Chapter

II. Developments in 2006

Author(s):
International Monetary Fund. African Dept.
Published Date:
May 2006
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Economic growth in sub-Saharan Africa is expected to moderate from 5.6 percent in 2005 to 4.8 percent in 2006 (Figure 2.1 and Table 2.1).2 For oil exporters, there are temporary constraints on expanding oil production;and South Africa’s expected decline to potential growth explains much of the slowdown for the oil-importing group. The impact of persistently high petroleum prices on importers has been mitigated in many countries by rising export prices for nonfuel commodities (Figure 2.2). Since 2002, investment in SSA has also been rising. If the trend can be sustained, it augurs well for future growth.

Table 2.1.Sub-Saharan Africa: Selected Indicators, 2002-071
Current Projections
200220032004200520062007
(Annual growth, in percent)
Real GDP3.54.05.75.64.85.9
Of which: Oil exporters24.27.78.37.85.610.1
Oil importers3.33.04.95.04.54.6
Real non-oil GDP3.83.45.25.25.05.0
Consumer prices (average)310.09.76.08.26.96.1
Of which: Oil exporters18.716.912.613.38.06.4
Oil importers47.77.64.16.86.56.0
Per capita GDP1.52.03.73.72.84.0
(Percent of GDP unless otherwise noted)
Exports of goods and services32.433.736.038.941.343.3
Imports of goods and services32.833.534.835.636.936.5
Gross domestic saving15.718.520.721.422.824.6
Gross domestic investment16.518.719.319.019.419.2
Fiscal balance (including grants)–2.7–2.2–0.41.54.53.5
Of which: Grants1.11.11.01.00.90.8
Current account (including grants)–3.4–2.7–2.00.00.82.7
Of which: Oil exporters–8.0–3.72.39.813.517.7
Terms of trade (percent change)0.51.22.67.810.83.3
Of which: Oil exporters4.51.58.527.823.27.0
Oil importers–0.91.10.3–2.11.7–1.2
Reserves (in months of imports)54.44.04.95.67.19.3
Memorandum items:
Advanced country import growth (in percent)2.64.09.16.07.56.0
Oil price (U.S. dollars per barrel)25.028.937.853.469.275.5
Real GDP growth in other regions
Sub-Saharan Africa63.64.15.65.85.26.3
Developing Asia7.08.48.89.08.78.6
Middle East4.16.45.55.75.85.4
Commonwealth of Independent States5.37.98.46.56.86.5
Sources: IMF, African Department database; and World Economic Outlook database.

Figure 2.1.Real GDP Growth and Investment, 2000-06

Source: IMF, African Department database.

Figure 2.2.Commodity Prices

(Index 2003=100)

Sources: IMF, Commodity Prices; and UN Comtrade.

1 Composite of cocoa, coffee, sugar, tea, and wood, weighted by SSA exports.

Per capita growth for 2006 is expected to slow from 3.7 percent in 2005 to 2.8 percent—even further below the 5 percent needed to reach the income MDG (Figure 2.3). As a group, landlocked countries3 continue to perform relatively poorly: their real GDP per capita growth in 2006 is expected to be just 1.7 percent, down from 2.3 percent in 2005.

Figure 2.3.Real Per Capita GDP Growth, 2000-06

(Average annual growth, percent)

Source: IMF, African Department database.

While SSA has a few success stories in terms of progress toward the MDGs, most countries in the region are not on track to meet most of the goals. Cameroon, Ethiopia, Senegal, South Africa, and Swaziland are considered to be “well positioned” to meet the income poverty goal.4 Recent growth performance, if sustained, should also allow Ghana and Mozambique to attain it. However, these countries account for less than a third of the population of SSA. At least 40 percent of SSA countries are either “off-track” or “seriously off-track” on each MDG.5 Progress toward the MDGs in up to a third of SSA countries cannot be assessed at all due to weaknesses in their statistical systems. The scaling up of aid to SSA that had been envisaged in 2005 has not yet occurred (see the section on Official Grants and Debt Relief later in this chapter).

Inflation in sub-Saharan Africa (excluding Zimbabwe) is expected to drop from 8.2 percent in 2005 to 6.9 percent in 2006; the slight increase in 2005 was due to food scarcity and higher petroleum prices (Figure 2.4). Inflation in oil-exporting countries has been above the SSA average in the past, reflecting the difficulties some of these countries, especially Angola and Nigeria, have faced in sterilizing rising inflows of oil revenue. Inflation in other oil exporters—all members of the Economic and Monetary Union of Central Africa (CEMAC)—has been subdued. For the region as a whole, the inflationary impact of higher oil prices was contained by prudent macroeconomic policy. Over the last 10 years, SSA countries have substantially reduced their dependence on bank financing of fiscal deficits, from around 1 percent of GDP in the mid-1990s to negligible levels in 2005.

Figure 2.4.Inflation, 2000-06

(Percent)

Source: IMF, African Department database.

