Regional Economic Outlook, April 2011 : Sub-Saharan Africa: Recovery and New Risks

Book
Chapter

1. Recovery and New Risks

Author(s):
International Monetary Fund. African Dept.
Published Date:
May 2011
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Introduction and Summary

Sub-Saharan Africa’s recovery from the crisis-induced slowdown is well underway, with growth now back fairly close to the high levels of the mid-2000s. The region’s output expanded by 5 percent in 2010 and is projected to grow by some 5½ percent in 2011, in line with last October’s projections (Table 1.1). Reflecting recent sharp increases in food and fuel prices, inflation is set to be higher this year while remaining in single digits. Higher commodity prices—and that for oil, in particular—will be a boon for several countries while adversely affecting many others. And, overall, they should help narrow the region-wide fiscal and current account deficits, the latter enabling an increase in international reserves. In all, the aggregate picture is one of a strong recovery from the 2009 downturn.

Table 1.1. Sub-Saharan Africa: Macroeconomic Aggregates, 2004–12
2004–08 2009 2010 2011 2012
(percent change)
Real GDP growth 6.6 2.8 4.9 5.5 5.9
Inflation, end of period 8.7 8.3 7.0 8.1 6.7
(percent of GDP)
Fiscal balance, excl. grants 0.1 -7.2 -5.6 -3.2 -2.3
Current account balance 0.8 -2.3 -2.2 0.5 0.5
(months of imports)
Reserves coverage 4.6 5.0 4.5 5.0 5.5
Sources: IMF, World Economic Outlook; and IMF, African Department database.

This overall positive picture is, however, somewhat incomplete because of uncertainty about the impact of the hiatus in growth on labor market and poverty outcomes. Recent data on the evolution of unemployment is only readily available for South Africa and Mauritius. In South Africa, despite a relatively more modest drop in output the scale of job losses was on a par with that experienced by countries at the epicenter of the crisis—with some 1 million people (6 percent of the country’s labor force) having lost their jobs. In Mauritius, which avoided a recession, employment actually increased in 2009. With virtually no data available on employment outcomes in the rest of the region, one can only speculate that wherever countries avoided an outright recession, experiences are closer to that of Mauritius. Be that as it may, as a result of the combined effects of the 2008 and more recent food and fuel price spike and growth slowdown, World Bank analysis suggests that the region’s progress toward the poverty reduction MDG target has been delayed. 1

The region-wide numbers also mask differences among and within the country groups we use in this publication—oil exporters, middle- and low-income countries. In most of the region’s 29 low-income countries (LICs), output growth as of this year is set to be back to the average growth rates during 2000–08—back to the future the global financial crisis threatened to derail. The recovery in growth among the seven oil-exporters also is not far behind. Where the recovery still has some way to go is in the region’s eight middleincome countries (MICs); there output gaps remain nontrivial and are unlikely to close before 2012–13.

And with the advent of another sharp increase in food and fuel prices, the resilience that the region has exhibited during the last couple of years is about to be tested and is likely to generate further differences within and across country groups. In the face of the largest output shock to the global economy in recent memory, growth only faltered for a short while in the region and has been quick to recover compared to recoveries from previous global slowdowns. As this publication has argued before, this quick recovery largely was due to the macroeconomic policy space that countries had created during the 2004–08 upswing; when the crisis threatened most countries were able to pursue countercyclical monetary and fiscal policies. But in hindsight, it also is clear that the positive terms of trade impact from sharply lower oil prices in 2009 considerably helped the region’s non-oil exporters—in which some three-quarters of the region’s population reside. Although in our baseline scenario we expect oil prices to remain shy of the highs they hit in 2008, we also do not expect them to decline much during 2012. If these projections prevail, economic activity in many of the non-oil exporters will face significant headwinds. Recent food price increases, although to date less generalized in their impact than fuel price increases, will also disproportionately hurt the poor.

Three near-term challenges could threaten the otherwise promising growth outlook for the region:

  • While the global economic recovery continues, it remains uneven and subject to downside risks. A turn for the worse in Europe, in particular, would have adverse implications for many countries in the region. And recent developments in Japan and the Middle East and North Africa, with whom some countries in sub-Saharan Africa have strong links, are likely to increase uncertainty about the global economy.

  • In countries in the region where output is back to its trend path there will be a new set of policy challenges, including ensuring excessive domestic demand growth does not spill over into widening macroeconomic imbalances.

  • Lastly, a number of countries are still dealing with fallout from the crisis, including many of the middle-income countries where unemployment has risen sharply and/or the medium-term outlook for tax revenues has been affected adversely. To the extent these effects linger, they could undermine growth further and foster larger macroeconomic imbalances.

The rest of this chapter provides a detailed picture of recent developments and prospects by addressing the following conjunctural issues:

  • To what extent has output recovered from the impact of the crisis?

  • Has fiscal policy begun to pay heed to the recovery?

  • What are the implications of the resurgence in food and fuel prices?

  • What are the upcoming policy priorities?

This chapter is complemented by two analytical chapters:

  • The second chapter covers recent trends in capital inflows to frontier markets in sub-Saharan Africa. With heightened investment interest in frontier markets, the chapter considers whether private capital inflows to sub-Saharan Africa frontier markets have resumed following the global crisis and whether global push or local pull factors dominate in steering investor interest.

  • The third chapter focuses on challenges faced by members of the East African Community—EAC; (Burundi, Kenya, Rwanda, Tanzania, Uganda) in their ambition to reach middle-income status by 2020. The chapter compares the EAC’s recent growth record with that of countries that have successfully achieved growth take-offs and the possible implications of ongoing changes in the global economy for the region’s future growth path.

How and Where Has Output Recovered from the Impact of the Crisis?

