## sreo0518 ## Source details **Canonical URL:** [sreo0518](https://www.imf.org/-/media/files/publications/reo/afr/2018/may/pdf/sreo0518.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/afr/2018/may/pdf/sreo0518.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/afr/2018/may/pdf/sreo0518.pdf.json) --- ### Executive Summary — Slow Recovery amid Growing Challenges - Regional growth projections and performance: - Average growth projected to rise from 2.8 percent in 2017 to 3.4 percent in 2018. - On current policies, average growth expected to plateau below 4 percent—barely 1 percent in per capita terms—over the medium term. - 29 of 45 countries expected to see growth accelerate in 2018—the highest number since 2010. - Excluding Nigeria and South Africa, growth forecast to pick up from 4.6 percent in 2017 to 4.8 percent in 2018. - Rest of sub-Saharan Africa (excluding oil exporters and South Africa): growth estimated at 5.9 percent in 2017. - South Africa: growth estimated at 1.3 percent in 2017; projected at 1.5 percent in 2018. - Poverty and per capita income: - In 2017, income per capita declined in 12 countries, affecting about 320 million people (about 33 percent of the region’s population). - Debt and vulnerability: - About 40 percent of low-income countries in the region are in debt distress or assessed as at high risk of debt distress. - Median public debt at end-2017 exceeded 50 percent of GDP. - External and commodity environment: - World growth: 3.8 percent in 2017; expected 3.9 percent in 2018. - Commodity moves: oil prices rose by about 20 percent between August 2017 and mid-December 2017 to more than $60 a barrel. - Frontier sovereign issuance: $7.5 billion in 2017; Kenya, Nigeria, and Senegal issued $6.7 billion in Q1 2018; several countries intended to issue at least $4.4 billion in Q2 2018. - Spreads: frontier-market spreads half of 2016 peak (~900 basis points); premium relative to emerging markets narrowed from almost 600 to about 150 basis points. - Policy priorities (high level): - Prudent fiscal policy to rein in public debt. - Monetary policy geared toward ensuring low inflation. - Structural reforms to foster private investment. - Strengthen revenue mobilization to finance physical and human capital and protect social spending. ### Chapter 1 — Slow Recovery: Macro Developments, Risks, and Policy Guidance - External positions and financing: - Current account deficits narrowed from an average of 4.1 percent of GDP in 2016 to 2.6 percent in 2017. - Nigeria: gross international reserves rose to more than $39 billion at end-2017; included $4.8 billion in international bond issuances. - CEMAC current account deficit declined from 13.8 percent of GDP in 2016 to 4.3 percent in 2017; Republic of Congo deficit narrowed from 74 percent of GDP in 2016 to about 13 percent in 2017. - Reserve coverage: WAEMU stabilized at about four months of imports at end-2017; alarmingly low reserves: South Sudan 0.1 month, Democratic Republic of the Congo and Zimbabwe about 0.5 month of imports. - Fiscal outcomes and debt dynamics: - Regional fiscal deficits widened from 4.6 percent of GDP in 2016 to 5.0 percent of GDP in 2017. - Oil-exporting countries’ fiscal position deteriorated by 0.7 percent of GDP between 2016 and 2017. - Median interest-payments-to-revenue ratio nearly doubled from 5 to close to 10 percent between 2013 and 2017. - Drivers of rising debt-to-GDP: large primary deficits, interest bills, negative growth (Chad, Republic of Congo, Equatorial Guinea), currency depreciations, reporting of previously undisclosed debt (Republic of Congo, Mozambique). - Foreign-currency-denominated public debt increased by about 40 percent from 2010–13 to 2017; accounted for about 60 percent of total public debt in 2017 on average. - Six countries in debt distress at end-2017: Chad, Eritrea, Mozambique, Republic of Congo, South Sudan, Zimbabwe. Zambia and Ethiopia moved to “high risk of debt distress.” - Banking and credit: - Private sector credit growth negative in real terms in many countries in 2017; in Angola, Gabon, Zambia credit growth negative even in nominal terms. - Nonperforming loans surged in resource-intensive countries (examples: Angola, Republic of Congo, Mozambique). - Policy recommendations to address bank-sovereign nexus: rebalance incentives toward private credit, macroprudential measures, tighten central bank refinancing gradually, enhance transparency (accounting standards, credit bureaus, property titling), improve bank resolution frameworks. - Inflation and exchange rate policies: - Regional annual inflation fell from 12.5 percent in 2016 to just over 10 percent in 2017; expected to drop further in 2018. - Angola allowed the kwanza to depreciate by about 40 percent against the US dollar in January 2018; parallel official exchange rate spread decreased from 150 to 100 percent. - Nigeria’s parallel market premium narrowed from 60 percent peak in February 2017 to 20 percent in early 2018 after introduction of the IEFX window. - Risks to outlook: - External: monetary policy normalization in advanced economies; reversal of portfolio inflows; weaker-than-expected growth in advanced economies or China. - Domestic: political uncertainty, impending elections, lingering internal conflicts (Burundi, Democratic Republic of Congo, South Sudan, parts of the Sahel). ### Chapter 2 — Domestic Revenue Mobilization: What Are the Possibilities? - Aggregate potentials and benchmarks: - Estimated additional tax revenue potential for the region: between 3 and 5 percent of GDP on average. - That potential corresponds to about $50–80 billion compared with an estimated $36 billion in official development assistance received in 2016. - Median total revenue excluding grants rose from around 14 percent of GDP in the mid‑1990s to more than 18 percent in 2016; tax revenue rose from 11 to 15 percent of GDP over the same period. - The tipping point estimate: a minimum tax-to-GDP ratio of 12.88 percent (presented as “about 12½ to 13 percent of GDP” in other summaries). - Tax frontier and tax gap: - Average tax frontier for sub-Saharan African countries is around 7½ percentage points of GDP lower than the rest of the world. - Average tax gap (tax potential) ranges between 3 and 5 percent of GDP. - Oil producers: tax potential “at 5 percent of GDP or more.” - Other resource and nonresource countries: “about 3 percent of GDP.” - Tax policy and administrative priorities: - Strengthen VAT systems and VAT C-efficiency; streamline exemptions and zero-rating practices. - Expand income tax coverage (PIT, CIT) and improve CIT productivity. - Develop property taxes (potentially 0.5 to 1 percent of GDP), and strengthen excise tax design (specific taxes preferred for predictability and externality correction). - Customs reforms: modernize and digitalize to quickly increase collections; customs collected on average one-third of nonresource revenue at border in 2015. - International corporate tax: review thin capitalization rules (ratios up to 4:1 observed) and strengthen transfer pricing monitoring. - Evidence from episodes: - Six sustained revenue-mobilization episodes identified: Senegal 2001–03; Liberia 2006–10; Mozambique 2007–12; Rwanda 2012–14; Tanzania 2005–07; Uganda 2014–16. - Definition of successful episode: total increase of 2 percentage points of nonresource GDP over three years with no substantial decline during or immediately after. - Episode statistics: - Range of nonresource revenue gain in episodes: 2.2 to 8 percent of nonresource GDP. - Average annual increase during episodes: 1.2 percentage points. - Average total revenue gain over episodes: 3.5 percentage points. - Gains continued after episodes: average increase of 1 percentage point a year over the next three years. - 2016 levels on average 3.4 percent of GDP higher than episode end points. - Institutional and political economy lessons: - Successful episodes combined medium-term revenue strategies, strengthened tax administration (taxpayer segmentation, semiautonomous revenue authorities, ICT), sustained political commitment, technical assistance (including IMF engagement), transparency and outreach. - Roadmap (preserved wording): 1. Identify the taxes that offer the greatest potential (VAT typically high potential; assess CIT, PIT, excises, customs, property). 2. Review the legal framework and tax policy design (align policies; reduce exemptions; introduce sanctions where needed). 3. Assess the institutional framework (governance and operational frameworks; consider revenue authority models). 