Chapter

1. Maintaining Growth in an Uncertain World

Author(s):
International Monetary Fund. African Dept.
Published Date:
October 2012
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Introduction and Summary

Growth in sub-Saharan Africa has remained generally robust against the backdrop of a sluggish global economy. Regional output is projected to expand by at least 5 percent in 2012–13, a similar pace to that recorded in 2010–11. That said, there is significant variation across the region, with solid expansion being recorded in most low-income countries, but growth slowing in middle-income countries that are tracking the global economy and in some countries affected by drought and political instability. The regional outlook is subject to downside risks, stemming from the uncertain global economic environment. Analysis of selected downside scenarios suggests that, absent a Lehman-style crash, a global slowdown would impair, but not derail, growth in the region.

The near-term outlook for the global economy has deteriorated over the past six months, with economic recovery in the advanced economies suffering from new setbacks and heightened uncertainties. The IMF’s projections for global growth in 2012–13 have been adjusted downward since the April 2012 edition of this publication, with growth in 2013 now projected at 3.6 percent, down from 4.1 percent previously. Uncertainty regarding global economic prospects is elevated, with intensified stresses in the euro area and the risk of a sharp fiscal tightening in the United States being the most immediate risks.

Against this background, sub-Saharan Africa has been maintaining relatively strong growth, and is on track to post growth of about 5¼ percent a year in 2012–13, a similar pace to that recorded in 2010–11. Most low-income countries are participating in this expansion, although drought has slowed growth in many Sahel countries, and political instability has undermined growth prospects in Mali and Guinea-Bissau. The situation is less favorable for many middle-income countries, more closely linked to European markets; growth in South Africa is set to slow to about 2½ percent in 2012, with many others also seeing a noticeable slowing of economic growth.

Inflation in the region has been slowing during 2012, as food/fuel price inflation eases following a surge during 2011; the containment of inflation has been most marked in East Africa, where sharp monetary tightening was needed to reverse the 2011 price spikes. A recent surge in world prices of cereals could derail at least some of the projected easing of inflation, although there is a good chance that the impact of what is expected to be a transitory price surge will be contained across most of the region, not least because the price of rice, the most important staple food import for sub-Saharan Africa, has not moved significantly. That said, surging world prices are likely to intensify stresses in countries/subregions experiencing poor harvests.

Deteriorating conditions in the world economy could quickly spill over into slower growth in sub-Saharan Africa. Assessment of the potential impact of a global slowdown on the region points to a likely reduction in the regional growth rate of about 1 percent a year, depending on both the severity and the duration of the global downturn. The impact could be more severe on individual countries, especially those where exports are undiversified and policy buffers are low.

Although most sub-Saharan African countries have rebounded from the Great Recession, many of them have been slow in rebuilding fiscal positions that weakened during the downturn. If growth remains as robust as envisaged, policymakers in fast-growing economies should move to rebuild fiscal and external buffers, without unduly affecting key social and capital spending. One route to strengthening fiscal positions would be to initiate actions to reduce costly and poorly targeted energy subsidies.

Were the global economy to experience a significant downturn, with knock-on effects on sub-Saharan Africa, policymakers in many countries would be constrained by limited policy space to respond. Avoiding procyclical fiscal contraction is imperative if the slippage in deficit levels can be financed; official external financing, from both bilateral and multilateral sources, may be needed to help lowincome countries facing tight financing constraints as budget and export revenues fall. But there are also many countries that will be able to manage a downturn, via a mix of fiscal, monetary, and exchange rate measures—the appropriate mix dependent on exchange rate arrangements, the ability to finance wider deficits, and the inflation situation.

Introducing South Sudan

This edition of the Regional Economic Outlook is the first to include South Sudan, bringing the number of countries covered to 45 (Box 1.1).

South Sudan, which proclaimed its independence on July 9, 2011, became the 188th member of the IMF on April 18, 2012. In terms of economic weight, South Sudan contributes about 1 percent of total sub-Saharan African countries’ GDP (in purchasing power parity (PPP) terms); data availability is limited, however, making analysis of developments correspondingly difficult.

Resilience in the Face of an Uncertain Environment

Growth in sub-Saharan Africa in 2012 continues at a solid pace, with aggregate output expected to expand by about 5¼ percent in both 2012 and 2013. Growth projections have been revised downward only marginally from our April 2012 projections, but risks to the outlook have increased, given the backdrop of heightened global uncertainties. The inflation surge in East Africa has been largely reversed, and inflation prospects for the region are generally favorable, even if food prices may pick up in a number of countries.

Recent Developments

Economic activity has held up well in most of sub-Saharan Africa, albeit with growth slowing in several middle-income countries (Table 1.1). With exports slowing in many countries, domestic demand has provided solid support to growth, helped by public and private investment—in several cases, linked to natural resource production. Macroeconomic policies have remained generally accommodative—an exception being eastern Africa, where monetary tightening was deployed to rein in inflation. On the supply side, agricultural output in the Sahel and Kenya is recovering after drought; oil output is increasing in several countries (including Angola, Chad, and Nigeria); new resource projects are under way in Niger (oil) and Sierra Leone (iron ore); and some service sectors, such as telecommunications, continue to show impressive dynamism. A strong postconflict recovery is under way in Côte d’Ivoire, although civil strife is disrupting activity in Guinea-Bissau and Mali. However, middle-income countries linked closely to advanced country markets, including South Africa, are seeing growth slow, notwithstanding support from macroeconomic policies.

Table 1.1.Sub-Saharan Africa: Real GDP Growth(Percent change)
2004–0820092010201120122013
Sub-Saharan Africa (Total)16.52.85.35.25.35.3
Of which:
Oil-exporting countries18.65.16.66.36.76.0
Middle-income countries25.0–0.63.84.53.43.8
Of which: South Africa4.9–1.52.93.12.63.0
Low-income countries27.35.46.45.55.96.1
Fragile countries2.53.14.22.36.66.5
Memo item:
World4.6–0.65.13.83.33.6
Source: IMF, World Economic Outlook.

Box 1.1.South Sudan: Newest IMF Member

South Sudan is a large, landlocked country with a diverse population. According to the 2008 census, its population is 8.3 million, one-third under the age of 10, comprising 65 different ethnic groups. Its total land area is about 645,000 square kilometers, equivalent to the size of France.