Notwithstanding the severity of the shock imparted by the financial crisis and the global recession that followed, after a brief hiatus, output expansion in most countries in sub-Saharan Africa has returned to the high precrisis levels. And the effect is striking. In the case of the oil-exporting and low-income countries in the region, it is hard to discern any impact from the crisis on the trajectory of output (Figure 1.1). In the oil exporters, non-oil output as of 2011 is projected to be at the trend implied by growth during 2000–08, taking 2006, the midpoint of the precrisis boom period, as a base for the output level. The picture is even better in LICs, where two-thirds of the region’s population reside. In their case, output in 2011 is set to be 3 percentage points higher than the level implied by growth rates during 2000—08 and 2 percentage points below the more exacting trend implied by the particularly purple growth patch of 2004—08. In sum, for the majority of countries in the region, we are back to the trajectory implied by the precrisis years.

Figure 1.1.Sub-Saharan Africa: Trends in Output among Low-Income and Oil-Exporting Countries

Sources: IMF, World Economic Outlook; and IMF, African Department database.

But some caveats are in order too. For one, the picture is much less favorable for the middle-income group dominated by developments in South Africa (Box 1.1). In particular, for these countries, output in 2011 is set to be some 5 percent below the trend level implied by growth during 2000–08 (Figure 1.2). Second, and more broadly, the strong growth of the past decade, while exceptional by the region’s historic standards, has only served to bring the region’s performance in line with that of other developing countries (Box 1.2). Third, even in terms of the speed of recovery from the effects of the global financial crisis, sub-Saharan Africa’s performance is not exceptional, but broadly in line with that of other emerging and developing economies (see World Economic Outlook, April 2011). Fourth, a number of countries have experienced weak growth in recent years, far below the country group averages, notably Cameroon, Swaziland, and Eritrea. This is not necessarily due to the impact of the global financial crisis, although the crisis made the outcomes worse.

Figure 1.2.Sub-Saharan Africa: Trends in Output among Middle-Income Countries

Sources: IMF, World Economic Outlook; and IMF, African Department database.

As elsewhere, the rapid rebound from the crisis has been made possible by supportive macroeconomic policies and recovery in partner countries. The rest of this section considers the impact of monetary and exchange rates policies and the outcomes they have engendered. The next section considers fiscal policy more extensively.

With growth having recovered and commodity prices increasing, inflation has started to pick up in many countries. The median 12-month CPI inflation rate was at 5.6 percent in December 2010, about 2 percentage points higher than in September 2010, although this aggregate figure masks considerable variation across country groups (Figure 1.3). The inflation rate among MICs remains fairly flat, with the large output gap providing downward pressure on prices. Among LICs, the recent surge in commodity prices amid limited economic slack has contributed to raising the median inflation rate by 1½ percentage points since July 2010 to 5 percent in December 2010.

Figure 1.3.Changes in Inflation and Policy Rates

Sources: IMF, International Financial Statistics; and IMF, African Department database.

Despite the pickup in inflation, monetary policy remains accommodative in most countries. Since early 2009, policy rates in many countries have declined to their lowest level in many years and real money growth is now above the precrisis peak, although private credit growth is recovering more slowly due to concerns about credit risk (Figures 1.3, 1.4). With subdued inflationary pressures, real interest rates remained between 3 and 4 percent through mid-2010. Since then, however, inflation has started to inch upward; with falling nominal rates, the real rate has declined. Indeed, nominal policy rates have only increased in a handful of countries in recent months (including Kenya, Mozambique, and Nigeria).

Figure 1.4 Sub-Saharan Africa: Broad Money and Private Sector Credit Growth, December 2005–September 2010

Sources: IMF, International Financial Statistics; and IMF, African Department database.

One consequence of the looser monetary policy stance has been more depreciated exchange rates. At end-2010, the policy interest rate among countries with floating exchange rates was 4 percentage points lower than at the previous peak in early 2009. Exchange rates among the floaters in the region have accordingly not recovered much from the low levels they reached in early 2009, at the height of the global financial crisis. For the median country in this group, the exchange rate was 15 percent more depreciated (in nominal effective terms) early this year compared to early 2009 (Figure 1.5). This contrasts with the much more limited depreciations of exchange rates in the countries with fixed exchange rates in the region. Among the oil exporters, the two countries that are not members of a currency union (Angola and Nigeria) also experienced sizeable exchange rate depreciations; and despite the recovery in oil prices, through end-March 2011, exchange rates remained more depreciated.

Figure 1.5.Nominal Effective Exchange Rate Change, January 2009 versus January 2011

Source: IMF, Statistics Department INS database.

Notable exceptions to these depreciation tendencies are South Africa and Seychelles. Reflecting strong portfolio inflows and high commodity prices, through January 2011 the South African rand had strengthened markedly by about 33 percent in nominal effective terms since January 2009. The currencies of other countries pegged to the rand (Lesotho, Namibia, Swaziland) and Botswana have also strengthened in nominal effective terms during this period although strong intraregional trade has muted the effects somewhat. The only other country in the region to have witnessed an exchange rate appreciation in nominal effective terms during this period is Seychelles. This is likely related to new-found confidence in the economy resulting from significant policy changes following the exchange rate crisis in late 2008.

The recovery in global economic activity has facilitated stronger export growth, with the latter expected to provide considerable support to economic growth among LICs in 2011. At the sub-Saharan aggregate level export volume growth is up by almost 3 percentage points compared to 2010 (median) although export performance differs across the various country categories. Exports are a major contributor to the robust growth projected for LICs, by far exceeding their average growth contribution during 2004–08 and suggests increasing market share given that global developments are comparable across the two periods (Table 1.2).

Table 1.2. Sub-Saharan Africa: Contributions to Real GDP Growth, 2004–11
2004–08 2009 2010 2011
(Percentage points)
Oil-exporting countries
Investment 3.4 2.6 -1.3 2.9
Public consumption 2.4 0.6 2.6 0.0
Private consumption 4.5 2.5 9.1 3.6
Exports 2.3 2.0 -0.7 1.0
Imports -3.8 -2.5 -3.5 -0.7
Middle-income countries
Investment 1.8 -1.8 2.2 0.8
Public consumption 0.9 1.3 1.8 1.0
Private consumption 3.6 -1.0 -3.1 3.1
Exports 1.6 -5.2 5.7 0.6
Imports -3.1 4.9 -2.9 -1.9
Low-income countries
Investment 2.5 2.9 1.6 1.3
Public consumption 0.8 0.5 1.3 0.9
Private consumption 5.3 2.2 4.8 3.0
Exports 1.8 1.3 0.1 3.3
Imports -4.1 -2.2 -2.3 -2.4
Sources: IMF, World Economic Outlook; and IMF, African Department database.