4. Define a medium-term revenue strategy (medium-term objectives and capacity-building). 5. Build a constituency for reform (horizontal and vertical accountability; public outreach anchored in credible commitment to better governance and transparency). - Digitalization (Box 2.1): - Digital tools: online e-tax portals, mobile tax payments, online VAT reimbursements, electronic fiscal devices. - Hurdles: low internet penetration, incomplete/low-quality data, implementation complexity, sociopolitical trust issues. - Peer events: 2016 Hackathon in Senegal; 2017 Ideas Workshop in Uganda. - Recommendation: design homegrown digital reforms and convene stakeholder seminars during medium-term planning. ### Chapter 3 — Private Investment to Rejuvenate Growth - Private investment levels and recent dynamics: - SSA averaged 15 percent of GDP in private investment during 2010–16; Developing Asia averaged 22 percent. - Within SSA (2010–16): about 14 percent in oil-exporting countries, 17 percent in other resource-intensive countries, 15 percent in non-resource-intensive countries. - Private investment grew on average 14 percent a year during early 2000s boom; 5 percent a year through 2014; contracted by 4 percent each year on average in 2015–16. - Determinants and magnitudes: - Baseline estimate: a 1 percentage point increase in GDP growth raises the private investment ratio by 0.21 percentage points (whole sample). - Interaction effects highlight amplification by institutions and infrastructure: - High regulatory quality → impact per 1 pp growth: up to 0.48 pps. - High financial development → impact per 1 pp growth: 0.47 pps. - Higher paved roads, access to electricity, trade openness, lower capital account openness: impacts around 0.26–0.33 pps. - Public investment effects: - Public investment tends to crowd out private investment when financial systems are less developed; example: a 1 percentage point increase in public investment → a ½ percentage point contraction of private investment ratio in the average SSA country. - In EMDE sample, same public investment increase → a ½ percentage point increase in private investment ratio where financial development is higher. - Policies to raise private investment: - Macroeconomic stability, strong institutions (regulatory and insolvency frameworks), better infrastructure, trade openness, and deeper financial markets. - Financial market deepening: develop domestic bond markets (examples: Côte d’Ivoire, Namibia, Uganda doubled local-currency issuance; average maturity rose from 1.5 years to 6.4 years); prerequisites include legal/regulatory frameworks, market infrastructure, diversified investor base, public borrowing plans. - PPPs and P-FRAM: PPPs widely used; average PPP-project ratio since 2000 = 1.4 percent of GDP (sub-Saharan Africa); P-FRAM pilots in Côte d’Ivoire, Mauritius, Niger to assess fiscal risks. - SEZs: mixed record; success factors include integration with national/regional strategies, links with domestic firms, adequate infrastructure, training and standards compliance; examples: Rwanda, Ethiopia improved approaches. - Fintech: mobile-money platforms (M-Pesa, M-Kesho, M-Shwari) and fintech platforms can reduce frictions and expand access; safety-efficiency trade-offs and cyber/operational risks require oversight. - International initiatives: - Belt and Road Initiative: financing pledges cited (up to $1 trillion over 10 years in framework; specific example: China doubled pledges to $60 billion at FOCAC 2015). - G20 Compact with Africa: launched early 2017; eight SSA participants: Benin, Côte d’Ivoire, Ethiopia, Ghana, Guinea, Rwanda, Senegal, Togo; three pillars (macro, business, financing frameworks). ### Key cross-cutting projections and aggregates (IMF staff estimates as of March 30, 2018; WEO April 2018 consistency) - Real GDP growth (Sub-Saharan Africa): 1.4 (2016); 2.8 (2017); 3.4 (2018); 3.7 (2019). - Real per capita GDP growth (Sub-Saharan Africa): –0.9 (2016); 0.4 (2017); 1.0 (2018); 1.3 (2019). - Inflation: consumer prices, annual average (Sub-Saharan Africa): 11.3 (2016); 11.0 (2017); 9.5 (2018); 8.9 (2019). - Fiscal balances: - Overall fiscal balance, including grants: –4.6 (2016); –5.0 (2017); –4.0 (2018); –3.9 (2019). - Government revenue, excluding grants: 16.4 percent of GDP (2016); 17.0 percent (2017); 17.8 percent (2018); 17.5 percent (2019). - Government debt (Percent of GDP): 37.0 (2016); 35.9 (2017); 35.6 (2018); 35.9 (2019). - External sector: - External current account (Percent of GDP): –4.1 (2016); –2.6 (2017); –2.9 (2018); –3.1 (2019). - Reserves (Months of imports): 5.2 (2016); 5.0 (2017); 5.3 (2018); 5.1 (2019). - Investment and savings: - Total investment (Percent of GDP): 19.8 (2016); 19.9 (2017); 20.4 (2018); 21.4 (2019). - Gross national savings (Percent of GDP): 15.9 (2016); 17.6 (2017); 17.5 (2018); 18.2 (2019). ### Policy recommendations (synthesized) - Macroeconomic stabilization and debt management: - Implement prudent fiscal consolidation that protects priority social spending and has low short-term multipliers where possible. - Strengthen debt management to improve maturity structures and reduce reliance on foreign-currency-denominated debt where feasible. - Reinforce external buffers for countries well placed to do so. - Revenue mobilization: - Target VAT efficiency gains, streamline exemptions, expand direct tax coverage, develop property taxes, and modernize customs. - Embed reforms in medium-term revenue strategies; combine policy design with administrative modernization and governance improvements. - Use digital tools prudently, accounting for penetration and trust limitations. - Reviving private investment: - Ensure macro stability and credible policies to increase current and prospective economic activity. - Strengthen regulatory, insolvency, and public investment management frameworks. - Deepen financial markets (domestic bond markets, equity, fintech) with safeguards to avoid financial instability. - Manage PPPs and SEZs with rigorous assessment of contingent liabilities and focus on linkages with domestic firms. - Country-specific guidance: - Oil exporters: continue fiscal adjustment, advance diversification, boost non-oil revenues, enhance spending efficiency; where exchange rate flexibility is chosen, eliminate FX restrictions. - Oil-importers: shift growth momentum from public to private sector, reduce fiscal imbalances to lower vulnerabilities. *Regional Economic Outlook: Sub‑Saharan Africa (sreo0518 — IMF, April 2018; chapter excerpts and executive summary).* ### 1. Economic forecasting — Africa, Sub-Saharan — Periodicals. 2. Africa, Sub-Saharan — ### Sub-Saharan Africa ### Publication scope and authorship - The Regional Economic Outlook: Sub-Saharan Africa is published twice a year, in the spring and fall, to review developments in sub-Saharan Africa. - Both projections and policy considerations are those of the IMF staff and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. - Prepared by a team led by Papa N’Diaye under the direction of David Robinson, with named contributors and production/editing staff listed in the acknowledgments. - Editor’s Note date: April 30, 2018. - HC80 0.R4 2017. - ISBN: 978-1-48433-398-62 (paper). - ISBN: 978-1-48434-889-5 (Web PDF). ### Major themes and chapter structure - Executive Summary. - Chapter 1: Slow Recovery amid Growing Challenges - Subsections listed: Macroeconomic Developments; Challenges and Risks; Policies. - Boxes included (chapter 1): Grappling with Rising Insecurities in the Sahel Region; Regional Spillovers: A Steady Strengthening of Diverse Linkages; African Continental Free-Trade Area (AfCFTA) Agreement: What to Expect; CEMAC: Implementation of the Regional Economic Strategy and Road Ahead; Protecting Social Spending in IMF-supported Programs. - Figures related to business cycle synchronization, sovereign bond issuances, EMBIG spreads and total public debt, commodity price changes, real GDP growth and decomposition, current account balances and financing, international reserves, fiscal balances, public debt and interest expenditure, inflation, base money changes, currency depreciations, debt currency decomposition, external debt service, medium-term fiscal plans, external arrears, debt risk status for PRGT eligible low-income developing countries, bank nonperforming loans, private sector credit growth, fiscal breakeven oil price for oil exporters, and real GDP per capita comparisons. - Chapter 2: Domestic Revenue Mobilization in Sub-Saharan Africa: What Are the Possibilities? - Subsections listed: Trends in Revenue