1 Excluding Zimbabwe.

SSA is benefiting from a favorable external environment. Import demand from advanced economies is expected to strengthen in 2006 (Table 2.1). With the continued rise in oil and other commodity prices, exporters of both oil and nonfuel commodities are expected to experience an aggregate improvement in the terms of trade. So far in 2006 the real exchange rates of oil exporters with flexible exchange rates have appreciated sharply, largely driven by the stronger currencies of Nigeria and Angola; those of oil importers have appreciated somewhat from the 2005 level and have been relatively stable over the past six months (Figure 2.5).

Figure 2.5.Real Effective Exchange Rate

(Index, Jan-2004=100)

Source: IMF, Information Notice System.

However, a number of SSA textile exporters have come under pressure as the United States and the European Union (EU) have phased out textile quotas. SSA is among the regions most affected. The value of its exports to the U.S. market declined by 17 percent in 2005 and a further 22 percent in the first quarter of 2006. A similar loss was observed for 2005 in the EU market, but the loss in the first quarter of 2006 was moderate. Even though the United States and the EU have reimposed extensive quotas on Chinese exports, SSA textile exporters should continue to strengthen their competitiveness. Madagascar, for instance, has been successful in increasing its exports to the EU.

Rising commodity prices and comprehensive debt relief have ignited private interest in investing in SSA (Box 2.1). At about $22 billion, direct investment continues to be the largest source of private capital inflows into SSA. While South Africa and the oil-exporting countries still attract about 80 percent of the inflows, direct investment in the rest of SSA has been steadily increasing; in 2006 it is projected to reach $4.1 billion, of which $1.2 billion would go to landlocked countries. Direct investment in South Africa is lower than in comparable emerging market countries because of impediments in the labor market, the impact of HIV/AIDS, and infrastructure deficiencies.6

Box 2.1Private Capital Flows to Sub-Saharan Africa

Since mid-2005 private foreign investors have begun to acquire government debt in local currencies in sub-Saharan Africa.1 Countries that have elicited the most investor interest are Botswana, Cameroon, Ghana, Kenya, Malawi, Nigeria, and Zambia. Estimates put the size of inflows into Kenya at the end of 2005 at about 8 percent of outstanding marketable government debt, into Nigeria at 18 percent, and into Zambia at 16 percent. The investor interest emerged because

  • Investors began searching for high-yield investment opportunities after interest rate spreads between the government securities of emerging markets and industrial countries fell to historical lows (Figure 1). Since May 2006, interest rate spreads have somewhat widened again, although it is too soon to assess how this has affected foreign investment in SSA.

    Figure 1.External Bond Spreads

    (Basis points)

  • SSA countries are better able to carry debt now after a series of initiatives to reduce or eliminate external debt, such as the HIPC (Heavily Indebted Poor Countries) and MDRI initiatives and cancellation of Paris Club debt. For example, sovereign risk ratings have improved for Cameroon, Ghana, Nigeria, and Zambia.

  • Rising prices for commodities exported by SSA countries have raised the expectation that their currencies will continue to appreciate (Figure 2).2 That would explain why foreign investment in Zambian bonds, for example, amounted to over $180 million in the first half of 2006.

Figure 2.Zambia: Exchange Rate and Price of Copper

Private capital flows can create both benefits and new challenges for SSA. On the one hand, they may put downward pressure on domestic interest rates in some countries (Figure 3). Over time, they may also stimulate more foreign direct investment. On the other hand, volatile capital inflows can complicate management of the exchange rate and monetary policy. The financial markets of SSA countries are small in relation to the large amounts of liquidity available globally. Thus, capital inflows could lead to large appreciations of domestic currencies, compromising external competitiveness. Capital inflows can reverse rapidly, too, leading to sudden rises in interest rates, deep currency depreciation, and destabilization of the financial market.

Figure 3.Average T-bill and inflation rates for Eight SSA countries1, 1991-2005

(Percent)

1 Ghana, Kenya, Malawi, Mozambique, Nigeria, South Africa, Uganda, and Zambia.

Governments need to strengthen their mechanisms for monitoring and supervising capital flows. They must keep track of inflows and repayment schedules. They also need to reinforce supervision of the financial sector to ensure that it can withstand swings in exchange and interest rates.

1 This box was prepared by Hans Weisfeld.2Cashin, Cespedes, and Sahay (2004) find that commodity price increases tend to push up the real exchange rates of their exporters’ currencies.

Governments in SSA need to better monitor private capital inflows and be prepared to manage effectively the volatility of inflows.

Capital inflows into SSA are relatively small because the costs of doing business there are still high compared with those of other regions. On the “ease of doing business” indicator compiled by the World Bank, the average SSA country ranks more than 40 positions below that of the average East Asian and Pacific country, and nearly 30 positions below that of the average Latin American and Caribbean country. This relationship is mirrored in the subindicators. The rankings on dealing with licenses and on starting a business, for instance, are lower for SSA countries than for countries in both other regions (Figure 2.6).

