## 1. Slow Recovery amid Growing Challenges

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### Preparation and authorship
- This chapter was prepared by a team led by Jaroslaw Wieczorek, coordinated by Francisco Arizala and composed of Reda Cherif, Xiangming Fang, and Cleary Haines.

### Macroeconomic developments — A more supportive external environment
- Global growth and drivers:
  - World economy estimated to have grown by 3.8 percent in 2017 and expected to accelerate to 3.9 percent in 2018.
  - Stronger-than-expected growth in major advanced economies, especially in the euro area and in the United States, partly thanks to the recently approved tax reform.
  - Growth in China projected to remain solid.
  - Commodity prices increased since mid-2017, providing relief to oil exporters and other resource-intensive countries.
- International sovereign bond issuance and capital flows:
  - Some frontier economies (Côte d’Ivoire, Nigeria, Senegal) issued a total of $7.5 billion in 2017, 10 times the level seen in 2016 and a record high.
  - In Q1 2018, Kenya, Nigeria, and Senegal issued sovereign bonds in the amount of $6.7 billion, and several countries stated their intention to issue at least an additional $4.4 billion during Q2 2018.
  - Sub-Saharan African frontier markets’ spreads are half of what they were at their peak of about 900 basis points in 2016.
  - The premium relative to emerging markets narrowed from almost 600 to about 150 basis points.
- Portfolio and equity market developments:
  - Sharp increases in portfolio inflows observed in Ghana, Nigeria, and Senegal in 2017.
  - Regional stock market indices (April 2017–end-Jan 2018): about 10 percent in South Africa, 40 percent in Kenya, 60 percent in Ghana, and 70 percent in Nigeria; fell in Senegal.
- Commodity price changes since 2013:
  - Oil prices rose by about 20 percent between August 2017 and mid-December 2017 to more than $60 a barrel.
  - Sizable increases in prices of metals (aluminum, copper, iron ore) and agricultural raw materials (cotton, tea, vanilla); some items (cocoa) experienced drops.
  - With the notable exception of oil and iron ore, most commodity prices are projected to approach, regain, or exceed their 2013 highs by 2020.

### Growth performance — Far from uniform
- Regional growth overview:
  - Growth expected to rise from 2.8 percent in 2017 to 3.4 percent in 2018.
  - More than half of the expected pickup reflects the growth rebound in Nigeria.
  - 29 of 45 countries are expected to see growth accelerate in 2018—the highest number since 2010.
  - Excluding Nigeria and South Africa, growth in the rest of the region projected to pick up from 4.6 percent in 2017 to 4.8 percent in 2018.
- Per capita and distributional outcomes:
  - Average growth rate in the region remains close to zero on a per capita basis and well below historical trends for most country groups.
  - In 2017, income per capita estimated to have declined in 12 countries, home to about 33 percent of sub-Saharan Africa’s population (320 million people).
  - For most of those countries, prospects continue to suggest falling GDP per capita in 2018.
- Country group and individual country notes:
  - Angola and Nigeria: some pickup in hydrocarbon production, but non-oil sector growth remained weak as balance sheets are still being repaired.
  - CEMAC oil-exporting countries: growth in 2017 was negative, except in Cameroon.
  - South Africa: growth estimated at 1.3 percent in 2017; projected at 1.5 percent in 2018.
  - Rest of sub-Saharan Africa (excluding oil exporters and South Africa): growth estimated at 5.9 percent in 2017.
  - Fast-growing countries include Côte d’Ivoire and Senegal (public investment and strong agricultural production) and Ghana (expected increase in oil production).
  - Fragile situations: Guinea, Guinea-Bissau, Madagascar benefited from rebound in commodity prices (aluminum, cashews, vanilla); political developments weighed on Liberia, Togo, Zimbabwe in 2017 but recent transitions point to opportunities.
  - Conflict-affected countries (Burundi, Democratic Republic of the Congo, South Sudan): record levels of refugees and displaced people with negative spillovers; conflicts and terrorist activity in the Sahel and parts of East Africa have resulted in food insecurity and impaired progress on human development indicators.

### Intraregional linkages and spillovers
- Channels and examples:
  - Intraregional spillovers through trade, remittances, and banking channels increasingly affect growth outcomes.
  - Weak performance in South Africa slowed growth in neighboring countries.
  - Côte d’Ivoire and Kenya have been significant demand centers for regional exports and hosts to regional banking groups.
  - Transmission channels include intraregional trade (SACU and WAEMU members), banking (Botswana), and remittances (Liberia, Togo).
  - The African Continental Free Trade Area (AfCFTA), recently launched, could boost regional integration and generate substantial long-term economic benefits.

### External positions — Current account and financing
- Current account deficits:
  - Narrowed from an average of 4.1 percent of GDP in 2016 to 2.6 percent in 2017 for the region, with significant dispersion between oil exporters and importers.
  - Most improvement stemmed from a compression in private sector demand.
- Oil exporters:
  - Large oil exporters (Angola and Nigeria): external balances improved due to higher oil production, uptick in oil prices, compressed imports, and foreign exchange measures (Nigeria); non-oil exports remain weak.
  - CEMAC current account deficit declined sharply from 13.8 percent of GDP in 2016 to 4.3 percent in 2017.
  - Republic of Congo: current account narrowed from a deficit of 74 percent of GDP in 2016 to about 13 percent in 2017—driven by strong fiscal adjustment, recovery in oil prices, and increased oil production.
  - Elsewhere in CEMAC: narrowing explained by increased oil exports, some pickup in non-oil exports (Chad, Gabon, Equatorial Guinea), and lower non-oil imports (Cameroon, Gabon, Equatorial Guinea).
- Other resource-intensive countries:
  - Improvements in 2017 reflected weaker import growth (South Africa), stronger commodity exports and lower non-oil imports (Ghana), and import compression and temporary increase in SACU receipts (Namibia).
  - Current account deficits widened in some countries following deterioration in terms of trade (Mali) or drops in current transfers and income payments (Liberia).
- Non-resource-intensive countries:
  - Current account deficits remained elevated in 2017 due to high food and fuel imports (Kenya), low exports and high capital goods imports (Ethiopia, Senegal), and increased imports for public infrastructure projects (Uganda).
- Financing composition:
  - Current account imbalances increasingly financed through portfolio investment inflows, easing pressure on reserves.
  - Oil-exporting countries’ reserve levels increased in 2017 for the first time since 2013.
  - For other resource-intensive countries, portfolio investment flows remained the major source of external financing.
  - Non-resource-intensive countries, despite net portfolio outflows, financed deficits mainly through foreign direct investment.

### External buffers — Reserves and coverage
- Reserve improvements:
  - The improvement in current account balances in 2017 boosted international reserves in about half of the region’s economies.
  - Many countries, however, maintained reserves barely at or below the traditional three-months-of-imports benchmark.
- Country specifics:
  - Nigeria: gross international reserves rose to a four-year high (more than $39 billion) at end-2017, supported by trade balance improvement, sovereign and corporate bond issuances (including $4.8 billion in international bond issuances), swaps, portfolio, and other private inflows.
  - Angola: foreign exchange reserves fell sharply in 2017 as authorities maintained a peg to the US dollar ahead of transition to a more flexible regime in early 2018.
  - CEMAC: international reserves started to recover as regional institutions (BEAC, COBAC) implemented supportive policies and fiscal consolidation took place; sustained increase in oil prices could lead to faster reserve accumulation.
  - WAEMU: after shrinking in 2016, international reserve coverage stabilized at about four months of imports at end-2017, helped by Eurobond issuances by Côte d’Ivoire, Senegal, and BOAD.
  - Alarmingly low reserve examples: South Sudan reserves equal to only 0.1 month of imports; Democratic Republic of the Congo and Zimbabwe reserves cover about 0.5 month of imports.

### Fiscal adjustment — Mixed record
- Regional fiscal balances:
  - Fiscal deficits widened for the region as a whole from 4.6 percent of GDP in 2016 to 5.0 percent of GDP in 2017, with significant variation across countries.
  - Fiscal positions deteriorated in the largest economies but improved in most other countries.
  - Improvements in many countries reflect continued adjustment to the sharp oil price decline in 2014, the largest in real terms since 1970 (IMF 2016).
- Oil-exporting countries:
  - Fiscal position deteriorated by 0.7 percent of GDP overall, as widened deficits in Angola and Nigeria outweighed narrowing deficits in CEMAC oil producers.
  - Angola’s wider deficit stemmed from weak revenues and some recovery in capital spending.
  - Nigeria’s deficit increased between 2016 and 2017, mainly due to doubling capital expenditure amid low revenue collection.

