IMFSurvey Magazine: Countries & Regions
Regional Economic Outlook
Africa's Economic Expansion Faces Downside Risks
IMF Survey online
- Deteriorating global economy may hit sub-Saharan Africa's growth prospects
- Higher oil, food prices raise challenge of maintaining macroeconomic stability
- Over medium term, region needs to focus on strengthening private sector
Growth in sub-Saharan Africa (SSA) is expected to average about 6½ percent again this year, driven by oil exporters, while inflation in 2008 is projected at about 8½ percent, up from 7¼ in 2007.
Although the region's economic expansion is expected to continue, risks are tilted to the downside. The external environment has become less favorable—with growth slowing in advanced economies, higher oil prices, and unsettled global financial markets—which could hurt growth in SSA. The IMF's Sub-Saharan Africa Regional Economic Outlook—Spring 2008 (REO) says that, in light of these risks, there is about a one-in-five chance that the region's growth will drop to less than 5 percent in 2008.
Benedicte Vibe Christensen, Acting Director of the IMF's African Department, told the press that "while the improved performance in SSA is encouraging, the region still has a lot of catching up to do if it is to achieve the Millennium Development Goals."
Growth in SSA's oil exporters is expected to accelerate to about 10 percent this year, underpinned by production at oil facilities coming onstream in Nigeria and Angola and a new liquefied natural gas plant in Equatorial Guinea (see Table 1). Higher income and wealth are expected to be the main drivers of domestic demand in these countries.
In countries that are not oil exporters, the picture is mixed, with average growth a bit lower than last year. With the slowing of the global economy, growth in the middle-income countries is expected to register only about 4 percent this year and, in low-income countries, about 6 percent (see Table 2). The fragile countries, buoyed by a continued recovery in investment, should see growth pick up to 5 percent in 2008, up from 3¼ percent in 2007 (see Table 3).
Inflation in the region as a whole should increase slightly to about 8½ percent if macroeconomic policies hold firm. Inflationary pressures arise mainly from oil prices, which are expected to increase by about 35 percent this year, and higher food prices.
SSA's overall fiscal position is projected at a small surplus in 2008. As oil prices rise, the fiscal surplus of the oil exporters should widen. Most other countries can expect only modest changes in their fiscal positions.
A pronounced global slowdown would weaken the prices of non-oil commodities and represent a large shock for SSA. Higher oil prices would reduce domestic demand, boost headline inflation, and worsen the current account and net foreign asset positions of net oil importers. Finally, less favorable financial conditions would reduce external financing and put the brakes on growth.
In addition to these external risks, SSA faces significant internal risks. Although the number of conflicts has declined in recent years, they still ravage the Darfur region of Sudan and the Horn of Africa. Moreover, conditions remain fragile in the Democratic Republic of Congo, and post-election violence in Kenya has taken a toll: it undermined investor confidence and tourism and could delay donor support and stall structural reforms that are needed to sustain recent growth. The conflicts in Darfur and Kenya are also affecting neighboring countries.
The REO says that SSA is less vulnerable to a worsening of the global environment than it was in the 1990s. Smaller current account and fiscal deficits, lower inflation and debt, higher foreign reserves, and stronger policy frameworks have all helped make the region more resilient to external shocks.
Responding to risks
How countries should respond if the downside risks are realized depends on, among other things, their initial conditions; inflation and inflation expectations; fiscal position; and degree of vulnerability, including their levels of foreign debt and reserves. Although countries' policy responses can help moderate the effects of external shocks, not all countries will have room to ease monetary and fiscal policies if the downturn is pronounced.
Forward-looking monetary policy responses could help reduce the output response to adverse demand disturbances. If the slowdown is short lived, countries with comfortable foreign reserves can use their reserves to smooth shocks. In some countries, exchange rate changes may help rebalance growth.
Several countries, especially the oil exporters, will face the challenge of maintaining macroeconomic stability while dealing with still-rising foreign exchange flows. They should identify ways to ensure that their economies can effectively absorb higher spending and make spending and saving decisions in a medium-term framework that takes long-term sustainability into account.
The region's most pressing challenge over the medium term will be to accelerate growth and achieve the Millennium Development Goals. But, although more SSA countries are enjoying robust growth, only a few seem well positioned to halve poverty by 2015.
The spring 2008 REO focuses on the challenge of strengthening the private sector to spur investment in SSA. The region's future economic performance will hinge on the implementation of reforms that improve the investment climate, reduce the cost of doing business, and strengthen governance. A few countries have made encouraging progress on this front, with Kenya and Ghana leading the way on broad-based reforms, including easing business regulation, procedures for property administration, and licensing requirements. In southern Africa, Madagascar, Mauritius, and Mozambique have lifted regulatory obstacles that weighed heavily on the private sector.
Although recent reforms have helped improve governance in a few SSA countries, more needs to be done. Among the region's priorities are to strengthen tax systems, establish transparent and comprehensive budgeting procedures, promote accountability and transparency, and enhance budgetary control.
High-quality infrastructure will also be critical for accelerating growth and for greasing the wheels of the economy. A major bottleneck in most African countries has been an unreliable power supply, and policymakers need to handle regulation and pricing well to improve the supply and provide the right signal to markets.
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