## Regional Economic Outlook: Sub‑Saharan Africa (April 2017) ## Source details **Canonical URL:** [Regional Economic Outlook: Sub‑Saharan Africa (April 2017)](https://www.imf.org/-/media/files/publications/reo/afr/2017/may/pdf/sreo0517.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/afr/2017/may/pdf/sreo0517.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/afr/2017/may/pdf/sreo0517.pdf.json) --- ### Executive summary — growth outlook, drivers, and policy priorities - Growth performance and outlook - 2016: growth slowed in about two-thirds of countries accounting for 83 percent of regional GDP; regional growth estimated at just 1½ percent. - 2017: modest rebound to 2½ percent expected, driven largely by one-off factors in three largest countries (recovery in oil production in Nigeria, higher public spending ahead of elections in Angola, fading of drought effects in South Africa) and modest improvements in terms of trade. - Alternative regional estimates in the document: 2016 = 1.4 percent; 2017 = 2.6 percent. - Some large western and eastern African countries expected to grow at 5 percent to 7½ percent. - At projected pace regional growth will continue to fall well short of past trends and barely exceed population growth. - Main drivers of deterioration in 2016 - Insufficient and delayed policy adjustments, especially in resource-intensive countries. - Country outcomes cited: - Nigeria: contraction of 1½ percent. - CEMAC countries: contraction of ¾ percent. - South Sudan: contraction of 13¾ percent. - Angola: stagnation. - Other commodity exporters (Ghana, Zambia, Zimbabwe) facing larger fiscal deficits. - Nonresource-intensive fast growers (Côte d’Ivoire, Kenya, Senegal) maintain high growth but show rising public debt, increased borrowing costs, some arrears, and rising nonperforming loans. - Weather, pests, and security: droughts, pest infestations, and conflicts contributed to food insecurity in about half of countries; famine declared in South Sudan and looming in northeastern Nigeria. - External environment - Commodity price recovery limited: oil prices up from early-2016 troughs but far below 2011–13 averages; not expected to recover much further. - Prospect of U.S. monetary policy normalization could tighten external financing conditions. - Frontier market financing costs remain higher than for other emerging markets; spreads and issuance at higher yields since early 2016. - Fiscal and macro stance - Average fiscal deficit widened to −4½ percent of GDP in 2016 (from −4.1 percent in 2015 and −3½ percent in 2014). - Fiscal balances worse among oil exporters; fiscal balances remained above 15 percent of GDP in Republic of Congo, Equatorial Guinea, and South Sudan. - Reported adjustment amounts around 2½ percent of GDP in some oil exporters; adjustments focused on current spending after 2015 capital cuts. - Policy priorities (summary) - Resource‑intensive countries: urgent fiscal consolidation; in CEMAC, binding limits on central bank financing; where available, greater exchange rate flexibility (Angola, Nigeria) and elimination of exchange restrictions; complement adjustments with concessional financing and credible multi‑year plans. - Other countries/unions: reduce emerging vulnerabilities by strengthening fiscal and external buffers; gradually consolidate fiscal stances as debt and borrowing costs rise; WAEMU: implement planned consolidation and improve monetary union coordination; East Africa: trim public investment scaling consistent with fiscal and external sustainability. - Across countries: boost domestic revenue mobilization, address structural weaknesses, and provide targeted social safety nets to protect vulnerable groups and support SDG progress. --- ### 1. Restoring the conditions for strong and sustainable growth — macro developments and vulnerabilities - Fiscal balances, revenue trends, and arrears - Oil income losses compounded by declining non‑oil revenues; recurrent spending cuts and, in some cases, capital expenditure cuts (Guinea, Namibia, Niger, Zambia). - EAC fiscal deficit reached 5¼ percent of GDP in 2016. - WAEMU fiscal deficit was 4½ percent of GDP in 2016 and rising since 2012. - Official end‑2016 stock of arrears (selected): - 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. - Zambia: more than 9 percent of GDP. - Guinea: 4½ percent of GDP. - Ghana: potentially up to 3 percent of GDP. - Additional arrears increases: Mozambique, São Tomé and Príncipe, Swaziland, Uganda. - Exchange rates, foreign exchange restrictions, and parallel market spreads - Some countries allowed depreciation; others imposed foreign exchange restrictions (Angola, Nigeria, Burundi, Ethiopia, Zimbabwe). - Parallel market spread widened from 5 to 10 percent in mid‑2014 to around 130 percent at end‑March 2017. - Angola: priority list for FX access, special tax on service payments, limits on travel FX. - Nigeria: restrictions on FX for importation of 40 categories of goods. - Inflation and monetary policy - End‑year inflation: Angola 42 percent; Nigeria 18½ percent. - Median inflation accelerated from 4½ percent in 2015 to 5½ percent in 2016. - Monetary responses diverged: - Angola and Nigeria: policies remained relatively loose in real terms despite tightening (Nigeria raised policy rate by 3 percentage points early 2016). - CEMAC/BEAC: accommodative policy, credit to governments, refinancing of banks; most CEMAC countries reached or exceeded statutory advances limit. - Uganda reversed 550 basis points of a prior 600 basis point cumulative hike after Shilling depreciation. - Tanzania cut discount rate by 400 basis points in March 2017. - Kenya cut policy rate by 150 basis points to 10 percent by end‑2016. - External pressures, financing, and reserves - Regional current account deficit narrowed to 4 percent of GDP in 2016 from almost 6 percent in 2015, but remains above the roughly 2 percent pre‑commodity shock level. - Contraction in FDI and portfolio flows broadly, including Chinese flows (picked up slightly in 2016 but below 2013 levels). - Since early 2016 only Ghana and Nigeria tapped international capital markets (data as of March 31, 2017). - Reserves fell where exchange rate flexibility was resisted; CEMAC drew heavily on pooled reserves amid insufficient fiscal adjustment. - Public indebtedness and debt service burdens - Average public debt‑to‑GDP increased by some 10 percentage points since 2014 to an average of 42 percent of GDP in 2016 (median 51 percent). - Debt accumulation accelerated sharply after 2014 across country categories. - Debt service burden increased sharply for oil exporters: seven‑fold rise from an average of 8 percent of revenues in 2013 to 57 percent in 2016. - Nigeria debt service as percent of revenues in 2016: 66 percent. - Angola debt service as percent of revenues in 2016: 60 percent. - Financial sector pressures - Increases in nonperforming loans, higher provisioning, strained bank profits, solvency pressures. - Liquidity and solvency risks exacerbated by deteriorating asset quality, declining banking system liquidity (CEMAC, Ghana), tighter monetary policy (Ghana, Zambia), weak growth (South Africa), possible end of credit cycle (EAC), and increased exposure to government. --- ### 1 — Policy actions: fiscal revenue mobilization, financial stability, and social safety nets - Revenue mobilization and fiscal reform - Median country potential to increase tax revenues by about 3 to 6½ percent of GDP. - For resource‑intensive countries: broaden tax base away from commodity income; balance income and indirect taxes. - Examples of revenue reforms: - Mauritius: broadened tax base in 2006, eliminated exemptions, introduced simple property tax; tax revenues rose from 17 percent of GDP in 2007 to almost 20 percent of GDP in 2016 while corporate tax rate fell from 25 to 15 percent. - Tanzania: strengthened revenue authority capacity, yielding close to a 5 percentage point increase in tax revenues within a decade. - Use of e‑filing programs to improve tax collection efficiency. - Financial stability and supervision - Strengthen supervisory capacity and cross‑border collaboration for consolidated supervision, especially for pan‑African banks. - Address long‑standing business climate weaknesses and diversify economies. - Reforms to support financial development critical to unlock new growth sources. - Social safety nets and inclusive growth - Current spending on safety nets (2012–16): - Oil‑exporting countries: generally less than ½ percent of GDP. - Other countries: about 1½ percent of GDP on average. - Coverage: less than 20 percent of population covered by safety net interventions. - Transfer levels vs poverty line (US$1.90 PPP 2011): <5 percent in Ghana, Lesotho, Tanzania, Zambia; >10 percent in Botswana, Namibia, South Africa. - Design priorities: - Consolidate benefits into fewer large programs with clear objectives and strong targeting. - Phase out regressive expenditures (fuel subsidies) to free resources for transfers. - Shift toward poverty‑targeted cash transfers; evidence supports impacts on consumption, human capital, and productive activities. - Build shock‑responsive programs and social registries; efficient payment systems. --- ### 2. Restarting Sub‑Saharan Africa’s growth engine — turning points, spells, and determinants - Stylized facts on turning points and spells - Structural breaks analysis (1950–2016): up‑breaks and down‑breaks common; fewer down‑breaks since 2000; 40 growth spells in SSA between 1950 and 2016 (about 30 percent of total spells); 25 of these spells ongoing as of 2016. - Median length of complete growth spells in SSA: six years (six years for resource‑intensive; five years for nonresource‑intensive). - Comparators: median length 10 years for other developing economies; eight years for emerging market economies. - Growth spells in SSA tend to be shorter, with larger swings and more frequent “hard landings.” - Median annual per capita growth around complete spells (region medians): before a spell −4 percent; during a spell 9 percent; after the end of the spell −4 percent. - What coincides with up‑breaks vs down‑breaks - Up‑breaks: lower inflation; increased investment-to‑GDP; greater trade openness; stronger net FDI inflows; higher credit to private sector; improved fiscal revenues and balances; improvements in institutions and social indicators; reductions in inequality; increases in TFP. - Down‑breaks: higher debt ratios; increased public expenditure; increased aid flows; overvalued exchange rates; more flexible exchange rate regimes often used during down‑breaks as adjustment. - External factors: up‑breaks tend to coincide with improved terms of trade and looser global liquidity (declines in U.S. federal funds rate by about 2.5 percentage points on average in early 2010s); changes in oil prices are not significantly associated with breaks at the aggregate region level. - Duration analysis — key quantified policy effects (summary multivariate results) - Improvements from the median by 25 percentile points in policy variables increase spell length by one to six years. - Summary marginal effects (selected): - Increase in investment rate → expected spell length +1.3 years. - Reduction in total public debt-to‑GDP → expected spell length +1 year. - Increase in openness → expected spell length +6 years. - Reduction in inflation → expected spell length +5.4 years. - Reduction in relative price of investment to consumption → expected spell length +2.5 years. - Improvement in terms of trade → expected spell length +3.4 years. - Increase in oil price → expected spell length +5.7 years. - Improvement in Polity 2 rating → expected spell length +7.7 years. - One‑by‑one and multivariate specifications confirm importance of fiscal balance, debt levels, investment, openness, inflation control, institutions, and diversification for sustaining spells. - Policy implications - For countries in severe slowdowns: preserve macro stability, consistent monetary policy to contain inflation, sound fiscal policy to anchor debt, foster investment and openness, reduce market distortions, and improve institutions and human capital. - For countries in growth spells: rebuild buffers and gradually consolidate to avoid overheating and rapid reversal; mobilize domestic revenue for infrastructure while ensuring sustainability. - For all countries: pursue structural reforms to diversify economies, raise productivity, deepen financial markets, adopt technology, and improve the business climate. --- ### 3. The informal economy — size, characteristics, drivers, and policy implications - Size and employment - Informal economy contributes between 25 and 65 percent of GDP and between 30 and 90 percent of total nonagricultural employment in sub‑Saharan Africa. - Unweighted regional average share of informality reached almost 38 percent of GDP during 2010–14. - Informal employment averages 60 percent of total nonagricultural employment. - Country ranges (MIMIC estimates, 2010–14): Mauritius, South Africa, Namibia ~20–25 percent of GDP; Tanzania and Nigeria ~50–65 percent of GDP. - Within region: informal economy averages 40 percent in LICs and 35 percent in MICs; oil exporters have informal economy close to 50 percent of GDP. - Productivity, firm size, and segmentation - Productivity of informal firms is only one‑fifth to one‑quarter that of formal firms: - Informal firm productivity on average 25 percent of small formal firms and 19 percent of medium formal firms (real output per employee, PPP, sample of 16 countries). - Informal firms typically microenterprises with <5 workers: - Average informal firm size ~30 percent of average small formal firm and ~7 percent of medium formal firm. - Share of small firms: SSA = 71 percent; non‑SSA = 61 percent. - Coexistence of productive formal firms and low‑productivity informal firms suggests segmented markets and financing constraints. - Drivers and estimation methodology - Estimation uses a Multiple Indicator–Multiple Cause (MIMIC) model (140 countries, 1991–2014) refined to address endogeneity; converted to GDP shares using Schneider (2007) calibration. - Causes included: tax burden, institutional development (rule of law, governance), official unemployment, trade openness. - Indicators included: currency as fraction of broad money (M0/M1), labor force participation, night lights intensity as proxy for true economic activity. - Predictive Mean Matching (PMM) used as an alternative robustness method; MIMIC and PMM broadly aligned. - Rank correlation between MIMIC and statistical agency estimates for eight countries: 0.73; Spearman's Rank Correlation: 0.857***; overall rank correlation reported 86 percent. - Empirical determinants (panel Arellano‑Bond GMM, 108 countries, 2006–2014) - Lagged informality strongly persistent (lagged coefficient ~0.963*** in aggregated regressions). - GDP per capita growth strongly and negatively associated with informality (coefficient examples: −0.422***, −0.290*** across specifications). - Financial market efficiency strongly associated with reductions in informality (coefficients: −2.551**, −1.817***, etc.). - Product market efficiency (cost to export, cost of enforcing contracts) lowers informality. - Labor market flexibility not significant. - Governance indicators not significant in some specifications when policy variables included. - Policy approach and priorities - Balanced approach: recognize informal sector as safety net; prioritize productivity gains over immediate tax extraction from household enterprises. - Differentiate policy by firm size: - Household enterprises: support productivity via access to finance, electricity, product‑market efficiency, and business environment improvements. - Firms above tax thresholds: focus on tax compliance, simplify tax laws, reduce cost burdens, and strengthen revenue administration with targeted assistance and credible enforcement. - Pathways to expand formal sector: 1. Increase size of formal enterprises and entry of new formal firms. 