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Report: East Africa modelling continent’s new economic future

By Peter Muiruri | March 22nd 2016

Africa is the most commodity-dependent continent on earth, partly due its relatively small manufacturing output.

According to a report released by the Institute of Chartered Accountants in England and Wales (ICAEW) last week, most African goods are exported in raw state, with little value addition.

It notes that models of growth driven by exports of such raw materials are becoming obsolete, with African economies in need of creating an environment that would allow companies in the manufacturing and services sectors to thrive.

The report, Economic Insight: Africa, analyses the continent’s first quarter of 2016, and warns that manufacturing still accounts for a small share of the continent’s output.

The East African region, however, was highlighted as setting a good example in discarding old technologies and embracing renewable energy.

Kenya, for instance, is the seventh-highest producer of geothermal power, with Olkaria being the biggest single-turbine geothermal plant in the world.

Commodity dependence

Nigeria, the largest economy, is projected to contribute significantly to the continent’s economic expansion with a growth rate of 4.8 per cent between 2015 and 2020. This will contribute more than 25 per cent of the continent’s forecasted growth over this period.

The second largest economy, South Africa, is expected to grow by an average 2.4 per cent over the same period. Kenya, however, is forecast to expand by 6 per cent between 2017 and 2020, riding on its relatively diversified economy and comparatively low commodity dependence.

But Kenya faces unique challenges, including a shaky fiscal situation that saw both Standard & Poor’s and Fitch downgrade the country’s outlook from stable to negative last year.

Still, the report points out that the Government has taken important steps towards fiscal consolidation by preparing a supplementary budget that plans to reduce development and recurrent public spending in the current financial year.

“A clear plan for preventing fiscal slippage will be needed to underpin confidence in public finances and economic stability. The Government’s recognition of these economic concerns will be needed to address these issues and instil some confidence in the country’s economic outlook,” said Tom Rogers, an associate director at Oxford Economics.

The continent’s future is especially bright as regards innovations in financial services technology (fintech). According to the ICAEW report, fintech has become a primary global investment opportunity, and has recorded rapid growth over the past five years in Africa. These innovations are allowing digitally active consumers to streamline and improve on traditional banking services.

“The online financial sector has really taken off in Africa, answering a need for quality financial services and tailor-made solutions to structural challenges, including frequent power disruptions and poor rural infrastructure,” said Mr Rogers.

Fintech significantly contributes to the ease of transferring money, remitting earnings, acquiring insurance and attaining credit, while mobile banking has enabled peer-to-peer lending on a large scale.

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