Chapter

I. Highlights

Author(s):
International Monetary Fund. African Dept.
Published Date:
April 2007
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For the third year in a row, sub-Saharan Africa (SSA) recorded growth in the 5-6 percent range (Chapter II). In 2006 economic growth was over 5 percent, and for 2007 a pick-up to 6-7 percent is expected, mainly due to higher production in the oil-producing countries (OPCs). Growth was equally strong in OPCs and non-oil-producing countries; more than half of non-oil-producing countries grew at 5 percent or more in 2006, and almost two-thirds are projected to do so in 2007. Nevertheless, some non-oil countries—including in the WAEMU (West African Economic and Monetary Union) zone and postconflict countries—failed to catch up to the regional average. The higher growth in the region is attributable both to positive external developments, such as strong foreign demand, and to strong domestic investment and productivity gains supported by sound economic policies in most countries.

The trend growth performance is inching toward the 7 percent rate earlier established as a target for SSA to achieve the income poverty Millennium Development Goal (MDG). While it is too early to assess whether higher growth has translated into a reduction in poverty, we do know that governments are spending more to reduce poverty and provide critical government services, financed in part by debt relief. Policymakers are also confronted with the challenges of population growth, which in SSA clearly exceeds that of other developing regions, and the high incidence of HIV and malaria. The potential impact of climate change adds to the uncertainty.

Commodity producers have saved a significant part of their additional revenue. That did not happen in past commodity price booms, when large and unproductive investment projects quickly exhausted the gains. Both OPCs and non-oil-producing countries are now faced with pressures for higher wages and the need to create fiscal space for investments in electric power and roads to alleviate bottlenecks to growth. These pressures intensified with the promises of scaled-up aid—promises that have yet to materialize—and debt relief under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI). With higher resource levels and increasing spending pressures, it becomes even more critical to strengthen governance, in particular public financial management (PFM) systems, to ensure that resources are used efficiently and transparently.

Faced with historically high prices and finite resources, oil producers must now deal with the complexities of managing their resources (Chapter III). The question is not whether the resources should be spent, but how and how fast. Countries might choose to use their wealth in different ways, such as adopting a framework based on a permanent income hypothesis (since the resources are finite) or on current social needs, as long as the spending is consistent with fiscal sustainability. In any case, OPCs need to ensure that, unlike in past commodity booms, the resources are productively used to yield high returns. Unless properly managed, scaling up spending could put substantial upward pressure on prices, causing an excessive real appreciation of the exchange rate. The risk can be mitigated by policies that ease absorptive capacity, such as liberalizing trade, reducing the numerous costs of doing business, and making labor markets more flexible. Whether countries should set up special oil funds to smooth spending over time depends on whether their governments are able to achieve overall fiscal surpluses as well as on their ability to safeguard resources for intended needs. In any case, only firm management of public finances will ensure that resources are spent efficiently.

The recent commodity boom has improved SSA’s export prospects (Chapter IV). Trade with Asia, particularly China, has expanded dramatically, although European Union countries and the United States still account for 2½ times the export shares of Asia. Nevertheless, the export of commodities has not been accompanied by export diversification. Oil and other commodities are still the main export items; SSA’s exports of manufactures are still confined to a few product categories. The emergence of clothing exports reflects the impact of African Growth and Opportunity Act (AGOA) and the fact that expiration of the Multi-Fiber Arrangement did not have as dire an effect as expected.

Most countries have neither managed to achieve a labor-intensive manufacturing export surge nor climbed up the value chain of their commodity-based exports. This is largely due to lack of infrastructure and the costs of doing business, including forbiddingly high total shipping costs. Experience from other parts of the world shows that trade could be an important engine of growth and that it does not necessarily require a transition to predominantly manufacturing-based exports. Tackling structural impediments to growth and trade in valued-added industries linked to agriculture and commodities is therefore important if SSA is to realize its growth potential.

African governments have increasingly turned to domestic debt markets as a way to finance their fiscal deficits (Chapter V). Local-currency government debt markets can increase the efficiency and transparency of budgetary financing. They can also give impetus to financial sector development by creating a benchmark instrument that will help establish a yield curve.

Corporate bond markets, which could help overcome the longer-term financing constraints of Africa’s private sector, generally develop only after government bond markets are in place, but most African domestic debt markets are still in their infancy. To achieve the full benefits, market infrastructure and debt management are essential. Limiting fiscal deficits will reduce the risk of crowding out. A review of the capital accounts may be needed to ensure that domestic interest rates are linked to world rates. Policymakers should also consider how foreigners can participate in domestic debt markets, taking into account the possible variability of capital flows.

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