In MICs, private consumption is the main driver of growth. By contrast, in the oil-exporting countries, with fuel production already at high levels, the contribution of exports to growth will be limited although the income effect of the recent sharp increase in oil prices will be significant.

The sharp increase in commodity prices will have an asymmetric effect on current account balances in the region (Figure 1.6). Oil exporters are set to benefit from the high oil prices that are predicted to prevail in 2011. For the group as a whole, we expect their current account balance to improve from 2¼ percent of GDP in 2010 to 10¼ percent of GDP this year. For the oil importers, with oil prices at close to the $107 per barrel mark that IMF staff predict for this year, current account deficits are projected to widen by 1½ percentage points of GDP among MICs to 4¾ percent of GDP. Deficits should remain contained, however, among LICs, with the proceeds from higher non-oil commodity prices partly offsetting the adverse impact of higher oil import bills. But within this broad picture, there are a number of countries where current account deficits are set to widen substantially in 2011 by more than 5 percent of GDP relative to last year, including Cape Verde, Lesotho, Comoros, and São Tomé and Príncipe.

Figure 1.6.Sub-Saharan Africa: External Account Indicators

Sources: IMF, World Economic Outlook; and IMF, African Department database.

External reserves are likely to remain under pressure in a number of countries. With private external financing yet to recover in many countries (see Chapter 2) and official financing projected to remain broadly unchanged, reserve coverage is projected to remain broadly stable between 2010 and 2011 in the low-and middle-income countries and increase in the oil exporters in 2011. Within this overall picture developments in Nigeria and Ethiopia, the second and fifth largest economies in the region, are worth noting. In Nigeria, reserve coverage halved between 2008 and last year, reflecting large portfolio outflows possibly associated with the banking crisis and political uncertainty as well as the government’s defense of the currency against depreciation pressures. However, the reserves coverage is still at a comfortable level in terms of insuring against changes in market sentiment and is likely to be boosted by the recent sharp increase in oil prices. In Ethiopia, reserve coverage has remained anemic at just above 2 months of import cover for the last couple of years reflecting a surge in imports associated with its strong growth.

Has Fiscal Policy Started to Pay Heed to the Recovery?

As discussed in previous editions of this publication, in a change from the past, fiscal policy was able to be appropriately countercyclical in most countries when the global financial crisis hit the region in 2009. Fiscal policy remained on a supportive footing in 2010 in many countries. But with output growth in 2011 likely to recover to precrisis rates in many countries, an important question is whether fiscal policy will revert to a more neutral stance. This is all the more important because larger fiscal deficits of recent years have led to an increase in public indebtedness, especially among middle-income countries. Thus, in many countries, fiscal policy should be driven by longer-term investment and poverty reduction objectives consistent with debt sustainability considerations and less by the need to support aggregate demand. In the rest of this section, we look at trends in revenues and spending in turn.

The process through which fiscal policy became countercyclical in most countries in 2009 was by allowing automatic stabilizers to operate on the revenue side and staying at precrisis spending growth rates. To gauge the extent to which fiscal policy is countercyclical, it is necessary to look closely at revenue trajectories. And because the evolution of tax revenues in the region tends to be affected much more by commodity prices and the business cycle in some countries relative to others, we divided the countries into three groups: (1) natural resource-intensive exporters, comprising seven oil exporters plus Botswana, Zambia, Sierra Leone, and Guinea—all countries where natural resource exports contribute more than 30 percent of exports; 2 (2) middle-income diversified exporters, seven countries comprising South Africa and the other middle-income countries in the region; and (3) low-income diversified exporters, 26 countries.

By and large, the outlook for revenue-to-GDP ratios is improving but looks unlikely to recover to precrisis levels for the middle-income countries (Figure 1.7):

  • In the low-income diversified exporters, revenues were affected modestly and are set to recover close to the precrisis trend path. Both tax and nontax revenues are expected to contribute to this improvement. The key challenge in many of these countries is that the level of revenues, while on an improving trend, remains low. In the future, tax collection needs to increase over time to finance pressing social and physical infrastructure needs against the backdrop of a possible decline in official development assistance over the medium term. 3

  • In most of the middle-income diversified exporters, revenues have proved strongly procyclical. And with the exception of South Africa, they are not expected to recover to precrisis levels in the near term. 4

  • As might be expected, for the natural resource-intensive exporters, the behavior of commodity prices determines the level of revenues. In these countries, the average revenue-to-GDP ratio fell by close to 6 percentage points in 2009 as commodity prices fell. 5 In 2011 and 2012, on the basis of the current outlook for commodity prices, which are expected to remain elevated, the revenue-to-GDP ratio in these countries is projected to recover to around 26 percent of GDP, comparable to the 2004—08 average.

Figure 1.7.Sub-Saharan Africa: Total Revenue Excluding Grants, 2000–12

Sources: IMF, World Economic Outlook; and IMF, African Department database.

On the spending side, there has been more stability in real expenditure growth in most cases:

  • In LICs, spending growth before and after the crisis has been remarkably stable at about 6 percent in real terms (Figure 1.8). Notable exceptions where spending growth is expected to be negative in real terms in 2011 Figure 1.9) are Burundi, Central African Republic, Liberia (reflecting implementation capacity difficulties) and Gambia, Madagascar, and Malawi (reflecting declining tax revenues). 6

  • In MICs, spending increased as economies slipped into recession in 2009. In 2011, cuts in real spending are expected in three of the eight countries given the weak revenue outlook discussed above. The largest economies in this grouping (Mauritius and South Africa) are expected to increase real expenditures considerably in 2011.