Mobilization in Sub-Saharan Africa; Structural Factors Affecting Tax Effort and Potential; Lessons from Successful Revenue Mobilization Episodes; Conclusions and Policy Implications. - Boxes included (chapter 2): Looking ahead: Digital Revenue Mobilization; Modeling the Economic Impacts of Revenue Mobilization in Resource-Rich Sub-Saharan African Countries. - Tables and figures cover revenue series (Total Revenue Excluding Grants, Tax Revenue, Nonresource Revenue to Nonresource GDP, Tax Revenue to GDP), decomposition of revenue and sources, revenue change, medians for 2016, revenue in oil exporters, fragile vs nonfragile nonresource revenue, tax rates (PIT, CIT), CIT productivity, VAT C-efficiency, PIT and VAT thresholds relative to per capita GDP, excise taxes, share of nonresource revenue collected at customs, tax efforts, tax frontier and gap, revenue mobilization episodes and timelines, progression of tax policy and administrative reforms, and relation to IMF-supported programs. - Chapter 3: Private Investment to Rejuvenate Growth - Subsections listed: Private Investment Trends; Determinants of Private Investment Ratios; Alleviating Constraints to Private Investment; Conclusions and Policy Recommendations. - Boxes included (chapter 3): Policy Reform and Private Investment Growth; Public Investment Efficiency in Sub-Saharan Africa; Developing Domestic Debt Markets in Sub-Saharan Africa; Fintech in Sub-Saharan Africa. - Figures and tables address private investment growth, investment to GDP comparisons across regions, contributions of investment to GDP growth, investment before and after conflicts, corporate financing and financial development indicators, banking system safety and soundness, public-private partnership (PPP) investment shares and sectoral breakdowns, disputed and cancelled PPPs, foreign direct investment, and a table measuring the economic impact on the private investment ratio of a 1 percentage point increase in GDP growth depending on institutional and structural characteristics. ### Data, conventions, and errata - Conventions: - In tables, a blank cell indicates “not applicable,” ellipsis points (. . .) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” - An en dash (–) between years or months indicates inclusive coverage; a 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. - Erratum: - Table SA24. External Debt, Official Debt, Debtor Based table on page 116 has been replaced; the new version includes revised figures for Senegal. ### Focus for readers and users - The report provides structured analysis across macroeconomic developments, fiscal and public debt dynamics, revenue mobilization strategies and episodes, and constraints and policies related to private investment in Sub-Saharan Africa. - Extensive empirical content is organized in figures, tables, and boxed case studies to inform projections, policy discussion, and country-level assessments. *Regional Economic Outlook: Sub-Saharan Africa (April 2018), International Monetary Fund.* ### Executive Summary ### sreo0518 - Executive Summary ### Slow Recovery amid Growing Challenges - Average growth in the region is projected to rise from 2.8 percent in 2017 to 3.4 percent in 2018. - About 40 percent of low-income countries in the region are now in debt distress or assessed as being at high risk of debt distress. - On current policies, average growth in the region is expected to plateau below 4 percent—barely 1 percent in per capita terms—over the medium term. - Growth performance is uneven: - Several economies (Burkina Faso, Côte d’Ivoire, Ethiopia, Ghana, Guinea, Rwanda, Senegal, Tanzania) grew 6 percent or faster in 2017 and are expected to maintain robust growth over the medium term. - 12 countries, home to about a third of sub-Saharan Africa’s population, saw per capita incomes decline in 2017; these countries are expected to see further declines in 2018. - Nigeria and South Africa remain below trend growth and weigh heavily on regional prospects. - Key vulnerabilities and pressures: - Oil exporters are dealing with the legacy of the largest real oil price decline since 1970, with growth well below past trends and rising debt levels. - Several countries rely on public-investment-driven growth with rising debt levels, shrinking fiscal space, slowing private sector credit, and increasing nonperforming loans. - Protracted internal conflicts (Burundi, Democratic Republic of the Congo, South Sudan) have produced record levels of refugees and internally displaced people and adverse spillovers to neighbors. - Outlook risks: - The favorable external impulse (stronger global growth, higher commodity prices, improved market access) is likely to fade as advanced-economy growth tapers and US monetary policy normalizes, potentially coinciding with higher refinancing needs for many countries. - Political transitions, impending elections, and cyclical commodity price upticks may reduce appetite for difficult reforms and lead to policy slippages. - Policy priorities to turn the recovery into sustained strong growth: - Prudent fiscal policy to rein in public debt. - Monetary policy geared toward ensuring low inflation. - Structural reforms to reduce market distortions and foster private investment. - Strengthening revenue mobilization to finance investment in physical and human capital and protect social spending during fiscal consolidation. - Policy guidance by country type: - Oil-exporting countries: continue fiscal adjustment, advance economic diversification, boost non-oil revenues, enhance efficiency of public spending; eliminate foreign exchange restrictions and multiple currency practices where exchange rate flexibility is chosen. - Oil-importing countries: transfer growth momentum from public to private sector, reduce fiscal imbalances to lower vulnerabilities. ### Domestic Revenue Mobilization in Sub-Saharan Africa: What Are the Possibilities? - Domestic revenue mobilization remains one of the most pressing policy challenges. - Despite progress over two decades, sub-Saharan Africa has the lowest revenue-to-GDP ratio among regions. - Estimated additional tax revenue potential: between 3 and 5 percent of GDP on average for the region. - Key steps to mobilize additional revenues: - Strengthen value-added tax systems. - Streamline exemptions. - Expand coverage of income taxes. - Develop new sources of taxation, such as property taxes. - Harness new technologies to access more reliable information. - Institutional and procedural priorities from case studies of successful episodes: - Adopt medium-term revenue strategies. - Strengthen basic building blocks of effective tax administration. - Emphasize efforts to broaden the tax base and modernize institutional processes. - Build a constituency for reform anchored in credible commitment to improved governance and transparency. - Note: The potential additional tax revenue "between 3 and 5 percent of GDP" is highlighted as significantly more than what the region has received each year from international aid. ### Private Investment to Rejuvenate Growth - Private investment in sub-Saharan Africa lags well below other regions, despite public investment being at similar levels. - Empirical findings: - The strength of current and prospective economic activity plays a dominant role in driving private firms’ investment decisions. - Strengthening regulatory and insolvency frameworks, increasing trade liberalization, and deepening financial markets can lift private investment. - Short- and medium-term avenues pursued to jump-start private investment: - Public-private partnerships (PPPs): widely used but require careful assessment and management due to sizable contingent liabilities; need institutional and legal frameworks to assess and limit risks. - Special economic zones (SEZs): can attract investors, but benefit host economies more when they establish strong links with domestic firms and integrate with national and regional development strategies. - Mechanisms to attract foreign direct investment (FDI). - Recent international initiatives (for example, the G20 Compact with Africa and the Belt and Road Initiative) could support private investment and foster institutional reforms to encourage FDI and PPPs. ### Macroeconomic Developments and External Environment - Global environment: - World growth is estimated at 3.8 percent in 2017 and expected to accelerate to 3.9 percent in 2018. - Stronger-than-expected growth in major advanced economies—especially the euro area—and in the United States, partly due to recently approved tax reform; growth in China