Chapter

I. Overview

Author(s):
International Monetary Fund. African Dept.
Published Date:
April 2008
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Macroeconomic developments in sub-Saharan Africa were broadly positive in 2007, with growth steady and as expected across most of the region. Inflation remains largely contained. The immediate prospects are for continued economic expansion but with a widening gap between oil exporters and oil importers. Because of the less favorable external environment, risks in 2008 are tilted to the down side, with the possibility of persistent high oil prices and a weakening of non-oil commodity prices as growth in major commodity-importing countries decelerates. Against this background, policymakers face the challenge of maintaining macroeconomic stability and moving their reform agenda forward.

Main Developments in 2007

In 2007 sub-Saharan Africa experienced one of its highest growth rates in decades (Figure 1.1).1 Real GDP expanded by about 6½ percent (Table 1.1), fueled by growing production in oil exporters and rising domestic investment and productivity across the region. Drivers include successes in stabilizing economies and implementing structural reforms. Solid global demand for commodities, greater flows of capital to Africa, and debt relief have helped increase resources and lift growth.

Figure 1.1.A Comparison of Growth

Sub-Saharan African growth is robust.

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

Table 1.1.Sub-Saharan Africa: Selected Indicators, 2003–081
2003200420052006Estimate 2007Current Projections 2008
Percent change
Real GDP4.96.96.26.16.66.5
Of which: Oil exporters28.111.07.77.38.89.9
Non-oil exporters3.55.15.65.55.64.9
Real non-oil GDP4.36.96.77.47.77.0
Consumer prices (average)10.87.38.87.37.28.6
Of which: Oil exporters20.414.914.78.25.78.1
Non-oil exporters6.94.26.27.07.88.8
Per capita GDP2.75.14.23.94.64.4
Percent of GDP
Exports of goods and services33.534.436.838.138.039.6
Imports of goods and services33.733.133.935.036.735.8
Gross domestic saving19.121.523.024.923.825.9
Gross domestic investment19.520.320.221.822.322.2
Fiscal balance (including grants)-2.1-0.21.75.10.82.6
Of which: Grants1.00.90.80.80.90.8
Current account (including grants)-2.9-1.5-0.40.7-2.8-1.2
Of which: Oil exporters-6.22.87.810.82.87.4
Non-oil exporters-1.7-3.1-4.0-4.6-5.8-6.7
Terms of trade (percent change)1.23.29.612.15.614.8
Of which: Oil exporters3.415.132.616.97.226.1
Non-oil exporters0.2-0.8-1.36.03.3-0.8
Reserves (months of imports)3.34.24.75.65.86.4
Memorandum items:
Oil price (US$ a barrel)28.937.853.464.371.195.5
Advanced economy import growth (in percent)4.19.36.37.44.23.0
Real GDP growth in other regions
Sub-Saharan Africa (WEO definition)35.06.86.26.46.86.6
Developing Asia8.18.69.09.69.78.2
Middle East6.95.95.75.85.86.1
Latin America2.16.24.65.55.64.4
Sources: IMF, African Department database; and IMF, World Economic Outlook (WEO) database.Note: Data as of March 31, 2008. Arithmetic average of data for individual countries, weighted by GDP.

But the external environment has recently become less favorable. The global economy is slowing down, driving down the demand for sub-Saharan African exports; oil prices have risen to record levels; and global financial markets are unsettled. This marks a shift from recent years, when demand for sub-Saharan African exports was healthy and nonfuel commodity prices grew at double-digit rates. The region’s growing integration with the global economy, albeit not as strong as in other regions, means a global slowdown would likely affect the economic performance of sub-Saharan Africa through trade and financial channels (Box 1.1).

Box 1.1.Sub-Saharan Africa and the Global Slowdown

A global slowdown affects sub-Saharan Africa through two primary channels. The first is through trade. As growth in trading partners slows, sub-Saharan Africa is affected by lower real external demand and declines in commodity prices and the terms of trade. The second channel is through financial links, namely a reduction or reversal in capital flows to the region, including foreign direct investment (FDI). The figure and table show the historical co-movement of global and sub-Saharan African growth.

The impact on growth would depend on the strength of the trade and financial linkages. An IMF study (the April 2007 World Economic Outlook, Chapter 4) shows that, on average, a 1 percentage point decline in GDP growth in the euro area is associated with a slowing in GDP growth of about 0.25 percentage point in sub-Saharan Africa as a whole, with less pronounced spillovers from U.S. growth (0.1 percentage point). However, these results abstract from output co-movements between regions. If disturbances in the United States led to disturbances elsewhere, the impact on sub-Saharan African growth would be larger.

Sub-Saharan Africa and the World: Real GDP Growth1

Source: IMF, World Economic Outlook.

1 Periods of U.S. recessions shaded (National Bureau of Economic Research).

To estimate the impact of a global slowdown on individual African countries, a series of panel regressions were estimated for oil exporters and other countries, relating real growth in domestic output to world growth (trade weighted by partner countries) and with several control variables: oil prices, non-oil prices, and country fixed effects. The sample includes 40 countries and uses annual data for 1980–2007. The coefficients on the world growth variables provide a measure of the magnitude of the impact, controlling for commodity or terms of trade changes. On average, a 1 percentage point decline in world growth is associated with a 0.3–0.4 percentage point drop in growth across the sample of sub-Saharan African countries. The specification does not control for an explicit financial channel, which, while small, is growing. Taking this channel into account could mean that the growth impact on sub-Saharan Africa of a global slowdown would be toward the upper end of the range reported.

