East Africa Economic Outlook 2019

East Africa Economic Outlook 2019

Macroeconomic developments and prospects

Political economy of regional integration

East Africa Economic Outlook 2019

The opinions expressed and arguments employed herein do not necessarily reflect the official views of the African Development Bank, its Boards of Directors, or the countries they represent. This document, as well as any data and maps included, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries, and to the name of any territory, city, or area.

Cover design by the African Development Bank based on images from

? African Development Bank 2019

ISBN 978-9938-882-97-1 (print) ISBN 978-9938-882-97-1 (electronic)

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CONTENTS

Acknowledgmentsv

Executive summary

1

Part 1

Macroeconomic developments and prospects

5

Economic performance and outlook

5

Macroeconomic stability and outlook

8

Domestic resource mobilization

12

Poverty, inequality, unemployment, and structural change

13

Emerging policy issues

17

Part 2

Political economy of regional integration

19

Progress in regional integration

19

Political economy of regional integration

24

Infographic: Moving Across East Africa

28

Intervention strategies and policies to strengthen regional integration

33

Notes35

References36

Annexes39

Statistical annex

45

Boxes

1 The diversity of East Africa

6

2 Progress toward the African Continental Free Trade Area in East Africa

18

3 An empirical analysis of the East African Community's readiness for monetary union 22

4 The Ethio-Eritrea Peace Agreement and its imperative for regional integration

26

5 Informal cross-border trade in Ethiopia and Uganda

27

Figures

1 GDP growth, by region, 2008?20

6

2 GDP growth in East Africa, by country, 2014?20

7

iii

3 Overlapping membership in regional economic communities in East Africa

20

4 Revealed comparative advantage of selected African countries and African trading

partners in manufactured goods, 2010?13

32

Tables

1 Inflation in East Africa, by country, 2017?20

9

2 Fiscal balance, including grants, in East Africa, by country

10

3 External current account balance, including grants, in East Africa, by country

11

4 External debt stock and debt indicators in East Africa, by country, 2018

12

5 Domestic resource mobilization and financial sector development in East Africa, by

country, 2016 and 2017

13

6 Poverty and inequality in East Africa, by country, various years

14

7 Structural change, growth, and unemployment, various years

16

8 Macroeconomic convergence criteria in the Common Market for Eastern and Southern

Africa and the East African Community, by country

21

9 Intraregional trade in East Africa, 2012?17

23

10 African Regional Integration Index ranks among Common Market for Eastern and

Southern Africa members, by country, 2016

24

11 Actual intra-Africa trade as a share of potential intra-Africa trade in Common Market for

Eastern and Southern Africa members, by country, 1993?2010

25

12 Exports and imports in East Africa, by country, 2014?17 (exports) and 2017 (imports)

29

A1.1 Real GDP growth rate in East Africa, by country, 2008?20

39

A2.1 External debt accumulation in East Africa, by country, 2008?18

40

A3.1 Unemployment rates in East Africa, by country, 2010?18

40

Statistical tables

1 Basic indicators, 2018

45

2 Real GDP growth, 2010?20

46

3 Demand composition and growth rate, 2017?20

47

4 Public finances, 2017?20

48

5 Monetary indicators

49

6 Balance of payments indicators

50

7 Intraregional trade, 2017

51

8 Demographic indicators, 2018

52

9 Poverty and income distribution indicators

53

10 Access to services

54

11 Health indicators

55

12 Major diseases

56

13 Education indicators

57

14 Labor indicators, 2018

58

iv C ontents

ACKNOWLEDGMENTS

The East Africa Economic Outlook 2019 was prepared in the Vice Presidency for Economic Governance and Knowledge Management, under the supervision and general direction of C?lestin Monga, Vice President and Chief Economist, with support from Eric Kehinde Ogunleye, Amah Marie-Aude Ezanin Koffi, Tricia Baidoo, and Vivianus Ngong.

