Chapter

CHAPTER III PROSPECTS FOR 2006

Author(s):
International Monetary Fund. African Dept.
Published Date:
November 2005
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The average growth rate for SSA as a whole is projected to rebound to 5.3 percent in 2006 primarily because of rising petroleum output in oil-producing countries and some pickup in import growth in advanced countries. Output growth in oil-producing countries is forecast to increase significantly from 4.7 percent to 8.1 percent. This reflects stronger growth in Angola and Nigeria. In the latter, growth is expected to pick up to about 4.9 percent as a major offshore oil field comes onstream. Growth is also expected to be particularly strong in Chad.

Real GDP growth of at least 5 percent is projected in about one-half of the oil-importing economies, with Cape Verde, Madagascar, Malawi, Mozambique, and Sierra Leone all projected to grow in excess of 7 percent. Steady growth in South Africa continues to be supported by robust domestic demand. Economic activity in the oil-importing countries is expected to be stimulated by a further rise in investment rates, which are projected to increase by 0.4 percentage point to 19.3 percent of GDP.1 Output growth below 2 percent is projected in only four countries in the region—Lesotho, Seychelles, Swaziland, and Zimbabwe.

Inflation looks set to fall. Given that monetary policy is expected to remain prudent in most countries, and world inflation remains subdued, consumer price increases are projected to decline to about 8.3 percent, on average, in the region as a whole. The existing policies of passing higher oil prices through to consumers are expected to continue in most countries.2 Among oil-producing countries, inflation is projected to fall significantly, with much lower rates in Angola and Nigeria. In the CFA franc zone, average inflation is expected to be contained to 2.6 percent.

On the strength of economic activity in oil-producing countries, both overall fiscal and current account deficits are expected to improve in SSA, on average, in 2006. These balances are projected to worsen, however, in a number of the oil-importing countries. A deterioration in the fiscal balance (including grants) is expected in 18 countries in the region, including, most notably, in Burkina Faso, Comoros, Kenya, São Tomé and Príncipe, and Uganda.3 On the basis of current projections of financing, 23 countries expect to increase their reserves in terms of months of import cover, whereas 16 countries are expecting their reserve coverage to fall.

SSA’s prospects in 2006 continue to be subject to political and economic risks. On the upside, recent international efforts to further reduce debt and increase overall development assistance related to the MDGs could enhance the region’s prospects for growth and poverty reduction, assuming that policies are implemented to ensure that additional resources can be absorbed and used efficiently. Countries receiving significantly scaled-up assistance would also need to remain alert to any emerging bottlenecks in individual sectors or a deterioration in international competitiveness. Proposed EU sugar reforms may entail significant export revenue losses for several sugar-producing SSA countries, beginning in 2006. In June 2005, the European Commission proposed cutting the internal EU sugar price by 39 percent and eliminating additional special quotas.4 Mauritius and Swaziland have been identified as countries in which the macroeconomic implications could be large. Many countries in SSA also remain vulnerable to droughts and other natural disasters. Moreover, high prevalence rates of HIV/AIDS in some countries may affect their economic prospects. The fragile security situation in the Great Lakes region also remains an important concern. Finally, under current conditions, economic risks stem also from uncertainties in the oil markets, while a larger-than-expected fall in non-oil commodity prices in 2006 would lead to a further worsening of the terms of trade of oil-importing countries.

Low investment rates in these countries have been behind relatively poor growth performance in the past (see IMF, 2005).

Box 2.2 of IMF (2005) describes current policies in the SSA region regarding the pass-through of oil prices to consumers.

The significant deterioration in São Tomé and Príncipe reflects the nonrepeat of the oil bonus the country had received in 2005. Fiscal balances (excluding grants) are expected to deteriorate in 17 countries in SSA in 2006.

The European Commission hopes for political agreement on the proposals by November 2005. Reforms would take place in 2006–09 and would imply significant adjustment costs—as sugar industries contract or close in certain high-cost countries—for some Asian, Caribbean, and Pacific countries that now enjoy preferential access to the EU market at EU internal prices (which exceed the world price by a factor of three to four).

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