I. Overview

International Monetary Fund. African Dept.
Published Date:
October 2007
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Main Developments and Outlook for 2007

Growth should reach 6 percent in 2007 (Table 1.1 and Figure 1.1), slightly lower than projected in the April Regional Economic Outlook: Sub-Saharan Africa but up from 5½ percent in 2006.1 The expansion partly reflects rising production in oil exporters and strong domestic investment in oil importers, fueled by continued progress with macroeconomic stability and reforms in most countries. The region also benefited from the external environment, including solid demand for commodities, increased capital inflows, and debt relief.

Figure 1.1.A Comparison of Growth

Sub-Saharan Africa growth is robust.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

The external environment continues to be favorable. Demand for sub-Saharan African exports is robust, nonfuel commodity prices are still growing at double digits, and fuel prices are projected to continue rising this year. Sub-Saharan Africa’s terms of trade have improved by 26 percent in the past three years.

The economic expansion is strongest in oil exporters but cuts across country groups (Box 1.1 and Figure 1.2).

  • Oil exporters should see growth accelerate to 7½ percent in 2007, led by Angola and Equatorial Guinea, where new oil fields have come on stream. In Nigeria, civil unrest in the Niger Delta is disrupting onshore oil output, though that is being partly offset by new off-shore production. Among oil exporters, oil revenues are spurring domestic demand and growth in the non-oil sector.

  • Middle-income countries should again grow by 4¾ percent this year, driven by South Africa, where both public and private investment should rise.

  • Low-income countries are expected to increase growth somewhat to about 7 percent in 2007, fueled by agriculture and construction.

  • Fragile countries are expected to grow at over 5 percent, faster than in 2006. Sierra Leone, Liberia, and the Democratic Republic of Congo are benefiting from buoyant agricultural output and rising exports. But weak policies and institutions and the risks of conflict and political instability weigh heavily on many countries. In Zimbabwe, economic activity is likely to contract by at least 6 percent in 2007 as macroeconomic imbalances worsen and the government intensifies price controls to suppress inflation.

Figure 1.2.Growth in Sub-Saharan Africa

The expansion cuts across country groups.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Table 1.1.Sub-Saharan Africa: Selected Indicators, 2003–081
Percentage change
Real GDP4.
Of which: Oil exporters27.
Non-oil exporters3.
Real non-oil GDP3.
Consumer prices (average)
Of which: Oil exporters18.713.714.
Non-oil exporters7.
Per capita GDP2.
Percent of GDP
Exports of goods and services34.235.638.440.540.440.8
Imports of goods and services33.534.234.836.438.837.9
Gross domestic saving19.721.423.325.423.324.7
Gross domestic investment19.319.919.721.121.821.8
Fiscal balance (including grants)-2.2-
Of which: Grants1.
Current account (including grants)-2.4-1.6-0.30.6-2.6-1.4
Of which: Oil exporters-
Non-oil exporters-1.8-3.1-4.0-5.2-5.6-6.0
Terms of trade (percent change)
Of which: Oil exporters4.014.432.517.41.34.7
Non-oil exporters0.10.5-1.97.1-0.3-2.2
Reserves (in months of imports)
Memorandum items:
Oil price (U.S. dollars per barrel)28.937.853.464.368.575.0
Advanced country import growth (in percent)
Real GDP growth in other regions
Sub-Saharan Africa (including Zimbabwe)
Sub-Saharan Africa (WEO definition)
Developing Asia8.
Middle East6.
Commonwealth of Independent States7.
Sources: IMF, African Department database; and World Economic Outlook (WEO) database.Note: Data as of October 1, 2007. Arithmetic average of data for individual countries, weighted by GDP.

Excludes Zimbabwe, unless otherwise indicated. See Appendix Table A1 for the list of sub-Saharan African countries.

Consists of Angola, Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon, and Nigeria.

Includes the countries listed in Appendix Table A1 plus Djibouti, Mauritania, and Sudan.

Sources: IMF, African Department database; and World Economic Outlook (WEO) database.Note: Data as of October 1, 2007. Arithmetic average of data for individual countries, weighted by GDP.

Excludes Zimbabwe, unless otherwise indicated. See Appendix Table A1 for the list of sub-Saharan African countries.

Consists of Angola, Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon, and Nigeria.

Includes the countries listed in Appendix Table A1 plus Djibouti, Mauritania, and Sudan.

Box 1.1.Typology of Countries

This Regional Economic Outlook: Sub-Saharan Africa organizes 44 countries into four nonoverlapping groups: oil exporters, and non-oil-exporting middle-income, low-income, and fragile countries (see the Appendix for a list).

  • The 7 oil exporters are countries where net oil exports make up 30 percent or more of total exports. Except for Angola and Nigeria, all belong to the CFA franc zone. Oil exporters are classified as such even if they would otherwise qualify for another group.

  • The 8 middle-income countries are not oil exporters and have per capita income higher than $905, according to 2006 GNI per capita as calculated by the World Bank.

  • The 15 low-income countries are not oil exporters and have per capita income equal to or lower than $905 and a score higher than 3.2 on the Country Policy and Institutional Performance Assessment of the World Bank, following the classification in the 2007 Global Monitoring Report.

  • The other 14 countries are categorized as fragile.

Domestic demand continues to drive the expansion in sub-Saharan Africa, with a strong contribution of investment reflecting the favorable economic outlook and better policies (Figure 1.3). Domestic investment is set to reach close to 22 percent of GDP, an all-time high for the region; it is particularly strong in the middle- and low-income country groups. The pick-up of growth in 2007 over 2006 is based on higher government consumption in some countries thanks to higher oil revenues and debt relief, and a greater contribution from net exports, reflecting rising oil shipments.