### Fiscal positions and public debt
- Fiscal deficits and consolidation:
  - Fiscal deficits widened in 2017 in several large economies following increased current expenditures and revenue underperformance (South Africa) and revenue slippages (Ethiopia).
  - Deterioration in fiscal accounts occurred in several resource-intensive countries (Burkina Faso, Liberia, Zambia, Zimbabwe) and non-resource-intensive countries (Burundi).
  - In the WAEMU, fiscal positions remained more relaxed than anticipated; in 2017 only one member met the overall fiscal deficit convergence criterion (below 3 percent of GDP), and fewer than half are projected to meet it by 2019.
  - Several countries consolidated fiscal positions in 2017 in the other resource-intensive group (Ghana, Mali, Namibia) and non-resource-intensive group (The Gambia, Togo), partly due to unintended underspending on capital expenditures (Uganda).
- Public debt trends and drivers:
  - Compared to 2011–13, the median public debt level for all three country groups significantly increased, especially in oil-exporting countries.
  - The median level of public debt in sub-Saharan Africa at the end of 2017 exceeded 50 percent of GDP.
  - Factors contributing to higher debt-to-GDP ratios include large primary deficits, higher interest bills, negative growth (Chad, Republic of Congo, Equatorial Guinea), currency depreciations (The Gambia, Sierra Leone), previously undisclosed debt (Republic of Congo, Mozambique), and below-the-line operations and arrears (Cabo Verde, Equatorial Guinea, Gabon, The Gambia, Senegal, Sierra Leone).

### Interest payments and composition of public spending
- Interest payment dynamics:
  - The share of interest payments in total spending has risen markedly, particularly among oil-exporting countries.
  - Average interest payments increased from 4 percent of expenditures in 2013 to 12 percent in 2017, owing notably to large increases in Angola, Chad, and Gabon.
  - The median interest-payments-to-revenue ratio for sub-Saharan Africa nearly doubled from 5 to close to 10 percent between 2013 and 2017.
  - For oil-exporting countries, the interest-payments-to-revenue ratio increased from 2 to more than 15 percent between 2013 and 2017.
  - Largest increases in interest payments occurred in Angola, Benin, Chad, Republic of Congo, Gabon, Mozambique, Nigeria, Swaziland, Uganda, and Zambia.

### Debt currency composition and external debt service
- Foreign-currency exposure:
  - Foreign-currency-denominated public debt increased by about 40 percent from 2010–13 to 2017 regionwide.
  - Foreign-currency-denominated debt accounted for about 60 percent of total public debt in 2017 on average.
  - The share of foreign-currency-denominated debt varies from about 10 percent of total debt in South Africa to 100 percent in Comoros and Zimbabwe.
  - The increased availability of external financing provides an opportunity to improve debt maturity structure, but countries should avoid overborrowing given rising external debt service and gross financing needs.
  - External debt service rose between 2011–13 and 2017 across country groups.

### Debt distress and PRGT-eligible low-income developing countries
- Debt distress status:
  - About 40 percent of PRGT eligible low-income developing countries in the region are now in debt distress or at high risk of debt distress.
  - As of end-2017, six countries were assessed to be in debt distress: Chad, Eritrea, Mozambique, Republic of Congo, South Sudan, Zimbabwe.
  - Zambia and Ethiopia saw their previous moderate ratings changed to “high risk of debt distress.”
  - Most countries in debt distress are fragile or facing large shocks to prices of major export commodities.

### Inflation, monetary policy, and exchange rates
- Inflation trends:
  - Regionwide, annual inflation fell from 12.5 percent in 2016 to just over 10 percent in 2017, and is expected to drop further in 2018 thanks to falling food prices and policy tightening by oil exporters.
  - Angola: inflation tapered from 42 percent in 2016 to 26.3 percent in 2017 amid tight monetary policy and contraction in reserve money.
- Monetary policy and exchange rates:
  - CEMAC (BEAC) increased its policy rate by 50 basis points in March 2017 and maintained strict control on bank refinancing.
  - Nigeria implemented tighter monetary policy, including open market operations, and introduced a new investor and exporter foreign exchange (IEFX) window in April 2017; parallel market exchange rate premium narrowed from a 60 percent peak in February 2017 to 20 percent in early 2018.
  - In January 2018, Angola allowed the kwanza to depreciate by about 40 percent against the US dollar; the parallel official exchange rate spread decreased from 150 to 100 percent.
  - Monetary policy was accommodative in countries with weakened economic activity or receding inflation (Rwanda, South Africa, Tanzania, Uganda); exchange rate movements enabled more accommodative stances in Rwanda and Zambia.
  - Other countries experienced large exchange rate movements: depreciations (Democratic Republic of the Congo, Liberia) and appreciations (Mozambique—partial reversal of a large depreciation in 2016).

### Banking sector, nonperforming loans, and credit growth
- Nonperforming loans and credit growth:
  - Nonperforming loan ratios have surged across the region, particularly among resource-intensive countries (Angola, Republic of Congo, Mozambique) and where government arrears affect banks (Zambia).
  - Nonperforming loans are often concentrated in a few banks (Angola, Nigeria) and in several instances have been incurred predominantly by public entities (CEMAC).
  - Private sector credit growth decelerated broadly; in 2017 private sector credit growth was negative in real terms in many countries and negative in nominal terms in Angola, Gabon, and Zambia.
  - Drivers of weak credit vary by country: demand-side (legacy of crisis), supply-side (tight liquidity in WAEMU), government arrears (Gabon), high nonperforming loans (Angola), crowding out by public sector (Zambia), and interest rate controls (Kenya).
  - Government reliance on domestic banks to finance rising public debt risks crowding out private sector credit and undermining banking sector stability.
- Banking sector safeguards and recommended actions:
  - Where NPLs are driven by a few entities, targeted resolution of credit should be undertaken.
  - Address liquidity pressures in the banking sector.
  - Enhance review of asset quality.
  - Prompt recapitalization of weaker banks to preserve banks’ ability to lend to the private sector.

### Policy recommendations and priorities
- Fiscal and debt management:
  - Tackle fiscal consolidation to stabilize debt dynamics and avoid slippages as external financing becomes more available.
  - Use favorable external market conditions to improve debt maturity structure and conduct strategic debt management operations without undermining medium-term fiscal plans.
- Banking and financial sector:
  - Rebalance incentives favoring holding government securities to reduce crowding out of private credit (for example, reconsider tax deductibility and exemptions).
  - Implement macroprudential measures to limit banks’ exposure to sovereign debt and gradually tighten central bank refinancing of commercial banks.
  - Strengthen bank resolution frameworks to encourage exposure to the private sector and enhance banking sector resilience.
  - Improve transparency in the corporate sector and reduce information asymmetry by implementing proper accounting standards, setting up credit bureaus and property titling.
- Revenue mobilization and spending:
  - Domestic revenue mobilization is urgent given infrastructure and social development needs and rising debt vulnerabilities.
  - Potential to mobilize about 3 to 5 percent of GDP in additional tax revenues in the next few years (Gaspar and Selassie 2017).
  - Pursue revenue administration reforms within a medium-term plan; improve governance and control of corruption; ensure efficient and transparent public spending to motivate tax compliance.
- Growth and structural reform:
  - Ensure macroeconomic stability: prudent fiscal policy, monetary policy geared toward low inflation, and strengthened external buffers where feasible.
  - Tailor macroeconomic policies and reforms to country-specific structural characteristics and cyclical positions.
  - For oil-exporting countries: continue fiscal adjustment and advance economic diversification; boost non-oil revenues and enhance public spending efficiency; eliminate foreign exchange restrictions where exchange rate flexibility exists.
  - For oil-importing countries: shift investment momentum from public to private sector; reduce fiscal imbalances to ensure sustainable growth.
  - Reinvigorate private investment through improved economic and institutional environment, high-quality infrastructure, skilled labor force, regulatory and insolvency reforms, trade liberalization, and deeper access to credit.
  - Consider innovative financing (public-private partnerships) with appropriate assessment of contingent fiscal liabilities.

### Long-term growth challenge and structural transformation
- Growth prospects and structural needs:
  - Under current policies, medium-term growth is projected to fall far short of 2000s levels and, given current population growth, well below what is needed to lift living standards.
  - Historical drivers of sustained growth include improved macroeconomic policies and stability, strong institutions, high investment in physical and human capital, effective use of foreign aid, and deeper financial markets (IMF 2013).
  - Rapid robotization of manufacturing and potential inward-looking policies may make emulation of past manufacturing-led strategies more difficult.
  - Critical to identify and remove obstacles holding back private sector activity to stimulate productivity growth in existing or new sectors.
- Demographic dividend and jobs:
  - To harness the demographic transition, sub-Saharan Africa would have to create on average about 18 million jobs a year until 2035.
  - Deliberate policies needed to encourage gradual structural transformation from informal low-productivity sectors to higher-productivity activities.
- Social outcomes:
  - Undernourishment rates fell from over 25 percent of the population to around 20 percent.
  - Poverty headcount rates fell from 60 to 40 percent.
  - School enrollment increased by 60 percent.
  - Much remains to be done despite these gains.

