Chapter

1. Sustaining the Expansion

Author(s):
International Monetary Fund. African Dept.
Published Date:
October 2011
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INTRODUCTION AND SUMMARY

This year looks set to be another encouraging one for most sub-Saharan African economies. Reflecting mainly strong domestic demand but also elevated commodity prices, the region’s economy is set to expand by 5¼ percent in 2011. For 2012, our baseline projection is for growth to be higher at 5¾ percent, owing to one-off boosts to production in a number of countries.

But there are specters at the feast. Helpful as commodity prices can be to the region, the increase in global food and fuel prices, now amplified by an acute drought in some parts, has hit the budgets of the poor and in a number of countries sparked rising inflation. And beyond this, hesitations in the global recovery threaten to weaken export and growth prospects. In particular, our projection for 2012 is highly contingent on global economic growth being sustained at about 4 percent. If growth in advanced economies slows further and curtails global demand, the region’s ongoing expansion is likely to face significant headwinds, with South Africa and others that are more globally integrated likely to be affected the most.

Policies in the coming months need to tread a fine line between addressing the challenges that strong growth and recent exogenous shocks have engendered and warding off the potentially adverse effects of another global downturn. As usual, much depends on country circumstances, but some broad guidelines can be advanced.

  • Some slower-growing, mostly middle-income countries, including South Africa, without binding financial constraints, have yet to see output and employment return to precrisis levels. Policies here should clearly remain supportive of output growth, and even more so if global growth sputters.

  • Most low-income countries are currently on a faster growth trajectory, but policies have been slow to move out of the accommodative mode set during the global slowdown. Some are so far behind the curve that inflation is now rising sharply. Against this backdrop:

    • Provided that the global economy keeps to the World Economic Outlook baseline scenario of steady but slow growth, these countries should focus squarely on medium-term considerations in setting fiscal policy while tightening monetary policy wherever nonfood inflation has climbed above the single digits.

    • In the event of a global downturn, subject to financing constraints, policies should focus on maintaining planned spending initiatives, while allowing automatic stabilizers to operate on the revenue side. If, however, the global slowdown looks to be persistent, there will be a need to revisit spending plans to ensure that they are consistent with lower growth and financing assumptions. Where nonfood inflation is high, monetary policy support for activity should wait for inflation to fall to single digits.

    • For oil exporters, better terms of trade are providing a good opportunity to build up policy buffers against further price volatility.

There are encouraging signs that the quality of the region’s recent high-growth episode has been fairly good. The analytical chapters in this edition of the Regional Economic Outlook focus on two dimensions of the quality of growth:

  • Chapter 2 focuses on the inclusiveness of the region’s recent high-growth episode based largely on a detailed look at the evolution of consumption for the poorest quartiles in six country case studies. Overall, for three of the high-growth countries in the six-country sample, economic growth has been fairly inclusive with the poorest quartiles benefiting from fairly impressive annual increases in consumption. Coupled with other evidence suggesting that reductions in poverty and improvements in social indicators have been evident in the region’s high-growth countries, this provides important support for the centrality of growth.

  • Chapter 3 focuses on the extent to which countries have been able to latch on to new growth markets. We find that there has been a significant and rapid reorientation of exports toward China, India, and other developing countries over the last decade. More than half of the region’s trade (both exports and imports) is now with nontraditional partners, and investment flows are moving in a similar path. The immediate payoffs from this reorientation of trade include reduced export and output volatility.

GROWTH WITH RISKS

2011 is a year of two contrasting storylines in the region. On the one hand, growth is as strong and broad as it has been for many years for many countries. On the other, global and domestic developments in 2011 have brought to the fore the fragility of economic conditions in sub-Saharan Africa. In particular, the surge in global food and fuel prices is causing dislocation in many parts of the region, particularly among the urban poor, and the drought in east Africa is causing untold human hardship including the displacement of close to a million people from Somalia into Ethiopia and Kenya. Furthermore, the renewed turmoil in global financial markets and the weaknesses exposed in advanced economies are likely to heighten downside risks to our central projections. Focusing on the macroeconomic outcomes engendered by these two trends, this section presents our baseline scenario, in which the downside risks that are now threatening to slow global economic activity below 4 percent remain contained.

