## 1. Restoring the Conditions for Strong and Sustainable Growth

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### Overview
- Chapter prepared by a team led by Maxwell Opoku-Afari, coordinated by Monique Newiak, and comprised of Cleary Haines, Mumtaz Hussain, Nkunde Mwase, and Tim Willems.
- Priority policy messages:
  - Urgent fiscal consolidation for hardest-hit resource-intensive countries to halt sharp declines in international reserves and offset revenue losses.
  - In CEMAC, fiscal measures should be complemented by binding limits on central bank financing to governments.
  - Where the exchange rate instrument is available (such as Angola and Nigeria), allow greater exchange rate flexibility and lift exchange rate restrictions as part of a coherent adjustment package.
  - Additional financing, preferably on concessional terms where appropriate, could complement a credible multi-year plan to restore macroeconomic stability.
  - For other countries, strengthen fiscal and external buffers by shifting toward gradual fiscal consolidation as debt and borrowing costs rise.
  - Boost domestic revenue mobilization, address structural weaknesses, and provide well‑targeted social safety nets to protect vulnerable populations and support progress toward the Sustainable Development Goals (SDGs).

### Global environment: limited room for maneuver
- Global growth and commodity context:
  - Global growth was 3.1 percent in 2016.
  - Global growth forecast ticked up to 3.5 percent in 2017.
  - Commodity prices picked up from low levels but remain far below 2013 peaks and are not expected to change much over the medium term.
  - Underlying drivers include China’s rebalancing from investment to less-commodity-intensive consumption.
- External financing:
  - External financial conditions loosened from peaks about a year earlier, but financing costs for frontier economies in the region remain higher than for other emerging markets and could tighten with U.S. fiscal easing and monetary normalization.
  - Higher-yield issuance episodes since early 2016 indicate countries with delayed adjustments should expect continued higher borrowing costs.

### Regional performance and 2016 outcomes
- Growth and distribution:
  - Sub-Saharan Africa growth estimated at 1.4 percent in 2016.
  - About two-thirds of countries—accounting for 83 percent of the region’s GDP—grew more slowly than in 2015.
  - Weighted average growth = 1.4; Median = 3.7.
- Country-specific outcomes:
  - Oil-exporters: recessionary or stagnating activity:
    - Nigeria: contraction of 1½ percent.
    - CEMAC countries: contraction of ¾ percent.
    - South Sudan: contraction of 13¾ percent.
    - Angola: stagnation.
  - Other resource-intensive countries faced difficulties (examples: South Africa, Ghana, Lesotho, Malawi, Zambia, Zimbabwe).
  - Nonresource-intensive countries generally continued robust growth (examples: Burkina Faso, Mali, Niger, Côte d’Ivoire, Ethiopia, Kenya, Senegal, Tanzania).

### Fiscal policy stance and arrears
- Fiscal deficit dynamics:
  - Average fiscal deficit in sub-Saharan Africa widened to −4½ percent of GDP in 2016 (from −4.1 percent in 2015 and −3½ percent in 2014).
  - Fiscal positions remained above 15 percent of GDP in the Republic of Congo, Equatorial Guinea, and South Sudan.
  - Fiscal deficit in the East African Community (EAC) reached 5¼ percent of GDP in 2016.
  - Fiscal deficit among WAEMU countries was 4½ percent of GDP in 2016 and has been rising since 2012.
- Adjustment composition:
  - Hardest-hit oil exporters focused 2016 adjustment (~2½ percent of GDP) on current spending after sharp capital cuts in 2015, but this was insufficient given further oil income losses and declining non-oil revenues.
  - Some countries strengthened revenue collection (examples: Guinea temporarily increased VAT rate; Tanzania conducted a campaign against corruption and tax evasion).
- Arrears (official end-2016 estimates of stock of arrears):
  - Gabon: more than 7½ percent of GDP.
  - Republic of Congo: at least 4 percent of GDP.
  - Cameroon: almost 3 percent of GDP.
  - Nigeria: 2.2 percent of GDP.
  - Angola: at least 2 percent of GDP.
  - Other notable arrears:
    - Zambia: more than 9 percent of GDP.
    - Guinea: 4½ percent of GDP.
    - Ghana: potentially up to 3 percent of GDP.
  - Increases in arrears also reported in Mozambique, São Tomé and Príncipe, Swaziland, and Uganda.

### Exchange rates, monetary policy, and inflation
- Exchange rate measures and restrictions:
  - Many countries allowed depreciation to absorb external pressures; some used exchange rate restrictions (Angola, Nigeria), introducing distortions and widening parallel market spreads.
  - Angola measures included a priority list for foreign exchange access at the official rate, a special tax on service payments, and stricter limits on foreign currency for travel introduced in 2015.
  - Nigeria maintained restrictions on acquisition of foreign exchange in the domestic market for importation of 40 categories of goods.
  - Parallel market spread in Angola widened from 5 to 10 percent in mid-2014 to around 130 percent at the end of March 2017.
- Inflation and monetary stances:
  - End-of-year inflation in 2016:
    - Angola: 42 percent.
    - Nigeria: 18½ percent.
    - Median inflation in the region accelerated from 4½ percent in 2015 to 5½ percent in 2016.
  - Monetary policy actions:
    - Policy rate increases cited: 150 basis points to 10 percent by end-2016 (example cited).
    - BCEAO increased its credit facility rate by 100 basis points and tightened refinancing window access in December 2016; later cut reserve requirements.
    - Kenya capped lending rates at 400 basis points above the policy rate, affecting private lending.

