1. Staying the Course
- International Monetary Fund
- Published Date:
- October 2014
Introduction and Summary
Growth trends in most of sub-Saharan Africa remain strong. The region’s economy is expected to continue growing at a fast clip, expanding by about 5 percent in 2014 and 5¾ percent in 2015. But this broad picture is underpinned by three distinct storylines.
The lion’s share of the region’s economies continues to experience solid growth, driven by the sustained infrastructure investment effort, buoyant services sectors, and strong agricultural production. The growth momentum is particularly pronounced in the region’s low-income countries—where activity is forecasted to acceralerate to 6½–6¾ percent in 2014–15—with growth averaging more than 8 percent over that period in Chad, Côte d’Ivoire, Democratic Republic of the Congo, and Mozambique. Furthermore, Nigeria, the region’s largest economy, is projected to continue to expand solidly, at an average rate of about 7–7¼ percent in 2014–15. Also noteworthy, new national accounts data depict economies that are significantly more diversified than previously thought, with a larger role played by the services sector—most notably in Nigeria, where the share of the services sector in the economy almost doubled in the process of national account rebasing.
This positive picture is, however, overshadowed by the dire situation in Guinea, Liberia, and Sierra Leone, where the current Ebola outbreak is exacting a heavy human and economic toll, with economic spillovers starting to materialize in some neighboring countries.
In a few countries, activity is facing headwinds from domestic policies. Growth in South Africa remains lackluster, held back by electricity bottlenecks, difficult industrial relations, and weak competitiveness. More worrisome, in a few countries, including in Ghana and, until recently, Zambia, large macroeconomic imbalances have resulted in pressures on the exchange rate and inflation.
While our baseline scenario remains for the solid growth of the past years to be sustained in the coming months, this is predicated on a number of increasingly potent downside risks being lifted, with differentiated impact across countries.
Ebola outbreak. Should the current Ebola outbreak be more protracted or spread to more countries, it would have severe consequences for activity in the affected countries and larger spillovers, undermining confidence, investment decisions, and trade activities throughout the region. In addition, the security situation continues to be difficult in the Central African Republic and South Sudan, and remains precarious in Northern Mali, Northern Nigeria, and the coast of Kenya.
Homegrown fiscal vulnerabilities. Notwithstanding strong growth, fiscal policy remains on an expansionary footing. In many cases, this reflects a time-bound increase to finance higher infrastructure and other development spending needs, funded by adequately concessional loans. Consequently, in most countries, public debt ratios remain relatively stable. But, in a few cases, particularly some frontier market economies, continued high growth and favorable global financial market conditions have not been sufficient to avert debt buildup and financing difficulties, reflecting wide fiscal deficits driven by rising recurrent expenditures. The risk is that the fiscal vulnerabilities that have emerged will eventually push these countries into a sharp and disorderly adjustment, with adverse near-term social costs and damage to the long-term growth momentum.
Less supportive external environment. Amid a return in global risk appetite, sub-Saharan African market access countries have benefited from renewed investors’ interest. However, with the upcoming normalization of monetary policy in the United States, global geopolitical events or a more marked slowdown in emerging markets than currently anticipated could trigger a reversal in sentiment toward these economies. Ensuing capital outflows would put pressure on countries with large external financing needs, forcing abrupt adjustments. Additionally, as emerging market growth slows down, especially in China, while activity in advanced economies only gradually strengthens, demand for raw materials is expected to soften, keeping a lid on or even pushing down commodity prices. A more marked slowdown than currently expected would immediately impact external positions and fiscal revenues, but, over time, could also reduce the appetite of foreign investors for projects in the region.
The rest of Chapter 1 is structured as follows. We first consider prospects for global growth, commodity prices, and financial markets. In light of the rising global integration of sub-Saharan Africa, we explore what they portend for the near-term outlook. Second, we look at the extent to which the expansionary fiscal stance in many countries in the region is affecting underlying public debt dynamics. Against this backdrop, a final section presents the outlook and risks, and distills policy recommendations.
In subsequent chapters, we turn to two aspects of the development agenda in the region:
Chapter 2 focuses on the complex process of transition from fragility. Fragile states—states in which the government is unable to reliably deliver basic public services to the population—face severe and entrenched obstacles to economic and human development. The chapter examines the factors associated with this transition in a group of sub-Saharan African countries that were deemed fragile in the 1990s. Findings emphasize the reinforcing role of capacity- and institution-building efforts, fiscal space, and peaceful political transitions as key factors to break out of fragility.
Chapter 3 considers the policy options to address the substantial infrastructure deficit in sub-Saharan Africa. While infrastructure bottlenecks continue to present challenges for sustained growth and development, the landscape of infrastructure financing is changing. To make the most of these opportunities, the chapter highlights the need to remove remaining absorptive capacity and regulatory constraints while controlling fiscal risks and maintaining debt sustainability.
Will Stronger Global Ties Continue to Support Growth?
A slow global recovery, with softening prospects in emerging markets
Global growth is expected to gradually strengthen, from 3.3 percent in 2013–14 to 3.8 percent in 2015 (Figure 1.1). The acceleration is projected to be largely driven by advanced economies, most notably the United States and the United Kingdom. The euro area has exited recession, but growth remains anemic, hampered by high unemployment, large debt stocks, and tight private sector borrowing conditions in some countries. Meanwhile, activity is expected to decelerate in emerging markets in 2014, including in key sub-Saharan African trading partners, before recovering somewhat in 2015. In particular, China’s growth is projected to slow to 7.4 percent in 2014, and 7.1 percent in 2015, with further slowdown later in the decade, as the economy transitions from export-led to consumption-driven growth. Conversely, activity is projected to pick up gradually in India, supported by postelection exports and investment.
Figure 1.1.World GDP Growth and Sub-Saharan Africa Exports Growth
Source: IMF, World Economic Outlook database.
In this context, global demand for commodities is expected to soften, especially as China’s manufacturing sector is likely to play less of a driving role. This, combined with recent and projected increases in productive capacity at the global level, is expected to keep a lid on commodity prices over the medium term. Oil prices are projected to decrease marginally over 2014–16 from their 2013 levels. Likewise, the composite price index for nonfuel commodities is expected to decline in 2014–16, by 6 percent compared with 2013. Prices for copper, gold, and platinum are all forecast to moderate by about 5 percent to 10 percent over that period, while prices for coal and iron ore are projected to decline more substantially, by 15 percent and close to 35 percent, respectively.
