CHAPTER II. Recent Developments and Short-Term Prospects
- International Monetary Fund. African Dept.
- Published Date:
- May 2005
Growth performance in Africa was strong in 2004, and inflation has reached a historical low. While output growth was particularly strong in the oil-producing countries, the region faced a number of sizable exogenous shocks with differing implications for individual countries. In particular, countries have been challenged by surges in oil prices and increases in other commodity prices, record low world cotton prices affecting Africa’s cotton exporters, and a locust plague in the Sahel region.
Overview of Developments in 2004
Real GDP growth in sub-Saharan Africa (SSA) increased during 2004 to an eight-year high of 5 percent (Table 2.1).1 While the region’s oil output continued to expand at a rapid pace, non-oil GDP growth also strengthened significantly. Growth has generally been encouraging across a broad range of countries that have different resource endowments and initial conditions and that face a variety of exogenous shocks. While a few important commodity prices (for example, cotton) fell in 2004,2 strong price increases for metals, diamonds, and food and an acceleration of import demand in advanced economies helped mitigate the impact of higher oil prices in many oil-importing countries. Excluding South Africa and Nigeria, average output increased by 6.4 percent. In IMF program countries, the average growth rates remained higher than the regional average, as they continued to benefit from their economic reform efforts.
|(Annual growth, in percent)|
|Of which: oil producers||4.1||8.0||6.9||6.8|
|Non-oil real GDP||4.1||3.3||4.4||4.6|
|Consumer prices (average)||12.5||13.7||9.1||9.2|
|Of which: oil producers||18.6||17.0||12.9||11.1|
|Per capita GDP||1.1||1.6||2.7||2.7|
|(Percent of GDP)|
|Exports of goods and services||32.8||33.8||35.5||36.9|
|Imports of goods and services||33.4||33.7||34.1||35.0|
|Gross domestic saving||15.6||17.9||20.1||20.3|
|Gross domestic investment||16.3||18.1||18.5||18.7|
|Fiscal balance (including grants)||–2.8||–2.3||–0.7||–0.6|
|Of which: grants||1.1||1.2||1.1||1.1|
|Current account (including grants)||–3.5||–2.4||–1.6||–1.1|
|Of which: oil producers||–8.3||–3.4||2.3||5.5|
|Terms of trade (percent change)||0.7||3.6||1.9||1.7|
|Memorandum items: Advanced country import growth (in percent)||2.6||3.6||8.5||6.5|
|Oil price (U.S. dollar per barrel)||25.0||28.9||37.8||46.5|
|Real GDP growth in other regions|
|Commonwealth of Independent States||5.4||7.9||8.2||6.5|
Average per capita real GDP rose by 2.7 percent in the region.
Despite the impact of higher oil prices, output growth was above 5 percent in more than one-third of the non-oil-producing countries in SSA. In Ethiopia and The Gambia, sharply higher growth rates reflected a rebound in agricultural production after a drought. In other non-oil- producing countries, including South Africa, growth has been broad-based, and the good performance of recent years was sustained in Ghana, Mozambique, Sierra Leone, Tanzania, and Uganda. In South Africa, real GDP growth rose to 3.7 percent in 2004, from 2.8 percent the previous year, supported by large reductions in interest rates since June 2003 and wealth effects arising from large increases in commodity and residential property prices.
Output growth continued to be particularly strong in the oil-producing countries.3 While production capacity increased only modestly in Nigeria following the exceptional expansion of 2003, when the Organization of Petroleum Exporting Countries (OPEC) lifted quota restrictions, the growth of oil output continued to be driven by the new fields coming onstream in Angola, Chad, the Republic of Congo, and Equatorial Guinea.
The easing of conflicts in a number of countries has allowed for a recovery in economic activity. Burundi saw a strong rebound in output in 2004 in part because of a bumper coffee crop, the Central African Republic achieved positive growth following the sharp contraction in the previous year, while, in the Democratic Republic of Congo, the strong growth of 2003 continued into 2004. In three countries in the region (Côte d’Ivoire, Seychelles, and Zimbabwe) output declined further in 2004, but at a slower pace.
