Growth performance in sub-Saharan Africa (SSA) remains buoyant in a wide range of countries despite a continued worsening of the terms of trade of the oil importers.1 Against a background of an easing of demand for imports in advanced countries, average real GDP growth is now expected to decline slightly in 2005 from its strong performance in 2004. The slowdown in 2005, however, is attributable primarily to lower growth in most of the oil-producing countries following the exceptional increases in oil-production capacity established during 2003 and 2004, especially in Nigeria; non-oil-producing countries are expecting average growth of about 4.5 percent, similar to that observed in 2004. Nonetheless, the number of countries anticipated to achieve growth in excess of 5 percent is expected to increase, while the number growing by less than 2 percent is expected to decline. Real GDP growth in SSA is projected to rebound to 5.3 percent in 2006. Growth in SSA, however, remains below the levels observed in other developing country regions and is still insufficient for most countries to achieve the income-poverty Millennium Development Goal (MDG).
Average inflation in SSA has picked up slightly to a projected 9.9 percent in 2005, but is expected to fall to 8.3 percent on average in 2006. For many countries, especially the net oil importers, the task of containing inflationary pressure has been particularly difficult this year because oil prices have risen further in 2005, reflecting continued strong world demand and weaker-than-expected oil-supply growth in countries that are not part of OPEC (Organization of Petroleum Exporting Countries).
The terms of trade of oil importers continue to deteriorate. In some non-oil-producing countries, higher world prices for beverages and some metals are helping to offset the terms of trade impact of increases in oil prices. Also, cotton prices recovered somewhat in the first half of 2005 from the trough of 2004 in light of an expected decline in world production. However, prices of food and agricultural raw materials so far have fallen in 2005 following a strong increase in 2004. The strengthening of the U.S. dollar vis-à-vis the euro has driven import prices up in the CFA franc countries. Moreover, crop harvests have suffered from locust infestation in the Sahel region and from droughts in southern Africa.
Implementing appropriate policies to adjust to external shocks is increasingly challenging for the SSA countries. External and domestic balances have been deteriorating in oil-importing countries and improving in oil exporters. For the latter, accumulating foreign exchange reserves can be an appropriate response to allow the economy to adjust gradually to what may be permanently higher oil prices. The extent to which government spending can and should be expanded depends on the circumstances of the individual countries. It remains important for all countries in the region to ensure the full pass-through of higher oil prices to consumers. Oil importers should contain any emerging fiscal pressures by cutting nonpriority spending, strengthening the revenue base, and, where possible, allowing flexibility in exchange rates. Any significant additional foreign resources provided by the donor community, through either higher aid flows or debt relief, should be accompanied by a strong policy framework to facilitate their effective absorption. At the same time, countries need to remain alert to any emerging supply pressures in different sectors or to a deterioration in competitiveness. A high import content in additional public spending, a focus of higher spending on infrastructure to boost productivity and ease supply bottlenecks, and further trade liberalization can all help mitigate pressures for a real exchange rate appreciation.
This Supplement updates the Recent Developments section of Regional Economic Outlook: Sub-Saharan Africa, published in May 2005 (see IMF, 2005). Sub-Saharan Africa is defined as the countries covered by the IMF African Department and thus excludes Djibouti, Mauritania, and Sudan, which are included in the SSA aggregation in the IMF’S World Economic Outlook (WEO). The Statistical Appendix provides information on 42 countries in SSA; Eritrea and Liberia are excluded from the database because of data limitations.