### Box — Grappling with rising insecurity in the Sahel region
- Context and scale:
  - Sahel region population about 150 million; high poverty, climate vulnerability, and shortages of physical and human capital.
  - Human costs: roughly 30 million people suffering from food insecurity and 5 million are refugees and internally displaced persons.
  - Terrorism surge has increased military and security-related outlays, complicating macroeconomic stability and fiscal space preservation.
- Policy steps to address insecurity while preserving growth and fiscal stability:
  - Strengthen revenue mobilization.
  - Improve governance.
  - Increase efficiency of public investment.
- Incidence and trends:
  - The Sahel experiences more than half of all attacks within sub-Saharan Africa and, except for the Middle East and North Africa, levels of terrorism far greater than in other large regions.
  - Most Sahel countries saw spikes in terrorist activity at different times; general trend has been a rise in terrorist activity in recent years, with 2017 marking the first year these countries together experienced more attacks than Nigeria.
- Economic and fiscal impacts:
  - Share of military expenditure in public expenditure has been rising.
  - Commodity-producing Sahel countries saw large falls in tax revenues as oil and uranium prices collapsed.
  - Efforts to raise domestic nonresource revenues hampered by slowing economies and trade route disruptions (for example, Niger saw a fall in customs revenue due to conflict disruptions).
- Sahel policy priorities:
  - Create fiscal space for priority security, social, and infrastructure spending to boost long-term growth, ensure greater inclusion, and improve people’s livelihoods to break the cycle of extremism and violence.
  - Strengthen domestic revenue mobilization and boost the efficiency of public investment.
  - Strengthen governance and transparency.
  - Envisage a prolonged, calibrated, and coordinated expansion of security operations across the Sahel; associated fiscal costs will continue to place a heavy burden on national authorities’ ability to deliver on sustainable development goals.
- Key indicators referenced (as presented):
  - Military spending and fiscal balance reported for 2013–16 (percent of GDP and percent of total expenditure).
  - Business Costs of Terrorism scale: 1 (worst) to 7 (best), reported for 2007–17 across G8 Sahel, Sub-Saharan Africa, and Low-income countries.
  - Revenue and Gross ODA, 2007–16, shown as percent of GDP, with separate series for tax revenue - Sahel oil-producers; tax revenue - Rest of Sahel; and Gross ODA.

### Regional spillovers: channels and magnitudes
- Trade linkages:
  - Intra-regional trade represented 6 percent of total exports in 1980, rising to 20 percent in 2016.
  - Most regional trade gains occur within subregional integration zones (SADC, EAC, WAEMU, CEMAC).
  - Trade demand concentration: 10 sub-Saharan African countries represent 65 percent of total regional demand for intraregional exports.
  - Estimated spillover magnitude: an economic spillover of about 0.11 percent to a country’s GDP growth for every percentage point change in the growth of the trading partners (Arizala and others 2018).
- Banking linkages:
  - Pan-African and subregional banks are increasingly active: banking groups based in South Africa, Togo, and Nigeria account for all pan-African bank assets and about 70 percent of subregional bank assets.
  - Expansion mode: mostly subsidiaries formed via acquisition of smaller banks or branch establishments; foreign subsidiaries have larger presence in smaller countries.
  - Correlation: growth rates of home countries of banks are correlated with credit growth in host countries where pan-African and subregional banks operate.
- Remittances:
  - Remittance inflows have reached elevated levels in some countries; regional remittances increased to one-third of the total in 2015.
  - Top five senders account for 55 percent of total outflows.
  - Remittance-linked growth spillovers comparable in strength to trade-linked spillovers (Arizala and others 2018).

### The African Continental Free-Trade Area (AfCFTA): structure, expectations, and challenges
- Key elements and timeline:
  - On March 21, 2018, representatives of a large number of AU member countries signed the AfCFTA agreement.
  - Expected coverage once fully implemented: all 55 African countries, combined GDP of about $2.2 trillion (based on IMF, World Economic Outlook database), and a population of over 1 billion.
  - Agreement becomes effective once at least 22 member countries have ratified it.
  - Phase I: framework for liberalization of trade in goods and services, dispute settlement mechanism; for goods, path to eliminate tariffs on 90 percent of product categories.
  - Services liberalization: request-and-offer approach based on seven priority sectors: logistics and transport, financial services, tourism, professional services, energy services, construction, and communications.
  - Phase II (separate negotiations expected to begin in late 2018): competition policy, investment, and intellectual property rights.
- Current trade and barrier metrics:
  - In 2016, 18 percent of Africa’s total trade was conducted within the continent.
  - In 2015, manufactured goods accounted for 19 percent of Africa’s exports to the rest of the world.
  - Applied average most-favored-nation tariff for African countries in 2016: 14.5 percent.
  - Maximum tariff rate on any product in sub-Saharan Africa was close to 400 percent.
  - Simple average tariff across all products: slightly less than 10 percent.
  - Duty-free line items represented only 28⅓ percent of all tariff lines.
- Potential benefits and distributional considerations:
  - Removal of all tariff barriers within the continent and a 50 percent reduction of nontariff barriers could increase intra-African trade by almost 130 percent within five years (Mevel and Karingi 2012).
  - Those changes combined with improved trade facilitation could increase GDP by as much as 5 percentage points in 15 years (Chauvin and others 2016).
  - Creation of a continental customs union, in addition to the AfCFTA, could increase African exports to the rest of the world by 4 percent within five years (Mevel and Karingi 2012).
  - Distributional impacts: gains unlikely to be uniform; mitigating measures and improved domestic revenue mobilization will be needed to offset tariff-revenue losses.
- Nontariff barriers and infrastructure constraints:
  - Fully realizing AfCFTA benefits requires reducing infrastructure gaps and improving the business environment.
  - Ground transportation cost reductions are critical.
  - Low scores relative to other regions for quality of ports, air transportation, customs efficiency, and logistics performance; financial depth and inclusion remain lower in Africa, constraining access to trade finance.
- Selected metrics (values preserved exactly as in source):
  - Container port traffic (WDI): Africa 0.09; Sub-Saharan Africa 0.07; Advanced Economies 0.75; North America 0.11; South America 0.12; Central America 0.38; Asia 0.65.
  - Air transport passengers, per capita (WDI): Africa 0.23; Sub-Saharan Africa 0.25; Advanced Economies 2.61; North America 1.6; South America 1.43; Central America 0.93; Asia 1.18.
  - Quality of port infrastructure (1=low to 7=high) (WDI): Africa 3.64; Sub-Saharan Africa 3.64; Advanced Economies 5.35; North America 5.21; South America 3.65; Central America 4.15; Asia 4.17.
  - Liner shipping connectivity index (WDI): Africa 14.38; Sub-Saharan Africa 12.72; Advanced Economies 50.64; North America 58.5; South America 12.4; Central America 16.36; Asia 35.11.
  - Infrastructure efficiency score (LPI): Africa 2.32; Sub-Saharan Africa 2.34; Advanced Economies 3.75; North America 3.73; South America 2.56; Central America 2.43; Asia 2.92.
  - Customs efficiency score (LPI): Africa 2.35; Sub-Saharan Africa 2.39; Advanced Economies 3.58; North America 3.53; South America 2.52; Central America 2.52; Asia 2.88.
  - International shipments efficiency score (LPI): Africa 2.52; Sub-Saharan Africa 2.52; Advanced Economies 3.56; North America 3.4; South America 2.76; Central America 2.81; Asia 3.01.
  - Timeliness efficiency score (LPI): Africa 2.87; Sub-Saharan Africa 2.86; Advanced Economies 4.09; North America 3.88; South America 3.21; Central America 3.13; Asia 3.44.
  - Overall logistics efficiency score (LPI): Africa 2.49; Sub-Saharan Africa 2.51; Advanced Economies 3.74; North America 3.68; South America 2.77; Central America 2.69; Asia 3.05.
  - Burden of customs (1=inefficient to 7=efficient) (WDI): Africa 3.6; Sub-Saharan Africa 3.6; Advanced Economies 4.6; North America 3.5; South America 3.7; Central America 4.3.
  - Time to export (days) (DB): Africa 29.3; Sub-Saharan Africa 30.9; Advanced Economies 10.2; North America 9.8; South America 19.8; Central America 15.4; Asia 20.
  - Time to import (days) (DB): Africa 36.4; Sub-Saharan Africa 38.5; Advanced Economies 9.3; North America 9.7; South America 24.3; Central America 15.3; Asia 21.6.
  - Cost to export (USD per container) (DB): Africa 2,149; Sub-Saharan Africa 2,302; Advanced Economies 1,054; North America 1,395; South America 1,809; Central America 1,181; Asia 1,026.
  - Cost to import (USD per container) (DB): Africa 2,819; Sub-Saharan Africa 3,056; Advanced Economies 1,102; North America 1,570; South America 2,020; Central America 1,329; Asia 1,092.
  - Start business (days) (DB): Africa 31.2; Sub-Saharan Africa 33.3; Advanced Economies 11.2; North America 6.5; South America 7.2; Central America 2.4; Asia 26.9; (other reported value) 30.5.
  - Start business (cost as % of income per capita) (DB): Africa 69.77; Sub-Saharan Africa 44.17; Advanced Economies 7.22; North America 739.82; South America 24.1.

