.0 5.9 5.1 5.5 3.6 4.3 3.9 5.6 7.1 5.0 3.3 6.8 2.8 5.0

35 233 150 99 188 176 157 31 169 196 66 103 200 184 128 36 172 84 160 89 115 93 151 198 109 115 212 19 121

Total Mortality under fertility rate age 5 (per 1000) 2006 2006 28.9 46.3 43.9 37.3 47.0 44.6 40.8 39.0 42.8 47.3 41.8 47.3 47.4 41.5 41.1 33.3 44.5 44.6 44.2 39.6 39.9 38.6 43.6 47.7 42.8 38.2 47.2 29.8 43.8

67.4 52.8 55.0 59.0 51.9 54.6 56.4 58.1 54.0 51.1 57.1 51.4 51.6 56.2 57.0 63.0 52.8 54.8 54.1 57.1 57.8 58.8 54.1 50.9 55.9 56.2 52.1 67.1 54.6

3.7 0.9 1.0 3.7 1.1 0.8 2.7 2.9 3.2 1.6 1.1 1.3 1.0 2.3 1.9 3.7 2.7 0.5 1.6 3.4 2.3 2.6 2.3 1.5 1.4 5.5 0.7 3.0 1.6

Distribution by age (%) 0-14 15-64 65+ 2006

Statistical Annex

© AfDB/OECD 2007

© AfDB/OECD 2007

166 918 158 256 943 158 052 426 375 230 160 936 81 ... 679 496 594 992 029 025 306 210 857 861 085

924 320

5 8 47 36 1 39 6 10 29 11 13

11

13 13 3 1 31 20 2 14 134 9

40.1

40.9 36.5 58.3 41.7 24.1 38.5 37.0 64.7 12.5 36.9 36.4

17.6 34.4 65.5 44.0 59.4 39.1 34.0 23.9 49.1 23.6 38.1 51.8 50.8

99.9

97.3 98.5 96.6 101.4 93.5 99.2 97.6 101.5 100.2 100.5 98.7

98.8 99.4 97.9 98.6 98.8 94.1 98.5 104.7 102.6 94.1 98.6 96.8 ...

2.4

1.5 1.7 1.8 2.3 1.5 2.4 3.4 1.3 3.0 2.3 1.4

2.4 2.7 2.8 1.1 1.6 2.6 2.8 3.4 2.5 6.2 1.8 2.5 0.5

2.2

3.9 3.2 0.9 2.0 0.3 2.0 2.8 1.1 3.4 1.8 0.7

2.3 3.0 3.0 1.0 1.5 2.0 1.5 3.4 2.3 3.1 2.2 2.4 0.8

Population growth rate (%) 2000-05 2005-10 5.8 6.7 5.5 1.9 2.6 5.2 3.6 7.6 5.4 5.3 3.7 4.6 ... 6.5 6.1 2.7 4.0 3.6 4.6 4.9 1.9 7.1 5.3 3.3 4.7

160.8 115.7 39.6 66.4 65.6 104.1 88.5 19.7 77.5 89.7 59.5 82.5

138

281 192 73 109 137 162 129 22 130 163 114

170 209 144 17 39 166 73 251 191 191 106 124 ...

41.3

42.9 44.2 32.4 39.0 40.4 42.3 43.2 25.2 50.5 45.6 39.5

47.3 48.2 43.0 24.2 30.7 43.8 40.8 49.0 44.0 43.1 39.2 42.2 ...

56.5

55.0 55.0 63.3 58.7 55.7 55.5 55.1 69.1 48.9 52.3 57.1

50.9 50.7 55.2 69.7 65.4 53.8 56.3 50.8 54.2 55.6 57.9 56.0 ...

2.2

2.2 0.8 4.3 2.3 4.0 2.2 1.6 5.7 0.6 2.1 3.4

1.7 1.1 1.8 6.1 3.9 2.3 2.9 0.2 1.8 1.3 2.8 1.8 ...

Distribution by age (%) 0-14 15-64 65+ 2006

http://dx.doi.org/10.1787/061700738332

Total Mortality under fertility rate age 5 (per 1000) 2006 2006

104.2 127.4 89.8 14.0 32.7 92.7 38.0 146.8 109.3 113.0 79.0 78.4 ...

Infant mortality rate (per 1000) 2006

(cont.)

Note: * Including Agalega, Rodrigues and Saint Brandon. Sources: United Nations, Department of Economic and Social Affairs, Population Division, World Population Prospects, The 2004 Revision.

Africa

Malawi Mali Mauritania Mauritius* Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles ... Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

Total Urban Sex ratio population population (males per (thousands) (% of total) 100 females) 2006 2006 2006

Table 13 - Demographic Indicators

Statistical Annex

African Economic Outlook

599

16.6 94.3 31.6 … 52.3 36.0 49.9 ... ... 67.0 ... ... ... 41.8 86.5 … ... ... 45.0 ... ... 51.6 ... ... 51.0 53.9 ... ... 77.0

7.3 57.0 23.6 … 19.9 43.0 22.1 ... ... 63.0 ... ... ... 23.4 ... … ... ... 37.0 ... ... 22.8 ... ... 49.0 27.8 ... ... 54.0

12.2 68.0 28.5 30.3 46.4 36.2 40.2 44.0 ... 64.0 ... ... ... 33.6 45.1 20.0 ... 53.0 44.2 62* 64.0 42.6 40.0 20.8 51.8 49.2 76.2 ... 72.0

National poverty line* Population below the poverty line (%) Survey year Rural Urban National

Algeria 1998 Angola 2001 Benin 2002 Botswana 2002-2003 Burkina Faso 2003 Burundi 1990 Cameroon 2001 Cape Verde 1989-1994 Central African Republic ... Chad 1995-1996 Comoros ... Congo ... Congo, Dem. Rep. ... Côte d’Ivoire 1998 Djibouti 1996 Egypt 2004-2005 Equatorial Guinea ... Eritrea 1993-1994 Ethiopia 1999-2000 Gabon 1994 Gambia 1998 Ghana 1998-99 Guinea 1994 Guinea Bissau 2002 Kenya 2000 Lesotho 1993 Liberia 2002 Libya ... Madagascar 2004

600

1995 ... 2003a 1993a 2003a 1998a 2001a ... 1993a ... ... ... ... 2002a ... 1999-2000a ... ... 1999-2000a 1994 1998a 1998-99a 1991 1991 1997a 1995a ... ... 2001a

1.8 ... 30.9 23.5 27.2 54.6 17.1 ... 66.6 ... ... ... ... 14.8 ... 3.1 ... ... 23.0 23.0 59.3 44.8 26.3 88.2 22.8 36.4 ... ... 61.0

15.1 ... 73.7 50.1 71.8 87.6 50.6 ... 84.0 ... ... ... ... 48.8 ... 43.9 ... ... 77.8 ... 82.9 78.5 50.2 96.7 58.3 56.1 ... ... 85.1

International poverty line Population below the poverty line (%) Survey year Below $1 Below $2 1995 ... 2003 1993 2003 1998 2001 ... 1993 ... ... ... ... 2002 ... 2000 ... ... 2000 ... 1998 1999 1994 1993 1997 1995 ... ... 2001

35.3 ... 36.5 63.0 39.5 42.4 44.6 ... 61.3 ... 33.9 ... ... 44.6 38.6 34.4 ... ... 30.0 63.2 50.2 40.8 40.3 47.0 42.5 63.2 ... ... 47.5

2.8 ... 3.1 0.7 2.8 1.7 2.3 ... 0.7 ... ... ... ... 2.0 ... 3.7 ... ... 3.9 ... 1.8 2.1 2.6 2.1 2.5 0.5 ... ... 1.9

26.8 ... 29.0 56.6 32.2 32.8 35.4 ... 47.7 ... ... ... ... 34.0 ... 29.5 ... ... 25.5 ... 37.0 30.0 32.0 39.3 33.9 48.3 ... ... 36.6

Gini Share Coefficient** of consumption (%) Survey year Index Lowest 10% Highest 10%