### External balances, reserves, and financing pressures
- Current account and reserves:
  - Regional current account deficit estimated to have narrowed to 4 percent of GDP in 2016 from almost 6 percent a year earlier, but remains well above the roughly 2 percent prevailing prior to the commodity price shock.
  - In countries with flexible exchange rates where authorities resisted depreciation, international reserves continued to fall.
  - CEMAC countries drew heavily on pooled international reserves as insufficient fiscal adjustment exerted strong external pressures.
- Financing flows:
  - Contraction in foreign direct investment and decreases in portfolio flows were broad-based; investment flows from China remained below 2013 levels despite a slight pickup in 2016.
  - Only Ghana and Nigeria tapped international capital markets since early 2016.
  - Secondary market prices indicate financing conditions significantly tighter for the region relative to peers.

### Public debt and debt-service pressures
- Debt levels and trends:
  - Average public debt-to-GDP ratio increased by some 10 percentage points since 2014 to an average of 42 percent of GDP in 2016 (median of 51 percent).
  - The upward trend in debt accelerated sharply after 2014 across all country categories.
- Drivers and distribution:
  - Oil exporters: earlier stock-flow-adjustments contributed to debt accumulation; post-2014 reserve drawdowns and widening fiscal deficits increased debt.
  - Nonresource-intensive countries: debt rise driven by primary deficits following big increases in public investment; trajectories around or above 50 percent of GDP in many countries (Benin, Cabo Verde, Côte d’Ivoire, Ethiopia, Kenya, Malawi, Mauritius, Mozambique, São Tomé and Príncipe, Senegal, and Togo).
- Debt-service burden:
  - Upward trends in debt-service-to-revenue ratio and external-debt-service-to-exports ratio.
  - For oil exporters: debt service increased seven-fold, from an average of 8 percent of revenues in 2013 to 57 percent in 2016; Nigeria at 66 percent and Angola at 60 percent.
  - Risk of debt distress has increased in a number of countries since 2013.

### Financial sector pressures and cross-border spillovers
- Banking sector strains:
  - Rising nonperforming loans, higher provisioning, strained bank profits, and solvency pressures due to weaker commodity exports, slower activity, and government arrears.
  - Commercial bank lending to the private sector has declined and in some cases contracted.
  - Deteriorating asset quality and declining banking system liquidity observed in CEMAC and Ghana.
  - Structural impediments: concentration of lending on large firms, insufficient credit information, weak foreclosure/collection mechanisms.
- Cross-border interconnectedness:
  - Expansion of pan-African banks: the 14 largest pan-African banks represented more than 50 percent of total deposits in 14 countries and between 30 and 50 percent in an additional nine countries as of 2015.
  - Contagion channels include reputational/confidence effects, ownership linkages, and nonbank activities within banking groups.
  - Loss of correspondent banking relationships affected local banks’ funding and cross-border payments (examples: Angola, Guinea, Liberia).

### Near-term outlook and country projections (baseline)
- Aggregate regional projection:
  - Aggregate growth modest rebound to 2.6 percent in 2017 is expected, driven largely by improvements in the three largest economies (Angola, Nigeria, South Africa), which are expected to contribute about three-quarters of the regional rebound.
- Selected country forecasts for 2017:
  - Nigeria: growth forecast at 0.8 percent.
  - South Africa: projected growth of 0.8 percent.
  - Angola: expected growth of 1.3 percent.
  - CEMAC subcases:
    - Equatorial Guinea: −5 percent.
    - Cameroon: 3.7 percent.
    - Gabon: 1 percent.
    - Republic of Congo: 0.6 percent.
- Resource-intensive and nonresource-intensive growth notes:
  - Resource-intensive countries: growth foreseen to pick up gradually, reaching close to 3 percent after an estimated 2 percent in 2016.
  - Tanzania projected at 6¾ percent.
  - Ghana expected to reach 5.8 percent.
  - Côte d’Ivoire expected at 6.9 percent; Senegal at 6.8 percent.
- Humanitarian and climate risks:
  - Drought and pest outbreaks affect parts of eastern and southern Africa; about half of sub-Saharan African countries reported food insecurity situations that could potentially impact 60 million more people this year.
  - Famine declared in South Sudan and looming in northeastern Nigeria.

### Risks and implementation challenges
- External risks:
  - Uncertainties around the extent of U.S. fiscal easing and monetary normalization; faster normalization could cause a sharp U.S. dollar appreciation and tighter financing conditions.
  - A shift toward protectionism could impede global growth and commodity prices.
- Implications of stronger U.S. dollar:
  - Upside: depreciation of currencies pegged to the euro could foster price competitiveness in WAEMU and CEMAC and raise domestic-currency proceeds for commodity exporters.
  - Downside: tighter financing conditions, higher external debt burdens, and potential spikes in inflation.
- Domestic risks:
  - Delays in policy adjustments and political developments (e.g., Angola and Nigeria exchange restrictions; CEMAC fiscal consolidation) and upcoming elections (Angola and Kenya) could complicate reforms.