Sub-Saharan Africa: Real GDP Growth Correlations
1980–2007
Rest of the world10.60
European Union0.32
United States0.01
Developing countries10.54
Asia0.30
Latin America0.32
Source: IMF, World Economic Outlook database.

An additional model analyzes the impact of a global slowdown on the sub-Saharan Africa region over time. A VAR model was estimated for aggregate sub-Saharan African real output growth, world GDP growth, and export commodity prices. The model was estimated using annual data from 1980 to 2007, with lags. Estimates suggest that a 1 percent reduction in world growth leads to a reduction in sub-Saharan African GDP growth by about 0.5 percentage point after one year.

Note: This box was prepared by Paulo Drummond and Gustavo Ramirez.

While growth in 2007 was healthy in most countries, it was strongest in oil exporters (Figure 1.2).2 In Angola and Equatorial Guinea, new oil fields came on stream. In Nigeria, the disruption of onshore oil output caused by civil unrest was partly offset by new offshore production. Some low-income countries like Ethiopia, Ghana, Mozambique, and Tanzania enjoyed growth above the regional average, in line with their leading performance in the last 10 years (Figure 1.3). In other countries, such as Côte d’Ivoire, however, growth has lagged, partly because of political instability. In Zimbabwe, economic activity continued to contract as macroeconomic imbalances worsened owing to persistent monetary financing of quasi-fiscal activities and as price controls were intensified.

Figure 1.2.Growth in Sub-Saharan Africa

The expansion cuts across country groups.

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

Figure 1.3.Regional Dynamics of Growth

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

Overall, domestic demand continued to drive growth in the region (Figure 1.4). Domestic investment reached 22 percent of GDP in 2007, an all-time high for the region. Higher government consumption also contributed to growth in some countries, thanks to higher oil revenues and debt relief.

Figure 1.4.Contribution to GDP Growth

Domestic demand continues to drive growth.

Sources: IMF, African Department database.

Over the past decade many countries have been reforming their economies and strengthening their macroeconomic policies, and this is now bearing fruit. Improvements in the business environment in some countries have helped support growth (see the section of this chapter on the private sector). Moreover, armed conflicts and political instability have become less frequent. As a result, not only have investment and growth increased but income volatility has fallen to near-30-year lows (Figure 1.5). Not surprisingly, real per capita income is improving across all country groups, though fragile countries continue to trail (Figure 1.6).

Figure 1.5.Growth Volatility

Source: IMF, African Department database.

Figure 1.6.Real Per Capita GDP Growth

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

Source: IMF, African Department database.

Many countries have become more resilient to shocks. Oil exporters, and more generally net commodity exporters who have been benefiting from higher fuel and commodity prices, have improved their policies and are saving a considerable amount of the windfall revenues (Figures 1.7 and 1.8). Other countries have continued to grow even when prices for their exports have stagnated or deteriorated. This performance reflects efficiency gains from structural reforms and improvements in the business climate and macroeconomic policies.

Figure 1.7.Sub-Saharan Africa: Oil Exporters

Current account and oil income savings.

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

1 Current account surplus to oil and gas exports.

2 Overall fiscal surplus to fiscal oil and gas revenues.

Figure 1.8.Sub-Saharan Africa: Trading Gains (Losses)1

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

1 Trading gain = (X-M)/P - (X/Px - M/Pm), where X and M are exports and imports, P is the GDP deflator, and X/Px and M/Pm are real exports and real imports.

Despite sustained increases in commodity prices in recent years, inflation on average was in the 6–9 percent range in 2007 (Figure 1.9). In response to inflation pressures, many countries (e.g., South Africa and Botswana) tightened policies, while others (Madagascar and Sierra Leone) have adopted medium-term measures to improve agricultural production, storage, and distribution to contain food price increases. In Zimbabwe, price pressures have spiraled to hyperinflationary levels (see Box 1.2).

Figure 1.9.Inflation in Sub-Saharan Africa

Inflation is in the single-digit range.

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

Box 1.2.Economic Crisis in Zimbabwe

The deterioration of economic and social conditions that began in Zimbabwe in 1999 continued to gain momentum in 2007. Economic activity is estimated to have fallen by over 6 percent in 2007 after declining by more than 30 percent over the previous seven years. The external situation is precarious, with official reserves generally at minimal operating levels. Living conditions have worsened with the eroded purchasing power of wages and salaries and shortages of basic goods. The skills base has deteriorated due to the substantial exodus of economic refugees.

Inflation has spiraled to hyperinflationary levels. The official price index significantly understates price pressures, as many of the goods with controlled prices are no longer regularly available in the formal sector. Very rapid annual reserve money growth and a quickly depreciating parallel market exchange rate suggest that inflation reached about 100,000 percent by December 2007 and is continuing to spiral upward.

Price pressures have been fueled mainly by the substantial quasi-fiscal activities of the Reserve Bank of Zimbabwe (RBZ). While the central government continues to run overall fiscal deficits (estimated at about 10 percent of GDP in 2007), these have been dwarfed by the RBZ’s quasi-fiscal activities, which skyrocketed to about 82 percent of GDP in 2007.1 These include foreign exchange subsidies to public enterprises and government, price support for exporters, in-kind subsidies to farmers, and interest payments.

Selected Hyperinflations

(t =0 is first month annual inflation is above 1,000 percent)

Zimbabwe: Estimates and Proxies of Annual Inflation

Note: This box was prepared by Robert Sharer, Said Bakhache, and Jens Clausen.1 These ratios represent the sum of deflated monthly flows divided by annual real GDP. Conventionally calculated annual flows in relation to nominal GDP become distorted in a hyperinflationary environment because, when inflation accelerates sharply, the real value of revenue and expenditure depends on the timing of these flows during the year.

