New Opportunities and New Risks: Prospects for Sub-Saharan Africa and MozambiqueDavid Lipton, First Deputy Managing Director
Universidade Politécnica, Maputo
May 6, 2013
As prepared for delivery
Good Morning. It is a great pleasure to be here today at Universidade Politécnica. I want to thank Dean Isabel Da Costa for her kind words of introduction. I am grateful for the opportunity to meet with you—the leaders of tomorrow who will shape Mozambique’s destiny.
I welcome the opportunity to come here to witness the great progress Mozambique has made in recent years. Your country is one of many in Sub-Saharan Africa that is doing well at a time of pessimism about the global economy. As continued uncertainty threatens many advanced economies, Africa is beginning to deliver on its economic potential, with solid growth and improvements in the lives of its people.
I will focus my remarks today around three themes: first, the global economic outlook; second, where Sub-Saharan Africa stands in the current environment; and third, the challenges and opportunities for Mozambique. What I would like to leave with you is a sense of the possible. Africa is changing and the world is noticing. Mozambique is a leading example of how much can change in a single generation. Much remains to be done, and we will talk about those challenges, too. But the potential for Africa and for Mozambique is huge. The biggest challenge is to seize that opportunity.
Global Growth Forecast
Let me begin with the global economy. The most recent IMF outlook, released a few weeks ago, shows that the global economy is slowly regaining strength. We are forecasting a gradual recovery this year to 3.3 percent growth and about 4 percent in 2014. But that is not enough. Job growth has been anemic, and unemployment in some advanced economies remains at alarming levels.
We are seeing significant disparities across countries and regions. There is a three-speed recovery, with some countries doing well, particularly emerging market and developing economies; others such as the United States on the mend; and finally, an important group centered on the euro area and Japan that has work to do. This needs to change if the global economy is to attain a full-speed recovery.
Europe needs to return to its role as an engine of global growth, particularly for developing economies. We are likely to see continued European recession this year, with modest growth of about 1 percent returning to the euro area only in 2014. The biggest problems are in southern Europe, where several countries are struggling with deep recessions. Growth is also weak in the core economies of Germany and France, among others. Europe’s banking system is not able to provide adequate levels of credit, and business investment is falling. Unemployment has soared, passing 25 percent in some crisis countries. A great deal will have to be done at the national level and within the European Union to remedy these problems.
The situation is somewhat better in the U.S., where growth should rebound to about 2 percent this year and 3 percent in 2014. Cuts in U.S. government spending may slow the momentum of recovery—a development that won’t help the global recovery in the short run. However, continued low interest rates have helped fuel the U.S. and world economies.
The emerging market and developing economies have given life to the global economy, providing an estimated three-quarters of growth since the financial crisis hit in 2008. We are projecting acceleration in these countries from 5.1 percent growth in 2012 to 5.3 percent this year. They have benefited from the low global interest rates, high commodities prices, and solid domestic demand.
Asia has been at the center of this surge, particularly China and India. Commodities have been exported to Asia, and investment capital and goods have flowed in the other direction. However, some emerging market countries—for example, Brazil and South Africa—have been growing more slowly, and even India and China no longer experience the break-neck expansion of a few years ago.
A Continent on the Rise
Africa has benefited tremendously from this trend. In 2008/2009, many were concerned that the continent would be hard hit by the global financial crisis. There was an impact, but most countries in Sub-Saharan Africa were remarkably resilient, notably the low-income countries. Growth was robust in 2012 at 5.1 percent, and that should accelerate moderately in the coming years. We project 5.4 percent growth in 2013 and 5.7 percent next year. Low-income countries should grow even faster, benefiting from rising domestic demand.
Demand for Africa’s commodities has helped spur this growth, particularly as new resources have been discovered and developed. But Sub-Saharan Africa’s resilience and growth are not simply a matter of rising commodity exports. In fact, some of the fastest-growing economies are not natural resource exporters.
This economic performance reflects many political, social and economic changes over the past generation. Most important was a new commitment to political stability as Africa moved beyond the ideological strife of the Cold War and then found strength in regional solutions to the conflicts of the 80s and 90s. At the same time, many governments gave a greater role to market forces in the economy, while strengthening economic stability. With rising educational standards, young populations increasingly are taking advantage of the new economic opportunities.
Information technology—computers and phones—is increasingly bridging the geographical distance between Africa and the global economy. And within countries, that same technology is rapidly bringing services that were unavailable just a few years ago; for example, mobile banking. Now online education can help young people like you to break down the knowledge barriers that have contributed to Africa’s remoteness.
Strong Institutions and Improved Governance
Most importantly, a new generation of African policy makers understands how to address the challenges their countries face. They are building a framework of effective economic policies on a foundation of stronger institutions and improved governance. They are creating an environment in which business can flourish.
Prudent monetary policies have reduced inflation and enabled the build-up of foreign exchange reserves. Legal regimes and tax codes are encouraging investment. Good fiscal policies—coupled with comprehensive debt relief—have produced smaller budget deficits and low levels of public debt. This created the buffers that have allowed many countries in Sub-Saharan Africa to cushion their economies against external and internal shocks. When the 2008 crisis hit, they were able to respond. Many countries were able to maintain—or even increase—social spending despite falling revenues, providing a welcome safety net for those most vulnerable to a downturn.
Financial sector development has also been an important part of the story. Across the continent, there has been a rapid expansion of financial services, including pan-African banking groups. In most countries, the financial sector remains robust. Africa also is attracting new sources of financing. Several countries have issued sovereign bonds with favorable terms in recent months. This partly reflects the low global interest rates. But it also reflects the investment opportunities that Africa offers and investors’ increasing confidence in the region’s long-term prospects. But financial sectors remain shallow in many low-income countries. Access, notably by small and medium-sized enterprises and in rural areas, remains limited. Mobile banking is making inroads, but much work remains to be done.