Recent deepening of trade and financial ties
Export performance underpinned by growing links with emerging markets
Sub-Saharan African countries have been making inroads in global trade. Goods exports now account for close to 30 percent of regional GDP—about 10 percentage points more than in the mid-1990s (Figure 1.2). While trade flows with advanced economies were severely curtailed by the global crisis, trade with emerging markets has been steadily increasing, especially with China and India, which account for the bulk of the rise in exports as a share of GDP since 1995. It is in fact growing trade with China that has allowed sub-Saharan Africa to maintain or even slightly augment its weight in world trade—although it remains small—in the face of the rapid increase in global exchanges (Figure 1.3).
Figure 1.2.Sub-Saharan Africa: Exports by Partner
Source: IMF, Direction of Trade Statistics.
Figure 1.3.World Export Interconnectedness, 2000 and 2013
Sources: IMF DOTS database; and IMF staff calculations.
Note: The size of each circle represents the relative weight of that country in world exports, taking into account the size of trade, the number of trade partners, and the weight of these trade partners in the overall trade network (see Brin and Page, 1998, for a description of the computation). The numbers in parentheses correspond to the share of exports to the respective regions as a percent of total sub-Saharan African exports.
One factor in particular that has been supporting export performance—but could also make it more vulnerable going forward—is that trade remains heavily skewed toward raw materials. These still account for about half of the region’s exports, partly reflecting the high intensity in commodities of China’s growth model. Only a handful of countries in the region, including Kenya, Tanzania, and Uganda, have managed to diversify their exports since the early 1990s. In addition, regional trade has risen but remains underdeveloped, hampered by high tariff and nontariff barriers, as well as poor intraregional transport infrastructure. In that respect, ongoing negotiations of successor trade agreements with the European Union and the United States offer an opportunity to support diversification efforts.
Financing supported by renewed global markets’ interest in the region
Since 2009, in a context of abundant global liquidity and low global returns, foreign investors have been increasingly drawn to sub-Saharan Africa, and the region has been able to access additional external funding—notably through substantial foreign direct investment. Traditional partners, such as France and the United Kingdom, and international institutions lending at concessional conditions remain prevalent in providing funding, but nontraditional partners, in particular China, have also increasingly been investing in the region (Chapter 3). This has allowed countries to finance public and private investment aimed at filling substantial infrastructure gaps. As such, the widening of current account deficits witnessed since 2007–08 is not necessarily of concern, as long as it is accompanied by a sustained investment effort—as has been the case particularly in low-income countries—and allows for a pickup in productivity and exports (Figure 1.4)1.
Figure 1.4.Current Account Balances and Investment, 2010–13
Source: IMF, World Economic Outlook database.
Note: Blue dots represent individual sub-Saharan African countries; while red dots represent country groups.
Most recently, the interest of international investors has been particularly visible for frontier market economies. Following the sharp retrenchment triggered by the U.S. Federal Reserve’s “tapering announcement” in May 2013 and the volatility spike in early 2014, these countries have been able to tap global financial markets again at a heightened pace. With stronger risk appetite and a return to search-for-yield behaviors at the global level, bond and equity flows to sub-Saharan market access economies surged back, recovering in the five months since April 2014 about 40 percent of the ground lost since May 2013.
In fact, the risk-on mode has been broad-based, with little discrimination based on domestic fundamentals or policies. Sovereign spreads have reverted to postglobal crisis lows across the board, regardless of countries’ fiscal positions—with the exception of Ghana (Figure 1.5). Recent Eurobond sovereign issuances were largely oversubscribed, including maiden issuances by Côte d’Ivoire and Kenya (Figure 1.6). Total issuance for the region, including South Africa, already nears US$7 billion so far this year, above the record US$6.5 billion issued in 2013. In that environment, currencies have generally stabilized, with the exception of Ghana, where renewed pressure on the currency reflected continuous concerns about the fiscal stance and low external reserves—the cedi is down by 35 percent vis-à-vis the U.S. dollar since January 2014. The Zambian kwacha experienced substantial pressures until May 2014, but has since regained about 10 percent of its value against the U.S. dollar. Meanwhile, in Nigeria, the central bank started to rebuild some of the substantial amounts of reserves used to defend the naira since May 2013.
Figure 1.5.Selected Economies: Change in Sovereign Spreads since May 2013 and Fiscal Balance over 2013–14
Source: Bloomberg, L.P.
Note: JP Morgan EMBI spreads. Pre taper-tantrum date is May 14, 2013; taper-tantrum peak date is June 24, 2013; and latest is September 20, 2014.
1 Tanzania’s spreads data are only available since May 31, 2013 (depicted in the first bullet).
Figure 1.6.Sub-Saharan Africa: Outstanding International Sovereign Bonds for Markets Access Economies
Sources: Bank for International Settlements Quarterly Review; Bloomberg, L.P.; and EPFR Global database.
Note: Market access economies include here Angola, Côte d’Ivoire, Ghana, Kenya, Mauritius, Nigeria, Rwanda, Senegal, Tanzania, Uganda, and Zambia.
But increased global integration also makes the region more vulnerable
Rising global economic and financial ties have been a boon for the region, but vulnerabilities to external shocks have also increased. As a result of these strengthening ties, many sub-Saharan African economies increasingly move in synchronization with other economies outside the region, especially China, but also Europe, which remains an important trading partner (Figure 1.7). Recent work suggests that higher (lower) growth in either advanced or emerging markets translates over time about one-to-one into higher (lower) growth in sub-Saharan Africa—a relatively high level of transmission (Figure 1.8).2 This means that, as growth slows down in emerging markets and only gradually strengthens in advanced economies, especially in Europe, the external sector is likely to be less supportive for many sub-Saharan African economies, as we discuss later in the outlook section.
Figure 1.7.Sub-Saharan Africa: GDP Growth Synchronization: 1990–20131
Sources: IMF, World Economic Outlook database; and IMF staff calculations.
Note: SSA signifies sub-Saharan Africa; EU signifies European Union; OAE signifies other advanced economies; and Other includes the other IMF members. Only countries for which data are available since 1980 are considered.