Provided that global growth is sustained at the 4 percent mark in 2011 and 2012, economic growth in sub-Saharan Africa is set to remain fairly robust this year and next (Figures 1.1 and 1.2 and Table 1.1). In particular:

Figure 1.1.Sub-Saharan Africa: Output Growth

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

Figure 1.2.Sub-Saharan Africa: Macroeconomic Indicators, December 2005–June 20111

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

Note: Country coverage is limited by availability of monthly data. For example, the figure on 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 2010 sub-Saharan African reserves.

1Where June 2011 data are not yet available, graphs depict data through May 2011.

Table 1.1.Sub-Saharan Africa: Macroeconomic Aggregates, 2004–12
2004–082009201020112012
(Percentage change)
Real GDP growth6.52.75.45.25.8
Inflation, end-of-period8.68.46.99.46.8
(Percent of GDP)
Fiscal balance, excl. grants0.5−6.7−5.3−3.1−2.1
Current account balance0.9−2.2−1.00.7−0.5
(Months of imports)
Reserves coverage4.65.14.55.15.6
Sources: IMF, World Economic Outlook; and IMF, African Department database.
  • In most of the region’s seven oil exporters, higher oil and gas production levels should be sustained by continued strong oil demand, and non-oil activity, particularly in the public sector, is being underpinned by the resurgence of hydrocarbon revenues—a pattern most evident in Angola. Consequently, growth in the oil-exporting countries is projected to average 6 percent this year and 7 percent in 2012.

  • In the middle-income countries (MICs), now numbering 11,1 growth is expected to be in the range of 4–4½ percent in 2011 and 2012, a more moderate pace than before the global financial crisis. The recent global market turmoil, and its likely restraining impact on growth in advanced economies, is expected to limit growth in South Africa to about 3½ percent this year and next. Another outlier in this group is Swaziland, where serious fiscal problems will cut into both private and public spending.

  • In the region’s 26 low-income countries (LICs) and fragile countries, the recent solid growth performance looks set to be sustained. Excluding Côte d’Ivoire, where civil conflict has significantly disrupted economic activity, growth in LICs in 2011 is projected to average about 6 percent (5 percent including Côte d’Ivoire), rising to nearly 7 percent in 2012. Contributing to the continued strong growth in 2012 is new mining production in a number of countries, including Niger and Sierra Leone.

There has been a perceptible increase in inflation in many countries across the region, and sharply so in some east African countries:

  • Across the region, consumer price inflation averaged 10 percent in June 2011 compared with 7½ percent a year earlier. In one-fourth of the region’s economies, inflation is now in double digits (Figure 1.3).

  • Higher food and fuel prices have contributed to the surge in inflation. The latest available data show overall and food inflation to be highly correlated (Figure 1.4).

  • Relative to the food price shock of 2008, the impact of the surge in food prices has been much more diffuse this time around. Although the number of countries in which food inflation is currently above 10 percent has increased in recent months, the number has remained well below the nearly 35 countries in which this was observed in 2008.

  • But in a sign that second-round effects from food and fuel price shocks may be taking hold, more recent data points show non-food inflation accelerating. There are at least 10 countries in the region now where nonfood inflation is above 10 percent, including Ethiopia, where overall inflation is close to 40 percent, and Guinea and Uganda, where it is now above 20 percent. In a number of other countries (including Ghana, Malawi, and Zambia), nonfood inflation is above 10 percent, although strong local harvests are keeping food inflation, and with it overall inflation, subdued.

Figure 1.3.Sub-Saharan Africa: CPI Inflation, 2011 vs. 20101

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

1The horizontal axis shows each country’s latest available monthly data (mostly between June 2011 and August 2011). The vertical axis shows equivalent data for the same month of the previous year. Zimbabwe is not included.

