Integrated Paper on Recent Economic Developments in DC October 2005 Banco de Moçambique
General Index Page I. Introduction... 3 II. Performance of the World and African Economy in 2004... 4 III. Performance of the DC region in 2004... 5 III.1. Gross Domestic Product... 5 III.2. Monetary Developments... 6 III.3. Inflation... 8 III.4. Fiscal developments... 9 III.5. External sector development... 10 III.5.1. Balance of payment (BoP) developments... 10 III.5.2. Foreign reserves position and foreign direct investment... 12 III.5.3. External debt... 13 III.5.4. Exchange rate developments... 14 IV. Status of macroeconomic convergence in 2004... 16 V. Prospects for 2005... 18 VI. References... 20 2
I. Introduction This is the third edition of Integrated Paper on Recent Economic Developments in the Southern African Development Community (DC). This paper was prepared by Banco de Moçambique and presented at the Committee of Central Bank Governors (CCBG) meeting held in Pretoria, South Africa, in September 2005, as per Governors decision. The paper highlights the major economic developments in the DC region, and Africa as a whole in 2004. It compares the actual performance against the proposed macroeconomic targets in the DC macroeconomic convergence program, and presents some prospect for the year 2005. The first section of the paper deals with world and African economic performance in 2004. Section 2 is about the performance of the DC region in 2004 compared to 2003, and focuses on developments, in terms of Gross Domestic Product (GDP), money supply, inflation, fiscal and external performance, while section 3 summarises the prospects for 2005. Most of the data used in this paper were sourced from reports on Recent Economic Developments submitted to Banco de Moçambique by individual DC member central banks. Where data was not available, other sources were used, namely, the DC Bankers website, the individual regional central bank websites and the International Financial Statistics published by International Monetary Fund (IMF). In general, the macroeconomic indicators were relatively better than in the previous year in the DC region, with an accelerated growth in output, a slow down in inflation and a sharp decrease in the fiscal deficit. The current account was the exception, as it worsened in 2004 compared to 2003, due to the worsening of the terms of trade and drought in some countries. As for 2005 further improvement is expected in almost all DC countries in terms of economic performance. 3
II. Performance of the World and African Economy in 2004 Global output growth gained momentum from around mid 2003, supported by fairly accommodative monetary and fiscal policies in the advanced economies. Following a soft path of hesitant growth in the second quarter of 2004, global real output growth accelerated onto firmer territory in the third quarter. Early estimates show a more than expected 5.1 per cent growth rate in real GDP in 2004 the highest rate since 1976. In 2003 world economy grew by 4.0 per cent. The number of central banks raising policy interest rates in 2004 exceeded those lowering them. Sustained large twin deficits in the U where current account is estimated to have reached a record a deficit of 5.7 per cent of GDP in 2004 contributed to the further depreciation of the US Dollar (USD) against other key international currencies during the course of 2004. The impact of the considerable increase in the dollar price of crude oil on international markets with prices in excess of 50 USD per barrel in October 2004 was therefore softened when translated into these comparatively strong currencies. Nevertheless, higher energy prices, buoyant commodity prices and smaller output gaps (as actual production edged closer to a potential output in most parts of the world) resulted in a modest acceleration of inflation in a number of the major economies. In Africa, real output growth is estimated at 5.1 per cent in 2004 the highest since 1996 after 4.2 per cent in 2003. In sub-saharan Africa, real GDP growth also accelerated to 5.1 per cent. Growth was underpinned by the strength of the global economy, including oil and commodity prices for exporting countries, improved