### CEMAC: Implementation of the Regional Economic Strategy and Road Ahead
- Stabilization and reserves:
  - International reserve coverage stabilized at 2.5 months of imports at the end of 2017.
  - Completion of IMF program reviews with Cameroon, Central African Republic, and Gabon in December 2017; agreement on Chadian debt restructuring allowed conclusion of Chad’s IMF program review; program negotiations with Republic of Congo and Equatorial Guinea are ongoing.
- Fiscal developments and projections:
  - Overall primary spending (focus on nonpriority cuts) declined from 27.5 percent of non-oil GDP in 2016 to 22.8 percent of non-oil GDP in 2017.
  - Fiscal consolidation is projected to reduce the overall fiscal deficit (excluding grants) across CEMAC member countries from 4.2 percent of GDP in 2017 to 0.7 percent of GDP in 2020, while preserving social protection programs.
  - Public debt ratios are projected to fall from about 52 percent of GDP at the end of 2017 to 49 percent of GDP at the end of 2020.
  - Domestic debt expected to drop as a share of GDP from close to 20 percent at the end of 2017 to less than 14 percent at the end of 2020; external debt would remain broadly stable.
  - Implementation of the regional reform package and sustained macro stabilization would lead to a gradual pickup in non-oil GDP growth to 4.8 percent in 2021.
- BEAC monetary and financial measures:
  - Elimination of new central bank credit to government at the end of 2017 to restore fiscal and monetary discipline.
  - In 2018 BEAC plans to: simplify monetary policy instruments; base liquidity management on the projection of autonomous factors; strengthen the framework for required reserves; adjust its collateral framework; and set up an emergency liquidity assistance (ELA) framework.
  - BEAC will anchor operations on the policy rate rather than monetary aggregates and promote financial sector databases and a credit bureau.
- Banking supervision:
  - Regional banking supervisor adopted an action plan to address high nonperforming loans, strengthen implementation of prudential regulations (risk concentration and connected party lending rules), and resolve banks in difficulty; aim for risk-based supervision.
- Structural reform priorities:
  - Business environment: establishment of trade courts; creation of one-stop shops; establishment of incubators.
  - Regional integration: harmonization and reduction of customs exemptions; full implementation of the Common External Tariff; enacting the freedom to establish companies.
  - Governance, fiscal transparency, and public financial management need strengthening; saving windfalls from higher oil revenues is recommended.

### Protecting Social Spending in IMF-Supported Programs
- Program coverage and design:
  - Since 2009, almost all IMF-supported programs in sub-Saharan African countries have included quantitative targets or structural benchmarks to preserve or increase social spending (health, education, social protection).
  - Under the post-2009 architecture, all instruments should support policies that safeguard social and other priority spending and be reflected in the Letter of Intent.
  - During 2006–09, about 50 percent of programs under the Poverty Reduction and Growth Facility included a floor on social spending; since 2009, about 90 percent of IMF-supported programs approved for low-income countries included such a floor, of which about 95 percent of programs approved were for sub-Saharan African countries.
- Effectiveness:
  - Floors on social spending were met in more than two-thirds of the programs.
  - The share of social spending protected by indicative floors increased between 2010 and 2017 by about 2.5 percentage points of total spending (from an average of about 23.5 percent to 26 percent) and by about 1 percentage point of GDP (from an average of 6 percent to 7 percent).

### Annex 1.1. Fiscal Break-even Oil Price: Definition and Decomposition
- Definition:
  - The fiscal break-even oil price is an approximate measure of the oil price needed to balance the budget and is defined (all variables in US dollars) as the non-oil fiscal balance divided by the number of oil barrels allotted to the government (i.e., fiscal oil revenue divided by the oil price).
- Decomposition:
  - A method decomposes changes in the fiscal break-even oil price into contributions from real exchange rate depreciation, fiscal adjustment, and changes in oil export volumes and/or oil taxation.
  - Change in the fiscal break-even oil price in constant US dollars equals: the difference in logarithms of the real exchange rate vis-à-vis the US dollar (depreciation), plus the difference in the logarithm of the non-oil fiscal balance in constant local currency (fiscal adjustment), plus a component reflecting changes in (log) volumes of oil exports and/or changes in the oil taxation schedule.
- Use and limitations:
  - The decomposition provides relative contributions of exchange rate movements and fiscal policy to break-even dynamics.
  - The indicator assumes non-oil revenue does not depend on oil price and a linear relationship between fiscal oil revenue and oil price.

*Source: IMF staff (Regional Economic Outlook: Sub‑Saharan Africa — Chapter 1).*

### 1. Slow Recovery amid Growing Challenges

### 1. Slow Recovery amid Growing Challenges

### Preparation and authorship
- This chapter was prepared by a team led by Jaroslaw Wieczorek, coordinated by Francisco Arizala and composed of Reda Cherif, Xiangming Fang, and Cleary Haines.

### Macroeconomic developments — A more supportive external environment
- Global growth: world economy estimated to have grown by 3.8 percent in 2017 and expected to accelerate to 3.9 percent in 2018.
- Drivers of improved external environment:
  - Stronger-than-expected growth in major advanced economies, especially in the euro area and in the United States, partly thanks to the recently approved tax reform.
  - Growth in China projected to remain solid.
  - Commodity prices increased since mid-2017, providing relief to oil exporters and other resource-intensive countries.
- International sovereign bond issuance and capital flows:
  - Some frontier economies (Côte d’Ivoire, Nigeria, Senegal) issued a total of $7.5 billion in 2017, 10 times the level seen in 2016 and a record high.
  - In Q1 2018, Kenya, Nigeria, and Senegal issued sovereign bonds in the amount of $6.7 billion, and several countries stated their intention to issue at least an additional $4.4 billion during Q2 2018.
  - Sub-Saharan African frontier markets’ spreads are half of what they were at their peak of about 900 basis points in 2016.
  - The premium relative to emerging markets narrowed from almost 600 to about 150 basis points.
- Portfolio and equity market developments:
  - Sharp increases in portfolio inflows observed in Ghana, Nigeria, and Senegal in 2017.
  - Regional stock market indices (April 2017–end-Jan 2018): about 10 percent in South Africa, 40 percent in Kenya, 60 percent in Ghana, and 70 percent in Nigeria; fell in Senegal.
- Commodity price changes since 2013:
  - Oil prices rose by about 20 percent between August 2017 and mid-December 2017 to more than $60 a barrel.
  - Sizable increases in prices of metals (aluminum, copper, iron ore) and agricultural raw materials (cotton, tea, vanilla); some items (cocoa) experienced drops.
  - With the notable exception of oil and iron ore, most commodity prices are projected to approach, regain, or exceed their 2013 highs by 2020.

### Growth performance — Far from uniform
- Regional growth overview:
  - Growth expected to rise from 2.8 percent in 2017 to 3.4 percent in 2018.
  - More than half of the expected pickup reflects the growth rebound in Nigeria.
  - 29 of 45 countries are expected to see growth accelerate in 2018—the highest number since 2010.
  - Excluding Nigeria and South Africa, growth in the rest of the region projected to pick up from 4.6 percent in 2017 to 4.8 percent in 2018.
- Per capita and distributional outcomes:
  - Average growth rate in the region remains close to zero on a per capita basis and well below historical trends for most country groups.
  - In 2017, income per capita estimated to have declined in 12 countries, home to about 33 percent of sub-Saharan Africa’s population (320 million people).
  - For most of those countries, prospects continue to suggest falling GDP per capita in 2018.
- Country group and individual country notes:
  - Angola and Nigeria: some pickup in hydrocarbon production, but non-oil sector growth remained weak as balance sheets are still being repaired.
  - CEMAC oil-exporting countries: growth in 2017 was negative, except in Cameroon.
  - South Africa: growth estimated at 1.3 percent in 2017; projected at 1.5 percent in 2018.
  - Rest of sub-Saharan Africa (excluding oil exporters and South Africa): growth estimated at 5.9 percent in 2017.
  - Fast-growing countries include Côte d’Ivoire and Senegal (public investment and strong agricultural production) and Ghana (expected increase in oil production).
  - Fragile situations: Guinea, Guinea-Bissau, Madagascar benefited from rebound in commodity prices (aluminum, cashews, vanilla); political developments weighed on Liberia, Togo, Zimbabwe in 2017 but recent transitions point to opportunities.
  - Conflict-affected countries (Burundi, Democratic Republic of the Congo, South Sudan): record levels of refugees and displaced people with negative spillovers; conflicts and terrorist activity in the Sahel and parts of East Africa have resulted in food insecurity and impaired progress on human development indicators.

### Intraregional linkages and spillovers
- Intraregional spillovers through trade, remittances, and banking channels increasingly affect growth outcomes.
- Examples:
  - Weak performance in South Africa slowed growth in neighboring countries.
  - Côte d’Ivoire and Kenya have been significant demand centers for regional exports and hosts to regional banking groups.
  - Transmission channels include intraregional trade (SACU and WAEMU members), banking (Botswana), and remittances (Liberia, Togo).
  - The African Continental Free Trade Area (AfCFTA), recently launched, could boost regional integration and generate substantial long-term economic benefits.

