Chapter

1. Back to High Growth?

Author(s):
International Monetary Fund. African Dept.
Published Date:
April 2010
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Introduction and Summary

As elsewhere, 2009 was a difficult year for most sub-Saharan African countries. But, playing off the revival in global economic activity, growth in the region is expected to rebound this year. Output is now projected to expand by some 4¾ percent in 2010, up from 2 percent last year.1 These numbers have been revised upwards by ½–1 percentage point since last October. And provided the global economy continues to improve, growth in the region should accelerate further still to 5¾ percent in 2011. In essence, the expectation is that growth in most countries is set to bounce back, albeit to rates a little shy of those that prevailed in the mid-2000s.

The brevity of the region’s slowdown owes much to the relative health of the region’s economies in the mid-2000s, and the countercyclical macroeconomic policies that were pursued in many countries, as well as the quick recovery in global economic activity (Figure 1.1). The decline in global trade volumes, sharp as it was, proved relatively short lived. Consequently, as demand recovered, so did commodity prices, boosting export earnings in many sub-Saharan Africa countries. Nearly two-thirds of the countries experiencing a slowdown were also able to increase government spending to buttress economic activity. Remittances and official aid flows remained broadly unchanged from their 2008 levels, notwithstanding the recessions in advanced countries.

The impact of the global financial crisis on the countries in the region has been quite varied (Figure 1.2). The countries most severely affected were middle-income (MICs) and oil-exporting countries, which are more closely integrated into the global economy. The median growth rate in these countries decelerated from 4½ percent in 2004–08 to ½ percent in 2009. On the other hand, all things considered, the region’s low-income (LICs) and fragile countries (29 in all, with some two-thirds of the region’s 750 million total population) proved fairly resilient to the global downturn (Table 1.1). To be sure, the median growth rate in these countries decelerated, but it did so less drastically: from 5½ percent in 2004–08 to 3½ percent in 2009. Of course, given their starting points, any setbacks to poverty reduction can least be afforded by these countries. Still, given the magnitude of the shock—the deepest global downturn since at least the 1930s—it is reassuring that most of these countries were able to sustain reasonably high growth rates.

Figure 1.1.Sub-Saharan Africa and World: GDP Growth

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

Figure 1.2.Sub-Saharan Africa: GDP Growth by Country, 2009

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

The slowdown has nonetheless entailed considerable social dislocation and suffering. Although establishing the exact numbers remains impossible, it is clear that job losses and reduced employment opportunities have affected millions of households. Just in South Africa, where up-to-date information is more readily available, some 900,000 jobs were lost during 2009, further increasing the high level of unemployment. Elsewhere, the impact of the slowdown on formal sector job losses was probably proportionately less. But with government-provided social safety nets virtually nonexistent, both the cash impact and the long-term nonmonetary consequences of losing employment opportunities have been severe. The experience of previous economic slowdowns suggests that setbacks can be expected in all areas of human development, implying that slower progress can be expected toward the Millennium Development Goals (MDGs). While considerable advances toward the MDGs have been made in sub-Saharan Africa in recent years, particularly in reducing the number of people in income poverty, the World Bank (Ravaillon, 2009) estimates that 7 million people may have been prevented by the global economic crisis from rising above the poverty line of US$1.25 per day in 2009.

A key issue going forward is the extent to which the global downturn and the uncertain prospects for the global economy might reduce future economic growth rates in the sub-Saharan Africa region. At this juncture, it very much looks like the global downturn has amounted to a large demand rather than a supply shock to most of the countries in the region. In particular, there is not much sign in sub-Saharan Africa of the disruptions to financial systems and sharp worsening of public sector balance sheets that have emerged in many advanced economies and some emerging markets. Rather, the region is more likely to be affected indirectly, with these effects proving a drag on growth in the advanced and some emerging market countries and thus dampening demand for and prices of sub-Saharan Africa’s exports. But for now, the global economy is expected to register a sustained if moderate recovery. Providing this holds, growth rates in the region should bounce back close to precrisis growth rates in most countries, with the notable exception of the group of oil-exporting countries, where growth is not expected to be as frothy as it was in the mid-2000s.

Against this backdrop, the focus of the three chapters of this 14th issue of the sub-Saharan Africa Regional Economic Outlook is as follows:

Table 1.1Sub-Saharan Africa: Change in Key Indicators Between 2004-08 and 20091
GDPCPIOverall Fiscal

Balance

, Including

Grants
Current

Account

Balance,

Including
Stock of

Reserves
(Percent change)(Percent of GDP)
Sub-Saharan Africa
Average-4.42.0-7.1-2.90.8
Median-2.1-0.1-2.5-2.30.9
Oil-exporting countries2
Average-4.70.3-14.1-7.60.4
Median-4.10.5-12.9-9.81.0
Middle-income countries2
Average-6.71.3-6.10.01.5
Median-4.80.8-6.2-4.31.5
Low-income countries2
Average-2.14.7-0.7-0.70.0
Median-1.8-0.5-1.9-1.00.0
Fragile countries2
Average-0.52.9-1.20.41.1
Median-0.9-1.8-0.6-0.81.2
Sources: IMF, World Economic Outlook; and IMF, African Department database.
  • This chapter continues with a discussion of economic developments in 2009 and the outlook for the region in 2010 and beyond. It considers how the slowdown and changes in the global environment might have a bearing on the region’s economic performance over the medium term. The chapter concludes by discussing the implications for macroeconomic policies in the coming months.