1 Each column shows the percent of bilateral correlations of GDP growth over five years between 40 economies in sub-Saharan Africa and those in other regions that exceed 0.5.
Figure 1.8.Sub-Saharan Africa: Transmission of Shocks from Advanced and Emerging Economies
Source: IMF staff estimates.
Note: The bars show the cumulative growth effect on sub-Saharan Africa of a one-time 1 percent shock on growth in either advanced or emerging economies for different time horizons.
One factor that could affect some sub-Saharan African economies much more abruptly would be a reversal in market sentiment. A marked reversal could happen especially if trade partner growth and demand for regional exports weakened further than currently expected, or if investors became more sensitive to domestic vulnerabilities.
In such an environment, countries where significant external financing needs have been increasingly filled by tapping international markets could find it difficult to continue to do so (Figure 1.9). Funding conditions would likely deteriorate, with potential renewed pressures on external reserves and/or exchange rates forcing an immediate fiscal policy adjustment, including public investment cutbacks. The demand boost from investment would be reduced, along with the positive supply effects over the longer term. This, in turn, would lower growth expectations, and could further reduce investors’ appetite. Monetary policy would likely need to be tightened, exacerbating the aggregate demand slowdown. In fact, some of the past external pressures have already induced policy rate hikes in South Africa, Zambia, and Ghana, where the currency depreciation has been the largest and is being passed through to inflation (Figure 1.10).
Figure 1.9.Sub-Saharan Africa: Gross External Financing, Average 2012–13
Source: IMF staff calculations based on authorities’ data.
Figure 1.10.Sub-Saharan African Selected Countries: Currency Depreciation and Inflation Between end-April 2013 and end-July 2014
Sources: Bloomberg, L.P.; and IMF, International Financial Statistics.
In sum, with rising global integration, vulnerabilities to external shocks have also risen in some countries. To protect against such vulnerabilities and be in a position to handle adverse shocks, the best strategy remains to conduct sound macroeconomic and financial policies geared toward preserving stability and, where needed, to rebuild any depleted policy buffers, especially on the fiscal side. As the recent period of volatility has shown, when foreign investors turn risk-averse, they tend to discriminate more clearly between countries with strong fundamentals and those where imbalances have been allowed to build up.
Public Debt: Vulnerabilities in Some Countries
Broadly stable public debt ratios, with some outliers
In this section, we examine fiscal developments through the lens of public debt dynamics.3 We look at evolutions at the regional level, but also for a specific group of countries that have been able to increasingly access international financial markets—as dynamics for this group have generally stood out from those in the rest of the region.4 The main features of recent debt dynamics are as follows:
Public sector debt-to-GDP ratios have remained broadly stable below 40 percent at the regional level since the late 2000s (Figure 1.11, top panel).
However, within the region, countries with access to international financial markets have bucked that trend, as their debt ratio has been rising since the global financial crisis. For these countries, the median debt-to-GDP ratio climbed from 27 percent in 2008 to 41 percent in 2013 (Figure 1.11, center panel).
In contrast, public sector debt in the rest of the region has continued to decline, with the median debt-to-GDP ratio edging down from 41 percent of GDP in 2008 to 37 percent in 2013 (Figure 1.11, bottom panel).
Figure 1.11.Sub-Saharan Africa: Public Sector Debt, 2004–13
Sources: IMF, Debt Sustainability Analysis database; IMF staff calculations; and World Economic Outlook database.
Note: Market access economies include Angola, Ghana, Kenya, Mauritius, Nigeria, Rwanda, Senegal, South Africa, Tanzania, Uganda, and Zambia.
Underlying dynamics appear less benign
To understand the underlying dynamics, it is useful to analyze in more detail the various factors driving public debt. The fiscal stance is certainly one element affecting the debt-to-GDP ratio, as additional spending commitments in excess of revenue need to be financed with new debt. But growth also plays a role in keeping a lid on debt as a share of the total economy; and borrowing terms impact the dynamics to the extent that they affect the debt service burden. Finally, debt relief, privatization proceeds, and other country-specific events act as exogenous additional factors. Based on the DSAs, three general findings stand out for the recent period (Figure 1.12).
Figure 1.12.Sub-Saharan Africa: Contribution to Public Sector Debt Accumulation, 2011–13
Sources: IMF, Debt Sustainability Analysis database; and IMF staff calculations.
Note: Lesotho and South Sudan have been excluded owing to data availability. The “Other” category comprises debt relief (HIPC and other), privatization proceeds, recognition of implicit or contingent liabilities, other country-specific factors (such as bank recapitalization), asset valuation changes, and other unidentified debt-creating flows as defined in the IMF-WB Debt Sustainability Framework. For 2011 (2012), more than 85 (96) percent of the “Other” category is explained solely by Angola, Nigeria, and South Africa.
A helping hand from growth…
First, strong economic activity has been instrumental in supporting the relatively stable debt-to-GDP ratios. Real GDP growth alone contributed to lower debt-to-GDP ratios throughout the region by about 4½ percentage points during 2010–13. In other words, debt ratios would have risen faster over the period had it not been for sustained growth momentum.
…masking weakening fiscal positions…
Second, masked by the positive effect of strong growth, weakening fiscal positions have increasingly been pushing debt ratios up. Primary fiscal balances contributed to higher debt-to-GDP ratios in 2013, to the tune of 2½ percentage points for the region as a whole. While this partly reflects countries’ efforts to support infrastructure upgrades over time, it nonetheless marks a significant shift relative to previous years, particularly among market access economies, where fiscal positions were neutral on debt dynamics or in some cases even contributed to lower debt ratios in 2011–12.
Indeed, after some improvement in 2010–12, the fiscal position of many countries in the region deteriorated in 2013. Although the median overall fiscal balance was broadly unchanged, the interquartile range shifted downward significantly, and an increasing number of countries were back to deficits not seen since 2009, often on the back of increasing current spending (Figure 1.13, top panel). The fiscal deterioration was more marked among market access economies, and visible already in 2012 (Figure 1.13, middle panel). Among these, Ghana recorded the largest fiscal deficit in 2013 (10 percent of GDP), but deficits have been increasing in most of the other access market countries (Figure 1.14).