Table 14 - Poverty and Income Distribution Indicators

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007 66.5 71.0 61.2 ... 27.2 55.0 ... 66.0 63.3 65.7 ... 57.5 ... 79.0 ... ... ... ... 38.7 ... ... … … 48.0

54.9 31.0 25.4 ... 12.0 52.0 ... 52.0 43.2 14.3 ... ... ... 56.4 ... ... ... ... 29.5 ... ... … … 7.9

65.3 64.2 46.3 12.1 19.0 54.0 ... 63.0 54.4 60.3 53.8 48.5 ... 70.0 ... 57.0 ... 40.0 35.7 72.2 4.2 38.0 67.0 34.9

1997-98a 1994a 2000a ... 1999a 1996a 1993 1995a 2003a 1999-00a ... 1995a ... 1989a ... 2000a ... 1994a 2000-01a ... 2000a 1999a 2002-03a 1995-96a 41.7 72.8 25.9 ... <2 37.9 34.9 60.6 70.8 51.7 ... 22.3 ... 57.0 ... 10.7 ... 8.0 57.8 ... <2 84.9 75.8 56.1

76.1 90.6 63.1 ... 14.3 78.4 55.8 85.8 92.4 83.7 ... 63.0 ... 74.5 ... 34.1 ... 22.5 89.9 ... 6.6 96.6 94.1 83.0

International poverty line Population below the poverty line (%) Survey year Below $1 Below $2

* The national poverty line is defined as two-thirds of the average consumption. ** The Gini coefficient is defined on consumption. a Consumption base. b Income base. Sources: Domestic authorities and World Bank (2006), World Development Report, Country DHS,

Note:

Malawi 1997-1998 Mali 1999 Mauritania 2000 Mauritius 1997 Morocco 1999 Mozambique 2002-2003 Namibia ... Niger 1993 Nigeria 2003-04 Rwanda 1999-2000 São Tomé and Principe 2001 Senegal 2002 Seychelles ... Sierra Leone 2003-2004 Somalia ... South Africa 2001 Sudan ... Swaziland 1995 Tanzania 2000-01 Togo 1995 Tunisia 2000 Uganda 2003 Zambia 2002-03 Zimbabwe 1995-96

National poverty line* Population below the poverty line (%) Survey year Rural Urban National 1997 1994 2000 ... 1999 1997 1993 1995 2003 1985 ... 1995 ... 1989 ... 2000 ... 1994b 2000–01 ... 2000 1999 2002–03 1995

50.3 50.5 39.0 36.7 39.5 39.6 74.3 50.5 43.7 28.9 ... 41.3 ... 62.9 ... 57.8 ... 60.9 34.6 ... 39.8 43.0 42.1 50.1

42.2 40.4 29.5 ... 30.9 31.7 64.5 35.4 33.2 24.2 ... 33.5 ... 43.6 ... 44.7 ... 50.2 26.9 ... 31.5 34.9 33.7 40.3

http://dx.doi.org/10.1787/763006236207

1.9 1.8 2.5 ... 2.6 2.5 0.5 0.8 1.9 4.2 ... 2.6 ... 0.5 ... 1.4 ... 1.0 2.9 ... 2.3 2.3 2.4 1.8

Gini Share Coefficient** of consumption (%) Survey year Index Lowest 10% Highest 10%

Table 14 - Poverty and Income Distribution Indicators (cont.)

Statistical Annex

601

African Economic Outlook

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

602

5.79 0.49 0.81 8.27 0.47 0.3 0.63 12.57 0.26 0.14 0.98 0.75 1.78 1.54 8.64 1.35 0.84 0.37 3.18 2.65 1.08 0.32 0.93 0.95 1.24 0.21 10.79 0.34

7.82 0.59 1.02 7.48 0.74 0.39 0.61 14.09 0.26 0.15 2.12 0.36 1.53 1.63 14.04 1.99 0.86 0.79 2.83 2.9 1.45 0.34 0.82 0.82 2.67 ... 13.56 0.36

0.28 0.2 0.87 12.17 0.22 0.24 0.68 4.54 0.14 0.07 2.38 3.2 2.14 1.1 9.79 0.45 0.66 0.56 0.42 1.21 0.05 0.71 0.39

41.52 6.86 5.33 46.63 4.33 2.03 13.84 16.12 1.53 2.15 2.01 12.25 4.77 12.06 5.07 18.41 19.26 0.92 0.53 46.95 16.31 12.85 2.36 5.01 13.46 13.65 4.87 4.15 2.71

18 592 1 157 399 1 959 … … 2 719 … … … … 260 2 442 2 757 … 64 330 … 173 1 419 989 … 6 055 … … 3 408 … … 10 132 …

23 608 1 799 545 2 041 … … 3 320 … … … … 314 2 254 3 032 … 85 088 … 224 2 051 1 154 … 5 318 … … 4 669 … … 12 059 …

4 105 211 59 164 … … 761 … … … … 180 228 699 … 10 750 … 38 167 234 … 1 616 … … 867 … … 3 592 …

4 976 325 114 131 … … 790 … … … … 293 211 847 … 12 315 … 48 254 273 … 890 … … 968 … … 5 740 …

Telecommunications Access to electricity Main telephone line Mobile lines Final consumption Distribution losses per 100 inhabitants per 100 inhabitants (GWh) 2000 2005 2000 2005 2000 2004 2000 2004

Table 15 - Access to Services

85 53 48 95 63 79 66 80 75 42 86 58 22 84 73 98 43 60 39 88 82 56 50 59 62 79 61 31

88 75 57 100 70 92 86 86 93 41 92 84 37 97 76 99 45 74 83 95 95 61 78 79 89 92 72 67

80 40 41 90 60 77 44 73 61 43 82 27 12 74 59 97 42 57 31 47 77 52 35 49 46 76 52 16

Water supply coverage Total Urban Rural (%) 2004 92 31 40 42 11 36 51 43 27 9 33 27 9 37 82 70 53 9 12 36 53 35 18 35 48 37 27 97 56

99 56 64 57 14 47 58 61 47 24 41 28 8 46 88 86 60 32 50 37 72 40 31 57 56 61 49 97 75

82 16 19 25 10 35 43 19 12 4 29 25 10 29 50 58 46 3 4 30 46 31 11 23 43 32 7 96 49

Sanitation coverage Total Urban Rural (%) 2004

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007

2.52

0.45 0.38 0.74 23.53 4.96 0.5 6.19 0.19 0.49 0.23 3.3 2.16 26.72 0.42 0.36 10.88 1.24 3.16 0.5 0.92 9.99 0.25 0.78 2.19 3.09

0.8 0.66 1.34 28.84 4.26 0.37 6.36 0.17 0.93 0.27 4.61 2.29 26.54 ... 1.22 9.97 1.85 3.39 0.39 0.95 12.47 0.35 0.81 2.76 2

0.47 0.1 0.6 15.08 8.16 0.3 4.61 0.5 2.63 33.63 0.26 1.14 18.28 0.07 3.27 0.32 1.08 1.25 0.52 0.92 2.34 15.03

3.33 7.66 24.3 57.29 39.37 6.16 24.37 2.15 14.13 3.21 7.67 14.84 70.68 2.21 6.08 71.6 5.04 19.36 5.16 7.22 56.32 5.29 8.11 5.87 345 789* 431 683*

6 10

8

1

162 2

1

8

12 1 2

… … … … … … … … 838 16 288 013 7 019 386 2 790 … … 688 12 892 … … … … 337 1 919 … … … … … … 516 197 497 058 3 259 … … 913 1 927 521 521 979 10 820 … … 039 7 712 494 10 117 53 377*