projected to remain solid. - Financial conditions and market access: - Global financial conditions remained accommodative, prompting a strong rebound in international sovereign bond issuance and sharp compression in yield spreads. - Sub-Saharan African frontier market sovereign bond issuance: - $7.5 billion issued in 2017 (about 10 times the 2016 level). - In the first quarter of 2018, Kenya, Nigeria, and Senegal issued sovereign bonds in the amount of $6.7 billion. - Several countries stated intentions to issue at least an additional $4.4 billion during the second quarter of 2018. - Spreads: - 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. - Between 2015 and 2017, spreads compressed even for countries with high debt-to-GDP ratios. - Portfolio inflows and stock market performance were heterogeneous across countries in 2017 (examples cited: Ghana, Nigeria, Senegal, Kenya, Zambia). - Commodities: - Commodity prices strengthened since mid-2017, providing a terms-of-trade boost for exporters. - Oil prices rose by about 20 percent between August 2017 and mid-December 2017 to more than $60 a barrel. - Sizable price increases occurred for metals (aluminum, copper, iron ore) and agricultural raw materials (cotton, tea, vanilla), though some items (cocoa) saw price 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. - Regional growth details: - Growth is expected to rise from 2.8 percent in 2017 to 3.4 percent in 2018. - 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 is foreseen to pick up from 4.6 percent in 2017 to 4.8 percent in 2018. - In 2017, income per capita is estimated to have declined in 12 countries, affecting about 320 million people (about 33 percent of the region’s population). - Specific country notes: - Angola and Nigeria: some pickup in hydrocarbon production, but weak non-oil sector growth 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 (boosted by public investment and strong agricultural production) and Ghana (on expected increase in oil production). - Fragile situations: Guinea, Guinea-Bissau, Madagascar helped by commodity price rebounds; political developments in Liberia, Togo, Zimbabwe affected growth in 2017, with recent political transitions opening opportunities in Liberia and Zimbabwe. - Intraregional linkages and spillovers through trade, remittances, and banking channels are increasingly important for growth outcomes. *Source: Executive Summary, Regional Economic Outlook: Sub‑Saharan Africa (sreo0518 - Executive Summary).* ### 1. SLOW RECOVERY AMID GROWING CHALLENGES ### 1. SLOW RECOVERY AMID GROWING CHALLENGES ### Regional spillovers and integration - Recent weak economic performance in South Africa has slowed growth in neighboring countries. - Côte d’Ivoire and Kenya have supported regional demand through robust growth and as hosts of regional banking groups. - Regional spillovers transmitted via intraregional trade (SACU and WAEMU members), banking (Botswana), and remittances (Liberia, Togo) (Box 1.2). - The African Continental Free Trade Area (AfCFTA) may further boost regional integration and generate substantial long-term economic benefits for African countries (Box 1.3). ### External positions - Current account deficits narrowed from an average of 4.1 percent of GDP in 2016 to 2.6 percent in 2017, with significant dispersion between oil exporters and importers. - Improvement largely driven by compression in private sector demand. - 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 from 13.8 percent of GDP in 2016 to 4.3 percent in 2017. - Republic of Congo: current account deficit narrowed from 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. - Other CEMAC improvements explained by increased oil exports, some pickup in non-oil exports (Chad, Gabon, Equatorial Guinea), and lower non-oil imports (Cameroon, Gabon, Equatorial Guinea). - Resource-intensive countries: improvements in 2017 from weaker import growth (South Africa), stronger commodity exports and lower non-oil imports (Ghana), import compression and temporary increase in SACU receipts (Namibia). - Widening current account deficits in some countries due to deterioration in terms of trade (Mali) or drops in current transfers and income payments (Liberia). - Non-resource-intensive countries: elevated current account deficits in 2017 due to high food and fuel imports (Kenya), low exports with high capital goods imports (Ethiopia, Senegal), and increased imports for public infrastructure projects (Uganda). ### External financing and reserves - 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. - Other resource-intensive countries: portfolio investment flows remained the major source of external financing. - Non-resource-intensive countries: financed deficits mainly through foreign direct investment despite net portfolio outflows. - Improvement in current account balances in 2017 boosted international reserves in about half of the region’s economies; many countries still maintained reserves barely at or below the traditional three-months-of-imports benchmark. - Specific country reserve developments: - Nigeria: gross international reserves rose to a four-year high (more than $39 billion) at the end of 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 due to supportive policies by BEAC and COBAC and fiscal consolidation; a sustained increase in oil prices could accelerate reserve accumulation. - WAEMU: international reserve coverage stabilized at about four months of imports at the end of 2017, helped by Eurobond issuances by Côte d’Ivoire, Senegal, and BOAD. - Alarmingly low reserve levels in some countries: - South Sudan: reserves equal to 0.1 month of imports. - Democratic Republic of the Congo and Zimbabwe: reserves cover about 0.5 month of imports. ### Fiscal positions and adjustment - Regional fiscal deficits widened from 4.6 percent of GDP in 2016 to 5.0 percent of GDP in 2017, with significant cross-country variation. - Fiscal positions deteriorated in the largest economies but improved in most other countries. - Oil-exporting countries: fiscal position deteriorated by 0.7 percent of GDP, with widened deficits in Angola and Nigeria outweighing narrowing deficits in CEMAC oil producers. - Angola: wider deficit due to weak revenues and recovery in capital spending. - Nigeria: deficit increased between 2016 and 2017, mainly from doubling capital expenditure amid low revenue collection. - CEMAC: fiscal deficits reduced from 7.6 percent in 2016 to 3.5 percent in 2017 through revenue mobilization (Chad) and cuts in capital and current spending (Cameroon, Equatorial Guinea, Gabon, Republic of Congo). - Ongoing strains: sharp contraction in Equatorial Guinea, debt distress in Chad and the Republic of Congo, unresolved arrears in Central African Republic and Gabon. - Other large economies: widening fiscal deficits from increased current expenditures and revenue underperformance (South Africa) and revenue slippages (Ethiopia). - Fiscal deterioration observed in several resource-intensive (Burkina Faso, Liberia, Zambia, Zimbabwe) and non-resource-intensive countries (Burundi). - WAEMU: fiscal positions more relaxed than anticipated; only one member met the overall fiscal deficit convergence criterion (below 3 percent of GDP) in 2017; fewer than half projected to meet it by 2019. - Fiscal consolidation achieved in 2017 in some countries (Ghana, Mali, Namibia, The Gambia, Togo), sometimes because of unintended underspending on capital expenditures (Uganda). ### Public debt and expenditure composition - With fiscal deficits still large, debt levels continued to rise in many countries. - Median public debt levels increased significantly compared to 2011–13, especially in oil-exporting countries. - Median level of public debt in sub-Saharan Africa at end-2017 exceeded 50 percent of GDP. - Drivers of deteriorating debt-to-GDP ratios: large primary deficits, interest bills, negative growth (Chad, Republic of Congo, Equatorial Guinea), currency depreciations (The Gambia, Sierra Leone), reporting of previously undisclosed debt (Republic of Congo, Mozambique), and below-the-line operations (Cabo Verde, Equatorial Guinea, Gabon, The Gambia, Senegal, Sierra Leone). - Interest payments rose as a share of expenditures: - Average interest payments increased from 4 percent of expenditures in 2013 to 12 percent in 2017, notably in Angola, Chad, and Gabon. - Interest payments share increased among other resource-intensive and many non-resource-intensive countries (Côte d’Ivoire, Ghana, Namibia, Senegal, Seychelles, Togo, Uganda, Zambia). - 