  • Finally, in the resource-intensive exporters, spending has been characterized by considerable procyclicality in recent years. For 2011, authorities’ plans are quite varied, with some projecting large expenditure increases and others calling for only modest growth in spending or even cuts. Time will tell if this restraint prevails when coffers are set to overflow from the recent sharp rise in commodity prices.

Figure 1.8.Sub-Saharan Africa: Real Government Expenditure Growth, 2004–11

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Figure 1.9.Real Government Expenditure Growth, 2011

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Reflecting these trends, fiscal balances in resource-intensive exporters and low-income diversified exporters are expected to improve in 2011 and 2012 (Figure 1.10). In the low-income diversified exporters, for the most part fiscal deficits are set to revert to precrisis levels, aided by continuation of the revenue trend, although rising food and fuel prices may affect this outcome.

Figure 1.10.Sub-Saharan Africa: Overall Balance Excluding Grants, 2000–12

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Assuming that spending restraint is exercised this time around, deficits in the resource-intensive exporters should also improve. Deficits are, however, set to remain elevated in the middle-income diversified exporters (compared to the broad balance prior to the crisis).

The accommodative fiscal policy stance over the past few years has led to rising debt ratios among a number of countries (Figure 1.11). The size of the bubbles shows the net present value of public debt as of 2010. As might be expected, the crisis has led to wider fiscal deficits and increased indebtedness. But in most cases the increases in indebtedness have been modest. Coupled with initial levels of debt that were manageable, the additional debt burdens should not be problematic—providing, of course, they do not continue to increase much more. But in the case of a few countries, the increase in indebtedness since 2008 has been fairly pronounced, including in Cape Verde, Ghana, Mauritius, Senegal, and South Africa.

Figure 1.11.Sub-Saharan Africa: Change in Fiscal Balance and Net Present Value of Public Debt

Sources: IMF, World Economic Outlook; and IMF staff calculations.

For Botswana, Gabon, Mauritius, Namibia, Nigeria, South Africa, and Swaziland, data are nominal public debt.

In all, then, the recovery in revenues has helped fiscal policy remain countercyclical in LICs in the upswing. Among MICs, deficits are set to remain elevated and the corresponding rise in the public debt ratio is constraining fiscal policy. Among the oil exporters, managing the likely oil bonanza this year will be a formidable challenge, especially against the backdrop of very strong real expenditure growth during the previous period of sharp oil price hikes.

What Are the Implications of the Resurgence in Food and Fuel Prices?

For many sub-Saharan African countries, the 2008 food and fuel price spike resulted in broad social and economic dislocation. It is thus with some foreboding that many policymakers in the region, particularly in net food-and oil-importing countries, are watching food prices rise above their 2008 levels (Figure 1.12). More recently, fuel prices have also risen sharply (although still below their 2008 peak as of late March). Such rapid movements in key prices create sudden big winners and losers in sub-Saharan Africa and complicate macroeconomic management greatly. This section considers what the impact so far of the most recent surge in food prices has been and how countries have begun to respond. We also consider the prospective impact of oil prices staying at their current elevated levels.

Figure 1.12.World Commodity Price Index

Source: IMF, World Economic Outlook.

Our thoughts on the appropriate policy response to this double shock are considered in the next section.

In 2008 the surge in global food and fuel prices was matched by a fairly prompt and sharp increase in domestic food prices virtually across the board in sub-Saharan Africa, but so far in 2011 the pattern of food price increases in the region has been more varied (Figure 1.13). There are a few reasons for the more diverse response this time:

  • In a number of countries (Burkina Faso, Malawi, Nigeria, South Africa, Zambia), the 2010 harvest was strong, limiting price increases (Figure 1.14). And even where local prices have increased reflecting international prices, substitution to other less internationally traded crops has been possible because these too have been in plentiful supply. 7

  • The increase in international food prices has also been less uniform than in 2008. For example, in the 12 months to February 2011, maize and wheat prices increased by about 80 percent in U.S. dollars but the price of rice, another important staple in the region, actually declined by 8 percent.

  • Domestic food prices have nonetheless increased sharply in a number of countries, such as Ethiopia, Guinea, Kenya, Madagascar, and Sierra Leone. Poor harvests due to adverse weather conditions played a role in Benin (floods) and Kenya (drought). Some countries are net staple food importers (Ethiopia, Guinea, Sierra Leone, Madagascar) and so quite quickly felt the impact of higher international prices. Finally, several idiosyncratic factors also played a role, including political crisis (Cote d’Ivoire and Madagascar), loose monetary policy and currency depreciation (Ethiopia), foreign exchange shortages (Guinea).

Figure 1.13.Sub-Saharan Africa: Food Inflation Rates

Sources: IMF, World Economic Outlook, and IMF, African Department database.

Figure 1.14.Sub-Saharan Africa: Food Inflation

Source: IMF, African Department database.

To cushion the adverse inflationary and welfare effects some countries have introduced price controls and subsidies. Ethiopia has introduced the most widespread price controls covering many food and non-food items (e.g. sugar, milk powder, palm oil, rice, meat, beer, steel sheets, soaps, books, and pens). Mozambique and Senegal have also introduced price controls covering several staples such as bread, sugar, maize, and rice. Cameroon recently created an agency to regulate the market of basic goods through imports and the build-up of food stocks. At the same time, some countries continue to make heavy use of administered prices (Mauritius) and/or introduced food and fuel price subsidies in recent months (Guinea, Madagascar, Mozambique).

More pronounced food price increases are possible in the region. Work done by IMF staff suggests that the average lag between international food price increases and domestic prices is about 6 months in sub-Saharan African countries. So the sharp increases in international food prices that occurred late in 2010 may well be felt more earnestly in most countries around the middle of this year. This said, the degree of pass-through from international to domestic food prices tends to vary quite a bit across the region (Figure 1.15). On average, the cumulative impact of a 10 percent increase in international food prices on domestic food prices is 3 percent. But the effect ranges from a full 10 percent pass-through in Kenya and Guinea-Bissau to very limited or even no pass-through in Nigeria and Ghana. 8

Figure 1.15.Relationship between Domestic and International Food Prices

Source: IMF, African Department database.