Figure 1.3.Contribution to GDP Growth in Sub-Saharan Africa

Domestic demand continues to drive growth.

Source: IMF, African Department database.

This year’s growth follows on several good years. The external environment has been broadly supportive. In addition, over the past decade many countries have been reforming their economies and strengthening macroeconomic policies. Improvements in public financial management, trade policy, and the business environment have helped support growth in a number of sub-Saharan African countries.2 Moreover, armed conflicts and political instability have become less frequent. As a result, investment has increased, economic growth has strengthened, and income volatility has fallen to near-30-year lows. Real per capita GDP growth averaged 3½ percent over 2003–06 and is expected to reach 4¼ percent in 2007, up from about 1 percent in 1997–2002 (Figure 1.4). All country groups are contributing, though fragile states are lagging behind.

Figure 1.4.Real Per Capita GDP Growth in Sub-Saharan Africa

Per capita income is generally improving, but fragile countries are lagging.

Source: IMF, African Department database.

Sustaining growth is a challenge. In the past, growth episodes have generally been shorter in sub-Saharan Africa than in other regions and more often ended with large output collapses.3 Historically, terms of trade changes have been significant drivers of growth in Africa (Box 1.2). What is the role of terms of trade in the current expansion?

  • Middle-income, low-income, and fragile countries have all grown in recent years despite stable or declining terms of trade (Figure 1.5 and Box 1.2). In these countries, rising investment and productivity have underpinned growth, likely reflecting efficiency gains from structural reforms and improvements in the business climate and macroeconomic policies.

  • However, in oil exporters as a group (and, more generally, net commodity exporters) more favorable terms of trade are supporting growth. For them, the efficient use of new resources is critical, underscored by sound public financial management (PFM) and good governance.

Figure 1.5.Terms of Trade in Sub-Saharan Africa

Terms of trade have improved for oil exporters.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Sustaining the current expansion ultimately rests on each country’s ability to use higher income to accelerate socioeconomic development. This, in turn, requires continued structural and institutional reforms to increase productivity, boost resilience to shocks, and create conditions that attract private investment to noncommodity sectors.

Despite sustained increases in commodity prices, average inflation has stayed in the 6–9 percent range for the first time in decades (Figure 1.6). Annual average inflation is projected to be 7½ percent in 2007, broadly unchanged from 2006.

  • In oil-exporting countries average inflation is expected to fall further, partly reflecting stabilization gains in both Angola and Nigeria.

  • Inflation in middle-income countries will likely accelerate to 6¾ percent this year, 1¾ percent higher than in 2006. In South Africa, higher food and energy prices pushed inflation slightly above the upper limit of the target band (3–6 percent) in the first half of the year; the Reserve Bank responded by adjusting the repo rate.

  • In most low-income countries, despite strong domestic demand, inflationary pressures are expected to ease further for a host of reasons: a more bountiful food supply; monetary policies that have helped check inflation expectations and the effects of higher oil prices; rising capital inflows that led to nominal exchange rate appreciation in some countries; and low bank financing of the budget deficit in most countries.

  • In fragile countries, average inflation remains high and there are large differences between countries. Inflation is above 10 percent in six countries (Democratic Republic of Congo, Eritrea, Guinea, Liberia, São Tomé and Príncipe, and Sierra Leone). Hyperinflation in Zimbabwe is fueled by rapidly deteriorating economic conditions and shortages of basic goods.

Figure 1.6.Inflation in Sub-Saharan Africa

Only fragile countries saw inflation above the 6–9 percent range.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Official grants to sub-Saharan Africa will likely increase only slightly; emerging creditors (not included in official aid data) have increased their financial assistance to the region (Figure 1.7 and Box 1.3). Grants to all of sub-Saharan Africa, excluding Nigeria and South Africa, are projected to be close to 3 percent of GDP, with a slight rise for the low-income countries, particularly Ethiopia, Mozambique, and Rwanda.4 Official development assistance (ODA) flows from OECD countries to sub-Saharan Africa (excluding debt relief to Nigeria in 2005) have been broadly flat since 2003. Meanwhile, emerging creditors, particularly China, are stepping up assistance to the area, generally in the form of project assistance and export credits.5

Figure 1.7.Components of Official Development Assistance to Sub-Saharan Africa

Net flows have been flat since 2003.

Source: OECD, DAC-ODA. Data as of October 1, 2007.

Box 1.2.Terms of Trade and Current Growth Episodes in Sub-Saharan Africa

To what extent have stronger terms of trade contributed to the current expansion in sub-Saharan Africa? Perhaps surprisingly little: most African countries currently enjoying prolonged growth spells have not had positive terms of trade shocks.

Growth in Africa, as elsewhere, depends on a complex set of factors, including sound economic policy, openness to trade, strong institutions, and good public services.1 Historically, changes in the terms of trade have been important determinants of growth in Africa (Deaton, 1999). In the short to medium term, higher export prices induce supply (increases in investment and output) and demand (increases in income) effects. Terms of trade improvements since the second half of the 1990s have, correspondingly, contributed to the growth recovery in sub-Saharan Africa, with some evidence that resource booms can account for much of the growth in resource-rich countries (Collier and Goderis, 2007). However, the longer-term effects of terms of trade and resource booms are less clearly positive. Positive terms of trade shocks may have positive short-term effects on output but adverse ones in the long term (Collier and Goderis, 2007). Similarly, positive terms of trade shocks are more strongly correlated with shorter-lived expansions than with sustained growth episodes, suggesting that terms-of-trade-induced booms may be less likely to last (Hausmann, Pritchett, and Rodrik, 2004).