Rising food prices are contributing to inflation pressures in many countries. Several countries have been experiencing double-digit food price inflation, continuing a trend from previous years. This reflects both a global increase in food prices and, in many countries, droughts, which have done much damage south of the equator. Post-election violence in Kenya was also a factor, leading to shortages and price hikes not only in Kenya but in neighboring countries too.

Except for debt relief to Nigeria, official development assistance (ODA) flows from OECD countries to sub-Saharan Africa have been largely flat. Meanwhile, emerging creditors, particularly China, are stepping up assistance to the region, generally in the form of project assistance and export credits, but comparable data are not available. 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 (see the October 2007 Regional Economic Outlook, Box 1.3).

Box 1.3.The Changing Nature of Public Debt in Sub-Saharan Africa

The size and composition of public debt in Africa have changed significantly in recent years. Debt relief under the HIPC and the MDR Initiatives and fiscal adjustment have significantly reduced external public debt over the past four years, creating room for fiscal spending and borrowing. At the same time, domestic public debt and debt held by private external creditors have become increasingly important, reflecting (i) increased banking sector liquidity; (ii) regional financial integration, which has allowed currency union members to tap larger pools of liquidity because private banks in the CFA franc zone are increasingly operating at the regional level, and the BCEAO is supporting development of a regional bond market; and (iii) higher capital inflows, reflecting improved macroeconomic conditions, a global search for yield, and greater interest in Africa by new official creditors.

The enhanced relevance of private domestic and external debt presents analytical and policy challenges as countries try to prevent a reemergence of debt vulnerabilities. The first is the lack of comparable cross-country data, with domestic debt data not being compiled systematically in many countries, and methodological differences in such areas as the definition of the public sector, treatment of contingent liabilities, and conventions for decomposing public debt. Another challenge is to go beyond the traditional focus on external public debt and integrate domestic public debt into debt sustainability analysis, recognizing that a domestic debt overhang can contribute to future debt and balance of payments crises. The fiscal template of the IMF/World Bank Debt Sustainability Analysis for Low-Income Countries provides a starting point for analyzing long-term total public debt dynamics. In addition, it will be increasingly important to assess near-term vulnerabilities (such as rollover, currency, or interest rate risks), especially in countries with a high share of domestic debt, which has generally shorter maturities, higher and more variable interest rates, and debt rollover dependent on an underdeveloped local banking sector or potentially volatile foreign portfolio flows.

Sub-Saharan Africa: Central Government Debt, 2002–07

(In percent of GDP)

Source: IMF staff estimates.

A central policy question is the appropriate speed of new borrowing in post-HIPC/MDRI countries, where the low level of debt and the benign borrowing environment may be seen as an opportunity for a rapid expansion of debt-financed public investment. The policy choice will depend on the cost and risk of new debt, especially in countries that have received HIPC and MDRI relief, the expected rate of return (and risk) of additional public investment, and the desired overall fiscal policy stance in a cyclical context. Another policy challenge is to better manage public debts, which can help governments control debt service and guard against exchange rate, interest rate, and rollover risks. In an environment with many new borrowing options, this will require careful cost-risk analysis to inform choices about debt composition. In many countries, it will take time and resources to improve public debt databases, strengthen debt management offices, and develop customized software tools. In addition, development of local financial markets will be important for reducing the cost and risks of domestic borrowing.

Note: This box was prepared by Christian Mumssen.

External current account deficits have generally been contained (Figure 1.10). In Angola and Nigeria, despite further improvements in the terms of trade, a volume decline in oil exports (as a percent of GDP) has been accompanied by rising imports due to investment in infrastructure. In other countries, the adverse impact of higher oil prices on the current account was partly offset by increases in non-oil commodity prices, especially metals (Figure 1.11). In low-income countries, imports rose modestly, partly financed by an increase in capital inflows.

Figure 1.10.Sub-Saharan Africa: External Current Account Balance

The current account deficits are contained.

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

Figure 1.11.Commodity Prices in Sub-Saharan Africa

Commodity prices are still edging up.

Sources: IMF, Commodity Prices database; and UN Comtrade.

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

Financial market developments

The global financial market turbulence that started last year has to date had limited impact on sub-Saharan African countries. However, sub-Saharan African countries with more globally integrated financial markets in the region, such as South Africa, experienced some increase in sovereign spreads and interbank rates (Figure 1.12) and volatility in their foreign exchange and stock markets. In the case of South Africa, an additional factor at play is the realization that bottlenecks in the energy supply may impose constraints on future growth. Tighter credit conditions, however, have by and large not materialized.

Figure 1.12.Three-Month Interbank Rates in Selected Emerging Markets

Source: Bloomberg.

Private capital flows to sub-Saharan Africa reached over US$50 billion—about four times larger than flows in 2000. Most flows were directed to Nigeria and South Africa, but the increases also reflect the improved fundamentals elsewhere in the region. In a small group of countries, notably Ghana, Uganda, and Zambia, portfolio flows have been on the rise, attracted by improved risk ratings and higher yields.

Sub-Saharan African countries have continued to reinforce their financial systems. Banking systems in much of the region are more stable because many countries (though not all) have liberalized interest rates, rehabilitated banks, and modernized the sector.

Bank credit to the private sector is growing rapidly, but economies in the region still lack financial depth (Figure 1.13). Faster progress in increasing financial intermediation would help foster private investment and growth. The priorities should be to increase access to formal bank financing; eliminate distortions in monetary and fiscal policy that discourage bank lending; strengthen creditor rights and information sharing; reduce reliance on unremunerated reserve requirements as a monetary tool; build domestic debt markets; improve the risk management capacities of banks; and encourage integration to increase competition and use economies of scale.