Figure 2.6.Sub-Saharan Africa: Average Rank Difference with Other Regions on Selected Doing Business indicators

(Higher number indicates poorer performance)

Source: World Bank, Doing Business 2006.

Notes: Calculations are based on the numerical rankings of countries from 1 to 155, where a lower number indicates better performance on that indicator. For each region, an average rank is constructed.

Each bar indicates the result when the other region average rank is subtracted from that for SSA.

Upper-income countries are excluded from the East Asia and Pacific grouping.

Food security began to improve in the second half of 2005. After a poor harvest in the 2004-05 season, the agricultural season turned out well above average, so that cereal imports in 2006 are expected to be only one-third of those in 2005. While the food situation in SSA has generally improved, a number of countries still face food scarcity and famine due to regional droughts as well as floods, civil unrest, and political tensions. Chad, Ethiopia, and parts of Kenya are most affected, but the situation is also precarious in Niger, Tanzania, northern Uganda, and Zimbabwe, where lack of food is aggravated by hyperinflation. So far this year, more than 17 million people in SSA have had to rely on food aid for their survival.

Though the prevalence of HIV/AIDS is reported to have declined in SSA, it is still a major problem. True, the rate declined slightly among those aged 15-49, to 6.1 percent from 6.2 percent two years earlier; the number of new infections is below the peak in the late 1990s; and UNAIDS (2006) analysis suggests that HIV prevalence among young women has declined by at least 25 percent in six countries.7

But the situation in southern Africa remains bleak. HIV prevalence rates are reported to be 33 percent in Swaziland, 24 percent in Botswana, 23 percent in Lesotho, and around 20 percent in Namibia and Zimbabwe. Though access to treatment in SSA has increased eightfold since 2003, still only about 17 percent of those needing treatment are actually getting it.

In 2005, resources allocated in SSA for treating HIV/AIDS increased. Funding from the World Bank and the U.S. President’s Emergency Plan for AIDS Relief almost doubled in 2005, and funding from the Global Fund increased by 35 percent.8 Disbursements from these three donors totaled $1.5 billion (0.24 percent of SSA GDP). These efforts were complemented by domestic spending supported by donor grants.9

Economic Developments in Oil Exporters

Growth in the eight SSA oil-exporting countries is projected to decline from 7.8 percent in 2005 to 5.6 percent in 2006 (Figure 2.7). Production in Equatorial Guinea will shrink temporarily as oil fields mature. Growth in Chad is expected to slow down drastically due to technical difficulties in oil production and completion of construction activity for the Chad-Cameroon oil pipeline. In Angola, where growth is still strong due to continued post-conflict recovery and rising oil production, a slightly lower rate of new oil fields coming onstream has lowered the projection for GDP growth to about 14 percent. Production in Nigeria has been affected by unrest in the Niger delta. Growth in the Republic of Congo and Gabon is expected to decline only slightly, and in Côte d’Ivoire to stagnate at a low level because of the difficult political and security situation there. Cameroon is the only oil exporter where growth is expected to accelerate in 2006 because oil production and investment there are rising. Non-oil GDP in oil-exporting countries should catch up further, growing at about 6.5 percent, though from a low base.

Figure 2.7.Oil-Exporting Countries: GDP, Investment, and Net Exports, 2000-06

Source: IMF, African Department database.

Inflation in oil-exporting countries is projected to fall to single digits for the first time since 1990, declining to 8.0 percent in 2006. This is mainly attributable to further stabilization in Angola and lower food prices in Nigeria. Inflation in the other six countries in this group is expected to remain at the mostly moderate levels prevailing in recent years. Nevertheless, with continued large inflows of oil revenue, pressures on prices and exchange rates are likely to persist. One way to alleviate such pressures is to undertake further trade reforms.

The fiscal situation should continue to improve.10 On average, the fiscal surplus (excluding grants) is projected to rise in 2006 to 11.3 percent of GDP. Fiscal surpluses of more than 15 percent of GDP are projected for Nigeria, the Republic of Congo, and Equatorial Guinea and of 12 percent for Gabon. In contrast, Chad will likely end the year with a small deficit due to exceptional security expenditures. Côte d’Ivoire’s fiscal balance, although improving, is also expected to record a small deficit.

The macroeconomic policies of oil-exporting countries have been generally prudent. Their expenditure increases have been measured, despite pressures to the contrary, partly in recognition of the fact that they have limited capacity to implement and absorb scaled-up public programs. The governments are therefore saving a larger share of higher oil revenues, which has bolstered their fiscal positions and turned them into net savers (see below). On the monetary side, the five CEMAC members and Côte d’Ivoire continue to benefit from the peg of the CFA franc to the euro; the euro’s appreciation against the U.S. dollar has offset the inflationary pressures of higher public spending. In addition, Angola and Nigeria continued to face the challenge of managing the monetary implications of higher oil revenue inflows and benefited from an improved inflation outlook. In oil-exporting countries as a group, the slight decline in private sector credit as a share of broad money suggests that monetary policy is tightening to counter the expansionary fiscal stance.