Figure 1.13.Sub-Saharan Africa: Overall Fiscal Balance, 2004–13
Source: IMF, World Economic Outlook database.
Figure 1.14.Market Access Countries: Overall Fiscal Balance, 2011 versus 2013
Source: IMF, World Economic Outlook database.
Moreover, there have been growing signs of fiscal slippages in a number of countries throughout the region (Figure 1.15). The median fiscal balance negative deviation from projection reached 0.4 percentage point of GDP in 2013, up from 0.1 percentage point in 2012, with fiscal outcomes more deteriorated than anticipated in two-thirds of the countries (versus one-half in 2012).5 Outside conflict countries, negative fiscal surprises in 2013 were particularly marked in Angola, Equatorial Guinea, and Nigeria, where disappointing oil production adversely affected fiscal revenues, and in Ghana, owing to stronger-than-initially-budgeted current expenditures.
Figure 1.15.Selected Sub-Saharan African Countries: Largest Negative Fiscal Balance Deviation from Projection, 2013
Source: IMF, World Economic Outlook database.
Also noteworthy is the absence of correlation between the weakening in fiscal position and the increase in capital expenditures in 2013 (Figure 1.16). This observation suggests that the expansionary stance was more systematically directed to current expenditures.6 While these results hide substantial heterogeneity across countries, they act as a reminder of the importance of properly allocating available fiscal space to public investment efforts, so as to generate a virtuous cycle between economic growth and debt sustainability. As stressed in Chapter 3 of this publication, improving spending efficiency, particularly for public investment, is also paramount.
Figure 1.16.Sub-Saharan Africa: Change in Primary Fiscal Balance and Capital Expenditure, 2013
Source: IMF, World Economic Outlook database.
Note: Excludes São Tomé & Príncipe.
… and gradually less favorable borrowing conditions
The third finding that comes out from the analysis of debt dynamics is that borrowing is generally more expensive for market access economies. Higher funding costs contributed to push debt ratios up by about 1½ percentage points of GDP over 2011–13 for this group. Conversely, in the rest of the region, borrowing at still predominantly concessional terms helped lower debt ratios by about 2½ percentage points of GDP over 2011–13—that is, because nominal rates on external debt were lower than inflation, the debt service burden as a percent of GDP was pushed down.
From a longer-term perspective, the role of concessional debt, as well as the average grant element of new external commitments, has generally been declining since the precrisis period (Figure 1.17). For example, for the region as a whole, the share of concessional debt in total external debt went down from 66 percent in 2001–07 to 61 percent in 2008–12.
Figure 1.17.Sub-Saharan Africa: Average Grant Element, 2001–12
Sources: IMF, World Economic Outlook; and World Bank, Global Development Finance.
Note: The discount rate used (10 percent) is higher than that typically used in the IMF Debt Sustainability Analysis (DSA) (4–5 percent), which is why the grant element appears higher.
The gradual move to more market-based sources of funding is not necessarily problematic per se, as it reflects diversification in financing sources. But these opportunities to widen the funding base also come with risks, mostly associated with both refinancing—most international issuances have been bullet bonds—and cost. While headline yields for international bonds are often substantially lower than for domestic bonds, the ultimate cost depends on the evolution of the exchange rate over the maturity of the external commitment. In fact, should macroeconomic stability come under threat, the ensuing currency depreciation can greatly increase the cost incurred ex post by taxpayers, as illustrated in Box 1.1.
Emerging fiscal vulnerabilities require monitoring going forward. In many countries, the fiscal deficit reflects time-bound efforts to fill infrastructure gaps—part of a development agenda financed at sufficiently concessional terms. But one concern is that, in an increasing number of countries, the expansionary fiscal stance is being driven by sharp growth in recurrent rather than developmental spending. In those cases, fiscal imbalances should be contained, primary spending readjusted toward growth-enhancing expenditures, and fiscal policy design appropriately embedded in medium-term frameworks with improved public financial management. In countries with increasing access to international financial markets, current favorable global conditions should not be construed as an invitation to relax the overall fiscal envelope, and the authorities should remain mindful of the need for continuous macroeconomic stability to ensure investors’ confidence and lower borrowing costs.
The Outlook: Strong Prospects, But Downside Risks
The outlook for sub-Saharan Africa remains favorable. Growth is projected to accelerate from about 5 percent in 2013–14 to 5¾ percent in 2015 (Table 1.1). In many countries, activity will continue to benefit from the sustained demand boost from infrastructure projects, the expansion of productive capacities (in particular in extractive activities and electricity production), buoyant services sectors, and/or a rebound in agricultural production. This positive momentum will be at play even as oil-related activities provide less support in a context of subdued global demand. Overall, sub-Saharan Africa is expected to continue being the second fastest growing region in the world, just behind emerging and developing Asia. Whether this generates inclusive growth, however, remains a matter of concern, as poverty rates and inequality are still high across the region.7
|Of which: Nigeria||9.6||9.6||10.6||4.9||4.3||5.4||7.0||7.3|
|Of which: South Africa||4.9||−1.5||3.1||3.6||2.5||1.9||1.4||2.3|
|World Economic Growth||4.9||0.0||5.4||4.1||3.4||3.3||3.3||3.8|
|Sub-Saharan Africa resource-intensive countries2||7.4||4.0||7.0||4.9||4.3||4.5||4.8||5.3|
|Sub-Saharan Africa market access economies3||6.9||4.6||7.3||4.9||4.3||4.5||5.1||5.6|
Supporting this favorable outlook, recent revisions in national accounts also point to underlying growth strength. The services sector, whose growth had been substantially underestimated in the past in Ghana and Nigeria, now accounts for a much larger share, and these economies are far more diversified than previously thought (Box 1.2). In the most notable case, Nigeria’s industry and services sectors now represent 60 percent of the economy, versus 40 percent prior to national account rebasing; and its 2013 nominal GDP was revised upward by more than 80 percent—making it the largest economy in sub-Saharan Africa.
Growth is forecast to accelerate among low-income countries and fragile states, whereas the outlook is more mixed for oil exporters and middle-income countries.