2. Facilitate transformation of informal into formal firms via improved access to finance, reduced cost to export, improved contract enforcement, and reliable electricity. - Case examples: - Mauritius: tax reform, one‑stop firm registration, SME finance risk‑sharing; tax revenues from 17 percent of GDP (2007) to almost 20 percent (2016); corporate tax reduced from 25 to 15 percent. - Rwanda: reformed commercial law, eased credit access, accelerated trade and property registration; strong formalization outcomes. --- ### Data, projections, and methodological notes - Data and projections are IMF staff estimates as of 31 March, 2017, consistent with April 2017 WEO; cover 45 sub‑Saharan African countries in IMF African Department. - Conventions highlighted: - Blank cell = “not applicable”; ellipsis = “not available”; 0 or 0.0 = “zero” or “negligible”. - “Billion” = thousand million; “trillion” = thousand billion. - Basis points refer to hundredths of 1 percentage point (example: 25 basis points = ¼ of 1 percentage point). - Macro series excerpts (selected) - Real GDP growth (Sub‑Saharan Africa): 2004–08 = 6.63; 2009 = 3.97; 2010 = 7.05; 2011 = 5.04; 2012 = 4.35; 2013 = 5.3; 2014 = 5.1; 2015 = 3.4; 2016 = 1.4; 2017 = 2.6; 2018 = 3.5. - Oil‑exporting countries growth: 2004–08 = 8.7; 2009 = 6.7; 2010 = 9.2; 2011 = 4.7; 2012 = 3.9; 2013 = 5.7; 2014 = 5.9; 2015 = 2.6; 2016 = −1.4; 2017 = 0.9; 2018 = 2.0. - Nigeria growth: 2004–08 = 7.7; 2009 = 8.4; 2010 = 11.3; 2011 = 4.9; 2012 = 4.3; 2013 = 5.4; 2014 = 6.3; 2015 = 2.7; 2016 = −1.5; 2017 = 0.8; 2018 = 1.9. - Low‑income countries growth: 2004–08 = 6.3; 2009 = 5.2; 2010 = 7.2; 2011 = 6.9; 2012 = 4.5; 2013 = 7.2; 2014 = 6.8; 2015 = 5.6; 2016 = 4.4; 2017 = 5.2; 2018 = 5.6. - Inflation, average series: 2004–08 = 8.8; 2009 = 9.8; 2010 = 8.2; 2011 = 9.4; 2012 = 9.3; 2013 = 6.6; 2014 = 6.3; 2015 = 7.0; 2016 = 11.4; 2017 = 10.7; 2018 = 9.5. - Fiscal balance (percent of GDP): 2004–08 = 1.7; 2009 = −4.5; 2010 = −3.4; 2011 = −1.1; 2012 = −1.8; 2013 = −3.1; 2014 = −3.5; 2015 = −4.1; 2016 = −4.5; 2017 = −4.5; 2018 = −3.9. - Current account balance (percent of GDP): 2004–08 = 2.1; 2009 = −2.8; 2010 = −0.9; 2011 = −0.8; 2012 = −1.8; 2013 = −2.4; 2014 = −3.9; 2015 = −6.0; 2016 = −4.0; 2017 = −3.8; 2018 = −3.7. - Reserves coverage (Months of imports): 2004–08 = 5.1; 2009 = 5.2; 2010 = 4.1; 2011 = 4.6; 2012 = 5.3; 2013 = 5.0; 2014 = 5.3; 2015 = 5.8; 2016 = 4.8; 2017 = 4.7; 2018 = 4.5. - Risks - Downside external risks: uncertain U.S. fiscal easing and monetary normalization; potential sharp U.S. dollar appreciation tightening financing conditions and increasing foreign‑currency debt burdens. - Domestic risks: reliance on exchange restrictions (Angola, Nigeria) depressing non‑oil sector activity; political cycles and upcoming elections (Angola, Kenya) may complicate addressing fundamentals; CEMAC requires strong fiscal consolidation implementation. *Regional Economic Outlook: Sub‑Saharan Africa (April 2017) — IMF staff analysis and data as presented in sreo0517.* ### 1. Economic forecasting — Africa, Sub-Saharan — Periodicals. 2. Africa, Sub-Saharan — ### Regional Economic Outlook: Sub‑Saharan Africa (April 2017) ### Publication and identification - Classification: HC80 0.R4 2017 - ISBN: 978-1-47557-446-3 (paper) - ISBN: 978-1-47557-498-2 (Web PDF) - Series: World economic and financial surveys - Frequency: Published twice a year (spring and fall) - Publisher contact details listed in source (publication orders information included) ### Scope and primary themes - Main objective: Review developments in sub‑Saharan Africa; projections and policy considerations represent IMF staff analysis. - Core analytical chapters: - Chapter 1: Restoring the Conditions for Strong and Sustainable Growth - Subthemes signaled by headings: Limited Room for Maneuver; Policies have been Expansionary; The Pain is Spreading Within and Across Countries; What Lies Ahead; Coming Out Stronger - Boxes: 1.1–1.4 on spillovers, firm ownership and intra‑regional spillovers, private investment, and social safety nets - Key macro tables and figures enumerated (real GDP growth, fiscal balances, debt composition, monetary and financial developments, cross‑border firm interconnectedness, social safety nets) - Chapter 2: Restarting Sub‑Saharan Africa’s Growth Engine - Stylized facts on turning points and growth spells; analysis of what happens around turning points; duration analysis; policy considerations - Figures and tables focus on growth up‑breaks/down‑breaks, spell durations, external shocks, macroeconomic indicators, institutions, social development, structural transformation - Chapter 3: The Informal Economy in Sub‑Saharan Africa - Assessment of size and nature of informality; interaction with economic performance; pathways to expand formal sector; policy implications - Empirical tools and results signaled by: MIMIC model estimation (Figure 3.1); estimates of informal economy (Figure 3.2); comparisons and drivers (Figures 3.3–3.6); productivity and firm size (Figures 3.9–3.10) - Box 3.1: Cases of Mauritius and Rwanda - Statistical Appendix indicated ### Data, figures, and tables inventory (as listed) - Chapter 1 includes 1.1–1.17 (figures) and Tables 1.1–1.2 - Chapter 2 includes 2.1–2.17 (figures and tables) - Chapter 3 includes 3.1–3.10 (figures) and Tables 3.1–3.4 - Other listed content: Abbreviations; Acknowledgments; Executive Summary; Publications of the IMF African Department, 2009–17; Statistical Appendix ### Methodology and conventions (explicitly stated) - Conventions: - Blank cell = “not applicable”; ellipsis points (. . .) = “not available”; 0 or 0.0 = “zero” or “negligible” - En dash (–) between years or months indicates the range inclusive of endpoints; slash (/) indicates a fiscal or financial year; FY indicates fiscal year - “Billion” means a thousand million; “trillion” means a thousand billion - “Basis points” refer to hundredths of 1 percentage point (example: 25 basis points = ¼ of 1 percentage point) ### Acknowledgments and production team - Report prepared by a team led by Céline Allard under the direction of David Robinson. - Team members listed: Francisco Arizala, Romain Bouis, Mehmet Cangul, Hilary Devine, Jesus Gonzalez‑Garcia, Cleary Haines, Mumtaz Hussain, Ali Mansoor, Leandro Medina, Nkunde Mwase, Monique Newiak, Maxwell Opoku‑Afari, Cemile Sancak, Charalambos Tsangarides, Tim Willems, Frank Wu, Mustafa Yenice. - Specific contributors listed: Luisa Charry, Wenjie Chen, Byung Kyoon Jang, Yun Liu, Daniela Marchettini, Manabu Nose, Alun Thomas, Arina Viseth, Torsten Wezel, Jiayi Zhang; and Aline Coudouel, Emma Monsalve (both from the World Bank). - Document production: Natasha Minges; production assistance: Charlotte Vazquez; editing and production overseen by Linda Long of the Communications Department. ### Abbreviations highlighted in the publication - CEMAC Economic and Monetary Community of Central Africa (also appears as Central African Economic and Monetary Community) - BCEAO Central Bank of West African States - BEAC Bank of Central African States - EAC East African Community - GDP gross domestic product - HPIC Heavily Indebted Poor Countries - IMF International Monetary Fund - ILO International Labour Organization - MIMIC Multiple Indicator‑Multiple Cause - OECD Organisation for Economic Co‑operation and Development - PMM Predictive Mean Matching - PPP purchasing power parity - REO Regional Economic Outlook (IMF) - SDGs Sustainable Development Goals - SMEs small and medium‑sized enterprises - SSA Sub‑Saharan Africa - VAT value‑added tax - WAEMU West African Economic and Monetary Union - WEO World Economic Outlook (IMF) *Regional Economic Outlook: Sub‑Saharan Africa (April 2017), International Monetary Fund* ### Executive Summary ### sreo0517 - Executive Summary ### Growth outlook and recent performance - Growth momentum in sub-Saharan Africa remains fragile: in 2016 growth slowed in about two-thirds of the countries in the region—accounting for 83 percent of regional GDP—and is estimated to have reached just 1½ percent. - A modest rebound to 2½ percent expected in 2017 will be to a large extent driven by one-off factors in the three largest countries (a recovery in oil production in Nigeria, higher public spending ahead of elections in Angola, and the fading of drought effects in South Africa) combined with modest improvements in their terms of trade. - Aggregate figures mask heterogeneity: some of the largest western and eastern African countries are still expected to grow at 5 percent to 7½ percent. - At the projected pace, regional growth will continue to fall well short of past trends and barely exceed population growth. - Alternative regional estimates in the document note growth in 2016 averaging 1.4 percent and a modest rebound in 2017 to 2.6 percent (both figures appear in the source text). ### Drivers of the deterioration - Insufficient and delayed policy adjustments, particularly in resource-intensive countries, have contributed to the deterioration. - Specific country outcomes in 2016: - Nigeria: economic activity contracted by an estimated 1½ percent. - CEMAC countries: contraction of ¾ percent. - South Sudan: contraction of 13¾ percent. - Angola: economy stagnated. - Other commodity exporters (Ghana, Zambia, Zimbabwe) are grappling with larger fiscal deficits. - Nonresource-intensive fast growers (Côte d’Ivoire, Kenya, Senegal) have maintained high growth rates but are showing emerging vulnerabilities: rising public debt, increased borrowing costs, some arrears, and rising nonperforming loans in banking despite strong growth. - Weather, pests, and security issues: droughts, pest infestations, and conflicts have contributed to about half of sub-Saharan African countries reporting food insecurity; famine declared in South Sudan and looming in northeastern Nigeria. ### External environment - Recent improvements in commodity prices provide limited relief; oil prices have recovered from early-2016 troughs but remain far below 2011–13 averages and are not expected to recover much further. - Prospect of U.S. monetary policy normalization could tighten external financing conditions further, increasing emphasis on appropriate national policies. - Frontier market financing costs remain higher than for other emerging markets; spreads and issuance at higher yields since early 2016 underscore risks for countries with delayed adjustments. ### Fiscal and macroeconomic stance - The average fiscal deficit in sub-Saharan Africa widened in 2016 to −4½ percent of GDP (from −4.1 percent in 2015 and −3½ percent in 2014). - Fiscal deterioration was most pronounced among oil exporters; fiscal balances remained above 15 percent of GDP in the Republic of Congo, Equatorial Guinea, and South Sudan. - Hardest-hit oil exporters implemented some fiscal adjustment but did not fully offset revenue losses or develop sufficient new (noncommodity) revenue sources. - In many oil exporters, capital expenditure cuts in 2015 led to 2016 adjustments focused on current spending; reported adjustment amounts around 2½ percent of GDP in some cases. - Emerging recommendation: shift from expansionary fiscal stances where appropriate to gradual fiscal consolidation to reduce vulnerabilities. ### Policy recommendations — resource-intensive countries - Fiscal consolidation is urgently needed to halt declines in international reserves and to offset permanent revenue losses. - In CEMAC, fiscal measures should be supported by binding limits on central bank financing to governments to help contain external pressures. - In countries where the exchange rate tool is available (Angola, Nigeria), allow greater exchange rate flexibility and eliminate exchange restrictions as part of a coherent adjustment package to remove distortions harming the real economy. - Accept that initial adjustment may further dampen activity, but additional delays risk sudden stops and even sharper adjustments. - Additional financing, preferably on concessional terms where appropriate, could complement credible multi-year plans to restore macroeconomic stability and smooth the impact on activity. ### Policy recommendations — other countries and unions - For other countries, prioritize reducing emerging vulnerabilities by strengthening fiscal and external buffers to preserve current growth momentum. - Gradually shift fiscal stance toward consolidation as debt and borrowing costs rise; delaying this shift raises the risk of a rapid slowdown later. - For WAEMU countries, implement planned fiscal consolidation at the country level and improve policy coordination at the monetary union level to preserve external stability. - Fast-growing East African countries should ensure that scaling up of public investment—associated with rapidly rising debt—is steadily trimmed to levels consistent with fiscal and external sustainability. - Simultaneously boost domestic revenue mobilization, address structural weaknesses, and provide targeted social safety nets to protect the most vulnerable and support progress toward the Sustainable Development Goals. ### Restarting growth — turning points and sustained growth - Growth turning points (accelerations and decelerations) are common in the region; since 2000 there have been relatively fewer down-breaks and more frequent growth spells over the last 15 years. - Compared with other regions, growth spells in sub-Saharan Africa tend to be shorter, exhibit larger swings, and more often end in “hard landings.” - Sustained growth is fostered by sound domestic policies: - Fiscal policy that prevents excessive public debt accumulation. - Monetary policy geared toward low inflation. - Outward-oriented trade policies. - Structural policies that reduce market distortions. - Given a less supportive external environment, a strong domestic policy response is essential to revive and sustain growth. ### The informal economy — role and policy implications - The informal economy contributes between 25 and 65 percent of GDP and between 30 and 90 percent of total nonagricultural employment in sub-Saharan Africa. - Informal activity functions as a safety net, providing employment and income for the growing working-age population. - Productivity of informal firms is much lower than that of formal firms: informal firm productivity is only one-fifth to one-quarter that of formal firms. - Policy approach should be balanced: increase productivity of informal activities while supporting expansion of formal firms. - Policies that foster the formal sector (improving access to finance, product-market efficiency, legal system reforms, trade liberalization, and access to electricity) also raise productivity in the informal sector and facilitate transition from informal to formal activities. *Source: sreo0517 - Executive Summary (Regional Economic Outlook: Sub‑Saharan Africa, Executive Summary).* ### 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH ### 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH ### Fiscal balances, revenue trends, and arrears - Oil income losses were compounded by declining non-oil revenues, reflecting lower economic activity and underscoring the need to accelerate implementation of strategies to widen revenue sources. - Fiscal revenue declined among other resource-intensive countries amid weak growth; authorities cut recurrent spending and in some cases capital expenditures (Guinea, Namibia, Niger, and Zambia). - A few countries strengthened revenue collection (for example, by temporarily increasing the value-added tax rate in Guinea and by conducting a campaign against corruption and tax evasion in Tanzania). - In nonresource-intensive countries, the average fiscal position was broadly stable but deficits have been elevated for several years despite buoyant growth: - East African Community (EAC) fiscal deficit reached 5¼ percent of GDP in 2016. - WAEMU countries’ fiscal deficit was 4½ percent of GDP in 2016 and has been constantly rising since 2012 despite consolidation commitments. - Widespread accumulation of domestic arrears (and, in a few cases, external arrears) is a key concern: - Official estimates of stock of arrears at end-2016: more than 7½ percent of GDP in Gabon; at least 4 percent in the Republic of Congo; almost 3 percent in Cameroon; 2.2 percent in Nigeria; at least 2 percent in Angola. - Other increases: more than 9 percent of GDP in Zambia; 4½ percent in Guinea; potentially up to 3 percent in Ghana. - Additional countries with increased arrears: Mozambique, São Tomé and Príncipe, Swaziland, and Uganda. *Sources and figures referenced in text: IMF, World Economic Outlook database.