Rising oil revenue is expected to improve the external current account balance (excluding grants) in oil-exporting countries to a record high of 13 percent of GDP. This is being accompanied by an improvement in international reserves to 9.4 months of import cover. Investment in these countries, which has been leveling off for a while, is expected to rise slightly, to 18.4 percent of GDP. While foreign direct investment is projected to decline somewhat, to 4.7 percent of GDP, the fall will be more than offset by an increase in government capital spending.

Just over a quarter of the increase in oil export earnings between 2003 and 2005 is reflected in higher national saving. On average, 27 percent of the increase in oil export earnings fed through to a higher current account balance, with improvements ranging from 10 percent for the Republic of Congo to 60 percent for Cameroon (Figure 2.8).11 The current account impact is significantly lower than in Middle Eastern countries (IMF, 2006a) because income outflows tend to be larger in SSA as a result of greater foreign ownership of oil companies there.12 Of the remaining oil earnings, most accrue to the government as revenue through taxes, royalties, or profits of state-owned oil companies; thus, the impact of higher oil export earnings on national saving is largely determined by the saving behavior of the government.

Figure 2.8.Oil Exporters: Impact on Current Account of Oil Export Earnings, 2003-20051

(Percent)

Source: IMF, African Department database.

1Ratio of the increase in current account balance to increase in oil export earnings. Côte d’Ivoire is excluded.

In 2006 governments in oil-producing countries are on average expected to save almost half their oil revenue; in 2002 savings were minimal (Figure 2.9). The average saving, however, masks sharp variations among countries. In 2006 Angola intends to spend most of its oil revenue, much of it on postconflict reconstruction. With Equatorial Guinea facing constraints on absorptive capacity and Gabon concerned about the sustainability of its debt when oil reserves are depleted, those countries are expected to limit their spending to under half the revenue. In general, as oil revenues increase, finding projects with a satisfactory rate of return has become more challenging.

Figure 2.9.Portion of Oil Revenue Spent, 2002-06

(Percent; ratio of non-oil fiscal deficit to oil revenue)

Source: IMF country desk data.

1 Comprises Angola, Cameroon, Equatorial Guinea, Gabon, Nigeria, and Republic of Congo.

Of the increased oil revenue since 2002, about half has been saved. The marginal propensity to save has risen sharply over time. In 2003, it was about 20 percent; by 2005, it had risen to 63 percent. However, the marginal saving rate varies considerably among countries, ranging from 26 percent in Angola to 100 percent in Cameroon.

Nigeria’s rate was 42 percent. Spending of increased oil revenue has been split about equally between current and capital expenditures (Figure 2.10), again with considerable variations among countries.

Figure 2.10.Use of Increased Oil Revenues, 2003-20061

(Percent)

Source: IMF, country desk data.

1Annualized cumulative change since 2002, as percentage of average non-oil GDP 2003-2006. Côte d’Ivoire is excluded from the calculation.

With significant saving of oil revenue, the aggregate non-oil deficit is expected to decline in 2006. As a share of non-oil GDP, it will fall from 54.1 percent to 53.7 percent. While most of this is accounted for by notable improvement in Nigeria, non-oil deficits in five other oil exporters are also expected to decline. Nevertheless, their budgets are still highly vulnerable to oil revenue fluctuations; four countries are expected to have non-oil deficits of over 30 percent of non-oil GDP.

Oil-exporting countries on average have scaled up their capital budgets (Figure 2.11). Angola, Cameroon, and the Republic of Congo have budgeted substantial increases in capital spending in relation to GDP. In Nigeria, on the other hand, capital spending is expected to be unchanged from previous years. Although some oil producers have increased recurrent spending (since 2002 Angola has raised recurrent outlays almost fivefold in nominal terms), outlays have not risen fast enough to keep up with the rise in nominal GDP. Despite some progress in improving the fiscal transparency of oil revenue (Box 2.2), capacity constraints in oil producers are likely to limit the ability of their governments to expand capital spending efficiently and transparently in the short term. This suggests that in the near term external current account and fiscal surpluses are likely to persist. To absorb more oil revenues, countries will need to (1) strengthen public financial management systems and (2) cast their spending plans in a medium-term context, taking into account fiscal sustainability.

Figure 2.11.Capital Expenditure, 2002-06

(Percent of GDP)

Source: IMF country desk data.