There can be no complacency about Africa’s current success. Poverty rates remain high—even where they have come down, such as here in Mozambique. Sub-Saharan Africa has made the least progress toward the Millennium Development Goals and still lags other regions on measures such as primary education and maternal mortality. Decisive progress on social indicators will be crucial in the coming years. Many countries on the continent also remain exposed to market volatility, especially of commodity prices, and capital flows are notoriously fickle. As integration in the global economy increases, with all its benefits, risks also increase.
With these problems in mind, the IMF recommends that Sub-Saharan Africa’s countries start rebuilding their reserves to guard against potentially adverse developments. This can be accomplished by spending wisely and reforming poorly targeted policies; replacing costly energy subsidies with measures targeted to protect the poor; and improving revenue mobilization by broadening tax bases.
The region also needs to deepen its engagement with the global economy. Africa’s links to the emerging economies represent an important, new dynamic. These ties should continue to develop, but also should encompass many middle-income economies now making their presence felt, including several in Africa. If these countries can continue to grow and diversify, they can help drive each other toward greater success—creating a development convergence that can lift living standards. African economies should continue to push for further improved market access in the advanced economies, but they should also strengthen trade and investment links to other developing economies.
Mozambique: Twenty years of success
Let me now turn to Mozambique. Your country is undeniably one of Africa’s best performers, and one of the fastest-growing economies in the world. Growth reached 7.4 percent in 2012 and is likely to remain at 7 percent this year. Like many developing countries, Mozambique has managed to offset weak demand from the euro area with growing links to the emerging market economies.
Your country’s achievements are all the more remarkable because they come despite this year’s severe flooding. The human impact has been devastating, but the economy managed to avoid the worst. Even though food prices rose, initial signs are that inflation should remain close to the target range of 5-6 percent this year.
Mozambique’s success is a clear illustration that sound policies work. Let me put things in the perspective of the changes since the end of the civil war in 1992:
- Per capita GDP has increased more than five-fold;
- Key social indicators have improved substantially—primary school enrollment is now at 90 percent compared to just 56 percent in 1995;
- Child mortality has fallen from 183 per thousand to 103.
These are impressive developments, but there is much more to accomplish. Here is another set of facts:
- Mozambique remains among the world’s poorest countries, with per capita GDP of $650 in 2012. Many social indicators remain below the averages for Sub-Saharan Africa; for example, access to clean water sources.
- More than half of the population still lives below the national poverty line, and some two-thirds still survive off subsistence agriculture. The child mortality rate remains too high.
- As the floods demonstrated, Mozambique is also at risk from adverse climatic events. With Africa’s third-longest coastline and numerous floodplains, there is an ever-present risk of natural disasters.
The Resources Challenge
The challenges are serious, but they can be overcome. Mozambique’s largely unexploited natural resources present a huge opportunity—particularly the new offshore gas fields. Of course, abundant resources can be a mixed blessing—boom-bust cycles, poorly managed investments, and even massive corruption in some countries.
It is possible to avoid the resource curse and reap the benefits. Experience suggests it is crucial to establish appropriate policy frameworks and institutions at an early stage to transform natural resources into productive assets. The huge investments needed to develop the resources need to be managed carefully and transparently to ensure that new debt is used productively and remains sustainable. It is also important to compile high-quality statistics and develop strong analytical expertise to guide policy decisions in an increasingly complex environment. This calls for have high standards of governance. The bottom line is transparency in all aspects of the resource sector—regulation, taxation, and spending.
The IMF is working closely with many African countries on these issues. I am pleased that we already have provided technical assistance to Mozambique to improve fiscal management in the mining and hydrocarbon sector. This can help maximize resource revenues without discouraging private investment. We are also assisting in strengthening public financial management.
Mozambique’s natural resources can boost economic growth. But growth alone is not enough. The challenge is how to lift people out of poverty, creating jobs and improving lives. This is not an easy task. But there are lessons to be learned from countries that have managed to reduce poverty and reduce inequities, some of which I have already discussed today:
- It is essential to address infrastructure gaps—electricity, water, transportation—to support the emergence of new economic activities outside the natural resources sector, and reduce business costs.
- It is critical to invest in education and training so that Mozambique’s young people can take advantage of emerging opportunities.
- Entrepreneurs need access to credit to finance their businesses. That requires further financial sector development.
- Social protections need to be strengthened to meet the basic needs of the most vulnerable members of the society. Mozambique has already made some progress, including work on social protection floors with the International Labour Organisation, the IMF and other UN agencies. This work will need to be reinforced.
The Role of the IMF
The IMF is fully committed to working with African countries to help further strengthen their economies and realize their full potential. We are providing policy advice, technical assistance and training, and, when necessary, financial support. In the area of technical assistance, we have four Regional Technical Assistance Centers in Sub-Saharan Africa, including a new one in Mauritius serving Mozambique, to be joined by a training institute later this year. A fifth regional technical assistance center will open soon in Ghana.
The IMF also has introduced changes to its lending policies to provide financing arrangements better tailored to the needs of our members. Over the past few years, we have introduced new lending instruments for low-income countries and raised the amount of financing available to them. We also have extended the zero interest rate on our concessional loans through next year for those countries that need financial assistance.
In summary, Mozambique, like many other countries in Africa, still faces formidable challenges. But it has made great progress and can build on this. Africa is in a different place than it was twenty years ago, and nowhere is this more true than in Mozambique. Now that the foundations have been laid for long-term success, it is time to take advantage of new opportunities at home and in the global economy. The IMF stands ready to assist, but it is Mozambique—and the rest of Africa—that will provide the energy and creativity to build prosperity and improve living standards.