Abstract

The world economy in 2003 provided little support for economic growth in SSA countries. World economic growth increased, but it still remained sluggish in the advanced economies and declined in the euro area. The terms of trade were broadly unchanged, and key commodity prices remained depressed by historical standards, despite some rebound during the year. However, the external environment is projected to improve this year.

The world economy in 2003 provided little support for economic growth in SSA countries. World economic growth increased, but it still remained sluggish in the advanced economies and declined in the euro area. The terms of trade were broadly unchanged, and key commodity prices remained depressed by historical standards, despite some rebound during the year. However, the external environment is projected to improve this year.

Thirteen countries saw their economies expand by 5 percent or more in 2003, compared with 11 countries in 2002.. As some countries in the region have now maintained this growth (on average) for five or more years, they appear to have established the foundation for reducing income-based poverty and advancing toward the MDGs. However, conflict, economic mismanagement, weak governance, low investment rates, and a slow pace of economic reform continue to hamper growth in most countries. The economies of seven countries contracted, compared with six the year before. The overall slowdown in 2003 stemmed from declining growth rates in industry and services, reflecting in part continued weaknesses in private-sector activity.

Most SSA countries continued pursuing sound macroeconomic policies. Inflation generally remained low throughout the region. Single-digit inflation was achieved in nearly three-quarters of SSA countries in 2003, as has been the case for the past five years, and inflation rates fell in most countries with histories of higher inflation rates. Fiscal deficits were generally kept to sustainable levels that were covered by concessional donor inflows or noninflationary levels of domestic financing. In addition, most countries either had balance of payments surpluses or levels of international reserves sufficient to accommodate temporary deficits. Debt burdens fell for most countries, supported by interim and permanent debt relief under the HIPC Initiative. These achievements notwithstanding, and they are substantial, macroeconomic stability remains fragile or unattained in a significant number of countries: large fiscal deficits have led to rising domestic debt burdens; very few countries have reached the completion point under the HIPC Initiative; external debt burdens are still large; and international reserves remain inadequate in some cases.

The main challenge facing most countries in the region remains one of substantially and sustainably raising economic growth rates. This will require an energized private sector and large increases in corresponding investment. If private consumption is to continue increasing, as it is expected to, then a significant amount of additional investment will need to be financed from external sources. This points to the crucial importance of improving the business climate, which entails steadfast commitment not only to sound macro-economic policies, but to more rapid and comprehensive structural and legislative reforms as well. It also requires enhanced governance and participatory processes, as well as the prevention of conflict, all of which are essential for poverty reduction.

In the near term, the principal source of economic growth in the oil economies will be rising oil production. An important challenge for these countries is to ensure that oil revenues are used prudently to increase public savings and finance poverty-reducing and growth-enhancing programs. Enhancing fiscal transparency and accountability and ensuring the environmental sustainability of economic growth are especially important for these countries.

Growth in the non-oil economies will be driven by rising domestic demand; the contribution of net exports to economic growth is projected to remain negative in the near term. This is not necessarily a problem. In line with the global effort to reduce poverty, external current account deficits would be expected to increase as official concessional debt flows rise. Deficits may also expand as foreign direct investment increases. A major challenge for these countries is to design and implement macroeconomic frameworks and fiscal policies aimed at achieving the MDGs, and to accommodate larger aid flows without undermining debt sustainability or export competitiveness. The latter is crucial in the medium to long term, in order to enhance the external viability of these economies.

The experiences of Benin, Burkina Faso, Cape Verde, Mozambique, Tanzania and Uganda demonstrate that high rates of economic growth can be sustained even in the absence of significant amounts of natural resources. These countries have generally implemented, on a sustained basis, sound macroeconomic policies and structural and institutional reforms that have promoted private investment (including foreign direct investment), attracted the support of international donors, and promoted the growth of exports. The latter success has been aided by liberalized trade and competitive exchange rates.

The external environment facing SSA in 2004 is generally favorable. World economic growth is forecast to rise; aid flows should increase; debt burdens are expected to ease, especially as more countries reach the completion point under the HIPC Initiative; and a concerted effort to achieve the goals of the Doha round of WTO negotiations could greatly enhance the export prospects for the region.

The countries of the region and their international development partners should capitalize on these opportunities so that the countries can break out of the low-growth path of the last five years. Improved domestic policies, including prudent fiscal and monetary policies, trade liberalization, regional integration and competitive exchange rates are indispensable. However, they must be supported by concrete actions of development partners if the region is to achieve and sustain the higher rates of economic growth that will be necessary for poverty reduction.