domestic macroeconomic policies and progress with structural reforms and the end of several protracted armed conflicts. Growth was particularly strong in oil exporting countries, notably ola, Chad, and Equatorial Guinea, and in countries where agriculture production has recovered after drought (Ethiopia and Rwanda). However, political instability and poor governance in some countries jeopardised growth. Its also important to note that the impressive economic performance in Africa and the DC region in 2004 were achieved in spite of unfavourable climatic conditions in some countries, and global decline in donor support and foreign investments. 4
III. Performance of the DC region in 2004 1 III.1. Gross Domestic Product DC economies performed better in 2004, compared to the previous year, as GDP growth increased from 3.6 per cent to 4.8 per cent, on average. ola recorded the highest growth rate (11.7 per cent, after 3.5 per cent in 2003), mainly on account of the recovery in the agriculture and construction sectors as well as an expansion in the oil sector. The decrease in the magnitude of recession in Zimbabwe in 2004 has also contributed to an overall improvement in the regional economic performance. (Chart 1) Growth has also Chart 1 improved in the Anual Real Growth Rate Democratic Republic of Congo (), 15,00% 10,00% 5,00% 0,00% -5,00% -10,00% -15,00% Zim DC 2003 2004 ibia, the Republic of South Africa (R) and zania, while in swana, awi, ritius, ambique and ziland it has slightly worsened as a result of the sharp increase in oil prices and unfavourable climatic conditions that caused a deceleration in manufacturing and agricultural outputs. In addition to the higher oil prices, the strengthening of domestic currencies vis-a-vis the USD, negatively affected output in non-oil exporting countries as it favoured non-oil imports hence reducing aggregate demand for domestic production. On average, aggregate consumption accounts for more than 80 per cent of the GDP in most countries of the region, with private consumption in excess of more than half of the GDP, with otho (114 per cent), awi (95.5 per cent) and zania (81.2 per 1 Statistics used are simple averages 5
cent) at the upper end and swana (63.1 per cent), R (63.3 per cent) and ritius (63.5 per cent) at the lower end. Exacerbated by the appreciation of local currencies against the USD in most countries, average per capita income in DC has increased by 14.4 per cent in USD terms, from USD 1,544 in 2003 to USD 1,767. The growth was particularly high in ola (34 per cent to USD 1,265), R (27 per cent to USD 4,562) and bia (28.8 per cent to USD 501.9). Zimbabwe, however, recorded a decrease of 39.4 per cent in per capita income to USD 407, reflecting the negative impact of drought and firming oil prices on wealth creation. ritius (USD 5,406), swana (USD 4,701) and R (USD 4,562) ranked among the countries with the highest per capita income in the region in 2004, while (USD 122), awi (USD 157.6) and zania (USD 294) are on the lower end. III.2. Monetary Developments Chart 2 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% Money Supply Expansion 2003 2004 The average rate of money supply growth in DC region slowed down by 14.2 percentage points, to 37.6 per cent. In terms of individual countries performance, there was a mix in 2004, with the growth decreasing in Zimbabwe (191 percentage points to 222.6 per cent), ola (30.5 percentage points to 35.8 per cent) and ambique (12.8 percentage points to 5.9 per cent). Money supply surged in (39 percentage points to 71 per cent) and bia (9.4 percentage points to 31.2 per cent), just to state some as reflected in Chart 2. Zim DC 6