What about the current expansions? Using the methodology of Berg, Ostry, and Zettelmeyer (2007), we identify breaks in growth and the resulting “growth spells”—periods with at least 5 years of annual per capita growth above 2 percent—in sub-Saharan Africa for 1980 to the present. There have been 17 completed spells since 1980 and 21 sub-Saharan African countries are currently enjoying growth spells. Both completed and ongoing spells are only weakly associated with positive terms of trade shocks. In particular, most ongoing growth spells are taking place despite negative terms of trade changes since the growth spell began (figure). This is not to say that terms of trade changes do not matter for growth, but rather that other factors are more important for most countries currently enjoying sustained growth.

Ongoing Growth Spells and Terms of Trade Growth During Spells

Note: This box was prepared by Charalambos Tsangarides.1IMF (2005) reviews the determinants of growth in Africa and the pickup in the last decade.

Box 1.3.Aid to Sub-Saharan Africa: Where Do We Stand on Gleneagles?

Early estimates suggest that the doubling of aid to sub-Saharan Africa pledged at the G-8 summit at Gleneagles in 2005 is not on track. Debt relief grants, a major component of aid to the region in recent years, are likely to taper off. Debt relief has freed up substantial resources for investment and social spending (IMF, 2006, Box 1.4), but as these grants decline, other types of aid will have to be increased. In fact, bilateral aid, excluding debt relief grants, has generally been static. If aid to the region is to meet the US$50 billion target set for 2010, donors must consistently increase net disbursements, excluding debt relief grants, by more than 15 percent every year. However, current country-by-country projections indicate that aid through 2010 will grow by only 8 percent a year (IMF, African Department database, 2007).

Translating increases in aid budgets into actual disbursements is always challenging: disbursements may be conditioned on commitments by recipient countries to implement specific reforms, or recipient countries may have limited administrative capacity to plan for and spend higher aid. Only half of the 20 countries that committed to develop a long-term education plan at the First African Ministerial Conference on Financing for Development in May 2006 have shown any progress (Janneh, 2007). But even countries like Ghana and Tanzania that have actionable development strategies and systems to implement them have seen aid level off in the last two years (World Bank, 2007b).

Changing modalities and a new aid architecture may improve the outlook in sub-Saharan Africa. While donors participating in the OECD’s Development Assistance Committee will continue to be a major source of development finance, the importance of nontraditional donors is growing, because they provide support not only through development assistance but also through bilateral trade, preferential credits, and foreign direct investment. The increasing role of global private aid funds and the proliferation of types of donors may help offset shortfalls of aid from traditional donors, but they carry their own challenges, including for macroeconomic management and donor coordination.

There is also a shift from project-based toward program-based aid that should increase alignment of aid with country systems. Finally, further progress in aid harmonization and alignment, more focus on result-oriented frameworks, and better aid predictability can make aid more effective.

Note: This box was prepared by Felipe Zanna, Smita Wagh, Armine Khachatryan, and Emmanuel Hife.

Reversing the previous trend, sub-Saharan Africa’s current account deficit should widen in 2007 to about 2½ percent of GDP (Figure 1.8). This mainly reflects rising domestic demand, which is only partly offset by a rebound in the volume of exports and a further modest improvement in the terms of trade (Figures 1.9 and 1.10):

  • The current account surplus of sub-Saharan African oil exporters is set to decline to 3½ percent of GDP in 2007; surpluses will be smaller in Angola and Nigeria, as oil exports in percent of GDP decline and imports are expected to grow owing to investment in infrastructure.

  • The current account deficit of middle-income countries should hold broadly steady at about 5 percent of GDP. In South Africa, higher imports to satisfy domestic demand are expected to be roughly balanced by strong exports.

  • In low-income countries the current account deficit is likely to widen slightly to 7 percent of GDP. Rising imports are being financed through export growth, some increase in capital inflows, and slightly higher grants. In Burkina Faso, Mozambique, Niger, and Tanzania, relatively rapid growth in investment is fueling higher imports, raising the deficit by more than 1 percent of GDP. In Madagascar, imports related to huge foreign direct investment in mining will more than double the deficit, to 20 percent of GDP.

  • In fragile countries, the deficit should widen slightly to 3¼ percent of GDP. In Zimbabwe, exports and imports are both collapsing, with the current account deficit falling to under 1 percent as external finance is withdrawn.

Figure 1.8.Sub-Saharan Africa’s External Current Account Balance

The current account deficit is widening.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Figure 1.9.Trade Volume and Terms of Trade in Sub-Saharan Africa

Import volume growth outpaces export growth.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Figure 1.10.Sub-Saharan African Commodity Prices

Commodity prices are still high.

Sources: IMF, Commodity Prices; and UN Comtrade.

1 Composite of cocoa, coffee, sugar, tea, and wood, weighted by Sub-Saharan Africa exports.

Private capital inflows have risen rapidly in recent years, particularly to South Africa and Nigeria, reflecting the favorable global environment and foreign investment in natural resource production (Box 1.4). Net foreign direct investment (FDI)—the largest source of private capital inflows into sub-Saharan Africa—should reach about US$18 billion this year. Portfolio flows have also been an important source of inflows. Since mid-2005 private foreign investors have been acquiring government debt in local currencies, particularly in Botswana, Kenya, Malawi, and Nigeria.

Rising capital inflows and generally small current account deficits have allowed sub-Saharan African countries as a group to increase foreign reserves and pay down external debt.

  • Foreign reserves for all of sub-Saharan Africa are expected to reach an all-time high of US$137 billion in 2007, raising import coverage to 5.7 months (Box 1.5 and Figure 1.11). This reflects insufficient initial reserve holdings, the increasing openness of sub-Saharan African economies, and a policy choice to build precautionary levels to insure against balance of payment risks. The value of this insurance was manifest when oil prices rose sharply in 2003 and oil importers managed to preserve growth, in part by drawing down reserves (IMF, 2006). Over the past 10 years, fast reserve accumulation by oil exporters (about US$50 billion) and steady accumulation by South Africa (about US$20 billion) have been notable. Other sub-Saharan African countries have kept reserves roughly stable as a share of imports.