* ### Exchange rates, foreign exchange restrictions, and parallel market spreads - Many countries allowed exchange rates to depreciate to absorb external pressures; some resorted to exchange rate restrictions to stem reserve depletion (Angola, Nigeria). - Restrictions have added to policy uncertainties, generated distortions, and widened parallel market spreads. - Angola retained 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 including on acquisition of foreign exchange for the importation of 40 categories of goods. - Rationing and restrictions were intensified in Burundi, Ethiopia (foreign exchange and import permit restrictions), and Zimbabwe (various current and capital account restrictions). - Parallel market spread widened from 5 to 10 percent in mid-2014 to around 130 percent at the end of March 2017. - Figure indicators (as described): Change in exchange rate, Dec. 2013–Mar. 2017 and Spread with parallel rate, latest available (positive indicates depreciation). ### Inflation and diverging monetary policy responses - Inflation developments and monetary policy diverged across the region: - End-of-year inflation reached 42 percent in Angola and 18½ percent in Nigeria. - Median inflation in the region accelerated from 4½ percent in 2015 to 5½ percent in 2016, reversing the trend of the last decade. - Inflationary pressures eased in Zambia and Ghana following tight monetary policy. - Monetary policy stances: - Resource-intensive countries: despite tightening, policy remained relatively loose in some cases. Policy rates remained very low and negative in real terms in Angola (even after base money growth was tightened and the policy interest rate corridor narrowed in the second half of 2016) and in Nigeria (despite a 3 percentage point increase in the policy rate in early 2016). - CEMAC (Banque des Etats de l’Afrique Centrale, BEAC) used accommodative monetary policy to mitigate liquidity constraints via credit to governments, refinancing of banks, and cuts in reserve requirements; all CEMAC countries except Cameroon reached or exceeded the statutory limit for advances from the BEAC (Figure 1.7). - Nonresource-intensive countries: mixed responses where inflation pressures were easing: - Uganda reverted 550 basis points of the 600 basis point cumulative policy rate hike introduced earlier after Shilling depreciation. - Tanzania reduced the discount rate in March 2017 by 400 basis points. - Kenya cut the policy rate by 150 basis points to 10 percent by end-2016 to counter slowing private sector credit growth (which had been compounded by a cap on commercial lending rates introduced in the first half of 2016). - WAEMU: inexpensive access to the BCEAO refinancing window led banks to rely on it and invest in treasury securities. The December 2016 BCEAO decision increased its credit facility rate by 100 basis points and tightened access to its refinancing window; impact was mitigated by a subsequent cut in reserve requirements for banks. ### External pressures, financing, and reserves - Current account and financing: - 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. - For oil exporters, current account deficits have not always been matched with equivalent financing, exerting pressure on reserves. - Investment and capital flows: - Contraction in foreign direct investment and decreases in portfolio flows were broad-based, including flows from China which, despite picking up slightly in 2016, 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 (data as of March 31, 2017). - Financing conditions in secondary market prices remained significantly tighter than for peers. - Reserves: - In countries with flexible exchange rates where authorities resisted depreciations, international reserves continued to fall. - CEMAC countries drew heavily on their pool of international reserves where the exchange rate instrument was absent, amid insufficient fiscal adjustment. - Figure 1.8, panel 4: Reserves, 2014–17, shown in months of imports for a range of countries and regional aggregates (Most recent vs October 2014). ### Public indebtedness and debt service burdens - Public sector 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 is the highest value since many countries received debt relief in the 2000s under the Heavily Indebted Poor Countries/Multilateral Debt Relief Initiative. - Debt accumulation accelerated sharply after 2014 across all country categories. - Drivers: - In most oil-exporting countries, a large part of debt accumulation between 2011 and 2013 was through stock-flow-adjustments reflecting net acquisition of financial assets (including reserves) during boom periods; since the oil price drop these countries drew down reserves and ran larger fiscal deficits. - Exchange rate movements (Angola) and U.S. dollar appreciation against the euro (CEMAC) increased external debt burden. - In other countries, debt accumulation was driven by primary deficits, especially among nonresource-intensive countries after large public investment increases despite buoyant growth. - Debt trajectories at 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: - Upward trend in debt-service-to-revenue ratio and external-debt-service-to-exports ratio. - Most dramatic change for oil exporters: seven-fold increase in debt service, from an average of 8 percent of revenues in 2013 to 57 percent in 2016. - Nigeria: 66 percent (debt service as percent of revenues in 2016). - Angola: 60 percent (debt service as percent of revenues in 2016). - Increased risk of debt distress in a number of countries since 2013. ### Financial sector pressures - Nonperforming loans and bank balance-sheet stress: - Weakening commodity exports, slowdown in economic activity, and buildup of government payment arrears to contractors have restricted firms’ capacity to service loans, resulting in widespread increases in nonperforming loans, higher provisioning, strained bank profits, and pressures on solvency (Figure 1.12, Panel 1). - Liquidity and solvency risks: - Deteriorating asset quality, declining banking system liquidity (CEMAC, Ghana), tighter monetary policy (Ghana, Zambia), weak growth (South Africa), possible end of the credit cycle (EAC), and increased exposure to the government (CEMAC, WAEMU, Zambia) are compounding financial sector vulnerabilities. _Regional Economic Outlook: Sub-Saharan Africa — IMF staff analysis and figures drawn from IMF data sources (World Economic Outlook database; Debt Sustainability Analysis database; BEAC; JP Morgan; Dealogic; Haver Analytics; China Global Investment Tracker)._ ### 3. Sub-Saharan African Low Income Countries: Debt ### 3. Sub-Saharan African Low Income Countries: Debt ### Risk ratings and debt distress (2013–17) - Ratings are based on the latest published IMF Debt Sustainability Analysis. - Country list (abbreviations as presented): ERI, MOZ, SSD, ZWE, BDI, CPV, CMR, CAF, TCD, GHA, STP, BFA, COD, COG, COM, CIV, ETH, GMB, GIN, GNB, LES, LBR, MDG, MWI, MLI, NER, SLE, TGO, ZMB, BEN, KEN, RWA, SEN, TZA, UGA. - Debt distress classification categories shown: Debt distress, High, Moderate, Low. - Movement since 2013 indicated: Downgrade since 2013, No change since 2013, Upgrade since 2013, Newly rated. ### Banking sector developments and structural constraints - Bank lending to the private sector has declined and in some cases even contracted. - Kenya: cap on lending rates at 400 basis points above the policy rate has distorted lending markets; commercial banks have cut back on private sector lending and instead invested in government debt. - Structural factors impeding credit growth and asset quality: - Many banks concentrate heavily on large firms in their loan books, often on the government (Chad, Sierra Leone, Uganda) or in construction (Benin, Equatorial Guinea, Malawi, São Tomé and Príncipe, Sierra Leone), with substantial risks of large losses if a few large firms delay debt service. - Insufficient information about debtors’ creditworthiness (quasi-absence of credit and collateral registries). - Difficulty to foreclose swiftly due to ineffective collection procedures and slow judiciary systems. ### Emerging risks of cross-border spillovers - Regional interconnectedness has increased over the past decade, raising potential for cross-border spillovers. - Financial sector channel: - Pan-African banks have emerged across the region, many headquartered in countries where growth has been weakening (Nigeria, South Africa) and with subsidiaries in numerous countries. - The 14 largest pan-African banks now 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. - Cross-border firm ownership has increased intra-regional linkages, with both upside (trade integration, economies of scale, technology sharing) and downside (increased exposure to shocks from host or headquarter countries). - Other spillover channels: - Loss of correspondent banking relationships has affected local banks’ funding and cross-border payments and possibly disrupted trade (Angola, Guinea, Liberia). - Bank funding could be significantly affected by a sharp slowdown in portfolio flows from abroad (South Africa). ### Monetary and financial indicators (selected) - Bank nonperforming loans to total loans and growth of credit to the private sector are referenced (figures presented in original). - Growth of credit to the private sector: country-level movements shown ranging from contracting credit to slowing credit; specific country abbreviations listed in figures (AGO, BEN, BWA, BFA, BDI, CPV, CMR, CAF, TCD, COM, COD, COG, CIV, GNQ, GAB, GHA, GIN, GNB, KEN, LSO, LBR, MDG, MWI, MLI, MUS, MOZ, NAM, NER, NGA, STP, SEN, SYC, SLE, ZAF, SWZ, TZA, TGO, UGA, ZMB, ZWE). - Note: “RED–Domestic arrears equal to or greater than 2 percent of GDP” as marked in the regional figure. ### Growth outlook and near-term projections - Baseline: modest rebound in aggregate growth—to 2.6 percent in 2017. - Contribution to regional rebound: three largest economies (Angola, Nigeria, South Africa) expected to contribute about three-quarters of the regional rebound. - Country and group projections and notes: - Nigeria: growth forecast at 0.8 percent, driven by higher oil production and strong agricultural production (conditional on maintaining relative peace in the Niger Delta). - South Africa: growth projected at 0.8 percent, driven by fading drought impact and improved terms of trade; political risks remain large. - Angola: growth expected to push up to 1.3 percent owing to a more expansive fiscal stance ahead of elections and improved terms of trade. - Equatorial Guinea: continued decline in oil production expected to keep the country in deep recession (−5 percent). - Cameroon: cuts in capital spending will likely slow growth to 3.7 percent. - Gabon: growth projected at 1 percent. - Republic of Congo: new oil production expected to push growth up to 0.6 percent despite deep fiscal adjustment. - Mali and Niger: growth above 5 percent projected on the back of strong public investment and favorable harvests. - Tanzania: growth projected at 6¾ percent, driven by continued strong mining and service activities. - Ghana: growth expected to reach 5.8 percent, boosted by coming on-stream of new oil fields. - Zimbabwe: some rebound in agricultural production, but economic and social vulnerabilities expected to increase further. - Côte d’Ivoire: growth expected to remain at 6.9 percent but represent a deceleration due to lower cocoa prices and intensifying social tensions. - EAC countries (Kenya, Rwanda, Tanzania, Uganda): foreseen to continue to grow at 5 percent or more, supported by sustained public spending; ongoing drought expected to dent momentum somewhat. - Senegal: growth forecast to reach 6.8 percent with implementation of the Plan Sénégal Emergent. - Madagascar: economic activity expected to strengthen on expanding mining projects and increase in vanilla prices. - Comoros: improvement in electricity production expected to support growth. ### Risks to food security and humanitarian outlook - Effect of 2016 southern African drought is fading; new drought affecting parts of eastern Africa (Ethiopia, Kenya, South Sudan, Tanzania) as La Niña hits. - Pest and armyworm infestations are impacting 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 in the region this year. - Famine declared in South Sudan and looming in northeastern Nigeria as a result of past and ongoing conflicts. ### Macroeconomic indicators (selected table highlights) - Real GDP growth (Sub-Saharan Africa): 2004–08 = 6.63; 2009 = 3.97; 2010 = 7.05; 2011 = 5.04; 2012 = 4.35; 2013 = 5.3; 2014 = 5.1; 2015 = 3.4; 2016 = 1.4; 2017 = 2.6; 2018 = 3.5. - Oil-exporting countries growth series includes: 2004–08 = 8.7; 2009 = 6.7; 2010 = 9.2; 2011 = 4.7; 2012 = 3.9; 2013 = 5.7; 2014 = 5.9; 2015 = 2.6; 2016 = −1.4; 2017 = 0.9; 2018 = 2.0. - Nigeria growth series includes: 2004–08 = 7.7; 2009 = 8.4; 2010 = 11.3; 2011 = 4.9; 2012 = 4.3; 2013 = 5.4; 2014 = 6.3; 2015 = 2.7; 2016 = −1.5; 2017 = 0.8; 2018 = 1.9. - Low-income countries growth series: 2004–08 = 6.3; 2009 = 5.2; 2010 = 7.2; 2011 = 6.9; 2012 = 4.5; 2013 = 7.2; 2014 = 6.8; 2015 = 5.6; 2016 = 4.4; 2017 = 5.2; 2018 = 5.6. - Inflation, average series: 2004–08 = 8.8; 2009 = 9.8; 2010 = 8.2; 2011 = 9.4; 2012 = 9.3; 2013 = 6.6; 2014 = 6.3; 2015 = 7.0; 2016 = 11.4; 2017 = 10.7; 2018 = 9.5. - Fiscal balance (percent of GDP) series: 2004–08 = 1.7; 2009 = −4.5; 2010 = −3.4; 2011 = −1.1; 2012 = −1.8; 2013 = −3.1; 2014 = −3.5; 2015 = −4.1; 2016 = −4.5; 2017 = −4.5; 2018 = −3.9. - Fiscal balance excluding oil exporters (percent of GDP) series: 2004–08 = −0.6; 2009 = −4.2; 2010 = −4.3; 2011 = −3.6; 2012 = −3.6; 2013 = −3.9; 2014 = −3.8; 2015 = −4.1; 2016 = −4.3; 2017 = −4.2; 2018 = −3.8. - Current account balance (percent of GDP) series: 2004–08 = 2.1; 2009 = −2.8; 2010 = −0.9; 2011 = −0.8; 2012 = −1.8; 2013 = −2.4; 2014 = −3.9; 2015 = −6.0; 2016 = −4.0; 2017 = −3.8; 2018 = −3.7. - Current account balance excluding oil exporters (percent of GDP) series: 2004–08 = −4.3; 2009 = −4.9; 2010 = −3.9; 2011 = −4.7; 2012 = −7.0; 2013 = −7.4; 2014 = −6.7; 2015 = −6.7; 2016 = −5.7; 2017 = −5.9; 2018 = −6.2. - Reserves coverage (Months of imports) series: 2004–08 = 5.1; 2009 = 5.2; 2010 = 4.1; 2011 = 4.6; 2012 = 5.3; 2013 = 5.0; 2014 = 5.3; 2015 = 5.8; 2016 = 4.8; 2017 = 4.7; 2018 = 4.5. ### Implementation risks amid global uncertainty - Downside risks from external environment and domestic factors cloud the near-term growth projection. - External uncertainties include: - Uncertain extent of fiscal policy easing in the United States and associated path of monetary policy normalization. - Faster-than-expected monetary policy normalization could imply a sharp U.S. dollar appreciation and a tightening of financing conditions, especially for countries with deteriorated fundamentals. *Sources: IMF, Debt Sustainability Analysis database; IMF, International Financial Statistics; IMF, World Economic Outlook database.