Figure 1.4.Sub-Saharan Africa: Food Inflation vs. CPI Inflation, data latest available1

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

1The horizontal axis (food component of the CPI) shows each country’s latest available monthly data (mostly between May 2011 and July 2011). The vertical axis shows overall CPI data for the same month. Equatorial Guinea and Zimbabwe are not included.

Only a handful of countries have tightened monetary policy in response to the price shocks:

  • Some flexible exchange rate countries experiencing strong growth and high or rising nonfood price inflation have increased policy rates (Burundi, Kenya, Nigeria, Uganda). But in most countries, interest rates are little changed from the low levels set during the global financial crisis (Figure 1.5).

  • And playing off the looser monetary stance, many countries in the region with floating exchange rates have seen their nominal effective exchange rates weaken appreciably over the past year. This process has been more marked than in other regions (Figure 1.6). Low-income oil-importing countries in sub-Saharan Africa have generally avoided declines in reserves (Figure 1.7), even in the face of pressures on the exchange rate. With the notable exception of Nigeria—which has both lost reserves and seen its nominal effective exchange rate depreciate—oil exporters have seized the opportunity presented by sharp improvements in oil prices to replenish or accumulate foreign exchange reserves.

  • For a better sense of overall monetary conditions in the countries with flexible exchange rates, it is useful to look at an index that combines (with equal weight) changes over the last year in the nominal exchange rate (vis-à-vis the U.S. dollar) with the extent to which monetary expansion exceeds projected real GDP growth in 2011. This measure of monetary conditions is found to be generally positively correlated with inflation (Figure 1.8). It is noteworthy that, with the exception of Rwanda, countries with index values higher than zero have double-digit nonfood inflation (including Ethiopia, Guinea, Malawi, and Sierra Leone). Also noteworthy is the impact of exchange rate appreciations in tightening monetary conditions over the past year in Madagascar, Mauritius, and South Africa.

Figure 1.5.Sub-Saharan Africa: Recent Changes in Policy Interest Rates1

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

1 The horizontal axis shows the latest available monthly data (mostly June 2011 or July 2011) for policy interest rates. The vertical axis shows the lowest level recorded for policy interest rates between January 2007 and the latest available month. Ethiopia, Eritrea, Liberia, and Zimbabwe are not included.

Figure 1.6.Sub-Saharan Africa, World: Changes in Nominal Effective Exchange Rate, June 2010–11

Source: IMF, Statistics Department, International Financial Statistics database.

1 Includes all SSA countries whose de facto exchange rate regime is not classified as either a conventional peg or a currency board, according to the IMF’s 2011 Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).

2 Includes all non-SSA low-income and middle-income countries (as classified by the World Bank) that are oil importers and maintain a flexible exchange rate regime as defined in the previous footnote.

Figure 1.7.Sub-Saharan Africa: Change in Reserves,1 June 2010–11

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

1Excludes gold.

2Includes all SSA countries whose de facto exchange rate regime is not classified as either a conventional peg or a currency board, according to the IMF’s 2011 Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).

Figure 1.8.Sub-Saharan Africa: Index of Monetary Conditions vs. Nonfood Inflation, June 2011

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

Fiscal deficits look set to remain at higher levels in many countries in 2011 and 2012, despite the generally strong growth environment. As discussed extensively in previous editions of the Regional Economic Outlook, as the global financial crisis threatened growth prospects, many countries in sub-Saharan Africa placed fiscal policy on an expansionary footing in 2009 and 2010. Thus, for example, among MICs, the median fiscal deficit (excluding grants) in 2009–10 was about 5 percentage points higher than the level that prevailed during 2004–08. And looking ahead, in 2011 and 2012 on average, fiscal deficits in 9 of these 11 countries are set to be higher than they were either in 2004–08 or in 2009–10 (Figure 1.9). In LICs and fragile countries, the median deficit (excluding grants) increased from 7½ percent in 2004–08 to 9¾ percent in 2009–10 and is slated to decline back to close to 8 percent in 2011–12. But in about half of the countries, deficits are set to be wider in 2011–12 (Figure 1.10) than in 2009–10, despite the recovery in growth. In some of these countries, the wider deficits reflect one-off or exogenous factors (for example, the conflict in Côte d’Ivoire and the sharp drop in South African Customs Union revenues in Lesotho). In others, however, rising fiscal deficits reflect a high pace of spending growth (Ethiopia, Uganda, Zambia).