### Policy guidance: restoring macroeconomic stability and growth
- General approach:
  - Restore macroeconomic stability in a growth-friendly manner with country-tailored measures; stability is a prerequisite for sustained, inclusive growth.
- Hardest-hit resource-intensive and oil-exporting countries:
  - Urgent fiscal consolidation to stop reserve declines and offset revenue losses.
  - Implement binding limits on central bank financing in CEMAC.
  - Where exchange rate flexibility is available (Angola and Nigeria), allow the exchange rate to absorb pressures and eliminate exchange restrictions.
  - Complement adjustment with additional financing on concessional terms where appropriate.
- Other country groups:
  - Strengthen fiscal and external buffers through gradual fiscal consolidation as debt and borrowing costs rise.
  - WAEMU: implement planned fiscal consolidation at country level and improve policy coordination at the monetary union level.
  - Fast-growing EAC countries: trim public investment scaling-up to levels consistent with fiscal and external sustainability.
- Structural fiscal priorities:
  - Boost domestic revenue mobilization—median country has potential to increase tax revenues by about 3 to 6½ percent of GDP.
  - For resource-intensive countries, broaden tax bases away from commodity-related income and balance income and indirect taxes.
  - Leverage financial development (including mobile banking) to broaden the tax base and reach the informal sector.
  - Strengthen tax administration and use e-filing and other efficiency gains (examples: Mauritius, Tanzania).
- Financial supervision and regional collaboration:
  - Strengthen cross-border collaboration for consolidated supervision of pan-African banks and reinforce financial stability frameworks.

### Social safety nets and inclusion
- Role and design:
  - Well-targeted social safety nets complement fiscal consolidation by protecting the poor at lower fiscal cost.
  - Many existing programs are fragmented, not well-targeted, and cover only a small share of the population.
  - Consolidate benefits into fewer large programs with clear objectives and strong targeting; phase out regressive expenditures (e.g., fuel subsidies).
  - Emphasize poverty-targeted (means-tested or proxy-means-tested) cash transfer programs.
- Program priorities:
  - Build common institutional platforms and shared instruments (social registries, efficient payment systems).
  - Develop shock-responsive programs that can be expanded vertically or horizontally and triggered efficiently.
  - Combine transfers with complementary investments in human capital (conditional transfers, school feeding).
- Fiscal space and progressive funding:
  - Rebalance from regressive to more progressive expenditures, improve revenue mobilization, and enhance public investment efficiency to expand social safety nets.
  - Subsidy distribution example: less than 15 percent of kerosene subsidies are received by the bottom 20 percent; 3 percent of LPG and gasoline subsidies are received by the bottom 20 percent.
  - Inefficiency example: providing US$1 to the poorest 40 percent households through untargeted gasoline subsidies costs US$23 on average in sub-Saharan African countries.

*Regional Economic Outlook: Sub-Saharan Africa — Chapter 1 (sreo0517-chap1)*

### 1. Restoring the Conditions for Strong and

### 1. Restoring the Conditions for Strong and Sustainable Growth

### Overview
- Chapter prepared by a team led by Maxwell Opoku-Afari, coordinated by Monique Newiak, and comprised of Cleary Haines, Mumtaz Hussain, Nkunde Mwase, and Tim Willems.
- Priority policy messages:
  - Urgent fiscal consolidation for hardest-hit resource-intensive countries to halt sharp declines in international reserves and offset revenue losses.
  - In CEMAC, fiscal measures should be complemented by binding limits on central bank financing to governments.
  - Where the exchange rate instrument is available (such as Angola and Nigeria), allow greater exchange rate flexibility and lift exchange rate restrictions as part of a coherent adjustment package.
  - Additional financing, preferably on concessional terms where appropriate, could complement a credible multi-year plan to restore macroeconomic stability.
  - For other countries, strengthen fiscal and external buffers by shifting toward gradual fiscal consolidation as debt and borrowing costs rise.
  - Boost domestic revenue mobilization, address structural weaknesses, and provide well‑targeted social safety nets to protect vulnerable populations and support progress toward the Sustainable Development Goals (SDGs).

### Limited Room for Maneuver — Global Environment
- Global growth context:
  - Global growth was 3.1 percent in 2016.
  - Global growth forecast ticked up to 3.5 percent in 2017.
- Commodity environment:
  - Commodity prices picked up from low levels but remain far below 2013 peaks and are not expected to change much over the medium term.
  - Underlying drivers include China’s rebalancing from investment to less-commodity-intensive consumption.
- External financing:
  - External financial conditions loosened from peaks about a year earlier, but financing costs for frontier economies in the region remain higher than for other emerging markets and could tighten with U.S. fiscal easing and monetary normalization.
  - Higher-yield issuance episodes since early 2016 indicate countries with delayed adjustments should expect continued higher borrowing costs.

### Regional Performance and 2016 Outcomes
- Regional growth:
  - Sub-Saharan Africa growth estimated at 1.4 percent in 2016.
  - Distribution: about two-thirds of countries—accounting for 83 percent of the region’s GDP—grew more slowly than in 2015.
  - Weighted average growth = 1.4; Median = 3.7 (Figure 1.3).
- Country-specific outcomes:
  - Oil-exporters: recessionary or stagnating activity:
    - Nigeria: contraction of 1½ percent.
    - CEMAC countries: contraction of ¾ percent.
    - South Sudan: contraction of 13¾ percent.
    - Angola: stagnation.
  - Other resource-intensive countries faced difficulties from political uncertainty, weak fundamentals, and droughts (examples: South Africa, Ghana, Lesotho, Malawi, Zambia, Zimbabwe).
  - Nonresource-intensive countries generally continued robust growth supported by domestic factors (examples: Burkina Faso, Mali, Niger, Côte d’Ivoire, Ethiopia, Kenya, Senegal, Tanzania).