* ### 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH ### 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH ### External risks and implications - Global shift toward inward-looking policies, including protectionism, could impede global growth by reducing trade, migration, and cross-border investment flows, and negatively impact commodity prices and exports from the region. - Potential further U.S. dollar appreciation: mixed implications - Upside: - Stronger U.S. dollar against the euro would imply depreciation of currencies that are pegged to the euro, fostering price competitiveness in the WAEMU and CEMAC. - Given that most commodities are quoted in dollars, this would mean higher proceeds in domestic currencies for commodity exporters. - Conversely, a stronger U.S. dollar would mean a higher import bill for oil importers. - Downside: - Tighter financing conditions for frontier and emerging market economies in the region and a higher external debt burden. - Higher yields on low-risk advanced market paper would make emerging and developing countries’ bonds less attractive, exacerbating discrimination against sub-Saharan Africa frontier market economies with delayed policy adjustment and/or weak fundamentals. - A large share of sovereign debt in the region is denominated in foreign currency (see Figure 1.15); further U.S. dollar appreciation could increase foreign debt servicing cost significantly. - A depreciation of national currencies could also result in a spike in inflation. - Figure 1.15 (Sub-Saharan Africa: Public Sector Debt Decomposition, 2010–13 and 2016) reports the following values (percent of GDP): 12.1; 17.6; 7.1; 11.8; 12.6; 17.3; 22.2; 29.2; 16.7; 21.8; 8.2; 13.0; 25.1; 31.3; 18.3; 22.0. ### Domestic risks and urgent macro stabilization - Continued reliance on exchange restrictions in Angola and Nigeria will continue to depress activity in the non-oil sector and enhance the risk of a disorderly adjustment. - In CEMAC, implementation of the fiscal consolidation strategy is paramount. - Upcoming elections in Angola and Kenya could make it more difficult for these countries to address weaknesses in underlying fundamentals. - Policy prescription for resource-intensive (particularly oil-exporting) countries: - Take decisive, sizable, and restorative measures to re-anchor macroeconomic stability. - 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 damage to the private sector. - Recognize that the strategy of delaying fiscal adjustment by relying on central bank financing and drawing down on reserves has reached its limits; recent firming up of oil prices provides only limited external and fiscal space. - Acknowledge that fiscal adjustment would likely further dampen economic conditions in the short term but is a prerequisite to prevent longer-lasting macroeconomic instability. - Policy prescription for nonresource-intensive countries (including some in the WAEMU and EAC): - Ensure public investment is steadily returned to normal levels consistent with medium-term fiscal and external sustainability. - In the WAEMU, strengthen coordination so individual country deficits are consistent with regional stability, guided by the regional convergence criteria. - Focus on domestic revenue mobilization to crowd-in private investment when combined effectively with public investment. ### Fiscal and revenue mobilization structural reforms - Boost domestic revenue mobilization to create space for growth-enhancing spending: - Previous analysis suggests 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 sources of taxes 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: - Mauritius broadened its tax base in 2006 while making the system more equitable by eliminating exemptions from the income tax, introducing a simple property tax payable with income tax without the need for cadaster, and normalizing the taxation of its export processing zones. Tax revenues rose from 17 percent of GDP in 2007 to almost 20 percent of GDP in 2016, despite a simultaneous reduction in the corporate tax rate from 25 to 15 percent. - In Tanzania, efficiency gains from strengthening the capacity of the tax revenue authority resulted in close to a 5 percentage point increase in tax revenues within a decade, largely without raising tax rates. - Tap into e-filing programs to improve the efficiency of tax collection. - Leverage financial development to broaden the tax base: - A major challenge has been the large size of the informal sector (cash-based economy). - Evidence (see Chapter 3) supports the role of financial development, including mobile banking, in enhancing domestic revenue mobilization as informal firms grow. Figure 1.16 presents the relationship between the financial development index (0 least developed to 1 most developed) and the tax mobilization surplus (percentage points of GDP). ### Financial stability and competitiveness reforms - Strengthen financial supervisory capacity and increase cross-border collaboration to ensure effective consolidated supervision, particularly for pan-African banks. - Recent deterioration in financial stability indicators points to emerging stress that could spill over within the region; countries with weakest supervisory capacity face higher undetected spillover risks. - Address longstanding weaknesses in the business climate and diversify economies to unleash private sector potential and foster resilience. - Reforms to support broad financial sector development are critical to address impediments to new sources of growth. ### Social safety nets and inclusive growth - Growth rebound must be durable and inclusive; strengthen social safety nets targeted to the most vulnerable. - Strengthening social safety nets and implementing fiscal consolidation are complementary and can be pursued in parallel at lower fiscal cost. - Countries should develop more integrated social safety net systems: - Consolidate benefits into a smaller number of large programs with clearly established objectives and strong targeting mechanisms. - Phase out regressive expenditures such as fuel subsidies or programs that benefit the rich disproportionately to enhance efficiency and create room to expand coverage with adequate benefit levels. - Shift toward poverty-targeted (means-tested or proxy-means tested) cash transfer programs; evidence from Brazil and Mexico and pilot programs in African countries show substantial impacts on consumption, investment in human capital, and productive activities. - Figure 1.17 (Social Safety Net Coverage and Poverty Headcount) draws on Beegle, Coudouel, and Monsalve (2017) and shows population benefiting from social safety nets as a share of total population; programs remain fragmented, not always well-targeted, and cover only a small share of the population in many countries. ### Financial sector and firm ownership spillovers (Boxes) - Box 1.1 — Potential Spillovers from the Financial Sector (key points) - African financial systems increasingly interwoven due to rapid expansion of pan-African banks over the last 15 years; number of subsidiaries of the largest pan-African banking groups has more than tripled since the early 2000s. - 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. - Expansion mainly through subsidiaries with limited integration across affiliate networks or with parent banks in terms of funding or capitalization. - Limited interbank exposures are mainly directed from host to home; subsidiaries fund themselves domestically and deposit excess liquidity in parent institutions, implying a centralized approach to liquidity risk management. - Direct cross-border lending to the nonbank private sector is limited; lending by subsidiaries appears more stable than direct cross-border lending. - Risks remain: reputational risks and confidence effects could spread problems from one affiliate to others; complexity through nonbank activities and ownership stakes increases contagion channels. - Example: in 2014 the South African banking group Nedbank acquired a share of about 20 percent of the Togolese group Ecobank Transnational Incorporated. - Box 1.2 — Firm Ownership in Sub-Saharan Africa and Intra-Regional Spillovers (key points) - Sub-Saharan African firms increasingly connected through cross-border ownership structures, with regional hubs. - Firms headquartered in South Africa own the most subsidiaries in other sub-Saharan African countries (over 2,400 subsidiaries); Kenyan firms play a key role in East Africa; Nigerian firms are major investors in West Africa; cross-border ownership activity is relatively sparse in Central Africa. - Cross-border firm ownership brings benefits (knowledge transfer, trade integration, diversification) and risks (spillovers of downturns from host or headquarter countries). - Sub-Saharan African subsidiaries in other African countries have generally performed relatively well compared to domestically owned subsidiaries, showing higher profit margins and higher profitability during some periods following the global financial crisis; since 2014 there have been some declines in profitability measured by return on equity. *Source: sreo0517 - 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH* ### 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH ### 1. RESTORING THE CONDITIONS FOR STRONG AND SUSTAINABLE GROWTH ### Growth performance, turning points, and growth spells - Timeframe analyzed: 1950 to 2016 (breaks can only be identified up to 2011 given minimum spacing requirement). - Main empirical findings: - Growth turning points (up-breaks and down-breaks) are common in sub-Saharan Africa, with substantial variation across time. Before 2000 both up-breaks and down-breaks were frequent; the region has experienced relatively fewer down-breaks since 2000. - Growth spells (sustained growth episodes) are frequent in sub-Saharan Africa—both in resource-intensive and nonresource-intensive countries—and have become more frequent over the last 15 years. - Growth spells in the region have tended to be shorter than elsewhere and characterized by larger swings in growth before, during, and after the spell: they start from worse growth positions and typically end in more “hard landings” compared to spells elsewhere (this result holds after controlling for armed and political conflicts). - Growth accelerations are generally associated with: - improved external conditions, - increased investment and trade openness, - better fiscal balances, - more diversified economies. - Growth decelerations are generally associated with: - increased public expenditure, - higher debt ratios, - increased aid flows, - overvalued exchange rates. - Asymmetries: Up-breaks tend to coincide with declines in inflation, increased fiscal revenues and foreign direct investment, improvements in institutional environment and social indicators, and reductions in inequality. Down-breaks coincide more often with the factors listed above for decelerations—implying different policy challenges for revival versus stabilization. ### Cross-border firms and subsidiaries' performance - In resource-exporting countries, performance of: - domestic subsidiaries and - subsidiaries owned by other sub-Saharan African firms has deteriorated relative to subsidiaries owned by foreign firms outside the region. - Policy responses to commodity price declines have varied across countries, producing varied impacts on cross-border firms: - Angola and Nigeria imposed exchange rate restrictions due to external pressures on the currency; controlled allocation of foreign exchange disrupts production and hurts locally operating businesses. - Subsidiaries owned by firms headquartered outside Nigeria are likely to have easier access to foreign currency than Nigerian-owned counterparts, but deteriorating host-country conditions still negatively affect local subsidiaries and increase risk to parent companies. - Nigerian firms owning subsidiaries in faster-growing sub-Saharan African countries (e.g., Kenya, Tanzania, Rwanda) can use cross-border investments buffered by strong internal demand to offset some profit losses at home. ### Private investment and crowding-out by public investment (Box 1.3) - Historical private investment-to-GDP trends: - Sub-Saharan Africa: private investment ratio decreased from 20 percent of GDP in the 1990s to 17 percent in 2011–16. - Asia: private investment ratio increased from 17 percent of GDP in the 1990s to 24 percent in 2011–16. - Empirical model (following Servén 2003; Cavallo and Daude 2011) regresses private investment ratio on: - its lag, lagged public investment ratio, relative price of investment, exchange rate volatility, and credit to the private sector (percent of GDP). - Key quantitative results and interactions: - For the full sample of developing and emerging economies, estimated negative association between private investment ratio and public investment—evidence consistent with crowding out. - The crowding-out effect of public investment on private investment can be mitigated by greater revenue mobilization and greater trade openness: - An increase in the ratio of government revenue to GDP from the 25th to the 75th percentile in the sample reduces the estimated crowding-out effect of public investment by 0.3 percentage points. - Increased access to external financial resources and better opportunities to trade (trade openness) reduce the crowding-out effect by 0.1 percentage points. - Selected regression coefficients from Table 1.3.1 (Emerging and Developing Economies: Private Investment): - Real private investment in percent of GDP (t–1): 0.658*** (column 1); 0.747*** (column 2). - Real public investment in percent of GDP (t–1): –0.664** (column 1); –0.486*** (column 2). - Credit to private sector, percent of GDP, Log of: 0.873** (column 1); 0.321 (column 2). - General government revenue, percent of GDP (interaction in column 2): 0.017**. - Observations: 1,083 (column 1); 1,178 (column 2). - Number of countries: 62 (both columns). - Adjusted R-squared: 0.477 (column 1); 0.866 (column 2). - Note: Time fixed effects included. Hansen statistics and instrument counts reported in table; generalized method of moments used to address endogeneity. ### Social safety nets: coverage, impacts, and design priorities (Box 1.4) - Spending levels on social safety nets (noncontributory transfer programs) varied across sub-Saharan Africa between 2012 and 2016: - Oil-exporting countries: spending generally less than ½ percent of GDP on average. - Other countries: spending about 1½ percent of GDP on average. - Coverage and transfers: - Less than 20 percent of the population in the region is currently covered by social safety net interventions. - Transfer amount (as share of the international daily poverty line of US$1.90 purchasing power parity in 2011) varies: - less than 5 percent in Ghana, Lesotho, Tanzania, Zambia; - more than 10 percent in higher-income countries (Botswana, Namibia, South Africa). - Categorical targeting is common (programs targeting children, the disabled, the elderly in specified country examples). - Meta-evaluation findings on impacts of social safety nets (Beegle, Coudouel, and Monsalve 2017): - Equity: Programs strongly impact household overall consumption and food consumption when targeting protocols are strong and transfers predictable and regular; impact on extreme poverty depends on transfer levels and overall poverty. - Opportunity: Programs can affect productive assets when they have a productive objective, larger lump-sum transfers, and complementary activities; they can promote investments in human capital (especially upper primary education and health service use). - Resilience: Programs increase savings and reduce negative coping strategies, including a notable reduction in child labor. - Design priorities for safety net systems: - Create synergies by linking existing institutions and programs, developing shared instruments (social registries), and establishing efficient payment systems. - Develop the opportunity aspect (e.g., conditional cash transfers tied to school attendance or health enrollment) to build human capital and resilience. - Establish shock-responsive programs that can be triggered efficiently and timely—building on permanent program administrative systems and using pre-defined instruments and financing strategies for vertical (adjust amounts/frequency) or horizontal (add temporary beneficiaries) expansion. - Progressive funding and subsidy reform: - Rebalancing from regressive to more progressive expenditures, revenue mobilization, and enhanced public investment efficiency can provide resources to expand social safety nets. - Fuel subsidies are inefficient for helping the poorest: less than 15 percent of fuel subsidies accrue to the bottom 20 percent of households for kerosene (3 percent for liquefied petroleum gas and gasoline). - For sub-Saharan African countries on average, providing US$1 to the poorest 40 percent households through untargeted gasoline subsidies costs US$23. ### Policy implications and recommendations (synthesized) - To revive growth in hardest-hit countries and sustain growth in faster-growing countries: - Address external vulnerabilities and improve macroeconomic stability (reduce inflation, avoid overvalued exchange rates). - Strengthen fiscal positions by increasing fiscal revenues and improving public investment efficiency to reduce crowding-out and create space for private investment. - Promote trade openness and attract FDI to support growth accelerations. - Design and finance social safety nets to be progressive, targeted, predictable, and shock-responsive—linking programs to opportunities (education, health) and using social registries and efficient payment systems to improve coverage and cost-effectiveness. - Reform regressive subsidies (e.g., fuel subsidies) to free up fiscal space for targeted transfers to the poor. *Prepared by the chapter team led by Charalambos Tsangarides with Francisco Arizala, Jesus Gonzalez-Garcia, Tim Willems, and Mustafa Yenice; Box contributors: Francisco Arizala, Jesus Gonzalez-Garcia, Jiayi Zhang (Box 1.3); Aline Coudouel, Emma Monsalve, Monique Newiak (Box 1.4).