Some countries in West Africa had to deal with their worst locust infestation in 15 years. Desert locusts were first detected in October 2003, but multiplied significantly during spring and summer 2004. The locust upsurge has significantly affected the livelihoods of populations dependent on subsistence farming and increased the need for food aid in the affected countries.4
Inflation in Africa has reached historical lows (Figure 2.1). Against a background of continued low inflation and interest rates in the advanced economies and generally prudent monetary policy in an increasing number of countries in the region, average inflation in SSA fell to 9.1 percent in 2004, the lowest recorded level in more than a quarter of a century. Average broad money growth also continued its steady decline. Twenty-eight countries in Africa achieved inflation rates in single digits during 2004, compared with just 10 countries a decade ago. Only Angola, Eritrea, and Zimbabwe recorded inflation above 20 percent. Moreover, the differential between the low inflation that the CFA franc countries have consistently achieved and the higher inflation observed in floating rate regimes continued to diminish. In South Africa, inflation has been relatively stable at about 4 percent, well within the South African Reserve Bank’s target range of 3–6 percent.
Figure 2.1.Inflation 1
Source: IMF, African Department database.
1 Shaded area indicates IMF staff projections.
There were significant commodity price movements during 2004, with divergent effects on the external balances and national incomes of individual countries (Figure 2.2). There was a 14 percent increase in the terms of trade of African oil-producing countries in 2004 as average petroleum prices increased by over 30 percent. In the non-oil-producing countries, the rise in the world prices of metals (especially tin, copper, and gold), diamonds, and food helped contain the fall in the average terms of trade to 2.8 percent.
Figure 2.2.Commodity Prices1
Source: IMF, World Economic Outlook (WEO).
1 Shaded area indicates IMF staff projections.
The external current account (including grants) of oil producers swung from an average deficit of about 3.4 percent of GDP in 2003 to a surplus of 2.3 percent in 2004. All the major oil producers, with the exceptions of Cameroon and Gabon, exported more oil and gas in 2004 than in 2003, in part reflecting new production capacity. However, the improvements in the external current account were smaller than the increase in oil exports, as strong growth in imports was underpinned by higher domestic absorption.
There was a strong improvement in the overall fiscal balance in the oil-producing countries, although the extent of the improvement varied with the share of the oil revenue accruing to the budget. The average fiscal balance moved sharply into surplus, albeit to different degrees across countries, mainly because of differences in the mechanisms for generating revenues from petroleum exports.5 Non-oil fiscal balances improved in most countries, with the largest improvement in the Republic of Congo reflecting a sharp fall in both current and capital expenditures. Oil revenues have been used to reduce domestic and external arrears in Angola, the Republic of Congo, Gabon, and Nigeria and to repay costly foreign loans in Angola and Gabon. As required by law, Chad deposited the entire additional oil revenue in a stabilization fund, and Nigeria set aside the incremental oil revenue under a fiscal rule being followed by the federal and state governments. A broad-based effort was launched during 2004 to enhance the transparency and accountability of oil sector operations in all the oil-producing countries (Box 2.1).
Box 2.1.Transparency in Oil Sector Operations in Africa
In general, oil sector operations in Africa have, in the past, been shrouded in secrecy. In recent years, however, some countries have sought to raise the transparency of oil sector operations, for example, by insisting on regular independent audits of national oil companies (provided to government authorities even if not always published). They have also taken the following additional steps to enhance the transparency of their oil operations:
Some countries have introduced explicit fiscal rules governing the treatment of oil revenue. For example, in the Republic of Congo and in Nigeria, the central government budget is prepared on the basis of a (conservative) reference price for oil—any windfall revenue is deposited in a special account at the central bank. In Chad, a special law governing the use of oil revenue earmarks the bulk of budgeted oil revenue for spending in priority sectors and on pipeline debt service while saving any windfall revenue in a stabilization account.
Some countries have started disclosing the terms of contracts and production-sharing arrangements (PSAs) with private oil companies. For example, in the Republic of Congo all PSAs have been placed on the government’s website. Others, such as Chad, have mandated the publication of independent external audits.