Excluding the and Zimbabwe, the average growth of money supply in the DC region slowed down by 2.8 percentage points, to 17.8 per cent. Chart 3 70% 60% 50% 40% 30% 20% 10% 0% Money Supply Expansion (excluding and Zimbabwe) 2003 2004 Most central have their interest DC banks reduced policy rates during 2004. recorded Zimbabwe the strongest decrease (190 percentage points to 110 per cent), followed by awi (8.5 percentage points to 27.5 per cent), while and zania have increased by 6 and 2.6 percentage points, respectively, to 14 and 9.1 per cent. Rates in the Common Monetary Area (CMA) were adjusted downwards by 50 basis points to 7.5 per cent, while in ola and swana there were no changes. DC (-2) Treasury bill, rediscount, and prime lending rates also decreased 2, following the move by the central banks in response to the improvement in the macroeconomic environment and the relative lower rates on increase in inflation in almost all the countries and strengthening of domestic currencies against the USD. The reverse was observed in countries where policy interest rates were increased to contain inflationary pressures arising from the excess liquidity. 2 The reduction on the reserve requirement rate also contributed for the decrease of bank prime lending rates. 7
III.3. Inflation Chart 4 On average, inflation in Inflation Rate 500% 400% 300% 200% 100% 0% Zim 2003 2004 DC countries excluding Zimbabwe and ola slowed down from 8.2 per cent in 2003 to 6.8 percent in 2004, reflecting some price stability in the region. Including ola and Zimbabwe with a 381.5 per cent inflation rate in 2004, up from 365 per cent in 2003 the average DC inflation rate stands at a high of 37.9 percent after 40.9 per cent in 2003. DC Chart 5 20% 15% 10% 5% 0% Inflation Rate (Exclunding Zimbabwe and ola ) 2003 2004 Appreciated domestic currencies, coupled with moderate growth rates in money contributed relative supply, to price stability in most countries, despite the increase in oil prices in USD terms. Chart 6 shows the development in the levels of inflation, money supply and exchange rate in terms of units of domestic currencies per USD in 2004. DC (-2) 8
Chart 6 Inflation, Money Supply and Exchange Rate (2004- Excluding Zimbabwe) 90% 70% 50% 30% 10% -10% -30% Inflation Money Supply Exchange Rate Var. ritius whose currency has depreciated against its major trading partner currencies (end of period exchange rate) faced moderate increases in inflation. Inflation in zania also rose slightly, due in part, to the impact of the revision, since October 2004, of the basket of goods and services as well as the weights for National Consumer Index (NCPI). Special reference is made to the fact that inflation in the CMA countries followed the trend recorded by this indicator in R, where an active policy of inflation targeting that moved the country to record an annual inflation of 4.3 per cent in 2004, the lowest level since 1962, against a target bound set between 3 per cent and 6 per cent. III.4. Fiscal developments The DC countries fiscal accounts showed considerable improvement in fiscal performance in 2004 as the public deficit decreased from 3.9 per cent in 2003 to 2.0 per cent of GDP. This was almost below the limit established in the DC macroeconomic convergence program. otho, which increased its fiscal surplus by 4.6 percentage points to 5.4 per cent of GDP, is among the countries with a good performance. also recorded fiscal surplus in 2004 (0.8 per cent of GDP, after a deficit of 4.3 per cent of GDP in 2003) and contributed notably to the improvement of this indicator in DC (Chart 7). 9
Chart 7 8,0% 6,0% 4,0% 2,0% 0,0% -2,0% -4,0% -6,0% -8,0% -10,0% Budget Deficit as Percentage of GDP 2003 2004 Zim DC Eight DC countries recorded improvement an on individual fiscal deficit, while ambique, ziland Zimbabwe witnessed and fiscal deficits worsening in 2004. ritius, despite having reduced the deficit from 5.4 per cent to 5.0 per cent of GDP, was the only country whose fiscal account stood above the DC average figure. Zimbabwe (5.5 per cent) and awi (4.4 per cent), stood above the maximum limit targeted in the macroeconomic convergence program. III.5. External sector development The performance of external sector variables was, in 2004, driven by the good performance of regional economies, particularly the major economy of the region (R), strengthening of exchange value of the rand in the international market and some external factors, namely the USD weakening, the gold and oil prices rising at the international market. III.5.1. Balance of payment (BoP) developments The external position of the DC region improved significantly in 2004, as the overall balance recorded a surplus of USD 625 million. ola, swana, otho, ibia, R and zania were the countries that recorded high surpluses and influenced the positive balance of DC against the rest of the world. 10