  • Chapter 2 explores the actions taken by countries in the region to put fiscal policy on an expansionary footing to counter the effects of the slowdown. Data gathered by IMF staff indicate that primary government spending in most countries in the region accelerated in 2009 relative to the mid-2000s. Preliminary indications are also of government spending on pro-poor and pro-growth areas continuing to increase in real terms during the slowdown. This ability to use fiscal policy as a countercyclical tool is a welcome change from the past when economic downturns often required widespread fiscal retrenchment. However, with growth expected to approach recent highs in most countries by next year, policymakers need to plan for transition back to medium-term fiscal paths.

  • Another important question in recent months, discussed in Chapter 3, has been the extent to which private external financing flows have been disrupted in the wake of the global financial crisis. The findings reported here show that the decline in flows in the aftermath of the crisis has been more modest than in other regions. This partly reflects the composition of these flows and the relatively greater importance in sub-Saharan Africa of foreign direct investment flows, which grew less rapidly during the upswing and proved more resilient to the crisis than other forms of private capital. However, much of the region remains marginalized from international capital markets and dependent on official forms of external financing. Over one-third of countries in sub-Saharan Africa were largely bypassed by both the rise and the fall in private capital inflows.

A Differentiated Picture in 2009

In the normal course of events, variations in economic growth across sub-Saharan Africa are strongly associated with idiosyncratic shocks.2 In 2009, such shocks were supplemented by the large systemic shock wrought by the global financial crisis and the subsequent global economic downturn. The effect was for economic growth to slow in most countries, and indeed decline markedly in the region’s oil exporters and middle-income countries. Aggregate economic activity is estimated to have expanded by just 2 percent in 2009, well below the 5–7 percent rates of growth registered since 2003.

The proximate cause of the slowdown in economic activity in 2009 looks to have been the decline in external demand rather than the disruptions to financial flows. Output in the region’s trading partners contracted by some 1½ percent in 2009, by far the sharpest such decline going back to at least the early 1970s. Those countries that were more export reliant were hit hardest (Figure 1.3). In the middle-income countries, output growth contracted on average by some 6¾ percent in 2009 compared with 2004–08, while oil exporters saw output growth decelerate from 8½ percent in 2004–08 to just 3¾ percent in 2009. These two country groupings (together numbering 15 countries) account for more than two-thirds of the region’s aggregate output and their travails were the primary reason for the sharp drop in the region’s weighted average growth rate in 2009.

The decline in economic activity in the region’s 29 low-income and fragile countries was more modest (Figure 1.4). Average growth rates in these countries decelerated from 6¼ percent in 2004–08 to 4½ percent in 2009. This mainly (but not exclusively) reflected the adverse effects of the global downturn. Country-specific shocks, including adverse weather conditions, which harmed agricultural production, and political instability, contributed to weaker growth outcomes in some countries. However, some countries saw export volumes rise and terms of trade improve. Policy responses also mitigated the impact of external shocks in many countries. Six countries were able to avoid a deceleration in output growth between 2008 and 2009. Virtually all of these were from the fragile country grouping, enjoying a pickup in growth after a period of civil conflict, external shock, or economic instability.

Figure 1.3.Sub-Saharan Africa: GDP Growth Deceleration in 2009 vs. Export Ratios

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

Figure 1.4.Sub-Saharan Africa: GDP Growth in 2004–08 and 2009 by Country Groups

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

The drop in the region’s exports was accompanied by a deceleration in the growth rate of real domestic demand (Figure 1.5). Total (public and private) consumption growth decelerated from an average rate of 6¾ percent in 2004-08 to 5 percent in 2009. Total investment spending growth also cooled off—from 10 percent to 6 percent over the same period.

Figure 1.5.Sub-Saharan Africa: Contributions to GDP Growth

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

The sharp drop-off in the value of the region’s export earnings, driven by developments in oil exporters, was only partly offset by a decline in imports. Although most commodity markets bounced back in the second half of 2009, export receipts for the year in the major oil exporters and producers of minerals and precious stones were curtailed by the impact of plummeting energy and metals prices and declining sales of precious stones. With the value of oil-exporting countries’ exports of goods and services falling in 2009 by over 40 percent in U.S. dollar terms, their large external surpluses shrank to 4½ percent of GDP compared with an average of 12 percent in 2004– 08. A number of countries with large mining sectors, including Botswana, Lesotho, and Namibia, also saw large deteriorations in their external balances. In South Africa, where external demand plummeted for both mining and manufacturing output, exports of goods and services fell by over 20 percent in U.S. dollar terms. However, export values declined by less than 5 percent on average in the low-income and fragile country groups (and exports actually rose in several countries) and their external balances, although weaker on average than in 2004–08, improved on 2008.

As a result, the region’s current account balance swung into deficit. Whereas the region had recorded small surpluses of the order of 1 percent of GDP during 2004–08, a deficit of some 2 percent of GDP was recorded in 2009 (Figure 1.6). The region’s current account deficit of about US$18 billion in 2009 seems to have been financed in part by a capital account surplus.3 Foreign exchange reserves, which received a boost of nearly US$12 billion from the Special Drawing Rights (SDR) allocations in August and September 2009, were at similar levels in aggregate at the end of October 2009 to where they had been at the end of 2008.4

Reflecting the decline in oil prices and weaker domestic demand, inflation moderated in 2009. The sharp and mostly short-lived depreciations in the exchange rates of some emerging and frontier markets and oil exporters countered these tendencies in the first part of the year but, by December 2009, none of the 33 countries for which 12-monthly inflation rates are available reported a rate significantly higher than a year earlier. In all but five reporting countries, inflation was in single digits.