Figure 1.13.Monetary Developments

Financial deepening is low in most countries.

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

Macroeconomic Policies

Monetary and exchange rate policies

With the stabilization of inflation in most countries, African countries have begun to adapt their monetary and exchange rate policy regimes to reduce macroeconomic volatility while achieving inflation objectives (see Chapter 2). African monetary policy regimes are in various stages of transition, which are difficult for countries that face structural changes or whose capital market imperfections generate uncertainty in the monetary transmission mechanism and affect the authorities’ control over policy. In many countries, also, the lack of timely statistics makes it difficult to assess the current state of the economy. In addressing these challenges, a few countries, such as Ghana, have opted to move to some form of inflation-targeting regime, mirroring with a lag a global trend in monetary policy that places less weight on intermediate targets, such as broad or narrow money, to stabilize prices.

A pressing challenge for many countries in the region has been how to respond to rising foreign trade and capital inflows. While the inflows have helped raise investment and growth, in some countries they have also put pressure on prices and the real exchange rate (see Chapter 3). While the median real exchange rate is broadly in line with the 1995–2007 average for sub-Saharan Africa as a whole, the distribution is widening (Figure 1.14).

Figure 1.14.Real Effective Exchange Rates in Sub-Saharan Africa

The exchange rate distribution is widening.

Source: IMF, Information Notice System.

Rising food prices have also posed policy challenges for several countries in the region. Some countries are seizing the opportunity to encourage an expansion of domestic agricultural production, which is the best solution in the medium term. On the macroeconomic level, temporary increases in inflation due to the direct effects of food price shocks need not call for countervailing monetary policy, particularly if monetary policy credibility is already established.

However, there could be a need to tighten policy if high food price inflation is sustained and starts to have significant second-round effects. Temporary and targeted subsidies and other carefully directed measures can help protect the most vulnerable while preparing for a well-targeted social safety net—the best long-run solution. Direct price and export controls, however, are likely to have unintended negative consequences: they may discourage food production, fail to help the most needy, and drain scarce resources from other critical purposes.

Fixed exchange rate regimes

In the CFA franc zone, where currencies are pegged to the euro and monetary policy is determined at the currency union level, rising inflows and the strengthening of the euro against the U.S. dollar in 2007 have led to a modest appreciation of the real effective exchange rates of both the Central African Economic and Monetary Community (CEMAC) and the West African Economic and Monetary Union (WAEMU) (Figure 1.15). Appreciating pressures were stronger in the CEMAC, though, because of the oil boom and an expansionary non-oil fiscal stance in the face of supply constraints.

Figure 1.15.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.

Members of the CEMAC have accumulated sizable reserves (Figure 1.16). Reserve coverage for the zone was at 4½ months of imports last year, with much of the buildup in recent years resulting from a policy choice to transform oil wealth into financial assets and build precautionary levels to insure against balance of payment risks.

Figure 1.16.Sub-Saharan Africa: Reserve Coverage

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

Foreign asset accumulation has fueled rapid growth in money stocks and credit in several countries (Figure 1.17). CEMAC countries in particular have experienced high liquidity, which is partly structural because banks have few opportunities to expand assets faster. Central banks of the CFA franc zone have not pursued an active monetary policy, instead relying on differentiated reserve requirements and adjusting official interest rates only sparingly.

Figure 1.17.Credit to the Private Sector in Sub-Saharan Africa

Credit is growing fast, though from low levels.

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

Flexible exchange rate regimes

Among all countries with a flexible exchange rate regime, the real effective exchange rate has been appreciating only for oil exporters and some low-income countries (Figure 1.18). In many countries, exchange rate adjustments have only partly reflected their current account positions (Figure 1.19). In South Africa, under the inflation-targeting regime, continued inflation pressures led the Reserve Bank to resume its monetary tightening in 2007 to fight inflation pressures. The Reserve Bank has continued to strengthen its international reserves without an explicit exchange rate objective. In Nigeria, foreign reserve accumulation has helped stabilize the official exchange rate against the dollar since 2004.

Figure 1.18.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 1.19.Sub-Saharan Africa: 2007 Exchange Rate Adjustments and Current Account Balances

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

1 An increase indicates appreciation.

Fiscal policy

Countries have generally attempted to address pressing development needs while preserving fiscal discipline.

  • Mobilization of domestic revenue, complemented by grant inflows, has been a significant source of fiscal resources. Revenues peaked at 25 percent of GDP in 2006, with a modest decline in 2007 (Figure 1.20).

  • In most low-income and fragile countries, capital outlays have picked up. Middle-income countries are also spending more to address infrastructure bottlenecks and social needs (Figures 1.21 and 1.22).

  • The fiscal position of low-income countries swung back into a deficit of about 3½ percent of GDP in 2007 as grants dropped by almost 7 percentage points of GDP. The 2006 surplus had been based on significant Multilateral Debt Relief Initiative (MDRI) relief for Burkina Faso, Madagascar, Mali, Niger, and Zambia. The deficit was financed mainly through external borrowing (Figure 1.23).

Figure 1.20.Central Government Revenues in Sub-Saharan Africa

Revenues have risen in most countries.

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

Figure 1.21.Central Government Primary Expenditures in Sub-Saharan Africa

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

Figure 1.22.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.

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

Deficits have been financed mainly by foreign resources.