Among oil producers, Nigeria’s activity is expected to accelerate from 5.4 percent to 7–7¼ percent in 2014–15, on the back of buoyant non-oil sectors and recovering oil production, as issues surrounding oil theft and pipeline shutdowns are gradually addressed. The security situation in the north of the country is, however, expected to negatively affect agricultural production. Conversely, in Angola, oil production is projected to decline as production in some mature fields falls, causing GDP growth to decelerate to below 4 percent in 2014, despite a robust rebound in agriculture. In Cameroon, public infrastructure projects will continue to drive growth.
In South Africa, activity is projected to remain lackluster. A muted recovery is expected to take hold only in 2015, with growth rebounding to 2.3 percent after 1.4 percent in 2014, predicated on the assumptions that improving labor relations allow inventory rebuilding and that gradually improving net exports offset the drag from financial tightening. Infrastructure constraints are expected to be lifted only gradually starting in 2016 as new power plants come on stream. In Ghana, high interest rates, the crowding out of private investment, and reduced real disposable income as the currency depreciation feeds into inflation will put the brakes on activity. Conversely, growth is forecast to accelerate in Senegal, supported by public investment, including in the energy sector.
Among low-income countries, growth is expected to remain strong or accelerate, in particular for fragile states. Greater political stability is expected to support a return to growth in the Central African Republic. Elsewhere, substantial infrastructure efforts in the energy sector (Mozambique, Tanzania), electricity capacity (Ethiopia, Rwanda, Uganda), transportation (Ethiopia, Niger), across the board (Côte d’Ivoire), or as donor support resumes (Mali) will sustain high growth rates.
Beyond the human toll it is exacting, the Ebola outbreak is set to have an acute impact on the economies of Guinea, Liberia, and Sierra Leone. Key economic sectors—agriculture, mining, and services—have become severely disrupted, sharply curtailing economic output and engendering significant fiscal and external financing gaps. Epidemiologists estimate that it may take up to nine months to bring the outbreak under control. Under that baseline, the epidemic is expected to shave off between 1½ (Guinea) and 3¼–3½ percentage points of growth (Liberia, Sierra Leone) in 2014. Neighboring countries are also starting to see tourism activities substantially curtailed (The Gambia, Senegal). Elsewhere in sub-Saharan Africa, economic spillovers are projected to remain modest and contained to regional transportation hubs (Ghana, Kenya, Nigeria).
Notwithstanding a favorable regional growth outlook, fiscal policy is projected to remain on an expansionary footing in 2014. The overall fiscal balance (including grants) is projected to widen to −3.3 percent of GDP from −3.1 percent of GDP in 2013 (Table 1.2). In many cases, higher capital spending is the main factor behind larger deficits, such as in Mali, following the resumption of donors’ project financing, in Niger, where infrastructure projects are being frontloaded, and in Uganda, where low compliance and enforcement are affecting revenues. But in some cases, a particularly large worsening of the fiscal balance is projected on the back of less dynamic oil revenues (Angola) or steady increase in the wage bill and public investment (Mozambique). Ghana’s deficit is projected to remain high, at 7.8 percent of GDP, both because of revenue underperformance and expenditure overruns. Conversely, some countries will see declining or stabilizing deficits in 2014, reflecting lower subsidies and capital spending (Zambia), overall restraint on spending (Nigeria, Senegal), and higher oil revenues (Chad, Nigeria).
|Inflation, end of period||8.9||9.2||7.8||10.1||8.2||6.11||7.3||6.7|
|(Percent of GDP)|
|Of which: Excluding oil exporters||−0.7||−1.7||−4.4||−3.8||−3.9||−4.4||−4.5||−4.3|
|Current account balance||1.7||0.4||−0.8||−0.7||−2.0||−2.4||−2.6||−3.2|
|Of which: Excluding oil exporters||−4.9||−3.2||−4.2||−5.0||−7.5||−7.8||−8.2||−8.1|
|(Months of imports)|
With continued robust growth, expansionary fiscal positions, and increased investment efforts, current account positions are projected to further deteriorate. Despite the gradual global recovery, the current account deficit is expected to widen from 2.4 percent of GDP in 2013 for the region as a whole, to 2.6 percent of GDP in 2014, and above 3 percent of GDP in 2015–16. Demand for imported goods and services would remain sustained in the context of investment projects and rapid private consumption growth. Meanwhile, exports are projected to decline in percent of GDP, particularly in oil- and raw material-producers, reflecting, to some extent, softening demand for commodities from emerging economies. Persistent infrastructure bottlenecks are also expected to prevent some countries, particularly South Africa, from taking full advantage of the gradual recovery in advanced economies.
Inflation is expected to increase in 2014, mainly as a result of temporary factors, including the pass-through from past exchange rate depreciation (Ghana, South Africa, Zambia), increases in food prices (Nigeria, South Africa), and adjustments to fuel prices (Ghana, Madagascar, Zambia). Some moderation is anticipated in 2015 as some of these factors abate.
While the baseline is for robust growth, risks to the outlook are squarely to the downside.
Some idiosyncratic domestic factors…
The Ebola outbreak could have larger regional spillovers than currently anticipated, in particular if the epidemic proved more difficult to contain. The associated confidence shock could have severe consequences for activity in sub-Saharan Africa, with trade coming to a halt, transport activities further curtailed, tourism receipts substantially reduced, and investment plans scaled down throughout the region. A more widespread extension of the outbreak would further exacerbate these patterns, especially if the outbreak were to spread to countries with already-stressed health systems or to large urban centers.
The security situation continues to be difficult in several parts of sub-Saharan Africa, including in Central African Republic and South Sudan, and remains precarious in Northern Mali, Northern Nigeria, and the coast of Kenya. If the situation were to deteriorate, the regional spillovers could be substantial (for example, in Cameroon and Uganda), affecting trade flows and investment decisions, and possibly diverting public resources toward higher security-related outlays.
Finally, idiosyncratic factors also prevail in South Africa, where further delays in the completion of power plants and protracted difficult industrial relations constitute downside risks to an already lackluster growth outlook.
…but also emerging homegrown vulnerabilities…
As explained in the previous section, fiscal vulnerabilities have built up in a number of countries, notably in Ghana and Zambia, although in the latter, the fiscal deficit has started to narrow. The fiscal position is also deteriorating in some other countries, on the basis of overoptimistic revenues, especially from the oil sector, and rising current expenditures. In addition, upcoming elections could exert additional pressures on public finances in a number of countries, including Burkina Faso, Burundi, Mozambique, Nigeria, Tanzania, Togo, and Uganda.