Figure 1.6.Sub-Saharan Africa: Current Account Balance by Country Groups

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

The policy response to these developments—particularly on the fiscal side—has been quite impressive. Despite a sharp decline in average tax-GDP ratios, expenditure-GDP ratios have risen virtually across the board (see discussion in Chapter 2). Oil exporters experienced a particularly large shortfall in tax collection compared to their budget plans, because of the unanticipated volatility in oil prices, and saw their average revenue-GDP ratios collapse from nearly 36 percent in 2008 to 24 percent in 2009, even against the backdrop of sharply declining levels of nominal GDP. Over the same period, their average expenditure-GDP ratios rose from 30 percent to 31½ percent. Among oil importers, revenue shortfalls were generally smaller, with some low-income countries actually exceeding revenue expectations and recording increases in revenue-GDP ratios. On average, oil importers’ revenue-GDP ratios fell by nearly ½ percentage points, while their expenditure-GDP ratios rose by nearly 2 percentage points. Oil importers’ real spending growth accelerated from 6¼ percent in the 2003–07 period to 7½ percent in 2009.

Moreover, early indications are that development spending and outlays on health and education have continued to increase through the slowdown. The median ratio of capital expenditure to GDP rose to about 9 percent in 2009 from an average of 7½ percent during the period 2003–07. At the same time, outlays on health and education have also been trending upward, from an average of about 5½ percent of GDP in 2006–07 to about 7 percent of GDP in 2008.

These developments have resulted in increases in fiscal deficits in most countries (Figure 1.7). Again, the largest swings were registered by the oil exporters and middle-income countries. Most of the oil exporters’ large fiscal surpluses (averaging over 7 percent of GDP in 2004–08) were wiped out or declined substantially.

Monetary authorities also generally tried to reduce interest rates to offset the weakening in private sector demand, subject to inflation and exchange rate considerations. Averaging across the entire sub-Saharan Africa region, short-term treasury bill rates fell from above 9 percent on the eve of the Lehman collapse in September 2008 to about 6¼ percent in September 2009. Exceptions to this declining trend were the CFA franc zone, where interest rates were already in a much lower band (3¼–3½ percent), and a few countries (including Kenya and Zambia) that experienced some bursts of downward pressure on their exchange rates.

Figure 1.7.Sub-Saharan Africa: Fiscal Balance by Country Groups

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

In most countries, monetary policy seems to have helped sustain activity in the face of adverse external shocks and deteriorating domestic conditions, including some limited financial knock-on effects from the global crisis that reduced access to cross-border finance and made local banks more cautious in their lending. Although the decline in nominal interest rates in most of the region did not match the decline in backward-looking 12-month inflation rates in this period (from 15 percent to 7 percent), there had previously been no upward adjustment in interest rates in response to the spike in food and fuel prices. Overall, it seems likely that inflationary expectations were fairly steady during and after the price spike, implying that real interest rates declined alongside nominal rates in 2009. Another indication of the supportive stance of monetary policy is that median broad money growth, while falling back from 19 percent in September 2008 to 11½ percent a year later, decelerated less rapidly than median GDP growth, which fell from 16½ percent in 2008 to 6 percent in 2009. The median 12-month growth rate for bank credit to the private sector also declined a little less rapidly than nominal GDP, from 28 percent to 19 percent. Looking at the paths of the stocks of credit and money during the first half of 2009, credit was broadly flat in real terms and money showed a slowly rising trend.

Official intervention in foreign exchange markets to defend currencies was modest, with reserves falling significantly in only a handful of countries. The region’s largest oil producers, Angola and Nigeria, drew on their substantial cushions of reserves, which fell by about one-third, before allowing their currencies to adjust more fully to lower oil prices. Reserve levels also declined in Malawi which, until late 2009, sought to defend an overvalued fixed exchange rate. In the CFA franc zone, reserves fell moderately but the premium of policy interest rates over euro rates was also subject to a further increase. Although the paths of average real effective exchange rates diverged substantially between different country groups in 2008 and early 2009, they had all returned to about 5–10 percent above their 2007 values by end-2009 (Figure 1.8). This reflected in part different patterns in domestic inflation.

Financial sector problems have so far surfaced in only a few countries in the region. In Nigeria, where credit growth to the private sector averaged nearly 50 percent per annum from end-2004 to end-2008, eight banks were intervened in 2009. Some banks had built up large exposures to equity markets through margin lending and loan losses were aggravated by oil price declines, currency depreciation, and slower growth. Corporate governance structures had been weak. In Ghana, which experienced similar rates of credit expansion in 2004–08, 15 percent of total bank loans were nonperforming at end-2009, up from less than 8 percent a year earlier. This reflected the exposure of some banks to contractors hit by budget arrears and to underperforming state-owned enterprises, as well as the impact of tighter credit conditions.

Figure 1.8.Sub-Saharan Africa: Real Effective Exchange Rates by Country Groups

Source: IMF, Information Notice System.