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 it increased from 2 to more than (figure indicates substantial increase). ### Growth composition and public-sector contribution - Fiscal deficits widened across all country groups since 2015, but public-sector contribution to growth varied: - Oil-exporting countries: collapse of oil revenues led to tighter government spending, producing a strong contractionary effect on growth in 2015–16. - Other resource-intensive and non-resource-intensive countries: public spending (consumption and investment) continued to support growth. ### Inflation and monetary policy - Regional annual inflation fell from 12.5 percent in 2016 to just over 10 percent in 2017; expected to drop further in 2018 due to falling food prices and policy tightening by oil exporters. - Monetary policy actions: - Angola: tight monetary policy in 2017 with reserve money contraction; inflation tapered from 42 percent in 2016 to 26.3 percent in 2017. - Nigeria: tighter monetary policy using open market operations to reduce excess liquidity, contributing to contained inflation. - CEMAC (BEAC): maintained tight stance, increased policy rate by 50 basis points in March 2017, and maintained strict control on bank refinancing. - Monetary conditions remained tight in other high/accelerating inflation countries (Kenya). - Accommodative policy in countries with weakening activity or receding inflation (Rwanda, South Africa, Tanzania, Uganda), aided by exchange rate movements in some cases (Rwanda, Zambia). ### Exchange rate policies and movements - Angola and Nigeria moved toward more flexible exchange rate policies: - Angola: in January 2018 allowed the kwanza to depreciate by about 40 percent against the US dollar; parallel official exchange rate spread decreased from 150 to 100 percent. - Nigeria: introduced a new investor and exporter foreign exchange (IEFX) window in April 2017; foreign exchange inflows and increased oil exports helped narrow the parallel market premium from its 60 percent peak in February 2017 to 20 percent in early 2018. - Other notable currency movements: large depreciations reflecting deteriorating economic conditions (Democratic Republic of the Congo, Liberia) and appreciations (Mozambique—partial reversal of large 2016 depreciation). ### Challenges and risks: debt vulnerabilities - Public debt continued to rise in 2017 despite growth pickup and improved external environment. - 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. - Median public debt at end-2017 exceeded 50 percent of GDP. - Debt dynamics vulnerable to fiscal slippages, subdued growth, exchange rate depreciations, and tighter financing conditions. - Interest payments have grown, crowding out other spending: - Median interest-payments-to-revenue ratio nearly doubled from 5 to close to 10 percent between 2013 and 2017. - For oil-exporting countries, it increased from 2 to more than (figure indicates a marked rise). *Source: sreo0518 - 1. SLOW RECOVERY AMID GROWING CHALLENGES.* ### 1. SLOW RECOVERY AMID GROWING CHALLENGES ### 1. SLOW RECOVERY AMID GROWING CHALLENGES ### Debt vulnerabilities and external financing - 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. - Increased reliance on foreign-currency borrowing exposes countries to exchange rate volatility, refinancing risk, and interest rate risk despite generally lower interest rates on foreign-currency debt relative to domestic interest rates in sub-Saharan Africa. - Recent rebound in Eurobond issuance by sub-Saharan African frontier markets contributed to the increase in external debt. - The favorable external market conditions create an opportunity to improve debt maturity structures and conduct strategic debt management operations, but countries need to remain vigilant not to overborrow in a context of rising external debt service and gross financing needs. - The rise in debt accompanied by a larger share of commercial, domestic, and nontraditional sources has increased exposure to market risk and complicated debt resolution for countries with difficult-to-manage debt burdens. - As of the end of 2017, six countries have been assessed to be in debt distress: Chad, Eritrea, Mozambique, Republic of Congo, South Sudan, Zimbabwe. - The previous moderate ratings for Zambia and Ethiopia were changed to “high risk of debt distress.” - Several countries, mostly resource-intensive countries in fragile situations, have accumulated external arrears. ### Banking sector risks, nonperforming loans, and credit - Nonperforming loan ratios have surged across the region, particularly large increases among resource-intensive countries (examples: Angola, Republic of Congo, Mozambique) where weak economic activity has translated into a decline in credit quality. - Government arrears have continued to affect the banking sector in some countries (example: Zambia). - Nonperforming loans tend to be concentrated in a few banks (examples: Angola and Nigeria) and in several instances have been incurred predominantly by public entities (CEMAC). - The broad-based deceleration in private sector credit growth raises additional concerns: - In 2017, private sector credit growth was negative in real terms in many countries. - In several cases (Angola, Gabon, Zambia) private sector credit growth was negative even in nominal terms. - Drivers of weak private credit varied by country: demand-side factors (legacy of the crisis), supply-side factors including tight liquidity (WAEMU), government arrears (Gabon), high levels of nonperforming loans (Angola), crowding out by the public sector (Zambia), and interest rate controls (Kenya). - The slowing of private sector credit poses a threat to recovery, especially where fiscal space has become constrained by rising public debt. - Where governments rely on domestic banks to carry rising public debt, risks include crowding out the private sector and undermining banking sector stability. - Recommended measures to address bank-sovereign nexus and revive private credit: - Rebalance incentives that favor holding government securities and discourage credit to the private sector (for example, tax deductibility and exemptions). - Implement macroprudential measures to limit exposure to sovereign debt. - Gradually tighten central bank refinancing of commercial banks. - Enhance transparency in the corporate sector and reduce information asymmetry (for example, by implementing proper accounting standards, setting up credit bureaus and property titling). - Improve the resolution framework for banks. - Where nonperforming loans are driven by a few entities, policy actions should include concentration reduction, safeguards to address liquidity pressures, enhanced asset quality reviews, and prompt recapitalization of weaker banks to preserve lending capacity. ### Fiscal positions, debt dynamics, and medium-term outlook - In 2018, some fiscal consolidation is expected 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 are expected to strengthen their fiscal positions with planned increases in revenue mobilization and current expenditure cuts, creating some room for higher capital expenditures (examples: Niger, Zimbabwe). - Among oil-exporting countries, modest improvements in fiscal positions are expected in some cases driven by a pickup in oil revenue helped by price increases and recovery of production (example: Nigeria). - The planned fiscal consolidation, together with a further pickup in growth, underlie an expected gradual reduction in debt over the medium term; if either factor fails to materialize, debt vulnerabilities could become more acute. - To enhance the likelihood that fiscal consolidations are implemented and sustained: - Pay careful attention to distributional consequences of adjustment and protect priority spending—a key feature of recent IMF programs. - In designing fiscal adjustment, prefer measures with low short-term multipliers to mitigate negative growth impacts, and accompany consolidation with fiscal reforms to promote long-term growth. ### Oil exporters: fiscal break-even and challenges - Despite recent increases, oil prices remain too low to balance the budgets of most oil exporters. - The break-even oil price declined between 2014 and 2017 for all sub-Saharan African oil-exporting countries except Gabon and Nigeria. - In most cases the break-even oil price is still well above the current and projected price of oil. - The drop in the break-even oil price reflects the extent of fiscal consolidation (reductions in expenditure envelopes and increases in nonoil revenues) and real depreciation vis-à-vis