### Fiscal Policy: Expansionary Stance and Arrears
- Fiscal deficits and trends:
  - Average fiscal deficit in sub-Saharan Africa widened to −4½ percent of GDP in 2016 (from −4.1 percent in 2015 and −3½ percent in 2014).
  - Deterioration most evident among oil exporters; fiscal positions remained above 15 percent of GDP in the Republic of Congo, Equatorial Guinea, and South Sudan.
  - Fiscal deficit in the East African Community (EAC) reached 5¼ percent of GDP in 2016.
  - Fiscal deficit among WAEMU countries was 4½ percent of GDP in 2016 and has been rising since 2012.
- Nature of adjustments:
  - Hardest-hit oil exporters focused 2016 adjustment (~2½ percent of GDP) on current spending after sharp capital cuts in 2015, but this was insufficient to arrest fiscal deterioration due to further oil income losses and declining non-oil revenues.
  - Some countries cut recurrent and capital spending; a few strengthened revenue collection (examples: Guinea temporarily increased VAT rate; Tanzania conducted a campaign against corruption and tax evasion).
- Domestic and external arrears:
  - Widespread accumulation of domestic arrears and some external arrears.
  - Official end-2016 estimates of stock of arrears:
    - Gabon: more than 7½ percent of GDP.
    - Republic of Congo: at least 4 percent of GDP.
    - Cameroon: almost 3 percent of GDP.
    - Nigeria: 2.2 percent of GDP.
    - Angola: at least 2 percent of GDP.
  - Other notable arrears:
    - Zambia: more than 9 percent of GDP.
    - Guinea: 4½ percent of GDP.
    - Ghana: potentially up to 3 percent of GDP.
  - Increases in arrears also reported in Mozambique, São Tomé and Príncipe, Swaziland, and Uganda.

### Exchange Rates and Monetary Policy Responses
- Exchange rate adjustments and restrictions:
  - Many countries allowed depreciation to absorb external pressures; some used exchange rate restrictions (Angola, Nigeria) to stem reserve depletion, introducing economic distortions and widening parallel market spreads.
  - Angola measures included a priority list for foreign exchange access at the official rate, a special tax on service payments, and stricter limits on foreign currency for travel introduced in 2015.
  - Nigeria maintained restrictions on acquisition of foreign exchange in the domestic market for importation of 40 categories of goods.
  - Rationing and restrictions also intensified in Burundi, Ethiopia (foreign exchange and import permit restrictions), and Zimbabwe (various current and capital account restrictions).
  - Parallel market spread in Angola widened from 5 to 10 percent in mid-2014 to around 130 percent at the end of March 2017.
- Inflation and monetary stances:
  - End-of-year inflation in 2016:
    - Angola: 42 percent.
    - Nigeria: 18½ percent.
    - Median inflation in the region accelerated from 4½ percent in 2015 to 5½ percent in 2016.
  - Monetary policy divergence:
    - Resource-intensive countries: monetary policy tended to remain loose despite tightening in some cases; policy rates remained very low and negative in real terms in Angola and Nigeria.
    - CEMAC (BEAC) used accommodative policy including credit to governments, increased bank refinancing, and cuts in reserve requirements, but nearly all CEMAC countries except Cameroon reached or exceeded the statutory limit for advances from the BEAC (Figure 1.7).
    - Nonresource-intensive countries: mixed responses. Examples:
      - Uganda reversed 550 basis points of the 600 basis point cumulative policy rate hike introduced earlier.
      - Tanzania reduced the discount rate in March 2017 by 400 basis points.
      - Kenya cut the policy rate (timing and magnitude referenced in text).

### Implications and Policy Priorities
- Immediate priorities for hardest-hit resource-intensive countries:
  - Urgent fiscal consolidation to stop reserve declines and offset revenue losses.
  - Implement binding limits on central bank financing in CEMAC.
  - Use exchange rate flexibility and lift exchange restrictions where feasible (Angola, Nigeria) to remove distortions.
  - Complement adjustment with additional financing on concessional terms where appropriate.
- Priorities for other countries:
  - Strengthen fiscal and external buffers through gradual fiscal consolidation as debt and borrowing costs rise.
  - For WAEMU: implement planned fiscal consolidation at country level and improve policy coordination at monetary union level to preserve external stability.
  - For fast-growing East African countries: steadily trim the scaling up of public investment to levels consistent with fiscal and external sustainability.
- Structural and social policy priorities:
  - Boost domestic revenue mobilization and widen noncommodity revenue sources.
  - Address structural weaknesses to foster private sector activity.
  - Provide well-targeted social safety nets to protect the most vulnerable and support Sustainable Development Goals progress.

*Regional Economic Outlook: Sub-Saharan Africa — Chapter 1*

### 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH

### 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH

### Monetary and regional central bank actions
- Central banks and regional authorities tightened policy to address slowing private credit growth and low sovereign financing costs:
  - Policy rate increases cited: 150 basis points to 10 percent by end-2016.
  - BCEAO (regional central bank of the WAEMU) increased its credit facility rate by 100 basis points and tightened access to its refinancing window in December 2016; impact mitigated by a subsequent cut in reserve requirements for banks.
- Cheap access to the BCEAO refinancing window had encouraged banks to rely on that funding source and invest in treasury securities, keeping sovereign financing costs low amid fiscal expansion.
- Kenya’s policy to cap lending rates at 400 basis points above the policy rate distorted lending markets, prompting banks to cut back on private lending and increase investment in government debt.

### Rising external pressures
- Current account deficits:
  - Regional current account deficit estimated to have narrowed to 4 percent of GDP in 2016 from almost 6 percent a year earlier, but remains well above the roughly 2 percent prevailing prior to the commodity price shock.
- Financing pressures and flows:
  - Oil exporters: current account deficits not always matched with equivalent financing, exerting pressure on reserves.
  - Contraction in foreign direct investment and decreases in portfolio flows were broad-based across the region, including lower-than-2013 investment flows from China (picked up slightly in 2016 but remained below 2013 levels).
  - Access to international capital markets remained tight for sub-Saharan African frontier market economies; only Ghana and Nigeria tapped the market since early 2016.
  - Secondary market prices indicate financing conditions significantly tighter for the region relative to peers (see Figure 1.9 summary).
- Reserves and exchange rate dynamics:
  - In countries with flexible exchange rates where authorities resisted depreciation, international reserves continued to fall.
  - CEMAC countries drew heavily on pooled international reserves as insufficient fiscal adjustment exerted strong external pressures.