1 Comprises Angola, Cameroon, Equatorial Guinea, Gabon, Nigeria, and Republic of Congo.

Box 2.2.Fiscal Transparency Among Oil Producers—Recent Progress

Since 2005 several governments have improved their reporting of oil revenue.1 Angola has begun publishing monthly information on oil revenue and the oil rights bidding process. Cameroon is publishing quarterly information on oil revenue and its use, as is Chad, which under a recent agreement with the World Bank is also incorporating all oil revenue into the budget. The Republic of Congo, among others, is publishing quarterly oil revenue certification reports produced by an independent audit firm. And Nigeria has published a series of oil-sector-related audit reports for 1999-2004, one of which aims to reconcile information on oil revenue payments and receipts. The audits identified a number of weaknesses in transparency and made recommendations that the government intends to translate into a time-bound action plan.

Some countries have also reduced or made more transparent the quasifiscal spending of their national oil companies. In 2005 Cameroon curtailed the quasifiscal spending of its national oil company and for the first time reported on it; in 2006 the authorities terminated such spending altogether. Nigeria brought the quasifiscal activities of its national oil company on to the budget.

The IMF strongly supports the efforts of SSA oil producers to enhance revenue transparency. At their request the IMF assessed the fiscal systems of Angola, Equatorial Guinea, and Gabon against good fiscal practices. A similar assessment, called a Reviews of Standards and Codes (ROSCs), was prepared for Cameroon in 1999.2 The Fund also seeks to enhance oil revenue transparency through the programs it supports. In this context, Cameroon committed to publishing key elements of the company’s audits and the first Extractive Industries Transparency Initiative (EITI) report; Chad agreed to publish quarterly reports on its collection and use of oil revenue; the Republic of Congo committed to publishing complete audits of the financial accounts of the national oil refinery; and Nigeria committed to publishing its draft and final EITI reports.

Four more countries—Cameroon, Côte d’Ivoire, Equatorial Guinea, and Gabon—subscribed to the EITI in 2005-06; Nigeria had signed up in 2003, and the Republic of Congo in 2004. Some countries have made tangible progress toward implementing the EITI: Cameroon has created an EITI implementation committee with civil society participation, adopted an action plan, and launched a public bidding process to hire an independent auditor. The Republic of Congo has held workshops on the EITI with civil society participation. Equatorial Guinea promulgated a decree establishing a committee and adopting an action plan for EITI implementation. Gabon published its first EITI report for 2004, covering about half of government oil revenue, as a step toward full implementation. Nigeria created an EITI implementation committee with civil society participation and, as mentioned, has already published oil sector audit reports covering 1999-2004.

Notwithstanding these positive developments, further progress is needed to enhance the transparency of oil revenue. Notably, in most countries, both auditing of national oil companies and follow-up on audit findings need to be strengthened. Also, except for Nigeria, first comprehensive reports for EITI signers still need to be prepared and published. Governments will also have to address discrepancies between oil revenues reported by oil companies and those reported in the fiscal accounts. Furthermore, in some countries, oil companies still conduct quasifiscal activities outside the budget.

1 This box was prepared by Hans Weisfeld.2 The assessments for Cameroon and Equatorial Guinea are available at www.imf.org.

Economic Developments in Oil Importers

Economic growth in oil-importing countries is projected to slow slightly, to about 4.5 percent (Figure 2.12). This reflects mainly the expected decline to potential growth of about 4 percent in South Africa—by far the biggest economy in this group (see Box 2.3)—partly in response to rising interest rates. In the other countries, slower growth in agriculture (in Burkina Faso, Ethiopia, Rwanda, and Tanzania) and high energy prices are contributing to the slowdown (see Chapter IV, on impact of higher oil prices on GDP). Nonetheless, growth is widespread and robust: nearly half (17) of the countries expect growth of 5 percent or more.

Figure 2.12.Oil-Importing Countries: GDP, Investment and Net Exports, 2000-06

Source: IMF, African Department database.

Box 2.3.The Growing Importance of South Africa for Sub-Saharan Africa

Though South Africa has only about 6 percent of the population of sub-Saharan Africa, it accounts for over a third of the region’s GDP on a purchasing power parity (PPP) basis.1 This is more than three times as much as Nigeria, the region’s second-largest economy; almost forty times as much as Mali, the median economy in the region; and more than each of the main regional economic blocs except for the Common Market for Eastern and Southern Africa (COMESA). Although its weight within SSA has declined somewhat from a peak of just over 40 percent in the early 1980s, South Africa has accounted for over a third of the expansion of SSA GDP since 1980.2 Moreover, growth in South Africa and growth in the rest of the region have been moving closely together.

Except for neighboring countries, South Africa’s trade linkages with the rest of the continent are small, though they have grown significantly since 1994. Between 1994 and 2005, the average share of South Africa in the external trade of the rest of Africa increased to three times its 1976-1993 average, though it was still only 2.8 percent of total trade (equivalent to 1.6 percent of GDP). Though South Africa is a significant trading partner for many countries in southern Africa, the structure of its trade is unbalanced; it imports more than it exports to SSA. Imports from sub-Saharan Africa were about 4 percent of total South African imports, of which almost half (primarily oil) were from Nigeria.