the US dollar. - In Gabon and Nigeria the increase in the break-even price can be partly explained by sizable drops in production volumes and, in Gabon, by an increase in government expenditure in real terms. - Policy recommendations for oil exporters: - Continue fiscal adjustment and advance economic diversification, taking advantage of the uptick in commodity prices. - Boost non-oil revenues and enhance the efficiency of public spending. - Countries that opted for exchange rate flexibility should eliminate foreign exchange restrictions and multiple currency practices and allow their exchange rate to adjust to reflect economic fundamentals. ### Risks to the outlook - External risks: - Expected monetary policy normalization in advanced economies could tighten financing conditions for many sub-Saharan African sovereigns, especially where public debt levels are already high. - A reversal of the recent surge in foreign portfolio investment to the region’s capital markets is possible. - Weaker-than-expected growth in key advanced economies or in large emerging market economies (especially China) would reverberate through the region, affecting commodity prices, demand for commodity exports, foreign direct investment inflows, and other financing sources. - Domestic risks: - Political uncertainty and security challenges weigh heavily on the outlook in some countries; impending elections and political transitions may reduce appetite for difficult reforms and lead to policy slippages. - Lingering internal conflicts remain a latent risk in several countries (examples: Burundi, Democratic Republic of Congo, South Sudan, parts of the Sahel), with socio-economic costs from rising numbers of internally displaced people and refugees. - Deteriorating economic conditions could tempt governments toward inward-looking policies, hindering growth. - There is also upside risk if uncertainties resolve in favor of an improved business climate, a larger-than-anticipated confidence boost, or faster progress on policy reforms (examples: Nigeria, South Africa). ### Policies to support sustainable recovery and growth - Ensuring macroeconomic stability: - Prudent fiscal policy is needed to rein in the buildup of public debt. - Monetary policy must be geared toward ensuring low inflation. - Strengthen external buffers in countries well positioned to take advantage of the global growth pickup and favorable external conditions. - Tailor macroeconomic policies and supportive reforms to countries’ structural characteristics and cyclical positions. - Revenue mobilization to reduce debt vulnerabilities and build fiscal space: - Sub-Saharan African countries could mobilize about 3 to 5 percent of GDP in additional tax revenues in the next few years, creating room for infrastructure and human capital spending. - Successful revenue mobilization requires appropriate tax policy design (including expansion of the base for value-added and direct taxes) and effective revenue administration institutions. - Pursue revenue administration reforms within a medium-term plan; policies improving governance and control of corruption, and ensuring efficient and transparent public spending, can bolster taxpayers’ willingness to pay. - Reinvigorating private investment: - Promote a favorable economic and institutional environment supported by high-quality infrastructure and a skilled labor force. - Ensure macroeconomic stability; strengthen regulatory and insolvency frameworks; increase trade liberalization; deepen access to credit. - Consider innovative financing structures, such as public-private partnerships, with appropriate assessment of contingent liabilities for the public sector. - Long-term challenge—catching up: - Under current policies, medium-term growth in the region is projected to fall far short of the levels experienced in the 2000s and, at the current rate of population growth, well below what is needed to lift living standards. - Income convergence to the frontier has been elusive for many countries. Some non-resource-intensive countries (examples: Burkina Faso, Ethiopia, Ghana, Rwanda, Tanzania) have achieved relatively high growth since the mid-1990s with growth not driven solely by natural resources. - Achieving sustainable, inclusive growth requires policies that support structural transformation, export diversification, and attracting foreign direct investment to support manufacturing and broader development. *Regional Economic Outlook: Sub-Saharan Africa — 1. SLOW RECOVERY AMID GROWING CHALLENGES* ### 1. SLOW RECOVERY AMID GROWING CHALLENGES ### 1. SLOW RECOVERY AMID GROWING CHALLENGES ### Growth drivers and policy determinants - Sustained growth in sub-Saharan Africa has been associated with: - improved macroeconomic policies and stability; - strong policymaking institutions; - high investment in both physical and human capital; - effective use of foreign aid; and - deeper financial markets (IMF 2013). - Additional supportive factors identified: - a supportive external environment (better terms of trade or favorable global financial conditions); - improvements in the quality of institutions; - sound fiscal management to prevent excessive public debt accumulation; - monetary policy geared toward low inflation; - outward-oriented trade policies; and - macro-structural policies to reduce domestic market distortions (IMF 2017d). - Economic diversification strategies should be tailored to country-specific circumstances to tap existing strengths and enable private-sector expansion (example: Botswana). ### Emerging challenges to traditional growth models - Rapid robotization of manufacturing and the risk of inward-looking policies may make it more difficult for sub-Saharan African countries to compete in manufacturing. - Priority actions to stimulate productivity growth and private-sector activity: - identify and resolve obstacles and distortions holding back private sector activity; - improve the business environment through reforms that foster governance, financial market deepening, and trade liberalization; - implement macro-structural reforms to enable resource reallocation toward higher-productivity activities. ### Demographic transition and employment needs - Implications of current demographic trends: - rapid increase in the working-age population and a demographic transition could raise saving and investment as in other regions; - to harness a demographic dividend, sub-Saharan African economies would have to create on average about 18 million jobs a year until 2035. - Policy implication: deliberate policies to encourage gradual structural transformation, allowing resources to move from the informal low-productivity sector to higher-productivity activities. ### Social outcomes and limits of growth-only strategies - Growth alone will not automatically deliver improved living standards and social outcomes. - Recorded social progress during 2000–14: - 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. - Conclusion: significant further progress is still required to achieve desired social outcomes. ### Box 1.1 — Grappling with Rising Insecurity in the Sahel Region - Context and human costs: - Sahel subregion population: about 150 million inhabitants. - Roughly 30 million people are suffering from food insecurity and 5 million are refugees and internally displaced persons. - Security and fiscal pressures: - surge in terrorism has raised military and other security-related outlays, complicating efforts to preserve macroeconomic stability and debt sustainability while maintaining fiscal space for growth-enhancing spending. - share of military expenditure in public expenditure has been on the rise. - commodity-producing Sahel countries experienced large falls in tax revenues as oil and uranium prices collapsed. - efforts to raise domestic nonresource revenues have been hampered by slowing economies and trade-route disruptions (example: Niger). - Incidence of terrorism: - the Sahel region experiences more than half of all attacks within sub-Saharan Africa; - in 2017, Sahel countries (excluding Nigeria) together experienced more attacks than Nigeria for the first time. - Economic and business effects: - business environment deterioration: most Sahel countries experienced sharper increases in terrorism-related business costs in recent years. - development partner support has been declining. - Recommended policy responses: - create fiscal space for priority security, social, and infrastructure spending by strengthening domestic revenue mobilization and boosting the efficiency of public