### Increasing public indebtedness
- Public debt trends:
  - Average public debt-to-GDP ratio increased by some 10 percentage points since 2014 to an average of 42 percent of GDP in 2016 (median of 51 percent).
  - This average is the highest value since many countries received debt relief in the 2000s under the Heavily Indebted Poor Countries/Multilateral Debt Relief Initiative.
  - The upward trend in debt accelerated sharply after 2014 across all country categories in the region.
- Drivers of debt accumulation:
  - Oil exporters: large part of debt accumulation between 2011 and 2013 reflected stock-flow-adjustments (net acquisition of financial assets, including reserves) during boom periods; post-2014, reserves were drawn down and fiscal deficits widened, increasing debt.
  - Exchange rate movements (Angola) and U.S. dollar appreciation against the euro (CEMAC) increased external debt burdens.
  - Nonresource-intensive countries: debt rise driven by primary deficits following big increases in public investment; debt trajectories now around or above 50 percent of GDP in many nonresource-intensive countries (Benin, Cabo Verde, Côte d’Ivoire, Ethiopia, Kenya, Malawi, Mauritius, Mozambique, São Tomé and Príncipe, Senegal, and Togo).
- Debt service burdens and risk of distress:
  - Upward trends in both debt-service-to-revenue ratio and external-debt-service-to-exports ratio.
  - For oil exporters: debt service increased seven-fold, from an average of 8 percent of revenues in 2013 to 57 percent in 2016; Nigeria at 66 percent and Angola at 60 percent.
  - Risk of debt distress has increased in a number of countries since 2013.

### Mounting financial sector pressures
- Rising nonperforming loans and bank profitability:
  - Weakening commodity exports, slowdown in activity, and government payment arrears have restricted firms’ capacity to service loans, widely increasing nonperforming loans, triggering higher provisioning, straining bank profits, and weighing on solvency.
- Credit growth and liquidity:
  - Commercial bank lending to the private sector has declined and in some cases contracted.
  - Deteriorating asset quality and declining banking system liquidity observed in specific areas (CEMAC, Ghana).
  - Tighter monetary policy in Ghana and Zambia, weak growth in South Africa, possible ending of credit cycle in EAC, and increased exposure to government (CEMAC, WAEMU, Zambia) have further constrained lending.
- Structural impediments:
  - Many banks concentrate lending on large firms, often with significant exposure to government or construction sectors, creating vulnerability to large borrower defaults (examples: Chad, Sierra Leone, Uganda; Benin, Equatorial Guinea, Malawi, São Tomé and Príncipe, Sierra Leone).
  - Insufficient information on creditworthiness (near absence of credit and collateral registries) and weak foreclosure/collection mechanisms (ineffective procedures, slow judiciary) impede credit growth and asset quality.

### Emerging cross-border spillover risks
- Financial sector interconnectedness:
  - Pan-African banks have expanded across the region; many headquartered in countries with weakening growth (Nigeria, South Africa) and with subsidiaries across numerous countries.
  - The 14 largest pan-African banks represent more than 50 percent of total deposits in 14 countries, and between 30 and 50 percent in an additional nine countries, surpassing the importance of long-established European banks in the region as of 2015.
- Corporate cross-border linkages:
  - Increased intra-regional firm ownership can foster trade integration and technology sharing but also exposes subsidiaries to shocks from host or headquarter countries.
- Other channels:
  - Loss of correspondent banking relationships affected local banks’ funding and cross-border payments, possibly disrupting trade (Angola, Guinea, Liberia).
  - Sharp slowdowns in portfolio flows from abroad can materially affect bank funding (example: South Africa).

### Near-term outlook and growth projections
- Baseline regional growth projection:
  - Aggregate growth modest rebound to 2.6 percent in 2017 is expected, driven largely by improvements in the three largest economies (Angola, Nigeria, South Africa), which are expected to contribute about three-quarters of the regional rebound.
- Country-specific outlooks:
  - Nigeria: growth forecast at 0.8 percent in 2017 on the back of higher oil production (contingent on relative peace in the Niger Delta) and strong agricultural production.
  - South Africa: projected growth of 0.8 percent in 2017 as the drought’s impact fades and terms of trade improve; political risks remain significant.
  - Angola: expected growth of 1.3 percent in 2017, supported by a more expansive fiscal stance ahead of elections and improvement in the terms of trade.
  - CEMAC region: situation expected to remain difficult; fiscal consolidation strategy aims to lower high-import-content spending, eliminate low-growth expenditure items, and gradually repay domestic arrears to limit growth impact.
    - Equatorial Guinea: continued decline in oil production expected to keep it in deep recession (−5 percent).
    - Cameroon: further cuts in capital spending likely to slow growth to 3.7 percent.
    - Gabon: projected growth of 1 percent with cuts in capital spending.
    - Republic of Congo: new oil production expected to push growth up to 0.6 percent despite deep fiscal adjustment.