A more potent threat to economic activity in the oil-importing countries of the region is the recent surge in fuel prices. The projections in this report assume an oil price of US$107 per barrel in 2011 compared to the US$80 per barrel that prevailed in 2010. 9 The impact of this 34 percent increase in oil prices is likely to be substantial in most of the oil-importing countries of the region but is likely to vary considerably from country to country. By and large, the higher oil prices will mean high import bills for all countries. In those countries that delay the pass-through of international oil prices to local prices, the fiscal accounts are also likely to be affected adversely. And, again, the degree of pass-through is likely to influence the level of inflation. Should prices rise sharply higher than assumed in the baseline, there almost certainly will also be an adverse effect on growth. In particular, simulations suggest that if oil prices were to increase to an average of US$150 per barrel in 2011, growth in oil importing sub-Saharan African countries would decline by 0.5–0.7 percent (see Box 1.3).

Given that some net food- and fuel-importing countries will also benefit from higher prices for other commodities, it is important to look at the net impact of recent commodity price movements. In terms of the impact on external accounts, work done for the World Economic Outlook suggests that commodity price movements observed through December 2010 are likely to affect adversely the trade accounts of a number of countries in the region fairly significantly. In Comoros, Lesotho, São Tomé and Príncipe, Seychelles, and Zimbabwe, the trade balance is projected to deteriorate by more than 3 percent of GDP in 2011 (Figure 1.16).

(Percent of GDP)

Figure 1.16.Trade Balance Effects of Commodity Price Changes in 2011

Source: IMF, Research Department database.

But there will also be big winners. In this camp are the oil and mineral resource exporters. The trade balance of six of the seven oil-exporting countries (Angola, Chad, Equatorial Guinea, Gabon, Nigeria, Republic of Congo) in the region are projected to improve by more than 10 percentage points of GDP in 2011 because of the oil price increases since last October. Zambia (on account of higher copper prices) is set for an improvement of more than 6 percent of GDP.

Policy Priorities Going Forward

The economic outlook for the region is particularly bipolar:

  • Economic growth in many countries, particularly the low-income ones, has reverted to the historically high precrisis trends; but sizeable output gaps are likely to prevail in most of the region’s middleincome countries.

  • Recent commodity price increases will be a boon for oil and metals exporters; but for many other countries in the region, elevated oil prices will generate significant external financing needs.

  • The recent sharp surge in food prices has been mirrored in higher domestic prices in some countries in the region but not others.

  • Within countries, high food prices should benefit farmers (the majority in many countries) but will very badly affect urban and landless rural poor.

The economic outlook for the region may also be colored by downside risks that may yet emanate from advanced and emerging-market trading partners. Although prospects for the global economy have improved since the October 2010 World Economic Outlook, the recovery remains uneven. In particular, the required mediumterm fiscal adjustments have yet to begin in earnest in many advanced economies; this could cause volatility in interest rates and risk premiums. Among emerging-market economies, overheating and rapid credit growth risks could result in higher interest rates, contributing to a moderation in growth rates. And should there be a sharp decline in commodity prices, this would rebalance the winners and losers from the current commodity price hike.

Against this backdrop, the following broad principles will be important in the conduct of fiscal and monetary policies in the coming months.

Fiscal Policy

Fiscal policy should continue to move away from the supportive stance of the last few years to a more neutral stance as soon as feasible. When the global financial crisis threatened to derail economic activity in sub-Saharan Africa, it was appropriate that countries moved quickly to counter any slowdown through expansionary monetary and fiscal policies. But since early 2010, it has been clear that growth would recover fairly quickly in most countries in the region. Thus budgets formulated beyond 2010 should ideally be focusing on more medium-term goals while taking into account debt stability considerations. Progress in this direction has generally been reasonable. Budget deficits between 2010 and 2011 are projected to narrow in 19 of the 30 non-oil countries where output growth is projected to be higher than or within 1½ percentage points of its 2004–08 average. In the other 11 countries, deficits are set to remain unchanged or to widen in 2011 (by more than 2 percentage points of GDP in Lesotho, Mali, and Mozambique). In all three cases the increased deficits are mainly financing public investment in infrastructure and/or food subsidies to protect the poor from food price hikes.

Although there is a broad need for fiscal policy to rebuild buffers, there are a number of specific factors to consider. First, in countries where the food price increase is likely to cause significant economic dislocation, fiscal resources should be used to ameliorate the impact on vulnerable groups. Second, in a number of middle-income countries, the crisis has resulted in a durable reduction in tax revenues. In these cases, more rapid fiscal consolidation is needed. Third, among oil and metal exporters likely to benefit from higher-than-expected commodity prices, it will be important to keep spending restrained and guided by medium-term fiscal frameworks that use conservative resource price assumptions. We consider each case in turn.

Where the price of food is set to increase sharply, targeted and time bound policy interventions should be considered, with the amount and duration dependent on the health of public finances. The first best policy response in these circumstances is to allow the pass-through of international prices to domestic prices and to provide targeted support to the most vulnerable groups. This support can be in the form of subsidies, income support, or direct provision of food items. But of course in many countries in the region without such mechanisms in place, identifying the neediest can be quite challenging. Where such identification is not possible, other, still targeted relief could be considered. This might include a temporary lowering of import taxes on essential staple foods. Alternatively, prices of food items primarily consumed by the poorest households could be subsidized. Where food shortages are localized, limiting subsidies and/or income support schemes to those areas is another possibility. All such interventions will of course entail some cost to the budget. One way to mitigate the cost is to ensure that intervention is time bound. Where financing constraints are binding, the interventions would have to be financed through savings elsewhere in the budget.