investment; - strengthen governance and transparency; - pursue a prolonged, calibrated, and coordinated expansion of security operations given the vastness and entrenched nature of threats. - Figures and data points cited (sources in the box): - Figure 1.1.2: regional distribution of terrorism, 2010–16. - Figure 1.1.3: Sahel Region incidence of terrorism, 2011–17. - Figure 1.1.4: Sahel Region military spending and fiscal balance, 2013–16. - Figure 1.1.5: Selected regions business costs of terrorism, 2007–17. - Figure 1.1.6: Sahel countries revenue and official development aid, 2007–16. - Box prepared by: Dalia Hakura, Trevor Lessard, and Shirin Nikaein Towfighian. ### Box 1.2 — Regional Spillovers: A Steady Strengthening of Diverse Linkages - Channels of regional spillovers: trade, banking relations, remittances, and conflict. - Recent growth trajectory: - growth decelerated markedly beginning in mid-2014, reaching its lowest level in 2016; most economies that suffered slowdowns appear to be rebounding, but growth remains subdued in some large economies including Nigeria and South Africa. - Trade linkages: - regional trade represented 6 percent of total exports in 1980 and reached 20 percent in 2016 (Figure 1.2.1). - most improvements in trade integration have been within economic integration zones (SADC, EAC, WAEMU, CEMAC) rather than between them. - regional trade remains low relative to advanced economies due to weak infrastructure, transport linkages, misaligned regulatory regimes, and informal trade. - demand concentration: 10 sub-Saharan African countries represent 65 percent of total regional demand for intraregional exports (Figure 1.2.2). - empirical estimate: a spillover of about 0.11 percent to a country’s GDP growth for every percentage point change in the growth of trading partners (Arizala and others 2018). - Banking linkages: - pan-African and subregional banks are increasingly active and highly 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). - foreign subsidiaries are widespread and tend to have larger presence in smaller countries, implying potentially far-reaching spillovers. - growth rates of bank-headquarter countries are correlated with credit growth in host countries where these banks operate. - Remittances: - remittance inflows have reached elevated levels in some countries and regional remittances rose to one-third of the total in 2015. - top five senders account for 55 percent of total outflows (Figure 1.2.4). - growth spillovers via remittances are estimated to be comparable in strength to those via trade (Arizala and others 2018). - Box prepared by: Matthieu Bellon and Margaux MacDonald. ### Box 1.3 — The African Continental Free-Trade Area (AfCFTA) Agreement: What to Expect - Key facts and scope: - On March 21, 2018, representatives of a large number of AU member countries signed the AfCFTA agreement. - Once fully implemented, the AfCFTA is expected to cover all 55 African countries, with a combined GDP of about $2.2 trillion (based on IMF, World Economic Outlook database) and a population of over 1 billion. - The 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 memberships in regional economic communities (RECs); - (4) enhancing competitiveness. - RECs are expected to contribute to the AfCFTA institutional structure, with eventual consolidation of RECs’ trade functions at the continental level. - Phase I provisions: - framework for liberalization of trade in goods and services and a mechanism for dispute settlement. - for trade in goods, the agreement sets the path for eliminating tariffs on 90 percent of product categories. - for the remaining 10 percent of product categories, countries can implement tariff reductions over a longer period for sensitive goods or maintain tariffs for excluded products. - liberalization of trade in services follows a request-and-offer approach based on seven priority sectors: logistics and transport, financial services, tourism, professional services, energy services, construction, and communications. - Phase II topics: - separate negotiations expected to begin in late 2018 and will focus on competition policy, investment, and intellectual property rights. - Preconditions to realize benefits: - reduce wide infrastructure gaps and improve the business climate; - mitigate differential impacts of trade liberalization on groups affected as activities migrate to lower-cost locations. - Context note: - Africa’s current trade remains dominated by exports outside the continent, often commodities, despite a patchwork of intra-African agreements including eight RECs and four subregional groupings. - Box prepared by: Paolo Cavallino, Nana Hammah, Garth Nicholls, and Hector Perez-Saiz. *Source: IMF Regional Economic Outlook: Sub-Saharan Africa — Chapter 1, "Slow Recovery Amid Growing Challenges".* ### 1. SLOW RECOVERY AMID GROWING CHALLENGES ### 1. SLOW RECOVERY AMID GROWING CHALLENGES ### Intra-African Trade and AfCFTA: Potential Benefits - In 2016, 18 percent of Africa’s total trade was conducted within the continent. - SADC and the EAC had the highest levels of intraunion trade (over 20 percent of total trade). - In 2015, manufactured goods accounted for only 19 percent of Africa’s exports to the rest of the world. - Trade within Africa is dominated by manufactured goods, and financial and retail services. - Estimated gains from AfCFTA and related measures: - 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). - The above changes, combined with improved trade facilitation, could increase GDP by as much as 5 percentage points in 15 years (Chauvin and others 2016). - Dynamic interaction between growth and capital accumulation can increase static gains from trade liberalization by more than 60 percent (Anderson and others 2015). - 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 warnings and fiscal implications: - Gains are unlikely to be uniform; activity may migrate to lower-cost locations within the region, requiring countervailing measures (for example, training program for workers) to ensure smooth reallocation of labor and capital. - Elimination of tariffs will lead to significant tariff-revenue losses for governments at a time when fiscal positions need to be strengthened, suggesting the need for further progress in domestic revenue mobilization. ### Tariffs, Nontariff Barriers, and Infrastructure Constraints - Tariff and tariff-line indicators: - In 2016, the applied average most-favored-nation tariff for African countries was 14.5 percent, about twice that for the European Union. - The maximum tariff rate on any product in sub-Saharan Africa was close to 400 percent. - The simple average tariff across all products was slightly less than 10 percent. - Duty-free line items represented only 28⅓ percent of all tariff lines. - Infrastructure and trade facilitation deficits (selected indicators from Table 1.3.1): - 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 72.4; Central America 26.9; Asia 30.5. - Start business (cost as % of income per capita) (DB): Africa 69.77; Sub-Saharan Africa 44.17; Advanced Economies 7.2; North America 27; South America 39.8; Central America 24.1. - Policy implications: - Reducing ground transportation costs is especially critical to encouraging intraregional trade, given the geographic configuration of the continent. - Improving customs efficiency and other administrative procedures is necessary to realize AfCFTA benefits. - Improving the business environment (reducing time and cost to create new businesses) and deepening financial inclusion and access to trade finance are key to promoting the AfCFTA agenda. ### CEMAC: Regional Strategy Implementation and Outlook - Recent outcomes 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 debt restructuring between Chad and its external creditors enabled program review conclusion with Chad; program negotiations ongoing with Republic of Congo and Equatorial Guinea. - Fiscal consolidation and projections: - Overall primary spending declined from 27.5 percent of non-oil GDP in 2016 to 22.8 percent of non-oil GDP in 2017. - Fiscal consolidation expected 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 projected to decline 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 broadly stable. - Implementation risks: indications of initial challenges to fiscal consolidation in some countries, with risks of weaker reform efforts amid political or social resistance. - Monetary and financial sector measures: - BEAC eliminated statutory advances and new central bank credit to government at the end of 2017. - In 