Current Challenges for Sub-Saharan Africa

The past year was an important one for African development. Policy makers throughout the continent, and Africa's partners in development, have much to do to maintain the momentum in the year ahead.

For several years African policy makers have pushed hard to reduce poverty and move the region forward. Over four years ago, the region's leaders, by adopting the African Union's New Partnership for African Development (NEPAD), placed their countries, both individually and collectively, on a path of sustainable growth and development. Subsequently, many Africans have benefited as incomes have begun to grow more rapidly, and poverty has begun to fall. But Africans know, and the rest of the world has also recognized, that far more needs to be done.

In 2005. the United Nations Millennium Development Project and the Commission for Africa joined the region's leaders in arguing persuasively that African countries needed significantly more aid to achieve the Millennium Development Goals (MDGs). The Group of Eight nations (G-8), in July 2005, indicated that, over the next decade, they would substantially increase aid to African countries committed to good governance. The G-8 also proposed that further comprehensive multilateral debt relief for heavily indebted poor countries should be offered by the IMF, the International Development Association of the World Bank, and the African Development Fund.

The IMF Executive Board agreed on December 21, 2005 on the implementation of the Fund's portion of this debt relief package, now known as the Multilateral Debt Relief Initiative (MDRI). Starting in January 2006, once the last steps in financing arrangements are completed, the IMF will extend 100 percent debt relief to countries that have reached, or will eventually reach, the completion point under the IMF-World Bank Heavily Indebted Poor Countries (HIPC) Initiative. The MDRI goes beyond the HIPC by freeing up additional resources to help these countries reach the MDGs. A first group of 19 countries have already qualified, including in Africa: Benin, Burkina Faso, Ethiopia, Ghana, Madagascar, Mali, Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia. We are actively working to help many other countries reach their "completion points" under the HIPC initiative as soon as possible. We will also be working with countries to ensure that the resources saved as a result of the MDRI are used for achieving the MDGs.

These are highly encouraging developments for Sub-Saharan Africa. At the start of a new year, it is vital that African policymakers and the international community continue to build on the spirit of the NEPAD to turn commitments into sustained development and poverty reduction.

Many Sub-Saharan African countries continue to enjoy good economic growth. Despite higher world oil prices, average growth declined only slightly in 2005, after a remarkably strong performance the previous year. Somewhat surprisingly, the slowdown was caused primarily by lower growth in oil-producing countries following the exceptional increases in oil production in 2003 and 2004. Africa's nonoil-producing nations expect sustained average growth in 2005 and 2006 of about 4.5 percent, which is similar to the growth they experienced in 2004.

Difficult challenges remained as countries try to achieve the MDGs. Growth in 2005 was still below the level required to reach the target of halving poverty by 2015. Keeping inflation in check was particularly difficult for many countries, as oil prices continued to rise. Prices of food and agricultural raw materials fell last year, and harvests suffered from a locust infestation in the Sahel region and droughts in southern Africa—producing severe hardships for people in many countries. There was some good news, as rising world prices for beverages, cotton, and some metals helped offset the higher cost of oil imports.

African policy makers—in both oil-exporting and oil-importing countries--face significant challenges in implementing the policies needed to adjust to the external developments. The region's oil producers can use a part of the higher oil revenues to support policies that will help them achieve the MDGs. Their ability to do so depends on their capacity to absorb the oil windfall, and the extent to which additional spending is consistent with a medium-term plan for public spending. Oil importers could contain emerging budgetary pressures by cutting back non-priority spending. They could strengthen their revenue base, and, where possible, allow exchange rates to adjust to provide a cushion against shocks.

The prospect of significantly higher levels of assistance from international donors and comprehensive debt relief reinforces the need for countries to design economic programs that will accelerate their efforts to reach the MDGs. There are many policy options open to governments; here are four priorities:

First, countries must strengthen the way they manage public spending, to get the best results and ensure high standards of public accountability. Assessments of public expenditure systems carried out by the Bank and Fund point to the need for substantial improvements.

Second, good economic governance is essential. Countries must promote transparency in all financial transactions in the budget, the central bank, and the public sector at large. They should be guided by international standards and codes of best practice and take strong measures where necessary to combat and stamp out corruption. Countries rich in natural resources face the biggest challenge promoting transparent institutions.

Third, the private sector must be the engine of sustained higher growth. But World Bank studies indicate that 16 of the 20 countries with the most difficult business climates are in Sub-Saharan Africa. Thus, another challenge is to make financing accessible to small businesses, establish an effective and predictable legal system, and remove the red tape and bottlenecks that often deter both domestic and foreign investment.

Fourth, experience shows that external trade is essential to more rapid growth. Countries must shift from the traditional use of trade preferences and focus instead on unilateral or multilateral liberalization. Africa is home to 30 regional trade agreements. Each country on average belongs to four. The cost of crossing a border in Africa can be equivalent to the cost of traveling more than 1,000 miles inland. Customs procedures and regional trade agreements should be simplified to encourage trade, particularly greater trade among African countries.

The international community made important steps in 2005 by offering Africa pledges of increased debt relief and aid. It could do even more in 2006, by bringing the "Doha Round" of international trade negotiations to an end that is favorable to the low income countries of Africa. But the greatest impact on poverty reduction will come from Africa's own efforts to sustain its recent strong economic performance in the future. The resolve of the region's policy makers is strong. They must sustain that resolve as they tackle the tough challenges of development.

The writer is Director of the International Monetary Fund's African Department