Economic development is limited and social indicators are very low. South Sudan’s economy depends almost entirely on oil production (oil accounts for 98 percent of government revenues and 99 percent of exports), complemented by subsistence agriculture and livestock. Per capita GNI is close to US$1,000, which is broadly in line with the sub-Saharan African average. Social indicators are generally well below regional norms, and the country’s infrastructure is almost non-existent (there are only 100 kilometers of paved roads, mainly in the capital Juba).

Table 1.Social Indicators
South Sudan,

2006
Sub-Saharan

Africa, 2006–09
Population (Millions, 2008)8.3750
National household survey poverty incidence5148
Literacy rate (Percent of adult population)2766
Mortality rate, under age 5 (Deaths per 1,000)10284
Prevalence of undernourishment (Percent of population)4726
Primary school enrollment ratio (Percent, gross)4868
Access to an improved water source (Percent of population)5560
Sources: World Bank, World Development Indicators; and IMF staff calculation.

Although South Sudan has sizeable economic potential, major challenges will need to be overcome if this potential is to be realized. These challenges include institutional weaknesses, limited physical infrastructure, and a weak human capital base. A pre-condition for addressing these challenges is the achievement of a lasting settlement of bilateral issues and tensions with Sudan. Revenue from oil provides an opportunity to invest in infrastructure and social development, although capacity constraints limit the pace at which this can be implemented. Sizeable livestock, fishery, and agricultural and forestry resources could also become a driver for growth. Key economic institutions are being built, including the ministry of finance, revenue collection agencies, the National Bureau of Statistics, and the central bank. To support institution building, the IMF has launched a three-year dedicated trust fund for South Sudan, which will enable the provision of large-scale technical assistance and training in macroeconomic policy areas and statistics. South Sudan is eligible for concessional financing from the IMF.

This box was prepared by Sweta Saxena.

Inflation is generally slowing from the elevated levels recorded in much of the region in 2011 (Table 1.2 and Figure 1.1). As discussed in the April 2012 Regional Economic Outlook, the inflation surge that commenced early in 2011 was driven in good part by global food and fuel price increases—but domestic factors, including drought and overly accommodative monetary policies, also played a role in many countries, most notably in East Africa. In 2012, easing pressures in global commodity markets during the first half of the year, coupled with the impact of monetary tightening in several countries (including Kenya and Uganda) and improved weather in the Sahel and the Horn of Africa, have produced a significant slowing of inflation. That said, not all countries are seeing inflation ease in 2012: Inflation in Nigeria picked up somewhat following a significant adjustment in retail fuel prices in January, whereas the ending of an unsustainable exchange rate regime in Malawi contributed to a sharp jump in inflation that is expected to carry over in part into 2013.

Table 1.2.Sub-Saharan Africa: Other Macroeconomic Indicators
2004–0820092010201120122013
(Percent change)
Inflation, end-of-period8.88.67.210.18.06.9
(Percent of GDP)
Fiscal balance1.9–5.4–3.7–1.6–2.2–1.4
Of which: Excluding oil exporters–0.7–4.6–4.3–4.1–4.5–3.6
Current account balance0.7–3.2–1.3–2.0–3.1–3.5
Of which: Excluding oil exporters–5.0–5.3–4.5–4.9–7.3–7.0
(Months of imports)
Reserves coverage4.85.14.24.44.74.9
Source: IMF, World Economic Outlook.Note: Excludes South Sudan.

Figure 1.1.Sub-Saharan Africa: Food and Nonfood Inflation

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

Private sector credit growth trends have reflected monetary policy and inflation developments (Figure 1.2). Although nominal private credit grew strongly during the first few months of 2012, there are signs of moderation in the pace of growth in low-income countries, a combined result of declining inflation and tighter monetary policies. Credit growth to the private sector is picking up among middle-income countries, including in South Africa, helped in part by supportive monetary policies. The unusual behavior of credit growth in oil-exporting countries reflects in large part developments in Nigeria, where banking conditions have been normalizing following the 2009 crisis.

Figure 1.2.Sub-Saharan Africa: Nominal Credit to the Private Sector

Source: IMF, International Financial Statistics.

Fiscal deficits remain elevated in most non-oil exporters (Figure 1.3). Several countries have moved to strengthen fiscal positions that had weakened significantly during the depths of the global downturn, but deficits are expected to narrow only marginally in 2012, remaining much higher than during the pre-crisis period. Some oil exporters (including Angola and the Republic of Congo), helped by favorable world prices, are set to run solid, albeit reduced, surpluses in 2012, but others (including Chad and Nigeria) are likely to record near-balanced fiscal positions. Cameroon’s fiscal position continues to weaken, reflecting expenditure overruns and poor non-oil revenue collection. For middle-income countries—the hardest hit by the global slowdown—fiscal deficits are set to remain broadly unchanged in most cases, although a recovery in revenue from the Southern Africa Customs Union (SACU), coupled with expenditure restraint in some cases, is producing significant improvements in fiscal positions in the four smaller SACU member countries. Sluggish growth continues to constrain the scope for fiscal consolidation in South Africa. In low-income and fragile countries, deficits are widening significantly in several countries (including Guinea, Liberia, and Mozambique), but narrowing in others (including Côte d’Ivoire and Sierra Leone), with little net change in the aggregate. Countries where deficits are rising appear to be taking advantage of enhanced external borrowing opportunities1—or, in the case of Guinea, running down a mineral revenue windfall from 2011.

Figure 1.3.Sub-Saharan Africa: Overall Fiscal Balance, 2004–13

Source: IMF, World Economic Outlook database.

Note: Excludes South Sudan.

Given elevated fiscal deficits, government debt-to-GDP ratios are rising in several countries—mainly middle-income countries (such as Namibia and South Africa) but also including Cameroon and Nigeria (among the oil exporters) and Tanzania and The Gambia (among low-income countries). However, the aggregate picture regarding debt burdens in the region shows little general change, as debt ratios are easing in a significant number of economies (Figure 1.4). On current projections, debt dynamics in most countries are favorable (Box 1.2).

Figure 1.4.Sub-Saharan Africa: Government Debt Ratios, 2000–12

Source: IMF, World Economic Outlook database.