* ### 2. Restarting Sub-Saharan Africa’s Growth Engine ### 2. Restarting Sub‑Saharan Africa’s Growth Engine ### Key conclusions and policy implications - Transitioning from growth turnarounds to periods of sustained growth is difficult and often requires additional efforts beyond what is needed to trigger a growth up‑break. - Main factors that lengthen the duration of a growth spell include: - consistency of macroeconomic policies (proxied by the level of inflation), - sound fiscal policy through reduced debt‑to‑GDP ratios, - more outward‑oriented trade policies, - efforts to induce higher investment‑to‑GDP ratios, - improved macro‑structural policies (captured by lower market distortions), - better‑quality institutions, diversification, and technology adoption. - Quantified policy effect: Improvements in each policy variable from its median value by 25 percentile points in the distribution (while keeping other variables constant) increases the length of the spell by one to six years. - Policy implications (in the current environment): - For countries in a severe growth slowdown: - Preserve macroeconomic stability to help trigger a turnaround and lead to sustained growth. - Policy adjustment should include consistent monetary policy to contain inflation and sound fiscal policy to anchor public debt increases. - Foster an environment that encourages investment, increased openness to trade, and more stable political environments. - For countries continuing to grow rapidly: - Focus on addressing potential vulnerabilities by rebuilding buffers and stemming increases in public debt. - Mobilize domestic revenue to finance a larger part of ambitious infrastructure projects while avoiding overheating. - For all countries: - Advance economic diversification to increase resilience to shocks and generate new sources of growth. - Deepen technology adoption. - Invigorate financial reforms. - Strengthen macro‑structural policies to reduce market distortions and investment risks and to improve the business climate. ### Stylized facts: turning points and growth spells in Sub‑Saharan Africa - Definitions used: - Structural turning points identified as up‑breaks (growth accelerations) and down‑breaks (growth decelerations) using a variant of the Bai and Perron (1998) methodology. - A complete growth spell: starts with an up‑break, is followed by an average rate of per capita growth of at least 2 percent, and ends with a down‑break (and a per capita growth rate of less than 2 percent). - An incomplete (ongoing) growth spell: starts with an up‑break and is still ongoing at the end of the sample (2016). - Frequency and concentration of breaks: - About 25 percent of total up‑breaks and down‑breaks identified correspond to sub‑Saharan Africa, which is in line with the fraction of sub‑Saharan African countries in the sample (about 28 percent). - Overall, about 30 percent of total growth spells identified over 1950–2016 correspond to the region. - Evolution over time: - Growth in the region during 1950–99 was characterized by high volatility and frequent shifts between expansion and contraction: - Up‑breaks were most common during 1985–99. - Most down‑breaks occurred during 1970–84. - During 2000–16 sub‑Saharan Africa experienced less volatile growth and fewer down‑breaks while maintaining about the same number of up‑breaks, representing a shift to a somewhat more regular pattern of growth upticks. - Magnitude of turning points: - On average, per capita growth in sub‑Saharan African countries was 10 percentage points higher after an up‑break compared to the period before it. - This 10 percentage point break size is the largest among all groups examined and exceeds the 7 percent break size in other emerging and developing economies. - Countries in the region also experience large swings in growth following a down‑break, on par with developing economies in the Middle East and North Africa and Asia, but significantly less than in emerging market economies. - Growth spells (1950–2016): - The region recorded 40 growth spells between 1950 and 2016—about 30 percent of total spells identified over the sample period. - Of the 40 growth spells in the region, 25 are ongoing (as of 2016), representing more than a third of all ongoing spells in the sample. - Of the ongoing growth spells in the region: - two are among oil exporters, - six among other resource‑intensive countries, - 17 among nonresource‑intensive countries. - Examples of countries with ongoing spells (and forecast in 2017 to register growth at 5 percent or higher): Côte d’Ivoire, Ethiopia, Kenya, Rwanda, Tanzania. - Duration and persistence: - The median length of complete growth spells in sub‑Saharan Africa has been six years. - six years for resource‑intensive countries, - five years for nonresource‑intensive countries. - Comparisons: - median duration of complete spells: 10 years for other developing economies and eight years for emerging market economies. - Only one out of three spells in the region lasts at least 10 years compared to more than half of the spells in the rest of the developing world and about 80 percent of spells in industrialized economies. - Volatility around spells: - Spells in sub‑Saharan Africa are characterized by the largest swings in growth before, during, and after spells. - Median annual per capita growth across complete spells (region median values): - before a spell: −4 percent, - during a spell: 9 percent, - after the end of the spell: −4 percent. - Excluding conflict countries, median annual growth rates are: - before a spell: −4 percent, - during a spell: 8 percent, - after the end of the spell: −6 percent. - These swings point to spells that often start from worse positions and end in “hard landings,” contrasting with milder starts and softer landings in other regions. ### What happens around growth turning points (variables examined) - The analysis examines outcomes around breaks in growth for variables representing: - the external environment, - macroeconomic policies, - structural features, - political and institutional characteristics. - The chapter investigates what coincides with up‑breaks and down‑breaks and what factors influence the duration of growth spells (details and list of variables referenced in Annex 2.2). - Robustness checks indicate that natural disasters, epidemics, or HIPC debt relief do not show systematic relationships with breaks in growth or the beginning or end of spells. *Source: Regional Economic Outlook: Sub‑Saharan Africa — Chapter 2 (authors’ calculations, based on Penn World Tables 9.0 and methods described in the chapter).* ### 2. RESTARTING SUB-SAHARAN AFRICA’S GROWTH ENGINE ### 2. RESTARTING SUB-SAHARAN AFRICA’S GROWTH ENGINE ### Exogenous Factors - Growth up-breaks tend to coincide with improvements in the countries’ terms of trade, while down-breaks coincide with worsening terms of trade (statistical test for symmetry between up- and down-breaks confirmed). - Examples: worsening terms of trade following the global financial crisis coincided with down-breaks in Nigeria in 2010 and in Equatorial Guinea and the Republic of Congo in 2011. - Stronger growth in trading partners is significantly associated with up-breaks in growth. - Growth up-breaks in sub-Saharan Africa are associated with looser global liquidity conditions, represented by declines in the U.S. federal funds rate of about 2.5 percentage points on average (as observed in the early 2010s). - No significant association is found between changes in the U.S. federal funds rate and down-breaks. - Unlike in the rest of the emerging and developing economies, growth breaks in the region are not significantly associated with changes in oil prices (likely because sub-Saharan Africa includes both oil exporters and importers, for which oil prices affect growth in opposite directions). ### Macroeconomic Indicators - Growth up-breaks coincide with: - Lower inflation. - Significant increases in investment (investment-to-GDP ratio), more trade openness, stronger net inflows of foreign direct investment, and increases in the ratio of credit to the private sector to GDP. - Examples: up-breaks in Zambia in 1999 and Equatorial Guinea in 1994 were associated with increases in investment; increases in FDI observed at up-breaks in the Democratic Republic of Congo in 2009, Zambia in 1999, and São Tomé and Príncipe in 1995. - Improved fiscal outcomes: higher government revenues and better overall fiscal balances (likely reflecting better growth performance and measures to boost revenue mobilization). - Examples: up-breaks in Ethiopia in 2003, Angola in 2000–01, and Rwanda and Tanzania in 1994 coincided with improved fiscal balances. - Growth down-breaks coincide with: - Higher debt ratios (both external debt and total public debt show similar results). - Aid flows toward the region rise significantly during down-breaks, suggesting a strong international response to support countries in difficult times. - More flexible exchange rate regimes during down-breaks, potentially reflecting policy reaction to use exchange rate flexibility as an adjustment tool. - Prudent fiscal policy is protective for growth spells: better fiscal balances increase the chance that a growth spell will continue, while higher debt burdens accelerate the end of spells. - The substantial debt reduction after debt relief through the Highly Indebted Poor Country (HIPC) Initiative provided more fiscal space to finance productive spending in most countries of the region, supporting sustainable growth. - Example: Tanzania’s period of strong growth that started in the early 1990s accompanied an improvement in terms of public debt and a stepping-up of public expenditures. ### Institutions, Social Indicators, and Structural Transformation - Growth up-breaks coincide with improvements in the institutional environment: - Reduction in political risks, fewer internal conflicts, and improved law and order. - Growth up-breaks tend to be associated with significant declines in inequality (Gini coefficient). - Structural factors: - Growth up-breaks are associated with significant increases in the rate of growth of total factor productivity (TFP), implying more efficient or intense use of resources. - Down-breaks show the opposite: deterioration in structural indicators. - Slower adoption of technology, represented by hampered growth of mobile cell phone lines, is present during down-breaks. - Note: There is a general declining trend in political risks and conflicts, which helps explain institutional improvement irrespective of up-breaks or down-breaks; however, only growth up-breaks show significant improvements in some structural conditions. ### Analyzing the Duration of Growth Spells - Objective: relate the probability that a growth spell will end in the next period to changes in the variables identified as associated with turning points, and investigate whether relationships differ for sub-Saharan Africa versus other regions. - Methodology: - Two-step approach due to limited number of spells and data: 1. Test relevance of each factor or policy one by one while controlling for initial conditions at the beginning of each spell (to account for growth convergence). 2. Select a representative set of factors/policies across groups to preserve sample size and estimate a multivariate specification to identify each factor’s effect controlling for other determinants. ### Determinants of Growth Spells: One by One - Exogenous factors: - Tighter global financial conditions significantly increase the probability that growth spells end in sub-Saharan Africa as well as in the rest of the world (U.S. interest rate used as a proxy combining the effective U.S. federal funds rate with alternative shadow measures to account for unconventional policies). - Fluctuations in oil prices do not appear to have a significant average impact on spells in the region (result may mask differing impacts for oil exporters versus importers). - Macroeconomic indicators and policy variables: - A better overall fiscal balance significantly reduces the probability that a growth spell will end; conversely, higher total public debt to GDP increases the probability that a spell will end. - Increases in government revenue to GDP and investment-to-GDP (changes) are associated with a lower probability that growth spells end. - Real exchange rate misalignment and extreme real exchange rate misalignment affect the probability that growth spells end. - Trade openness (change) lowers the probability that spells end; higher aid percent of GDP and higher inflation (Log (1+ inflation)) are associated with higher probability that spells end in some specifications. - More flexible de facto exchange rate regimes are associated with changes in the probability that growth spells end (reflecting the role of exchange rate policy in adjustment). - Statistical reporting: - Results are presented as changes in the probability (measured in units) that a growth spell will end associated with a 1 unit change in each variable; statistical significance markers used in figures are *, **, and *** indicating significance at the 10, 5, and 1 percent levels respectively. *Source: Authors’ calculations as presented in the chapter "2. RESTARTING SUB-SAHARAN AFRICA’S GROWTH ENGINE."