Figure 1.9.Sub-Saharan Africa: Overall Fiscal Balance (Excluding Grants) of Oil Importers, 2009–10 vs. 2011–12

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

Figure 1.10.Sub-Saharan Africa: Overall Fiscal Balance (Excluding Grants) of Oil Importers, 2004–12

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

The fiscal picture is set to be similarly mixed among the oil exporters. For these countries, we benchmark the shift in deficits relative to 2007–08 (when oil prices were similarly high). Mirroring the movement in oil prices, fiscal balances are set to improve in 2011–12 relative to 2009–10 in four out of seven of the oil exporters (Angola, Chad, Republic of Congo, Nigeria), but remain relatively elevated in Cameroon, Equatorial Guinea, and Gabon (Figure 1.11). The reasons for this include ambitious capital investment projects and poor control of current expenditures, including on fuel subsidization.

Figure 1.11.Sub-Saharan Africa: Overall Fiscal Balance (Excluding Grants) of Oil Exporters, 2007–12

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

The positive response of the region’s exports to the recovery in world trade from the global financial crisis augurs well for external viability and growth. Much of the recent buoyancy in sub-Saharan African export revenues can be directly attributed to the surge in commodity prices since the end of 2009. But many low-income countries have also experienced a spurt in the volumes of exported goods and services this year. Among the gainers are countries with new or expanding natural resource developments (Central African Republic, Eritrea, Guinea, Niger). Several countries are also diversifying into higher-value-added production (Ethiopia, Kenya, Rwanda) and new country markets.

For the most part, the surge in export growth is being matched by import growth. Although the region’s terms of trade currently stand at an all-time high, recent gains have accrued almost entirely to oil producers; other commodity producers are facing even faster growth in import prices than in export prices. In addition, the experience of the 2004–08 boom was that most non-oil commodity exporters spend most of the income generated by higher terms of trade, leading to much higher imports. In consequence, we expect only the oil exporters—which both are benefiting from rising terms of trade and tend to save more of the gains—to experience stronger external current account positions in 2011–12 (Figure 1.12). They will also be the best placed to continue rebuilding policy buffers, both in foreign reserves and fiscal balances.

Figure 1.12.Sub-Saharan Africa: External Current Account, 2004–12

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

Current fragilities

Perhaps the most acute problem facing the region at the moment is the drought in the Horn of Africa. This is imposing direct production, fiscal, and external costs on the countries affected by food shortages and refugees in addition to its immense humanitarian burden. Our estimate is that the initial impact on output in Ethiopia and Kenya will be less than ½ percent of GDP, but the final impact of the drought, and its ramifications throughout the region, could ultimately be much larger. For example, in Tanzania, the drought has reduced hydroelectric power generation, with attendant implications for not only output but also fiscal accounts.

Higher food and fuel prices have also squeezed consumers’ expenditure in many countries and imposed considerable hardship on some low-income households. The urban poor in countries relying on imported staple foods have been particularly severely affected. While many governments have responded appropriately, increasing income or price support, this has tended to inhibit progress toward fiscal consolidation. In addition, countries that have attempted to address the issue by imposing price controls, banning some food exports, or introducing blanket subsidies now suffer from distorted markets, with adverse implications for incentives and resource allocation.

RISKS TO THE OUTLOOK

In all, then, under the baseline scenario of lower but stable global growth, the vast majority of countries in sub-Saharan Africa look set to sustain fairly healthy growth rates in 2011 and 2012. But alongside this good news are the drought in east Africa and the surges in food and fuel prices that are causing considerable difficulties in other parts of the region, particularly to the urban poor. The other, more potent threat to the region’s economic prospects is the debt overhang in many advanced economies that is threatening to significantly slow down global growth further in the coming months.