The Turning Point

A range of indicators point to the worst of the disruption to demand and activity being over by mid-2009 in most sub-Saharan African countries (Figure 1.9). Exports started to recover throughout the region in the early part of the year, as the period of heavy global destocking began to abate and commodity markets bounced back. Imports also started to show signs of buoyancy at that time. These factors helped to restore confidence in sub-Saharan African economies and the region’s financial markets. By the third quarter of the year, money stocks in the region had resumed an upward trend in real terms, and bank credit to the private sector had tentatively begun to rise again. In South Africa, affected the most by faltering consumer demand and hesitation in business spending, industrial production began to recover around September.

Figure 1.9.Sub-Saharan Africa: High-Frequency Macroeconomic Indicators

Sources: IMF, International Financial Statistics; IMF, Direction of Trade Statistics; and IMF, African Department database. Note: Country coverage is limited by availability of monthly data. For example, the figure on consumer price index (CPI) inflation covers from 33 to 42 countries, depending on the time period; for the reserves data, only 31 countries are used throughout, covering approximately 95 percent of 2007 sub-Saharan-Africa (SSA) reserves.

Currency depreciations quickly reversed or stabilized. The South African rand, in particular, rebounded strongly, while interest rates continued to decline, and the exchange rate relative to the U.S. dollar ended 2009 at about 7.5 from 10 at the beginning of the year. By end-2009, spreads on the region’s external sovereign bonds had returned to their precrisis levels and Senegal was able to issue a debut international bond.

This performance is very encouraging in light of previous economic cycles in sub-Saharan Africa. As outlined in the last Regional Economic Outlook (IMF, 2009b), recovery in activity in sub-Saharan Africa following past global downturns has tended to lag well behind the rest of the world. Governments then had little room to support recovery because they had limited access to financing and instead often resorted to distortive administrative controls to preserve foreign exchange. This time, both the initial recovery phase and the policy stance of sub-Saharan African countries seem much more promising. Trade patterns (both exports and imports) seem to be tracking global developments more closely (Figure 1.10), with no indications that financing constraints, administrative factors, or supply bottlenecks are significantly holding back purchases or production. Government policy has generally been to sustain demand by allowing fiscal deficits to rise and allowing markets to function.

2010 and Beyond

Against this backdrop, the prospects for a rebound in growth in most sub-Saharan Africa countries—albeit not quite to the buoyant levels of the mid-2000s—now seem much more assured than six months ago. Two developments have helped. First, tail risks for the global economy have declined since the last Regional Economic Outlook (IMF, 2009b) and projections for world growth have been revised upward: activity is now expected to expand by some 4 ¼ percent in 2010 compared to just over 3 percent. Second, as noted earlier, there are signs from within sub-Saharan Africa (albeit from indirect indicators) that the worst of the slowdown is over and a rebound is underway.

Figure 1.10.Sub-Saharan Africa: Sharing in World Recovery

Source: IMF, Direction of Trade Statistics.

A key question now is whether and to what extent the disruptions to activity and financing in 2009 might have a sustained and significant impact on sub-Saharan Africa’s growth prospects. There are three channels that merit examination: lower global growth, lower private investment, and limited fiscal space.

Lower Global Growth

Global economic growth is projected to be some 4 ¼ percent in 2010 and to remain in the 4–4½ percent range from 2011 onward, lower than the 5 percent or so witnessed in the mid-2000s. Moreover, the pace setters in the coming years are expected to be emerging market economies. Could these lower growth rates for the global economy and shift in the composition of growth away from the advanced countries imply a lower growth path for sub-Saharan African countries too?

This seems unlikely. For one, although global economic activity is expected to expand at a slower pace than in the recent past, the rates of expansion would still be quite healthy by historical standards. For example, the 4–4½ percent global growth being projected for 2011 onward compares with 4½ percent in the 1970s, 3 percent in the 1980s, and 3 percent in the 1990s. As for the shift in the composition of growth, this has been going on for a while (Figure 1.11), without any indication that it is an adverse development for sub-Saharan Africa. Alongside the shift in the composition of world output, the region’s exports have shifted away from Europe and North America and toward emerging markets and developing countries (Figure 1.12). In any case, with the region’s exports dominated by commodities, it seems of little relevance where they end up being consumed.

Figure 1.11.World: Contributions to GDP Growth

Sources: IMF, World Economic Outlook.

Figure 1.12.Sub-Saharan Africa: Exports by Destination

Source: IMF, Direction of Trade Statistics.

Lower Private Investment

Beyond the impact of lower external demand noted above, private investment rates in the region could be dampened further by the expected higher costs of capital in the future—as a result of the high public sector borrowing globally and consequently more limited availability of external financing. But this, again, is only likely to exert a modest drag on private investment growth in the region. Two factors seem particularly relevant.

First, although the growth of private investment spending seems to have decelerated sharply in 2009, it has remained well above the levels observed during the upswing when measured relative to GDP. This contrasts sharply with what has happened elsewhere (Figure 1.13). Relative to GDP, private investment in both Organisation for Economic Co-operation and Development (OECD) countries and developing countries outside sub-Saharan Africa declined markedly between 2003–07 and 2009. This disparity in performance is consistent with the more limited decline in output in the sub-Saharan Africa region.