*Source: sreo0517-chap1 - 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH (IMF PDF).*

### 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH

### 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH

### Growth outlook and recent developments
- Resource-intensive countries
  - Economic growth is foreseen to pick up gradually, reaching close to 3 percent after an estimated 2 percent in 2016, helped by somewhat improved terms of trade.
  - Growth above 5 percent is projected in Mali and Niger on the back of strong public investment and favorable harvests, notwithstanding continued security issues.
  - Tanzania is projected to remain the fastest-growing resource-intensive country with a rate of 6¾ percent, driven by continued strong mining and service activities.
  - Growth in Ghana is expected to reach 5.8 percent, boosted by the coming on-stream of new oil fields.
  - Economic and social vulnerabilities are expected to increase further in Zimbabwe, despite some rebound in agricultural production.
- Nonresource-intensive countries
  - Growth momentum is expected to remain robust overall but subject to new shocks.
  - Côte d’Ivoire growth is expected to remain brisk at 6.9 percent, but this marks a deceleration from last year due to lower cocoa prices and intensifying social tensions.
  - The EAC countries (Kenya, Rwanda, Tanzania, and Uganda) are foreseen to continue to grow at 5 percent or more, supported by sustained public spending, though ongoing drought would dent momentum.
  - Growth is forecast to reach 6.8 percent in Senegal with continued implementation of the Plan Sénégal Emergent.
  - Economic activity is expected to strengthen in Madagascar (expanding mining projects and an increase in vanilla prices) and in Comoros (improvement in electricity production).
- Humanitarian and climate shocks
  - Political tensions and security issues continue to weigh on activity in Burundi, Central African Republic, Chad, Democratic Republic of the Congo, Mali, and South Sudan.
  - A new bout of drought affects parts of eastern Africa (Ethiopia, Kenya, South Sudan, and Tanzania) as La Niña hits these countries.
  - Pest and armyworm infestations impact agricultural activity in Democratic Republic of Congo, Malawi, Namibia, South Africa, Zambia, and Zimbabwe.
  - About half of sub-Saharan African countries have reported food insecurity situations that could potentially impact 60 million more people this year.
  - Famine has been declared in South Sudan and is looming in northeastern Nigeria as a result of past and ongoing conflicts.

### Macroeconomic projections and heterogeneity
- Inflation
  - Outlook is extremely heterogeneous across the region.
  - Inflationary pressures are foreseen to remain in large oil exporters (Angola, Nigeria) and South Sudan is forecast to continue to suffer from excessive inflation.
  - Burundi, Democratic Republic of Congo, Ghana, Malawi, Mozambique, and Sierra Leone are foreseen to register inflation rates in excess of 10 percent.
  - Inflation is expected to remain below 3 percent in the WAEMU and CEMAC countries.
  - Some Eastern African countries are expected to see a modest uptick in inflation reflecting food price pressures from drought.
- Fiscal balances and deficits
  - The aggregate fiscal deficit is expected to remain elevated at 4½ percent of GDP, unchanged from 2016.
  - CEMAC countries are planning fiscal measures that would likely see the overall deficit decline from 7.2 to 3.4 percent of GDP in 2017 for the union as a whole.
  - Among oil importers, the average fiscal deficit is expected to narrow marginally from 4.3 to 4.2 percent of GDP.
  - Ghana’s deficit is foreseen to decline to 5 percent of GDP (6.8 percent on cash basis) after pre-election slippages drove fiscal deficits to about 8¼ percent of GDP in 2016.
  - Malawi’s deficit is expected to decline from 7.8 to 5.3 percent of GDP, with fiscal and monetary policy working to reduce inflation.
  - Continued public investment in the largest WAEMU countries is forecast to increase the currency union’s fiscal deficit from 4.5 percent to 4.6 percent of GDP in 2017.
  - The fiscal deficit in the EAC is expected to remain elevated at 5.3 percent of GDP.
- External balances and reserves
  - Current account balances and reserves coverage are referred to as weakening for many countries, with specific country risks highlighted (see underlying tables and figures in the source).

### Implementation risks amid global uncertainty
- External risks
  - Uncertainties persist despite a slight improvement in the global outlook and generally accommodating financial conditions.
  - The extent of U.S. fiscal easing and the associated path of monetary policy normalization remain uncertain.
  - Faster-than-expected normalization of monetary policy could imply a sharp U.S. dollar appreciation and tighter financing conditions for countries with deteriorated fundamentals.
  - A shift toward inward-looking policies, including protectionism, could impede global growth and negatively impact commodity prices and exports from the region.
- Implications of a stronger U.S. dollar
  - Upside: stronger U.S. dollar against the euro would imply depreciation of currencies pegged to the euro, fostering price competitiveness in the WAEMU and CEMAC and higher domestic-currency proceeds for commodity exporters.
  - Downside:
    - Tighter financing conditions for frontier and emerging market economies in the region.
    - Higher external debt burden because a large share of sovereign debt in the region is denominated in foreign currency.
    - A depreciation of national currencies could also result in a spike in inflation.
- Domestic risks
  - Delays in policy adjustments and political developments pose risks in some countries.
  - Angola and Nigeria: ongoing reliance on exchange restrictions will continue to depress non-oil sector activity and heighten risk of a disorderly adjustment.
  - CEMAC: implementation of fiscal consolidation strategy is paramount.
  - Upcoming elections in Angola and Kenya could complicate addressing weaknesses in underlying fundamentals.