### External positions — Current account and financing
- Current account deficits:
  - Narrowed from an average of 4.1 percent of GDP in 2016 to 2.6 percent in 2017 for the region, with significant dispersion between oil exporters and importers.
  - Most improvement stemmed from a compression in private sector demand.
- Oil exporters:
  - Large oil exporters (Angola and Nigeria): external balances improved due to higher oil production, uptick in oil prices, compressed imports, and foreign exchange measures (Nigeria); non-oil exports remain weak.
  - CEMAC current account deficit declined sharply from 13.8 percent of GDP in 2016 to 4.3 percent in 2017.
  - Republic of Congo: current account narrowed from a deficit of 74 percent of GDP in 2016 to about 13 percent in 2017—driven by strong fiscal adjustment, recovery in oil prices, and increased oil production.
  - Elsewhere in CEMAC: narrowing explained by increased oil exports, some pickup in non-oil exports (Chad, Gabon, Equatorial Guinea), and lower non-oil imports (Cameroon, Gabon, Equatorial Guinea).
- Other resource-intensive countries:
  - Improvements in 2017 reflected weaker import growth (South Africa), stronger commodity exports and lower non-oil imports (Ghana), and import compression and temporary increase in SACU receipts (Namibia).
  - Current account deficits widened in some countries following deterioration in terms of trade (Mali) or drops in current transfers and income payments (Liberia).
- Non-resource-intensive countries:
  - Current account deficits remained elevated in 2017 due to high food and fuel imports (Kenya), low exports and high capital goods imports (Ethiopia, Senegal), and increased imports for public infrastructure projects (Uganda).
- Financing composition:
  - Current account imbalances increasingly financed through portfolio investment inflows, easing pressure on reserves.
  - Oil-exporting countries’ reserve levels increased in 2017 for the first time since 2013.
  - For other resource-intensive countries, portfolio investment flows remained the major source of external financing.
  - Non-resource-intensive countries, despite net portfolio outflows, financed deficits mainly through foreign direct investment.

### External buffers — Reserves and coverage
- Reserve improvements:
  - The improvement in current account balances in 2017 boosted international reserves in about half of the region’s economies.
  - Many countries, however, maintained reserves barely at or below the traditional three-months-of-imports benchmark.
- Country specifics:
  - Nigeria: gross international reserves rose to a four-year high (more than $39 billion) at end-2017, supported by trade balance improvement, sovereign and corporate bond issuances (including $4.8 billion in international bond issuances), swaps, portfolio, and other private inflows.
  - Angola: foreign exchange reserves fell sharply in 2017 as authorities maintained a peg to the US dollar ahead of transition to a more flexible regime in early 2018.
  - CEMAC: international reserves started to recover as regional institutions (BEAC, COBAC) implemented supportive policies and fiscal consolidation took place; sustained increase in oil prices could lead to faster reserve accumulation.
  - WAEMU: after shrinking in 2016, international reserve coverage stabilized at about four months of imports at end-2017, helped by Eurobond issuances by Côte d’Ivoire, Senegal, and BOAD.
  - Alarmingly low reserve examples: South Sudan reserves equal to only 0.1 month of imports; Democratic Republic of the Congo and Zimbabwe reserves cover about 0.5 month of imports.

### Fiscal adjustment — Mixed record
- Regional fiscal balances:
  - Fiscal deficits widened for the region as a whole from 4.6 percent of GDP in 2016 to 5.0 percent of GDP in 2017, with significant variation across countries.
  - Fiscal positions deteriorated in the largest economies but improved in most other countries.
  - Improvements in many countries reflect continued adjustment to the sharp oil price decline in 2014, the largest in real terms since 1970 (IMF 2016).
- Oil-exporting countries:
  - Fiscal position deteriorated by 0.7 percent of GDP overall, as widened deficits in Angola and Nigeria outweighed narrowing deficits in CEMAC oil producers.
  - Angola’s wider deficit stemmed from weak revenues and some recovery in capital spending.
  - Nigeria’s deficit increased between 2016 and 2017, mainly due to doubling capital expenditure amid low revenue collection.
  - CEMAC countries substantially reduced their fiscal deficits (from levels detailed elsewhere in the chapter).

*This chapter was prepared by a team led by Jaroslaw Wieczorek, coordinated by Francisco Arizala and composed of Reda Cherif, Xiangming Fang, and Cleary Haines.*

### 7.6 percent in 2016 to 3.5 percent in 2017)

### chap1 - 7.6 percent in 2016 to 3.5 percent in 2017)

### Fiscal positions and public debt
- Fiscal deficits widened in 2017 in several large economies following increased current expenditures and revenue underperformance (South Africa) and revenue slippages (Ethiopia).
- Deterioration in fiscal accounts occurred in several resource-intensive countries (Burkina Faso, Liberia, Zambia, Zimbabwe) and non-resource-intensive countries (Burundi).
- In the WAEMU, fiscal positions remained more relaxed than anticipated; in 2017 only one member met the overall fiscal deficit convergence criterion (below 3 percent of GDP), and fewer than half are projected to meet it by 2019.
- Several countries consolidated fiscal positions in 2017 in the other resource-intensive group (Ghana, Mali, Namibia) and non-resource-intensive group (The Gambia, Togo), partly due to unintended underspending on capital expenditures (Uganda).
- Compared to 2011–13, the median public debt level for all three country groups significantly increased, especially in oil-exporting countries.
- The median level of public debt in sub-Saharan Africa at the end of 2017 exceeded 50 percent of GDP.
- Factors contributing to higher debt-to-GDP ratios include large primary deficits, higher interest bills, negative growth (Chad, Republic of Congo, Equatorial Guinea), currency depreciations (The Gambia, Sierra Leone), previously undisclosed debt (Republic of Congo, Mozambique), and below-the-line operations and arrears (Cabo Verde, Equatorial Guinea, Gabon, The Gambia, Senegal, Sierra Leone).

### Interest payments and composition of public spending
- The share of interest payments in total spending has risen markedly, particularly among oil-exporting countries.
- Average interest payments increased from 4 percent of expenditures in 2013 to 12 percent in 2017, owing notably to large increases in Angola, Chad, and Gabon.
- The median interest-payments-to-revenue ratio for sub-Saharan Africa nearly doubled from 5 to close to 10 percent between 2013 and 2017.
- For oil-exporting countries, the interest-payments-to-revenue ratio increased from 2 to more than 15 percent between 2013 and 2017.
- Largest increases in interest payments occurred in Angola, Benin, Chad, Republic of Congo, Gabon, Mozambique, Nigeria, Swaziland, Uganda, and Zambia.

### Debt currency composition and external debt service
- Foreign-currency-denominated public debt increased by about 40 percent from 2010–13 to 2017 regionwide.
- Foreign-currency-denominated debt accounted for about 60 percent of total public debt in 2017 on average.
- The share of foreign-currency-denominated debt varies from about 10 percent of total debt in South Africa to 100 percent in Comoros and Zimbabwe.
- The increased availability of external financing provides an opportunity to improve debt maturity structure, but countries should avoid overborrowing given rising external debt service and gross financing needs.
- External debt service rose between 2011–13 and 2017 across country groups (see external debt service indicators).

### Debt distress and PRGT-eligible low-income developing countries
- About 40 percent of PRGT eligible low-income developing countries in the region are now in debt distress or at high risk of debt distress.
- As of end-2017, six countries were assessed to be in debt distress: Chad, Eritrea, Mozambique, Republic of Congo, South Sudan, Zimbabwe.
- Zambia and Ethiopia saw their previous moderate ratings changed to “high risk of debt distress.”
- Most countries in debt distress are fragile or facing large shocks to prices of major export commodities.

### Inflation, monetary policy, and exchange rates
- Regionwide, annual inflation fell from 12.5 percent in 2016 to just over 10 percent in 2017, and is expected to drop further in 2018 thanks to falling food prices and policy tightening by oil exporters.
- Angola: inflation tapered from 42 percent in 2016 to 26.3 percent in 2017 amid tight monetary policy and contraction in reserve money.
- CEMAC (BEAC) increased its policy rate by 50 basis points in March 2017 and maintained strict control on bank refinancing.
- Nigeria implemented tighter monetary policy, including open market operations, and introduced a new investor and exporter foreign exchange (IEFX) window in April 2017; parallel market exchange rate premium narrowed from a 60 percent peak in February 2017 to 20 percent in early 2018.
- In January 2018, Angola allowed the kwanza to depreciate by about 40 percent against the US dollar; the parallel official exchange rate spread decreased from 150 to 100 percent.
- Monetary policy was accommodative in countries with weakened economic activity or receding inflation (Rwanda, South Africa, Tanzania, Uganda); exchange rate movements enabled more accommodative stances in Rwanda and Zambia.
- Other countries experienced large exchange rate movements: depreciations (Democratic Republic of the Congo, Liberia) and appreciations (Mozambique—partial reversal of a large depreciation in 2016).