R recorded the largest surplus of about USD 8.1 billion in 2004 which is a significant increase from a surplus of by 1.2 billion in 2003, basically reflecting a significant improvement of the financial account. Zimbabwe, on the other hand, recorded the largest deficit, as a result of a worsening of its current account. Chart 8 Overall Balance of BoP in 2004 (excluding South Africa) DC Zim -400-300 -200-100 0 100 200 300 400 500 600 700 millions of USD Chart 9 Current Account Position in 2003-2004 (Excluding South Africa) -1,000.0-500.0 0.0 500.0 1,000.0 (millions of USD) DC Zim Sw a 2004 2003 Improvement in the overall balance of payments reflected good performance in the capital and financial account. The current account performed poorly resulting in the deficit worsening by 54 per cent to USD 594 million. Nine countries recorded negative balances in their current accounts in 2004 with R recording the highest current account deficit, notwithstanding the huge surplus in its the overall BoP balance. 11
Chart 10 Current Account Position (2002-2004 ) DC Zim Sw a 2004 2003 2002-8000 -6000-4000 -2000 0 2000 (millions of USD) R recorded major increases in their current account deficits in 2004, while ola, swana, and ziland recorded surplus in their current accounts in 2004. III.5.2. Foreign reserves position and foreign direct investment Chart 11 9000,0 8000,0 7000,0 6000,0 5000,0 4000,0 3000,0 2000,0 1000,0 0,0 Foreign Direct Investiment (USD million) 2003 2004 The DC region received about USD 6.4 billion worth of Foreign Direct Investment (FDI) inflow in 2004. This however represents a decline of about 21 per cent in relation to the amount received in 2003. swana (USD 1,657 millions) and ola (USD 1,410 million) are the countries that received the largest amount, followed by ziland (USD 930 million), and R (USD 585 million). On the other hand, Zimbabwe attracted the lowest FDI inflow of USD 8.7 million. ritius and awi also recorded low levels of FDI in 2004. Zim DC 12
Despite the fall in overall FDI inflows in DC, swana,, otho, awi, ibia, ziland, bia and Zimbabwe recorded an increase in FDI flows. Worth noting is bia which at USD 346.3 million recorded the highest growth in FDI in the region. Chart 12 25,0 20,0 15,0 10,0 5,0 Import Cover (months) Notwithstanding the fact that the region accumulated a positive overall balance in 2004, most DC member countries ran down their stock of net international reserves. 0,0 Zim DC 2003 2004 The average months of imports covered by gross international reserves in DC declined from 4.9 to 4.6 months. This largely reflected a decline in swana from 22 to 17 months of import cover. Reductions were also notable in otho, ritius, ambique and zania. III.5.3. External debt In absolute terms, the external debt of the region can be considered low mainly when compared with other regions. Nevertheless, some countries in the region are considered highly indebted in relation to their GDP and export earnings. The external debt stock of the DC countries stood at about USD 93 billion in 2004 - public (68 per cent) and private (32 per cent). Excluding the R, which displayed the greatest amount (USD 42 billion), the total amount of external debt for the region declined to about USD 51 billion largely owed by ola,, awi, ambique, zania, bia and Zimbabwe. 13
Chart 13 (millions USD) 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Foreign Reserves and External Debt in 2004 (excluding ) Debt Foreig Reserves Zim Comparing the external debt to foreign reserves stock (Chart 13), it is clear that except swana, ritius and ziland, all countries hold a debt balance above their stock of international reserves. Of these, ola, zania and stand out as being the countries holding a major spread between both aggregates in analysis. On the other hand, swana holds huge reserves relative to the size of its external debt. III.5.4. Exchange rate developments It is worth emphasizing that among the DC countries exchange rate regimes vary considerably. During the year 2004, the domestic currencies of the DC countries witnessed mixed performance in relation to the USD, thus indicating the macroeconomic conditions in each country, the policy focus and the behavior of the USD in the international market. Chart 14 30.0% 20.0% 10.0% 0.0% -10.0% Exchange Rate Development (2004 - exclundig Zimbabwe) The four countries comprising the CMA (South Africa, otho, ibia, and ziland) recorded an appreciation of their domestic currencies against the USD. A -20.0% -30.0% 14