South African investment in the rest of Africa has also increased substantially in recent years. Its direct investment in other parts of Africa has doubled since 2000. In 2004, it was about $3.7 billion, about 11 percent of total South African foreign investment. As with trade, investment has been heavily concentrated in neighboring countries. For the continent as a whole, South Africa accounts for only about 2 percent of the stock of total inward direct investment, equivalent to less than 1 percent of African GDP.

Investment by South African companies in SSA is becoming more diversified geographically and is relatively diversified by sector. Their investments in countries outside the South African Customs Union (SACU) have accelerated since the end of economic isolation (except for Zimbabwe).3 South Africa’s presence in the traditional resources sector is strong, but South African companies have been equally willing to invest in nontraditional sectors, notably retailing, telecommunications, and food and beverages. South Africa was the third largest investor measured by number of companies in a survey of foreign investment in manufacturing and services in 15 African countries (UNIDO, 2005). South African banking operations have tended to follow corporate investment in the region. South African banks have operations in 17, mainly southern, African countries.

Figure 1.South Africa: Outward Investments by Date

(Number of new investments)

Source: Survey coducted for South Africa Foundation.

1 This box was prepared by Robert Mark Burgess.2 See Arora and Vamvakidis, 2005.3 See South Africa Foundation, 2004.

Countries rich in non-oil resources are the only subgroup where growth is expected to accelerate, to 5 percent. They are led by Guinea, Namibia, and Zambia, which are profiting from strong demand for diamonds, copper, and other mining products. Though landlocked resource-poor countries—which have the least favorable starting conditions—are expected to experience a slight slowdown in 2006, growth there has been catching up in recent years and is relatively robust at above 4 percent (Figure 2.13). The driving force appears to be investment financed by official development assistance (ODA), which has been increasing strongly in recent years, mainly due to debt relief.13

Figure 2.13.Real GDP Growth, 2000-06

(Percent)

Source: IMF, African Department database.

Inflation pressures are moderating in most oil-importing countries. The aggregate inflation outlook for SSA oil importers, excluding Zimbabwe, is benign, with an expected decline from 6.8 percent in 2005 to 6.5 percent in 2006; prudent macroeconomic policies have contained the impact of higher oil prices. In contrast, inflation in Zimbabwe is forecast to be more than 1,200 percent. Inflation is also set to rise, though much more moderately, in Ethiopia because of persistent food price increases, underlying demand pressures, and the impact of the upward adjustment in retail oil prices in May, and in São Tomé and Príncipe because of currency depreciation. In South Africa, continued strong domestic demand growth, high oil prices, and exchange rate depreciation are expected to result in inflation approaching 6 percent as the year ends.

The fiscal position in oil-importing countries should improve. For oil importers other than South Africa, the fiscal balance, including grants, is projected to rise by 1.2 percentage points, to a small deficit of 0.1 percent of GDP; this mainly reflects MDRI relief.14 In 25 out of 36 countries, fiscal balances excluding grants are expected to widen as many countries increase poverty-reducing spending, financed by grants and the MDRI (Box 2.4). Efforts to raise revenue are strongest in landlocked countries, where revenue is projected to increase by 1.1 percent of GDP, mainly because of stronger revenue efforts in Burundi, the Democratic Republic of the Congo, and Ethiopia.

Box 2.4.The Multilateral Debt Relief Initiative (MDRI) and Poverty-Reducing Spending

Resource transfers to countries that qualified for MDRI relief began in early 2006.1 The IMF delivered the bulk of its relief in January 2006 and the International Development Association (IDA) and the African Development Fund (AfDF) started extending their portion in July 2006. Through mid-2006 14 countries in sub-Saharan Africa had qualified for MDRI relief.2 The IMF has delivered $2.8 billion to them.

With this debt relief, MDRI countries are increasing spending on the poverty-reducing programs identified in their Poverty Reduction Strategy Papers (PRSPs). In 2006, such spending on average is budgeted to increase by 1.4 percentage points, to 44.3 percent of total expenditures (Figure 1). As a percent of GDP, it is set to increase by 1.0 percentage point, to 11.1 percent (Figure 2).

Figure 1.MDRI Countries: Spending on PRSP Priorities as a Share of Total Spending

(Percent of total expenditure)

Source: IMF, country desk data.

Figure 2.MDRI Countries: Spending on PRSP Priorities as a Share of GDP

(Percent of GDP)

Source: IMF, country desk data.

Spending on specific programs varies by country. About half the countries plan to use resources freed by the MDRI for reaching the education and health MDGs. Investment in infrastructure features prominently in Burkina Faso, Cameroon, and Mali. In the Great Lakes region, where drought has led to food insecurity and energy shortages because of declining hydropower, resources have been set aside for spending on energy and food imports, as in Rwanda and Tanzania. Finally, spending on social service delivery will be bolstered in Senegal and on rural sector development in Niger.

1 Prepared by Ulrich Jacoby.2 They are Benin, Burkina Faso, Cameroon, Ethiopia, Ghana, Madagascar, Mali, Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia.