  • Sub-Saharan Africa’s external debt is projected to fall to 11 percent of GDP in 2007, a three-decade low, thanks to rapid growth, comprehensive debt relief, and debt repayment by Angola, Malawi, Nigeria, and others. Debt relief was delivered through the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and the MDRI. So far the IMF has contributed MDRI debt relief of US$3 billion to 17 countries in sub-Saharan Africa (most recently, in March 2007, São Tomé and Príncipe). Eight more could qualify once they reach the HIPC completion point.6 Though debt ratios have been declining in all groups, they remain high in many countries, in particular fragile ones (Figure 1.12).

Box 1.4.Private Capital Flows to Sub-Saharan Africa

Although private capital flows to sub-Saharan Africa are still dwarfed by those to regions such as Asia, they have tripled since 2003. Nigeria and South Africa attract the bulk of these inflows, accounting for about two-thirds of total flows in 2006. However, foreign investments in the bond and equity markets of a few other countries are on the rise.

In 2006, total gross private flows amounted to about US$45 billion, almost 6 percent of GDP, compared with about US$9 billion in 2000.1 This surge reflects improved domestic fundamentals in recipient countries as well as the favorable global economic environment.

Nevertheless, FDI inflows continue to be directed mainly to extractive industries; an estimated 70 percent of the direct investment flows to sub-Saharan Africa in 2006 went to oil exporters Angola, Equatorial Guinea, and Nigeria (figure). South Africa is the recipient of by far the most private portfolio flows, which have shot up to almost half of total gross private capital flows to the region (figure).

An interesting recent development is the rise (admittedly from a very low base) in portfolio flows to a small group of countries, notably Cameroon, Ghana, Uganda, and Zambia, attracted by improved risk ratings and higher yields.2 There is also evidence of foreign investments in bond and equity markets in Botswana, Kenya, Malawi, and Nigeria. These flows are still generally small, both absolutely and in relation to GDP, but they have become important in some countries. For example, in 2006 they represented about 3 percent of GDP for Cameroon and 2 percent for Malawi.

The projected decline in total gross private capital inflows in 2007 is the result of a reduction in portfolio flows to South Africa after a record increase in 2006. FDI in non-oil exporters and portfolio flows to sub-Saharan Africa (excluding South Africa) will increase slowly. The impact of recent market turbulence on sub-Saharan Africa has so far been limited but highlights the uncertainties.

The rising private inflows underscore the importance of proper financial system regulation, monitoring, and supervision (IMF, 2007b, Chapter 5). In general, the benefits of greater international financial integration accrue to those countries with strong domestic financial systems and institutions.

Gross Private Capital Flows to Sub-Saharan Africa

Source: IMF, African Department database.

Note: This box was prepared by Gillian Nkhata and Corinne Delechat.1 Although the measures of private capital flows used here suffer from the poor quality of portfolio flow estimates reported in the World Economic Outlook database, they are broadly consistent with other data sources and are the most comprehensive measure available.2 See IMF (2006), Box 1.1.

Figure 1.11.International Reserves in Sub-Saharan Africa

Large inflows and high commodity prices have allowed the buildup of foreign reserves.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Figure 1.12.External Debt in Sub-Saharan Africa

Government debt is falling.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Macroeconomic Policy Issues

Monetary and exchange rate policies

Monetary developments have generally reflected the rise in trade and capital flows in the sub-Saharan African region:

  • Foreign asset accumulation has fueled growth in money stocks, particularly in oil exporters and middle-income countries (Figure 1.13).

  • Growing liquidity has stimulated credit growth of more than 20 percent in all groups (Figure 1.14).

  • Real exchange rates have appreciated in many countries, especially oil exporters. (Figure 1.15).

Box 1.5.Foreign Exchange Reserve Adequacy in Africa

Reserve adequacy needs to be viewed in the broader context of macroeconomic policies. A specific level of reserves may be adequate when there are alternative sources of financing or adjustment can be quickly attained. But the same level may not be adequate if there are no alternative financing sources, no exchange rate instrument, or a reluctance or inability to correct a current account deficit. There are also a number of economic fundamentals, besides international reserves, that can increase the frequency or amplify the impact of adverse shocks, rendering a country crisis-prone. Among these are lack of export diversification; risky short-term financing; stock imbalances owing to maturity, currency, and interest rate mismatches; aid volatility; and high leverage in both public and private sector balance sheets. The reserve indicators considered here are therefore useful for operational purposes but should be considered indicative rather than definitive.

Current account–based measures—gross official reserves in months of imports—are particularly useful for sub-Saharan African countries, indicating how rapidly a country would need to adjust to a shock. At the end of 2006, reserves on average covered 5.6 months of imports, up from 3.8 months in 1997–2002, though levels varied widely (figure).

For the few sub-Saharan African countries that are subject to potential capital outflows, capital account–based measures of reserve adequacy are also important. At the end of 2006, reserves covered close to five times short-term external debt, and over 100 percent of broad money. The ratio of reserves to short-term debt is especially relevant for countries with risks related to short-term financing. For middle-income sub-Saharan African countries, foreign reserves cover twice these countries’ short-term external debt.

A complementary approach to assessing reserve adequacy estimates the insurance value of reserves, weighing the benefits of consumption smoothing against the cost of holding reserves. Reserve adequacy would depend on a country’s vulnerability to shocks, the magnitude of likely shocks, and the opportunity cost of holding reserves.1 A preliminary analysis using the Jeanne-Rancière model supports the observation that most sub-Saharan African countries carry reserves consistent with the expected output costs of large (i.e., greater than 10 percent) terms of trade shocks. However, the few exceptions are cause for concern, particularly because sub-Saharan African countries may be subject to a combination of shocks, including abrupt changes in aid flows (see Eifert and Gelb, 2005).

