IMF Survey: Africa: Sustaining the Momentum
June 29, 2007
- Africa in fourth year of strong economic growth
- Better policies, stronger exports, debt relief have helped boost growth
- IMF role: promote sustainable development backed by sound policies, reforms critical to raising growth
Leaders of the 53-member African Union (AU) are meeting in Ghana July 1-3 at a time of revived regional economic vigor that presents a great opportunity for a continent often beset by disease, hunger, and conflict.
THE IMF'S ROLE IN AFRICA
Sub-Saharan Africa is experiencing its fourth year of strong growth. Higher oil revenues, strong commodity prices, and increased debt relief are being used to make inroads into poverty. While parts of Africa are still plagued by wars and tarnished by corruption, elsewhere improved macroeconomic performance and better policies are helping countries put their economies on a firmer footing.
The challenge now is to keep things going. The record shows that it is much easier to start a period of high growth than to maintain the pace: growth surges that last only a few years are quite frequent in Africa, as elsewhere. What is rarer is that these growth periods endure.
Summit leaders are discussing ways to accelerate regional integration and link the continent more closely to the global economy—steps that are essential for spurring further growth, boosting employment, raising living standards, and reducing poverty and deprivation. An increasing focus will need to be placed on implementing the structural reforms that will help foster vibrant market-based economies.
So what is the IMF doing to help African countries take advantage of this opportunity and maintain, or even boost, current rates of growth? After all, without faster and more sustained growth, poverty will not see much reduction in the continent. Thus, growth must accelerate if Africa is to edge closer toward achieving the Millennium Development Goals (MDGs) (see interview with IMF African Department Director Abdoualye Bio-Tchané).
IMF's role in Africa
The IMF has long been helping African countries achieve and maintain macroeconomic stability, improve public financial management systems (which promotes good governance), and develop an effective financial sector that helps foster growth spearheaded by the private sector (see Finance & Development, December 2006). While much has been achieved in that respect—as evidenced by the strong growth and benign inflation in most countries of the region—the stark fact is that too many African countries are falling short of meeting any of the MDGs.
Making a permanent dent in poverty and achieving progress toward the MDGs will take not only higher overall resource flows from donors but also the steadfast implementation of growth-critical reforms, targeted and efficient use of available resources, and improved coordination of macroeconomic policies to increase the absorption of higher aid inflows.
The IMF is trying to help address these challenges. Its Medium-Term Strategy renews the IMF's commitment to helping low-income countries in its core areas of expertise through policy advice, capacity building, and financial assistance, and seeks to improve its effectiveness.
Refining the toolkit
The IMF has already made progress in reviewing the effectiveness of its policy advice and program design, and is continuing to refine its toolkit for low-income countries. It is discussing how to take on board recommendations in two recent reports—one from the IMF's own watchdog on the evaluation of the "IMF and Aid to Sub-Saharan Africa," and the second from the External Review Committee on Bank-Fund Collaboration.
The IMF has introduced a new Policy Support Instrument (PSI) to help countries that want IMF support and endorsement of their economic policies without a borrowing arrangement. Mozambique became the fifth African country to opt for a PSI in June this year (see box). The Fund also introduced the Exogenous Shocks Facility (ESF) that provides policy support and financial assistance to low-income countries facing external shocks, and is currently reviewing how to better assist so-called fragile states.
Mozambique's new PSI
The IMF's Executive Board approved on June 18 a Policy Support Instrument (PSI) for Mozambique under the IMF's PSI framework, which is intended to support the nation's economic reform efforts. The PSI for Mozambique is aimed at maintaining macroeconomic stability as foreign aid is scaled up, promoting structural reforms as well as implementing the broader policy agenda as envisaged in the Mozambican authorities' national poverty reduction strategy, Plano de Acção para Redução da Pobreza Absoluta (PARPA II). Approval of Mozambique's PSI signifies IMF endorsement of the policies outlined in the program.
The IMF's framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring, and endorsement of their policies. PSIs are voluntary and demand driven. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PSI-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. Members' performance under a PSI is normally reviewed semi-annually, irrespective of the status of the program.