1

1

17

5

2

… … … … 122 243 260 … 618 … … 236 … … … 053 376 … 555 36 117 … 249 422 59 758*

1

1

14

6

3 1

… … … … 116 187 304 … 809 … … 346 … … … 710 607 … 578 89 543 … 338 472 62

67 50 40 100 81 40 87 59 48 46 79 75 88 57 29 88 70 62 52 52 93 66 62 81 83

96 78 30 100 99 37 98 64 67 66 89 90 100 75 32 99 78 87 85 80 99 67 86 98 50

62 36 49 100 56 41 81 57 31 44 73 64 75 46 27 73 64 54 42 36 82 61 37 72

Water supply coverage Total Urban Rural (%) 2004

44

46 46 36 94 73 36 25 18 44 8 25 33 39 26 65 34 48 90 35 85 60 27 53

58

66 59 55 95 88 38 50 79 53 8 32 57 53 48 79 50 59 90 71 96 71 41 63

34

42 39 20 94 52 35 13 5 36 8 20 17 100 30 14 46 24 44 90 15 65 58 13 47

Sanitation coverage Total Urban Rural (%) 2004

African Economic Outlook

http://dx.doi.org/10.1787/730873623306

Sources: Telecommunications: International telecommunication Union - online database, 2006. Electricity: International Energy Agency - online database, 2006 Water supply coverage and sanitation coverage: WHO and UNICEF, 2006, Joint Reporting Form and WHO regional offices reports; October 2006 Data for Benin, Burkina, DRC, Ethiopia, Ghana, Kenya, Madagascar, Malawi, Mauritania, Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia are from Getting Africa on track to meet the MDGs on water and sanitation, a Status Review of Sixteen African Countries, 2006, Report on a regional initiative by AMCOW, AfDB, EUWI, WSP and UNDP.

Africa

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

(cont.)

Telecommunications Access to electricity Main telephone line Mobile lines Final consumption Distribution losses per 100 inhabitants per 100 inhabitants (GWh) 2000 2005 2000 2005 2000 2004 2000 2004

Table 15 - Access to Services

Statistical Annex

603

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

72.0 41.7 55.5 34.4 48.9 45.1 46.2 71.4 39.5 44.2 64.7 53.2 44.4 46.2 53.7 70.9 41.9 55.5 48.3 53.6 57.3 57.8 54.2 45.3 49.6 34.8 42.5 74.3 56.0

2006

… 41.9 55.9 33.9 49.3 45.6 46.3 … 39.5 44.3 … 53.5 44.7 46.2 53.9 … 41.5 56.0 48.5 53.3 57.7 58.1 54.4 45.5 50.3 34.3 42.5 … 56.2

… 45.7 59.1 70.0 54.5 52.5 54.4 … 54.5 49.5 … 61.0 49.3 55.2 57.5 … 54.1 59.9 54.3 65.0 59.5 63.0 59.4 49.6 61.4 65.6 48.4 … 58.8

With Without AIDS AIDS 2005-10

Life expectancy at birth (years)

2002-04

prevalence (%)

Food availability

African Economic Outlook 1 1 2 2 2 2 2 2 2 1 3 2

3 2 2 2 2 1 2 3 2 2 1 2 1 2 2 3

114 178 652 084 529 682 212 058 004 137 787 130 560 637 350 286 … 465 840 707 178 723 426 001 149 495 923 476 070

2004 4.1 2.8 4.4 5.6 5.6 3.1 4.2 4.6 4.0 6.5 2.7 2.0 4.0 3.6 5.7 5.1 5.8 1.5 4.4 5.9 4.4 8.1 4.5 5.4 5.6 4.3 5.2 4.7 4.1

as % (Kcal/person/day) of GDP

Undernourishment

4 35 12 … 15 66 26 … 44 35 … 60 33 74 13 24 4 … … 46 5 29 11 24 39 31 … 50 3

604 89.0 26.0 20.0 232.0 19.0 3.0 37.0 78.0 12.0 16.0 11.0 19.0 28.0 4.0 47.0 55.0 96.0 8.0 5.0 196.0 21.0 16.0 22.0 9.0 20.0 31.0 6.0 171.0 8.0

($) 2003

Per capita**

80.8 84.2 43.1 58.2 46.8 23.3 28.9 73.2 38.6 39.9 54.1 64.2 18.3 27.6 66.9 38.6 42.6 67.5 45.5 58.4 66.6 40.0 31.8 16.6 45.8 38.7 79.7 56.7 62.9

19.2 15.8 56.9 41.8 53.2 76.7 71.1 26.8 61.4 60.1 45.9 35.8 81.7 72.4 33.1 61.4 57.4 32.5 54.5 41.6 33.4 60.0 68.2 83.4 54.2 61.3 20.3 43.3 37.1

Distribution Public Private (%) (%)

Total health expenditure

Table 16 - Basic Health Indicators

2005 2005 2005 2005 2005 2005 2005 2004 2005 2005 2005 2005 2004 2004 2004 2004 2004 2004 2004 2004 2003 2004 2004 2004 2005 2003 2004 2002 2004

Survey year

92.9 16.7 4.3 37.7 2.7 6.7 20.1 46.7 4.7 3.6 14.8 19.5 10.4 11.6 16.6 53.0 31.1 5.1 1.6 29.0 10.9 15.0 10.7 12.2 26.1 4.9 3.2 120.0 28.7

Physicians

(per 100 000)

Health personnel

238.2 247.8 26.3 240.3 32.3 79.1 47.8 82.8 29.8 24.7 75.9 91.1 51.5 57.0 33.0 202.0 46.3 59.2 14.0 511.9 119.6 91.0 51.7 67.4 125.3 62.4 18.9 355.5 31.3

Nurses

Statistical Annex

© AfDB/OECD 2007

© AfDB/OECD 2007

46.4

41.1 49.3 … … … 41.8 45.9 45.4 44.2 44.6 … … … 41.9 … 44.1 56.9 29.9 46.6 55.8 … 52.1 39.1 37.3 55.5

58.8 51.8 … … … 54.9 70.0 47.0 50.3 49.4 … … … 43.8 … 68.4 60.6 65.5 58.0 62.0 … 57.5 55.7 64.3 20

38 35 29 10 5 6 44 … 32 9 33 10 20 9 … … 3 26 … 44 24 3 19 47

2002-04

prevalence (%)

Food availability

077 163 640 999 158 057 174 121 720 173 525 414 426 849 … 004 311 224 963 334 344 348 947 978

2 435

3 2 2 1 2 3 2 1 1

2 2 2 2 3 2 2 2 2 2 2 2 2 1

2004

5.6

2.7 9.3 4.8 4.2 3.7 5.1 4.7 6.4 4.7 6.2 8.6 5.1 5.9 3.5 … 8.4 4.3 5.8 4.3 5.6 5.4 7.3 5.4 7.9

as % (Kcal/person/day) of GDP

Undernourishment

63.4 35.2 57.4 76.8 60.8 33.1 61.7 70.0 53.0 25.5 83.9 41.8 73.2 58.3 … 38.6 43.2 57.3 55.4 24.8 45.7 30.4 51.4 35.9 49.3

42.9

2003

50.7

36.6 64.8 42.6 23.2 39.2 66.9 38.3 30.0 47.0 74.5 16.1 58.2 26.8 41.7 … 61.4 56.8 42.7 44.6 75.2 54.3 69.6 48.6 64.1

Distribution Public Private (%) (%)

13.0 16.0 17.0 172.0 72.0 12.0 145.0 9.0 22.0 7.0 34.0 29.0 522.0 7.0 n.a. 295.0 21.0 107.0 16.0 137.0 18.0 12.0 21.0 40.0

($)

Per capita**

Total health expenditure

…

2004 2004 2004 2004 2004 2004 2004 2004 2003 2004 2004 2004 2004 2004 1997 2004 2005 2004 2002 2004 2004 2004 2004 2004

Survey year

…

2.1 8.0 10.5 105.7 54.1 2.6 29.8 2.8 27.7 4.5 53.0 5.2 151.4 3.1 4.8 73.8 22.1 16.5 2.3 3.8 98.1 7.9 11.0 16.1

Physicians

(per 100 000)

Health personnel

African Economic Outlook

…

57.6 49.8 63.5 369.0 86.4 20.4 305.8 20.1 167.0 40.5 167.4 28.9 793.4 34.5 23.0 390.7 49.5 660.2 36.7 35.8 296.0 58.3 165.6 72.3

Nurses

http://dx.doi.org/10.1787/121137204756

*Including Agalega, Rodrigues and Saint Brandon ** at average exchange rate Sources: Life expectancy at birth : United Nations, Department of Economic and Social Affairs, Population Division, World Population Prospects, The 2004 Revision, ADB Statistics Department.