One intervention that should be avoided is the imposition of food price controls. By and large, price controls tend to exacerbate scarcity. Even where they can be effectively put in place this approach amounts to ad hoc taxation of those that produce, distribute, and retail food items.

Fuel price subsidies should also be avoided. Country studies show that fuel subsidies are almost invariably badly targeted. As a result, they tend to be highly regressive (i.e., overwhelmingly captured by the well-off). Also, they are very costly fiscally, tend to encourage excessive consumption, and are difficult to phase out because of vested interests. However, it may be reasonable to cross-subsidize kerosene, which is largely consumed by the poor, by other fuel products such as gasoline. Too large a subsidy to kerosene, however, may lead to unintended consequences, such as the adulteration of diesel.

Except for South Africa, the other members of the Southern African Customs Union (SACU) are set to experience a sharp decline in revenues and need to effect large fiscal consolidations fairly promptly. Between 2008 and 2010, government revenues (excluding grants) in these countries (Botswana, Lesotho, Namibia, Swaziland) declined by 7 percentage points of GDP (median estimate), and are projected to recover only gradually over the medium term. Considerable fiscal adjustment will likely be necessary in these countries to address this large revenue shortfall if debt is to be stabilized at sustainable levels in relation to GDP. Given the authorities’ debt targets and financing difficulties, particularly in Lesotho and Swaziland, this adjustment would have to take place despite the excess production capacity that is prevalent.

In aggregate, the fiscal accounts of the oil-exporting countries are expected to swing back into surplus in 2011. This reflects higher oil prices and government intentions as of early 2011 not to increase spending in line with higher oil revenues. In these countries, it is important that spending remains guided by medium-term fiscal frameworks that take into account implementation and absorption capacity. Developments in Angola during the last few years are a reminder of macroeconomic imbalances that can emerge when government spending is scaled up on the assumption that high oil prices will endure.

Monetary Policy

Despite the recent uptick in inflation, the failure of monetary authorities in most countries to demonstrate a tightening bias is cause for some concern. With relatively few exceptions, policy rates in the region were reduced as the global recession threatened and have remained at relatively low levels (Figure 1.17). Because inflation declined sharply as activity slowed domestically and, more importantly, commodity prices crashed in 2009, low policy rates were not problematic well into 2010. But with inflation picking up, real rates in many countries are now either very low or even negative. With growth back to precrisis levels in most cases, this is likely to do little to restrain inflation in the coming months. The measures required in the coming months are as follows:

  • In those countries where growth has reverted to precrisis levels, the monetary policy stance should commensurately revert to a more neutral stance or even be tightened to avert incipient inflationary pressures.

  • In most of the region’s middle-income countries, where there is still significant excess capacity and inflationary pressures are subdued, there is more scope for a supportive monetary policy stance. This is especially true of South Africa and the other SACU countries with appreciating nominal exchange rates providing a contractionary impulse.

  • Where food and fuel price increases are pronounced, monetary policy should accommodate the first round response and lean against any second round effects. By and large, work done by IMF staff suggests that food and fuel price shocks do not tend to be persistent in the region. In particular, in countries with floating exchange rates, a 1 percent shock to food price inflation has a significant positive impact on the overall inflation rate of about 0.1 percent within one month but then dies out (Figure 1.18). The impact of a 1 percent shock to fuel price inflation on overall inflation is more delayed, peaking between 4 and 6 months at 0.1 percent. 10 Other things being equal, this suggests that central banks should generally only react to acceleration in the inflation rate that threatens to last beyond 3–4 months.

  • In countries with floating exchange rates, allowing greater exchange rate flexibility would also reduce the impact of the food and fuel price shock on the external accounts.

Figure 1.17.Sub-Saharan Africa: Real Policy Interest Rate

Sources: IMF, International Financial Statistics; and IMF, African Department database.

Figure 1.18.Sub-Saharan Africa: Relationship between CPI Inflation and Food and Fuel Inflation Rates, 2000–10

Sources: IMF, African Department database; and IMF staff estimates.

Countries with floating exchange rate regimes.

One final consideration for monetary policy in the coming months is the limited likelihood that food and fuel prices will collapse as they did in 2009 following their peaks in 2008. The price reversal had an important role in ensuring that inflation reverted to precrisis levels quickly. This time, with output gaps closed in many cases and another global slump, it is hoped, not in the offing, the recent food and fuel price increase could have a more enduring effect unless monetary policy reacts promptly.

Box 1.1.Why Has South Africa’s Recovery from the Recession Been Subdued?

South Africa’s recovery from the global financial crisis is lagging behind that of other emerging markets brethren (Figure 1). Whereas output gaps in most of these other cases have closed, there remains a nontrivial gap of some 3 percent in South Africa this year and it is not expected to close until 2013 at the earliest. South Africa accounts for 30 percent of sub-Saharan Africa’s GDP so developments there have a large bearing on regional outcomes. This box considers the factors behind its slow recovery.

Figure 1.Real GDP in Selected Emerging Markets (EMs)

Sources: IMF, World Economic Outlook; and IMF staff calculations.

The selected EMs include the emerging economies of the G-20 group apart from China and Saudi Arabia.

Constraints on consumption

Accounting for slightly above 60 percent of GDP, private consumption plays a central role in economic fluctuations. And indeed private consumption has been an important driver of both the recession (2008—09) and subsequent recovery (2010). In the first three quarters of 2010, private consumption expanded by some 5 percent reflecting relatively high real wage increases and higher government transfers. But going forward, although private consumption is expected to remain strong, expansion at the heady levels of the mid-2000s is highly unlikely for the following reasons:

  • High household indebtedness . Household debt as a share of disposable income increased substantially in the precrisis period, mainly reflecting the rapid expansion of mortgage lending (Figure 2). Currently, at 79 percent of disposable income, household debt remains high from a historical perspective, suggesting that banks are likely to remain cautious in granting credit and mortgages to households. Additionally, as interest rates rise over the medium term, the associated increase in the debt-service cost will pose an additional constraint to private consumption.