Despite rising international oil prices, most oil-importing countries have preserved their macroeconomic stability. The overall fiscal position in these countries is expected to improve even though they are scaling up expenditures in pursuit of the MDGs; the expenditures are financed not only by MDRI relief but also by continued efforts to increase domestic revenue. These efforts were facilitated by the decision of most countries to adjust domestic prices as international oil prices rose. As a result, domestic financing of government spending continued to decline; about a third of oil-importing countries are expected to have net savings in 2006. The appreciation of the euro against the U.S. dollar helped contain inflationary pressures in countries in the CFA zone. In other countries, a tighter monetary policy subdued not only prices but also pressures on the exchange rate.

Higher nonfuel commodity prices are expected to help stabilize the external balances of oil importers despite the continued rise in fuel prices. As firmer prices for nonfuel commodity exports help offset higher fuel prices, their terms of trade will improve by almost 2 percent, and aggregate trade and current account deficits will deteriorate only slightly. Countries that do not profit from rising prices for exports, such as Ethiopia and Kenya, are responding by lowering their import demand for oil.15

Strong improvements in the trade balance are expected in Mali, Mozambique, Namibia, and Zambia. In aggregate, reserve coverage for oil importers other than South Africa is projected to remain stable at 4.6 months of imports.

Official Grants and Debt Relief

Though official grants to SSA countries have been gradually increasing in recent years, they are projected to decline somewhat in 2006, to 2.7 percent of GDP (excluding South Africa and Nigeria). The decline reflects falling commitments to a number of countries, including Ethiopia, Ghana, Niger, Rwanda, and Uganda. The main beneficiaries are resource-poor landlocked countries, which are expected to receive around 6 percent of GDP in grants. In addition to the 13 SSA countries that received MDRI relief in the first round, Cameroon qualified on April 28, 2006, when it reached the completion point under the enhanced HIPC Initiative. Nine other SSA countries could qualify for debt relief when they reach the HIPC completion point.16 Reflecting both MDRI relief and Nigeria’s recent agreement with the Paris Club,17 the debt burden in SSA is set to fall by almost 10 percentage points, to about 16 percent of GDP.

Official development assistance to SSA increased through 2004. Since 2000, ODA to SSA countries on average increased by almost 15 percent annually; it is now one-third of total ODA—a reversal of the falling flows through the mid-1990s. After adjusting for debt relief, which on average has been around 20 percent of total ODA in recent years, the net increase in ODA to SSA is relatively small. While ODA is the largest source of financing in SSA, private capital plays an increasing role, through both direct investment and remittances (Box 2.5).

Box 2.5.The Size and Importance of Remittances to Sub-Saharan Africa

Remittances are an important source of external financing for several SSA countries.1 In 2005 remittances for the 34 reporting countries in the region amounted to $6.7 billion. For countries like Cape Verde, Guinea-Bissau, and Lesotho, remittances are quite significant relative to GDP and are a substantial means of financing the external current account (Figure 1). In absolute terms, Nigeria, Senegal, and South Africa, which have a large number of migrants in the OECD countries, receive the most remittances.

Figure 1.Current Account Balance With and Without Remittances, 2000-05

(Percent of GDP)

Source: IMF, Balance of Payments Yearbook, 2006; and IMF, African Department database.

Recorded remittances are only 45 to 65 percent of the actual flows (Freund and Spatafora, 2005). High transaction costs and noncompetitive structures among formal money transfer operators like Western Union make the use of informal channels quite common in SSA.2 Official development assistance (ODA) to SSA continues to dominate, constituting three times recorded remittances (Figure 2).

Figure 2.Comparing Inflows for SSA Countries, 1975-2004

(in millions of US dollars)

Source: IMF, Balance of Payments Yearbook, 2006; IMF, African Department database; World Bank staff estimates; OECD/DAC, 2006.

Remittances are less volatile than aid flows and export earnings. Through securitization of future flows, remittances can help ease access to, and lower borrowing costs for, international capital. As with any form of external flows, remittances do carry the risk of Dutch disease effects for the receiving country (Amuedo-Dorantes and Pozo, 2004; Bourdet and Falck, 2006)—something policymakers must be prepared to respond to.3 Other studies have found no evidence that remittances hurt export competitiveness (Rajan and Subramanian, 2005).

Evidence of the impact of remittances on growth and poverty reduction is inconclusive. The most immediate channel through which remittances impact GDP is the multiplier effect of increased spending by recipient households. Studies that link remittances with investment, where remittances either substitute for or improve financial access, conclude that remittances have a positive impact on growth (Giuliano and Ruiz-Arranz, 2005; Toxopeus and Lensink, 2006). Other studies find that recipient households respond to a steady stream of income from abroad by cutting back their own labor effort, thereby impeding growth (Chami, Fullenkamp, and Jahjah, 2003; Azam and Gubert, 2005). Similarly, evidence on the direct impact of remittances on poverty seems to vary by sample (Adams and Page, 2005).