### Policy guidance: restoring macroeconomic stability and growth
- General approach
  - Achieving sustained, durable, and inclusive growth requires decisive efforts to restore macroeconomic stability in a growth-friendly manner.
  - Policy measures must be tailored to country circumstances; restoring macroeconomic stability is a prerequisite.
- Resource-intensive and oil-exporting countries
  - Need decisive, sizable, and restorative measures to re-anchor macroeconomic stability.
  - In the CEMAC, further fiscal adjustment is critical; delaying adjustment by relying on central bank financing and reserves has reached its limits.
  - For oil exporters with scope for exchange rate flexibility (Angola and Nigeria), allow the exchange rate to fully absorb pressures and eliminate exchange restrictions to address private sector damage and support growth recovery.
- Nonresource-intensive countries, WAEMU and EAC
  - Ensure public investment, which has led to rapidly rising debt levels, is returned to levels consistent with medium-term fiscal and external sustainability.
  - In the WAEMU, stronger coordination is needed to ensure individual country deficits are consistent with regional stability, guided by regional convergence criteria.
  - Greater focus on domestic revenue mobilization is required to complement public investment and crowd-in private investment.

### Structural reforms and fiscal-side priorities
- Boost domestic revenue mobilization
  - The median country in the region has the potential to increase tax revenues by about 3 to 6½ percent of GDP.
  - For resource-intensive countries, broaden tax sources away from commodity-related income by better balancing income taxes and indirect taxes and broadening the tax base to improve resilience of tax revenues.
  - Strengthen and streamline tax procedures; examples cited include Mauritius and Tanzania in the mid-2000s and tapping e-filing programs to improve efficiency.
  - Mauritius example: tax revenues rose from 17 percent of GDP in 2007 to almost 20 percent of GDP in 2016, while reducing the corporate tax rate from 25 to 15 percent.
  - Tanzania example: efficiency gains from strengthening the tax revenue authority resulted in close to a 5 percentage point increase in tax revenues within a decade.
- Leverage financial development to broaden the tax base
  - The large informal sector (cash-based economy) constrains revenue mobilization.
  - Evidence supports financial development (including mobile banking) to enhance domestic revenue mobilization as informal firms grow (Figure 1.16).
- Strengthen financial supervision and cross-border collaboration
  - Increase efforts to strengthen cross-border collaboration for effective consolidated supervision, particularly for pan-African banks, to safeguard financial stability.
  - Recent deterioration in financial stability indicators points to emerging stress with potential spillovers.
- Address business climate weaknesses and diversify economies
  - Reforms to improve the business climate and support broad financial sector development are critical to unleash private sector potential and foster diversification and resilience.

### Social safety nets and inclusion
- Social safety nets as complementary to fiscal consolidation
  - Strengthening social safety nets and implementing fiscal consolidation are complementary goals; safety nets mitigate the impact of consolidation on the poor and can be pursued in parallel at a lower fiscal cost.
  - Addressing design and implementation gaps could enhance effectiveness of existing programs (Box 1.4).
  - Safety nets should set the stage for more emphasis on SDGs over the medium term.
- Program design and consolidation
  - Countries should develop more integrated social safety net systems; many programs are fragmented, not well-targeted, and cover only a small share of the population.
  - Consolidating benefits into a smaller number of large programs with clear objectives and strong targeting, while phasing out regressive expenditures (e.g., fuel subsidies), would enhance efficiency and increase room to expand adequate coverage.
  - Emphasis could shift toward poverty-targeted (means-tested or proxy-means-tested) cash transfer programs, which have shown substantial impacts on poverty in other regions and in African pilot programs.
- Coverage indicators
  - Social safety net coverage and poverty headcount vary across country groups (Figure 1.17), with many countries showing limited coverage relative to poverty rates.

*Source: sreo0517-chap1 - 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH (IMF).*

### Box 1.1. Potential Spillovers from the Financial Sector

### Box 1.1. Potential Spillovers from the Financial Sector

### Overview and recent expansion
- African financial systems have become increasingly interwoven, reflecting the rapid expansion of pan-African banks over the last 15 years (IMF 2015a).
- The number of subsidiaries of the largest pan-African banking groups, with headquarters in Côte d’Ivoire, Kenya, Morocco, Nigeria, South Africa, and Togo, has more than tripled since the early 2000s.
- The expansion of pan-African banks accelerated following the global financial crisis, partly due to the retrenchment of lenders from advanced economies.
- As of 2015, the 14 largest pan-African banks had a share of total deposits above 50 percent in 14 countries and between 30 and 50 percent in an additional nine countries.

### Organizational structure and implications for contagion risk
- Expansion mainly through subsidiaries with limited integration across affiliate networks or with parent banks in terms of funding or capitalization.
  - Evidence: interbank funding from home to host is negligible for most host countries in the illustrated cases of banks headquartered in South Africa and Nigeria.
  - Net interbank exposure from parent to subsidiary is positive only for Kenya and Tanzania (Nigerian banks), and for Burkina Faso, Kenya, Nigeria, and Uganda (South African banks).
- Limited interbank exposures are mainly directed from host to home, reflecting subsidiaries funding themselves domestically and depositing excess liquidity in parent institutions.
  - This pattern suggests a centralized approach to liquidity risk management, allowing parents to open centrally managed cash and collateral resources to subsidiaries under temporary financial pressures (Reinhardt and Riddiough 2014).
  - Countervailing risk: liquidity may be drained from subsidiaries in the event of financial pressures on the parent.
- Direct cross-border lending to the nonbank private sector is limited.
  - Analysis hampered by lack of Bank for International Settlements reporting for most countries in the region (except South Africa).
  - Available information suggests lending to the private sector is mainly extended by domestically funded subsidiaries.
  - Lending by subsidiaries appears more stable than direct cross-border lending (Peek and Rosengren 2000; De Haas and van Lelyveld 2006).