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

With rapid growth, comprehensive debt relief, and debt repayment by several countries, sub-Saharan Africa’s debt has declined and the challenge now is to safeguard debt sustainability. Total government debt (the median for sub-Saharan Africa) fell to about 40 percent of GDP in 2007 (Figure 1.24). Countries should use resources released through debt reduction prudently, notably by strengthening their public financial management systems (PFMs) so that spending is efficient and within sustainable limits. Several countries would benefit also from strengthening their capacity to analyze all new loans, whether from traditional or nontraditional creditors, so that debt vulnerabilities do not reemerge. As they do so, it is increasingly important that domestic debt, which is rising in many countries as a share of total debt, be fully integrated into any assessment of debt sustainability (see Box 1.3).

Figure 1.24.Total Government Debt in Sub-Saharan Africa

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

1 The band is calculated based on 88 developing countries. The lower and upper limits are the 25th and 75th percentiles.

Outlook for 2008 and Risks

A global slowdown in activity, led by a marked downturn in the United States and the spreading crisis in financial markets, will face the sub-Saharan African region with more difficult external conditions. Global growth has been revised down since the October World Economic Outlook and it is now expected at 3.7 percent in 2008.

GDP growth in sub-Saharan Africa (including Zimbabwe) is projected at 6½ percent, driven by oil exporters; growth in oil importers is expected to taper off to about 5 percent. This is a markdown of about 1 percentage point relative to the October 2007 Regional Economic Outlook, part of which (0.6) is due to revised growth projections for Angola.3

  • Growth in oil exporters is expected to accelerate to about 10 percent, underpinned by oil production from new facilities coming on stream in Nigeria and Angola and the coming online of a liquefied natural gas plant in Equatorial Guinea. Higher income and wealth are expected to be the main drivers of domestic demand.

  • Growth is projected to slow to 4 percent in middle-income countries and to about 6 percent in low-income countries, reflecting the less favorable global environment. Both public and private demand are expected to support growth, but the gap with respect to growth rates in oil exporters is projected to widen.

  • Growth in fragile countries is projected to pick up again in 2008, to 5 percent, buoyed by a continued recovery in investment, especially in the Democratic Republic of Congo, where large infrastructure projects are under way, and in some post-conflict countries (e.g., Côte d’Ivoire).

Inflation is expected to be contained at about 8½ percent for the region as a whole, assuming macroeconomic policies hold firm. Inflation pressures arise mainly from oil prices, which are expected to increase by about 35 percent this year, and rising food prices. Overall, nonfuel commodity prices are expected to continue edging upward. In some countries inflation is expected to remain in the double digits. Unless policies change, hyperinflation in Zimbabwe is expected to continue.

In light of the economic outlook, the overall fiscal position of sub-Saharan Africa is projected at a small surplus. The fiscal surplus of oil exporters should widen as oil prices rise; changes in the fiscal position of most other countries are expected to be modest.

The external surplus of oil exporters is expected to rise as oil prices increase, but current account deficits in fragile and low-income countries should widen moderately as their terms of trade worsen.

What are the risks for sub-Saharan Africa?

Sub-Saharan Africa faces several external risks: a pronounced global slowdown—bringing weaker non-oil commodity prices—would represent a large shock; higher oil prices would reduce domestic demand, boost headline inflation, and worsen the current account and net foreign asset positions of net oil importers (Figure 1.25); and less favorable financial conditions would reduce external financing and hurt growth.

Figure 1.25.Oil Prices and GDP Growth in Sub-Saharan Africa

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

  • Estimates were prepared assuming oil prices at $100 a barrel in 2008, compared with the October World Economic Outlook projections of $75 a barrel. As a result, GDP growth is estimated to be lower by 0.2–1 percent in sub-Saharan African countries, depending on the production structure and energy intensity of the economies (Box 1.4).

  • However, the behavior of other non-oil commodity prices will be crucial to the growth outcome. If high oil prices are accompanied by a slowdown in the major commodity importers, particularly in Europe—the subcontinent’s largest trading partner—that would substantially affect demand for exports from sub-Saharan Africa, which have been a driver of growth in the region (Figure 1.26). It is estimated that for every 1 percent decline in global GDP growth, sub-Saharan African GDP growth will decline by about ½ percentage point. But lags are at play, and some of the global slowdown in 2008 will affect sub-Saharan African growth only in 2009.

  • A reversal of portfolio flows would reduce external financing and hurt growth in a few countries. But given the relatively small portfolio inflows in most sub-Saharan African countries, the impact is likely to be limited. As long as global growth is as projected, the economic impact of financial market turbulence on sub-Saharan African economies should be contained.

  • A global slowdown could also hurt commodity prices, reducing the potential for an offset of higher oil prices. A decline in nonfuel commodity prices of 10 percent could reduce sub-Saharan African GDP by roughly 1.5 percent (Figure 1.27).

Box 1.4.The Impact of High Oil Prices on Sub-Saharan Africa

The recent surge in fuel prices poses new challenges for African policymakers in oil-importing countries. It will likely reduce GDP growth, boost headline inflation, and put pressure on external balances. Policy responses will need to be tailored to individual country circumstances, but some basic principles hold: higher fuel prices should generally be passed on to domestic users, net fuel importers will need to find the appropriate mix of adjustment and financing, and safety nets will likely be needed to protect the poor.

Since 2003 most sub-Saharan African countries have allowed a considerable degree of pass-through of higher fuel prices to domestic retail prices (see figure). The high pass-through to retail gasoline prices in some countries partly reflects both the use of ad valorem rather than specific taxes and the impact of higher fuel prices on the cost of transporting petroleum products from seaports.