The preparation of the outlook was led and coordinated by Ferdinand Bakoup, Acting Director, Country Economics Department, with a core team consisting of Abraham Mwenda and Marcellin Ndong-Ntah, Lead Economists for East Africa.

The data appearing in the report were compiled by the Statistics Department, led by Charles Lufumpa, Director, and Louis Kouakou, Manager, Economic and Social Statistics Division. Their team included Anouar Chaouch, Mbiya H. Kadisha, Soumaila Karambiri, Stephane Regis Hauhouot, Slaheddine Saidi, Kokil Beejaye, Adidi Ivie, and Guy Desire Lakpa.

Contributions were received from Tilahun Temesgen, Chief Regional Economist, and

Patrick Kanyimbo, Principal Regional Integration Officer for East Africa. Alemayehu Geda (University of Ethiopia) contributed a background note to the report. External consultant Esther Katende-Magezi provided the background note for the infographic on people and goods moving across East Africa.

Augustin Fosu (University of Ghana) and Peter Montiel (Williams College) served as peer reviewers.

The cover of the report is based on a general design by Laetitia Yattien-Amiguet and Justin Kabasele of the Bank's External Relations and Communications. Editing, translation, and layout support was provided by a team from Communications Development Incorporated, led by Bruce Ross-Larson and including Joe Brinley, Joe Caponio, Meta de Coquereaumont, Mike Crumplar, Peter Redvers-Lee, Christopher Trott, and Elaine Wilson, with design support from Debra Naylor and translation support from JeanPaul Dailly and a team at JPD Systems.

v

EXECUTIVE SUMMARY

T his report analyzes economic growth, its drivers, and its implications for social development (including) poverty, employment, and inequality as well as progress in regional integration in East Africa.

In 2018, real GDP in East Africa grew by an estimated 5.7 percent, slightly less than the 5.9 percent in 2017 and the highest among African regions. Economic growth is projected to remain strong, at 5.9 percent in 2019 and 6.1 percent in 2020. The countries with the highest economic growth are Ethiopia, Rwanda, Tanzania, Kenya, and Djibouti. In both Ethiopia and Rwanda, real GDP growth has been driven by industry and services. The service sector has also been the main driver of growth in Tanzania and Kenya, followed by the agricultural sector, the main growth driver from the supply side. On the demand side, consumption has been the main driver of economic growth across East Africa.

The region continues to face various downside risks that could undermine economic growth and development prospects. Major risks are agriculture's vulnerability to the vagaries of nature, heavy reliance on primary commodity exports, and--in oil-importing countries--rising oil prices. Another key risk is persistent current account deficits and related increases in external indebtedness. Finally, state fragility--with its adverse implications for security and economic progress --is a risk for Burundi, Somalia, South Sudan, and, to some degree, Ethiopia.

Notwithstanding the variation across countries, the region's fiscal deficit remained low, at an estimated 4.1 percent of GDP in

2018, and is projected to drop to 3.7 percent in 2019 and 3.5 percent in 2020. But current account deficits remain high, and two patterns are emerging. First, since almost all countries depend on primary commodities for exports, falling global commodity prices have negatively affected their terms of trade. Second, the region's high growth has been achieved through high investment, which is above domestic savings. The internal investment?savings gap is strongly associated with the persistent current account deficit (or external gap).

As in 2017, East Africa's strong growth has not been matched by commensurate and substantial reduction in poverty and inequality. So in 2018, the region is still characterized by high poverty, inequality, and unemployment. Poverty pervades all countries in the region and is extremely high in Burundi and Rwanda and very low in Seychelles, Sudan, and Comoros.

Structural transformation remained markedly absent in the region. The service sector dominates the composition of GDP in the region, averaging 59.0 percent, followed by the agricultural sector, averaging 25.7 percent. Industry, which includes construction, is very small, averaging 15 percent. Similarly, the average share of manufactured exports --about 14.6 percent--also indicates the region's lack of structural transformation.

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