Until recently, risks to the economic outlook for countries in the sub-Saharan Africa region were broadly balanced. The global economy looked to be recovering, albeit unevenly, from the financial crisis. And while nontrivial headwinds to the recovery were evident, these were expected to be limited mainly to the advanced economies with particularly severe household and sovereign debt problems. Recent developments—including the turmoil in financial markets in August and associated increase in risk aversion—are, however, suggestive of a much more difficult period ahead for the global economy. As elsewhere, this in turn ushers in a period when risks to the outlook for sub-Saharan Africa are likely to be much more tilted to the downside (Figure 1.13).

Figure 1.13.Sub-Saharan Africa: Growth Prospects to 2012

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

The main threat to economic activity in the region is the strong possibility that global growth will decelerate further, particularly in 2012. The IMF’s baseline projections are for global output to expand by 4 percent in 2011 and 2012, markedly slower than the 5 percent expansion in 2010. Growth in the advanced economies is expected to be only 1½ percent in 2011 and 2 percent in 2012—both figures having been revised downward significantly since June of this year. But even these growth levels are predicated on containment of the unresolved structural fragilities, particularly in the euro area periphery. Although the importance of these countries as a market for sub-Saharan African exports has been declining of late, as discussed in Chapter 3, traditional partners continue to account for nearly half of the region’s exports. And beyond trade links, these partners remain crucial sources of official financing as well as remittances, tourism, and investment flows. Accordingly, further significant downward revisions to the growth outlook in these countries are likely to translate into lower growth outcomes for many countries in sub-Saharan Africa. In particular, estimates made in mid-2011 by IMF staff suggest that a sustained reduction of 1½ percentage points in global GDP growth stemming from weakness in the United States and Europe could shave 1 percent off a representative low-income country’s growth rate in 2012, with noncommodity exporters particularly susceptible to growth risks. South Africa and other middle-income countries, because of their closer integration into the global economy, are likely to be affected still more by a global slowdown.

Could demand from the region’s emerging partners help offset a further weakening in advanced country growth? In 2009–10, strong demand in many of sub-Saharan Africa’s emerging market trade partners likely helped avert a strongerstill deceleration in economic activity. But in the future, even in our baseline projection, activity in these countries is expected to slow down as China, India, and other major emerging markets continue to adjust policies to counter overheating. There is, for example, already evidence that China’s growth in imports of many commodities, a bellwether of global commodity conditions, has started to decelerate (see the September 2011 World Economic Outlook). More broadly, commodity prices have already declined from the highs they reached in April 2011, reflecting the slackening of world growth and the weaker near-term outlook (Table 1.2). Should advanced economies’ growth slow further, our expectation is that by lowering import demand, this will lower growth in many of the large emerging markets. Under these circumstances, it would be prudent not to expect that either export demand or commodity prices will be as buoyant in the future as they have recently been. The region should therefore not anticipate that its newer markets will be able to insulate its exports fully from the sputtering recovery in the advanced economies.

Table 1.2.Change in Outlook for Commodity Prices, 2011–12
WEO April 2011WEO Sept. 2011
2011201220112012
(Percentage change)
Food24.1−4.722.1−4.4
Oil35.60.830.6−3.1
Metals26.5−0.818.6−3.5
Agricultural raw materials24.8−11.526.1−7.5
Source: IMF, World Economic Outlook database.

Whether or not these adverse global developments materialize, fragilities within the region also present sizable risks. Growing imbalances within the region’s economies could present risks to growth in some countries. In particular, more recent inflation observations for east African countries point to inflationary pressures continuing to increase to worrying levels—to nearly 40 percent in Ethiopia, and over 16 percent and 21 percent in Kenya and Uganda, respectively. The surge in inflation in these countries points to the dangers of delaying the monetary policy response to shocks. In a similar vein, failure to shift fiscal policy from the expansionary footing on which it was placed during the downturn in 2009–10 to a more neutral stance consistent with debt sustainability considerations is eventually going to be even more detrimental to sustaining high growth and development. Although elections so far in the election-heavy year of 2011 have had much less economic impact than feared, political factors remain an important risk within the region. And financial systems, as elsewhere in the world, are vulnerable to both global and domestic pressures.