### Contagion channels and timing of effects
- Local banking systems might be protected from first-round contagion effects that typically transmit through interbank funding and direct cross-border lending.
- Risk remains that shocks propagate later via reputational risks and confidence effects, spreading problems in one part of a banking group to other affiliates.
- Contagion is also possible through interlinkages with other sectors or business segments sensitive to regional or global lending conditions.

### Amplifying features of pan-African bank expansion and business models
- Increasing complexity: pan-African banks now encompass nonbank activities such as insurance and securities dealings, particularly in the Southern African region, increasing linkages between banks and other financial institutions of the same group and between home and host countries (securities exposures).
- Ownership linkages:
  - Pan-African banks hold significant ownership stakes in a wide variety of financial and nonfinancial entities.
  - Nigerian banking groups have the largest number of controlling ownership linkages with the corporate sectors of other African economies; South African banking groups have comparatively few controlling ownership linkages.
  - South African banks are heavily connected to the rest of Africa via noncontrolling interests, particularly in the financial sector.
  - These ownership patterns create links between bank and nonbank corporate sectors and across banking groups, heightening possibilities of contagion within countries’ financial sectors and to the real economy.
  - Illustrative example: in 2014 the South African banking group Nedbank acquired a share of about 20 percent of the Togolese group Ecobank Transnational Incorporated.

*Prepared by Daniela Marchettini.*

### Box 1.4 (continued)

### Box 1.4 (continued)

### Targeting of Social Safety Nets
- Figure indicates types of targeting used in social safety net programs across countries: Categorical targeting; Geographic targeting; Poverty targeting; Geographic and categorical targeting; All three; Missing.
- Country abbreviations shown include: COG, GAB, NGA, AGO, CMR, TCD, SSD, MLI, NAM, ZMB, GIN, BWA, GHA, CAF, BFA, TZA, ZWE, ZAF, COD, LBR, SLE, GNB, STP, TGO, MOZ, MUS, BDI, SYC, MWI, BEN, SEN, CIV, RWA, ETH, CPV, LSO, COM, KEN, MDG, UGA.
- Program shares are reported as "Share of spending, percent" (visual categorical breakdown across countries).

### Social Safety Net Public Expenditure
- Panel presents "Social Safety Net Public Expenditure" as "Percent of GDP" for a range of countries over the period 2010–16, including only active programs.
- Countries are grouped in the figure legend as: Oil exporters; Resource-intensive countries; Nonresource-intensive countries.
- Country labels in the expenditure figure include: AGO, NGA, TCD, GAB, CMR, COG, SSD, NAM, ZAF, CAF, BWA, BFA, GIN, MLI, LBR, COD, TZA, GHA, ZWE, ZMB, SLE, LSO, MUS, BEN, BDI, CPV, SYC, GNB, RWA, ETH, SEN, MDG, MWI, UGA, COM, MOZ, KEN, TGO, CIV, STP.

### Design Matters (program design and implementation priorities)
- No silver bullets; evidence emphasizes:
  - Effective targeting mechanisms.
  - Appropriate levels and predictability and regularity of transfers.
  - Long-term sustainability of programs.
  - Combining complementary activities (example: school feeding).
  - Accounting for constraints faced by different groups, such as youth and women.
  - Stronger access to quality basic services.
- Priorities for developing a safety net system (synthesized from World Bank 2012; Monchuk 2014; Beegle, Coudouel, and Monsalve 2017):
  - Create synergies by building links between existing institutions and programs:
    - Establish a common institutional platform.
    - Develop shared instruments to improve efficiency and coordination (particularly social registries shared by all programs and efficient payment systems).
  - Develop the opportunity aspect of programs to increase human capital, productivity, and resilience:
    - Examples include cash transfers conditioned on school attendance or enrollment in health programs.
  - Establish shock-responsive programs that can be triggered efficiently and timely:
    - Build on existing programs and expand them vertically (temporarily adjusting amounts and frequency) or horizontally (adding temporary beneficiaries).
    - Trigger new programs for a limited period ideally building on administrative systems of permanent programs.
    - Temporarily modify program focus or target when appropriate.
    - Efficiency gains from predefined instruments and an adequate financing strategy for timely response.

### Progressive Funding
- Rebalancing from regressive to more progressive expenditures, revenue mobilization, and enhanced public investment efficiency can provide resources to expand social safety nets.
- Fuel subsidies generally benefit richer households; specific distribution notes:
  - Less than 15 percent of kerosene subsidies are received by the bottom 20 percent (kerosene is mostly used by the poor).
  - 3 percent of liquified petroleum gas (LPG) and gasoline subsidies are received by the bottom 20 percent.
- Inefficiency example:
  - For sub-Saharan African countries, on average, providing US$1 to the poorest 40 percent households through untargeted gasoline subsidies costs US$23 (Coady, Flamini, and Sears 2015).

### Figures and Data Notes
- Figure 1.4.2: Social Safety Nets in Sub-Saharan Africa — Source: Beegle, Coudouel, and Monsalve (2017), drawing on the ASPIRE database. Note: The period of reference is 2010–16, and includes only active programs.
- Figure 1.4.3: Sub-Saharan Africa: Distribution of Subsidy Benefit — Source: Coady, Flamini, and Sears (2015). Note: LPG = liquified petroleum gas. Distribution is shown across quintiles (Bottom, 2nd quintile, 3rd quintile, 4th quintile, Top) for Total direct impact, Gasoline, Kerosene, LPG.

*Source: Box 1.4 (continued), Chapter 1, REGIONAL ECONOMIC OUTLOOK: SUB-SAHARAN AFRICA.*

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_Source: https://www.imf.org/-/media/files/publications/reo/afr/2017/may/pdf/sreo0517-chap1.pdf_