The IMF is reviewing how to better help ensure that countries have the budgetary leeway ("fiscal space") needed to expand priority spending on social services and infrastructure, and to find ways to increase their capacity to absorb aid and debt relief effectively. All of this must be achieved while trying to preserve the hard-fought gains provided by macroeconomic stability, and avoiding past debt-related problems.
Expanding fiscal space
Fiscal space can be expanded by mobilizing resources from domestic revenue, external grants, and domestic and external loans; and by increasing the efficiency of spending, including through reducing untargeted and low priority expenditures.
Higher resources need to be spent wisely, and such spending, particularly on social services and infrastructure, is being accommodated in all IMF-supported programs in Africa unless it would threaten macroeconomic stability. Fiscal and financing targets in IMF-supported programs will continue to be designed to accommodate higher poverty-reducing spending. Indeed, many programs include floors (or minimum levels) for poverty-reducing spending, for example, programs in Rwanda, Sierra Leone, and Uganda.
Similarly, program design will allow higher aid inflows to be spent productively, whenever appropriate in light of other macroeconomic considerations. In the context of higher aid inflows, the Fund will continue to help governments address issues related to competitiveness, as well as fiscal and debt sustainability.
Domestic and external resource mobilization. In countries where revenue is inadequate to meet national policy challenges, the IMF provides advice and technical assistance to increase tax revenue by widening the tax base, improving tax policy design, and strengthening tax and customs administration. The Fund also plays an important role in the mobilization of external resources:
• But more needs to be done. The scaling-up of aid promised at the economic summit in Gleneagles has not yet materialized. The IMF will continue to remind donors of the need to live up to their commitments, and will give a candid assessment when it thinks that macroeconomic conditions allow for an increase in aid inflows.
• External loans increase the resource envelope for development. However, countries need to avoid falling into the debt trap of the past. The IMF and the World Bank have refined their debt sustainability framework to help countries implement debt management strategies that will avoid a renewed build-up of unsustainable debt.
Increasing the effectiveness of spending. Well-functioning Public Expenditure Management (PEM) systems are essential for effective use of public resources for achieving and sustaining high rates of growth. They also improve governance by making public expenditures more transparent (including to citizens), and help provide assurance to donors that their resources are being used for the intended purposes.
The IMF provides advice and technical assistance on expenditure policy and PEM, including medium-term fiscal frameworks, treasury management, and budget control. In this context, programs have also relied on the use of wage bill ceilings as a means to prevent macroeconomic imbalances when the wage policy is not coordinated with sectoral priorities and the overall resource envelope.
While a recent study (Aid Scaling Up: Do Wage Bill Ceilings Stand in the Way?) concluded that wage bill ceilings have not restricted the use of available donor funds, it also found that they are not the best instrument to address the underlying problems of budget control. As PEM systems are strengthened, these ceilings increasingly become redundant. The IMF has already strongly reduced reliance on such ceilings and, going forward, is committed to using them only selectively and transparently.
Increasing absorption of aid
A key objective of IMF-supported programs is to ensure that conditions are in place for effective absorption of aid, so as to help promote economic growth and contribute to poverty reduction. In general, this requires various macroeconomic policies (monetary, fiscal, and exchange rate policies) to be well coordinated, as well as implementing key reforms in areas such as trade, the financial sector, governance, and public financial management.
The IMF's analysis of the scope for using aid takes into account many factors, not just inflation and reserves: important considerations are aid volatility, the incidence of shocks, debt sustainability concerns, export competitiveness, the domestic debt burden, and microeconomic capacity constraints to higher spending to ensure aid can be spent effectively.
Progress toward MDGs
Much has been achieved in stabilizing the economies of Africa in recent years. Along with increased reform efforts, this has helped put African countries on a higher growth path and created a new opportunity for the continent. Of course, much more needs to be done and the IMF, working in its areas of expertise along with the World Bank and other development partners, is committed to helping African countries build on their success and make progress toward the MDGs.