Sluggish external demand for exports is contributing to some widening of current account deficits across much of the region. Exports have weakened significantly for middle-income exporters over the past year; oil exporters have seen receipts ease for much of 2012 as a result of softer fuel prices; and low-income countries have seen export levels rise only modestly on 2011 levels (Figure 1.5, left panel). In several smaller countries, balance of payments developments are being heavily affected by import needs and financing inflows for large investment projects—with exports benefiting significantly as new resource projects begin production (for example, Liberia, Niger, and Sierra Leone). Indications are that service exports and remittances remain quite strong across the region. For the year as a whole, IMF staff anticipates a weakening of external current account positions, in almost all cases financed through expanded capital flows of some form rather than reserve erosion (Figure 1.5, right panel).

Figure 1.5.Sub-Saharan Africa: Exports and the Current Account by Regional Groups

Sources: IMF, World Economic Outlook; African Department database; and Direction of Trade Statistics.

Note: Excludes South Sudan.

Box 1.2.Debt Dynamics in the Baseline over the Medium-term

This box compares the primary fiscal balance over the medium term, as a percent of GDP (p) with the primary balance that stabilizes the debt-to-GDP ratio (p*). The difference between p* and p, (p*-p), referred to as the “primary balance gap,” signals the direction in which indebtedness is evolving, with a positive gap indicating a tendency of the debt-to-GDP ratio to increase over time unless fiscal policies are tightened. The formula for the debt-stabilizing primary balance is

where r is the real interest rate and g is the real GDP growth rate. The values for these parameters in the calculations are derived from realized macroeconomic outcomes and the IMF projected outlook for the period 2007–17. In general, the parameter λ tends to be negative given currently projected growth rates (see statistical appendix, Table SA1).

The 2009 crisis interrupted a generalized process of reduction of debt-to-GDP ratios in sub-Saharan Africa, causing a significant proportion of the countries to increase their debt ratios. Since then, the primary balance gap has decreased gradually (Figure 1), with more than half the countries in the region showing negative gaps in 2012. Figure 2 examines the distribution of the primary balance gap in 2012 by country groups, with the “box and whiskers” plot displaying the minimum, median, maximum, and inter-quartile range of the distribution of primary gaps within each country group. For each one of the REO’s analytical country groups, more than half the countries, but not all countries, show primary balances consistent with reducing debt-to-GDP ratios under the baseline macroeconomic projection.

Care should be exercised when interpreting these charts. In particular, a negative primary balance gap in the baseline case should not be meant to indicate that, in an adverse scenario, fiscal policy space would necessarily be available.

Figure 1.Sub-Saharan Africa: Primary Balance Gap, 2007–13

Sources: IMF, World Economic Outlook Database; and IMF staff estimates.

Figure 2.Sub-Saharan Africa: Primary Balance Gap, 2012

Sources: IMF, World Economic Outlook Database; and IMF staff estimates.

This box was prepared by Seok Gil Park.

The Health of Financial Systems

As discussed in the April 2012 edition of this publication, financial systems in sub-Saharan Africa did not experience significant direct shocks from the crisis that afflicted advanced country financial markets in 2008–09, but the financial health of many banks was adversely hit by a weakening in the quality of their loan portfolios as borrowers experienced financial distress in the ensuing global economic downturn (Figure 1.6 and Table 1.3).2 Review of the available financial stability indicators across the region suggests a number of themes.

Figure 1.6.Sub-Saharan Africa: Financial Soundness Indicators

(Selected countries*)

Sources: IMF, African department database; and country authorities.

*The official definition of financial soundness indicators varies by country. The sample includes up to 33 of the 45 countries in sub-Saharan Africa.

Table 1.3.Sub-Saharan Africa: Financial Soundness Indicators in 2011, Selected Countries*(Percent)
Capital to

Assets
Non-Performing Loans

to Total Loans
Provisions to Non-

Performing Loans
Return on AssetsReturn on

Equity
Oil-exporting countries
Angola14.82.4n.a.2.727.2
Cameroon15.812.396.70.22.2
Congo, Republic of9.91.275.31.422.0
Gabon11.05.558.10.88.6
Nigeria3.911.6n.a.0.24.5
Middle-income countries
Ghana13.714.176.23.927.2
Lesotho9.52.4110.32.828.9
Mauritius7.22.841.41.317.9
Namibia7.81.5n.a.3.747.1
Senegaln.a.16.254.02.222.6
Seychelles9.08.133.83.741.0
South Africa7.34.734.91.521.0
Swaziland17.47.544.62.413.8
Low-income countries
Ethiopia7.82.1n.a.3.031.5
Kenya13.24.4n.a.3.332.2
Mali17.418.569.31.415.2
Mozambique9.02.655.12.526.5
Rwanda14.58.050.82.210.6
Sierra Leone14.015.149.43.815.6
Tanzania17.86.7n.a.2.715.1
Uganda14.62.259.74.027.4
Fragile countries
Burundin.a.7.7n.a.3.223.0
Congo, Democratic Republic of15.05.0n.a.n.a.3.0
São Tomé and Príncipen.a.14.846.10.10.2
Togo13.410.884.12.024.7
Mean12.07.561.22.320.4
Median13.36.755.12.422.0
Sources: Country authorities; and IMF African Department database.

First, banks’ capital adequacy ratios, having improved somewhat through 2009, deteriorated in 2010, with rising non-performing loans (NPLs) taking a toll on profitability. There was some recovery in capital adequacy ratios in 2011, along with a reported drop in the NPL ratio—but the latter may in part reflect the impact of loan write-offs and expansion of the loan portfolio itself. Second, there appears to have been a trend decline in banks’ profitability levels over the past several years, as reflected in declining rates of return on assets and bank equity—likely attributable to a range of factors, including losses on loan portfolios and increased competition in some markets.3 Policies to enhance financial sector resilience in developing financial systems in sub-Saharan Africa are discussed in the April 2012 edition of this publication (Chapter 2).

Looking Ahead: Baseline Scenario

The near-term outlook for growth remains broadly positive, with aggregate output growth in sub-Saharan Africa projected to reach about 5¼ percent in 2012 and 2013, a robust pace relative to other major developing country blocs (Figure 1.7). The weak global environment is reflected in projections of sluggish growth for several middle-income countries, including South Africa, where trade links to European countries are important and business confidence tracks global trends closely.4 The direct impact of sluggish growth in South Africa on growth in the region as a whole should be modest, given that South Africa is not a significant export destination for most (but not all) sub-Saharan African countries (see Chapter 2 for a fuller discussion of spillovers from South Africa and Nigeria to the rest of sub-Saharan Africa).

Figure 1.7.Selected Regions: Real GDP Growth, 2008–13

Source: IMF, World Economic Outlook.

Note: Excludes South Sudan.

