CHAPTER I. Overview

International Monetary Fund. African Dept.
Published Date:
May 2005
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Real GDP growth in sub-Saharan Africa (SSA) increased in 2004 to an eight-year high of 5 percent, and average inflation has fallen to historical lows. Real GDP per capita increased by 2.7 percent. Output growth continues to be particularly strong in the oil-producing countries, but it has also been encouraging in many oil-importing countries. Nonetheless, growth remains below the level required for SSA countries to reach the Millennium Development Goal of halving income poverty by 2015 and is lower than in other emerging market and developing country regions.

The policy response of most oil-importing countries to higher oil prices in 2004 was appropriate. Strong increases in the prices of metals, diamonds, and food and an acceleration of import demand in advanced economies all helped mitigate the impact of higher oil prices on oil-importing countries. Many countries alleviated pressures on the external current account through their ongoing fiscal consolidation effort and—for those with flexible exchange rate regimes—a nominal depreciation of their currency. Most countries have also passed on oil price increases to consumers. Oil producers face several challenges: to smooth the short-run response of public spending to oil-related receipts, formulate overall policy within a medium-term expenditure framework, and strengthen public expenditure management.

Sub-Saharan Africa’s growth and inflation prospects in 2005 remain broadly unchanged. Risks to these prospects emanate from lingering conflicts in the region, vulnerability of many countries to droughts and other natural disasters, and uncertainties in foreign exchange and oil markets. The elimination of textile quotas in industrial countries in 2005 will also pose challenges for some countries. On the positive side, an increase in overall development assistance in the context of strong reform efforts could enhance the region’s prospects for higher growth and poverty reduction.

The sharp decline of world cotton prices over the past year has lowered some countries’ export earnings by as much as 3 percent of GDP. Given that the world prices are unlikely to rebound strongly in the near future, African countries should continue to pursue structural reforms to improve productivity in the cotton sector. In the period immediately ahead, donor support for the worst-affected countries will be critical to soften the impact, particularly for those that subsidize the cotton producers or cotton processors or both. In countries where prices are fully passed through to producers, falling producer prices may substantially lower farm income and increase poverty. In the medium term, the elimination of cotton subsidies in industrial countries would help boost world prices.

African countries are likely to incur losses as a result of the recent lifting of the remaining quota restrictions on world trade in textiles and clothing. While the balance of payments impact may be cushioned by the high import content of garment exports, the pressure on employment could be severe because garment production is labor intensive and often accounts for a large share of manufacturing jobs. The immediate impact needs to be addressed through a judicious mix of fiscal, monetary, and exchange rate policies. And structural reforms will be key to improving export competitiveness.

SSA’s long-run growth performance has been termed “the economic tragedy of the twentieth century.” Real per capita income is approximately the same as in the mid-1970s, notwithstanding the improvement in economic growth since the mid-1990s. Improvements in macroeconomic policies contributed strongly to the recovery of the fastest-growing economies of the 1990s, and the improvements were strongest for countries where IMF-supported programs were implemented boldly. More favorable terms of trade also aided the growth recovery. While total investment has not increased significantly for the fast-growing economies (excluding Equatorial Guinea), total factor productivity (TFP) growth has improved strongly for the first time since the 1960s.

Very large and sustained increases in growth rates are necessary if SSA is to have a realistic prospect of halving income poverty by the year 2015. A preliminary analysis suggests that growth accelerations are aided by good policies, strong trade growth, and political liberalization and are accompanied by increases in investment and TFP growth. A number of SSA countries succeeded in sustaining the acceleration for 10 years by relying on policy improvements that led to stronger trade and investment, lower debt burdens and higher aid, and more democratic institutions.

To boost growth further, SSA must implement additional macroeconomic, trade, and structural reforms. Addressing the constraint to growth from low levels of investment—particularly by improving the private investment climate—is a key priority: 16 of the 20 countries in the world with the most difficult business conditions are in SSA. There is also a role for well-targeted and efficient public investment that can induce private investment and productivity improvements. In addition to promoting domestic savings, higher aid inflows—consistent with absorptive capacity—and lower debt burdens are necessary to support higher and more efficient investment rates.

Africa’s regional trade arrangements (RTAs) have fallen short of expectations for promoting trade and investment. Specifically, the beneficial effects of African RTAs are constrained by the region’s relatively high trade barriers against the rest of the world, small market size, weak resource complementarity among RTA members, poor transport infrastructure, and inadequate efforts in trade facilitation. Trade within Africa remains low, and in terms of overall trade and foreign direct investment inflows, the region is falling further behind the rest of the world.

The available evidence suggests that reductions of Africa’s external trade barriers on a nondiscriminatory basis would promote trade with the rest of the world as well as within the region. Africa has a unique opportunity for such broad-based liberalization by committing itself to ambitious reforms in the current Doha Round of trade talks. At the same time, it must make greater efforts to reduce transport and border-crossing costs and to upgrade workers’ skills. African countries should also consider streamlining existing RTAs to eliminate conflicting commitments. To compensate for potential revenue losses from trade liberalization, they should continue to strengthen their capacity to mobilize domestic taxes.

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