  • Job loss and high unemployment . The massive job shedding that occurred in 2008—09 (equivalent to 8 percent of total employment at end-2008) during the recession is also going to constrain future aggregate consumption growth.

  • Fragile consumer confidence . The composite index of consumer confidence showed a noticeable improvement in 2010:Q1. However, since then it has deteriorated and remained at a lower level compared with the level that prevailed in the precrisis period.

Figure 2.South Africa: Household Debt and the Growth of Credit to the Private Sector

Source: South African Reserve Bank (SARB).

Sluggish recovery in private investment

The global financial crisis triggered a noticeable decline in the level of investment, mainly from the private sector. Since end-2008, private investment has declined by about 2 percentage points of GDP, partly offset by the increase in public investment. And despite the recovery, the contribution of private investment to real GDP growth in 2010 was negligible (Figure 3).

Figure 3.South Africa: The Contribution of Investment to Real GDP growth

Sources: South African Reserve Bank (SARB); and IMF staff calculations.

The lack of recovery in private investment may reflect several factors, including firms’ anticipation that weak demand conditions will prevail. This perception is supported by moderate business confidence, which, although improved in recent months, remains well below that observed in the precrisis period. The latter translates to low capacity use in the manufacturing sector and to firms’ decision to run down their existing stocks instead of building new inventories (Figure 4).

Figure 4.South Africa: Change in Inventory and Capacity Utilization Rate

Source: South African Reserve Bank (SARB).

Weak external demand, exacerbated by deterioration of external competitiveness

In part, the weak GDP growth reflects weak external demand for South Africa’s goods and services. Although South Africa’s terms of trade have improved by 18 percent since end-2008, exports remained below their precrisis level. This reflects various factors, including

  • Weak demand from Europe . Although South Africa’s exports fell sharply at the outset of the financial crisis, external demand has picked up recently, and exports to some destinations returned to their precrisis level. To Europe, however, exports remain weak, reflecting the weak recovery in the euro area and the sharp appreciation of the rand against the euro (around 30 percent since end-2008). The latter shows in the decline of Europe’s share to 26 percent in total exports of goods from 34 percent on the eve of the crisis (Figure 5). All in all, the fact that Europe remains South Africa’s second-largest trading partner combine d with Europe’s modest growth trajectory in the foreseeable future limits the prospects for stronger external demand for South African products.

  • Loss of competitiveness . South Africa has received substantial amounts of portfolio inflows. With measured intervention by the South Africa Reserve Bank (SARB), these inflows have put upward pressures on the real effective exchange rate (REER), which has appreciated since early-2008 by about 25 percent—significantly more than other emerging markets (Figure 6).

Figure 5.South Africa: Change in the Share of Total Exports of Goods

Source: South African Reserve Bank (SARB).

Figure 6.Real Effective Exchange Rate in South Africa and Selected EMs

Sources: IMF, Statistics Department INS database; and IMF staff calculations.

This box was prepared by Nir Klein.

Box 1.2.How Unique Is Sub-Saharan Africa’s Growth Surge of the Last Decade?

The pronounced pickup in sub-Saharan Africa’s economic growth in recent years is garnering a lot of attentio . In three recent studies, different approaches to identify sets of top performers all reached the same conclusion—significant parts of the region appear to be making a decisive break with the past:

  • In the fall of 2008, this publication identified a set of 17 “Great sub-Saharan Africa Takeoff’ economies which had achieved average per capita growth above 2¼ percent since the mid-1990s. The group was diverse, but shared the common features of macro stability, good institutions, and pro-growth structural reforms.

  • In his book, Emerging Africa (2010), Steven Radelet identified 17 non-oil-exporting emerging economies based not only on growth, but other important economic, political, and social dimensions, including the rise of more democratic and accountable governments and implementation of better economic policies.

  • More recently, the Economist (January 6, 2011) reported that since 2001 sub-Saharan Africa had been home to six of the world’s top ten fastest growing economies, which it dubbed, “Sub-Saharan Africa’s lion kings.” The gains were attributable not only to global demand for commodities, but also to structural reforms and better economic management.

But the 2000s were a period of high growth for many developing regions, raising the question of whether there was anything unique about sub-Saharan Africa’s growth acceleration . This box seeks to provide an answer.

We start by confirming the occurrence of a structural upbreak in growth encompassing 21 of the region’s 44 countries . Figure 1 shows average per capita growth during 1980—94 and 1995—2010 for the groups of countries identified in the three studies, and the remaining 23 sub-Saharan African countries that didn’t make the grade. All groups of top performers achieved significantly higher growth in the second period than in the first. Moreover, while none of them differed significantly from the other 23 sub-Saharan African countries in the first period, all of them did in the second. 1

Figure 1.Growth Rates of Sub-Saharan Africa’sTop Performers in 1980–94 and 1995–2010

Sources: IMF, World Economic Outlook; IMF, African Department database.

How do sub-Saharan Africa’s recent strong performers compare with other regions? Figure 2 shows a similar pattern throughout the developing world of more rapid growth since the mid 1990s, indicating that sub-Saharan Africa’s (SSA’s) experience was not unique. 2 On average, SSA’s top performers grew significantly faster than comparators in either Latin America and the Caribbean (LAC) or Middle East and North Africa (MNA) during 1995—2010, but only marginally faster than Developing Asia (Dev. Asia) and slower than the Commonwealth of Independent States (CIS). In terms of the strength of the acceleration (that is, the difference in growth between the two periods) sub-Saharan Africa’s top performers did significantly better than LAC and Developing Asia and marginally better than MNA. 3

Figure 2.Growth Rates of Developing Regions, 1980–94 and 1995–2010

Sources: IMF, World Economic Outlook; IMF, African Department database.