Figure 1.13.Sub-Saharan Africa and World: Change in Private Investment-to-GDP Ratios between 2003–07 and 2009

Second, private investment in the region is less reliant than elsewhere on bank lending and other more formal sources of financing. Instead, retained earnings are the main source of financing for private investment in most sub-Saharan African countries (Ramachandran, Gelb, and Shah (2009).

Accordingly, an increase in the cost of funds may not be as detrimental to investment growth as elsewhere.5

Reflecting these considerations, total investment growth (public plus private) is projected to increase by some 7 percent in 2010, compared to 6 percent in 2009. This compares with average investment growth of about 10 percent observed during 2004–08. In 2011 and beyond, investment growth is projected to fall back to 6¼ percent.

Limited Fiscal Space

The other main source of potential downward pressure on growth in the region is the risk that the deterioration in some fiscal balances is so great that it will require sharp fiscal consolidation in the coming years. Faced at the start of the global financial crisis with the prospect of a strong adverse external shock, policymakers in most sub-Saharan African countries sought to use the fiscal cushion they had built up during the upswing to support economic activity. The analysis presented in Chapter 2 shows that they were successful in their efforts to a large degree. Public spending increases in 2009 actually accelerated in most countries experiencing an economic slowdown. The question now is whether these increases have left fiscal deficits at excessively high levels. Two indicators are considered here.

First, as for the last Regional Economic Outlook (IMF, 2009b), staff has compared the debt trajectories from debt sustainability analyses undertaken before and after the global financial crisis for a large group of low-income countries from sub-Saharan Africa. The main conclusion from this exercise is that while debt paths are set to rise in almost all countries as a result of the slowdown in economic activity, they have not done so to a worrying degree. The increase in debt is not expected to translate into a broad rise in risks of debt distress if two assumptions hold: (1) the crisis will not have a permanent impact on growth, and (2) countries progressively undo the fiscal easing implemented during the crisis. This said, a significant number of countries continue to face a high risk of debt distress or to be in debt distress. Sustained implementation of a combination of measures, involving debtors and creditors, should permit reducing debt vulnerabilities significantly in these countries over the medium term.

The second approach is to see the extent to which primary fiscal balances differ from the levels required to stabilize the ratios of public debt to GDP at existing values. The aim here is not to quantify the required degree of adjustment nor the degree of debt vulnerability but rather to identify the broad trends in countries’ fiscal balances relative to this important benchmark.6 As of 2007, the primary balances of most (20 out of 23) countries in the sample were at or above the levels required to stabilize existing public debt ratios (Figure 1.14, top panel). This was a reflection of the relatively high growth rates that countries were enjoying through 2008 or so, and relatedly the healthy fiscal balances they were registering. But with the slowdown in economic activity in 2009 and accompanying increases in spending in many cases, primary balances in many (12 out of 23) countries last year had drifted to below levels required to stabilize debt ratios (Figure 1.14, middle panel). This shift essentially shows the desired countercyclical policy response to the slowdown.

Figure 1.14.Sub-Saharan Africa:1 Primary Balance vs. Debt-Stabilizing Primary Balance,2 2007, 2009, and 2011

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

1 Excludes: Burundi, Democratic Republic of Congo, Eritrea, and Liberia.

2 Calculated as pb*={rg1+g}(D/Y)t1 Where r = nominal effective interest rate; g = nominal growth rate of GDP; DIY= debt-to-GDP ratio.

A cause for concern would be if countries with primary balances below debt-stabilizing levels were to sustain these levels for an inordinately long time. At least through 2011 (Figure 1.14, bottom panel), this analysis shows roughly the same proportion of countries (12 out of 23) with projected primary fiscal balances below the level that is required to stabilize debt ratios at end-2007 levels. The evidence, then, suggests weaker fiscal positions in many sub-Saharan African countries as a result of the global financial crisis, but not to a worrying degree in most cases.

All in all, taking into account these considerations, growth in the sub-Saharan Africa region is projected to accelerate from 4¾ percent in 2010 to 5½-6 percent in 2011 and beyond (Figure 1.15). Although this is lower than the 5–7 percent or so rates enjoyed in the mid-2000s, 5½–6 percent is a reasonably high rate by historical standards. Moreover, the main reason this region-wide average growth figure is projected to remain below the mid-2000s level is the less robust performance expected in the oil exporters and middle-income countries groups. Although both groups are expected to bounce back solidly in 2010–11, growth would still be modest compared with the mid-2000s. With oil output at or near a plateau in some countries (Cameroon, Chad, Gabon), average GDP growth for oil exporters is projected at only 6½ percent in 2010, some way below the 8½ percent rate achieved during the oil boom of 2004–08.

Dominating prospects for the middle-income countries is South Africa, which is projected to expand by some 2½ percent in 2010, rising to 3½–4 percent in 2011 and beyond, compared to an average growth of nearly 5 percent in 2004–08. The fragile countries group is expected to show further steady improvement in growth in 2010 and beyond, to about 4½–5½ percent, well above the range of 3–3¾ percent of 2004–08.