* ### 2. Government Revenue, and Total Investment ### 2. Government Revenue, and Total Investment ### Role of Investment in Growth Spells - Investment supports warding off growth stops and sustaining growth spells by supporting aggregate demand initially and expanding productive capacity over time. - Evidence includes growth spells in Chad and Lesotho in the 1980s that were accompanied by a sharp increase in the investment-to-GDP ratio. - In the multivariate analysis, an acceleration in the change of investment to GDP increases the expected length of the spell by about 1.3 years. ### Macroeconomic Factors (competitiveness, trade openness, inflation, exchange rate) - A more flexible exchange rate regime and less overvalued exchange rate levels seem to extend the length of growth spells (coefficients not significant for SSA in this sample). - Higher trade openness tends to increase the duration of growth spells (not significantly in some specifications), reflecting more diversified and resilient economies. - Example: Botswana experienced one of the longest growth spells with total trade representing 95 percent of GDP during the period. - In sub-Saharan Africa, aid flows appear to significantly increase the duration of growth spells in the region (a result noted as new to the literature). - Higher inflation seems to decrease the duration of growth spells in the region (estimated coefficient not significant). - In the summary model, an increase in openness increases the expected length of the spell by six years; a reduction in inflation increases the expected length of the spell by 5.4 years. ### Institutions, Conflict, and Human Development - High institutional quality strongly supports growth spells in the region and more so than in other regions. - Armed conflicts significantly disrupt economic activity and shorten the duration of growth spells in sub-Saharan Africa, though the number of such conflicts has dramatically decreased over the last two decades. - Social and human development profoundly impacts growth spells: - Higher levels of education and human capital are associated with longer growth spells (countries cited: Botswana, Ghana, Lesotho, Mauritius). - Reduction in infant mortality is associated with longer growth spells. - Higher income inequality leads to shorter spells (effect not statistically significant in this sample). - In the summary model, improvements in the Polity 2 rating (political institutions) increase the duration of the spell by 7.7 years. ### Structural Transformation and Technology Adoption - Diversification, especially of export composition, supports the resilience of growth episodes; a high share of manufacturing exports is particularly beneficial. - Countries with higher product diversification (examples: Tanzania, Kenya) enjoy ongoing growth spells. - Botswana, Cabo Verde, Lesotho, Mauritius increased their share of manufactures in exports while experiencing sustained growth. - Higher financial liberalization (index reflecting interest rate restrictions, credit controls, competition restrictions, state ownership, and banking supervision quality) is associated with longer growth spells. - The relative price of investment to consumption goods (proxy for market distortions) seems associated with shorter spells (coefficients not statistically significant). - In the summary model, a reduction in the ratio of the relative price of investment to consumption increases the expected length of the spell by 2.5 years. - Adoption of foreign new technology (imports of computers and ICT goods) matters in other regions but does not come out significant for sub-Saharan Africa in this sample (likely reflecting low levels of such imports and data limitations). ### Determinants of Growth Spells: Summary View (multivariate duration analysis) - Full model variables include: U.S. interest rate, change in the terms of trade, oil price change; trade openness, capital account openness, inflation, exchange rate regime, debt-to-GDP ratio, change in investment rate; human capital; Polity 2; measure of market distortions; average growth during the spell; indicator for 2000–08. - Key multivariate results for sub-Saharan Africa: - Increase in the investment rate → expected spell length +1.3 years. - Reduction in the debt-to-GDP ratio → expected spell length +1 year. - Increase in openness → expected spell length +6 years. - Reduction in inflation → expected spell length +5.4 years. - Reduction in the relative price of investment to consumption → expected spell length +2.5 years. - Improvement in percent change of terms of trade → expected spell length +3.4 years. - Increase in oil price → expected spell length +5.7 years. - Improvement in Polity 2 rating → expected spell length +7.7 years. - Reduction in GDP per capita growth (sign of overheating) → expected spell length +2.8 years (interpreted as a decrease in overheating increasing duration). - Summary statement: improvements by 25 percentile points from the median in policy variables increase spell length by one to six years; similar improvements in institutional environment or exogenous factors raise spell length by four to eight years. ### Comparative Insights with Other Emerging and Developing Economies - Lower inflation, good institutions, and lower government debt prolong growth spells both in sub-Saharan Africa and other emerging and developing economies. - Region-specific findings for sub-Saharan Africa: - Higher investment-to-GDP ratio and positive developments in terms of trade uniquely prolong growth spells in SSA in this analysis. - Trade openness has a stronger positive effect in SSA. - Macro-structural distortions (higher dispersion in the relative price of investment) do more harm in SSA. ### Policy Considerations and Concluding Remarks - Growth turnarounds and sustained growth have become more common since the turn of the century in sub-Saharan Africa, but growth spells tend to be shorter, exhibit larger swings, and often end in “hard landings.” - Sustaining spells longer and avoiding hard landings requires a combination of factors and policies rather than single drivers. - Domestic macroeconomic policies are critical: - Sound fiscal policy to prevent excessive public debt accumulation. - Monetary policy geared toward low inflation. - Outward-oriented trade policies to leverage global opportunities. - Macro-structural policies to reduce market distortions, unleash private sector potential, and boost investment. - External environment and institutional improvements have played important roles historically, but domestic policy improvements (investment, openness, inflation control, debt management) are central to prolonging growth spells. *Source: Authors’ calculations, "2. Government Revenue, and Total Investment."* ### 2. RESTARTING SUB-SAHARAN AFRICA’S GROWTH ENGINE ### 2. RESTARTING SUB-SAHARAN AFRICA’S GROWTH ENGINE ### Current context and key challenges - Resource-intensive countries in sub-Saharan Africa have been severely affected by the slump in commodity prices. - The global environment is expected to provide little support for regional growth due to: - growth rebalancing in China toward less resource-intensive sectors; - commodity prices expected to remain low for a long period of time; - aid flows expected to become more scarce; - growing risks of inward-looking policies globally. - Implication: impetus to revive and sustain growth must come from domestic macroeconomic and structural policies. ### Policy priorities where growth has slowed markedly - Priority: maintain macroeconomic stability and set the stage for a sustainable growth turnaround through a comprehensive, mutually reinforcing policy package: - improving fiscal balances through targeted cuts and measures that durably increase revenue to contain the increase in public debt; - ensuring monetary policy is consistent with keeping inflation under control; - strengthening macro-structural policies that foster investment and help recover growth; - promoting openness and integration with the global economy; - improving human capital and more stable political environments. - Empirical finding: these policies are strongly associated with growth turnarounds and sustained growth spells. ### Policy priorities for countries currently enjoying a growth spell - Focus: prolong growth spells and avoid a hard landing by rebuilding buffers during comparatively favorable times. - Rebuilding buffers helps stem increases in public debt and is important to sustain the length of growth episodes. - Given rising public debt in many growing countries, some gradual fiscal consolidation is warranted, especially amid tighter and more volatile financial markets. - Strengthen monetary policy frameworks to center objectives around a price stability mandate (consistent with analytical findings). ### Complementary structural policies for all countries - Complement macroeconomic policies with measures to unlock growth potential: - foster educational development and invest in human capital; - advance economic diversification to increase resilience to shocks and increase the share of manufactures in total exports; - promote regional and international trade integration; - prioritize growth-enhancing investment and reduce investment risks; - invigorate macro-structural policies to reduce market distortions; - strengthen governance frameworks and the business climate to attract investment toward new growth sectors; - deepen technology adoption through imports of information technology goods; - strengthen financial liberalization reforms. - Empirical evidence: specific measures highlighted (invest in human capital; increase export diversification by partners and products; increase share of manufactures; deepen ICT imports; strengthen financial liberalization; reduce investment risks) are evidenced in the chapter’s empirical results. ### Methodology — Structural breaks and growth spells (Annex 2.1) - Structural breaks - Procedure: variant of Bai and Perron (1998) per Antoshin, Berg, and Souto (2008) to test for multiple structural breaks when number and location are unknown. - Parameters set: minimum number of years between potential breaks h = 5; statistical significance p = 0.10. - Identified breaks: 184 up-breaks and 185 down-breaks in economic growth across 146 countries over 1950–2016. - Note: with h = 5, first and last five years of the estimation sample cannot be used; for a country with 66 years of data and h = 5, up to 12 possible structural breaks can be identified, with the last possible break occurring in 2011. - Groups: breaks grouped by income level into advanced, emerging, and developing economies; developing disaggregated into Asia, Middle East and North Africa, sub-Saharan Africa, and Latin America. - Growth spells - Definition of “complete” growth spells (following Berg, Ostry, and Zettelmeyer (2012)): 1. begin with a growth up-break followed by at least 2 percent average per capita income growth; 2. end with a growth down-break followed by a period of less than 2 percent average per capita income growth. - The 2 percent per capita growth threshold is considered reasonable for low-income and sub-Saharan countries. - “Incomplete” growth spells satisfy condition (1) and are ongoing at end of sample. - Identified spells: 80 complete and 67 incomplete spells for the full sample. ### Changes in variables at turning points - Approach: follow Jones and Olken (2008) using one-sample t-tests to examine changes in means of many variables between the period before a break and the period after a break, for up-breaks and down-breaks. - Additional symmetry tests: two-sample t-tests evaluating whether mean changes in up-breaks have same magnitude as mean changes in down-breaks; Satterthwaite approximation used to account for different variances and sample sizes. ### Duration analysis approach - Objective: study how duration of growth spells varies with covariates using survival models. - Model structure: - baseline hazard function describes how risk of spell ending changes over time at reference covariate levels; - effect parameters describe how hazard varies with covariate changes. - Proportional hazard model assumption: covariates multiplicatively related to hazard; covariates have same proportional effect across horizons. - Empirical choices: - Weibull distribution specified for the baseline hazard (following Berg, Ostry, and Zettelmeyer (2012)); - hazard at time t assumed to depend only on lagged realizations of covariates (to avoid feedback from duration to covariates). ### Variable list and sources (Annex 2.2) — selected entries (preserved terminology) - Real GDP per capita growth: 2011 U.S. dollars at PPP, extended using WEO until 2016, percent change — PWT 9.0 - Initial GDP per capita: U.S. dollars in PPP — PWT 9.0 - Investment to GDP: In percent of GDP — PWT 9.0 - Trade openness: Exports plus imports, in percent of GDP — PWT 9.0 - Population growth: Percent change — PWT 9.0 - Overall fiscal balance: In percent of GDP — WEO - Total government revenue: In percent of GDP — WEO - Total public debt: In percent of GDP — FAD - External debt: In percent of GDP — WEO - Log (1 + inflation): Consumer price index — WEO - Crude oil price: Simple average of Brent, WTI, and Fateh spot prices — WEO - Terms of trade growth: Goods, U.S. dollars, percent change — WEO - Capital account openness: Normalized from 0 to 1 — Chinn-Ito database (2014) - Shadow federal funds rate: Interest rate — Krippner (2016) - Political stability (Polity 2): Modified polity score +10 to -10 — Polity IV dataset - Years of primary schooling: Average number of years — Barro and Lee database (2013) - Human capital: Index — PWT 9.0 - Aid: Net official development assistance and aid received in percent of GDP — WDI - Manufactured exports: Percent of merchandise exports — WDI - ICT goods imports: Percent of total goods imports — WDI - TFP (Total factor productivity): Constant national prices (2011=1) — PWT 9.0 - Financial liberalization: Index — IMF (2008) - Fewer financial restrictions on current account: Index — IMF (2008) - Exchange rate misalignment calculations: In percent of equilibrium level / Dummy variable — IMF staff calculation/PWT - Product concentration: Index — SPR - Partner concentration: Index — SPR ### Duration analysis results (Annex 2.3) — selected estimated hazard ratios and statistics - Note on interpretation: reported values are exponentiated regression coefficients (“hazard ratios”). A hazard ratio > 1 implies increases in the variable shorten spells (raise hazard of spell ending). A hazard ratio < 1 implies a protective effect (helps sustain the spell). Statistical significance indicated by *, **, *** for 10, 5, and 1 percent levels. - Columns correspond to: (1) SSA, (2) EMEDEV, (3) EMEDEV without SSA. - External shocks - U.S. interest rates: 1.021, 1.046, 1.037 (standard errors: (0.110), (0.0437), (0.0529)) - Oil price, change: 0.935 ***(0.0187), 1.005(0.0209), 1.032(0.0293) - Terms of trade growth: 0.959 **(0.0161), 0.996(0.0135), 0.996(0.0165) - Macroeconomic indicators - Investment to GDP, change: 0.923 *(0.0403), 0.962(0.0429), 0.953(0.0332) - Total public debt to GDP: 1.007 **(0.00343), 1.006 **(0.00258), 1.007(0.00812) - Trade openness: 0.98 *(0.0117), 0.992(0.00686), 0.994(0.0109) - Capital account openness: 1.359(0.797), 1.071(0.173), 1.086(0.230) - Inflation: 3.242 **(1.770), 1.472 *(0.302), 1.527 *(0.343) - De facto exchange rate regime: 0.756(0.210), 0.81 **(0.0740), 0.849(0.0882) - Institutions - Polity 2, cumulative change: 0.815 **(0.0652), 0.963(0.0280), 1.003(0.0311) - Social and human development - Human capital: 0.159(0.355), 0.464(0.333), 0.355(0.322) - Other - Real GDP per capita growth: 1.115 ***(0.0321), 1.049 ***(0.0138), 1.064**(0.0286) - Initial GDP per capita: 4.691(6.359), 1.531(0.454), 1.052(0.422) - Population growth: 1.073(0.671), 1.004(0.232), 1.104(0.251) - Relative price of investment to consumption: 1.015 **(0.00582), 0.994(0.00574), 0.982 ***(0.00638) - Decade dummy 2000: 1.380(1.634), 0.547(0.256), 0.424(0.249) - Sample and model statistics (as reported) - Observations: 326, 1,076, 750 - Subjects: 288, 153 - Failures: 829, 21 - α: 3.956, 1.557, 1.342 - p-value: 0.00, 0.00, 0.00 - Source interpretation note: a hazard ratio of 1.05 implies a unit increase in the regressor increases the risk that a growth spell will end in the next period by 5 percent. *Source: IMF — sreo0517 - 2. RESTARTING SUB-SAHARAN AFRICA’S GROWTH ENGINE* ### REFERENCES ### sreo0517 - REFERENCES ### Key findings on the informal economy in sub-Saharan Africa - The informal economy contributes between 25 and 65 percent of GDP and accounts for between 30 and 90 percent of total nonagricultural employment in most economies in sub-Saharan Africa. - The sub-Saharan Africa unweighted average share of informality reached almost 38 percent of GDP during 2010–14. - The share of informal employment averages 60 percent of total nonagricultural employment. - Informality estimates by country range from a low of 20 to 