### Banking sector, nonperforming loans, and credit growth
- Nonperforming loan ratios have surged across the region, particularly among resource-intensive countries (Angola, Republic of Congo, Mozambique) and where government arrears affect banks (Zambia).
- Nonperforming loans are often concentrated in a few banks (Angola, Nigeria) and in several instances have been incurred predominantly by public entities (CEMAC).
- Private sector credit growth decelerated broadly; in 2017 private sector credit growth was negative in real terms in many countries and negative in nominal terms in Angola, Gabon, and Zambia.
- Drivers of weak credit vary by country: demand-side (legacy of crisis), supply-side (tight liquidity in WAEMU), government arrears (Gabon), high nonperforming loans (Angola), crowding out by public sector (Zambia), and interest rate controls (Kenya).
- Government reliance on domestic banks to finance rising public debt risks crowding out private sector credit and undermining banking sector stability.

### Policy recommendations and priorities
- Tackle fiscal consolidation to stabilize debt dynamics and avoid slippages as external financing becomes more available.
- Rebalance incentives favoring holding government securities to reduce crowding out of private credit (for example, reconsider tax deductibility and exemptions).
- Implement macroprudential measures to limit banks’ exposure to sovereign debt and gradually tighten central bank refinancing of commercial banks.
- Improve transparency in the corporate sector and reduce information asymmetry by implementing proper accounting standards, setting up credit bureaus and property titling.
- Strengthen bank resolution frameworks to encourage exposure to the private sector and enhance banking sector resilience.
- Use favorable external market conditions to improve debt maturity structure and conduct strategic debt management operations without undermining medium-term fiscal plans.

*Regional Economic Outlook: Sub-Saharan Africa — Chapter content (pages excerpted).*

### 1. SLOW RECOVERY AMID GROWING CHALLENGES

### 1. SLOW RECOVERY AMID GROWING CHALLENGES

### Banking sector and private credit
- Nonperforming loans (NPLs) have risen in several countries; where driven by a few entities, targeted resolution of credit should be undertaken.
- Safeguards recommended:
  - Address liquidity pressures in the banking sector.
  - Enhance review of asset quality.
  - Prompt recapitalization of weaker banks to preserve banks’ ability to lend to the private sector.
- Private sector credit growth exhibited wide cross-country variation in 2016–17 (figures shown in source).

### Fiscal positions and debt dynamics
- 2018 expectations:
  - Some fiscal consolidation among non-resource-intensive countries, driven mostly by revenue mobilization efforts (Ethiopia, Lesotho, Mozambique) and cuts in current primary expenditures (The Gambia, Madagascar, Malawi).
  - Non-resource-intensive countries expected to strengthen fiscal positions, enabling some room for higher capital expenditures (Niger, Zimbabwe).
  - Among oil-exporting countries, modest fiscal improvements in some cases driven by pickup in oil revenue from price increases and recovery of production (Nigeria).
- Planned fiscal consolidation plus a pickup in growth underlie an expected gradual reduction in debt over the medium term.
- Implementation risks:
  - If planned consolidation or growth fails to materialize, debt vulnerabilities could become more acute.
  - To increase likelihood of sustained consolidation, attention needed to distributional consequences and protection of priority spending—a feature of recent IMF programs.
  - Fiscal adjustment design should favor measures with low short-term multipliers and include accompanying fiscal reforms to promote long-term growth (IMF 2015b, 2017b).

### Outlook for oil exporters
- Despite recent increases, oil prices remain too low to balance budgets of most oil exporters.
- Break-even oil price:
  - Declined between 2014 and 2017 for all sub-Saharan African oil-exporting countries except Gabon and Nigeria.
  - In most cases, break-even price remains well above current and projected oil prices.
  - Drop in break-even reflects fiscal consolidation (reductions in expenditure envelopes and increases in nonoil revenues) and real depreciation vis-à-vis the US dollar.
  - In Gabon and Nigeria, increases in break-even partly explained by sizable drops in production volumes and, in Gabon’s case, an increase in government expenditure in real terms.
- Note: For Cameroon, interpretation is harder because oil represented about 13 percent of government revenue in 2017; a very high price would be needed to balance the budget.

### Risks to the outlook
- External risks:
  - Expected monetary policy normalization in advanced economies could tighten financing conditions for many sovereigns, especially where public debt levels are already high.
  - Recent surge in foreign portfolio investment could be reversed.
  - Weaker-than-expected growth in key advanced economies or large emerging markets (for example, China) would affect commodity prices, demand for exports, FDI inflows, and other financing sources.
- Domestic risks:
  - Political uncertainty and security challenges weigh on outlook in some countries.
  - Impending elections and political transitions may reduce appetite for difficult reforms and lead to policy slippages.
  - Continued policy uncertainty dampens investment in many countries despite potentially positive developments in Angola, South Africa, Zimbabwe.
  - Lingering internal conflicts remain a latent risk in several countries (Burundi, Democratic Republic of Congo, South Sudan, parts of the Sahel), with rising internally displaced people and refugees.
  - Deteriorating economic conditions could prompt inward-looking policies that hinder growth.
  - Upside risk exists if uncertainties resolve favorably, producing a confidence boost or faster policy reforms (Nigeria, South Africa).

### Policy priorities to restore and sustain growth
- Ensuring macroeconomic stability:
  - Prudent fiscal policy to rein in public debt buildup.
  - Monetary policy geared toward ensuring low inflation.
  - Strengthen external buffers where countries can take advantage of global growth pickup and favorable external conditions.
  - Tailor macroeconomic policies and reforms to country-specific structural characteristics and cyclical positions.
- For oil-exporting countries:
  - Continue fiscal adjustment and advance economic diversification, leveraging the uptick in commodity prices.
  - Boost non-oil revenues and enhance public spending efficiency to ensure medium-term macroeconomic stability.
  - Countries with exchange rate flexibility should eliminate foreign exchange restrictions and multiple currency practices and allow exchange rates to adjust to fundamentals.
- For oil-importing countries:
  - Shift investment momentum from public to private sector.
  - Reduce fiscal imbalances to ensure sustainable growth over the medium term.
- Revenue mobilization:
  - Domestic revenue mobilization is urgent given infrastructure and social development needs and rising debt vulnerabilities.
  - Potential to mobilize about 3 to 5 percent of GDP in additional tax revenues in the next few years (Gaspar and Selassie 2017).
  - Success requires appropriate tax policy design (including expanding the base for value-added and direct taxes) and effective revenue administration institutions.
  - Pursue revenue administration reforms within a medium-term plan; improve governance and control of corruption; ensure efficient and transparent public spending to motivate tax compliance.
- Reinvigorating private investment:
  - Nurturing a dynamic private sector is key to sustainable growth.
  - Policies should ensure a favorable economic and institutional environment supported by high-quality infrastructure and a skilled labor force.
  - Essential measures: ensure macroeconomic stability, strengthen regulatory and insolvency frameworks, increase trade liberalization, and deepen access to credit.
  - Consider innovative financing (public-private partnerships) with appropriate assessment of contingent fiscal liabilities.

### Long-term growth challenge and structural transformation
- Under current policies, medium-term growth is projected to fall far short of 2000s levels and, given current population growth, well below what is needed to lift living standards.
- Income convergence:
  - Between 1985 and 2000, most low-income sub-Saharan economies failed to close per capita income gap relative to the frontier (the United States).
  - In the 2000s, comparator countries from other regions achieved higher growth and narrowed the gap, which most sub-Saharan African countries have not done and seem less well-positioned to do on current projections.
- Historical drivers of sustained growth include improved macroeconomic policies and stability, strong institutions, high investment in physical and human capital, effective use of foreign aid, and deeper financial markets (IMF 2013).
- Challenges ahead:
  - Rapid robotization of manufacturing and potential inward-looking policies may make emulation of past manufacturing-led strategies more difficult.
  - Critical to identify and remove obstacles holding back private sector activity to stimulate productivity growth in existing or new sectors.
  - Improve business environment through governance reforms, financial market deepening, and trade liberalization.
- Demographic dividend:
  - To harness the demographic transition, sub-Saharan Africa would have to create on average about 18 million jobs a year until 2035.
  - Deliberate policies needed to encourage gradual structural transformation from informal low-productivity sectors to higher-productivity activities.
- Social outcomes progress and remaining needs:
  - Undernourishment rates fell from over 25 percent of the population to around 20 percent.
  - Poverty headcount rates fell from 60 to 40 percent.
  - School enrollment increased by 60 percent.
  - Much remains to be done despite these gains.