From 2003 to 2007 oil importers were able to manage an average increase in the oil import bill of 2 percent of GDP, in part because of the concomitant increase in the export prices for non-oil commodities. Oil importers’ terms of trade did not deteriorate on average (although some countries did experience a worsening).

To assess the impact of higher oil and other fuel prices on GDP, estimates were prepared assuming oil prices are $100 a barrel in 2008 compared with the October WEO projections of oil prices:

Pass-Through of Higher Gasoline, Kerosene, and Diesel Prices, 2003–07

(Ratio of change in the retail price to change in import price)

Source: IMF, country desk data.

  • Estimates were prepared for all oil-importing sub-Saharan African countries using a simple net import model (UNDP/ESMAP 2005) to measure the direct impact of fuel price increases on GDP. Estimates are based on real oil prices (deflated by export prices for manufactures for industrial countries). Key model parameters are oil intensity, degree of financing, and efficiency changes/fuel switching in response to higher prices. The estimates provided do not include indirect effects, such as the ones caused by the reduction in GDP of all net importing countries, the impact of monetary policy adjustments, or offsettings that may occur from simultaneous changes in nonfuel commodity prices. GDP growth is estimated to be lower by 0.2–1 percent in sub-Saharan African countries.

  • Simulations were also conducted using the Global Trade Analysis Project (GTAP) model for nine countries, to capture the effects of adjustments of economic agents to oil price increases as well as structural changes through input-output linkages. While the sizes of coefficients do not vary significantly, simulations suggest that the behavior of other non-oil commodity prices will have an important effect on growth for countries in the region.

Note: This box was prepared by Paulo Drummond and Yongzheng Yang.

Figure 1.26.Exports and Growth in Sub-Saharan Africa

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

Figure 1.27.Sub-Saharan Africa: Growth and Commodity Prices

Source: IMF, African Department database.

Sub-Saharan African countries also face significant internal risks (Box 1.5). While the number of conflicts has declined in recent years, they still ravage the Darfur region of Sudan and the Horn of Africa, and the situation remains fragile in the Democratic Republic of Congo. In Côte d’Ivoire the challenge is to consolidate the peace and reunification process and hold free presidential elections. Post-election violence in Kenya undermined investor confidence and tourism; it could also delay donor support and slow structural reforms that are needed to sustain recent growth. Neighboring countries were also affected: some transit routes, particularly for oil supplies, have been disrupted, which further aggravates the already acute energy situation. The conflict in Chad, with its ethnic, regional, and cross-border dimensions, also has implications for neighboring countries. To illustrate the uncertainties and the risks to the central growth forecast for sub-Saharan Africa, Figure 1.28 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 5 percent.

Figure 1.28.Growth Prospects in Sub-Saharan Africa1

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

1 Including Zimbabwe.

Box 1.5.Conflicts and Political Instability in Sub-Saharan Africa: Growth and Spillover Effects

The economic and social costs of conflicts can be enormous (see first figure). Collier (1999) found that during civil wars GDP growth is 2.2 percentage points lower than in periods of peace. Some costs persist over the long run, particularly damage to the social fabric as a result of heightened social divisions, human displacement, and psychological traumas (IANSA, Oxfam, and Saferworld, 2007). Conflicts also have spillover effects on neighboring countries, both human, in the form of refugees, and economic, in terms of shocks (Clément, 2004).

After a post-Cold-War surge through 1999, the number of sub-Saharan African countries affected by conflicts has declined sharply (see second figure). A return to peace in many countries has reduced the need for extra military spending and allowed more resources to be allocated to increasing productive capacity and reducing poverty (Knight, Loayza, and Villaneuva, 1996). In Angola, Mozambique, and Rwanda, such a peace dividend has resulted in faster growth, lower inflation, and improved current account balances.

These encouraging developments provide a stark contrast with countries that are still experiencing conflicts. Chad, for example, managed to grow only 0.5 percent in 2006 and 1.7 percent in 2007. The country has enjoyed only four years of peace over the past two decades. Slow growth in turn has been a main economic factor underlying the conflict, fueled by competition for power and by resource rents. The conflict has ethnic, regional, and cross-border dimensions, and the spillover effects in terms of refugees have been significant. The insecurity undermines the effective use of the oil windfall through high military spending and bypassing of sound budget principles. Recent events, which include a major rebel attack on the capital, reflect these vulnerabilities, which could be exacerbated by intensified competition to control oil revenues.

GDP Per Capita Growth in Sub-Saharan African Countries1

Source: IMF, Regional Economic Outlook database.

1 Unweighted averages.

Number of Conflicts in Sub-Saharan Africa, 1989–2005

Source: Uppsala University, Uppsala Conflict Data Program.

Although typically less devastating, political disputes can also inflict a heavy human toll as well as hinder economic progress, as illustrated by the recent events in Kenya. Violence triggered by a dispute over the presidential election outcome has claimed over 1,000 lives and displaced more than 300,000 people since late 2007. Initial disruptions to supply lines led to shortages and price hikes not only in many parts of Kenya but also in some neighboring countries. The violence and resulting insecurity have devastated Kenya’s tourism industry and depressed other sectors. As a result, GDP growth in 2008 is expected to be much lower than the 7 percent achieved in 2007. This would translate into weaker regional demand and higher prices of imports from Kenya for neighboring countries, just when these countries are also affected by slowing global demand and higher oil prices.

Note: This box was prepared by Sekou Camara, Sukhwinder Singh, and Yongzheng Yang.

How vulnerable is sub-Saharan Africa to a worsening of the global environment?