51.4

Africa

Note:

40.8 49.0 54.1 72.8 70.7 41.8 46.4 45.2 44.0 44.4 63.8 56.8 71.9 41.6 48.3 45.0 56.8 30.5 46.5 55.5 73.9 51.1 38.8 37.3

Malawi Mali Mauritania Mauritius* Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

2006

With Without AIDS AIDS 2005-10

Life expectancy at birth (years)

Table 16 - Basic Health Indicators (cont.)

Statistical Annex

605

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

60.6 33.4 44.0 35.7 35.6 35.1 41.5 60.8 37.4 40.7 54.6 46.3 37.1 39.5 42.9 59.0 45.5 50.0 41.2 51.4 49.5 49.8 44.8 40.5 44.4 31.4 35.3 63.7 48.6

Total

59.7 31.6 43.4 36.0 34.9 33.4 41.1 58.8 37.0 39.7 53.9 45.3 35.0 37.6 42.5 57.8 44.7 49.3 40.7 50.2 48.5 49.2 43.9 39.6 44.1 29.6 33.6 62.3 47.3

2002

Male

61.6 35.1 44.5 35.4 36.3 36.8 41.8 62.9 37.7 41.7 55.3 47.3 39.1 41.3 43.2 60.2 46.3 50.8 41.7 52.6 50.5 50.3 45.6 41.5 44.8 33.2 37.0 65.0 49.9

19 320 87 270 150 150 510 0 250 180 <500 120 1 000 750 15 5 9 59 … 60 20 320 85 32 1 300 270 … … 49

0.1 3.7 1.8 24.1 2.0 3.3 5.4 … 10.7 3.5 <0.1 5.3 3.2 7.1 3.1 <0.1 3.2 2.4 … 7.9 2.4 2.3 1.5 3.8 6.1 23.2 … … 0.5

HIV/AIDS People living with Adult HIV/AIDS prevalence Female (000) (%) Survey end-2005

Healthy life expectancy at birth (years)

606 … 160 62 120 120 120 240 … 140 57 … 110 680 450 6 … 5 36 … 20 4 170 28 11 1 100 97 … … 13

AIDS orphans cumulative (000) Notified 2004 cases

1997 197 2002 1 409 328 1997 670 857 1995 17 599 1995 501 020 1995 932 794 1997 645 309 1997 20 2003 95 644 1995 343 186 1996 15 509 1997 9 491 2003 4 386 638 1997 983 089 1997 4 314 1997 11 1995 12 530 2003 72 023 2003 565 273 1997 35 842 ... ... 2003 3 552 869 1997 802 210 ... ... 2002 124 197 ... ... ... ... ... ... ... ...

2003 year

Malaria notified cases

Table 17 - Major Diseases

African Economic Outlook 2 117 2 1 11 6 1 91 10 1 1 19

7 84 17 3 11

4 5

19 36 2 9 2 6 15

730 079 932 862 620 822 964 205 837 077 ... 782 687 782 231 490 416 805 600 174 945 891 199 600 522 111 753 917 309

2003

Tuberculosis notified cases

2 302 258 210 8 253 0 605 0 471 2 912 146 182 485 117 298 77 ... 19 357 0 0 435 99 0 153 ... 8 292 ...

2004

Measles incidence

83 45 85 90 84 75 68 65 35 23 80 56 70 51 65 98 51 84 59 55 84 83 59 80 69 85 94 97 59

88 47 93 97 96 74 80 73 40 20 80 65 73 56 71 98 33 83 69 38 88 84 69 80 76 83 87 98 61

Vaccination coverage (%) MCV DTP3

Statistical Annex

© AfDB/OECD 2007

© AfDB/OECD 2007

44.6

Africa

43.8

35.0 37.5 42.8 60.3 59.5 36.3 42.9 35.8 41.3 36.4 54.2 47.1 57.4 27.2 36.1 43.3 47.2 33.2 40.0 43.5 61.3 41.7 34.8 33.8

2002

Male

45.3

34.8 38.3 46.3 64.6 60.9 37.5 43.8 35.2 41.8 40.2 54.7 48.9 64.9 29.9 37.5 45.3 49.9 35.2 40.7 45.7 63.6 43.7 35.0 33.3 23 876

1 1 1

1

5

2

1

940 130 12 4 19 800 230 79 900 190 61 0 48 44 0 500 350 220 400 110 9 000 100 700 6.4

14.1 1.7 0.7 0.6 0.1 16.1 19.6 1.1 3.9 3.1 … 0.9 … 1.6 0.9 18.8 1.6 33.4 6.5 3.2 0.1 6.7 17.0 20.1 11 521

1

1

1

1

550 94 7 … … 510 85 46 930 210 … 25 … 31 23 200 … 63 100 88 … 000 710 100

AIDS orphans cumulative (000) Notified

...

2002 2 2003 ... 1997 2000 2003 5 2003 1997 2003 2 1997 1 ... 1995 ... ... 2003 1996 2003 3 ... 2003 10 ... ... 2003 12 2001 2 1995

2003 year

...

853 317 809 428 ... 65 59 087 865 444 081 978 855 608 479 210 775 ... 628 773 ... ... 23 349 29 160 084 320 ... 712 526 ... ... 343 411 010 185 330 002

2004 cases

Malaria notified cases

1 153 546

25 841 4 496 3 067 ... 26 789 28 602 11 776 7 078 44 184 6 011 ... 9 410 ... 5 289 9 278 227 320 25 095 6 748 61 579 1 766 1 965 41 795 53 932 53 183

2003

Tuberculosis notified cases

318 280

1

2 110

12

184 33 127 7 ... 598 4 183 927 129 0 0 0 29 ... 615 374 0 23 38 15 22 45 420

2004

Measles incidence

68

82 86 61 98 97 77 73 83 35 89 88 74 99 67 35 82 60 60 91 70 96 86 84 85

70

93 85 71 97 98 72 86 89 25 95 97 84 99 64 35 94 59 71 90 82 98 84 80 90

Vaccination coverage (%) MCV DTP3

Notes: DTP: Diphtheria, tetanus toxoids and pertussis antigen. MCV: Measles Contaning Vaccine. Sources: UNAIDS and WHO, Country epidemic updates September 2006; Malaria notified cases: WHO, Roll Back Malaria (RBM) database; World Malaria Report, 2005. Tuberculosis notified cases: WHO, 2006, Global Tuberculosis Database; Vaccination coverage and Measles incidence: WHO Vaccine Immunization and Biological, 2005 Global Summary. WHOSIS, February 2007. http://dx.doi.org/10.1787/567153014637

34.9 37.9 44.5 62.4 60.2 36.9 43.3 35.5 41.5 38.3 54.4 48.0 61.2 28.6 36.8 44.3 48.5 34.2 40.4 44.6 62.5 42.7 34.9 33.6

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

Total

HIV/AIDS People living with Adult HIV/AIDS prevalence Female (000) (%) Survey end-2005

Healthy life expectancy at birth (years)

Table 17 - Major Diseases (cont.)