similar pattern was observed by the currencies of swana (Pula), zania (Shilling), bia (Kwacha) and ambican (Metical), rising to eight the number of DC countries whose currencies strengthened against the USD. awi was the only country whose currency remained relatively stable in 2004, while the currency of ola (Kwanza), (CDF) and ritius (Rupee) faced a depreciation of their currencies against the USD. Zimbabwe recorded the highest variation during the year as the domestic currency was adjusted by 600 per cent. 15
IV. Status of macroeconomic convergence in 2004 A substantial degree of macroeconomic convergence is necessary for effective policy co-ordination and regional integration in DC. The table below shows the actual convergence status of the member states compared with the targets defined in the Regional Indicative Strategic Development Plan (RISDP) to indicate the level of divergence or convergence among the countries. Table 1: Present Status of Macroeconomic Convergence Inflation (end of period) Public Debt Stock as Percentage of GDP Budget Deficit (-) / Surplus (+) as Percentage of GDP Real Growth Rate of GDP TARGET Single Digit 60% 5% 7% ola 31,0% 48,6% -4.0% 11,3% swana 7,0% 11,3% -0,2% 5,7% 9,2% 127,0% 0,8% 6,8% otho 5,1% 53,7% 5,4% 3,4% awi 11,5% 151,7% -4,4% 4,6% ritius 4,7% 66,0% -5,0% 4,1% ambique 9,1% 72,4% -4,0% 7,8% ibia 3,9% 33,5% -2,4% 4,4% South Africa (1) 4,3% 36,1% -1,5% 3,7% ziland (2) 3,4% 21,8% -3,6% 2,1% zania 4,2% 67,8% -3,4% 6,7% bia (1) 17,5% 152,5% -1,3% 5,4% Zimbabwe 381,5% 110,4% -5.5% -3,2% DC Average 37,9% 71,8% -2,2% 4,8% (1) Total Central Government Debt as % of GDP (2) Debt stock as a % of GDP On inflation, most DC countries have made significant progress towards achieving the convergence target (single digit inflation). With the exception of only four countries, all DC countries recorded single digit inflation in 2004, with ziland recording the lowest inflation rate of 3.4 per cent. Regarding Public Debt, there is still has many problems with the data. Some countries do not have aggregated data on public debt (internal and external) while some did not send any data at all (ola). Only five countries recorded a stock of 16
public debt below the target. On the other hand, bia with 153 per cent of external debt as a percentage of GDP is the highest in the region. Related to Budget indicator, in overall terms, the DC countries fiscal accounts showed considerable improvement in fiscal performance in 2004 and on average, the target have been met. All DC countries had fiscal deficits below or equal to 5 per cent, while otho and were the only countries that recorded fiscal surpluses in 2004. On the GDP growth rate, despite the improvement recorded an average term for the DC region as whole, many countries recorded output growth rates below the target. Only ola and ambique recorded annual growth rates above the target while the remaining countries performed were below the target. In Zimbabwe the output decreased by 2.5 per cent. 17
V. Prospects for 2005 Despite the achievements obtained in 2004, economic and social conditions in DC are still weak and many economic and social indicators are far below the Millennium Development Goals as well as the targets established in the macroeconomic convergence programme and the RISDP. The fast harmonisation of policies, economic management instruments and indicators in use in the region, appears to be fundamental elements for effective and prosperous integration among the DC countries Looking forward, global prospects generally remain favourable, with GDP growth projected at 4.5 per cent in 2005 for the African continent. The Sub-Saharan African region is projected to grow by 5.2 per cent in 2005 and 5.6 per cent in 2006, aided by prudent macroeconomic