What is the bottom line? First, the acceleration in growth is not particularly unique to sub-Saharan Africa. Other regions also experienced a marked pickup. Second, sub-Saharan Africa’s growth all-stars performed as well as, if not better than, many comparators elsewhere. Third, it is especially encouraging that many of SSA’s strongest performers have sustained their superior performances for a decade or more through good times and bad and that increasingly they exhibit characteristics associated not only with faster growth, but more sustained growth (Berg, Ostry, and Zettelmeyer, 2008). For now, at least, the lions continue to roar.

Of course, Figure 2 compares the top 40 percent of SSA performers with the entire census of the other regions . 4 What would be the outcome of a fairer competition against the top 40 percent elsewhere as well? As Figure 3 shows, SSA continued to do better than the top 40 percent of Middle East and North Africa on average. However, growth in 1995–2010 lagged significantly behind CIS and Developing Asia, although the accelerations between the two periods were similar in magnitude (see Table 1 below for significance tests on the various differences shown in Figures 13).

Figure 3.Growth Rates Top 40 Percent of Developing Regions, 1980–94 and 1995–2010

Sources: IMF, World EconomicOutlook; IMF, AfricanDepartment database.

Table 1. Significance Tests of Mean Difference
All Top 40 Percent
LAC MNA CIS Dev. Asia Other SSA LAC MNA CIS Dev. Asia
1980–94
IMF Great Takeoff *** ***
Radelet, Emerging Africa ** ***
Lion Kings ** *** ** ***
1995–2010
IMF Great Takeoff *** ** ***
Radelet, Emerging Africa *** *** ** *** *** ***
Lion Kings *** *** *** *** * *** *
Change from 1980–94 to 1995–2010
IMF Great Takeoff *** *** **
Radelet, Emerging Africa *** ** *
Lion Kings *** ** *** ** *** **
* >> 10% significance >> High-growth SSA country is better
Legend: ** >> 5% significance >> High-growth SSA country is worse
*** >> 1% significance
Sources: IMF, World Economic Outlook; and IMF staff calculations.
This box was prepared by Robert Keyfitz. 1 All differences were significant at the one percent level. 2 See http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/weoselagr.aspx for country composition of the various aggregates. The comparator regions comprise mostly low- and middle-income developing countries. For instance, Developing Asia excludes Japan, the Republic of Korea, and Singapore, though a few wealthy, non-OECD countries are included such as Bahrain, the United Arab Emirates, and Brunei Darussalam (in MNA and Developing Asia, respectively). 3 Insufficient data exist for CIS countries in the earlier period. 4 The SSA Great Takeoff aggregate includes 17 of the AFR REO’s 44 countries, or 39 percent.

Box 1.3.An Adverse Oil Shock Scenario

In light of recent developments in the Middle East and North Africa and the impact that this might have on oil markets IMF staff has done a simulation exercise on the likely implications of much higher oil prices in 2011. In particular, we assumed that oil prices rose to US$200/b in the second quarter of 2011 falling back to US$125/b in the fourth quarter, for an average price of US$150/b this year. This compares with our estimate of US$107/b for 2011 in the baseline (and US$108/b in 2012).

This shock is expected to have a significant adverse impact on the oil importers in sub-Saharan Africa. Growth is projected to be lower by 0.7 percent and 0.5 percent in the low and middle-income countries, respectively (median estimates). The adverse impact of oil price increases on fiscal accounts is generally a result of limited pass-through of higher international prices to local prices.

Among the oil exporters, the simulation points to a negligible impact on output growth and inflation. With production already at full capacity, the volume of exports and thus growth is unlikely to be affected much. But current account balances will still improve sharply—to the tune of 6 percent of GDP in 2011. The fiscal accounts will also benefit greatly, with a median improvement in the fiscal balance for oil exporters of 4½ percent of GDP.

Table 1. Sub-Saharan Africa: Adverse Effect on Macroeconomic Aggregates from Oil Shock Scenario, 2011–12 Change Relative to Baseline
Oil Exporters Oil Importers
Middle-Income Low-Income
2011 2012 2011 2012 2011 2012
(median, percent)
Real GDP growth 0.0 0.0 -0.5 -0.3 -0.7 -0.2
Inflation, end of period 0.0 0.0 2.2 1.4 1.8 0.7
(median, percent of GDP)
Fiscal balance, excluding grants 4.4 0.4 -0.7 -0.9 -0.7 -0.2
Current account balance 5.8 0.3 -1.9 0.1 -2.5 -0.1
Sources: IMF, World Economic Outlook; and IMF, African Department database.
This box was prepared by Alun Thomas.

This chapter was prepared by Abebe Aemro Selassie and Alun Thomas, with inputs from Rodrigo Garcia-Verdu, Robert Keyfitz, Nir Klein, and Maitland MacFarlan. Research assistance was provided by Duval Guimaraes and Cleary Haines, and administrative assistance by Natasha Minges.

Namibia is not considered in this group because of the sharp fall in its revenues in 2010 associated with the decline in the Southern African Customs Union (SACU) transfers.

The paper entitled “Revenue Mobilization in Developing Countries”, IMF, 2011c, emphasizes the need to strengthen revenue administration, eliminate exemptions, implement a broad-based VAT and levy excises on more products.

In most cases, this has to do with the permanent reduction in SACU imports in relation to GDP from the 2008 peak and the large repayment over the next two years of revenue advances through FY10.

On average, a 10 percent increase (decrease) in the resource price index tends to raise (lower) tax revenues by a % percentage point of GDP, with the index defined as a country weighted average of the IMF oil and metal commodity indexes.

Nominal spending is deflated by the GDP deflator except for the resource-intensive countries whose spending is deflated by the CPI.

Food Price Watch, World Bank, February 2011.

These results are based on regressions of the domestic food inflation rate on the IMF global food inflation rate expressed in local currency over 2000—10.

The oil prices used by the IMF represent an average of UK Brent, Dubai and West Texas Intermediate blends.

Among countries with fixed exchange rates, the effects are insignificantly different from zero at all lags; this is also true of food prices from non-sub-Sahara Africa LICs. The results are based on a regression of monthly observations of the inflation rate on food and fuel inflation, and the change in the exchange rate between 2000 and 2010.