Economic reform brightens outlook for U.S. trade in sub-Saharan Africa; opportunities will expand as prosperity returns to the region - World Trade Outlook

Opportunities Will Expand as Prosperity Retums to the Region

Barring an unexpected rapid appreciation of the dollar, U.S. exporters can anticipate moderate to strong sales growth in Sub-Saharan Africa this year, particularly in sectors related to infrastructural development: transportation and earthmoving machinery, telecommunications, agribusiness, and medical equipment. Foodgrains, especially wheat and rice, should also find good market potential. However, two factors cloud the favorable outlook: continued depressed commodity prices and escalating costs of debt service could constrain Africa's imports generally, as they have in the past, thus limiting further growth in sales to the region.

U.S. exports to Sub-Saharan Africa performed well in 1988, as sales continued to recover from the steady decline experienced during the first half of the 1980s. Despite some moderation of the upsurge in the fourth quarter, shipments totaled $3.7 billion for the year, 19 percent above the 1987 level. The expansion was led by high-ticket capital goods, particularly aircraft, earthmoving machinery, and computer equipment. Overall, 1988 was the best year for U.S. sales to Africa since 1985, but was still 44 percent below the banner year of 1981.

The United States purchases nearly 20 percent of Africa's total exports. Depressed world prices for crude oil, coffee, and cocoa helped curtail the value of U.S. imports from Africa in 1988. Purchases totaled $9.3 billion, about 6 percent below 1987. The resulting U.S. trade deficit with the region narrowed to $5.6 billion, the lowest in more than a decade.

While the trade picture improved in 1988, it spells possible difficulty ahead for Africa's troubled economies. SubSaharan Africa has compiled a cumulative trade surplus with the United States of $60 billion since 1980, but the growth stimulus associated with the trade imbalance has been offset by larger deficits the African nations have incurred with other trade partners. As a result, Africa's trade advantage with the United States has failed to nurture selfsustaining economic expansion. With the 1988 African surplus below $6 billion for the first time in years, the transfer of much needed capital resources from the United States to Africa is further diminished.

Africa has faced daunting economic problems during the 1980s. Large fiscal and trade deficits, excess indebtedness, inflation, and overall economic contraction have plagued most of the region. With a growth rate of 3 percent per year, Africa's population doubles every generation, while food production has stagnated. The result is that even in the best of times, food demand and supply are delicately balanced. Adverse times, such as the drought of the mid-1980s, bring widespread famine and massive starvation.

Africa's special difficulties arise from its narrow economic base. At least 25 African countries depend on a single primary commodity for at least a third of their total export revenues, and in 16 countries one commodity supplies more than half. With most commodity prices at severely depressed levels, the African countries have been all but deprived of the foreign exchange lifeline they need for essential imports.

The foreign exchange squeeze is further aggravated by escalating service costs on external debt. African countries borrowed heavily in the 1970s and early 1980s to finance consumption and development in the face of declining export prices. Today, Sub-Saharan Africa is strapped with a total foreign debt approaching $140 billion. Debt service costs (before rescheduling) were $16 billion in 1988, and are expected to exceed $53 billion between now and 1992. This further constrains the ability of African countries to finance essential imports.

While some factors which govern economic development are beyond human control, an essential part of the formula is determined by governments themselves. Governments can choose their own economic policies, so as to encourage growth through competitive market forces, or hinder the productive energies of citizens and discourage foreign participation. By choosing policies which promote growth and competition, governments can minimize the

damage in times of misfortune. In more prosperous times they can minimize the benefits and help clear the way for selfsustaining economic growth.

For years, most African governments opted for excessive state control of their economies, bridling their private sectors with a host of restrictions and bureaucratic procedures. Today, an increasing number of African countries have adopted far-reaching programs of economic reform, dismantling the system of statism and economic socialism which had contributed to their economic decline. Many countries have devalued their currencies, adopted tighter fiscal constraints, cut internal subsidies, trimmed their bloated bureaucracies, and privatized state-owned companies. Some have liberalized their trade and investment regimes. In adopting these measures, they have removed constraints on their own private sectors and made their business climates more attractive to foreign investors.

The accompanying articles reveal the scope of economic reform programs under way in Ghana, Nigeria, Tanzania, and elsewhere in Africa. However, Africa's economic reform movement is far broader. Like Nigeria, Cameroon and Gabon have been forced by depressed oil eamings to adopt programs of structural reform involving budget cuts, privatization of state-owned enterprises, and curtailment of internal subsidies. Senegal has liberalized its import regime, adopted a new investment code, and removed government regulations on grain marketing. Guinea is working to streamline its civil service, and has opened many sectors to private ownership. Sao Tome and Principe, an island nation in the Gulf of Guinea, devalued its currency, deregulated most prices, and is rehabilitating its basic infrastructure. The list goes on and on.

Although some of the measures are difficult and politically hazardous, countries which have implemented reform programs have reaped substantial economic benefit. According to a recent World Bank report, they have showed an average 3.8 percent annual real growth over the last three years, compared with 1.5 percent growth in countries without major reform programs.

A few African countries have implemented debt conversion mechanisms to convert a portion of their foreign debt into working equity capital. The arrangements typically allow potential investors to purchase part of a country's commercial debt at a discount from open foreign exchange markets, to be converted into investment capital for use within the country. Nigeria instituted a formal debt conversion program last year, and has held three successful debt auctions. Zambia has converted trade debt into equity capital for agriculture, and Mozambique plans to initiate a debt-equity scheme with Portuguese companies. A U.S. bank has developed a plan to retire some of Zaire's arrearages on unpaid supplier credits.

Last February, the U.S. Agency for International Development (USAID), the Overseas Private Investment Corporation (OPIC), and the African Development Bank jointly sponsored a workshop on debt conversion in Abidjan, Cote d'Ivoire. Senior officials ftom eleven African countries attended, and most governments are now actively studying the process. U.S. Treasury Secretary Brady has called on the World Bank and the IMF to encourage programs to reduce foreign debt by providing funds for conversion operations.

The critical need in each case is to identify investment projects which would attract prospective investors. The United States is actively assisting the African countries to develop and market such projects. OPIC recently sponsored an investment mission to Southern Africa, and has launched its Africa Growth Fund to provide investment capital and management services for new productive ventures. OPIC also recently launched a new four-year Pilot Equity Program to provide equity capital on commercial terms for ventures in Sub-Saharan Africa and the Caribbean Basin. These programs will provide new sources of sorely needed investment capital for Africa.

The United States has concluded and ratified Bilateral Investment Treaties with a number of countries, which set standards of treatment and dispute settlement mechanisms for foreign investors on ,a reciprocal basis. The treaties are designed to stabilize the investment environment and remove an element of unpredictability which has hindered investment nows. In Africa, investment treaties have been ratified with Senegal, Cameroon, and Zaire.

While investment is a critical need, Africa's gradual recovery is also causing renewed trade interest. More than 50 U.S. firms recently participated in USAWest Africa Expo '89 in Abidjan, Cote d'Ivoire, the largest U.S. trade exhibition ever held in Sub-Saharan Africa. A U.S. trade fair is slated for Nairobi In 1990. The Department of Commerce is also planning a Cosmetics and Personal Care Trade Mission to several Frenchspeaking countries later this year.

Sub-Saharan Africa remains one of the' "last frontiers" for U.S. business abroad. As economic policy reform spreads the benefits of renewed growth, and prosperity returns to Africa, opportunities for increased trade and investment will continue to expand.

COPYRIGHT 1989 U.S. Government Printing Office
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