Liberia’s Economy Spirals

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These are not good times the world over, it is well known. But with Liberia, the total of whose foreign direct investments are in the extractive sectors – iron ore, natural rubber and oil – high hopes for huge returns have not been realized, as global commodity prices plummet, creating grave uncertainty for the national and regional economy.

A recent report titled “Africa’s Pulse”, released by the World Bank Group yesterday, April 11, says that the fall in commodity prices represents a significant shock for the sub-Saharan region, as fuels, ore and metals account for more than 60 percent of the region’s exports.

According to the report, “African countries experienced some of the fastest growth rates and exports in the decade and a half since the turn of the century. This was mostly driven by rising prices for commodity exports such as oil and metals with limited impacts on local economies.” Therefore, the report says, “the exports of many African countries are highly concentrated in a few commodities.”

Liberia is among the 12 countries considered “vulnerable”, as their terms-of-trade losses are expected to exceed 10 percent. Terms-of-trade refer to the relationship between the prices at which a country sells its exports and the prices paid for imports. In the case of Liberia, which has relied on two key exports for nearly a century –natural rubber and iron ore – the extractive industries contributed in no small way to job creation and government revenue. However, in the absence of value added products made locally, the tiny country has had little or no options in shaping the market value of raw extracts.

There has been some progress toward diversification in some countries (Ethiopia and Rwanda) but others have become even more dependent on just a few products (Chad and Sierra Leone)
The analysis shows that the slowdown comes amidst a sharp drop in prices of global commodities, weak global growth that was underpinned by a slowing of growth in emerging market economies.

According to the Africa’s Pulse author Punam Chuhan-Pole, trade in 36 African countries will deteriorate, hurting their budgets.

“So governments have less revenue now to spend on both current expenditure, but also much needed public investment and in terms of things like social safety nets and targeted programs to help the poor,” he said.

In her annual address to the National Legislature on January 25 2016, President Sirleaf reiterated that the economy continued to experience suppressed growth in 2015, owing not only to falling prices of the country’s prime export commodities and the effects of the Ebola Virus outbreak but also to the ongoing drawdown of the United Nations Mission in Liberia (UNMIL), which mainly affected the services sector.

“Consequently, real GDP growth declined further to 3.0 percent in 2015 compared to the original forecast of 6.8 percent,” she noted, stressing that the foundation of economic diversification already set in place by her administration could not, in the short run, absorb these unforeseen shocks.

The report also says the Ebola outbreak in Liberia, Sierra Leone and Guinea highlights the overtaxed health systems of the three countries worst affected by the disease.

Urban opportunities
As Africa undergoes rapid urban growth, Author Chuhan-Pole said there is a window of opportunity to harness the potential of cities as engines of economic growth. She said the rapid decline in oil and commodity prices has adversely affected resource-rich countries and signalled an urgent need for economic diversification in Africa. Urbanization and well managed cities provide a major opportunity to offer a springboard for diversification.

The growth of cities, when well managed, can spur economic growth and productivity. But African cities are currently not delivering agglomeration economies or reaping urban productivity benefits. Instead they suffer from high housing and transport costs, in addition to the high cost of food that takes up a large share of urban household budgets.

Housing and transport are particularly costly in urban Africa. Housing prices are about 55 percent higher in urban areas of African countries relative to their income levels. Urban transport, which includes prices of vehicles and transport services, is about 42 percent more expensive in African cities than cities in other countries. Like households and workers, firms also face high urban costs. Cross-country analysis confirms that manufacturing firms in African cities pay higher wages in nominal terms than urban firms in other countries at comparable development levels.

“To ensure growth and social development, cities need to become less costly for firms and more appealing to investors,” says Punam Chuhan-Pole.

“They must also become kinder to residents, offering services, amenities. All of this will require reforming urban land markets and urban regulations and coordinating early infrastructure investment.”

“These episodes are dramatic for growth and development. They create huge setbacks for growth wherever they take place. So they remain the issue of concern, the fragility in these areas and in these countries mostly affected is a source of concern for those particular countries,” said Ferreira.

According to the World Bank, it has delivered $15.7 billion in lending for more than 160 projects across the continent. The lending includes $10.2 billion in zero-interest credits and grants for the International Development Association.

Transport, energy, agriculture
The report stresses the need for structural reforms to ignite and sustain economic growth in all sectors to foster employment, cheap transport and energy as well as agriculture.

The world Africa’s Pulse author said plunge in commodity prices – particularly oil, which fell 67 percent from June 2014 to December 2015 – and weak global growth, especially in emerging market economies, are behind the region’s lackluster performance.

In several instances, the adverse impact of lower commodity prices was compounded by domestic conditions such as electricity shortages, policy uncertainty, drought, and security threats, which stymied growth. There were some bright spots where growth continued to be robust such as in Côte d’Ivoire, which saw a favourable policy environment and rising investment, as well as oil importers such as Kenya, Rwanda, and Tanzania.

The external environment confronting the region is expected to remain difficult. In a number of countries, policy buffers are weaker, constraining these countries’ policy response. Delays in implementing adjustments to the drop in revenues from commodity exports and worsening drought conditions present risks to Africa’s growth prospects.

“As countries adjust to a more challenging global environment, stronger efforts to increase domestic resource mobilization will be needed. With the trend of falling commodity prices, particularly oil and gas, it is time to accelerate all reforms that will unleash the growth potential of Africa and provide affordable electricity for the African people,” says Gerard Kambou Senior Economists of World Bank for Africa.

The report said several countries are expected to see moderate growth. Among frontier markets, growth is expected to edge up in Ghana, driven by improving investor sentiment, the launch of new oilfields, and the easing of the electricity crisis. In Kenya, growth is expected to remain robust, supported by private consumption and public infrastructure investment.

The projected pickup in activity in 2017-2018 reflects a gradual improvement in the region’s largest economies – Angola, Nigeria, and South Africa – as commodity prices stabilize and growth-enhancing reforms are implemented.

The report stresses the need for structural reforms to ignite and sustain economic growth in all sectors to foster employment, cheap transport and energy as well as agriculture.

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