COMMODITIES AND THE AfCFTA

COMMODITIES AND THE AfCFTA Presenter Janvier D. Nkurunziza Chief of Research and Analysis, Commodities Branch UNCTAD TRALAC Conference 22-23 March 2018, Kigali (Rwanda)

Commodities and the AfCFTA Outline Why is commodity dependence a relevant issue for Africa s CFTA? Transmission channels of commodity dependence Challenges of Africa s trade structure Maximizing the benefits of the AfCFTA: policies Conclusion

Why is commodity dependence relevant for AfCFTA? Commodities and the AfCFTA Fact #1: Almost all African countries are commodity-dependent Fact #2: Commodity prices closely correlated with growth & human development in Africa Fact #3: Africa does not trade with itself Fact #4: To fully benefit from AfCFTA, need for structural change in production & trade

Commodities and the AfCFTA Map of commodity-dependent developing countries

40 Commodities and the AfCFTA Commodity prices are closely related to per capita growth in developing countries UNCTAD Non-oil Nominal Commodity Price Index and GDP per capita developing countries 1995-2016 (annual % changes) 7 30 6 20 10 0-10 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 5 4 3 2 1-20 0 Price index all commodities GDP per capita developing countries, right axis Correlation coefficient = 0.79

Commodities and the AfCFTA Commodity dependence and development Scatter plots of the Human Development Index and commodity dependence ratios, 1995-2013

Key transmission channels Commodities and the AfCFTA

Transmission channels Commodities and the AfCFTA

Commodities and the AfCFTA Terms of trade: betting on wrong horse Fiscal and monetary policy challenges Impacts at the micro level

Key transmission channels Commodities and the AfCFTA Terms of trade & commodity prices: betting on wrong horse

The terms of trade channel: betting on wrong horse 350 Commodities and the AfCFTA 300 250 200 Commodity super-cycle 150 100 50 2008 Financial crisis 0 Non-oil commodities, current USD Non-oil commodities, constant USD Source : Data from UNCTADStat

Long-term view on commodity prices Commodities and the AfCFTA Grilly and Yang commodity price indices, 1900-2010

Jan2000 Jun2000 Nov2000 Apr2001 Sep2001 Feb2002 Jul2002 Dec2002 May2003 Oct2003 Mar2004 Aug2004 Jan2005 Jun2005 Nov2005 Apr2006 Sep2006 Feb2007 Jul2007 Dec2007 May2008 Oct2008 Mar2009 Aug2009 Jan2010 Jun2010 Nov2010 Apr2011 Sep2011 Feb2012 Jul2012 Dec2012 May2013 Oct2013 Mar2014 Aug2014 Jan2015 Jun2015 Nov2015 Apr2016 Sep2016 Feb2017 Jul2017 Commodities and the AfCFTA Recent commodity price developments 450 UNCTAD Non-Oil Commodity Price Index, January 2000-October 2017 (2000=100) 400 350 300 250 200 150 100 50 0 Non-oil commodity All food Agricultural raw materials Minerals, ores and metals

Projected commodity prices in 2030 Commodities and the AfCFTA Primary food prices projected to remain at 2010 level Projected output price indices in 2030 (2010=100) Prices of non-food commodities projected to grow moderately Oil expected to register highest price increase by 2030

Commodities and the AfCFTA Projected production factor prices in 2030 Large differences in factor price variations across regions Projected factor prices in 2030 (2010=100) In Africa, wage of skilled labour increases more than for unskilled labour Land price increase strongest in Africa

Commodities and the AfCFTA Fiscal and monetary policy challenges

Commodities and the AfCFTA Commodity price swings affect: export earnings and taxes country budgets (e.g. break-even oil prices) Reliance on commodities associated with Dutch Disease (decline of agriculture & manufacturing) Declining commodity prices lead to: currency depreciations (Angola, Nigeria, etc.) downgrade in country sovereign ratings

Commodity price volatility-- 2016 vs. 2017 Monthly price, January vs. August (% change) Recent developments in global commodity markets Gold Tin Zinc Lead Nickel Copper Aluminium Iron ore Rubber Tropical logs Cotton Tobacco Cottonseed oil Palm oil Coconut oil Soybean oil Soybeans Tea Cocoa beans Coffee Sugar Rice Maize Wheat -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% Jan-Aug 2017 Jan-Aug 2016

Commodity price trends 2017 Rubber Sugar Cottonseed oil Iron ore Coconut oil Coffee Palm oil Tobacco Soybeans Maize Cotton Cocoa beans Tin Soybean oil Rice Tea Wheat Gold Tropical logs Lead Nickel Copper Aluminium Zinc Commodities and Development Report 2017 Percentage price change of selected commodities between January and October 2017-40 -30-20 -10 0 10 20 30