Figure 1.15.Sub-Saharan Africa: GDP Growth 2004–08 vs. 2010–12

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

This expectation that most oil-importing countries in the region will get close to their precrisis growth rates is mainly grounded in the view that the crisis is a short-lived shock to external demand, with no permanent impact on the terms of trade. In a recent study, IMF staff considered the factors affecting periods of growth acceleration and deceleration among lower-income countries.7 The work shows that the pattern of GDP growth in sub-Saharan African countries in 2009 is consistent with the downturn in global demand being the major factor behind the slowdown in growth, rather than terms-of-trade changes; and that such effects, while reducing output levels in the medium term, tend not to be associated with any permanent impact on growth. In contrast, large persistent deteriorations in the terms of trade can propel countries into a “low growth” period that can persist for a long time.

Risks to the Outlook

Uncertainties are likely to remain unusually high as the world economy emerges from the extraordinary convulsions in its financial systems and the starkness of the global recession. For the region, there are several external and internal tail risks, the realization of which could dampen growth prospects and the ability of countries to make serious inroads toward reducing poverty.

  • A hiatus in the global recovery. There is very limited room left for policy maneuvers in the advanced economies in the event of negative shocks. Bank exposures to real estate continue to pose downside risks. So risks remain that the cumulative stresses of 2008–09 in the world economy could resurface, producing, once again, heavy falls in commodity prices.

  • Shortfalls in official finance. Although bilateral aid held up well in the global recession, and international financial institutions ratcheted up their grants and lending, the outlook for official finance has been worsened by the permanent hits suffered by the economies of major donors. Already, in spite of their resilience in 2009, G8 donors are lagging well behind the scaling-up commitments they made at Gleneagles in 2005. With lower-than-expected GDP levels and massive fiscal problems to address in their countries, there is a risk that aid and other financing will fall further behind in the years ahead. If so, there could be serious repercussions for pro-poor spending and infrastructure investment in sub-Saharan Africa.

  • Volatile commodity prices. Even if the global recovery remains on track, renewed spikes or even sustained shifts in commodity prices, particularly oil and minerals, remain possible, perhaps aggravated by shifting patterns of demand as the global economy rebalances. As in the last three years, large changes in different commodity prices would have varied effects in different parts of the sub-Saharan Africa region. Sharp energy price increases could hit oil importers hard, as during the fuel and food price shocks of 2008. Conversely, while providing welcome relief to most low-income countries, a weakening in energy prices would exacerbate fiscal problems for some oil exporters. More generally, simply the risk of volatility can reduce growth by inducing precautionary behavior such as raising private savings rates, lowering private investment, and cutting public spending plans.

  • Internal risks include political unrest and a deterioration in financial systems in some countries. As developments in Guinea and Madagascar in 2009 showed, political instability can have immediate and strongly negative effects on economic activity. Should the fragile political outlook worsen in countries in the western Africa region economic growth may weaken in the countries affected and spill over into neighboring ones. As for the risks related to financial systems, although problems with nonperforming loans do not yet appear to have had a significant adverse impact on broader economic activity, economic growth could get affected if holes in bank balance sheets are not addressed promptly and forcefully.

Policy Implications

At this juncture, the economic slowdown in sub-Saharan Africa looks to have been pronounced but mercifully brief. In tandem with the recovery of the global economy, the region’s growth now looks set to pick up from last year’s 2 percent to 4¾ percent in 2010 and 5½–6 percent beyond that. While lower than the 5–7 percent rates the region registered in the mid-2000s, this would still be quite high by historical standards. Nonetheless, the slowdown has caused considerable dislocation and suffering and any additional hardship is more than the region’s population should have to bear.

In many respects, the main positive feature of the slowdown has been the resilience that the region has exhibited. The global financial crisis and the recession that followed has amounted to the most stringent possible “stress test” of the region’s improved macroeconomic and structural policies. Most countries have come through in reasonably good shape, if a little bruised.

The next challenge for countries in the region is to sustain policy coherence in an environment of heightened global uncertainty. To get through this new stress test in decent shape will, among other things, require some fine-tuning of macroeconomic policies. The case for recalibrating policies is twofold. First, with economic growth expected to revert close to precrisis paths in most countries by 2011, it will be important to ensure that macro policies are consistent with medium-term objectives, backing off the more near-term and output-stabilization considerations that have (rightly) dominated policy making over the last year or so. Second, emerging risks to high growth must be addressed. Recent developments have highlighted in particular the risks that can emanate from financial sectors that are poorly supervised and macroeconomic policies that fail to address surges in private capital flows. Some of the policy issues considered below are more pressing in some countries than others, and not all have been evidenced in the recent slowdown, but this difficult—and hopefully brief—interlude has intensified the need to address them.

Rebuilding Policy Buffers

As amply demonstrated by recent events, the main rationale, and a strong one at that, for rebuilding policy buffers is that countries in the region are highly susceptible to shocks. In the last three years, the region has been shaken by two huge global shocks: the food and fuel price spikes of 2007–08 and the global financial crisis of 2008–09. Policymakers were forced to react defensively when they should have been focusing on longstanding priorities. Moreover, further shocks of this broad-based nature cannot be ruled out, nor their ability to do greater harm still as they pile one on top of the other. But in addition to shocks of this nature, countries in the region are also subjected to more localized shocks that put huge strains on them—an example is the drought that hit several east African countries in the second half of 2009. Navigating through all these shocks is neither easy nor costless. But the costs can best be minimized by rebuilding key policy buffers, where this is necessary, for the shocks that are almost certain to come.