25 percent (Mauritius, South Africa, and Namibia) to a high of 50 to 65 percent (Tanzania and Nigeria) based on MIMIC estimates averaged over 2010–14. - By region and comparator groups: - Latin America and the Caribbean: 40 percent of GDP. - South Asia: 34 percent of GDP. - Europe: 23 percent of GDP. - OECD member countries: 17 percent of GDP. - Within sub-Saharan Africa: - Informal economy averages 40 percent in low-income countries (LICs). - Informal economy averages 35 percent in middle-income countries (MICs). - Oil exporters have an informal economy close to 50 percent of GDP. ### Definition and economic implications - Narrow definition (referred to as the informal sector or household enterprises): (1) household enterprises that have some production at market value but are not registered; and (2) more broadly, underground production where registered firms conceal activities to avoid compliance or tax, or illegal activities. - Household enterprises are microenterprises inferred from household surveys comprised of persons earning money but not in salaried employment; subsistence agriculture is included if its production is sold. - Positive role: the informal sector provides a pool of jobs and acts as a safety net for a large and growing working-age population. - Negative role: the informal sector tends to contain relatively low productivity activities, perpetuating low productivity in the economy and constraining expansion of the tax base. ### Estimation methodology (MIMIC Model and refinements) - The chapter uses a parametric Multiple Indicator–Multiple Cause (MIMIC) Model to estimate the unobserved informal economy. - The MIMIC Model sample covers 140 countries during 1991–2014. - The MIMIC Model was refined to address past criticisms including endogeneity concerns (see Annex 3.2). - The model relies on observable drivers (causes) and measurable indicators (effects): - Causes used: - Tax burden. - Institutional development (rule of law and other governance indicators). - Official unemployment rate. - Trade openness. - Indicators used: - Currency as a fraction of broad money (M0/M1). - Labor force participation. - A measure of the size of the economy using night lights (light intensity from outer space) as a proxy for true economic growth independent of traditional GDP measures. - The MIMIC estimates are converted to annual shares of GDP by applying estimated dynamics to a starting value chosen as 2000 and estimated for each country by Schneider (2007) using a currency demand model. ### Drivers of informality (empirical associations) - Higher tax burden is likely to encourage more activity to remain informal. - Weaker institutions (lower rule of law and other Worldwide Governance Indicators) are associated with larger informal economies. - Higher official unemployment rates are associated with greater informality. - Greater trade openness is associated with lower informality by increasing opportunities in the globally competitive part of the economy and shifting resources from the informal sector. - Institutional subcomponents from the Worldwide Governance Indicators (voice and accountability; political stability and absence of violence; government effectiveness; regulatory quality; rule of law; control of corruption) are inversely related to the size of the informal economy. - Trade openness and institutions show observable relationships with informality across sub-Saharan African countries (see country illustrations such as Benin, Togo, Mauritius, Gabon). ### Robustness checks and cross-validation - An alternative Predictive Mean Matching (PMM) method was used to treat informality as a missing data problem; PMM groupings are broadly aligned with MIMIC findings. - MIMIC estimates were compared with statistical agency estimates for eight sub-Saharan African countries that publish informality estimates: - Rank correlation between MIMIC and statistical agency estimates: 0.73. - Spearman's Rank Correlation: 0.857***. - Overall rank correlation reported: 86 percent. - Forty-nine countries were identified as having survey-based estimates of the size of their informal economies, including nine in sub-Saharan Africa. ### Nature of entrepreneurship and informality survey evidence - Sub-Saharan Africa exhibits the highest rate of total early-stage entrepreneurial activity and nascent entrepreneurship among regions, measuring the share of the working-age population in the process of starting a business and businesses less than four months old, respectively. - Entrepreneurship and self-employment data from the Global Entrepreneurship Monitor (GEM) Adult Population Survey (APS) and National Expert Survey (NES) have been used as proxies for informal sector activities. ### Policy implications and recommended policy focus - Policymakers should apply a balanced approach to formalize the informal sector: - Focus on nurturing productivity gains rather than attempting to increase tax revenues from household enterprises (household enterprises often act as a safety net). - For firms above tax thresholds that evade taxes partially or fully, tax policy and revenue administration should work to improve tax compliance. - To expand the formal sector and facilitate transition of resources from informal to formal: - Improve access to finance and deepen financial markets, especially for small and medium-sized enterprises (SMEs). - Foster product market efficiency; important components include: - Reducing the cost to export. - Reducing the cost of enforcing contracts. - Improving access to electricity. - Create an overall business environment friendly to SMEs to support formal-sector growth, productivity gains, and revenue mobilization to finance public services. *Prepared by a team led by Ali Mansoor and Cemile Sancak and comprised of Leandro Medina, Romain Bouis, Hilary Devine, Mehmet Cangul, and Frank Wu, with contributions from Luisa Charry, Yun Liu, Manabu Nose, Alun Thomas, and Arina Viseth.* ### 1. Informality and Voice and Accountability ### 1. Informality and Voice and Accountability ### Attitudes toward entrepreneurship and motives - Sub-Saharan Africa reports the most positive attitude towards entrepreneurship, with the largest share of its working-age population considering entrepreneurship a desirable career choice and believing that high status is associated with the activity (Global Entrepreneurship Monitor database, average over 2010–15). - Main attributes (average over 2010–15): - Nascent entrepreneurship rate and total early-stage entrepreneurial activity are higher in Sub-Saharan Africa than in emerging and developing economies and advanced economies (GEM database). - Motivations of entrepreneurship (share of total early-stage entrepreneurial activity): about a third of new entrepreneurs in sub-Saharan Africa report necessity-driven entrepreneurship, slightly higher than other parts of the world. - Societal values: Sub-Saharan Africa scores higher on “Desirable career choice,” “High status associated with entrepreneurship,” and “Positive media coverage” relative to comparators (GEM database). ### Informality as a safety net and distributional effects - Informal activity provides employment and income where formal-sector opportunities are insufficient. - ILO surveys report that 30 to 90 percent of employment in the nonagricultural sector occurs in the informal sector in some sub-Saharan African countries (Table 3.2). - Household surveys indicate that between 55 and 75 percent of nonagricultural employment in low-income and resource-rich countries in sub-Saharan Africa occurs in household enterprises (Figure 3.7). - Comparison of per capita consumption (sample of six low-income countries: Cameroon, Ghana, Mali, Rwanda, Uganda, Zambia): - Workers in agriculture: on average 60 percent have consumption levels below the 25th percentile of salaried workers. - Household enterprises: consumption is generally better than agriculture but remains below salaried employment at the 50th and 75th percentiles; at the 25th percentile consumption is similar to salaried workers only in Rwanda and Uganda (Figure 3.8). ### Informality and productivity - Productivity of informal firms is substantially lower than that of formal firms (World Bank Enterprise Surveys and IMF staff calculations). - On average, productivity of informal firms is only 25 percent that of small formal firms and 19 percent of medium-sized formal firms (real output per employee, PPP terms) based on a sample of 16 sub-Saharan African countries (Figure 3.9). - Large country variations exist in the informal–formal productivity gap; particularly wide gaps observed in Kenya, Namibia, Niger, Senegal, Swaziland, and Tanzania. - The productivity gap likely reflects lower physical capital and skill levels among informal firms. ### Firm size and market segmentation - Informal firms are typically microenterprises with less than five workers. - Average informal firm size is about 30 percent of the average size of small formal firms and 7 percent the size of medium-sized formal firms (firm size measured by average number of full-time employees). - Proportion of small firms: - Sub-Saharan Africa: 71 percent. - Economies outside Sub-Saharan Africa: 61 percent. - Regions with high informality have significantly smaller average firm size across the distribution (Figure 3.10). - Coexistence of more productive formal firms and less productive informal firms suggests segmented markets. ### Informality as a vicious cycle and financing constraints - Low access to credit and poor conditions for entrepreneurship sustain a vicious cycle that keeps the informal sector large (Figure 3.11). - La Porta and Shleifer (2008) identify cost of financing and access to financing as key obstacles keeping informal firm size small. - World Bank Enterprise Surveys identify lack of access to finance as the greatest perceived constraint for both informal and formal enterprises. ### Informality and tax policy - Reasons for not paying taxes vary across informal firms; policy should distinguish categories of informality (Kanbur and Keen 2015). - Some firms do not remit taxes because they are below legal thresholds; others operate just below thresholds; larger firms may evade taxes partially or fully. - Policy implications: - Raising the VAT threshold can encourage firms operating just below the threshold to increase production while leaving the number of informal firms and tax collection unchanged (Kanbur and Keen 2014). - Relatively high VAT thresholds are recommended for developing countries, with license fees or turnover taxes for businesses below the VAT threshold. - Small firms should not be discouraged from registering; scarce government enforcement resources should target large firms. - Household enterprises, even if not paying direct taxes, contribute via indirect taxes (for example, VAT on inputs) and other charges; improving their performance in the informal sector can generate additional revenue without imposing direct taxes. - For firms above the tax threshold that evade taxes, tax policy and administration should improve compliance through: - Simplifying tax laws and reducing taxes on microenterprises and small businesses. - Revenue agencies developing integrated compliance management strategies, including: 1. Reducing community tolerance for tax evasion. 2. Providing targeted assistance to promote voluntary compliance. 3. Encouraging self-regulation, which may rest on simplification. 4. Demonstrating visible and credible detection and enforcement capability (Russell 2010). ### Pathways to expand the formal sector - Two pathways: 1. Increase the size of formal enterprises and encourage entrance of new formal firms. 2. Transform informal enterprises into formal enterprises by improving the business environment to allow growth and formalization. - Key constraints identified: cost of financing, access to financing, and inefficiencies in labor and product market regulations that create incentives to operate outside the regulatory framework. ### Empirical evidence from panel regressions (Arellano-Bond GMM, 108 countries, 2006–2014) - Regression specifications tested: effects of financial market efficiency and product market efficiency; inclusion of advanced-economy dummy and oil-exporter dummy; addition of labor market flexibility; addition of an index based on voice and accountability and political stability and absence of violence (PCA). - Key regression results: - The size of the informal sector changes slowly; the lagged share of informality is strongly significant in all specifications, indicating high persistence. - GDP per capita growth is strongly and negatively associated with the share of informality. - Financial market efficiency is strongly associated with a reduction in informality; the variable is composed of five subcomponents: financial services meeting business needs, affordability of financial services, financing through local equity markets, ease of access to loans, and venture capital availability. The result remains significant when controlling for GDP per capita growth. - Product market efficiency lowers the share of the informal sector; significance is stronger for certain Doing Business subcomponents such as cost to export and cost of enforcing contracts. - Labor market flexibility is not found to be significant. - No statistically significant relationship is found between the size of the informal economy and either governance indicators or the macroeconomic environment (proxied by a subcomponent of the Global Competitiveness Index). - Neither the advanced-economy dummy nor the oil-exporter dummy is significant when included with policy variables. *Sources: World Bank, World Governance Indicators; Global Entrepreneurship Monitor database; World Bank Enterprise Surveys; International Labour Organization (ILO); IMF staff calculations.