The strength of projected growth in sub-Saharan Africa, relative to other developing regions, is helped in part by the supply-side factors cited earlier—including expanding natural resource sectors and some presumed improvement in climatic conditions. But there are also more fundamental factors at work. As argued in previous editions of this publication, low-income countries in sub-Saharan Africa have shown solid growth over a sustained period, helped by, among other things stronger policy frameworks, improving institutional capacity, favorable commodity price trends, and sharply reduced external debt burdens. (The role of structural transformation as part of this broader growth process is discussed in Chapter 3.)

The outlook for inflation has improved over the last year. As discussed above, inflation has been declining across most of the region during 2012; by end-2012, it is expected that the 12-month inflation rate for the region will have fallen to about 8 percent, down from about 10 percent at end-2011 (Figure 1.8). Progress achieved to date has already led some countries, including Kenya and Uganda, to ease their previously tight monetary stance. A further decline in inflation is envisaged for 2013, but achievement of this result will require appropriately tight macroeconomic policies in countries still experiencing elevated (double-digit) inflation. These projections incorporate the first-round effects of recent global food price increases arising from drought conditions in the United States and other supply-side shocks; in addition to posing potential challenges for monetary policy in some countries, the price shock could also complicate the management of food security issues in some parts of the region (Box 1.3).

Figure 1.8.Selected Regions: Inflation 2008–13

(End of period)

Source: IMF, World Economic Outlook.

Note: Excludes South Sudan.

Some widening of current account deficits in the region is expected in 2012–13 (see Figure 1.5), with trade balances weakening somewhat as a result of a small deterioration in the terms of trade and ongoing weakness in import demand among traditional partners. Rising investment levels are the counterpart to this increased reliance on external savings.

The financing of the region’s balance of payments includes an increasingly diverse array of instruments. One recent development of note has been the debut on international sovereign bond markets of Angola in August 2012 (a US$1 billion 7-year bond with a 7 percent coupon, now trading at a significantly lower yield) and of Zambia in September 2012 (a US$750 million 10-year bond, with a coupon of 5.375 percent). Resilience in the region’s economies, coupled with the search for yield against a backdrop of low world interest rates, is producing growing interest in the region among investors. Yields have also declined significantly on pre-existing bond issues from sub-Saharan African economies, and are now at levels comparable with yields for several emerging European economies.

Box 1.3.Global Food Prices and Food Security in Sub-Saharan Africa

Weather-related supply disruptions worldwide have recently prompted large increases in some food prices in international markets. Extreme drought in the United States and Russia, adverse weather conditions in China and other countries, and below-average monsoon rains in India more recently, have worsened the short-term outlook for maize, soybean, wheat, and (to a lesser extent) rice production at the global level.

This situation has induced a rapid increase in the international prices of these crops since mid-June (Figure 1 and Table 1).

Figure 1.International Commodity Prices

Source: IMF, Commodity Price System.

Figure 2.International Commodity Price Projections

Source: IMF, Commodity Price System.

Table 1.Commodity Price Changes in July 2012(Selected crops, percent)
AnnualMonthly
Total food2.59.3
Maize10.724.6
Rice5.9–4.6
Wheat13.825.2
Soybean21.416.7
Source: IMF, Commodity Price System.

Various factors suggest that the potential impact of these increases is likely to be less severe than during the 2007–08 episode. So far, the shock has not affected all key crops and the rise in overall food prices on an annual basis remains moderate, as the most recent price increases come on the heels of previous declines. Also, in contrast with 2007–08, the shock has not been exacerbated by high energy prices, and new export restrictions are not generalizing. As a result, with the exception of wheat, futures markets anticipate prices to moderate in the near-term and revert back to their pre-shock levels by end-2013 (Figure 2).

Within sub-Saharan Africa, the impact of the food price shock will likely be felt in places showing some underlying vulnerability. On the positive side, the most import-intensive staple in sub-Saharan Africa, rice, is also the cereal displaying the most stable international price. Between 2005 and 2008, average annual imports of rice (in proportion of total imports) have been far larger than those of wheat or maize.

Rice imports are especially large in most of western and central Africa (Figure 3). Nevertheless, increases in prices of wheat and maize could create localized stresses. Although not a major staple in sub-Saharan Africa, wheat imports are relatively important in western parts of Africa, and elsewhere in Chad, Democratic Republic of the Congo, Ethiopia, São Tomé and Príncipe, and Tanzania. In fact, increases in the price of flour have already caused public discontent in Côte d’Ivoire, where there are calls for government to raise the bread subsidy, and wheat price rises could complicate the disinflation process in East Africa. Typically, most of the maize consumed in sub-Saharan Africa is produced in the region, with some cross-border trade at prices that reflect a mix of regional and global conditions. Owing to recent drought in pockets of Southern Africa, however, in a significant number of countries crops will have to be supplemented with reserves and imports, possibly sourced in part outside the region.

Figure 3.Sub-Saharan Africa: Food Imports by Region, Annual Average 2005–08

Source: IMF staff calculations with data from Comtrade.

*Excludes Eritrea.

In July 2012, a Southern African Development Community (SADC) Summit projected a regional grains deficit in 2012, including the first maize deficit since 2006/07, owing largely to poor rainfall. Only four SADC countries show significant overall surpluses in maize (Malawi, South Africa, Tanzania, Zambia). Zambia is projecting the largest maize surplus, but it would not suffice to cover the deficits elsewhere in the SADC region; moreover, since that assessment was made, Zambia has been revising up its targets for building up its own reserves. On balance, and including zones with chronic food security problems, the summit estimated that about 5.5 million people would be at risk of food insecurity in the SADC region, mainly in parts of Angola, the Democratic Republic of the Congo, Lesotho, Malawi, and Zimbabwe. (In fact, the government of Lesotho is already speaking of a food crisis). Simulations indicate that in the Democratic Republic of the Congo, Lesotho, and Zimbabwe, which are regular wheat or maize importers, an additional 10 percent rise in food prices could deteriorate their trade balances by up to 1 percentage point of GDP.

Governments in vulnerable countries are working to put together a response with the support of the UN World Food Program, the World Bank, and other development partners.

This box was prepared by Emily Forrest, Jean-Claude Nachega, and Juan Treviño.

