Medium-Term Forecast: Stormy Weather

Over the course of 2023, the impact of the COVID-19 pandemic has faded, the world has largely adjusted to the energy price shock caused by the war in Ukraine, while the rise in inflation caused by supply-chain disruptions has been slowed by tightening monetary policy. 

However, while the global economy has shown tremendous resilience, the recovery from the shocks of the past few years remains slow and uneven. Energy and food security remain elusive for many households, prices are still high, and financial stability cannot be taken for granted – particularly given persistent high interest rates and shadow bank concerns. More recently, a new war in the Middle East has further complicated an already uncertain outlook. 

In a special report on Africa, the International Monetary Fund (IMF) said in October 2023: “The crises have underscored the continent’s ongoing vulnerability and the need to build resilience.” The report was published on the occasion of the IMF/World Bank Group annual meetings in Morocco – the first time in 50 years the institutions held their conference in Africa. 

An uncertain economic outlook 

Given this backdrop, the global economy will be shaped over the next few years by the interplay of several key factors including economic policies, elevated debt stocks, geopolitical tensions, climate change and technological advancements – possibly rounded off by other “black swan” events such as new global health scares. 

In line with the IMF’s World Economic Outlook of mid-October 2023, the near term global recovery remains slow, with increasing regional gaps and little room for policy error. The IMF expects global growth to slow to 3.0 percent in 2023 (from 3.5 percent in 2022) and 2.9 percent in 2024, below the historical (2000–19) average of 3.8 percent (see Chart 1). “The global economy is limping along, not sprinting,” said IMF Chief Economist Pierre-Olivier Gourinchas. 

Meanwhile, advanced economies are expected to slow to 1.5 percent in 2023 (from 2.6 percent in 2022) and 1.4 percent in 2024 as policy tightening starts to bite. Emerging market and developing economies are forecast to see a modest decline in growth to 4.0 percent in both 2023 and 2024 (from 4.1 percent in 2022). 

Global inflation is forecast to decline steadily, to 6.9 percent in 2023 (from 8.7 percent in 2022) and 5.8 percent in 2024, due to tighter monetary policy aided by lower global commodity prices (see Chart 2). Core inflation (which excludes food- and energy-related costs) is generally expected to decrease more gradually and in most cases inflation is not expected to return closer to 2 percent until 2025. Monetary policy actions and frameworks are significant driving forces at the moment to keep inflation expectations anchored, as reflected in the tightening of monetary policy across many countries – developed and developing. 

Economic driving forces 

Looking at the major economic indicators, and taking on board the IMF’s forecasts and expectations, the OPEC Fund is cautiously more optimistic for an improvement in headline growth next year given the following: 

• Economic growth is expected to benefit from an acceleration of the digital transformation along with advances in artificial intelligence, innovation, 5G, technology and biotechnology. These are likely to accelerate across some countries and many industries, driving productivity gains and reshaping labor markets. 
• As countries intensify their efforts to tackle climate change, investment into renewable energy will continue to grow. Allied to this, an increased focus on environmental, social and governance (ESG) fundamentals will help to underpin sustainable growth in partner countries. 
• Many governments will continue to implement fiscal stimulus measures to support businesses and individuals affected by the cost-of-living crisis and lingering effects from the pandemic. 
• Following the lead of the US Federal Reserve, some central banks may hold interest rates at current levels, which could indicate forthcoming cuts that signal a normalization of the interest rate environment across many economies. 
• Reforms will remain an important element in building the foundations for sustainable growth. 
• Efforts to create more resilient supply chains (such as through near-shoring) will continue, with diversification and local production playing a role in reducing vulnerabilities to supply chain disruptions. 
• Finally, demographic change will continue to have a large effect: aging and shrinking populations in some developed countries are lowering demand but this will be offset to some degree by growth of the middle class and of populations overall in emerging economies. 

Risks to the outlook 

Despite the more optimistic outlook for growth next year, there are several risks that could undermine the growth picture: 

• Trade tensions between major economies like the US and China could persist, leading to potential disruptions in global supply chains and trade patterns. 
• Geopolitical risks, political developments, war, resource scarcity and sanctions could further impact global stability and trade. 
• If inflation remains entrenched, central banks’ monetary policies will remain tighter for longer, constraining growth. 
• Cybersecurity, data breaches and misconduct will have far-reaching adverse economic and financial consequences. 
• Efforts to reduce carbon emissions, switch to renewable energy sources and adapt to the effects of climate change may be more urgent and costly than expected, stretching resources and straining national budgets. 
• Healthcare infrastructure and international cooperation could still be tested with the emergence of new pandemics. 