Increasingly, countries are adopting or subscribing to international standards to reinforce the credibility of their policies. For example, the Extractive Industries Transparency Initiative (EITI) aims at encouraging information disclosure by both participating governments and private companies. A number of African countries, including Chad, Gabon, and Nigeria, have expressed their intention to subscribe to the EITI, while Equatorial Guinea received an EITI mission and is expected to begin implementing the mission’s recommendations. Equatorial Guinea also underwent an assessment against good practices in fiscal transparency in the first quarter of 2005.
Inflation has been contained in most of the oil-producing countries. In those countries that are part of the CFA franc zone, with the exception of Equatorial Guinea, inflation has remained at or below 2 percent. Among the countries with floating exchange rates, inflation increased slightly in Nigeria and São Tomé and Príncipe, but fell in Angola. Containing the pressure for real exchange rate appreciation through fiscal tightening remains crucial for SSA countries to avoid a weakening of export and growth prospects in the non-oil sectors.
In the oil-importing countries, the additional import costs attributable to the higher oil prices have varied widely, reflecting each country’s degree of dependence on oil imports. In most countries, the change in costs has been less than the equivalent of 2 percent of GDP, and in half the countries it was less than 1 percent. In some countries, the impact was either fully or partially mitigated by rising prices of commodity exports, and, in many cases, pressures on the external current account were alleviated by the ongoing fiscal consolidation efforts. In two-thirds of the oil-importing countries, any weakening in the current account was less than the increase in the oil bill (Figure 2.3).
Figure 2.3.Oil Importers: Oil Impact and Changes in Current Account, 2004
Source: IMF, African Department database.
The current account deficit of oil-importing countries increased from 2.1 percent of GDP to 3.1 percent on average, as the strong growth of export volumes was more than offset by weaker terms of trade and higher imports. Domestic demand growth in South Africa, together with an appreciation of the currency, led to a significant widening of the external current account deficit to above 2 percent of GDP. Elsewhere, diversification efforts in some countries and improved market access in some sectors helped boost exports. These issues must now be addressed with urgency in other countries, especially in the cotton- and textile-exporting countries of Africa (see discussion in Chapter III).
Most oil-importing countries attenuated any weakening of the current account balance by avoiding or limiting any deterioration in the fiscal balance (Figure 2.4). Overall, the average deficit in oil-importing countries increased only slightly to 2.6 percent. In many cases, the fiscal balance has strengthened, supported by higher ratios of revenue to GDP. Oil price increases have been passed on to consumers in most countries (Box 2.2). Expenditure-tightening measures were also taken, notably in Guinea-Bissau, Madagascar, and Mozambique. Some oil-importing countries reported significant increases in their fiscal deficit arising from the oil price increase. Incomplete pass-through resulted in increased actual or expected deficits in Burundi, Ghana, and Seychelles. Increased deficits related to higher government outlays on oil-related products were also reported in São Tomé and Príncipe and Sierra Leone. In South Africa, the budget deficit was estimated at 2.3 percent of GDP in 2004, following several years during which the deficit was kept at or below 2 percent of GDP.
Figure 2.4.Oil Importers: Change in Current Account and Fiscal Balances, 2004
Source: IMF, African Department database.
Box 2.2.Pass-Through of Oil Price Increases to Domestic Prices
Recent oil price increases have been fully passed on to consumers in 24 of 44 African countries. Where price increases have been passed on, the institutional structure of domestic petroleum product pricing is most often linked to a formula based on import prices, distributor and retailer margins, exchange rates, and taxes (14 countries). Adjustment for those countries using a formula normally takes place at monthly or quarterly intervals. In other countries, with full pass-through, pricing is either fully market-determined (8 countries), set by a single private company (1 country), or administered (1 country).
In an additional 15 countries, there has been partial pass-through of the oil price increase, either through a formula mechanism (6 countries) or through administrative adjustments (8 countries). In some cases, a country normally using an automatic formula-based system has, in practice, decided to make an administrative increase. In five countries, however, there has been no adjustment. The lack of adjustment often reflects political concerns in the context of elections. For example, in the Central African Republic, prices have not been adjusted for the past four years.