### Box — Grappling with rising insecurity in the Sahel region
- Context and scale:
  - Sahel region population about 150 million; high poverty, climate vulnerability, and shortages of physical and human capital.
  - Human costs: roughly 30 million people suffering from food insecurity and 5 million are refugees and internally displaced persons.
  - Terrorism surge has increased military and security-related outlays, complicating macroeconomic stability and fiscal space preservation.
- Policy steps to address insecurity while preserving growth and fiscal stability:
  - Strengthen revenue mobilization.
  - Improve governance.
  - Increase efficiency of public investment.
- Incidence and trends:
  - The Sahel experiences more than half of all attacks within sub-Saharan Africa and, except for the Middle East and North Africa, levels of terrorism far greater than in other large regions.
  - Most Sahel countries saw spikes in terrorist activity at different times; general trend has been a rise in terrorist activity in recent years, with 2017 marking the first year these countries together experienced more attacks than Nigeria.
- Economic and fiscal impacts:
  - Share of military expenditure in public expenditure has been rising.
  - Commodity-producing Sahel countries saw large falls in tax revenues as oil and uranium prices collapsed.
  - Efforts to raise domestic nonresource revenues hampered by slowing economies and trade route disruptions (for example, Niger saw a fall in customs revenue due to conflict disruptions).

*Source: IMF staff (Regional Economic Outlook: Sub‑Saharan Africa chapter 1).*

### 1. SLOW RECOVERY AMID GROWING CHALLENGES

### 1. SLOW RECOVERY AMID GROWING CHALLENGES

### Sahel: security costs, fiscal pressures, and revenue trends
- Business environment deterioration: most Sahel countries have experienced a sharper increase in terrorism-related business costs in recent years (Figure 1.1.5).
- Declining external support: official development aid to Sahel countries has been declining (Figure 1.1.6).
- Policy priorities recommended:
  - Create fiscal space for priority security, social, and infrastructure spending to boost long-term growth, ensure greater inclusion, and improve people’s livelihoods to break the cycle of extremism and violence.
  - Strengthen domestic revenue mobilization and boost the efficiency of public investment.
  - Strengthen governance and transparency.
  - Envisage a prolonged, calibrated, and coordinated expansion of security operations across the Sahel; associated fiscal costs will continue to place a heavy burden on national authorities’ ability to deliver on sustainable development goals.
- Key statistics and indicators (as presented):
  - Military spending and fiscal balance reported for 2013–16 (percent of GDP and percent of total expenditure shown in figures).
  - Business Costs of Terrorism scale: 1 (worst) to 7 (best), reported for 2007–17 across G8 Sahel, Sub-Saharan Africa, and Low-income countries.
  - Revenue and Gross ODA, 2007–16, shown as percent of GDP, with separate series for tax revenue - Sahel oil-producers; tax revenue - Rest of Sahel; and Gross ODA.

*This box (Sahel discussion) is continued across figures and notes in the source material.*

---

### Regional spillovers in sub-Saharan Africa: channels and magnitudes
- Main spillover channels: trade, banking relations, remittances, and conflict.
- Trade linkages:
  - Intra-regional trade growth: regional trade represented 6 percent of total exports in 1980, rising to 20 percent in 2016 (Figure 1.2.1).
  - Most regional trade gains occur within subregional integration zones (SADC, EAC, WAEMU, CEMAC).
  - Compared with advanced economies, regional trade remains low due to weak infrastructure and transport linkages, misaligned regulatory regimes, and prevalence of informal trade.
  - Trade demand concentration: 10 sub-Saharan African countries represent 65 percent of total regional demand for intraregional exports.
  - Estimated spillover magnitude: an economic spillover of about 0.11 percent to a country’s GDP growth for every percentage point change in the growth of the trading partners (Arizala and others 2018).
- Banking linkages:
  - Pan-African and subregional banks are increasingly active and concentrated: banking groups based in South Africa, Togo, and Nigeria account for all pan-African bank assets and about 70 percent of subregional bank assets (Figure 1.2.3).
  - Expansion mode: mostly subsidiaries formed via acquisition of smaller banks or branch establishments; foreign subsidiaries have larger presence in smaller countries, implying broad spillover reach.
  - Correlation: growth rates of home countries of banks are correlated with credit growth in host countries where pan-African and subregional banks operate.
- Remittances:
  - Remittance inflows have reached elevated levels in some countries; regional remittances increased to one-third of the total in 2015.
  - Origin concentration: the top five senders account for 55 percent of total outflows.
  - Recipient exposure: some countries are substantially exposed to remittance inflows (Figure 1.2.4).
  - Estimated spillover strength: remittance-linked growth spillovers comparable in strength to trade-linked spillovers (Arizala and others 2018).

---

### The African Continental Free-Trade Area (AfCFTA): structure, expectations, and challenges
- Key Elements of the AfCFTA:
  - On March 21, 2018, representatives of a large number of AU member countries signed the AfCFTA agreement.
  - Expected coverage once fully implemented: all 55 African countries, combined GDP of about $2.2 trillion (based on IMF, World Economic Outlook database), and a population of over 1 billion.
  - Agreement becomes effective once at least 22 member countries have ratified it.
  - Objectives: (1) creating a continental customs union; (2) expanding intra-African trade; (3) resolving overlapping RECs memberships; (4) enhancing competitiveness.
  - Phase I: framework for liberalization of trade in goods and services, dispute settlement mechanism; for goods, path to eliminate tariffs on 90 percent of product categories. Remaining 10 percent may see reductions over longer periods or maintenance of tariffs for excluded products.
  - Services liberalization: request-and-offer approach based on seven priority sectors: logistics and transport, financial services, tourism, professional services, energy services, construction, and communications.
  - Phase II (separate negotiations expected to begin in late 2018): competition policy, investment, and intellectual property rights.
- Current state of trade and barriers:
  - In 2016, 18 percent of Africa’s total trade was conducted within the continent.
  - In 2015, manufactured goods accounted for 19 percent of Africa’s exports to the rest of the world.
  - Applied average most-favored-nation tariff for African countries in 2016: 14.5 percent.
  - Maximum tariff rate on any product in sub-Saharan Africa was close to 400 percent.
  - Simple average tariff across all products: slightly less than 10 percent.
  - Duty-free line items represented only 28⅓ percent of all tariff lines.
- Potential benefits and distributional considerations:
  - Mevel and Karingi (2012) estimate that removal of all tariff barriers within the continent and a 50 percent reduction of nontariff barriers could increase intra-African trade by almost 130 percent within five years.
  - Chauvin and others (2016) estimate that those changes combined with improved trade facilitation could increase GDP by as much as 5 percentage points in 15 years.
  - Anderson and others (2015) find that dynamic interaction between growth and capital accumulation can increase static gains from trade liberalization by more than 60 percent.
  - Creation of a continental customs union, in addition to the AfCFTA, could increase African exports to the rest of the world by 4 percent within five years (Mevel and Karingi 2012).
  - Distributional impacts: gains unlikely to be uniform; activity may migrate to locations with lower costs. Mitigating measures (for example, training programs for workers) and improved domestic revenue mobilization will be needed to offset tariff-revenue losses.
- Nontariff barriers and infrastructure constraints:
  - Fully realizing AfCFTA benefits requires reducing infrastructure gaps and improving the business environment.
  - Ground transportation cost reductions are critical given geographic configuration of the continent.
  - Low scores relative to other regions for quality of ports, air transportation, customs efficiency, and logistics performance; financial depth and inclusion remain lower in Africa, constraining access to trade finance.
- Selected metrics from Table 1.3.1 (Barriers to Trade in Africa) — values shown as in the source:
  - Container port traffic (WDI): Africa 0.09; Sub-Saharan Africa 0.07; Advanced Economies 0.75; North America 0.11; South America 0.12; Central America 0.38; Asia 0.65.
  - Air transport passengers, per capita (WDI): Africa 0.23; Sub-Saharan Africa 0.25; Advanced Economies 2.61; North America 1.6; South America 1.43; Central America 0.93; Asia 1.18.
  - Quality of port infrastructure (1=low to 7=high) (WDI): Africa 3.64; Sub-Saharan Africa 3.64; Advanced Economies 5.35; North America 5.21; South America 3.65; Central America 4.15; Asia 4.17.
  - Liner shipping connectivity index (WDI): Africa 14.38; Sub-Saharan Africa 12.72; Advanced Economies 50.64; North America 58.5; South America 12.4; Central America 16.36; Asia 35.11.
  - Infrastructure efficiency score (LPI): Africa 2.32; Sub-Saharan Africa 2.34; Advanced Economies 3.75; North America 3.73; South America 2.56; Central America 2.43; Asia 2.92.
  - Customs efficiency score (LPI): Africa 2.35; Sub-Saharan Africa 2.39; Advanced Economies 3.58; North America 3.53; South America 2.52; Central America 2.52; Asia 2.88.
  - International shipments efficiency score (LPI): Africa 2.52; Sub-Saharan Africa 2.52; Advanced Economies 3.56; North America 3.4; South America 2.76; Central America 2.81; Asia 3.01.
  - Timeliness efficiency score (LPI): Africa 2.87; Sub-Saharan Africa 2.86; Advanced Economies 4.09; North America 3.88; South America 3.21; Central America 3.13; Asia 3.44.
  - Overall logistics efficiency score (LPI): Africa 2.49; Sub-Saharan Africa 2.51; Advanced Economies 3.74; North America 3.68; South America 2.77; Central America 2.69; Asia 3.05.
  - Burden of customs (1=inefficient to 7=efficient) (WDI): Africa 3.6; Sub-Saharan Africa 3.6; Advanced Economies 4.6; North America 3.5; South America 3.7; Central America 4.3.
  - Time to export (days) (DB): Africa 29.3; Sub-Saharan Africa 30.9; Advanced Economies 10.2; North America 9.8; South America 19.8; Central America 15.4; Asia 20.
  - Time to import (days) (DB): Africa 36.4; Sub-Saharan Africa 38.5; Advanced Economies 9.3; North America 9.7; South America 24.3; Central America 15.3; Asia 21.6.
  - Cost to export (USD per container) (DB): Africa 2,149; Sub-Saharan Africa 2,302; Advanced Economies 1,054; North America 1,395; South America 1,809; Central America 1,181; Asia 1,026.
  - Cost to import (USD per container) (DB): Africa 2,819; Sub-Saharan Africa 3,056; Advanced Economies 1,102; North America 1,570; South America 2,020; Central America 1,329; Asia 1,092.
  - Start business (days) (DB): Africa 31.2; Sub-Saharan Africa 33.3; Advanced Economies 11.2; North America 6.5; South America 7.2; Central America 2.4; Asia 26.9; (other reported value) 30.5.
  - Start business (cost as % of income per capita) (DB): Africa 69.77; Sub-Saharan Africa 44.17; Advanced Economies 7.22; North America 739.82; South America 24.1.
  - Note: table entries preserved exactly as presented in the source.