policies, continuous structural reforms, and supportive global economy. Oil exporting countries are expected to continue enjoying the strongest growth as production continues to expand. The risk remains the higher oil prices, which may adversely affect growth and the balance of payment in non-oil-producing countries, particularly if non-fuel commodity prices weaken. A further important challenge for a number of countries in the DC region (otho, Madagascar, awi, ritius, South Africa and ziland) will be adjusting to the elimination of world textile trade quotas, which will increase the competition they face from the United States and European Union markets and from low-cost Asian producers. As a result textile production and employment (primarily of women workers) in DC are likely to fall. An annual average growth rate of 5.5 per cent is projected for DC in 2005, strongly supported by ola,, ambique and zania. The rest of the countries are expecting an economic growth below the target established in macroeconomic convergence programme. In Zimbabwe growth is projected at 1.5 per cent, which represents a sharp turn, after seven consecutive years of economic recession. 18
Table 2: Projection for 2005 : Inflation and GDP real growth Zim DC GDP Growth 16.1% 5.0% 6.6% 0.1% 2.1% 3.8% 7.1% 3.8% 3.5% 2.1% 6.9% 5.1% 1.5% 4.9% Inflation 15.0% 4% - 6% 22.6% 5.0% 15.5% 5.3% 8.0% 4.7% 3%-6% 4.0% 4.0% 15.0% 80.0% 16.3% The inflation in the region is projected to decrease to an average of 16.3 per cent in 2005 (9.9 per cent if excluding Zimbabwe), which is on line with the goal of achieving single digit envisaged in the programme. Regarding the monetary policy, it is expected that most DC countries, central banks will continue to maintain and or tighten policy stance, aiming to achieve currency and price stability in the region. 19
VI. References IMF, April 2005, World Economic Outlook IMF, International Financial Statistics March 2005 Recent Economic Developments Contributions received from Member States DC (April 2005), Recent Economic Developments and Statistics. Committee of Central Bank Governors www.sadcbankers.org www.reservebank.co.za www.centralbank.co.sz 20
Table 3: Major Macroeconomic Indicators for DC Members States Real Growth Rate Money Supply Growth Rate Inflation Rate Budget Deficit (-) / Surplus (+) as Percentage of GDP 2003 2004 2003 2004 2003 2004 2003 2004 ola 5.2% swana 7.8% 11.3% 66.3% 35.8% 76.8% 31.0% -7.0% -1.9% 5.7% 20.0% 19.2% 9.2% 7.0% -3.8% -0.2% 5.8% 6.8% 31.7% 70.8% 4.4% 9.2% -4.3% 0.8% otho 3.3% 3.4% 6.0% 3.3% 7.2% 5.1% 0.8% 5.4% awi 3.9% 4.6% 29.3% 29.8% 9.6% 11.5% -8.3% -4.4% ritius 4.6% 4.2% 10.9% 13.2% 3.9% 4.7% -5.4% -5.0% ambique 7.9% 7.8% 18.7% 5.9% 13.8% 9.1% -3.5% -4.0% ibia 3.7% 4.4% 9.6% 16.2% 7.3% 3.9% -7.5% -2.4% South Africa 2.8% 3.7% 12.9% 13.1% 6.8% 4.3% -2.3% -1.5% ziland 2.4% 2.1% 14.1% 10.4% 7.4% 3.4% -2.9% -3.6% zania 5.7% 6.7% 14.2% 19.2% 3.5% 4.2% -3.8% -3.4% bia 5.1% 5.0% 22.6% 31.2% 17.2% 17.5% -2.9% -1.3% Zimbabwe -10.3% -2.5% 413.5% 222.6% 365.0% 381.5% -0.3% -6.5% DC (Average) 3.7% 4.8% 51.5% 37.7% 40.9% 37.9% -3.9% -2.0% Convergence Criteria (2004-08) not less than 7% single digit inflation rate by 2008 less than 5% by 2008 Table 4: Other Financial Indicators for DC Member States Financial Deepening (M2/GDP) Interest Rate (Base Bank Rate) Exchange Rate Change (local/us$ period average) Import Cover (months) 2003 2004 2003 2004 2003 2004 2003 2004 ola (1) 16.7% 15.2% 95.0% 95.0% 34.4% 8.4% 1.4 2.9 swana 25.3% 27.8% 15.8% 15.8% -18.7% -4.9% 22.0 17.0 5.7% 8.6% 8.0% 14.0% -9.0% 19.2% 0.6 1.3 otho 42.3% 46.0% 8.0% 7.5% -28.1% -14.8% 1.7 1.5 awi 29.3% 29.8% 36.0% 27.5% 24.6% 0.3% 2.9 3.0 ritius 83.0% 85.0% 7.4% 5.8% -11.9% 7.5% 9.0 8.3 ambique 28.3% 24.9% 18.5% 13.5% 0.0% -20.8% 6.3 5.8 ibia 42.3% 46.0% 7.8% 7.5% -28.1% -14.8% 1.5 1.7 South Africa 58.6% 59.6% 8.0% 7.5% -28.1% -14.8% 5.2 4.9 ziland 20.8% 20.1% 8.0% 7.5% -28.1% -14.8% 2.0 2.0 zania 16.1% 17.3% 6.5% 9.1% 9% -2% 9.2 8.6 bia 4.6% 5.2% 37.7% 29.8% 9.9% -2% 1.3 1.2 Zimbabwe (1) 59.0% 42.0% 300.0% 110.0% 1501% 593% 0.7 1.3 DC Average 33.2% 32.9% 42.8% 27.0% 109.8% 41.6% 4.9 4.6 DC Average (exc.zim & ) 32.4% 33.7% 14.7% 13.2% -9.7% -5.5% 5.6 5.0 (1) Rediscount rate 21