Sub-Saharan Africa: International Reserves Coverage

(Months of imports)

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Note: This box was prepared by Paulo Drummond.1 See Jeanne and Rancière (2006); Becker and others (2007); and Hauner (2005). We calibrate the Jeanne-Rancière model using sample estimates for the 44 sub-Saharan African countries for 1980 through 2006. In this period, terms of trade shocks greater than 10 percent occurred about 5 percent of the time, causing output losses of 3.7 percent of GDP in the following year.

Figure 1.13.Counterparts to Money Supply in Sub-Saharan Africa

Foreign asset accumulation fueled growth in money stocks.

Source: IMF, International Financial Statistics.

Figure 1.14.Credit to the Private Sector in Sub-Saharan Africa

Credit is growing fast from low levels.

Sources: IMF, International Financial Statistics; and IMF, World Economic Outlook.

Figure 1.15.Real Effective Exchange Rates in Sub-Saharan Africa

The real exchange rate has appreciated for oil exporters.

Sources: IMF, Information Notice System; and World Economic Outlook.

Countries with a fixed exchange rate have continued to enjoy the stability and credibility benefits of a strong nominal anchor, but they face important challenges. Given the exchange rate target, inflation partly reflects underlying trends in the real exchange rate. However, monetary policy needs to play a supportive role, coordinating with fiscal policy to provide an environment conducive to growth while avoiding excessive inflation and managing capital inflows and terms of trade shocks. Countries that peg to the appreciating euro (including Cape Verde and Comoros) have thereby imported downward price pressure. Real exchange rates have been appreciating substantially, especially in the Economic and Monetary Council of Central Africa (CEMAC), where oil exporters predominate (Figure 1.16). This partly reflects appreciation pressures arising from the oil boom, notably an expansionary non-oil fiscal stance in the face of supply constraints. They have risen much less in the West African Economic and Monetary Union (WAEMU). In this context, the key objectives are the following:

  • Manage liquidity given its possible inflationary implications. Central banks in the CFA franc zone have not been pursuing an active monetary policy, relying mostly on differentiated reserve requirements and adjusting official interest rates only sparingly. While high liquidity is partly structural, caused by limited opportunities for banks to expand assets faster, there is always the potential for high liquidity to feed inflationary pressures.

  • Cope with rising foreign exchange inflows. Inflows in recent years have been driving appreciation of real exchange rates in many CFA franc zone countries, particularly oil exporters. In the CEMAC, real exchange rate appreciation and broad money growth have been much stronger than in the WAEMU, but private sector credit has grown much less.

  • Coordinate monetary with fiscal policy. Rising inflows have helped raise investment and growth, but in some countries they have also put pressure on prices and the real exchange rate. While policy responses can vary, it is important for fiscal and monetary authorities to coordinate actions. In currency unions, fiscal policy has even greater responsibility for safeguarding macroeconomic stability, making it even more important that there is a mechanism to coordinate national fiscal policies with regional monetary policy. Fiscal restraint is one way to mitigate real appreciation and reduce vulnerability to a sudden stop or reversal of the inflows or the terms of trade; without it monetary policy can do little to stem inflation over the medium term.

  • Preserve competitiveness. Against the backdrop of a recent loss of price competitiveness in the WAEMU and the CEMAC, preserving competitiveness will require both a supportive fiscal policy and reforms to address long-standing structural obstacles, such as inadequate infrastructure, deterrents to doing business, and low productivity. Recent progress in some member countries is encouraging, but overall a more concentrated effort is needed.

Figure 1.16.Real Effective Exchange Rates in the CEMAC and the WAEMU

Appreciation in the CEMAC has been greater than in the WAEMU.

Source: IMF, Information Notice System.

For countries with a flexible exchange rate, reserve accumulation has often limited exchange rate volatility. The following cases are illustrative:

  • In South Africa, a flexible exchange rate policy is part of the Reserve Bank’s inflation targeting regime, along with a declared policy of buying foreign exchange to build up reserves when the currency is strong. Tracking inflows, gross foreign reserves have risen gradually, and the nominal exchange rate has fluctuated without a defined trend. Continued inflation pressures led the Reserve Bank to resume its monetary tightening in mid-2007.

  • In Nigeria, the central bank pursues a money targeting regime while maintaining a stable exchange rate. Foreign reserve accumulation beyond the level of fiscal savings has helped stabilize the official exchange rate against the dollar since 2004, and inflation has been in the single digits since last year.

  • In Kenya, the central bank holds to both a managed float and a reserve money target. Both nominal and real exchange rates have appreciated in the past two years, with the authorities intervening at times to alleviate appreciation pressures.

The real effective exchange rate has been appreciating for many countries with a flexible exchange rate, especially oil exporters and low-income countries (Figure 1.17). After depreciating in the early 2000s, real exchange rates reversed course as inflows surged and commodity prices rose. For sub-Saharan Africa as a whole, the median real exchange rate is broadly in line with its 1995–2007 average, but the distribution is widening (Figure 1.18).

Figure 1.17.Real Effective Exchange Rates in Sub-Saharan African Countries with a Floating Regime

Reserve accumulation has limited currency appreciation in several countries.

Source: IMF, Information Notice System.

Note: The oil-exporting countries are Angola and Nigeria. The middle-income countries are Mauritius and South Africa.

Figure 1.18.Real Effective Exchange Rates in Sub-Saharan Africa

The exchange rate distribution is widening.

Source: IMF, Information Notice System.

