- International Monetary Fund. African Dept.
- Published Date:
- October 2008
©2008 International Monetary Fund
Regional economic outlook : Sub-Saharan Africa – [Washington, D.C.] : International Monetary Fund, 2008.
p. cm. – (World economic and financial surveys)
Includes bibliographical references.
1. Economic development – Africa, Sub-Saharan. 2. Inflation (Finance) – Africa, Sub-Saharan. 3. Africa, Sub-Saharan – Economic conditions – 1960- 4. Africa, Sub-Saharan – Economic policy. I. Title: REO. II. International Monetary Fund. III. Series (World economic and financial surveys)
HC800 .R445 2008
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African Economic Growth ProjectCEMAC
Central African Economic and Monetary CommunityCPI
Consumer price indexCPIA
Country Policy and Institutional AssessmentEAC
East Africa CommunityFDI
Foreign direct investmentHIPC
Heavily indebted poor countriesMDG
Millennium Development GoalMDRI
Multilateral Debt Relief InitiativeOECD
Organization for Economic Cooperation and DevelopmentOPC
Purchasing power parityPRGF
Poverty Reduction and Growth FacilityTFP
Total factor productivitySG
West African Economic and Monetary UnionWEO
World Economic Outlook
The following conventions are used in this publication:
In tables, a blank cell indicates “not applicable,” and ellipsis points ( . . .) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.
An en-dash (–) between years or months (for example, 2005–06 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
Developments in 2008 and Outlook for 2009
In an increasingly adverse global environment, sub-Saharan African growth is expected to slow to about 6 percent in 2008 and 2009, down from 6½ percent in 2007. Meanwhile, inflation is projected to increase to 12 percent in 2008 and 10 percent in 2009. The growth projections are somewhat lower and the inflation projections markedly higher than in the April 2008 Regional Economic Outlook: Sub-Saharan Africa, especially for 2008.
The worsening macroeconomic situation reflects headwinds from strong increases in food and fuel prices, slower world growth, and global financial turmoil. So far, the main effects of the global financial turmoil appear to be indirect, in the form of slower global growth and volatile commodity prices. Recent heightened turbulence raises the risks, including of a decline in resource flows to Africa in the form of private capital, remittances, and even aid.
The food and fuel price shock has put upward pressure on inflation and current account deficits. Further, donor support has not risen to cover the larger import bills caused by the price shock, leaving the adjustment to domestic resources. Foreign exchange reserves have held up fairly well so far but cannot be expected to absorb the long-term consequences of the food and fuel price shock. These concerns remain valid in spite of the recent easing of oil prices and, to a lesser extent, food prices. Food and fuel prices are still far above their 2007 levels, adjustment to higher prices is not yet complete, and remaining inflationary pressures may still be substantial in many countries.
The challenge for policymakers is to adjust to the food and fuel price shock, preserve economic stability, and shield the poor. The increase in food and fuel prices needs to be passed through to the economy over time to encourage adjustment. With food accounting for a major share of household expenditure, the resulting loss in the purchasing power of the poor is a serious concern. To help protect the poor, policymakers have so far tended to reduce taxes and tariffs on fuel and food items and increase subsidies on them. But not only have these measures tended to benefit a broader segment of the population and therefore been of limited value to the poor, they are also costly for government budgets in the longer run. Measures to cushion the impact of higher food and fuel prices on the poor therefore need to be better targeted—and also better supported by donors. For oil exporters, a particular challenge is to use oil revenue wisely in ways the economy can absorb.
A number of governments may have “fallen behind the curve” in fighting inflation. The rise in inflation tracks not only the rise in oil and food prices, but also demand pressures in some economies. Therefore, monetary policies may need to be tightened in several countries to preserve price stability and external sustainability. Fiscal tightening should support this effort, particularly where monetary policy choices are limited by the exchange rate regime and where the fiscal stance has contributed to inflation.
There are unprecedented risks to the global economic outlook, and the resilience of growth and macroeconomic stability in the continent is being put to a test. Countries need—more than ever—to be able to respond quickly to unexpected exogenous shocks. Those countries facing inflationary import price shocks, declines in their terms of trade, and lower remittances and private capital inflows face an especially acute challenge; a shortfall in aid would be a further difficult blow. More generally, recent volatility underscores the lesson that countries enjoying favorable circumstances should build an adequate external reserve cushion.
The current volatile environment comes at a time when, for the first time since the 1970s, a large number of countries in sub-Saharan Africa are enjoying high rates of growth in per capita income. Sustaining and even accelerating high growth—and extending it to low-growth countries—is critical if the region is to achieve its overriding economic objective: raising living standards and reaching the Millennium Development Goals (MDGs). Chapter 2 scrutinizes the current growth takeoff and draws five main conclusions:
Sub-Saharan Africa has enjoyed a remarkable growth takeoff since the mid-1990s Average growth rates approach those of developing countries elsewhere, and growth in the region is in some ways more persistent than in any previous postwar period. There is little evidence of an inescapable poverty trap. The fast growers are a diverse group, including resource-rich and landlocked countries and resource-poor countries that have not had large gains in their terms of trade.
Sustained growers in sub-Saharan Africa have gotten the critical basics right and avoided major policy failures. Most of those that are getting ahead have achieved macroeconomic stability, including stable and low inflation and debt sustainability, pursued sound economic policies, and reinforced their institutions.
Recent African success stories also demonstrate that governments need to play a proactive role but that there is no simple recipe for achieving high growth. Countries need to choose policies that allow them to benefit from what is happening externally, preserve macroeconomic stability, promote effective public and private investment, and ensure that all share in the benefits of growth, which must include improvements in health, education, and the other areas targeted by the MDGs as well as income. Moving toward growth trajectories that emphasize value added and nontraditional exports—paths that characterize most sustained fast growers in other regions—is not easy, but it can be done.
Higher aid has been part of the story for fast growers that have not benefited from large resource rents, providing room for higher social spending and public investment and promoting or at least being consistent with fast growth. However, as the Commission on Growth and Development’s recent Growth Report notes, fears that large increases in aid may also undermine exports are “difficult to prove, but difficult to dismiss” (p. 77). It is therefore important that the sectoral allocation of aid reflect country priorities, especially productivity-enhancing investments.
High growth cannot be taken for granted. Previously, boom-bust cycles, exogenous shocks and conflicts, and the inability to channel resource wealth into sustainable growth and productive investments all worked to derail what were considered promising growth trajectories. The current period presents new challenges, as Chapter 1 makes clear, but stronger policies and fundamentals should allow countries to sustain growth. For example, higher reserves should help sub-Saharan Africa oil importers absorb higher fuel prices, at least temporarily.