Image by Muhammadtaha Ibrahim Ma'aji

Macro economic

outlook of West Africa

August 2020

Introduction 

This economic outlook for West Africa is a comprehensive analysis of the 16 countries in the region, focusing on growth, employment and macroeconomic stability, poverty reduction and structural change. 

 

Economic community of West African state (ECOWAS) 

With the exception of Mauritania, 15 out of the 16 West African countries are members of the “Economic Community of West African States” (ECOWAS)”, a regional economic union. The purpose of ECOWAS is to foster the ideal of collective self-sufficiency among its member states. As union based on trade, it is designed to create a single, unified trading bloc through economic corporation.  

 

Issues in Production Sector and the Road Ahead for the West African Economy 

The West African economy reflects an average balance of economic indices such as income, production, employment and trade, which are comparable of other African economies.  GDP growth in West Africa in 2018 was 3.8% but declined to 2.9% in 2019. Nigeria constitutes approximately 70% of regional GDP and the other 15 countries depend on Nigeria for oil and other minerals. The service sector is a major contributor to West Africa’s economy from almost all 16 countries. Conversely, the manufacturing sector remains underdeveloped and relatively unsuccessful by comparison. About 70% of demand comes primarily from private consumption. 

The production sector in West Africa contributes most to the regional economy. Comprising production of goods, services, distribution and consumption, the production sector can best be understood through division into three categories:

•    The Primary sector refers to the production of goods from natural resources. It includes extraction of raw materials, which play a crucial role in the process of production, and activities such as agriculture, mining, forestry, fishing, poultry and dairy. 

•    The Secondary sector or industrial sector refers to the manufacture the goods including electricity, gas and the water supply 

•    The tertiary sector refers to services such as health, education, transport, trade, banking and insurance. The contribution of this sector is largest in advanced economies. 

 

The West African economy has experienced serious impediments in all three sectors.  Most of the region’s economies are held back by bad roads, severe electricity shortages and inefficient ports. The poor state of this infrastructure increases the transaction costs for businesses in the region, with multiple roadblocks both across borders and within countries.  

Despite the presence of a large number of regional and international banks, credit to the private sector is limited and expensive. To solve this, sources of finance need to be broadened to include insurance companies, pensions, remittances, venture capital and the equity markets. The lack of credit particularly affects smaller companies that depend on external financing to grow, innovate and inject new energy into their economies. 

Similarly, low agricultural productivity holds back the structural transformation of West African economies. To move forward, improved access to land and rural credit, in addition to the proliferation of more modern farming techniques including mechanization, better seed varieties, improved quality standards and create better access to markets and value chains are a vital prerequisite to the development of regional agriculture. 

The skills found in the West African workforce also do not match those demanded by the modern workplace. This problem affects both recent graduates and older workers. Improvements to the educational system, from vocational training to direct instruction, will ensure better employability and remove the region’s reliance on expatriate workers over time. 

While structural changes can take a long time and often require international assistance, West African countries must tackle these areas if they wish to achieve greater prosperity, independence and economic stability. Better regional coordination could help to channel the right resources and produce synergies to overcome some of the current bottlenecks. 

Global Opportunities and Risks to Economy 

Positive economic outlooks for developed countries will likely raise commodity prices over the next year, which will in turn boost West African growth in short and medium term. Foreign investors will be attracted to new opportunities in the region beyond the traditional destinations like Nigeria – particularly if national governments begin to  address some of the systemic issues outlined above.

 

The rising manufacturing costs in China due to increased labour costs, are an opportunity for Africa to compete in this sector. In order to get maximum profit out of these opportunities, West Africa must increase its manufacturing industry and the value added content of its exports. The present dependence of the large economies of West Africa on natural resources exports will undoubtedly leave them vulnerable to external shocks. While growth projection depends upon the stability of oil production and its price, West Africa’s reliance on this export is also the greatest risk to West African growth.  

Cross Border Growth Spillover 

West Africa’s economy is currently on four countries: Nigeria, Senegal, Côte d’Ivoire and Ghana collectively collectively account for 90% of West Africa’s GDP. The region’s economic prosperity and growth therefore depend on the development of these economies; conversely, any adverse shocks, especially to Nigeria, will adversely affect regional economic prosperity. Improvements to regional trade integration through ECOWAS, its growth and development will likely drive the region’s development and improve its prospects if cooperation is cogent and coherent. 

Economic Growth and Trade 

Over the last decade, West African economic growth rates have been insufficient in most countries to make significant reductions in poverty. Essentially, West Africa’s farmers and firms produce and trade in highly localized markets and do not achieve sufficient economies of scale to attract broad-based investment that could accelerate growth and reduce poverty.

 

This is due to a number of constraints including inefficient transportation and trade barriers along corridors and at borders, a heavy reliance on family and informal sources of financing, and an insufficient supply of reliable and affordable power. These factors result in West African products being uncompetitive in the international marketplace. 

About the author(s)

 

Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.