Risk Scenario Analysis

There are large downside risks to the projections presented above, stemming mainly from uncertainties regarding the likely evolution of the global economy. We consider here two adverse scenarios for global growth, taken from the IMF’s October 2012 World Economic Outlook, and explore the implications for sub-Saharan Africa in each case. One conclusion is that adverse shocks to global growth, with their ensuing impact on commodity prices, are felt quite quickly in sub-Saharan Africa, although the impact of the global shock on aggregate growth in the region is slightly muted. But it would be dangerous to assume that what holds true at the aggregate level is true for individual economies: countries with undiversified exports and limited foreign reserves, for example, would likely come under much greater stress than the regional picture suggests.

The global outlook described in the IMF’s October 2012 World Economic Outlook is subject to significant downside risks. Key near-term risks identified include a further deepening of the euro area crisis, a political failure to prevent the scheduled sharp tightening of the U.S. fiscal stance before year-end, and a renewed spike in oil prices. Given heightened risks to the global economic outlook, the uncertainties around our projection of the economic outlook for sub-Saharan Africa have, unsurprisingly, increased (Figure 1.9).

Figure 1.9.Sub-Saharan Africa: Growth Prospects, 2002–13

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

Note: Excludes South Sudan.

We consider two scenarios drawn from the October 2012 World Economic Outlook, with a view to identifying how sub-Saharan Africa would be affected.

The first case we consider is a scenario in which policies deployed in the euro area fail to calm markets, and instead allow an intensification of euro area sovereign and banking stresses. In this scenario—in effect a worsening of the dynamics that have already been seen in the euro area—output in the euro area core would fall by 1½ percent relative to the baseline in 2013, with much more severe effects in the euro area periphery; with spillover effects to the rest of the world, there would be significant output losses further afield, most markedly in the United States and among oil producers. It is estimated that the decline in global output (relative to the baseline) would be close to 2 percentage points, with declines in world oil and non-oil commodity prices of about 17 percent and 8 percent, respectively.

What would this mean for sub-Saharan Africa? The scenario described here is similar in its main features to that explored in the April 2012 edition of this publication;5 so we draw on our previous analysis for insights. That analysis concluded that i) the full output loss for sub-Saharan Africa would be about 1 percent of GDP to 1.2 percent of GDP in 2013; ii) losses would be somewhat larger (perhaps 1.4 percentage points) in South Africa, given its closer links to European markets; iii) output losses would be more modest in the major oil producers, where the main hit would come in the form of erosion of foreign reserves;6 and iv) the impact on low-income countries would vary significantly, depending on the extent of their trade links to Europe (an area of vulnerability for Kenya) and the evolution of aid flows and remittances (key for Ethiopia, which would benefit from lower oil prices).

The second scenario that we take from the World Economic Outlook is one in which future potential output growth in advanced and emerging market economies is lower than envisaged (by 0.5 percentage point and 1 percentage point a year, respectively) for 2013–16. In this exercise, the world’s major economies grow more slowly for an extended period; advanced economies are pressed into additional fiscal adjustment to maintain debt sustainability; and there are significant growth effects on both emerging and developing countries, and ensuing effects on world commodity prices. In numerical terms, global output falls below the baseline by about 2¼ percentage points by 2014 and by 5½ percentage points by 2016; commodity prices are down by about 15 percent by 2014 and by 20–30 percent by 2016.

To establish the impact of these developments on sub-Saharan Africa, a “bottom-up” assessment was developed for the 11 largest sub-Saharan African economies, which collectively account for about 80 percent of regional GDP (Figure 1.10). The analysis focused mainly on the first two years of the global slowdown (2013–14).7 The main effects of the slowdown both globally and in the region are felt in 2014. Key results of the exercise are:

Figure 1.10.Sub-Saharan Africa: Downside Scenario

Source: IMF, World Economic Outlook.

  • The negative impact on GDP growth in sub-Saharan Africa would be about ¼ percentage point and 1 percentage point in 2013 and 2014, respectively. Fiscal balances would worsen by about 2½ percentage points by 2014, with the biggest impact falling on the oil exporters. The region’s current account balance would deteriorate by about 0.5 percent in 2014, with oil importers’ balances rising and those of oil exporters declining.

  • The impact of the slowdown on the different economies and regions of Africa has some similarities to that outlined in the first scenario, with the key differences being i) the timing and magnitude of the effects (slower but cumulatively larger shocks), and ii) that the second scenario sees relatively more of the global output losses being borne by emerging Asian economies, including China, hence entailing a more significant drop in commodity prices.

  • Thus, South Africa takes a significant hit, with GDP about 2 percentage points below the baseline in 2014; oil exporters rely on their reserve buffers, which, absent a policy response, could in some cases approach minimum critical levels, beyond which exchange market pressures would sharply intensify;8 and the impact on low-income countries depends, among others, on i) their position as a net exporter or importer of commodities (the former losing, the latter gaining); ii) the main country/regional sources of current account receipts; and iii) the (country-specific) sensitivity of resource investment and output to commodity price declines.

  • Looking beyond 2014, the growth rate for sub-Saharan Africa would be reduced by about 1 percentage point in both 2015 and 2016.

The discussion above makes it clear that adverse shocks to global growth yield significant output losses in sub-Saharan Africa; the illustrative quantification suggests that a 1 percent drop in global growth knocks about 0.6 points off the growth rate in Africa.

Although the effect of these shocks on aggregate output in the region is not especially large, it is important to note that the economic impact on individual economies—especially economies heavily dependent on one or two export commodities—could be much more marked and potentially destabilizing. As an illustration, a sizable shock to the price of the main export commodity—hitting export receipts, budget revenue, and foreign investment in that sector—could create severe pressures in both foreign exchange and domestic financial markets; absent a strong buffer in the form of foreign reserves, this situation could quickly evolve into a full-blown economic crisis (as occurred in Angola in 2009).9 For countries with modest reserve coverage and a concentrated pattern of exports, there is no room for complacency.

Is There Still Room for Policy Action if Needed?

The risks to the outlook highlighted above point to the possible need for macroeconomic policy adjustments in the face of a downturn—but the kind of response that is feasible will depend on whether authorities have “policy space” to make adjustments without creating destabilizing effects. Although a number of sub-Saharan African countries have rebuilt policy space since the onset of the global crisis, there is less room to maneuver in most countries than was the case in 2008; and there is little room to maneuver in most fragile states. One area in which governments could move to strengthen fiscal positions and enhance policy room would be to begin scaling back energy subsidies.