Countries in sub-Saharan Africa have continued to strengthen their financial systems. The macroeconomic and political environment in most countries has improved significantly and regulatory frameworks generally have been strengthened, though the scope and pace of reforms have varied. Reflecting these developments, banking systems in much of the region are exhibiting greater stability (with a few exceptions). The range of financial services is increasing and banks in selected countries are expanding their cross-border operations. The nonbanking sector, particularly microfinance and the pension industry, is growing rapidly, albeit from a low base.

Fiscal policy

Revenues have increased in recent years but are expected to fall in 2007, reflecting declines in Nigeria and Angola (Figure 1.19). Fiscal revenues exceeded 26 percent of GDP in 2006, up 4 percentage points on average since 2002.

Figure 1.19.Central Government Revenues in Sub-Saharan Africa

Revenues have improved in most countries.

Sources: IMF, World Economic Outlook; and IMF African Department database.

Spending increases have generally been directed to investment but also have gone to current spending on health and education (Figures 1.20 and 1.21). Spending, mainly on capital outlays, has picked up in most low-income and fragile countries. Middle-income countries are also spending more to address infrastructure bottlenecks and social needs.

Figure 1.20.Central Government Primary Spending in Sub-Saharan Africa

Primary spending is stable, except in middle-income countries…

… and capital outlays are rising in most countries.

Figure 1.21.Central Government Social Spending in Sub-Saharan Africa

Social spending has been sustained across countries.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

A small budget surplus is expected for all of sub-Saharan Africa in 2007 (Figure 1.22).

  • Oil exporters are expected to post a substantially smaller fiscal surplus of 3¾ percent of GDP. Although oil exporters have scaled up spending on social and infrastructure projects, they are still saving some of the windfall from higher oil revenue, unlike in previous oil booms. However, the ratio of their non-oil primary deficit to non-oil GDP is rising (Table SA2), making budgets more vulnerable to fluctuations in oil prices.7

Figure 1.22.Central Government Balance in Sub-Saharan Africa

The overall fiscal balance for all sub-Saharan Africa is a small surplus.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

In middle-income countries the fiscal surplus is set to remain stable at about ½ percent of GDP. South Africa has an emerging surplus; its tax revenues reflect buoyant demand and more efficient tax collection.

  • In contrast, the fiscal position of low-income countries is expected to swing to a deficit of 4 percent of GDP in 2007 as grants drop by close to 7 percentage points of GDP. The 2006 surplus was based on significant MDRI debt relief for Burkina Faso, Madagascar, Mali, Niger, and Zambia.8 The deficit should be financed mainly through external borrowing (Figure 1.23). Because Ghana and Senegal are working harder to raise revenues, their deficits will decline.

  • Grants amounting to close to 5 percent of GDP are expected to give fragile countries a surplus of about 1½ percent of GDP this year. But Eritrea and Guinea Bissau, which spend far more than others in the group, are likely to see deficits in the double digits even after grants.

Figure 1.23.Low-Income Sub-Saharan African Countries: Government Financing of Fiscal Deficits

Deficits have been financed mainly by foreign resources.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Addressing pressing development needs while preserving fiscal discipline will be the primary challenge for fiscal policy. Policymakers will need to coordinate fiscal and monetary policy, improve PFM, boost tax systems, and strengthen governance and institutions. Priorities differ by country:

  • In most countries, but particularly oil exporters, the challenge will be to manage the scaling up of public spending and identify ways to ensure that the economy can absorb higher spending effectively. Key macroeconomic concerns are to avoid destabilizing the economy and to minimize the risks of loss of competitiveness.

  • Middle- and low-income countries must make the most of their fiscal resources and efficiently invest in infrastructure to tackle bottlenecks, improve PFM, and better target social spending.

  • Fragile countries must improve administrative capacity, limit nonconcessional borrowing, and firm up fiscal controls—especially of off-budget spending.

Prospects for 2008

Global growth is projected to be 4¾ percent in 2008. Advanced economies should enjoy robust growth, helping to sustain demand for sub-Saharan African exports. Inflationary pressures are expected to stay well contained. Terms of trade for the region as a whole, meanwhile, should fall slightly as oil prices increase further by just under 10 percent; nonfuel commodity prices are expected to slip from their peak this year.

GDP growth in sub-Saharan Africa (including Zimbabwe) should accelerate to 6¾ percent, underpinned by oil production from new facilities coming on stream in Angola and Equatorial Guinea. In middle- and low-income countries, robust demand for nonfuel commodity exports and a promise of good harvests are expected to sustain growth. Buoyed by a continued recovery in investment, growth in fragile countries is expected to be above the regional average for the first time in years.

Box 1.6.The Local Currency Debt Market in the West African Economic and Monetary Union

The local currency debt market in the West African Economic and Monetary Union (WAEMU) is growing rapidly. Total annual gross issuance of publicly traded debt (public, private, and from regional institutions) has grown more than tenfold since 2000; in 2006 it reached CFAF 383 billion. As of mid-2007, total outstanding debt stood at CFAF 905 billion (about US$2 billion, 3.5 percent of GDP)—much lower than in South Africa (47 percent of GDP) but comparable to Russia (3 percent).1 As is typical, government debt accounts for most of the local debt market.

The elimination of central bank financing of the government has been the main catalyst for the growth of the local debt market. Starting in 1998, central bank financing to national treasuries was gradually phased out and national treasuries are now turning to market financing of deficits. The development of the treasury bills market has also helped reduce excess liquidity in the system, offering commercial banks a more profitable use for excess reserves.