Oil producers are less likely than oil importers to ensure full pass-through of international price increases. Among the nine oil-producing countries in SSA, only Chad, Nigeria, and São Tomé and Príncipe maintain a market-determined price with full pass-through of costs to consumers. Four countries (Cameroon, Côte d’Ivoire, Equatorial Guinea, and Gabon) provide for limited pass-through of price increases. Angola has increased prices to reduce the costs of subsidies to consumers, while the Republic of Congo has not adjusted domestic prices in response to higher world prices.
In several countries with market-oriented systems, petroleum-product subsidies exist for electricity companies (for example, in Rwanda and São Tomé and Príncipe), or automatic pricing mechanisms are not in place for other energy products. Cape Verde subsidizes domestic prices of butane gas with the aim of containing the impact of higher prices on the poor.
In general, the impact of higher prices of petroleum products on the poor is relatively modest (Box 2.3). The countries that subsidize domestic energy products have faced difficulties in targeting the poor because of weak administrative capacity. Several countries have used a type of stabilization fund to smooth and manage oil price changes, protecting the deficit from the shocks.
Box 2.3.Impact of Higher Oil Prices on the Poor in Sub-Saharan Africa
Higher petroleum prices can affect the poor in two ways. First, to the extent that the poor are dependent on petroleum products for their cooking and transportation needs, higher prices lower their real disposable income. Households clustered around the poverty line can then fall below it. Second, higher petroleum prices can reduce the competitiveness of sectors that rely relatively heavily on petroleum in their production processes. The resulting contraction of sectors intensive in oil use can increase unemployment.1
The impact of an oil price hike has been estimated to be relatively modest in SSA. In Mali, simulations based on household expenditures show that an 8.5 percent petroleum price increase would lead to a decline in consumption by the poor of 0.6 percent. In Mozambique, a 50 percent oil price hike leads to a reduction in purchasing power of about 1 percent.2 A 20 percent price increase lowers the purchasing power of the poor by less than 1 percent. By contrast, a recent study for Ghana suggests that the poor experience higher income loss from the direct effects of oil price increases, while the rich experience higher income losses from the indirect effects on prices of other goods and services. The direct effect on the poor is stronger because of a higher consumption share of kerosene.
The risk of social and political disruption is minimized when credible, effectively targeted mechanisms for protecting the poor are established. Observers have linked the widespread protests by organized labor and students in Nigeria at the end of 2003 and several times in the first half of 2004 to price hikes.1 For details see Clements, Jung, and Gupta (2003).2 See World Bank (2003b).
Many countries have attracted both higher foreign assistance and debt relief. While official grants as a share of GDP fell slightly in SSA, external debt burdens continued to decline as more countries reached the completion point under the Heavily Indebted Poor Countries (HIPC) Initiative.6 Among countries that have reached the HIPC Initiative completion point, grants remained at 4.7 percent of GDP on average. One-fourth of the countries in the region received grants in excess of 7 percent of GDP, with a larger share in the form of budget support. At the same time, average revenues as a share of GDP increased in 22 oil-importing countries, in many cases reflecting ongoing implementation of tax reform programs. These developments allowed overall government expenditure to increase as a share of GDP in two-thirds of the non-oil-producing countries.
The sharp appreciation of the rand and the euro against the U.S. dollar during 2004 affected oil-importing countries in different ways, depending mainly on currency arrangements but also on trading patterns. In South Africa and neighboring countries, the appreciation of the rand helped hold down inflation pressures and attenuated the impact of higher oil import prices. At the same time, this real appreciation eroded the competitive gains these countries experienced during 2001–02 when the South African rand depreciated against the dollar. The real effective exchange rates of the West Africa Economic and Monetary Union (WAEMU) and Central African Monetary and Economic Community (CEMAC) regions, where the currencies are pegged to the euro, were mostly stable because fiscal deficits and domestic wage and cost pressures were broadly contained. However, their reserve coverage fell in terms of months of imports.