Policy Space

Policy space is understood here as follows: the ability to finance larger fiscal deficits without creating undue pressure in domestic financial markets and unfavorable debt dynamics; the ability to ease monetary policy without triggering significant inflation and/or exchange rate pressures; and the room in the form of adequate reserves to help finance a weakening in the balance of payments or support exchange rates, if warranted. We consider each of these aspects of policy space in turn.

Who has fiscal space?

We saw previously (Figure 1.3) that fiscal deficits widened significantly in most countries in the wake of the global economic slowdown—an appropriate policy response to the temporary collapse in external demand that occurred in 2009–10—but have not been scaled back since then in most cases. Who now has the room to allow fiscal deficits to widen further in the event of a slowdown in the global economy? And would this space still exist in a crisis situation, where revenue levied on the export sectors might be falling (most markedly in the case of the oil producers) and access to external financing drying up?

A moderate and stable debt level is an important precondition for having fiscal space—and many countries in sub-Saharan Africa, helped by debt relief and prudent borrowing policies, have now achieved debt levels assessed to be sustainable by IMF staff (Table 1.4).10 But, in countries with thin domestic financial markets, the ability of governments to quickly raise domestic borrowing levels by a significant margin is not assured—even if external debt ratios are low. Foreign financial markets cannot yet be easily accessed by most sub-Saharan African economies, but countries currently able to do so would likely face much more restricted access in the event of a significant global downturn.

Table 1.4.Sub-Saharan Africa: Indicators for Fiscal Policy Room(Percent of GDP)
Debt risk

index 1
Public debt

level (2012)
Changes in

debt2
External debt

level (2012)
Changes in

external debt2
Interest

payment to

revenue ratio

(2007)
Interest

payment to

revenue ratio

(2012)
LMHD
Sub-Saharan Africa (Total)17186332.41.89.8‒2.36.66.7
Of which:
Oil-exporting countries430017.6–0.25.2–1.33.44.3
Middle-income countries551040.312.05.91.98.89.6
Low-income countries761036.91.923.13.76.05.8
Fragile countries (HIPC)3143048.8–61.221.4–73.413.16.4
Fragile countries (Non-HIPC)001356.3–16.464.2–19.013.74.9
Sources: IMF, World Economic Outlook Database; and IMF staff estimates.

The key criterion for having adequate space to run larger budget deficits is the combination of moderate domestic debt levels and domestic financial markets that are sufficiently deep to absorb a jump in borrowing levels. An alternative source of space, for the minority of countries that have been able to run fiscal surpluses, is the ability to draw down on a stock of government financial assets, held either at the central bank or abroad. To determine whether these conditions are met requires a country-by-country assessment; we make the following general points:

  • As noted, countries with thin domestic financial markets are likely to be restrained in their ability to run larger fiscal deficits unless governments have built reserves of some form that can be drawn down in a crisis.11 Most fragile states fall into this category; Côte d’Ivoire, with established access to a regional bond market, is an exception.

  • Countries that have experienced a significant accumulation of public debt in recent years may encounter sustainability concerns, reflected in higher interest rates, if they seek to raise borrowing levels. The buildup of public debt levels in South Africa since the global crisis is now a constraint on the government’s fiscal space, as significant additional debt accumulation would likely raise funding costs.

  • Oil producers, benefiting from a solid rebound in world prices in 2011–12, have, in several, but not all, cases, run budget surpluses and, as a corollary, rebuilt their foreign reserve positions—leaving them better placed to handle an adverse shock.12 But oil price volatility is such that reserve levels, in some cases, may not yet be sufficiently large to handle a large decline in world oil prices.

Looking across the region, our general conclusions are that i) fiscal space is limited for most low-income and fragile states; ii) many middle-income countries have some flexibility, albeit with debt levels a concern in some cases; and iii) most but not all oil producers have strengthened their fiscal positions but could see that gain erode quickly in the face of a sharp drop in oil revenue.

Who has monetary policy space?

For countries with monetary autonomy, the general progress made in containing inflation (see Figure 1.11), most notably in East Africa, is an encouraging development that may give central banks some room to ease monetary policy if needed.13 But caution is needed in making such a judgment, as inflation expectations need to be well anchored and strong central bank credibility established if monetary easing is not to reignite inflation. In addition, monetary easing may encourage capital flight, putting unwanted pressure on foreign exchange markets and potentially eroding reserves. And in many sub-Saharan African economies, inflation control is vulnerable to food price shocks, given the importance of food in consumption baskets; as discussed above, there has been a selective surge in world food prices in recent months, with varying impact across the region.

Figure 1.11.Sub-Saharan Africa: Changes in CPI Inflation from 12-months Earlier, End-2012 vs. End-2011

Source: IMF, International Financial Statistics.

Who has adequate foreign reserves?

External policy buffers, as measured by the foreign reserve coverage of imports, are at less-than-satisfactory levels in many countries. The average reserve coverage ratio for low-income and fragile states is barely three months of imports (excluding CFA member countries, whose regional central banks collectively have ample reserves), while reserve coverage levels for most oil exporters and middle-income countries have not yet returned to pre-crisis levels. For about 40 percent of sub-Saharan African countries, the reserve coverage ratio is less than the often-cited benchmark of three months of imports (Figure 1.12).

Figure 1.12.Sub-Saharan Africa: Reserve Coverage and Current Account Balance

Source: IMF, World Economic Outlook database.

Creating Fiscal Space: Reducing Energy Subsidies

Available fiscal space can be increased where there are clear policy distortions and savings to be made. Despite some reforms over the past two decades, energy subsidies—for fuels and electricity—remain costly, and are regressive and inefficient (Box 1.4). The reduction of energy subsidies is a potential avenue for strengthening fiscal positions over the medium term. Reducing subsidies would also allow governments to undertake more socially-desirable spending, notably in health, education, and infrastructure.

Reducing energy subsidies significantly will take time, but initial steps are warranted. Several preliminary lessons emerge from countries that have reduced energy subsidies.

  • It takes time to build consensus for reducing energy subsidies among all stakeholders. In Kenya, electricity sector reform efforts started in the mid-1990s and culminated with the adoption of tariffs reflecting long-term marginal costs and automatic pass-through of fuel costs in 2005.

  • Withdrawal of costly blanket subsidies typically requires providing disadvantaged households and communities with special help. The best approach would be to have targeted (cash) subsidies, but most countries find this difficult to implement. Thus, for example, in Kenya and Namibia, there are cross-subsidies in transport and distribution costs to equalize, respectively, electricity and fuel prices over the territory of the country. In Niger, authorities introduced a subsidy for public transport to keep it affordable for the poor in spite of the increase in oil prices.