Impacts at the micro level Commodities and the AfCFTA

Commodities and the AfCFTA Commodity price changes directly affect households: producer prices for agricultural commodity exports food prices Indirect effects on firms and households: currency depreciation makes imports more expensive public investment and spending decline

Commodities and the AfCFTA Challenges posed by Africa s trade structure

Africa s export products Commodities and the AfCFTA Country Top 2 exports % Share Burundi Gold, coffee 72 Comoros Spices, ferrous waste 93 Djibouti Petr. Prod. & live animals 45 Eritrea Copper, fisheries 64 Ethiopia Coffee, vegetables 39 Kenya Tea, vegetables 47 Madagascar Nickel, spices 59 Malawi Tobacco, sugar 68 Mauritius Fish, sugar 69 Mozambique Aluminium, pearls, etc. 35 Rwanda Base metals, coffee 59 Seychelles Fish, petroleum oils 96 Somalia Live animals, gold 80 Country Top 2 exports % share Benin Cotton, gold 50 Burkina Faso Gold, cotton 82 Cabo Verde Fish, petroleum oils 90 Côte Ivoire Cocoa, petroleum oils 59 Gambia Forestry, fruits & nuts 64 Ghana Gold, petroleum oils 58 Guinea Al ores, petroleum oils 62 Liberia Iron ore, rubber 61 Mali Gold, cotton 91 Mauritania Iron ore, fish 66 Nigeria Petroleum, natural gas 90 Senegal Petroleum oils, fish 46 Sierra Leone Precious stones, base metals 69

Africa s export partners Commodities and the AfCFTA Country Top 2 partners % Share Burundi UAE, EU 62 Comoros EU, Singapore 63 Djibouti UAE, Yemen 43 Eritrea China, India 90 Ethiopia EU, Africa 40 (23+17) Kenya EU, Africa 51 (33+18) Madagascar EU, USA 52 Malawi EU, Africa 51 (42+9) Mauritius EU, Viet Nam 73 Mozambique EU, S. Africa 56 (37+19) Rwanda DRC, China 38 (22+16) Seychelles EU, Japan 78 Somalia S. Arabia, UAE 73 Country Top 2 partners % share Benin China, India 41 Burkina Faso Switzerland, India 66 Cabo Verde EU, India 89 Côte Ivoire EU, Africa 58 (42+16) Gambia China, India 71 Ghana EU, India 46 Guinea EU, India 52 Liberia EU, China 53 Mali UAE, South Africa 53 (32+21) Mauritania China, EU 62 Nigeria EU, India 52 Senegal Africa, EU 56 (32+24) Sierra Leone China, EU 93

Growing importance of emerging economies 80% 70% 60% 50% 40% 30% 1995 2005 2016 20% 10% 0% Iron ore Copper Iron ore Copper Iron ore Copper China United States EU28

China s major role Iron ore Nickel ores Copper ores Aluminium ores Natural rubber 2016 2005 1995 Cotton Coal Petroleum oils, crude 0% 10% 20% 30% 40% 50% 60% 70% 80%

Commodities and the AfCFTA Maximizing the benefits of the AfCFTA

Continued reliance on commodities not winning strategy Modifying export basket: Manufactured products are more traded regionally Trading in food products Trade in services Multi-country projects for value addition (chocolate from Ghana and Côte d Ivoire?) Fostering regional value chains Commodities and the AfCFTA

Commodities and the AfCFTA Maximizing the benefits of the AfCFTA Diversification crucial to reduce risks associated with commodity dependence Capturing value added important to generate sustainable growth & employment to meet SDGs Investment in human capital key element for inclusive development

Commodities and the AfCFTA Maximizing the benefits of the AfCFTA Adopting horizontal policies to foster economic and export diversification: Monetary policy Fiscal policy Targeted policies Identifying countries comparative & competitive advantages Putting in place flexible industrial policy Learning from other developing regions (e.g. MERCOSUR)

Maximizing the benefits of the AfCFTA Building resilient regional economies Maximizing government revenue Pursuing industrial diversification Countercyclical fiscal policy Good governance Expanding linkages of commodity sectors with local economy to avoid enclaves Promoting inclusive growth Commodities and Development Report 2017

Conclusion Commodities and the AfCFTA

Commodities and Development Report 2017 Commodity dependence poses risks to long-term development For AfCFTA to reduce commodity dependence: restructuring production and trade building more multi-country ventures to attain scale Generating regional value chains Without these adjustments: African economies will remain locked into commodity and fail to take advantage of the AfCFTA Need to strengthen knowledge on commodities: create an Institute on Commodity Studies in Africa (ICSA)?

Some recent UNCTAD publications on Commodities Commodities and the AfCFTA

Commodities and the AfCFTA

Commodities and the AfCFTA

Commodities and the AfCFTA Thank you. Download report: http://unctad.org/en/pages/suc/co mmodities-special-unit.aspx Contact: Janvier.nkurunziza@unctad.org