Public Finances

As noted above, the use of fiscal policy to ameliorate the impact of the downturn on output has been one of the welcome new developments in the region. Among the 32 countries experiencing a slowdown in economic activity in 2009, 20 (or nearly two-thirds) appear to have been able to have a countercyclical fiscal stance. And in most cases this has been done without much of an adverse impact on the sustainability of public debt trajectories. This is a testament to the improved fiscal positions in an increasing number of sub-Saharan African economies in the run-up to the global crisis. In earlier slowdowns, the share of countries that were able to pursue supportive fiscal policies was markedly lower. In 1992, when growth last decelerated in a broad swath of countries in the region, only a third of the countries were able to adopt a countercyclical fiscal stance. At that time, fiscal positions were less robust and the macroeconomic environment was more difficult, with inflation in double digits in most countries.

And, of course, not all countries have been in a position to pursue countercyclical policies this time around. A third of the countries in the region experiencing a slowdown (12 out of 32) did not adopt a countercyclical fiscal stance in 2009. Comprising this group are five low-income countries facing financing constraints and/or with already high fiscal deficits and seven middle-income and oil-exporting countries where real primary spending growth was decelerating in the face of revenue decline and high rates of spending in the preceding years.

With the onset of the crisis, fiscal policy has rightly been cast with an eye to supporting output in the near term in most instances. But with output growth in most countries now looking set to rebound toward 2004–08 levels from 2011 onward, it is important that the focus of fiscal policy shift too.8 Specifically:

  • Where growth is expected to rebound to precrisis levels or the output gap is simply expected to close, spending plans from 2011 onward should be determined by medium-term fiscal objectives. Of course, if spending plans through the crisis have continued to be cast along these lines, no change is warranted. Rather, it is where spending was increased to help ameliorate the impact of the crisis, or where output prospects have deteriorated—at least relative to the trajectory envisaged prior to the crisis (Figure 1.16)—that a second look at spending paths is called for to ensure that they can still be readily financed and are still called for. Unless precrisis nominal spending paths are revisited, the result could be spending-to-GDP ratios higher than might be consistent with sustainability over the long term.

  • Where output remains well below potential, subject to financing availability there remains a strong case for fiscal policy to help sustain demand in the near term.

Figure 1.16.Sub-Saharan Africa: GDP Projections Made in Spring 2008, 2009, and 2010

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

International Reserves

Foreign reserves remain below desirable levels in a significant number of the countries in the region, including after the SDR allocation. The case for maintaining a healthy level of foreign exchange reserves is threefold: to facilitate trade transactions, to self-insure against balance of payments shocks, and, to a lesser degree, to foster confidence in the government’s policy framework and its capacity to meet external obligations. But in a quarter of the region (11 countries), reserves provide cover for less than three months of imports, generally considered a minimum level for low-income countries. And, while the number of countries below this level has not increased during the slowdown, their reserves remain low—in 7 of these 11 countries reserve levels at end-2010 are projected to be below two months of import cover.

With the outlook for current accounts and for external financing from both official and private sources more uncertain than usual, the case for establishing reserves at a level of at least about three months of imports is all the more pressing. Building reserves to this level will not be an easy undertaking. Still, it should remain an important, though not overriding, objective for macroeconomic policies. As for the policy requirements to achieve this objective, these vary from country to country but likely include recalibration of monetary and exchange rate policies and in some cases fiscal adjustment.

Minimizing Financial Shocks

Strengthening the Financial Sectors

Financial sectors in many countries in the region remain shallow and vulnerable. Banking sectors serve only a small proportion of the population, nonbank financial institutions are weak, and supervisory capacity is low. As noted above, nonperforming loans in the banking sector have increased in a number of countries in the region, constraining the availability of credit and with a potential to affect public sector balance sheets. The exceptionally rapid expansion of bank credit to the private sector in the mid-2000s—upward of 40 percent per annum in many countries—stretched banks’ assessment capacity and regulators’ supervisory competence, increased exposure to asset and capital market volatility, and shifted the balance of final demand in the economy in some countries. It also underpinned a diversification in the institutional structure of financial sectors that substantially complicated the tasks of regulators.

Looking ahead, the urgent need is for regulatory capacity to catch up with the increasing depth and breadth of financial sector activity, including through cross-border institutions. Stress testing can highlight the vulnerabilities that these new interconnections bring with them. Contingency plans should be regularly updated in the light of the clear international financial fragilities that persist. But there is also a need for closer monitoring of the direct macroeconomic consequences of credit and money growth, including their implications for asset prices and spending volatility.

Reaping the Benefits of Increased External Financial Integration

The costs and benefits of external financial integration remain finely balanced. Increased access to foreign capital can in theory boost economic growth, reduce macroeconomic volatility, and contribute to domestic financial development. At the same time, however, financial opening has also been associated with more frequent and severe economic crises. Crucial factors in determining whether capital flows will aid or hinder development are the adequacy of institutional and policy frameworks.

For many of the region’s low-income countries and fragile states currently marginalized from international capital markets, the challenge will be to develop the domestic investment opportunities that can attract foreign capital. Experience within sub-Saharan Africa suggests that the reforms needed to unlock an economy’s productive potential—such as promoting trade and financial sector development, encouraging domestic savings and investment, and raising standards of governance and strengthening institutions—are also helpful in attracting private capital inflows and making these flows more productive. Given the time taken to implement such reforms, these countries should carefully monitor the implications and effects of financial opening. There is reason to be more confident of increases in foreign direct investment, which can result in the transfer not just of resources but also know-how, and is generally beneficial even for countries with relatively weak economic fundamentals.