  • The credibility of a government’s commitment to compensate vulnerable groups and use the savings from subsidy reductions for well-targeted development interventions is essential for the success of energy subsidy reform. In Kenya, the key to securing private sector acceptance of higher electricity tariffs was a commitment to use the funds to expand the provision of power and its reliability. A careful communication strategy including public and media campaigns to explain the rationale for reform to those affected was critical.

Policy Recommendations

Given the narrowing of policy space in most sub-Saharan Africa countries, governments are constrained in their capacity to respond to adverse shocks. There is a need to rebuild this policy space, in particular through fiscal consolidation: the judgment call revolves around the appropriate pace of this consolidation. Although specific prescriptions should be tailored to country-specific circumstances, the following general principles can be articulated:

  • For countries experiencing strong growth and favorable export prices, a solid case exists for undertaking fiscal consolidation over the coming year by controlling spending and continuing to strenghten fiscal buffers.14 It is noteworthy that the strengthening of fiscal positions in some key oil economies is occurring at a significantly slower pace than previously projected—including in Angola and Nigeria.

  • Although there is a case for an accommodative fiscal policy in middle-income countries where growth continues to be sluggish, the margin to maneuver is narrowing as debt levels rise. South Africa’s public debt will have risen by about 13 percentage points of GDP during 2008–12, leading the government to pursue gradual fiscal consolidation, in part to contain market concerns about debt accumulation.

  • Most low-income countries and fragile states need to strengthen domestic revenue bases, both to finance increased public investment and to build a cushion against a potential erosion of foreign aid from fiscally pressed advanced country donors.

Monetary policy appears to be appropriately calibrated in most sub-Saharan African countries that have monetary autonomy. But some caveats are in order:

  • Most low-income countries and fragile states have limited monetary policy room. Indeed, some countries may need to tighten monetary conditions to safeguard foreign exchange rate pegs (for example, São Tomé and Príncipe), or to strengthen weak foreign exchange positions (for example, Guinea, Liberia, Malawi, and Sierra Leone). In the case of Malawi, tight fiscal and monetary policies became necessary to curtail inflation from spiraling upward, following the sharp devaluation in May 2012.

  • For eastern African countries that experienced an inflation spike in 2011, there is scope to further reduce policy rates as low single-digit inflation becomes entrenched. Kenya and Uganda are cases in point. The situation is less benign in some other East African Community (EAC) countries (Burundi and Tanzania), where elevated inflation rates persist and monetary policy will consequently need to remain tight.

Box 1.4.Energy Subsidies in Sub-Saharan Africa: Costly, Untargeted, and Inefficient

In spite of reform efforts, energy (fuel and electricity) subsidies still absorb a large share of scarce public resources in sub-Saharan Africa. According to IMF staff estimates, fuel subsidies, which include fuel tax revenue lost owing to less than full pass through of international prices into domestic prices (Figure 1) and direct price subsidies allocated in the budget, reached close to 2.0 percent of GDP on average in sub-Saharan Africa in 2011. In addition, contingent liabilities linked to debt, arrears, or operating losses of state-owned enterprises involved in refining, importing and distributing fuel amounted to 0.5 percent of GDP on average. Quasi-fiscal deficits of state-owned electricity companies in sub-Saharan Africa, defined as the difference between the actual revenue collected and the revenue required to fully recover the operating costs of production and capital depreciation, amounted to about 1½ percent of GDP during 2009–10 on average and a multiple of that in some countries (Figure 2).

Figure 1.Median Fiscal Cost1 Flowing from Fuel Subsidies, 2008–11

Source: IMF staff estimates.

1 Fiscal cost is the shortfall in annualized tax revenues using end-2011 tax rates relative to annualized tax revenues using end-2008 tax rates.

2 Comoros, Eritrea, Seychelles, and Zimbabwe are omitted.

Figure 2.Sub-Saharan Africa: Quasi-Fiscal Deficits of Power Utilities in 2009–10

Source: IMF staff calculations based on data from the World Bank, International Energy Agency, and IMF.

Note: Zimbabwe, which had a quasi-fiscal deficit of 11 percent of GDP in 2009, is excluded from the calculation of the average.

These energy subsidies benefit mostly the better off, but their removal would hurt the poor as well. Energy subsidies benefit mostly higher income groups because they consume the most (Figure 3). Electricity subsidies are even more regressive than fuel subsidies because connection to the electricity grid is highly skewed towards higher income groups. However, the impact of eliminating subsidies would be significant for both the poor and the better off because the share of energy in total household consumption is fairly even across the entire population (Table 1).

Figure 3.Sub-Saharan Africa: Distribution of Benefits from Fuel Subsidies

(Percent of total subsidy received by each income group)

Source: Javier Arze del Granado, David Coady, Robert Gillingham, The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries, 2010.

Table 1.Sub-Saharan Africa: Impact of Increase in Oil prices of $0.25 per liter(Percent of total household consumption)
Consumption Quintiles
Bottom234TopAll
Total5.85.65.55.66.05.7
Direct Impact2.21.91.81.72.11.9
Gasoline0.10.10.10.20.60.2
Kerosene1.91.41.20.90.61.2
LPG0.10.10.10.20.20.2
Electricity0.20.30.30.40.60.4
Indirect3.53.73.73.94.03.8
Source: Javier Arze del Granado, David Coady, Robert Gillingham, The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries, 2010.

Energy subsidies have a negative impact on economic efficiency, in particular on the allocation of resources and on competitiveness and growth. Energy subsidies can lead to resource misallocation through overconsumption. They may crowd out more productive government spending, as indicated by a strong negative relationship between fuel subsidies and public spending on health and education (Figure 4). Underpricing and subsidies have negative effects on the energy supply through various channels: if energy companies are forced to consistently sell below cost (including necessary returns on investment), this leads to underinvestment and poor maintenance which, in turn, results in deteriorating infrastructure across the energy production and supply chain, persistent shortages, and reduced access and quality. Evidence suggests that it takes longer to get an electricity connection (a form of rationing) in sub-Saharan African countries in which electricity firms cannot recover their costs (Figure 5).

Figure 4.Sub-Saharan Africa: Fuel Subsidies vs. Public Spending on Education and Health in 2008–11

Sources: IMF, Fiscal Affairs Department and African Department.