* ### Annex 3.3 presents a regional overview of the associations ### Annex 3.3 presents a regional overview of the associations ### Aggregate association between informal economy size and indices - Broad association at the aggregate level between the size of the informal economy and aggregate values of the indices for regions; association is weak for governance indicators. - Control variable used in regressions: growth rate rather than the level of per capita GDP, because per capita GDP is nonstationary and nonstationarity may cause problems if added directly into the regression. ### Key regression results (Table 3.3: Dependent Variable: Share of Informality) - Lagged share of informality: 0.963***; 0.820***; 0.781***; 0.800***; 0.827*** (t-statistics: (20.00)(6.89)(5.64)(6.76)(8.44)) - Growth rate of GDP per capita (2011 U.S. dollars, PPP): –0.422***; –0.290***; –0.273***; –0.260***; –0.205*** (t-statistics: (–3.18)(–2.77)(–2.61)(–2.76)(–2.91)) - Flexibility of labor market (CGI): 0.590; 0.460 (t-statistics: (0.67)(0.57)) - Efficiency of financial market (CGI): –2.551**; –1.817***; –1.718**; –1.633**; –1.159* (t-statistics: (–2.12)(–2.79)(–2.29)(–2.46)(–1.87)) - Cost of doing business: 1.340**; 1.106*; 1.682*; 1.600*; 1.492* (t-statistics: (2.06)(1.69)(1.67)(1.76)(1.74)) - Governance indicator: 0.393 (t-statistic: (0.53)) - Advanced economy dummy: –3.273; –2.695; –2.811; –3.283 (t-statistics: (–1.43)(–0.97)(–1.22)(–1.22)) - Oil exporter dummy: 5.314; 2.483; 2.293 (t-statistics: (0.62)(0.49)(0.51)) - Constant: 9.064*; 11.57**; 10.59**; 7.623; 5.854 (t-statistics: (1.77)(2.45)(2.00)(1.35)(1.18)) - Number of observations: 803; 803; 803; 803; 803 - Estimation method: Arellano and Bond system-generalized method of moments estimator, including year fixed effects. Robust t-statistics in parentheses. Significance: * p < 0.10, ** p < 0.05, *** p < 0.01. - Notes: - CGI = Global Competitiveness Index; PPP = purchasing power parity. - Share of informality taken from the MIMIC estimates. - Cost of doing business is based on an average of the standardized indices of cost to export and of the cost of enforcing contracts (World Bank, Doing Business database). - Governance indicator is the first component from Principal Component Analysis of “Voice and Accountability” and “Political Stability and Absence of Violence” (Worldwide Governance Indicators). ### Subcomponents with largest statistically significant differences (Table 3.4) - Getting electricity: Procedures (number): Low Informality (Bottom quintile) = 4.4; High Informality (Top quintile) = 6.7; Comparison of Means (t-test) = 0.01 - Time to export: Documentary compliance (hours): Low Informality = 55; High Informality = 1050; Comparison of Means (t-test) = 0.01 - Irregular payments and bribes, 1–7 (best): Low Informality = 4.2; High Informality = 3.1; Comparison of Means (t-test) = 0.02 - Property rights, 1–7 (best): Low Informality = 4.6; High Informality = 3.5; Comparison of Means (t-test) = 0.03 - Reliability of infrastructure, 0–8 (best): Low Informality = 2.7; High Informality = 0.4; Comparison of Means (t-test) = 0.03 - Burden of customs procedures, 1–7 (best): Low Informality = 4.2; High Informality = 3.3; Comparison of Means (t-test) = 0.03 - Doing Business Indicators - Country Rank: Low Informality = 107; High Informality = 154; Comparison of Means (t-test) = 0.03 - Sources: World Bank, Doing Business Indicators; World Economic Forum, Global Competitiveness Report. ### Policy implications and recommendations - Principal insight: Expanding the formal sector to create opportunities for resources to migrate from the informal sector would increase productivity and could help unlock sustained inclusive growth; transformation is expected to be slow, so policies must also support household enterprises that provide a safety net. - Policymaker priorities: - Recognize household enterprises as an important component of the economy that provide a safety net for the large and growing working-age population; focus on policies to foster the productivity of household enterprises rather than primarily increasing tax revenues from them. - For larger firms that evade taxes partially or fully, revenue authorities should work to improve tax compliance. - Focus on improving access to finance and enhancing product market efficiency, especially where indicators show the largest gap compared to countries with smaller informal sectors. - Improving access to finance is key to expanding the scope of the formal sector; policy options include developing technological innovation within the financial sector (for example via mobile banking or Fintech). - Fostering product-market efficiency matters; the cost to export and the cost of enforcing contracts appear particularly important, together with access to electricity. ### Case examples: Mauritius and Rwanda (Box 3.1) - Mauritius (2010–14 relative to 1996–2000): reduced informality by a further four percentage points of GDP, reaching OECD levels. - Policies: improved access to financing for SMEs, free export market intelligence, industrial parks, risk-sharing programs with banks to enable SME credit at the prime rate, computerized same-day firm registration, one-stop shops for financing and permits, tax reform to facilitate compliance, extensive computerization for tax payments and registrations. - Outcome: SMEs represent close to 40 percent of GDP and about 45 percent of total employment; between 2005 and 2010, employment in SMEs continued to grow and contributed more job growth than larger firms. - Rwanda (2010–14 relative to 1996–2000): significantly reduced size of informal sector via movement from informal household enterprises to formal SMEs. - Policies: reformed commercial law, improved regulations to ease access to credit, accelerated trade and property registration; Rwanda outperforms OECD standards in procedures to start a formally registered business. ### Measurement methodologies (Annex 3.1) - Direct approaches: surveys and tax auditing; sensitive to questionnaire design and respondents’ willingness to cooperate; may not capture all informal activities. - Indirect approaches (indicator-based and model-based): include - Discrepancy between national expenditure and income statistics (assumes components of expenditure measured without error). - Discrepancy between the official and actual labor force (weak indicator due to multiple explanations for participation changes). - Electricity approach (Kaufmann and Kaliberda 1996): uses difference between growth of electricity consumption and growth of official GDP; drawbacks include incomplete capture of informal activities and variable electricity-GDP elasticity. - Transaction approach (Fischer’s quantity equation): assumes Prices*Transactions = k (official GDP + informal economy); weaknesses include arbitrary k and changes in payment instruments affecting velocity. - Currency demand approach (Tanzi 1980): infers excess demand for currency due to informal cash transactions; problems include underestimation when noncash informal transactions exist, shifts between currency and deposits, velocity assumptions, and base-year assumptions. - Multiple Indicators–Multiple Cause (MIMIC) approach: considers multiple causes and effects; produces relative estimates that require benchmarking/calibration to convert to percent of GDP (Schneider (2007) calibration using the currency demand approach for year 2000). ### Innovations and robustness checks (Annex 3.2) - Addressing MIMIC criticisms: - Replace GDP per capita and growth as causes/indicators with night lights approach (Henderson, Storeygard, and Weil 2012) to capture economic activity and address endogeneity of GDP. - Use Multiple Imputation using Predictive Mean Matching (Rubin 1987; Little 1988) as an alternative, fully independent methodology. - Predictive Mean Matching uses survey-based observations for 49 countries, matches them to countries with missing data via multiply-imputed datasets from linear regression, producing a set of plausible estimates that incorporate uncertainty. - Procedure: estimate linear regression for countries with observations using covariates similar to MIMIC; draw from posterior predictive distribution; predict values for all countries; match predicted values of nonmissing countries to missing countries in groupings; use actual values for nonmissing countries as estimates; average matches across samplings. - Key assumption: missing data mechanism is “missing at random”; practical validation cited by availability of survey data for large informal economies such as Burundi and Niger, though sensitivity analyses are needed. *Source: Annex 3.3 and related sections from the provided IMF PDF content.* ### 3. THE INFORMAL ECONOMY IN SUB-SAHARAN AFRICA ### 3. THE INFORMAL ECONOMY IN SUB-SAHARAN AFRICA ### Annex 3.3 — Association of Governance, Doing Business, and Competitiveness Indicators with the Size of the Informal Economy - Annex Figure 3.3.1 compares selected regions using: - World Governance Indicators (Index range –2.5 to 2.5) - Doing Business: Distance to Frontier (scale shown 40 60 80) - Global Competitiveness Index (Index range 1 to 7) - Size of Informal Economy (Percent of GDP) - Regions displayed: OECD; Middle East and North Africa; Asia; Europe and Central Asia; Latin America and the Caribbean; Sub-Saharan Africa. - Sources cited: World Bank, World Governance Indicators; World Bank, Doing Business Indicators; World Economic Forum; and IMF staff calculations. ### Annex 3.2 — Selected Sub-Saharan African Countries: Informal Economy, Average 2000–12 - Country groups by estimated informal economy share (Average 2000–12): - Low-Size Countries (0-20 percent) - Mauritius - South Africa - Botswana - Lesotho - Swaziland - Senegal* - Middle-Size Countries (20-40 percent) - Cabo Verde - Namibia - Kenya - Zimbabwe - Eritrea - Gabon - The Gambia - Uganda - Sierra Leone* - Cameroon* - Malawi - Madagascar - Equatorial Guinea - Niger* - Mozambique - Burkina Faso - Chad - Burundi* - High-Size Countries (>40 percent) - Congo, Republic of - Togo* - Guinea-Bissau - Nigeria* - Mali - Comoros - Congo, Democratic Republic of* - Zambia - Ghana - Guinea - Tanzania - Ethiopia - Mauritania - Central African Republic - Angola - Côte D'Ivoire - Liberia - Madagascar - Equatorial Guinea - Niger* - Mozambique - Burkina Faso - Chad - Burundi* - Notes: - Sources: Survey estimates and Predictive Mean Matching Analysis. - *Based on survey estimates. ### Annex 3.4 — Country Classifications (Annex Table 3.4.1) - Classification categories: Oil exporters; Upper-middle income; Lower-middle income; Low-income; Fragile states. - Country classifications (an "X" indicates membership in the category as shown in the source table): - Angola: Oil exporters X, Upper-middle income X - Benin: Low-income X - Botswana: Oil exporters X, Upper-middle income - Burkina Faso: Low-income X - Burundi: Low-income X, Fragile states X - Cameroon: Oil exporters X - Cabo Verde: Upper-middle income X - Central African Republic: Low-income X, Fragile states X - Chad: Oil exporters X, Upper-middle income X, Fragile states X - Comoros: Low-income X, Fragile states X - Democratic Republic of Congo: Oil exporters X, Fragile states X - Republic of Congo: Oil exporters X, Upper-middle income X, Fragile states X - Côte d'Ivoire: Low-income X, Fragile states X - Equatorial Guinea: Oil exporters X, Upper-middle income X - Eritrea: Low-income X, Fragile states X - Ethiopia: Low-income X - Gabon: Oil exporters X, Upper-middle income X - The Gambia: Low-income X - Ghana: Oil exporters X - Guinea: Low-income X X - Guinea-Bissau: Low-income X, Fragile states X - Kenya: Low-income X - Lesotho: Upper-middle income X - Liberia: Low-income X, Fragile states X - Madagascar: Low-income X, Fragile states X - Malawi: Low-income X, Fragile states X - Mali: Low-income X, Fragile states X - Mauritius: Oil exporters X, Upper-middle income X - Mozambique: Low-income X - Namibia: Oil exporters X, Upper-middle income X - Niger: Low-income X - Nigeria: Oil exporters X X - Rwanda: Low-income X - São Tomé and Príncipe: Oil exporters X X - Senegal: Low-income X - Seychelles: Oil exporters X - Sierra Leone: Low-income X, Fragile states X - South Africa: Oil exporters X - Swaziland: Oil exporters X - Tanzania: Low-income X - Togo: Low-income X, Fragile states X - Uganda: Low-income X - Zambia: Oil exporters X - Zimbabwe: Low-income X, Fragile states X *Sources: Survey estimates; Predictive Mean Matching Analysis; World Bank; World Economic Forum; and IMF staff calculations.* ### REFERENCES ### sreo0517 - REFERENCES ### Data and projections - Data and projections presented in this Regional Economic Outlook are IMF staff estimates as of 31 March, 2017, consistent with the projections underlying the April 2017 World Economic Outlook. - The data and projections cover 45 sub-Saharan African countries in the IMF’s African Department. - Data definitions follow established international statistical methodologies to the extent possible; however, in some cases, data limitations limit comparability across countries. ### Country groupings and classification criteria - Countries are aggregated into four (overlapping) groups: oil exporters, middle-income, low-income, and countries in fragile situations. - Oil exporters: countries where net oil exports make up 30 percent or more of total exports. (Except for Angola, Nigeria, and South Sudan, they belong to CEMAC.) - Middle-income countries: had per capita gross national income in the years 2013–15 of more than US$1,025.00 (World Bank, using the Atlas method). - Low-income countries: had average per capita gross national income in the years 2013–15 equal to or lower than US$1,025.00 (World Bank, Atlas method). - Countries in fragile situations: had average CPIA scores of 3.2 or less in the years 2013–15 and/or had the presence of a peace-keeping or peace-building mission within the last three years. - Membership of sub-Saharan African countries in major regional cooperation bodies (CFA franc zone, CEMAC, COMESA, EAC-5, ECOWAS, SADC, SACU) is indicated in the Statistical Appendix. ### Methods of aggregation for appendix tables - In Tables SA1–SA3, SA6–SA7, SA13, SA15–SA16, and SA22–SA23: country group composites are calculated as the arithmetic average of data for individual countries, weighted by GDP valued at purchasing power parity as a share of total group GDP. The source of purchasing power parity weights is the World Economic Outlook (WEO) database. - In Tables SA8–SA12, SA17–SA21, and SA24–SA26: country group composites are calculated as the arithmetic average of data for individual countries, weighted by GDP in U.S. dollars at market exchange rates as a share of total group GDP. - In Tables SA4–SA5 and SA14: country group composites are calculated as the geometric average of data for individual countries, weighted by GDP valued at purchasing power parity as a share of total group GDP. The source of purchasing power parity weights is the WEO database. - In Tables SA27–SA28: country group composites are calculated as the unweighted arithmetic average of data for individual countries. - The source of purchasing power parity weights is explicitly the World Economic Outlook (WEO) database. ### Statistical appendix coverage, tables, and key notes - The Statistical Appendix contains Tables SA1 through SA28, covering indicators including Real GDP Growth; Real Non-Oil GDP Growth; Real Per Capita GDP Growth; Consumer Prices (average and end of period); Total Investment; Gross National Savings; Overall Fiscal Balance (including and excluding grants); Government Revenue and Expenditure; Government Debt; Broad Money and Broad Money Growth; Claims on Nonfinancial Private Sector (percent change and percent of GDP); Exports and Imports of Goods and Services; Trade Balance on Goods; External Current Account; Net Foreign Direct Investment; Real and Nominal Effective Exchange Rates; External Debt, Official Debt, Debitor Based; Terms of Trade on Goods; Reserves; Banking Penetration; Banking Sector: Loan-to-Deposit Ratio. - Table and data sources include IMF Information Notice System, IMF International Financial Statistics, IMF African Department database, and IMF World Economic Outlook database, 31 March, 2017. - Notes and footnotes included in the appendix: - “...” denotes data not available. - Fiscal year data are indicated where applicable with footnote markers. - Some tables report values in constant 2009 U.S. dollars; staff estimates of U.S. dollar values may differ from authorities’ estimates (notably where local currency ceased circulating, e.g., Zimbabwe). - Certain table-specific notes: Table SA22–SA23 source: IMF, Information Notice System; Table SA27 source: IMF, International Financial Statistics (1 Includes offshore banking assets.); Table SA28 source: IMF, International Financial Statistics (1 Loan-to-deposit ratio includes deposits and loans of commercial banks to the public sector). ### Country classification matrix (summary) - A classification matrix of country membership across groupings (Oil exporters, Middle-income countries, Low-income countries, Countries in fragile situations, Other resource-intensive, Non-resource-intensive) is provided in the Statistical Appendix, reflecting the most recent per capita GNI (averaged 2013–15) and World Bank CPIA scores (averaged 2013–15). ### Statistical and methodological caveats highlighted - Country groupings have been changed compared to previous Regional Economic Outlooks. - Data limitations may limit comparability across countries despite adherence to established international statistical methodologies. - Where tables aggregate by PPP weights, the WEO database provides the PPP weights. - Specific country and table footnotes draw attention to fiscal year notations, inclusion of grants, and methods for handling missing or nonstandard data (e.g., Zimbabwe’s currency cessation and staff estimates). *Regional Economic Outlook: Sub‑Saharan Africa — Statistical Appendix and Methodological Notes (content as provided in the source PDF).* --- _Source: https://www.imf.org/-/media/files/publications/reo/afr/2017/may/pdf/sreo0517.pdf_