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African Economic Outlook: Africa’s Economic Expansion Faces Downside Risks

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
May 2008
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Growth in sub-Saharan Africa (SSA) is expected to average about 6½; percent again this year, driven by oil exporters (see table). Although the region’s economic expansion is expected to continue, risks are tilted to the downside. The external environment has become less favorable—with growth slowing in advanced economies, higher oil prices, and unsettled global financial markets—which could hurt growth in SSA.

The IMF’s Sub-Saharan Africa Regional Economic Outlook—Spring 2008 (REO) says that, in light of these risks, there is about a one-in-five chance that the region’s growth will drop to less than 5 percent in 2008.

Growth prospects

Growth in SSA’s oil exporters is expected to accelerate to about 10 percent this year, underpinned by production at oil facilities coming onstream in Nigeria and Angola and a new liquefied natural gas plant in Equatorial Guinea. Higher income and wealth are expected to be the main drivers of domestic demand in these countries.

In countries that are not oil exporters, the picture is mixed, with average growth a bit lower than last year. Growth in the middle-income countries is expected to register only about 4 percent this year and, in low-income countries, about 6 percent. In the fragile countries, buoyed by a continued recovery in investment, growth should pick up to 5 percent in 2008, up from 3¼ percent in 2007.

Inflation in the region should increase slightly to about 8½; percent if macroeconomic policies hold firm. Inflationary pressures arise mainly from oil prices, which are expected to increase by about 35 percent this year, and higher food prices.

Looming risks

A pronounced global slowdown would weaken the prices of non-oil commodities and represent a large shock for SSA. Higher oil prices would reduce domestic demand, boost headline inflation, and worsen the current account and net foreign asset positions of net oil importers. Finally, less favorable financial conditions would reduce external financing and hurt growth.

A mixed growth picture

The expansion is expected to continue in sub-Saharan Africa, but could stall if risks materialize.

(GDP growth, percent)

20052006Est.

2007
Proj.

2008
Oil-exporting countries7.77.38.89.9
Middle-income countries4.95.25.14.0
Low-income countries7.06.66.96.1
Fragile countries3.72.63.35.0
Sub-Saharan Africa6.26.16.66.5
Sources: IMF, African Department database, March 31, 2008; and World Economic Outlook database, March 31, 2008.

SSA also faces significant internal risks. Conflicts still ravage the Darfur region of Sudan and the Horn of Africa. Moreover, conditions remain fragile in the Democratic Republic of Congo, and postelection violence in Kenya has undermined investor confidence and tourism and could delay donor support and stall structural reforms needed to sustain recent growth. The conflicts in Darfur and Kenya are also affecting neighboring countries.

But the IMF says that SSA is less vulnerable to a worsening of the global environment than it was in the 1990s. Smaller current account and fiscal deficits, lower inflation and debt, higher foreign reserves, and stronger policy frameworks have all helped make the region more resilient.

How countries should respond if the downside risks are realized depends on, among other things, their initial conditions; inflation and inflation expectations; fiscal position; and vulnerability, including their levels of foreign debt and reserves. Although policy responses can help moderate the effects of external shocks, not all countries will have room to ease monetary and fiscal policies if the downturn is pronounced.

Several countries, especially the oil exporters, must maintain macroeconomic stability while dealing with still-rising foreign exchange flows. They should identify ways to ensure that their economies can effectively absorb higher spending and make spending and saving decisions in a medium-term framework that takes long-term sustainability into account.

Medium-term challenges

The region’s most pressing challenge will be to accelerate growth and achieve the Millennium Development Goals. But, although more SSA countries are enjoying robust growth, only a few seem well positioned to halve poverty by 2015.

The spring 2008 report focuses on what SSA must do to spur investment. The region’s future economic performance will hinge on reforms that improve the investment climate, reduce the cost of doing business, and strengthen governance. A few countries have made encouraging progress on this front, with Kenya and Ghana leading the way on broad-based reforms. In southern Africa, Madagascar, Mauritius, and Mozambique have lifted regulatory obstacles.

Although recent reforms have helped improve governance in a few countries, more needs to be done. Among the region’s priorities are to strengthen tax systems, establish transparent and comprehensive budgeting procedures, promote accountability and transparency, and enhance budgetary control. High-quality infrastructure, especially a reliable power supply, will also be critical for accelerating growth and greasing the wheels of the economy. Policymakers need to handle regulation and pricing well to improve the supply and provide the right signal to markets.

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