Countries in sub-Saharan Africa that are moving toward frontier or emerging market status face additional challenges. Insulating an economy from the volatility of cross-border financial flows, including more footloose flows such as portfolio and other shorter-term investments, becomes progressively more difficult in the face of growing merchandise trade and the development of domestic financial sectors. Macroeconomic policy needs to focus particularly on the risk of overheating, loss of competitiveness, and increased vulnerability to crises in the face of larger and potentially volatile movements in flows to these countries.

The swings in private capital flows experienced by some sub-Saharan African countries during the global financial crisis have provided a first stress test of their toolkits for policy responses to these flows. Most took the opportunity to build foreign reserves during the upswing (and sterilized much of the resulting increase in money) but allowed exchange rates to depreciate during the downswing—an asymmetric response that was broadly appropriate given the low starting level of foreign reserves and the severity of downward pressure on exchange rates in the immediate wake of the global financial crisis. Greater fiscal restraint during the period of inflows also appears to have enabled some countries to weather the crisis relatively well, both by moderating upward pressure on real exchange rates during the upswing and by creating room for a more robust countercyclical fiscal response during the downswing.

Policymakers will need to consider these and other tools as capital inflows to the region resume. The experience of emerging markets in recent crises has refocused attention on the possible role of financial disincentives and other instruments to discourage potentially volatile flows. There may, for example, be a case for tightening prudential requirements or imposing penalties in response to temporary surges in capital inflows if: (1) an economy is operating near potential (ruling out lower interest rates), (2) political considerations and implementation lags limit the scope for fiscal consolidation, (3) foreign reserves are adequate, and (4) the exchange rate is already overvalued such that further appreciation would damage competitiveness. Where increases in inflows prove to be persistent, however, the economy will eventually need to adjust to a permanently higher exchange rate (Ostry and others, 2010).

Role of the IMF

The IMF stepped up the pace and volume of its lending to sub-Saharan Africa in 2009. Over US$3.6 billion of concessional (zero interest) finance was committed during the year and US$1.4 billion in stand-by and extended arrangements (Figure 1.17). This represented nearly a fivefold increase in IMF commitments over 2008 (excluding arrears-related lending). In addition, the SDR allocations in August and September 2009 provided nearly US$12 billion of reserve assets to sub-Saharan African countries. The extent to which these additional financial resources will be utilized will depend on the strength of the global recovery and the continued coherence of policy responses in member countries.

For the most part, the economic policy stances adopted in 2009 by authorities in the 30 sub-Saharan African countries that have program relationships with the IMF were designed to ameliorate the impact of the global recession. Fiscal deficits were slated to rise and interest rates to decline. Social spending was protected. However, in a few countries that faced preexisting macroeconomic imbalances, the priority was to reestablish macroeconomic stability.

Figure 1.17.Sub-Saharan Africa: IMF Lending Commitments 1, 2007-09

Sources: IMF, Finance Department.

1 Includes concessional lending (Poverty Reduction and Growth Facility, Emergency Post-Conflict Assistance, Emergency Natural Disaster Assistance, and Exogenous Shocks Facility) and nonconcessional lending (Stand-By Arrangement and Extended Fund Facility). Excludes arrears-related lending (Liberia).

2 Converted into U.S. dollars using the average exchange rate for each year.

Looking ahead, an elevated level of financial support from the international community will remain crucial in ensuring continued macroeconomic stability, growth, and poverty reduction in sub-Saharan Africa. This will require bilateral donors to step up aid disbursements so they can more fully honor pledges made to low-income countries, and multilateral financial institutions to mobilize additional concessional finance and grants. For its part, the IMF has enhanced both the scale of assistance that can be made available to low-income countries and the range and flexibility of the instruments that can be used.

This chapter was prepared by Abebe Aemro Selassie and Jon Shields, with research assistance by Gustavo Ramirez and Duval Guimarães.

Unless otherwise stated, all figures for the region or country groups are averages of country figures, weighted by each country’s recent GDP measured on a purchasing-power-parity basis.

Notable idiosyncratic shocks in 2009 include the drought in east Africa (which most severely affected Kenya, Eritrea, and Ethiopia) and political instability (Guinea and Madagascar).

The IMF made gross disbursements of US$2.7 billion to sub-Saharan Africa in 2009.

Data cover 31 out of 44 countries in sub-Saharan Africa.

Of course, higher interest rates will raise the opportunity cost of using funds for investment relative to other competing activities.

For the purposes of this exercise, we consider the 23 sub-Saharan African countries with debt-to-GDP ratios between 15 and 60 percent as of 2007. Most of the countries with debt-to-GDP ratios above 60 percent have yet to benefit from the Multilateral Debt Relief Initiative and/or are in need of debt restructuring. Countries with debt-to-GDP ratios below 15 percent are considered to have room to increase indebtedness without much cause for concern.

As reported in World Bank, 2010.

Only seven countries are projected to grow in 2011 by 2 percentage points less than they did in the 2004–08 period. Three of these countries are oil exporters (Angola, Chad, and Equatorial Guinea) that enjoyed a rapid spurt of growth in 2004–08 on the back of new oil discoveries. The other four countries where growth is expected to be below recent highs are Ethiopia, Madagascar, Namibia, and Rwanda.

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