…that could be exacerbated if external risks were to materialize
A sudden increase in risk premiums and volatility in global financial markets—from very low current levels—would severely affect countries reliant on external market funding. As mentioned earlier, such a reversal could be triggered either by homegrown factors or external shocks, including increased geopolitical tensions elsewhere in the world—especially in Ukraine or in the Middle East—a larger-than-expected slowdown in emerging markets, or a faster-than-anticipated normalization of monetary policy in the United States.
Lower growth in emerging market economies also poses a protracted risk for the region.8 As discussed in the IMF’s 2014 Spillover Report, growth forecasts for emerging markets have been reduced repeatedly since 2010. While current forecasts still expect a meaningful pickup for these countries, there is a risk that this rebound fails to materialize. The ongoing real estate correction in China could be more severe than expected, while a lack of action on structural constraints could lead to lower potential growth across emerging market economies.
The most immediate channel of transmission for sub-Saharan African countries would be through a weakening demand for commodity exports.9 The risk would be that this weakening materializes before noncommodity sectors have gained enough traction to maintain the current growth momentum, affecting especially Angola, Chad, the Republic of Congo, Equatorial Guinea, Gabon, and Nigeria—where oil exports account for between 20 percent of GDP and 90 percent of GDP. A further slowdown in other commodity prices, especially for coal, copper, gold, iron ore, and platinum would affect a wide range of countries in the region. Tightening financial conditions, including in China, could also lead foreign investors to scale down their financial operations, including in sub-Saharan Africa, especially if growth prospects became more uncertain in the region—with a more permanent impact on the growth momentum. A more protracted period of slow growth in advanced economies would compound these effects.
Indeed, simulations of a synchronized slowdown in emerging economies suggest that the impact would be substantial and protracted (Figure 1.18). Using a multicountry model incorporating most sub-Saharan African economies, a scenario is explored, where emerging economies experience ½ percentage point lower growth each year for three years and a tightening of financial conditions.10 Not surprisingly, commodity exporters in sub-Saharan Africa would be most affected, with cumulated growth over those three years shaved off by close to 1 percentage point. But noncommodity exporters would also be impacted, although to a lesser extent. A faster recovery in the United States and the United Kingdom and additional monetary accommodation elsewhere in advanced economies would help reduce the negative impact of a marked emerging market slowdown on sub-Saharan African economies, but would be far from sufficient to offset it—leaving the region’s growth momentum durably dented.
Figure 1.18.Sub-Saharan Africa: Impact on GDP Level from External Shocks
Source: IMF staff simulations.
Note: The scenarios are computed using the Flexible System of Global Models (FSGM), which is a multiregion, general equilibrium model of the global economy consisting of 22 blocks. Of these 22 blocks, 11 represent sub-Saharan African regions.
1 Commodity exporters: Angola, Cameroon, Chad, Democratic Republic of the Congo, Republic of Congo, Equatorial Guinea, Gabon, Nigeria, and Zambia.
2 Noncommodity exporters: Benin, Botswana, Burkina Faso, Burundi, Cabo Verde, Central African Republic, Comoros, Côte d’Ivoire, Eritrea, Ethiopia, Guinea, Guinea-Bissau, Kenya, Lesotho, Madagascar, Malawi, Mali, Mauritius, Mozambique, Namibia, Niger, Rwanda, São Tomé and Príncipe, Senegal, Seychelles, Sierra Leone, Swaziland, Tanzania, The Gambia, Togo, and Uganda.
For the vast majority of countries in the region, sustaining high growth remains the key consideration. As policymakers pursue development objectives, it will be important to pay heed to macroeconomic constraints. In particular, policies should continue to emphasize growth-enhancing measures, including by boosting fiscal revenue mobilization, targeting public spending toward infrastructure investment and other development spending, safeguarding social safety nets to ensure inclusive growth, and improving the business climate. At the same time, overreliance on volatile capital flows and widening of macroeconomic imbalances of a permanent nature need to be avoided. Monetary policies should continue to focus on consolidating the gains achieved in recent years in reducing inflation, including by tightening in countries with rapid growth and persistent high inflation.
In a few countries, however, macroeconomic imbalances have become a source of concern, as evidenced by large fiscal deficits and sharply rising recurrent spending. Budgets have become over-extended, financing constraints have emerged, and exchange rates have come under pressure. In these cases, fiscal consolidation is necessary, but will need to avoid overly adverse consequences on the poor and vulnerable groups.
Finally, in the countries affected by the Ebola outbreak and other such one-off shocks, fiscal accounts are likely to come under considerable pressure. As long as the source of the pressure is of a one-off nature, and provided the public debt level is manageable, fiscal deficits should be allowed to widen subject to the availability of financing.
Box 1.1.Comparing the Cost of Sovereign Bond Issuance in Domestic and Foreign Currencies
Sub-Saharan Africa’s sovereign international bond issuance has grown significantly in the last decade.1 Countries such as Côte d’Ivoire, Ghana, Kenya, and Senegal have recently had oversubscribed issuances. The strong African growth performance and outlook, enhanced macroeconomic fundamentals, and ample global liquidity have drawn international investors to the region in search of yield and portfolio diversification.
There are important factors that can affect the decision of issuing international or domestic bonds. First, local currency bond markets are not well developed in sub-Saharan Africa, with a few exceptions, such as in South Africa. Thus, domestic borrowing costs are increased by a liquidity premium, given that it is very difficult to obtain a large amount of domestic financing, especially at long maturities. Second, by being able to issue international bonds, countries can signal improved domestic fundamentals and showcase that they are ready for business. This both gives the country the opportunity to diversify from traditional sources of foreign financing and can act as a catalyst for international funding for the private sector, including through FDI. At the same time, the sovereign rating that comes along with issuance provides a benchmark for private firms to issue their own bonds. Finally, issuing internationally can have the added benefit of fostering financial innovation, for example, by indirectly promoting the development of local currency bond market products.