*This box (AfCFTA discussion and Table 1.3.1) was prepared by Paolo Cavallino, Nana Hammah, Garth Nicholls, and Hector Perez-Saiz.*

*Source: IMF Regional Economic Outlook: Sub-Saharan Africa (chap1 - 1. SLOW RECOVERY AMID GROWING CHALLENGES).*

### 1. SLOW RECOVERY AMID GROWING CHALLENGES

### 1. SLOW RECOVERY AMID GROWING CHALLENGES

### CEMAC: Implementation of the Regional Economic Strategy and Road Ahead
- Recent stabilization outcomes and context
  - International reserve coverage stabilized at 2.5 months of imports at the end of 2017.
  - Completion of IMF program reviews with Cameroon, Central African Republic, and Gabon in December 2017; agreement on Chadian debt restructuring allowed conclusion of Chad’s IMF program review; program negotiations with Republic of Congo and Equatorial Guinea are ongoing.
- Fiscal developments and projections
  - Overall primary spending (focus on nonpriority cuts) declined from 27.5 percent of non-oil GDP in 2016 to 22.8 percent of non-oil GDP in 2017.
  - Fiscal consolidation is projected to reduce the overall fiscal deficit (excluding grants) across CEMAC member countries from 4.2 percent of GDP in 2017 to 0.7 percent of GDP in 2020, while preserving social protection programs.
  - Public debt ratios are projected to fall from about 52 percent of GDP at the end of 2017 to 49 percent of GDP at the end of 2020.
  - With budgetary financing shifting toward external financing, domestic debt is expected to drop as a share of GDP from close to 20 percent at the end of 2017 to less than 14 percent at the end of 2020; external debt would remain broadly stable.
  - Implementation of the regional reform package and sustained macro stabilization would lead to a gradual pickup in non-oil GDP growth to 4.8 percent in 2021.
- Monetary and financial sector measures by the regional central bank (BEAC)
  - Elimination of new central bank credit to government at the end of 2017 to restore fiscal and monetary discipline.
  - In 2018 BEAC will pursue modernization of its monetary policy operations, including plans to:
    1. simplify its monetary policy instruments;
    2. base liquidity management on the projection of autonomous factors;
    3. strengthen the framework for required reserves;
    4. adjust its collateral framework; and
    5. set up an emergency liquidity assistance (ELA) framework.
  - BEAC will anchor operations on the policy rate rather than monetary aggregates and strengthen transmission; it will support financial market development by promoting financial sector databases (on financial information, payment incidents, and credit risks) and a credit bureau.
- Banking supervision and prudential actions
  - The regional banking supervisor adopted an action plan to address high nonperforming loans (including clarifying and better enforcing provisioning rules), strengthen implementation of prudential regulations (risk concentration and connected party lending rules), and resolve banks in difficulty; continued implementation of a strategy plan aiming at risk-based supervision.
- Structural reform priorities to reduce oil dependence and foster inclusive growth
  - Business environment measures: (1) establishment of trade courts; (2) creation of one-stop shops to reduce time and cost for creating a new company; (3) establishment of incubators to facilitate new business creation and share best practices.
  - Regional integration measures: (1) harmonization and reduction of customs exemptions through a revised customs code; (2) full implementation of the Common External Tariff; (3) enacting the freedom to establish companies.
  - Governance, fiscal transparency, and public financial management need strengthening; saving windfalls from higher oil revenues is recommended to increase fiscal and external buffers or to accelerate repayment of domestic budgetary arrears relative to program assumptions.
- Risks and implementation challenges
  - Fiscal consolidation has begun but faces risks of weaker reform efforts due to political or social resistance; initial challenges in some countries highlight these risks.
  - Past expansion of BEAC advances to governments contributed to downward pressure on foreign reserves; elimination of statutory advances is a major corrective step.

*This box was prepared by Edouard Martin.*

### Protecting Social Spending in IMF-Supported Programs
- Program architecture and coverage
  - Since 2009, almost all IMF-supported programs in sub-Saharan African countries have included quantitative targets or structural benchmarks to preserve or increase social spending (health, education, social protection).
  - Under the post-2009 architecture, all instruments (Extended Credit Facility, Standby Credit Facility, Rapid Credit Facility, Policy Support Instrument) should support policies that safeguard social and other priority spending and be reflected in the Letter of Intent.
  - During 2006–09, about 50 percent of programs under the Poverty Reduction and Growth Facility included a floor on social spending; since 2009, about 90 percent of IMF-supported programs approved for low-income countries included such a floor, of which about 95 percent of programs approved were for sub-Saharan African countries.
- Design features of social spending safeguards
  - Floors typically cover outlays on health, education, and social protection; quantitative floors were often designed to consider only domestically financed social and other priority spending to avoid misses due to shortfalls in external financing.
  - Some programs provided stronger safeguards, e.g., excluding social spending from the fiscal deficit target or allowing target adjustments to accommodate larger-than-budgeted social spending (examples: Malawi, Grenada).
  - Structural benchmarks have included measures to better target the most vulnerable, increase cash transfer coverage, or redesign safety net systems.
- Effectiveness and empirical outcomes
  - Floors on social spending were met in more than two-thirds of the programs; this holds broadly even when examining only programs with fiscal consolidation.
  - Based on a sample with comparable data, the share of social spending protected by indicative floors increased between 2010 and 2017 by about 2.5 percentage points of total spending (from an average of about 23.5 percent to 26 percent) and by about 1 percentage point of GDP (from an average of 6 percent to 7 percent).
  - These results align with earlier studies showing social sector spending expanded under IMF-supported programs in low-income countries.

*This box was prepared by Alice Mugnier, Ivohasina F. Razafimahefa, and Sampawende J. Tapsoba.*

### Annex 1.1. Fiscal Break-even Oil Price: Definition and Decomposition
- Definition and interpretation
  - The fiscal break-even oil price is an approximate measure of the oil price needed to balance the budget and is defined (all variables in US dollars) as the non-oil fiscal balance divided by the number of oil barrels allotted to the government (i.e., fiscal oil revenue divided by the oil price).
  - It is illustrative and does not imply that a balanced budget is necessarily the appropriate fiscal target.
- Decomposition approach and insights
  - A novel method is proposed to decompose changes in the fiscal break-even oil price into contributions from real exchange rate depreciation and fiscal adjustment, and a component for changes in oil export volumes and/or oil taxation.
  - Rewriting the definition in local currency terms introduces the nominal exchange rate vis-à-vis the US dollar (e) and the GDP deflator (p); examining the break-even price in constant US dollars requires dividing by the US GDP deflator (or US CPI).
  - Taking differences in logarithms shows the change in the fiscal break-even oil price in constant US dollars equals:
    - the difference in logarithms of the real exchange rate vis-à-vis the US dollar (depreciation),
    - plus the difference in the logarithm of the non-oil fiscal balance in constant local currency (fiscal adjustment),
    - plus a component reflecting changes in (log) volumes of oil exports and/or changes in the oil taxation schedule.
- Use and limitations
  - The decomposition provides relative contributions of exchange rate movements and fiscal policy to break-even dynamics.
  - The indicator assumes non-oil revenue does not depend on oil price and a linear relationship between fiscal oil revenue and oil price.

*Annex prepared as part of the chapter.* 

*Source: chap1 - 1. SLOW RECOVERY AMID GROWING CHALLENGES (PDF chapter).*

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_Source: https://www.imf.org/-/media/files/publications/reo/afr/2018/may/pdf/chap1.pdf_