Treasury bills account for most of the securities issued, but the share of government bonds has been rising since 2005. Treasury bill issues grew from zero in 2000 to about CFAF 200 billion in 2006. Maturities typically range from 3 to 12 months, but the most popular are the 3- and 6-month bills. Bond issues, on the other hand, increased from CFAF 5 billion in 2000 to about CFAF 120 billion in 2006 and CFAF 265 billion as of July 2007. Bond tenors range from 3 to 5 years. In this new market, credit differentiation among issuers is limited and supply and demand are key determinants of yields. Cross-border within-WAEMU transactions are common, especially for countries with smaller banking systems.

Banks and institutional investors are the largest investors in treasury bills. Because they have had so much excess liquidity, banks now have an appetite for government securities so they can earn interest at relatively short-term maturities (reserves at the central banks are not remunerated). In addition, interest on such instruments is typically tax-exempt, and treasury bills carry a zero risk weight in the calculation of capital adequacy ratios, are tradable in all eight WAEMU countries, and can in principle be used to obtain liquidity at the central bank if necessary. Although growing rapidly, government securities still generally represent only a small share of banking assets. Insurance companies in the WAEMU are also allowed to invest in treasury bills.

Since 2002, the International Development Association, Multilateral Investment Guarantee Agency, and African Development Bank have provided financial and technical assistance to develop the regional financial market by (1) increasing the role of the West African Development Bank (BOAD) as a benchmark issuer; (2) raising medium- to long-term funding for public infrastructure projects; (3) creating risk mitigation instruments to raise private funding for infrastructure projects; and (4) improving regulation, training and public education, and tax harmonization in WAEMU institutions.

A new segment for issuers that are not WAEMU residents, the “Kola Bond Market,” started with a CFAF 22 billion ($44.6 million) 5-year bond that was issued by the International Finance Corporation at the end of 2006. The AAA-rated bond has a 4.75 percent coupon, was issued at par, and was placed mainly with institutional investors within the WAEMU. More than 30 percent were sold to investors outside the WAEMU. The proceeds will be used to support long-term local-currency financing for local companies. Among the developmental objectives of the issue were (1) supporting regional integration and capital markets in West Africa; (2) introducing international best practices in bond documentation, syndication, and selling techniques; (3) reinforcing credit differentiation and rationalizing market regulations; and (4) offering investors an alternative instrument in local currency of AAA quality.

WAEMU: Treasury Bills and Government Bonds Gross Issuance

Note: This box was prepared by Amadou Sy.1 Estimates for Russia and South Africa are from the Bank for International Settlements.

Inflation is expected to decline to 6¾ percent for the region as a whole as Angola and the Democratic Republic of Congo stabilize further, food supplies improve, and macroeconomic policies generally hold firm. Only in Ethiopia, Eritrea, Guinea, São Tomé and Príncipe, Sierra Leone, and Seychelles is inflation expected to be in the double digits. Zimbabwe remains an exception.

The overall fiscal balance for sub-Saharan Africa is projected to be a surplus of close to 2 percent of GDP. As oil prices rise, the fiscal surplus for oil exporters should widen; changes in the fiscal position of most other countries are expected to be modest. Revenues are expected to rebound close to recent highs.

The current account deficit of sub-Saharan Africa should be smaller, with healthy export growth for the region as a whole. Oil exporters would record a bigger current account surplus as oil prices rise again. Meanwhile, the current account deficits of fragile and low-income countries are likely to widen moderately with higher oil prices, declining prices for nonfuel commodities, and fewer grants.

There are external and internal risks to the sub-Saharan African outlook. The former emanate from the global economy, the latter mainly from weak policy implementation and the potential for security and political shocks. The two may join forces: as in the past in sub-Saharan Africa, good times may not lead to sustained growth, and unsound domestic policies would increase that threat. Among specific risks are the following:

  • An unexpected slowdown in the global economy. Estimates for 1981–2006 suggest growth correlations of about 40 percent with the EU-15 and about 20 percent with the United States. While historically the co-movement of growth with Asia has been weak, this is changing with rapid growth in trade and financial linkages, in particular with emerging Asia. A slowdown in China, for example, would have a direct impact on global commodity demand and prices.

  • An unexpectedly large decline in nonfuel commodity prices. An average price shock of 10 percent—equivalent to about two standard deviations of terms of trade changes for oil-importing countries for 1981–2006—could reduce sub-Saharan African output by roughly 1.5 percent.9

  • Unexpectedly high oil prices. For oil importers, this would worsen the current account and the net foreign asset position. It would also reduce domestic demand by decreasing disposable income and corporate profitability. A permanent increase in real oil prices of US$10 a barrel could bring about an output decline of up to ½ percent in industrial countries (somewhat less for developing economies).

  • Greater credit discrimination and risk repricing. A few countries in sub-Saharan Africa have experienced strong portfolio inflows in recent years, and about a third of expected private flows next year are portfolio flows. A reversal of these flows would reduce external financing and hurt growth. So far, African markets have shown little reaction to the recent turbulence in global financial markets, with the notable exception of South Africa. However, this may change. Moreover, the repricing of risk might make it more difficult for African countries to raise funds in global markets or to privatize.

  • Political and security risks, such as the crisis in the Darfur region of Sudan, conflicts in Ethiopia and Somalia, political divisions in Côte d’Ivoire and Guinea, and fragilities in the Democratic Republic of Congo. The effect of conflict is exacerbated by refugee movements in Chad and the Central African Republic. Severe floods and outbreaks of disease continue in Eastern Africa, particularly in Ethiopia, Kenya, and Uganda. The instability in Zimbabwe is having adverse regional consequences as traditional trade patterns are disrupted and Zimbabweans move to neighboring countries for work.

To illustrate the uncertainties and risks to the central growth forecast for sub-Saharan Africa, Figure 1.24 provides confidence intervals based on the WEO assessment of global risks. The intervals incorporate the historical dependence of African growth on world growth as well as historical African growth volatility. The confidence intervals suggest there is about a one-in-five chance that in 2008 growth in sub-Saharan Africa will fall to less than 5¼ percent.