Countries are also typically attracted to external financing by low foreign interest rates—usually significantly lower than domestic ones. However, borrowing externally entails a foreign currency risk, which needs to be factored in when assessing the relative cost of external versus domestic borrowing. Countries have to reimburse the bonds in foreign currency at the prevailing exchange rate—at a much higher cost for those that experience large currency depreciation during the maturity of the bond. This is of particular relevance in sub-Saharan African countries, whose nominal effective exchange rates have depreciated by 3 percent to 4 percent per year on average during 2000–13—that is, 44 percent on a cumulative basis over that period.
We illustrate these trade-offs here through the examples of Ghana and Zambia, comparing the respective costs of sovereign bonds in domestic and foreign currencies, both by looking at exchange-rate adjusted interest rates and by comparing net present values. The results highlight the role of foreign currency risk and the extent to which it can make the cost of borrowing externally higher than domestically.
Uncovered Interest Parity
A first angle to assess the relative costs is to look at interest rates after adjusting for expected exchange rate variations. To adjust for these, we rely on the uncovered interest parity. According to the uncovered interest rate parity condition, the expected return on domestic assets should equal the exchange rate-adjusted expected return on foreign currency assets. While the relationship assumes full capital mobility and perfect substitutability of domestic and foreign assets, and does not fully hold in practice, also because of transaction costs, risk aversion, political risk or differential taxation, it still provides a useful gauge (Hansen and Hodrick, 1980; and Fama, 1984):
i = i* + E(d)
where i and i* are the domestic and foreign interest rates, and E(d) is the expected depreciation of the domestic currency.
Ghana first issued a US$750 million 10-year international bond in September 2007. The 8.7 percent yield compared favorably with interest rates on domestic bonds. Indeed, the domestic bond with the longest maturity (seven-year) issued in 2013 carried an 18 percent yield. However, assuming that a similar domestic bond had been issued in 2007, given that the observed depreciation rate averaged 9 percent in the five to six years prior to issuance, and adjusting for a similar expected rate of depreciation for the remaining of the bond maturity, there would in fact have been little difference to expect in the adjusted cost of borrowing externally and domestically (Table 1.1.1). A similar result holds for the 2013 10-year Eurobond issuance.
|Interest rate||Differential before|
|Depreciation rate||Differential after|
7-yr Domestic bond 2013
|9 ppt||9%||0 ppt|
7-yr Domestic bond 2013
|9 ppt||12%||-3 ppt|
|Interest Rate||Differential before|
|Depreciation rate||Differential after|
10-yr Domestic bond 2012
|10 ppt||5%||5 ppt|
Zambia issued a 10-year Eurobond for US$750 million at a yield of 5.6 percent in 2012. The equivalent 10-year government bond on the domestic market carried a 15.7 percent yield. Because the past depreciation rate had averaged only 5 percent, in that case, it was expected that the cost of external financing would indeed be lower than borrowing domestically by about 5 percentage points.
Net Present Value
In practice, the currency depreciation rate varies across the lifetime of the bond. To better capture that time dimension, it is useful to compare the difference in net present value (NPV) terms between international and domestic sovereign bonds of equivalent maturity. This method also allows to take into account the currency fluctuations already observed since issuance, and to get a closer estimate of the ex post (as opposed to expected) difference in cost. In the case of Ghana, the analysis in NPV terms also suggests that domestic financing (at terms achieved for the seven-year domestic bond issued in 2013) would likely have been less costly than external financing for both the 2007 and 2013 Eurobond issuances. More specifically, it shows that the 2007 Eurobond is projected to cost the authorities about 60 percent more, in NPV terms,2 than the equivalent domestic bond, despite the 9 percent difference in headline yields (Table 1.1.2). Conversely, in the case of Zambia, the overall cost of the 2012 Eurobond is still projected to be about 30 percent lower in NPV terms than that of the domestic bond issued that year.
|Coupon rate||Annual observed|
|Average annual projected|
|NPV difference (%)|
7-yr Domestic bond 2013
7-yr Domestic bond 2013
|Coupon rate||Annual observed|
|Average annual projected|
|NPV difference (%)|
10-yr Domestic bond 2012
Sovereign bond issuance in foreign currency offers opportunities, but can also comes with costs. An important caveat, of course, is that shallow domestic financial markets make it more difficult to mobilize similarly large amounts in local currency.
That said, the true cost of borrowing in foreign currency is highly contingent on the stability of the domestic currency. Sound macroeconomic and governance policies, as well as more timely access to high-frequency reliable data, are of primary importance in the determination of international borrowing costs. Ex ante, they reduce the risk premium demanded by foreign investors. But, equally important, ex post, they determine the extent of macroeconomic stability—and hence exchange rate stability—over the course of the duration of foreign bonds. Less prudent policies and growing fiscal vulnerabilities run the risk of eroding foreign market confidence; in extreme cases, they can trigger a sell-off that itself precipitates the currency depreciation and further increases the cost of external borrowing.
Box 1.2.More Diversification than Previously Thought? Examples from Recent National Account Rebasing
National account rebasing is the process through which the reference year for evaluating economic performance is updated to a more recent year. It typically allows for a more accurate picture of the structure of the economy, especially if it is undergoing substantial structural changes. Recent rebasing in some sub-Saharan African countries, most notably Nigeria, has indeed highlighted that the size of these economies can be dramatically larger than previously estimated, on account of much more dynamic growth in some sectors not having been properly measured in the past. The corollary has been that the structure of these economies is in some cases now significantly different from what national accounts used to show, with more diversification than previously estimated. While these results alleviate some of the concerns about the lack of structural transformation in the region, uncertainty about the exact structure of the economy also makes policymaking more difficult. To better inform policy decision, regular rebasing in future will therefore be essential.