One aspect of migrant remittances is the associated impact of brain drain on the supply of skilled personnel in SSA countries, particularly in the health sector (Kapur and McHale, 2005; Carrington and Detragiache, 1998; Pond and McPake, 2006). On average, about 20 percent of the SSA tertiary-educated population older than 15 works in the OECD countries. Less than 10 percent of the comparator group from South Asia are to be found there. For some countries, such as Angola, Guinea-Bissau, and Mozambique, more than 50 percent of the educated population are working elsewhere.

1 This Box is drawn from Gupta, Pattillo, and Wagh (2006, forthcoming).2 The cost of remitting $100 to Africa from the U.S. can be as high as 20 percent. Comparative fees in high volume corridors rarely exceed 15 percent (United States to Mexico), and can be as low as 4 percent (United Kingdom to India).3 See Gupta, Powell, and Yang (2006).

Prepared by Sanjeev Gupta, Ulrich Jacoby, Arto Kovanen, and Kevin Carey.

In addition to countries being classified as oil importers and oil exporters, they were also classified as resource-rich, with subgroups oil and non-oil; and nonresource-rich, with subgroups coastal and landlocked. These groupings follow Collier and O’Connell (2006), who show that the effect of resource endowments is independent of location and thus classify all SSA economies by endowment and location. A country is classified as resource-rich if primary commodity rents—that is, revenue minus extraction costs—exceed 10 percent of GDP (on this criterion, South Africa is not resource-rich). In terms of location, countries are classified by whether they have ocean access (coastal) or are landlocked. A country is classified as landlocked if its access to the sea is limited and is likely to be a significant impediment to trade. (Hence, the Democratic Republic of the Congo is classified as landlocked.) For further details, see the section on Data and Conventions in the Statistical Appendix.

World Bank (2006), World Development Indicators report.

This spending averaged 0.16 percent of GDP for 35 countries and exceeded 0.5 percent of GDP for 6 countries.

The fiscal outcomes in part reflect the conservative oil prices used in preparing budgets. For FY 2006, oil prices used in budgeting ranged between 50 to 75 percent of the World Economic Outlook (WEO) projection of $66.5 per barrel (from $35 in Nigeria to $51.3 in Côte d’Ivoire). Some oil producers, like Gabon, are allocating part of their oil revenues to funds that can be tapped by future generations.

National saving is proxied by the change in the current account balance, given that investment has been relatively stable.

For example, while in 2005 Angola had an oil sector trade surplus of over $19 billion, there was an oil sector income outflow of $3.6 billion along with a services deficit of nearly $7 billion (much of which is incurred in the oil sector). In the same year, Nigeria had a trade surplus in the oil sector of over $40 billion, with an income outflow of nearly $11 billion and a services deficit of $2.5 billion. SSA oil producers also tend to have substantial oil equipment imports because they have expanded production capacity in recent years.

Among the 13 countries classified as landlocked, 9 are HIPCs, of which 6 have already qualified for MDRI relief. The increase in investment in the landlocked group is part of a broad increase across HIPCs. One simple way to assess the significance of the increase in investment is a statistical comparison of average investment in 1997-2002 and 2003-05: The unweighted average of investment increased by about 2 percentage points from the first to second periods for HIPCs and HIPCs at their completion point. The increase is strongly significant (according to a t-test) for the latter group.

Since MDRI relief is reflected in both grants and a reduction of scheduled debt service, the grant data shown in Table SA.20 do not fully capture this relief. In addition, classification in the fiscal and external accounts varies by country depending on the classification system, accrual or cash budgeting, and the arrangements between central bank accounts and the budget for transfer of the IMF’s MDRI relief.

Oil import volumes may have declined in 2005, but this seems temporary because energy consumption appears to continue to grow. For SSA importers as a group, the data are not conclusive. Aggregate oil import volume data show substantial variations over time, with pronounced decreases also in years of relatively low oil prices (1999, 2002) and pronounced increases even in times of high and rising prices (2004). The data suggest that oil import volumes are mainly a function not of consumption but of anticipated prices and supply developments, and of a commensurate variation of inventories. Smoothing the data with a three-year moving average suggests that oil import volumes did not fall through 2005, and data on petroleum consumption show a steady expansion by about 2.5 percent annually through 2004. Finally, oil import data in SSA are particularly subject to misreporting due to leakage from transit trade and other customs corruption issues, and smuggling.

They are Burundi, Chad, the Democratic Republic of the Congo, The Gambia, Guinea, Guinea-Bissau, Malawi, São Tomé and Príncipe, and Sierra Leone.

The second tranche of the October 2005 Paris Club agreement with Nigeria was implemented in May 2006. About 60 percent of Nigeria’s debt to the Paris Club has been cancelled. As part of the agreement, Nigeria cleared arrears and repaid early a substantial portion of outstanding debt.

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