Statistical Annex

African Economic Outlook

607

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

20.4 17.1 52.1 19.6 70.6 32.7 23.0 12.9 35.2 59.2 36.0 8.3 19.1 39.2 19.5 17.0 6.6 27.7 46.7 ... 48.9 33.6 57.4 38.8 22.3 26.3 24.1 6.2 23.5

39.9 45.8 76.7 18.2 84.8 47.8 40.2 28.3 66.5 87.2 50.1 18.1 45.9 61.4 37.4 40.6 19.5 49.3 60.7 ... 63.4 50.2 81.9 68.2 29.8 9.7 56.3 24.9 34.7

Estimated adult illiteracy rate (%) Latest available 1999-2004 (people over 15) Total Male Female

30.1 32.6 65.3 18.8 78.2 40.7 32.1 21.3 51.4 74.3 43.0 13.4 32.8 51.3 28.7 28.6 13.0 38.6 53.7 ... 56.3 42.1 70.5 53.9 26.4 17.8 40.2 15.3 29.3

608 8.0 ... 41.0 9.6 59.7 30.6 7.2 9.3 26.0 25.6 40.5 1.5 13.6 33.7 12.1 26.5 1.9 25.5 39.0 ... 35.6 6.2 ... 35.0 3.3 8.0 26.0 2.3 16.6

4.8 ... 23.9 13.1 49.0 30.8 6.2 7.0 19.8 20.8 33.9 1.1 8.7 26.0 9.0 21.2 1.0 16.7 34.2 ... 28.2 4.8 ... 22.9 3.0 14.9 11.6 0.2 14.0

11.3 ... 57.9 6.1 70.7 30.3 8.3 11.6 32.0 30.3 47.2 2.0 18.5 41.3 15.1 32.1 2.9 34.4 43.7 ... 42.9 7.6 ... 47.1 3.6 1.0 40.3 4.5 19.3

Estimated youth illiteracy rate (%) Latest available 1999-2004 (people between 15 and 24) Total Male Female

Table 18 - Basic Education Indicators

... ... 3.3 ... ... 5.2 3.8 7.3 ... ... 3.9 3.2 ... ... 6.1 ... 0.6 3.8 4.6 ... 1.9 ... ... ... 7.0 9.0 ... ... 3.3

(% of GDP)

Public expenditure on education Latest available 2002-04

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007

43.3

Africa

Sources: UNESCO Institute for Statistics (UIS) Database.

35.9 81.0 48.8 15.6 47.7 48.3 15.0 71.3 28.1 35.1 15.1 60.7 8.2 64.9 ... 17.6 39.1 20.4 30.6 46.8 25.7 33.2 32.0 7.6

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe 34.5

25.1 73.3 40.5 11.6 34.3 33.2 13.2 57.1 21.5 28.6 ... 48.9 8.6 53.1 ... 15.9 28.9 19.1 22.5 31.3 16.6 23.2 23.7 4.5 52.4

46.0 88.1 56.6 19.5 60.4 62.9 16.5 84.9 34.4 40.2 ... 70.8 7.7 75.6 ... 19.1 48.2 21.7 37.8 61.5 34.7 42.3 40.2 10.7

Estimated adult illiteracy rate (%) Latest available 1999-2004 (people over 15) Total Male Female

24.2

16.1

20.2

http://dx.doi.org/10.1787/533803487518

6.0 ... 3.4 4.7 6.3 ... 7.2 2.3 ... ... ... 4.0 5.4 ... ... 5.4 ... 6.2 ... 2.6 8.1 5.2 2.8 ...

34.3 70.2 56.5 4.3 34.0 46.2 5.1 83.1 10.3 13.4 ... 51.7 ... ... ... 7.5 21.8 6.7 8.4 29.1 7.3 23.0 11.2 2.9

25.5 59.2 49.3 5.1 27.2 33.7 6.8 73.3 8.9 12.8 ... 43.8 ... ... ... 7.5 18.1 7.5 6.9 19.6 4.3 17.7 9.4 1.8

16.8 48.2 42.1 5.8 20.5 21.2 8.4 63.5 7.6 12.1 ... 35.9 ... ... ... 7.5 14.5 8.4 5.4 10.0 1.4 12.3 7.6 0.7

Public expenditure on education Latest available 2002-04 (% of GDP)

(cont.)

Estimated youth illiteracy rate (%) Latest available 1999-2004 (people between 15 and 24) Total Male Female

Table 18 - Basic Education Indicators

Statistical Annex

609

African Economic Outlook

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

111.7 ... 99.0 105.0 53.0 80.0 117.0 111.0 56.0 80.0 85.0 89.0 ... ... 39.0 101.0 ... 66.0 77.0 130.0 81.0 81.0 79.0 ... 111.0 131.0 ... ... 134.0

Total 116.0 ... 111.0 105.0 59.0 87.0 126.0 113.0 67.0 97.0 91.0 92.0 ... ... 44.0 103.0 ... 74.0 85.0 130.0 79.0 84.0 87.0 ... 114.0 131.0 ... ... 136.0

Male 107.0 ... 86.0 104.0 47.0 73.0 107.0 108.0 44.0 63.0 80.0 85.0 ... ... 35.0 98.0 ... 59.0 69.0 129.0 84.0 79.0 71.0 ... 108.0 131.0 ... ... 131.0

96.7 ... 82.6 82.1 40.5 57.0 ... 91.8 ... ... ... ... ... ... 32.2 95.4 ... 47.8 46.4 ... 75.2 57.9 63.8 ... 76.4 85.9 ... ... 88.8

Total 97.8 ... 92.5 80.9 45.6 60.2 ... 92.2 ... ... ... ... ... ... 35.9 96.7 ... 51.7 49.2 ... 73.1 57.7 69.0 ... 76.4 83.4 ... ... 88.8

Male 95.4 ... 72.4 83.3 35.3 53.8 ... 91.4 ... ... ... ... ... ... 28.5 94.0 ... 43.8 43.6 ... 77.4 58.1 58.2 ... 76.5 88.5 ... ... 88.7

Female

Primary School, 2004/05 Net enrolment ratio

Female

Gross enrolment ratio

610 Table 19 - School Enrolment

27.0 ... 52.0 26.0 49.0 51.0 54.0 27.0 ... 69.0 35.0 83.0 ... ... 35.0 22.0 ... 48.0 72.0 36.0 37.0 33.0 45.0 ... 40.0 44.0 ... ... 52.0

Pupil/ teacher ratio 81.0 ... 26.0 75.0 12.0 12.0 44.0 66.0 ... 16.0 35.0 39.0 ... ... 22.0 87.0 ... 29.0 28.0 ... 47.0 42.0 26.0 ... 48.0 36.0 ... ... ...

78.0 ... 36.0 73.0 14.0 14.0 51.0 63.0 ... 23.0 40.0 42.0 ... ... 25.0 90.0 ... 38.0 34.0 ... 51.0 45.0 34.0 ... 50.0 32.0 ... ... ...

84.0 ... 17.0 77.0 10.0 10.0 36.0 69.0 ... 8.0 30.0 35.0 ... ... 18.0 84.0 ... 21.0 21.0 ... 43.0 38.0 17.0 ... 46.0 41.0 ... ... ...

21.0 ... ... 14.0 31.0 19.0 33.0 23.0 ... 34.0 14.0 34.0 ... ... ... 17.0 ... 51.0 54.0 ... 42.0 19.0 33.0 ... 32.0 26.0 ... ... ...

Secondary School, 2004/05 Gross enrolment ratio Pupil/ teacher Total Male Female ratio

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007

95.9

125.0 64.0 94.0 103.0 106.0 95.0 ... 45.0 99.0 119.0 133.0 76.0 110.0 145.0 ... ... 60.0 ... 101.0 101.0 110.0 125.0 99.0 ... 103.7

123.0 71.0 95.0 103.0 111.0 104.0 ... 52.0 107.0 118.0 134.0 78.0 109.0 169.0 ... ... 64.0 ... 103.0 110.0 112.0 126.0 101.0 ...

Male

90.4

126.0 56.0 93.0 103.0 100.0 86.0 ... 37.0 91.0 120.0 132.0 74.0 110.0 122.0 ... ... 56.0 ... 99.0 92.0 108.0 125.0 97.0 ...

Female

71.1

95.3 46.5 74.3 95.1 86.1 71.0 ... 39.2 60.1 73.2 98.2 66.1 96.4 ... ... ... ... ... 85.9 78.8 97.4 ... 79.8 ...

Total

73.2

93.1 50.1 74.7 94.2 88.7 74.8 ... 45.7 63.5 71.5 98.5 67.8 96.0 ... ... ... ... ... 86.8 85.3 97.2 ... 79.8 ...

Male

Pupil/ teacher ratio 70.0 52.0 41.0 23.0 28.0 65.0 ... 44.0 36.0 62.0 32.0 43.0 14.0 67.0 ... ... 29.0 ... 56.0 44.0 21.0 50.0 49.0 ... 43.8

Female 97.6 42.7 73.9 96.1 83.4 67.3 ... 32.4 56.5 74.8 98.0 64.5 96.9 ... ... ... ... ... 85.1 72.3 97.6 ... 79.9 ... 68.8

Primary School, 2004/05 Net enrolment ratio

(cont.)