The example of Nigeria
A revised picture of the Nigerian economy
Like several countries in the region, Nigeria embarked on a rebasing of its national accounts, as the 1990 base year had become increasingly outdated to depict the structure of the economy. In July 2014, the Nigeria Bureau of Statistics (NBS) released its final estimates of nominal and constant GDP, with 2010 as the new base year. The new figures indicate a substantial increase in nominal GDP—by 60 percent for the 2010 base year and more than 80 percent for 2013—and places Nigeria as the largest economy in sub-Saharan Africa (Table 1.2.1).
|Nominal GDP (billions of U.S. dollars)|
|Change (in percent)||61.4||68.8||76.8||82.2|
|Real GDP Growth (in percent)|
|Share in SSA GDP (in percent of total)|
The large increase reflects the deep structural changes undergone by the Nigerian economy between 1990 and 2010. These changes are better captured thanks to a significant improvement in the methodology of the surveys used to compile the underlying data: (i) survey samples have been expanded to better capture the informal sector; (ii) the coverage of the services sector in the surveys has been broadened, especially to better include health and social services, information and communications, and professional, scientific, and technical services; (iii) new activities, not yet covered, have been added in the surveys, including entertainment, research, patents, and copyrights; and (iv) new data sources, mostly administrative data, are now used. As a result of this improved coverage, the national accounts now depict an economy where the share of services is much larger (half of the total economy, as opposed to a third prerebasing). Manufacturing, electricity, water, and construction sectors also play a larger role, while oil activities and agriculture account for a much smaller share of the economy.
Impact on sub-Saharan Africa growth
Given its larger size, the performance of the Nigerian economy now has an increased bearing on sub-Saharan Africa’s overall growth. Compared with the April 2014 Regional Economic Outlook: Sub-Saharan Africa, growth for the region was revised down by ½ percentage point for 2011–12, and up by ¼ percentage point in 2013. The bulk of the revision is attributable to Nigeria’s rebasing, through two different channels (Table 1.2.2).
|October 2014 WEO||6.9||5.1||4.4||5.1||5.1|
|Nigeria growth effect||0.8||-0.8||-0.7||-0.3||-0.1|
|Nigeria weight effect||0.4||0.3||0.3||0.3||0.3|
|April 2014 WEO||5.6||5.5||4.9||4.9||5.4|
Nigeria’s growth has been revised down by about 2½ percentage points in 2011–12 and 1 percentage point in 2013, on the back of temporarily less dynamic real services sector activity in 2011–12 and a sharp contraction in oil GDP in 2013. This alone contributed to lower sub-Saharan Africa’s growth rate by ¾ percentage point in 2011–12 and by ¼ percentage point in 2013 (Table 1.2.2).
The weight of Nigeria’s economy in sub-Saharan Africa has risen, from 21 percent prerebasing to 32 percent postrebasing. Because Nigeria has had faster growth than the rest of sub-Saharan African countries, this weight effect alone contributed to increase sub-Saharan Africa’s growth rate on average over 2010–13 by ¼ percent each year.1
Rebasing Across the Region: More Diversified Economies
Revisions to national account estimates have also occurred recently in Ethiopia, Ghana, Kenya, and Mozambique, and are expected to be released in the fall of 2014 in South Africa, Tanzania, and Uganda.2 Along with Nigeria, the revised data resulted in more diversified economies than previously understood also in Ghana (Figure 1.2.1).
Figure 1.2.1.Selected Countries: Sectoral Decomposition of Real GDP, Before and After National Accounts Rebasing, Average 2010–13
Source: IMF, African Department database.
Although more diversified economies are likely to be more resilient, the challenges facing them remain substantial. On the one hand, rebasing does not change the poverty or unemployment outlook. In addition, new national accounts highlight even more sharply the low level of tax revenues or social spending relative to the more accurate recording of the size of the economy. On the other hand, having a better (and more accurate) picture of the economy is essential to guide policymakers, investors, and consumers on the current economic trends, and help them take informed economic decisions. This could lead to new investment opportunities, help create jobs, and reduce poverty in the medium to long term.
Given the pace of structural transformation occurring in sub-Saharan Africa, it is crucial to regularly revisit the underpinnings of national account estimates to avoid assessing the performance of the economy based on an outdated representation. In line with best practice, it is therefore recommended that rebasing exercises be undertaken at least every five years by national statistical offices.
See IMF, 2013b, which shows that large current account deficits across the region have been driven by higher imports and lower official transfers, reflecting high (low) investment (savings) rates. Data show that more than half of the deficits are financed by foreign direct investment (FDI), which is a mitigating factor in many countries as FDI financing for the region has proved to be resilient in trying times.
A similar exercise shows that a shock to growth in emerging markets affects advanced economies by at most half of the magnitude of the originating shock.
The analysis in this section is based on Debt Sustainability Analyses (DSAs) conducted by the IMF and the World Bank to assess public sector debt, which encompasses both general government debt and debt incurred by public corporations. See http://www.imf.org/external/pubs/ft/dsa/lic.htm for low-income countries and Chapter 2 of the May 2013 Regional Economic Outlook: Sub-Saharan Africa for a previous application to the region. IMF (2014e) also assesses debt developments since 2000 for low-income developing countries.
We define here market access countries as those that have issued an international sovereign bond and/or are typically featured in investment bank reports. These include Angola, Ghana, Kenya, Mauritius, Nigeria, Rwanda, Senegal, South Africa, Tanzania, Uganda, and Zambia. Côte d’Ivoire is also considered a market access economy, but is excluded here, as it was experiencing a civil conflict over part of the period of analysis.
This goes beyond forecast errors inherent to projections, as the average deviation from projection for the region as a whole was positive in 2011 (2.2 percentage points of GDP), before turning increasingly negative, at −1.1 percentage point of GDP in 2012 and −2.5 percentage points in 2013.
The April 2014 Regional Economic Outlook: Sub-Saharan Africa also showed that, except for some oil-exporting countries where revenue softened, the widening in fiscal position largely reflects increases in primary spending rather than weak revenue performance. It found that in some 27 countries, primary expenditure has increased rapidly relative to revenue since 2010, in many cases because of higher current expenditures, and in some at the expense of public investment.
See Chapter 2 of the April 2014 Regional Economic Outlook: Sub-Saharan Africa—Fostering Durable and Inclusive Growth.
A related risk is that the reduction in the trade intensity of global growth recently observed persists.
Conversely, sharply higher oil prices in the short term as a result of an escalation in geopolitical tensions, in particular in Ukraine or in the Middle East, would benefit the region’s oil exporters but negatively affect its oil importers, especially since energy constraints faced by most countries in the region are related to a high cost of electricity, as generation often relies on fuel-based power plants.
The shocks described here are replicating scenarios discussed in the IMF’s 2014 Spillover Report.