POLICY CHALLENGES

Looking ahead, policies need to tread a fine line between addressing the challenges that strong growth and recent exogenous shocks have engendered and warding off the potentially adverse effects of another global downturn. In this context, the broad direction for policies largely depends on which of the following broad circumstances a country finds itself in.

Countries where output and employment have yet to recover to precrisis levels

For the small group of countries in the region where output remains below potential and financing is not constrained, there is a strong case for policies to continue in a more supportive vein. South Africa is a prime example in this category, with an output gap expected to persist into 2012 and employment set to remain well below precrisis levels. In these circumstances, monetary policy needs to remain accommodative even if the increase in global food and fuel prices causes inflation to exceed the target range temporarily. Fiscal policy should continue to be guided by medium-term debt sustainability objectives, but with financing readily available, there is some scope to let automatic stabilizers operate. Thus, if growth proves to be slower than envisaged owing to slower global economic activity, the fiscal deficit should be allowed to widen temporarily to support activity. On the spending side, discretionary spending increases should be limited to nonwage items and be kept under review in case the global slowdown is protracted.

In addition, there are a handful of countries where output remains subdued but financing to pursue an expansionary fiscal stance is not readily available. These include Swaziland and several other countries where the causes of economic difficulties reflect political conflict as well as poor economic management, including Comoros, Guinea, and Zimbabwe. In these cases, although there is a case for policies to be more supportive, the scope for policy action is limited by medium-term fiscal sustainability considerations and the availability of financing.

Countries where there are clear signs of inflationary pressures

For the first time in a while, there are signs of strong inflationary pressures in several countries in the region. The grouping includes Ethiopia, Kenya, Malawi, and Uganda, where—to varying degrees—inflation has accelerated sharply and currencies have come under significant pressure. The trigger for Kenya and Uganda’s current difficulties was a combination of local drought conditions and the surge in global food and fuel prices. With the economies already at close to full capacity, and the monetary policy responses to the shock not consistently robust, both food and nonfood price increases have escalated. In Ethiopia, drought has also played a role. But an equally important factor was last September’s sharp exchange rate adjustment against the backdrop of excessively loose monetary conditions and high public sector spending growth. In Malawi, the policy failure has been related to maintaining an overly appreciated exchange rate. This has created severe macroeconomic imbalances which current inflation rates understate, at the cost of virtually exhausting reserves and sharply compressing imports. Agricultural production and, with it, economic growth are likely to suffer in the coming months.

In these countries, monetary policy needs to be tightened decisively. In particular, policy needs to firmly focus on bringing nonfood inflation back into single digits and sustaining it there to prevent inflationary expectations from becoming entrenched. While the period of high interest rates and reduced monetary expansion that this requires will likely have adverse effects on activity, this impact should be short-lived, and the output costs will likely be smaller than if macroeconomic imbalances are allowed to widen unchecked. A tighter fiscal stance would also facilitate monetary authorities’ task of getting inflation under control. And where it is not possible to curtail public spending without halting midstream construction projects (as in Ethiopia), nonmonetary financing of these investment projects will be critical.

Countries growing close to “speed limits”

All indications are that many economies in the region are currently expanding at or near their highest rates of growth in many years. And with growth having been sustained at these elevated levels for several years now, supply constraints are emerging in a large number of these countries—mainly because investment levels remain low in many cases. Under these circumstances, it is important to recognize that the scope for further significant increases in demand growth without encountering supply bottlenecks or further increasing inflation is likely limited.

At the same time, macroeconomic policies in many countries in the region are still in supportive mode. For one thing, as discussed above, expansionary fiscal measures adopted during the global downturn have for the most part only partially been withdrawn. For another, several other countries in the region are not far from the tipping point where inflation can easily accelerate to levels that will heighten macroeconomic uncertainty and dampen investment—for example, nonfood inflation is above 10 percent in the Democratic Republic of the Congo, Guinea, Sierra Leone, and Zambia.