Most of the oil-importing countries operating floating exchange rate regimes sought to safeguard their foreign reserve positions by allowing the exchange rate to adjust. With the exception of South Africa and Uganda, these countries saw a decline in the nominal effective rate (Figure 2.5). In Burundi, Kenya, and Tanzania, strong downward pressure on the exchange rate was contained through intervention.
Figure 2.5.Oil Importers: Changes in Nominal Effective Exchange Rates (NEERs) and Reserves
Source: IMF, African Department database.
While the growth performance of SSA last year was encouraging, it is below the level required to reach the income-poverty Millennium Development Goal. It is also lower than in most other emerging market and developing country regions. Domestic savings rates increased in the oil-producing countries, raising the regional average above 20 percent of GDP, but average investment rates remained close to the level of the previous year. Chapter IV analyzes the factors behind recent surges in growth in Africa and the policies needed to sustain them.
Prospects for 2005
The average growth rate for the region as a whole is projected to remain at about 5 percent in 2005. Output growth in oil-producing countries is forecast to remain close to last year’s level, with real GDP growth in Nigeria expected to pick up to over 7 percent as a major offshore oilfield comes onstream. Growth is also expected to be particularly strong in Angola, Chad, and the Republic of Congo.
Real GDP growth of at least 5 percent is projected in nearly half of the non-oil-producing economies, with Madagascar, Mozambique, Senegal, Sierra Leone, and Tanzania all projected to grow in excess of 6 percent. Strong growth in South Africa continues to be fueled by buoyant domestic demand and low interest rates (Box 2.4). Economic activity in the non-oil-producing countries is expected to be stimulated by a further rise in investment rates, which are projected to increase by 0.2 percentage points to 18.7 percent of GDP. Exports as a share of GDP are expected to fall by 0.2 percentage points among this group, reflecting an easing of import demand from the advanced economies. Output growth below 2 percent is projected in only four countries in the region—Côte d’Ivoire, Gabon, Seychelles, and Zimbabwe.
Box 2.4.South Africa—Structural and Social Reforms
South Africa has made impressive macroeconomic gains over the past decade, and its short-term prospects are very favorable. But important medium-term economic challenges remain. Unemployment and poverty are still high, and, while some social indicators have improved, the HIV/AIDS epidemic has lowered life expectancy and is exacting a heavy toll on society.
Raising growth well above its past trend level of 3 percent a year and increasing labor market flexibility will be crucial for lowering unemployment and reducing poverty. This task will require major job skill improvements, labor market reforms, further steps in trade liberalization, and public enterprise reform.
Higher growth will also depend on creating a favorable business environment, especially for small and medium-sized firms. This was recognized in the 2005 budget, which presented a series of initiatives, such as tax relief and streamlined tax legislation, to stimulate small business development, a potentially important engine for job creation. The government’s other reform priorities focus on the need to accelerate the pace and quality of infrastructure investment and to address deficiencies in municipal planning and service delivery.
South Africa’s ability to persevere with macroeconomic and structural reforms will be more effective in an environment of social stability and cohesion. The government is therefore undertaking a number of important initiatives to address wide disparities in income and wealth, including additional spending directed at social services, education, and infrastructure. To combat the HIV/AIDS epidemic, the government has put in place a comprehensive plan for the universal rollout of antiretroviral drugs and has undertaken parallel steps to strengthen the public health system.
Inflation looks set to remain subdued. As monetary policy is expected to remain prudent in most countries, and world inflation remains subdued, consumer price increases are projected to remain at about 9 percent on average.
Nonfuel commodity prices are forecast to fall in 2005 after the strong increases of last year. The WEO projects oil prices to be higher on average in 2005, leading to a further increase in the terms of trade of oil-producing countries. However, nonfuel prices—especially those of food and cotton—are expected to decline. As a result, the terms of trade of the non-oil producers are projected to fall further. Going forward, a challenge for the oil producers, given the uncertainty in price forecasts, is to smooth the short-run response of public spending to oil-related receipts. In some countries, the higher revenues provide governments an opportunity to increase public spending on priority economic and social goals, such as investment in key infrastructures. At the same time, countries need to formulate overall policy within a medium-term expenditure framework, avoiding permanent expenditure commitments that are not sustainable. It would also be important for them to strengthen public expenditure management systems to ensure that resources are used for their intended purposes. For all countries, policies aimed at encouraging export diversification would help mitigate the impact of future exogenous shocks.