Figure 1.24.Growth Prospects in Sub-Saharan Africa1

Sources: IMF, World Economic Outlook; and IMF, African Department database.

1 Including Zimbabwe.

Medium-Term Policy Challenges

A growing number of countries are enjoying robust growth and many have made headway on structural reforms. Growth is expected to stay strong and average per capita income to improve again. Policymakers in some African countries are seizing the opportunity offered by vigorous global growth and buoyant commodity markets to pursue reform.

Yet only a few sub-Saharan African countries seem well-positioned to halve poverty by 2015. With sustained per capita growth, extreme poverty rates for the whole of sub-Saharan Africa (41 percent of the population in 2004) should fall gradually.10 While a handful of countries seem well-positioned to meet the income poverty goal, most sub-Saharan African countries, especially fragile states, have a tremendous distance to go. In several countries it is difficult even to assess progress toward the Millennium Development Goals (MDGs) because statistics are so poor.

African policymakers will need to intensify efforts to reduce poverty faster and make progress toward the other MDGs. There are several priorities:

  • Consolidate stabilization gains and reduce vulnerabilities. Fragile countries need to continue to take advantage of the current favorable environment to achieve stabilization and debt sustainability and in some cases accumulate reserves. Oil exporters and other resource-rich countries need to consider appropriate fiscal policy in light of the possibly temporary nature of natural resource booms. In general, countries in the region need to preserve hard-won gains on inflation, and keep debt sustainable, by giving careful attention to domestic debt levels. They will also need to coordinate fiscal and monetary policy to manage natural resource revenues and aid scaling up without undue negative consequences on interest rates, the real exchange rate, and the private sector, and address possible consequences of volatility.

  • Continue to work to provide better health and education services, and to improve infrastructure. Inadequate public infrastructure, including energy supply, has emerged as a critical bottleneck in many countries. While several countries are doing better at formulating budgets and controlling spending, all must use fiscal space efficiently. Fragile states must build the basics of effective PFM, including functioning budgets and other basic institutions. Other countries need to continue to improve their PFM in order to plan for—and benefit from—scaled-up aid, capital inflows, and more resource revenues. They must also sustain adequate public revenue with an equitable tax system (see Chapter 2).

  • Unleash the private sector, reduce the cost of doing business, and boost productivity. Entrepreneurs in many sub-Saharan African countries must struggle not only with worse infrastructure but also more regulatory obstacles than in any other region of the world. The World Bank’s Doing Business in 2008 report ranked 178 countries on ease of doing business; the average sub-Saharan African country rank was 135. About half of sub-Saharan African countries implemented at least one positive reform in 2006–07. Ghana has made progress on reforming its property administration and procedures for business regulation; Kenya, its licensing requirements; and Mozambique, its commercial code.

  • Overcome financing constraints. Many countries are liberalizing interest rates, rehabilitating banks, and modernizing banking. But much more must be done if a domestic pool of savings and efficient financial systems are to foster private investment. Priorities are to increase business and household access to formal bank financing; eliminate distortions in monetary and fiscal policy that discourage bank lending; reduce reliance on unremunerated reserve requirements as a monetary tool (this acts as a tax on banks and discourages financial intermediation); build domestic debt markets; and increase integration to increase competition and exploit economies of scale.

  • Expand trade and markets. The share of sub-Saharan Africa in global trade declined from about 4 percent in 1970 to about 2 percent in 2007. To reverse this decline, African countries must not only gain greater market access but also reduce trade barriers on a nondiscriminatory basis, streamline regional trade arrangements, and improve regional infrastructure and customs administration.

Meanwhile, donors must do more to coordinate their actions and deliver on commitments. Aid can open fiscal space in countries that will use it well. While there has been some progress in designing, coordinating, and delivering aid, the scaling up needed to help countries meet their goals has yet to materialize. Traditional donors will have to step up their commitments quickly to reach the Gleneagles targets. Nontraditional donors should ensure that their assistance is consistent with the priorities of the recipient government, as reflected in its Poverty Reduction Strategy Paper (PRSP).

Note: This chapter was prepared by Andrew Berg, Paulo Drummond, and Ulrich Jacoby.

Excluding Zimbabwe, growth in 2007 should be 6.2 percent. Hereafter, and except where specifically noted, all indicators and figures in this chapter exclude Zimbabwe.

The increase in the pace of reforms in recent years to encourage businesses in Africa is reported in the World Bank’s Doing Business 2008(World Bank, 2007a).

Multilateral Debt Relief Initiative (MDRI) relief should be classified as grants and a reduction of scheduled debt service, though this may not be reflected in the grant data shown in Table SA20. Classification in the fiscal and external accounts varies depending on each country’s accounting system, accrual or cash budgeting, and the arrangements between central bank accounts and the budget for transfer of IMF MDRI relief.

See IMF (2007b), Box 4.1 on China’s financial relations with Africa.

Burundi, Central African Republic, Chad, Democratic Republic of the Congo, The Gambia, Guinea, Guinea-Bissau, and Republic of Congo. Another five sub-Saharan African countries (Comoros, Côte d’Ivoire, Eritrea, Liberia, and Togo) have met the income and indebtedness criteria of the enhanced HIPC Initiative (based on 2004 data) and may be considered for debt relief.

See IMF (2007b) for an assessment of longer-term fiscal sustainability in oil exporters.

As discussed in footnote 4, the grant data in the fiscal accounts may differ from the grant data in Table SA20.

Using survey data from a sample of 19 low-income countries, the 2007 Global Monitoring Report estimates that 1 percent GDP growth was associated with a 1.3 percent decline in extreme poverty in low-income countries. Extreme poverty is the share of the population living on less than $1 a day.

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