Boosting consumption in East Africa will spur growth

November 20, 2013

Experts have been asking East African countries to put an effort on implementing policies that boost consumer demand, arguing that such initiatives would reduce inflationary pressures as the sub Saharan economies continues to grow. Most developing countries in Africa are not well prepared to handle challenges emanating externally. In some countries like Zimbabwe and Sudan there has been continued demand boosting measures that has proved counterproductive and the end result is inflationary pressures. A strong rebound in capital inflows to Africa induced by protracted rounds of quantitative easing in the United States has amplified credit and asset price risks. The good news is that incoming Federal Reserve chair Janet Yellen has promised not to scale bond buying which means sub Saharan countries will continue to enjoy the growth. The forecasts of the continent’s economies are expected to grow by an average 5% next year. Various studies attributes the steady economic growth in most sub Saharan countries to risks from the emerging markets like India, Brazil, Russia, the Euro zone countries and the United States of America that have declined since the middle of 2012. The growth for the developing economies in sub Saharan region is projected to hit 8% in 2014. For East African region, the experts projects the on average five economies will grow by an average 6% next year because of the expected growth of domestic investment. East Africa’s rising middle-income class, low interest rate environment has fueled a strong domestic economy, helping it to grow on average 5% this year.

On the other side, with consumer spending on the rising trend, added by improved wages and the stable currency has helped held up inflationary pressure that accelerated to over 20% that were experienced last year in Kenya, Uganda and Tanzania. East African countries unlike their west and southern African counterparts are at their productive capacity and they have seen a bottoming out of inflation. For example Burundi and Rwanda inflation has started to rebound although some of the recent increase in prices, which has been driven by a handful of basic food items. Region’s central bankers are still keeping a favorable interest rate environment to provide leeway for higher consumer spending. This year most of them have lowered or kept their key interest rate unchanged arguing that the inflation risk going forward remains real. Economists always argue that a low interest rate environment encourages consumers to purchase goods by borrowing. In East Africa, consumption is mostly financed through salaries and other sources of income and government policies in the region promote more consumption through subsidized prices. There is need for an appropriate policy that can halt pressures like infrastructure development and investment like the proposed Mombasa-Kampala-Kigali motorway, Mombasa-Kampala-Kigali railway line that focuses on trade competitiveness and trade reforms. Business people in East Africa have been crying foul on non tariff barriers and elimination of trade barriers that continues to hamper the regional trade and the allocation of money to fund infrastructure projects could be answer to what they have been asking for.

Contador Harrison