Sources: ADB Statistics Department ; UNESCO Institute for Statistics (UIS) Database, March 2007; various domestic authorities.

Africa

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

Total

Gross enrolment ratio

Table 19 - School Enrolment

40.8

29.0 22.0 20.0 85.0 48.0 11.0 ... 8.0 35.0 14.0 40.0 19.0 102.0 14.0 ... ... 33.0 ... ... 39.0 81.0 19.0 26.0 ... 40.1

32.0 28.0 22.0 86.0 52.0 13.0 ... 9.0 38.0 15.0 39.0 22.0 98.0 14.0 ... ... 34.0 ... ... 52.0 ... 21.0 29.0 ...

...

... ... 28.0 17.0 19.0 ... ... 31.0 ... 26.0 ... 26.0 14.0 ... ... ... 25.0 ... ... 34.0 18.0 19.0 34.0 ...

http://dx.doi.org/10.1787/021613337607

36.5

26.0 17.0 18.0 85.0 43.0 9.0 ... 6.0 31.0 14.0 41.0 16.0 106.0 14.0 ... ... 32.0 ... ... 26.0 ... 17.0 23.0 ...

Secondary School, 2004/05 Gross enrolment ratio Pupil/ teacher Total Male Female ratio

Statistical Annex

African Economic Outlook

611

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo, Dem. Rep. Côte d’Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

2004 … … 2001 1994 1990 2001 … … 1993 … … … … … 2003 … 1984 2004 1993 … 2000 1994 … 1994 1997 … … 2002

Year 20 … … 19 3 1 8 … … 1 … … … … … 11 … 17 23 18 … 8 3 … 21 39 … … 5

20 … … 16 … 1 8 … … 1 … … … … … 7 … 15 16 19 … 8 5 … 13 31 … … 4

Men

Unemployment rate

Total

612

21 … … 22 … 0 7 … … 0 … … … … … 23 … 19 31 16 … 9 2 … 28 47 … … 6

Women 58 82 70 56 84 92 66 54 79 71 72 71 75 64 ... 47 70 74 80 72 72 73 83 76 79 58 69 57 82

Participation rate (>15) 2005 42 18 30 44 17 8 34 46 21 29 28 29 24 36 ... 54 30 27 20 28 28 27 17 24 21 43 31 43 18

Total 20 9 14 33 11 7 20 24 11 23 13 13 10 12 ... 27 10 10 11 18 14 25 13 8 11 28 17 20 14

64 26 46 55 22 8 48 66 30 34 42 44 39 61 ... 80 50 42 29 39 41 30 21 39 31 54 46 68 21

Inactivity rate (>15) 2005 Men Women

Table 20 - Employment and Remittances

790 ... 87 26 67 ... 11 87 ... ... 12 10 ... 119 ... 2 852 ... 3 000 53 6 14 32 1 2 538 252 ... 9 11

2000 1 070 ... 76 27 50 ... 11 85 ... ... 12 1 ... 120 2 893 ... ... 33 3 7 44 15 18 395 194 ... 7 17

2 911 ... ... 18 5 7 46 9 10 517 209 ... 10 11

2002

670 ... 84 26 50 ... 11 81 ... ... 12 1 ... 116

2001

African Economic Outlook 2 961 ... ... 47 6 8 65 111 23 494 288 ... 8 16

1 750 ... 55 39 50 ... 11 92 ... ... 12 1 ... 142

2003

Workers’ remittances ($ million)

3 341 ... ... 134 6 8 82 42 23 494 355 ... 10 16

2 460 ... 55 39 50 ... 11 92 ... ... 12 1 ... 148

2004

Statistical Annex

© AfDB/OECD 2007

© AfDB/OECD 2007

1998 2004 … 2004 2003 … 2001 … 1995 1996 2000 … … … … 2004 … 1997 2001 … 2003 2003 1998 2002 11 336

1 9 … 9 12 … 31 … 17 1 14 … 35 … … 27 … 25 5 … 15 3 .20 12 8 12 394

Total 1 7 … 6 12 … 27 … 18 1 13 … 28 … … 24 48 20 4 … … 3 13 10 12 906

Men 1 11 … 14 13 … 36 … 15 0 18 … 41 … … 32 52 26 6 … … 4 12 6 15 323

Women

Note: See note on methodology. Source: Employment: ILO, KILM database. Workers’ remittances: World Bank, Global Development Finance 2006.

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe Africa

Year

Unemployment rate

87 78 69 61 54 84 54 83 65 82 52 69 … 75 … 62 28 51 88 70 52 83 78 74 18 845

Participation rate (>15) 2005 13 22 31 39 47 16 46 17 35 18 49 31 … 25 ... 38 76 50 12 30 48 17 22 26

Total

(cont.)

10 16 16 21 19 17 37 5 15 16 26 18 2 6 ... 21 641 28 10 10 25 14 9 16

15 28 46 57 73 16 53 29 55 20 70 44 1 44 ... 54 740 69 14 50 71 20 34 36

Inactivity rate (>15) 2005 Men Women

Table 20 - Employment and Remittances

1 73 2 177 2 161 37 9 14 1 392 7 0 233 1 7 ... 344 978 74 8 34 796 238 ... ...

2000 1 88 2 215 3 261 42 9 22 1 167 8 1 305 1 7 ... 297 1 224 74 16 69 927 338 ... ...

2001

523 89 11 148 1 432 347 ... ...

435 88 9 148 1 250 285 ... ...

288 1 403 62 12 104 1 071 416 ... ...

http://dx.doi.org/10.1787/574003408116

25

26

22

1 154 2 215 4 221 58 16 26 2 273 10 1 511

2004

1 154 2 215 3 614 70 12 26 1 063 9 1 511

2003

1 138 2 215 2 877 53 7 19 1 209 7 1 344

2002

Workers’ remittances ($ million)

Statistical Annex

613

African Economic Outlook

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Congo. Dem. Rep. Côte d´Ivoire Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea Bissau Kenya Lesotho Liberia Libya Madagascar

614

… 1.7 … 6 3 … 2 … … … … … … 2.7 … 3.1 … … 3.2 … … 3.5 … … 2.1 … … … …

… 85 … 26 65 … 84 … … … … … … 71 … 63 … … 60 … … 52 … … 82 … … … …

… … … 6 … … 2 … … … … … … 2.4 … 3.6 … … … … … 3.4 … … 2 … … … …

… … … 26 … … 84 … … … … … … 77 … 54 … … … … … 59 … … 84 … … … …

… 1.7 … 6.4 … … 2.2 … … … … … … 2.7 … 3.4 … … 3.5 … … 3.9 … … 1.9 … … … 1.7

… 98 … 24 … … 89 … … … … … … 71 … 62 … … 59 … … 50 … … 96 … … … 98

2.6 1.8 … 5.7 … … 1.8 … … … … 2.2 … 2.1 … 3.3 … … 2.5 … 2.5 3.3 … … 1.9 … … 2.1 2.6

88 124 … 30 … … 124 … … … … 113 … 118 … 70 … … 92 … 92 70 … … 122 … … 118 88

2.7 2 3.2 6 … … 2.1 … … 1.7 … 2.3 2 2 … 3.2 … 2.6 2.3 3.3 2.8 3.6 … … 2.1 … … 2.5 3.1

97 133 77 31 … … 129 … … 142 … 114 133 133 … 77 … 102 114 74 90 64 … … 129 … … 108 82

2.8 2 2.9 5.9 3.4 2.3 2.2 … … 1.7 … 2.3 2.1 1.9 … 3.4 1.9 2.6 2.2 2.9 2.7 3.5 … … 2.1 3.4 2.2 2.5 2.8

97 151 88 32 70 130 137 … … 158 … 130 144 152 … 70 152 107 137 88 103 65 … … 144 70 137 117 97

3.1 2.2 2.5 5.6 3.2 2.4 2.3 … 2.4 2 … 2.2 2 2.1 … 3.3 2.1 2.9 2.4 3 2.5 3.3 1.9 … 2.2 3.2 … 2.7 3.1

84 142 121 37 79 130 138 … 130 156 … 142 156 151 … 70 151 93 130 90 121 70 160 … 142 79 … 105 84

2000 2001 2002 2003 2004 2005 2006 Index Country Rank Index Country Rank Index Country Rank Index Country Rank Index Country Rank Index Country Rank Index Country Rank / 90 / 91 / 102 / 133 / 145 / 158 / 163

Table 21 - Corruption Perception Index

Statistical Annex

African Economic Outlook

© AfDB/OECD 2007

© AfDB/OECD 2007

Source: Transparency International.

Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

(cont.)

4.1 … … 4.7 4.7 2.2 5.4 … 1.2 … … 3.5 … … … 5 … … 2.5 … 5.2 2.3 3.4 3

43 … … 37 37 81 30 … 90 … … 52 … … … 34 … … 76 … 32 80 57 65

3.2 … … 4.5 … … 5.4 … 1 … … 2.9 … … … 4.8 … … 2.2 … 5.3 1.9 2.6 2.9

61 … … 40 … … 30 … 90 … … 65 … … … 38 … … 82 … 31 88 75 65

2.9 … … 4.5 3.7 … 5.7 … 1.6 … … 3.1 … … … 4.8 … … 2.7 … 4.8 2.1 2.6 2.7

68 … … 40 52 … 28 … 101 … … 66 … … … 36 … … 71 … 36 93 77 71

2.8 3 … 4.4 3.3 2.7 4.7 … 1.4 … … 3.2 … 2.2 … 4.4 2.3 … 2.5 … 4.9 2.2 2.5 2.3

83 78 … 48 70 86 41 … 132 … … 76 … 113 … 48 106 … 92 … 39 113 92 106

2.8 3.2 … 4.1 3.2 2.8 4.1 2.2 1.6 … … 3 4.4 2.3 … 4.6 2.2 … 2.8 … 5 2.6 2.6 2.3

90 77 … 54 77 90 54 122 144 … … 85 48 114 … 44 122 … 90 … 39 102 102 114

2.8 2.9 … 4.2 3.2 2.8 4.3 2.4 1.9 3.1 … 3.2 4 2.4 2.1 4.5 2.1 2.7 2.9 … 4.9 2.5 2.6 2.6

2.7 2.8 3.1 5.1 3.2 2.8 4.1 2.3 2.2 2.5 … 3.3 3.6 2.2 … 4.6 2 2.5 2.9 2.4 4.6 2.7 2.6 2.4

105 99 84 42 79 99 55 138 142 121 … 70 63 142 … 51 156 121 93 130 51 105 111 130

http://dx.doi.org/10.1787/203153668061

97 88 … 51 78 97 47 126 152 83 … 78 55 126 144 46 144 103 88 … 43 117 107 107

2000 2001 2002 2003 2004 2005 2006 Index Country Rank Index Country Rank Index Country Rank Index Country Rank Index Country Rank Index Country Rank Index Country Rank / 90 / 91 / 102 / 133 / 145 / 158 / 163

Table 21 - Corruption Perception Index

Statistical Annex

615

African Economic Outlook

Statistical Annex

Table 22 - Political Troubles

616

Algeria Angola Benin Botswana Burkina Faso Cameroon Chad Congo Congo, Dem. Rep. Côte d'Ivoire Egypt Equatorial Guinea Ethiopia Gabon Ghana Kenya Madagascar Mali Mauritius Malawi Morocco Mozambique Namibia Niger Nigeria Rwanda Senegal South Africa Tanzania Tunisia Uganda Zambia Zimbabwe

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

121.4 … … 0.0 0.0 23.7 4.4 … … 16.4 22.9 1.9 48.5 10.0 4.9 14.8 … 3.4 0.0 … 12.2 37.7 3.5 … 30.2 … 0.3 85.0 4.7 0.0 81.3 4.8 9.6

124.2 … … 0.0 3.2 54.7 5.6 … … 3.8 43.6 0.0 12.2 1.0 0.0 25.5 … 13.7 0.0 … 1.6 0.0 0.0 … 51.3 … 19.6 40.8 1.9 0.0 15.3 4.6 9.7

126.6 … … 0.0 1.1 1.3 2.2 … … 3.4 0.0 1.9 1.6 2.5 0.3 34.1 … 1.2 0.0 … 2.2 0.0 0.0 … 10.2 … 2.7 20.3 0.9 0.5 10.5 4.9 11.3

141.6 … … 0.0 5.6 1.5 20.2 … … 21.7 1.0 0.0 24.8 0.9 4.5 0.0 … 8.8 5.2 … 0.5 2.7 7.6 … 47.1 … 5.6 38.8 0.0 2.5 9.6 3.6 5.4

120.3 … … 0.0 9.5 2.2 26.7 … … 28.1 7.8 0.0 5.7 0.0 1.9 0.0 … 0.0 0.0 … 0.5 6.8 3.8 … 29.2 … 5.7 18.9 0.0 0.5 0.0 0.6 16.8

142.5 … … 0.0 2.5 1.0 16.7 … … 2.9 7.2 0.0 8.4 0.0 3.8 11.6 … 0.0 0.0 … 0.0 0.0 0.0 … 39.7 … 5.9 2.2 6.0 0.0 23.9 17.6 12.6

64.8 … … 0.0 2.5 0.6 10.5 … … 13.7 2.0 0.0 42.6 1.5 3.8 1.9 … 0.0 0.0 … 0.0 0.0 0.0 … 19.4 … 7.7 3.3 0.0 2.9 14.3 1.1 16.5

14.5 … … 0.0 0.1 0.8 2.9 … … 18.8 5.4 1.0 15.2 0.0 1.1 6.8 … 0.6 0.0 … 0.0 4.5 0.0 … 10.4 … 6.7 1.2 0.5 2.3 17.2 5.7 8.8

61.4 54.6 2.7 0.0 4.1 2.0 3.8 2.0 21.7 25.2 8.5 1.0 25.9 0.5 1.9 4.5 6.7 0.6 1.9 … 3.5 3.8 0.0 5.5 31.6 0.0 9.1 11.3 0.3 0.0 41.1 2.0 3.4

23.4 2.9 0.0 0.0 0.8 3.3 11.2 1.9 21.9 20.6 13.7 0.0 13.2 6.6 0.0 12.4 8.8 2.5 1.9 5.7 2.0 1.0 0.0 3.5 4.0 0.0 4.7 3.1 5.3 2.9 8.8 2.0 4.5

0.6 2.0 1.0 0.0 2.0 3.4 38.5 1.0 18.9 6.8 0.0 6.7 2.4 0.0 5.7 4.8 1.9 1.0 5.4 0.0 0.0 0.0 1.2 21.5 32.4 0.5 4.3 9.4 0.0 0.0 7.6 2.7 4.1

Note: See note on methodology. Source: Authors' calculations based on Marchés Tropicaux et Méditerranéens.