Figure 5.Sub-Saharan Africa: Cost Recovery by Electricity Firms vs. Ease of Getting Electricity

Source: World Bank databases.

This box was prepared by Christian Josz and Sukhwinder Singh. Report of the Task Force on Energy Pricing in Sub-Saharan Africa.

As discussed above, financial stability indicators point to some erosion of bank profitability across the region, but there has not been a marked deterioration in indicators of financial health since the onset of the global economic crisis. That said, there is no room for complacency, especially in countries with weak regulatory capacity, and country authorities will need to move ahead to strengthen supervisory capacity, including in regard to the oversight of pan-African banks.

Policies for a global downturn

The policy assessment above is predicated on the realization of what we have referred to as the baseline scenario, in which global activity weakens only modestly in 2012 and sub-Saharan Africa records growth in excess of 5 percent. How should macroeconomic policies be modified if one or more of the downside risks confronting the global economy materializes, leading to a much more significant global slowdown?

As discussed above, many countries in sub-Saharan Africa have limited policy space to respond to a significant growth slowdown and could well be pushed into procyclical fiscal adjustment by financing constraints. Countries in currency unions have one less adjustment tool (but also, typically, have better-grounded inflation); countries with jittery domestic investors that fear a currency collapse are also constrained because orderly exchange rate adjustment will be difficult to manage, absent an adequate stock of foreign reserves.

Policy prescriptions will again depend on country circumstances, but some general points can be made.

  • Countries with market-determined exchange rates should allow the exchange rate to move, deploying monetary policy adjustments where needed to contain inflation. The willingness of the South African Reserve Bank to let the exchange rate move in 2009, for example, was an important factor in helping South Africa to weather the global financial crisis.

  • Countries with the space to allow deficits to widen should avoid procyclical fiscal tightening, and instead allow automatic stabilizers to operate (for example, Botswana and Mauritius). Whether proactive fiscal expansion should be deployed will depend on the availability of stimulus measures that do not quickly leak into imports.

  • Oil exporters with ample reserve coverage can allow oil revenue erosion to be handled via a drop in reserve levels (or the pace of reserve accumulation). But countries with reserve levels viewed as insufficient to meet medium-term stabilization objectives may need to contain (or halt) reserve erosion by some combination of exchange rate adjustment (typically a last resort in many African oil exporters) and fiscal restraint.

  • Countries with monetary autonomy and strong track records of containing inflation are well placed to respond to a slowdown via monetary easing. With fiscal space somewhat constrained in South Africa, monetary policy may be the most appropriate tool to handle a demand shock. Monetary easing may also be appropriate in Mauritius, should export demand fall.

  • Countries lacking policy space that are hit hard by cyclical external demand shocks will likely need to seek official external financing—from donors or international financial institutions.

Concluding Remarks

The region’s growth momentum looks set to be maintained in 2012–13, but the outlook is subject to heightened risks stemming from the uncertain global economic outlook. How different is the situation from six months ago, when IMF staff last produced a detailed set of forecasts for sub-Saharan Africa? In broad terms, the answer is that not much has changed, because the baseline projections for the global economic outlook have been adjusted by relatively modest amounts, and there have been few Africa-specific surprises of sufficient magnitude to affect the region-wide picture. What has evolved is the assessment of risks, now seen to be more heavily weighted to the downside, and the level of uncertainty regarding likely developments, now more elevated. We have examined here some downside scenarios that, if they correctly capture the path of the global economy, suggest that growth in sub-Saharan Africa could drop by 1 percentage point or thereabouts—an unwelcome development but a much better outcome than recorded in 2009.

That said, individual countries could experience much more severe outcomes, depending on specific country circumstances.

In a context where output growth remains robust across much of the region, there is a case for fiscal consolidation in fast-growing economies that have yet to rebuild the policy space they had prior to the onset of the global crisis. But flexibility in implementing such consolidation will be needed, given the uncertainties surrounding the global outlook. Were the world economy to slow sharply, growth would also slow in sub-Saharan Africa, with some countries being pushed into financial stress, either on the exchange rate or budget financing sides. Countries across the region have different policy tools that can be deployed to respond to these developments—but it seems likely that, for many low-income countries and fragile states, official external financial support from bilateral and multilateral institutions will be needed to help contain the damage and maintain macroeconomic stability.

This chapter was prepared by Montfort Mlachila, Seok Gil Park, and Juan Treviño. Research assistance was provided by Emily Forrest.

Deficit levels can also be affected by shifts in external support from grants to concessional loans as a country’s economic condition improves (for example, Liberia).

Given data quality concerns and cross-country variations in the definitions used, caution is needed in interpreting trends.

Data on Nigeria need to be interpreted with caution, given the impact of central bank interventions to stabilize, reform, and recapitalize the banking system in the wake of the 2009 banking system crisis.

A new factor weighing on the near-term forecasts for South Africa is the recent stoppage of work in platinum and gold mines.

See April 2012 Regional Economic Outlook: Sub-Saharan Africa, pages 16–17; the implications of an oil price surge on sub-Saharan Africa are discussed in pages 17–20.

It is conceivable that in the case of some oil producers, the scale of the loss in oil revenues might push reserves below the critical level needed to maintain confidence, precipitating sharper adjustment, including of the exchange rate.

The severity of the impact intensifies in 2015 and 2016.

Whether this occurs by end-2014 requires detailed consideration of country-specific conditions.

Botswana also faced an extreme shock to export receipts in 2009, but had accumulated sufficiently large foreign assets to enable it to cushion the blow on GDP, inflation, and the exchange rate.

By “sustainable debt levels,” we mean that the country’s debt profile is such that the country has been classified as having low or moderate risk of debt distress by the IMF. For countries eligible for concessional financing, this assessment is made jointly by IMF and World Bank staff; for middle-income countries, the assessment used is that of IMF African Department desks.

Sierra Leone is a good case in point: although the public debt-to-GDP ratio is below 50 percent, efforts by the government to increase borrowing in domestic financial markets have yielded a jump in interest rates.

One exception is Nigeria, which has not recorded significant fiscal surpluses in recent years and whose reserve levels (while now being rebuilt) are still below pre-crisis levels.

The option to adjust monetary policy to respond to domestic developments is available only to those countries not participating in a common currency zone (countries using the CFA franc or having long-standing one-to-one pegs to the rand).

The pace and focus of consolidation should take into account the need to give continuity to key multiyear capital projects.

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