Compared with the 1990s, many countries in the region are less exposed to shifts in global economic conditions. Smaller current account and fiscal deficits, lower inflation, reduced debt, increased foreign reserves, and strengthened policy frameworks have all helped make the region more resilient to external shocks.

  • Current account–related vulnerabilities have been reduced in many countries, which have smaller financing requirements and improved foreign reserve positions. Several countries hold enough foreign reserves to cover large trade shocks (Figure 1.29). In these countries, policymakers would have the option to buffer shocks and smooth the path of adjustment in the event of a temporary slowdown. However, countries that do not have enough reserves and whose current account vulnerabilities are high would have less room for maneuver.

  • External debt ratios have been on a downward trend, opening up space for foreign financing in several countries. Countries need to use this space carefully to prevent a reemergence of vulnerabilities. Keeping debt sustainable continues to be a key anchor for their macroeconomic strategy.

  • The fiscal positions of many countries have strengthened; both overall and primary fiscal balances have significantly improved in most countries in recent years. But some of the improvement is cyclical and subject to uncertainty.

Figure 1.29.Sub-Saharan Africa: Reserve Coverage for Terms of Trade Shocks, 2007

Source: IMF, African Department database.

While many countries in the region have become more resilient to shocks, trends in vulnerability vary significantly among them, and the region as a whole would still be affected by a pronounced slowdown in external demand and a deterioration in terms of trade. Appropriate policy responses can help sustain the current expansion.

How should countries respond if downside risks are realized?

Policy responses can help moderate the effects of external shocks, but some countries may not have room to ease monetary and fiscal policies in the event of a pronounced downturn. Responses, which will have to vary by country, depend on several factors, including the magnitude and nature of the slowdown and a country’s own initial conditions: inflation and inflation expectations; fiscal position; and degree of vulnerability, including level of foreign debt and reserves. In the face of uncertainty, countries will have to adjust policies with caution to ensure they preserve hard-earned macroeconomic stability.

If the downside risks to growth materialize, countries with low and stable inflation and sound underlying fiscal positions may have scope to ease policies.

  • Forward-looking monetary policy responses could help reduce the output response to adverse demand disturbances. To the extent that the slowdown is temporary, countries with comfortable foreign reserves could use reserves to smooth shocks. In some countries, exchange rate changes may help rebalance growth.

  • Countries with a sustainable fiscal position may have room for countercyclical fiscal policy and could let their automatic stabilizers operate. However, those with no room for fiscal relaxation may have to offset at least part of the effect of automatic stabilizers. The degree of fiscal easing should take into account whether public debt is a constraint, and discretionary action, if any, should be well-targeted and reversed when possible.

In several countries, especially oil exporters, the challenge will be to maintain macroeconomic stability while dealing with still-rising foreign exchange inflows. Countries should identify ways to ensure that the economy can absorb higher spending effectively, and cast spending and saving decisions in a medium-term framework that takes long-term fiscal sustainability into account. At the microeconomic level, better public financial management and reforms in budgeting and the implementation of capital projects would help ensure that expenditures are growth promoting and poverty reducing.

Medium-Term Challenges: Unleashing the Private Sector and Reducing the Cost of Doing Business

The main medium-term challenge for sub-Saharan Africa is to accelerate growth and achieve the MDGs. While a growing number of countries are enjoying robust growth, only a few sub-Saharan African countries seem well-positioned to halve poverty by 2015. Notwithstanding the improvement in economic growth since the mid-1990s, real per capita income is about the same as in the mid-1970s. Only with sustained per capita growth can extreme poverty rates for the whole of sub-Saharan Africa (41 percent of the population in 2004) be expected to fall.4 Progress on several policy priorities is needed (see the October 2007 Regional Economic Outlook for a more expansive discussion of the medium-term challenges sub-Saharan African countries face). In this section, we focus on private sector development: unleashing the private sector to spur investment is one of the critical medium-term challenges.

Economic performance in sub-Saharan Africa in the years ahead will depend in no small measure on whether countries can accelerate reforms that improve the investment climate, reduce the cost of doing businesses (including costs related to infrastructure), and strengthen governance.

Cross-country indicators suggest that the investment climate has been improving at an uneven speed in sub-Saharan Africa, although the pace is encouraging in a few countries. Kenya and Ghana are leading the way with broad-based reforms, including easing business regulations, procedures for property administration, and licensing requirements. In southern Africa, several countries have lifted regulatory obstacles that weigh heavily on the private sector, with Madagascar, Mauritius, and Mozambique taking the lead (Figure 1.30).

Figure 1.30.Sub-Saharan Africa: Doing Business, 2007

Several African countries have managed to firm up policies that determine the level of productivity as measured by the World Economic Forum’s Global Competitiveness Index (GCI). The index provides numerous indicators for a large number of countries, thus providing a measure of a country’s ability to sustain high growth. Of all the sub-Saharan African countries, only South Africa figures among the top 50 countries (Figure 1.31).

Figure 1.31.Sub-Saharan Africa: Global Competitiveness Index, 2007

Source: World Economic Forum, Global Competitiveness Report 2007–08.

Recent reforms have also helped improve governance in a few sub-Saharan African countries, but much remains to be done (Figure 1.32). Priorities are to strengthen tax systems, establish transparent and comprehensive budgeting procedures, promote accountability and transparency, enhance budgetary control, increase accountability for revenues from extractive industries, and build capacity in fragile states and those with acute governance problems.

Figure 1.32.Sub-Saharan Africa: Governance Ranking, 2000–06

Source: World Bank Institute, World Governance Indicators, 2000–06.