African Economic Outlook

http://dx.doi.org/10.1787/680402624746

© AfDB/OECD 2007

Statistical Annex

Table 23 - Softening of the Regime

Algeria Angola Benin Botswana Burkina Faso Cameroon Chad Congo Congo, Dem. Rep. Côte d'Ivoire Egypt Equatorial Guinea Ethiopia Gabon Ghana Kenya Madagascar Mali Mauritius Malawi Morocco Mozambique Namibia Niger Nigeria Rwanda Senegal South Africa Tanzania Tunisia Uganda Zambia Zimbabwe

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

1.3 … … 0.0 0.4 0.7 4.5 … … 1.5 0.1 0.0 0.1 0.0 0.9 0.9 … 1.4 0.0 … 0.9 0.1 0.0 … 1.1 … 0.5 3.1 0.2 1.4 0.0 1.4 0.1

3.6 … … 0.0 0.4 2.0 4.0 … … 2.1 0.0 2.6 0.1 0.5 0.1 0.7 … 2.3 0.1 … 0.6 0.0 0.4 … 1.8 … 0.7 2.3 0.1 0.7 0.4 0.0 0.1

0.8 … … 0.0 0.0 0.8 0.0 … … 1.0 0.0 0.0 0.8 0.5 0.0 0.6 … 0.9 0.0 … 0.6 0.0 0.0 … 6.6 … 0.0 0.8 0.1 0.1 0.4 1.7 0.0

1.9 … … 0.4 0.0 0.0 1.8 … … 1.1 1.4 0.8 0.0 0.0 0.0 0.0 … 1.7 0.0 … 0.0 0.0 0.0 … 3.4 … 2.4 2.0 1.6 2.8 0.6 0.7 0.2

0.7 … … 0.0 1.1 0.1 0.5 … … 2.6 1.9 0.7 0.1 0.1 1.1 0.0 … 1.4 0.0 … 2.1 0.7 0.0 … 0.3 … 1.1 0.9 0.0 0.7 0.7 0.0 1.2

0.0 … … 0.0 0.0 0.8 1.1 … … 3.9 0.2 0.5 1.6 0.0 0.2 1.1 … 0.1 0.0 … 0.0 1.5 1.1 … 0.0 … 1.6 2.2 1.6 1.8 0.1 1.2 0.6

3.0 … … 0.0 0.7 0.0 2.7 … … 1.8 0.6 1.8 0.0 1.1 0.0 0.0 … 1.3 0.0 … 0.9 0.7 0.0 … 0.9 … 0.1 0.9 0.7 3.0 0.4 1.3 1.5

2.2 … … 0.0 0.1 0.7 3.2 … … 6.9 2.6 1.5 0.0 0.4 0.0 2.7 … 0.0 1.0 … 1.0 0.1 0.5 … 0.6 … 0.0 0.5 0.0 0.7 0.9 1.6 2.5

3.8 1.2 0.9 0.0 1.1 2.4 0.2 0.8 0.4 6.0 2.5 0.4 0.4 0.8 0.4 0.7 2.9 0.2 0.1 … 3.0 0.1 0.0 0.0 1.2 0.6 2.6 0.6 0.5 0.0 0.6 0.5 0.5

1.9 0.7 0.2 0.0 0.0 1.0 0.4 1.1 1.7 3.6 1.8 0.0 1.9 0.8 0.0 0.0 0.2 0.0 0.1 0.0 1.2 0.0 0.2 1.2 0.3 1.5 1.2 0.8 0.0 1.1 0.6 0.2 0.1

1.1 1.9 0.6 0.0 0.0 0.6 0.4 0.1 1.3 2.0 1.7 1.9 0.7 0.0 0.2 0.4 0.0 0.0 1.5 2.1 0.0 0.0 1.4 0.6 1.6 0.1 0.7 0.2 0.0 0.4 2.2 0.5 0.7

Note: See note on methodology. Source: Authors' calculations based on Marchés Tropicaux et Méditerranéens.

© AfDB/OECD 2007

http://dx.doi.org/10.1787/104360166735

African Economic Outlook

617

Statistical Annex

Table 24 - Hardening of the Regime

618

Algeria Angola Benin Botswana Burkina Faso Cameroon Chad Congo Congo, Dem. Rep. Côte d'Ivoire Egypt Equatorial Guinea Ethiopia Gabon Ghana Kenya Madagascar Mali Mauritius Malawi Morocco Mozambique Namibia Niger Nigeria Rwanda Senegal South Africa Tanzania Tunisia Uganda Zambia Zimbabwe

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

11.9 … … 0.3 0.8 7.4 2.9 … … 2.9 9.4 0.0 7.5 1.0 2.2 3.9 … 0.4 0.3 … 5.0 0.3 0.0 … 125.5 … 1.7 18.6 1.3 3.9 3.1 5.5 4.0

6.5 … … 0.5 1.9 5.9 1.0 … … 2.5 6.8 1.2 3.9 5.1 0.8 11.0 … 5.1 0.0 … 3.7 0.9 0.3 … 9.1 … 3.3 14.3 0.4 1.5 0.0 8.5 3.7

4.3 … … 0.0 0.6 1.9 1.4 … … 0.7 5.5 5.0 2.4 0.7 2.5 3.6 … 0.0 0.0 … 1.4 2.3 0.0 … 5.8 … 2.7 6.1 0.5 1.5 0.7 3.9 7.7

2.5 … … 0.6 4.5 1.6 0.0 … … 10.2 2.0 0.0 0.0 2.1 2.4 0.0 … 0.4 0.4 … 1.2 1.1 1.2 … 4.2 … 0.3 4.5 0.0 2.4 0.9 3.0 5.1

0.3 … … 0.0 1.6 1.0 1.1 … … 7.8 7.7 0.0 0.7 0.4 0.0 0.0 … 1.2 0.0 … 3.4 3.7 1.6 … 4.5 … 0.0 1.9 0.3 1.4 0.0 1.1 4.8

8.1 … … 0.0 1.1 3.3 2.6 … … 1.4 3.9 0.9 3.6 0.0 0.8 0.7 … 1.1 0.0 … 2.9 1.2 0.3 … 2.8 … 1.7 1.2 0.4 3.3 5.8 4.7 12.5

15.0 … … 0.0 2.7 0.9 1.7 … … 3.2 11.5 5.7 8.4 0.5 1.3 1.2 … 0.3 0.0 … 2.5 0.0 0.3 … 2.4 … 1.1 1.8 0.0 2.9 1.3 5.2 17.5

4.5 … … 0.0 2.4 2.2 0.0 … … 7.2 4.8 0.5 1.2 1.3 0.0 2.0 … 1.0 2.2 … 3.7 0.4 0.8 … 3.5 … 1.4 1.7 0.5 1.6 3.8 1.5 15.5

8.9 5.7 1.2 1.0 2.8 2.5 0.9 1.4 4.9 9.6 4.0 8.1 1.3 3.6 0.4 2.3 2.8 0.3 0.4 … 5.6 1.6 0.3 1.6 12.4 4.0 0.9 4.0 0.0 6.4 12.3 2.4 16.3

0.0 0.3 0.3 0.3 0.5 0.0 6.9 1.0 10.4 7.2 3.2 0.0 12.4 7.8 0.0 2.6 1.1 0.0 0.4 3.4 1.9 0.0 0.0 3.1 2.6 0.0 2.6 4.5 1.5 2.7 2.9 1.2 13.4

1.8 1.3 1.7 0.0 0.3 2.5 17.0 0.5 14.7 5.6 1.4 4.1 2.7 0.0 3.6 1.7 0.8 0.0 8.2 0.8 0.0 0.3 1.6 4.0 21.4 0.0 2.8 2.2 0.0 0.5 6.5 1.4 10.1

Note: See note on methodology. Source: Authors' calculations based on Marchés Tropicaux et Méditerranéens.

African Economic Outlook

http://dx.doi.org/10.1787/788830603871

© AfDB/OECD 2007

2007

African Economic Outlook The African Economic Outlook combines the expertise of the OECD – which produces the OECD Economic Outlook twice a year – with the knowledge of the African Development Bank on African economies. The objective is to review annually the recent economic situation and the short-term likely evolutions of selected African countries. The Outlook is drawn from a country-by-country analysis based on a unique analytical design. This common framework includes a forecasting exercise for the current and two following years using a simple macroeconomic model, together with an analysis of the social and political context. It also contains a comparative synthesis of African country prospects, placing the evolution of African economies in the world economic context. This edition includes a special focus on water and sanitation issues. A statistical appendix completes the volume.

African Economic Outlook

This volume will be of significant interest to decision makers in African and OECD countries, both in the public and private sectors, such as aid agencies, investors, and government officials of aid-recipient countries. The African Economic Outlook is a joint project of the African Development Bank and the OECD Development Centre, with generous support from the European Commission. This publication provides dynamic links (StatLinks) for graphs and tables. These StatLinks direct the user to a web page where the corresponding data are available in Excel® format.

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African Economic Outlook

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2006/2007

www.oecd.org/dev ISBN 978-92-64-02510-3 41 2007 01 1 P

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