External environment: Challenges and opportunities 

The OPEC Fund and its partner countries are facing a changing external environment – one where rapid and sometimes unforeseen developments are taking place. Amid the worsening effects of climate change, debt-level stress and progress stalling or reversal on the Sustainable Development Goals (SDGs), there are challenges ahead. At the same time, a shift in the geopolitical and economic landscape, as well as advances in technology, present opportunities that the OPEC Fund is striving to meet by mobilizing more funds to meet partner countries’ needs. The OPEC Fund’s Strategic Framework 2030 provides a robust approach to stimulate operations to deliver increased lending and support to address both challenges and opportunities. 

Limited progress towards the SDGs 

Global crises continue to imperil the UN’s 2030 Agenda for Sustainable Development. Poverty reduction, food security, health and employment efforts are all falling behind. The SDG financing gap in low- and middle-income countries increased significantly during the COVID-19 pandemic and could reach US$4.3 trillion per year by 2025. With constrained public funding there is a clear need to mobilize more private capital for SDG financing. In parallel, there is a greater focus on development effectiveness to ensure funding delivers results. Supporting partner countries to achieve the SDGs is critical for the OPEC Fund to achieve its mandate. 

Intensifying climate crisis 

As the impacts of climate change continue to worsen, financing demands remain unmet. At least US$4.4 trillion in annual finance flows are required to avoid the worst impacts of climate change. Despite the seemingly dramatic scale of the funding gap, it represents less than 5 percent of global GDP. The OPEC Fund is leading by example – taking credible climate action is crucial to nurture an ecosystem that drives climate investments where they are needed the most. The OPEC Fund is playing a catalytic role in channeling funds from member countries into climate action. 

Increasing multi-polarity and shifting geopolitics 

The war in Ukraine sharpened the divide between East and West, placing many developing countries at an inflection point. Meanwhile, the growing US-China rivalry, including trade disputes, are putting additional pressure on many OPEC Fund partner countries. Many states are becoming more vocal, exerting their influence in geopolitics. Amid this shifting landscape, the OPEC Fund maintains its position as a reliable partner and provider of development solutions. 

The South is rising 

In recent years, there has been a notable shift in economic influence and the South has emerged as a significant contributor to global growth. Middle- and low-income countries combined grew by 7.2 percent in 2021, outpacing advanced economies in a trend that is expected to continue. This transition presents new opportunities for South-South cooperation. It also represents new opportunities for the OPEC Fund to expand support for partner countries’ growth. 

Technological advancement and digital transformation 

Through its lending operations the OPEC Fund is helping to bridge the digital divide. Digital technologies can help accelerate delivery of the SDGs. Yet a global digital divide persists. Partner country populations are among the most digitally excluded: only 36 percent of low- and middle-income countries’ populations use the Internet, compared to the global average of 66 percent. The OPEC Fund, along with other multilateral development banks (MDBs), has a key role to play, ranging from financing the infrastructure “backbone” to the deployment of new technologies in core assets. Understanding partner country needs and opportunities for leveraging technology will be essential for maximizing the impact of OPEC Fund operations. 

MDB reform agenda 

There have been mounting calls for MDB reform in recent years. There is now clear agreement from the G20 that MDBs are overly constrained and need to do more, be it through enhanced governance, improved effectiveness, greater coordination and higher risk-taking. 

There are now expectations that MDBs’ lending levels could triple and provide an additional US$260 billion in annual financing by 2030. MDBs are also being asked to support the mobilization of an additional US$500 billion in private capital by 2030 to help bridge the immense SDG funding gap, especially given the current debt stress scenario.

The OPEC Fund Strategic Framework 2030 has prepared and positioned the institution well to respond to the calls for MDB reform. While the global environment may evolve under different scenarios, the OPEC Fund retains an important role for driving progress on the 2030 Agenda in any scenario, either as a counter-cyclical financier or as a steward for higher growth and development. The OPEC Fund will remain responsive, impactful and agile to implement its mandate under any scenario. 

Laying the Foundations For Poverty Reduction 

Africa’s investment needs are enormous. But first of all it must foster its homegrown talent 

Africa needs vast amounts of money. But to attract inflows the countries must improve their track record in providing an investor-friendly and secure environment. 