An essential driver of growth is high-quality infrastructure, which is critical for the efficient functioning of an economy. Quality roads, railroads, ports, and air transport, an adequate communications infrastructure, and reliable electricity supplies are prerequisites for the efficient functioning of markets and for export growth, as well as for the ability of poor communities to benefit from economic activities and schools.

Energy supply has emerged as a major bottleneck in most African countries and, as discussed in Chapter 4, policymakers should carefully consider their options, including regulation and pricing, to improve supply and provide the right signal to markets.

Private sector development requires access to financial markets that can make capital available for investment from such sources as loans from a sound banking sector, well-regulated securities exchanges, and venture capital. Private sector bank credit in sub-Saharan Africa remains low. Financial underdevelopment in Africa is at least partly related to the development of legal institutions and their ability to enforce contracts (see Box 1.6).

Box 1.6.Creditor Rights in Sub-Saharan Africa

Over the past two decades, sub-Saharan African countries have embarked on substantial financial liberalization and made progress toward macroeconomic stability. However, financial deepening has remained elusive in most countries. For example, between the early 1980s and the end of 2004, the simple sub-Saharan African average of private sector bank credit to GDP fell from 15.6 percent to 15.1 percent. If we exclude 15 countries whose financial sectors showed signs of sustained development, the average private sector credit–to-GDP ratio declined from 17.2 percent in the early 1980s to 8.7 percent by the end of 2004. This contrasts with the doubling of private sector credit in developing Asia (to over 40 percent of GDP) between 1990 and 2004, and growth by about 50 percent (to over 20 percent of GDP) in Latin America and the Caribbean during the same period. There is evidence that sub-Saharan African countries could make faster progress toward financial deepening by strengthening creditor rights and implementing reforms to increase the sharing of information on borrowers.

Several studies have focused on the links between financial development and the legal institutions that can facilitate credit contracts, exploring the nature of these contracts based on the power theory of credit (ability to enforce contracts), information theories of credit, and the legal origin of institutions (see La Porta and others, 1998). The evidence supports this institutional approach. Djankov, McLiesh, and Shleifer (2005) found from data for 149 countries that, after controlling for macroeconomic factors, legal institutions made a clear contribution to the development of financial markets. Similar findings were reported by Galindo and Micco (2001) in cross-sectional regressions of Latin American countries.

As a contribution to this work, empirical research by McDonald and Schumacher (2007) on specific factors affecting financial intermediation in sub-Saharan African countries found a strong correlation between legal institutions and financial development. Using panel data for a sample of 37 countries between 1983 and 2004, they found that while financial liberalization and macroeconomic stability have promoted deeper financial markets, when financial liberalization efforts are similar those countries with stronger creditor rights and information sharing have deeper financial systems. This indicates that financial institutions seem more willing to extend credit if, in case of default, they can easily enforce contracts by forcing repayment or seizing collateral. The amount of credit to firms and individuals would also be larger if financial institutions could better predict the probability of repayment by potential customers.

The main policy implications of these findings are, first, that protecting creditor rights should be given a higher priority in financial sector reforms. That means not only firming up legislation at all levels, but also creating efficient property registries, promoting land surveys, and reforming courts. Second, governments should seek to sponsor credit registries where private credit bureaus do not seem to be commercially viable.

Note: This box was prepared by Liliana Schumacher.
Appendix 1.1
Table A1.1.Categorization of Sub-Saharan African Countries
Oil-Exporting CountriesMiddle-Income CountriesLow-Income CountriesFragile Countries
AngolaBotswanaBeninBurundi
CameroonCape VerdeBurkina FasoCentral African Rep.
ChadLesothoEthiopiaComoros
Congo, Republic ofMauritiusGhanaCongo, Dem. Rep. of
Equatorial GuineaNamibiaKenyaCôte d’Ivoire
GabonSeychellesMadagascarEritrea
NigeriaSouth AfricaMalawiGambia, The
SwazilandMaliGuinea
MozambiqueGuinea-Bissau
NigerLiberia
RwandaSão Tomé and Príncipe
SenegalSierra Leone
TanzaniaTogo
UgandaZimbabwe
Zambia
Note: Lesotho and Cape Verde are PRGF-eligible.
Table A1.2.Non-Oil Primary Fiscal Deficits, 2002–07(Percent of non-oil GDP)
200220032004200520062007
Angola83.369.961.160.950.352.6
Cameroon0.50.72.70.0-30.21.0
Chad2.43.24.35.214.819.3
Republic of Congo40.232.133.634.458.761.1
Equatorial Guinea41.247.581.783.292.275.3
Gabon16.78.99.117.518.011.7
Nigeria18.835.828.733.832.931.6
Average (unweighted)29.028.331.633.633.836.1
Source: IMF, African Department database.Note: (–) denotes surplus.

Note: This chapter was prepared by Calvin McDonald and Paulo Drummond.

Excluding Zimbabwe, growth in 2007 was about 6½ percent. Hereafter, except where specifically noted, all indicators and figures in this chapter exclude Zimbabwe.

GDP growth figures in this Regional Economic Outlook: Sub-Saharan Africa (henceforth, Regional Economic Outlook) reflect country weights calculated from the new purchasing power parity data published by the International Comparison Program in December 2007. This has resulted in an upward revision of sub-Saharan African growth of 0.3 percentage point in 2007 relative to the estimates in the October 2007 Regional Economic Outlook.

The typology of countries is explained in Box 1.1 of the October 2007 Regional Economic Outlook.

Using the new PPP country weights, the projected sub-Saharan African growth for 2008 in the October 2007 Regional Economic Outlook would have been 7.5 percent.

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

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