With economies, therefore, close to their “speed limits,” the risks entailed in maintaining the current supportive macroeconomic stance in many of these countries are highly asymmetric. Although, on the one hand, there is a chance of a strengthened supply response in these countries—particularly, scope for productivity improvements—the possible costs, on the other hand, of overheating could be serious, eventually requiring much stronger policy responses and potentially reversing many of the gains achieved in recent years. Against this backdrop, the chances of overheating can best be avoided as follows:

  • Monetary policy. Wherever nonfood inflation has climbed above the single-digit level, monetary policy should be tightened decisively to prevent inflationary expectations from becoming entrenched. Although the 10 percent cutoff seems somewhat arbitrary, we think it is justified in view of the limited slack in most cases.

  • Fiscal policy. More so than at any time in the recent past, fiscal policy needs to be firmly guided by medium-term rather than nearterm growth considerations. These include absorption and project execution capacities, and the availability of projects with sufficiently high rates of return, as well as financing and debt sustainability considerations. In particular, it will be important to ensure that these factors are considered collectively when the appropriate fiscal stance is determined. Basing fiscal policy on only one of these factors would likely result in suboptimal outcomes. For example, the fiscal stance expected in 2011–12 in most of the countries to the left of the diagonal line in Figure 1.14 would be consistent with stabilizing their debt-to-GDP ratios at their current levels. And even in countries where the fiscal stance in 2011 and 2012 would lead to increased indebtedness (those to the right of the diagonal line in the figure), the moderate initial level of debt (in Zambia and Mozambique, for example) means the risk of debt distress is limited. Rather, the consideration that needs to be made is whether the sizable real spending increases planned (Figure 1.15) take into account absorption capacity issues.

  • What if the downside risks to global growth materialize? Under such circumstances, fiscal policy should continue to be guided by the medium-term considerations noted above. With activity close to speed limits in many cases, the case for a discretionary fiscal stimulus is weak. But where financing is not a constraint, planned spending initiatives should be maintained in the short term while automatic stabilizers are allowed to operate on the revenue side. And where exchange rates are not under strong downward pressure and inflation is trending toward targeted levels, monetary policy could be eased. To the extent the downside scenario includes a sharp drop in oil prices, inflation pressures will soften and provide more room for monetary easing.

  • And if the global slowdown seems likely to persist? Spending plans will then need to be revisited in the light of the weaker outlook for growth and financing.

Figure 1.14.Sub-Saharan Africa: Primary Balance vs. Debt-Stabilizing Primary Balance,1 2004–12

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

1The size of the bubble depicts the size of NPV of debt-to-GDP ratio at end-2010.

Figure 1.15.Sub-Saharan Africa: Real Government Expenditure Growth,1 2004–12

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

1 Excludes Chad, Eritrea, and Zimbabwe.

Countries benefiting from significant terms-of-trade gains.

Virtually all of the region’s oil-exporting countries are enjoying strong output growth and are benefiting from sharp terms-of-trade improvement. Under the baseline scenario, policies in these countries need to be strongly countercyclical: now is the time to build up policy buffers ahead of further price volatility. But as discussed above, the opportunity is not being taken in Cameroon, Equatorial Guinea, and Gabon, where projected fiscal balances are well below those achieved in the mid-2000s. It will be important to ensure that the medium-term considerations noted above are fully taken into account. And should downside risks to global growth materialize and commodity prices fall below the prices assumed in budgets, the focus of policies should be on protecting priority spending to the extent consistent with financing constraints and any adverse implications for the medium term of persistent weakness in global growth.

This chapter was prepared by Abebe Aemro Selassie and Jon Shields, with inputs from Alun Thomas, Rodrigo Garcia-Verdu, Robert Keyfitz, and Maitland MacFarlan. Research assistance was provided by Cleary Haines and Luiz Edgard R. Oliveira.

Ghana, Senegal, and Zambia have been added to our grouping of middle-income countries, reflecting the rise in the three-year moving average of their gross national income per head (Atlas method) above the corresponding income thresholds used for World Bank country rankings.

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