A major step towards this goal is the general improvement of living conditions. The escalating prices of essential commodities pose significant hurdles for many citizens as they strive to meet their everyday needs. In August 2023, Nigeria, Africa’s largest economy, saw its annual inflation rate rise to 25.8 percent, marking an 18-year high. In South Africa and Kenya fuel prices reached all-time highs, while in Ethiopia the cost of living almost tripled in the last year. 

The lack of economic progress affects the fight against poverty: From 1990 to 2018 the number of people living in extreme destitution in sub-Saharan Africa rose from 284 million to 433 million as population growth outpaced economic growth. The COVID-19 pandemic further exacerbated the crisis: Real GDP per person was lower in 2022 than 10 years earlier. 

Polls show that job creation is by far the most-cited priority of 18- to 35-year-olds. Africa has the youngest population in the world, with 70 percent of sub-Saharan Africa under the age of 30. The Mo Ibrahim Foundation, a British-Sudanese NGO, reckons that 18 million formal jobs must be created annually to absorb the numbers entering the labor force. The current figure is 3 million. 

Almost half of 18- to 24-year-olds in 15 countries surveyed last year by the Africa Youth Survey said they were thinking of emigrating. A similar picture emerged from the latest Arab Youth Survey, published in August 2023, which found that 53 percent of people aged 18-24 in the eastern Mediterranean region and 48 percent of those in northern Africa wanted to move abroad. 

According to the United Nations, over 31 million Africans live outside the country of their birth, mostly within the African continent. The majority of migration is intra-regional or intra-African, especially in western and southern Africa, while about 25 percent of African migrants go to Europe. The main reasons for migration are inadequate living conditions, unemployment, famine, the effects of climate change and armed conflicts. 

Improving wealth often starts at the grassroots. In Ghana, the fairafric chocolate factory is aiming to secure a bigger share of the profits generated by chocolate sales – and keep those profits in the country. The traditional pattern of trade since colonial days is African countries exporting cheap raw materials to richer countries that use them to manufacture valuable finished goods. Growing and harvesting cocoa is the lowest-paid link in the chocolate value chain. The result is that farmers receive a mere 5 or 6 percent of what a chocolate bar sells for in Europe or the USA. 

In contrast, fairafric – founded by the German social entrepreneur Hendrik Reimers – keeps the production process in the country that produces the raw materials. The goal is to create a profitable company and distribute the gains more equitably. By keeping manufacturing at home, fairafric supports other local businesses and helps to build infrastructure. 

It is a model that could be applied in other places. Many African countries have large reserves of natural resources. In Ghana, it’s cocoa. In Botswana, it’s diamonds. In Nigeria, it’s oil. All too often the African countries miss out on the part that generates the biggest returns. 

Africa and the OPEC Fund 

Madagascar: Integrated Growth Poles Project 

Approved: December 2014 
Completed: September 2020 
Total project cost: US$16 million 
OPEC Fund financing: US$15 million 

The project supported the revitalization of areas with high growth potential in promising sectors such as agribusiness and tourism. It combined the rehabilitation of key infrastructure, the improvement of the business environment and activities to support the growth of small businesses and entrepreneurship and the strengthening of local governance. 

In urban areas, the project made it possible to modernize and extend the distribution network and make production more reliable. In the Ambanja district with more than 37,000 inhabitants, the project supported the energy transition from a thermal power plant to a hybrid system with solar PVs. The project also provided initial access to electricity to some 3,000 households in rural areas, with the numbers expected to rise to 10,000. 

The project led to an improvement of living and working conditions, access to information and telecommunications and improvements in public life thanks to access to electricity. 

Mozambique: Artisanal Fisheries Promotion Project 

Approved: June 2014 
Total project cost: US$43.5 million 
OPEC Fund financing: US$13.5 million 

The project's objectives are to improve incomes and livelihoods of poor households involved in traditional fisheries and to increase the returns from fish sales for artisanal fishers and small-scale operators on a sustainable basis. An estimated 334,000 people depend directly or indirectly on fishing in Mozambique. 

The project provided training on fishing and fish handling techniques, allow fishers to access more resource-rich open sea areas and supporting activities to improve transport and sales. The project also increased financial services available to fishing communities and trained households on cooking and eating habits. The project is estimated to benefit around 56,000 people with training, improved equipment and financial services. 

The 2020 completion report estimates that the project has contributed to a 12 percent increase in the share of high-value fish catch as well as to an almost 90 percent increase in total artisanal fishing production overall in targeted areas.