Overall fiscal deficits (including grants) are likely to fall slightly, on average, in 2005. The average surplus in oil-producing countries is expected to increase to 6.3 percent of GDP, while the average deficit of oil importers increases to 3.4 percent. A deterioration in the fiscal balance is expected in 23 countries in the region, including, most notably, in Burkina Faso, Mozambique, Rwanda, and Zimbabwe.
Official grants are projected to remain flat, on average, as a share of GDP. Staff projections currently show average grants falling as a share of GDP in 25 countries and increasing in just 10 countries, suggesting greater selectivity among donors. Revenues as a share of GDP are expected to increase to 24 percent of GDP, while expenditures are projected to increase to an average of about 26 percent of GDP. Countries benefiting from a higher level of donor grant financing would have opportunities to increase their social and developmental outlays, including efforts to combat HIV/AIDS. Progress in these areas is an essential part of efforts to establish a better environment for investment and growth.
Current account deficits (including grants) are expected to increase, on average, reflecting mainly larger deficits in the non-oil-producing countries. While the average surplus in oil-producing countries is projected to increase to 5.5 percent, the average deficit in the non-oil-producing countries may rise to 3.8 percent. Based on current projections of financing, 16 countries expect to increase their reserves in terms of months of import cover, while 23 countries are expecting their reserve coverage to fall.
SSA’s prospects in 2005 are subject to political and economic risks. The lingering conflicts in Côte d’Ivoire and the still-fragile security situation in the Great Lakes region are important concerns, given the potential implications for neighboring countries. Moreover, many countries in SSA remain vulnerable to droughts and other natural disasters. Under current conditions, economic risks stem from uncertainties in the oil markets, while the elimination of textile quotas in industrial countries in 2005 will also pose challenges for employment and growth in the affected countries. A slowdown in the global recovery and a further appreciation of the rand could undermine South Africa’s export performance and lead to a worsening in the current account balance. A larger-than-expected fall in non-oil commodity prices could lead to a further worsening of the terms of trade. On the upside, the renewed international efforts to further reduce debt and increase overall development assistance related to the Millennium Development Goals could enhance the region’s prospects for growth and poverty reduction.
Sub-Saharan Africa is defined as the countries covered by the IMF African Department and thus excludes Djibouti, Mauritania, and Sudan, which are included in the SSA aggregation in the IMF’s World Economic Outlook (WEO). The Statistical Appendix provides information on 42 countries in SSA; Eritrea and Liberia are excluded from the database because of data limitations.
Chapter III includes an assessment of the impact on the region of declining world cotton prices as well as of the removal of textile quotas in 2005.
The oil-producing countries are Angola, Cameroon, Chad, the Republic of Congo, Côte d’Ivoire, Equatorial Guinea, Gabon, and Nigeria. In São Tomé and Príncipe, which is included as an oil producer in the Statistical Appendix tables for aggregation purposes, production is not expected to commence until about 2012, although oil signing bonuses start in 2005.
The crop damage is estimated to range between 10 and 40 percent, despite the concerted national, bilateral, and multilateral efforts to treat about 2 million hectares of land infested by locusts. Mali and Niger were the hardest hit by locusts, which caused growth in the two countries to drop by 0.5 and 1.5 percent of GDP, respectively.
These include production-sharing arrangements (Angola, Cameroon, Republic of Congo, Equatorial Guinea, Gabon, and Nigeria), royalties (Angola, Chad, Republic of Congo, Equatorial Guinea, Gabon, and Nigeria), equity participation (Nigeria and Equatorial Guinea), and corporate income taxes (Cameroon, Equatorial Guinea, Gabon, and Nigeria). In Angola and the Republic of Congo, the production-sharing arrangements are structured in a way that the government receives an incrementally larger share as the size of the oil windfall gets bigger.
Eleven countries in the region have now reached their completion point under the HIPC Initiative, including, during 2004, Ethiopia, Ghana, Madagascar, Niger, and Senegal.