2018, BEAC will modernize its monetary policy operations to anchor on the policy rate, by: 1. Simplifying monetary policy instruments; 2. Basing liquidity management on the projection of autonomous factors; 3. Strengthening the framework for required reserves; 4. Adjusting its collateral framework; 5. Setting up an emergency liquidity assistance (ELA) framework. - BEAC will support financial market development by promoting establishment of financial sector databases and a credit bureau. - Regional banking supervisor adopted an action plan to address high nonperforming loans, enforce provisioning rules, strengthen prudential regulations (including risk concentration and connected party lending), resolve banks in difficulty, and implement risk-based supervision. - Structural reform priorities to diversify growth and support inclusive recovery: - Reduce excessive dependence on oil exports and related revenues. - Enhance business environment: establish trade courts; create one-stop shops to reduce time/cost to create a new company; establish incubators for new businesses. - Deepen regional integration: harmonize and reduce custom exemptions via revised customs code; fully implement the Common External Tariff; enact freedom to establish companies. - Improve governance, fiscal transparency, and public financial management. - With reforms and sustained macro stabilization, non-oil GDP growth in CEMAC projected to gradually pick up to 4.8 percent in 2021. ### Protecting Social Spending in IMF-Supported Programs - Coverage and intent: - Since 2009, almost all IMF-supported programs in sub-Saharan African countries included quantitative targets or structural benchmarks to preserve or increase social spending (health, education, social protection). - The 2009 architecture for IMF facilities in low-income countries aims to assist them in achieving a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. - Prevalence of safeguards: - 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; about 95 percent of these programs were for sub-Saharan African countries. - Some programs excluded social spending from fiscal deficit targets or allowed target adjustment to accommodate larger-than-budgeted social spending (examples cited). - Some programs included structural benchmarks to better target social protection, increase cash transfer coverage, or redesign social safety nets. - Measurement and results: - Definition of social and priority spending typically covers outlays on health, education, and social protection (including maternity and child benefits, women’s and old-age benefits, youth employment benefits, social security transfers). - Quantitative floors often consider only domestically financed social and priority spending to avoid missing targets due to external financing shortfalls. - Floors on social spending were met in more than two-thirds of programs. - In a sample of countries with comparable data, the share of social spending protected by these 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: 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. - It is defined as: fiscal break-even oil price = (non-oil fiscal balance) / (fiscal oil revenue per dollar of oil price), where variables are expressed in US dollars. - Interpretation: the non-oil fiscal balance divided by the number of oil barrels allotted to the government—that is, fiscal oil revenue divided by the oil price. - Assumptions: non-oil revenue does not depend on the oil price and the relationship between fiscal oil revenue and oil price is linear. - Decomposition method: - Rewriting with local currency and price level terms: - The non-oil fiscal balance in local currency, exchange rate e, and domestic GDP deflator p are used to express the fiscal break-even price. - To analyze changes in the fiscal break-even oil price in constant US dollars, divide by the US GDP deflator. - The difference in logarithms of the constant-US-dollar fiscal break-even price decomposes into: - Change in the real exchange rate vis-à-vis the US dollar (depreciation); - Change in the non-oil fiscal balance in constant local currency (fiscal adjustment); - A component reflecting changes in the (log) volumes of oil exports and/or changes in the oil taxation schedule. - The approach yields relative contributions of real exchange rate depreciation and fiscal adjustment to changes in the break-even price. *Source: sreo0518 - 1. SLOW RECOVERY AMID GROWING CHALLENGES (IMF Regional Economic Outlook: Sub-Saharan Africa).* ### REFERENCES ### REFERENCES ### Chapter and authors - Chapter title: Domestic Revenue Mobilization in Sub‑Saharan Africa: What Are the Possibilities? - This chapter was prepared by a team led by Alex Segura‑Ubiergo and composed of Chuling Chen, John Hooley, Gabriel Leost, Toomas Orav, Miguel Pereira Mendes, Ashan Rodriguez, and Manuel Rosales. ### Key findings and quantitative highlights - The region as a whole could mobilize about 3 to 5 percent of GDP, on average, in additional revenues. - This additional revenue would represent about $50–80 billion, compared with an estimated $36 billion in official development assistance received by sub‑Saharan African countries in 2016. - For the median sub‑Saharan African economy: - Total revenue excluding grants increased from around 14 percent of GDP in the mid‑1990s to more than 18 percent in 2016. - Tax revenue increased from 11 to 15 percent of GDP over the same period. - Since the mid‑1990s, 15 sub‑Saharan African countries have transitioned to tax‑to‑GDP ratios of about 13 percent and above. - Two‑thirds of sub‑Saharan African countries now have revenue ratios above 15 percent, compared with fewer than half in 1995. - Median revenue‑to‑GDP ratio among all emerging market and developing economies is 23 percent, 5 percentage points higher than for sub‑Saharan Africa. - The tipping point estimated in Gaspar, Jamarillo, and Wingender (2016) is a minimum tax‑to‑GDP ratio of 12.88 percent. - Nontax revenues typically average 2 percent of GDP. - A tax‑to‑GDP revenue of 13 percent, and an overall revenue ratio of 15 percent of GDP, should be viewed as a minimum threshold. - Oil exporters (2000–16): - Average revenue‑to‑GDP ratio was 27 percent, compared with 18 percent for non‑oil economies. - Nontax revenue accounts for almost half of oil‑exporters’ revenue, compared with less than 20 percent for non‑oil exporters. - Revenues are more volatile: during 2000–16 the standard deviation of total revenue for oil exporters was seven times that of non‑oil exporters. - The decline in the world oil price since 2014 led to an overall revenue‑to‑GDP fall for oil exporters from 31 percent in 2012 to 18 percent in 2016. ### Trends and drivers - Revenue gains over the past three decades have been driven primarily by nonresource revenues, which have increased particularly sharply in the past 10 years. - The main sources of gains were increases in direct and indirect taxes; indirect taxes benefited from the introduction of the VAT in several countries. - Revenue from taxes on imports declined as a share of GDP, reflecting increased trade liberalization. - Sub‑Saharan Africa’s increase in revenue ratios over the past three decades has been double that for all emerging market and developing economies. ### Structural constraints and potential additional sources - Low efficiency of key taxes such as the value‑added tax (VAT) and the corporate income tax (CIT) are significant constraints. - Other potential sources of additional revenue collection discussed include excise and property taxes. - Structural conditions affecting lower tax‑to‑GDP ratios include level of development, trade openness, sectoral structure, income distribution, and institutional quality. ### Institutional and political economy considerations - Sustained revenue mobilization requires consistent institutional development over time and attention to basic processes and reforms where reversals are frequent. - Robust reforms should consider efficiency and equity impacts and be embedded in well‑defined medium‑term strategies supported by strong political will. - Building tax collection capacity strengthens state capability and can produce positive institutional spillovers (for example, to statistical agencies and public finance management). - Successful medium‑term strategies emphasize building broad‑based support via proactive outreach to public and private sectors. ### Technology and distributional impacts - The chapter discusses the role of new technologies (digitalization) to give tax policymakers quicker access to more reliable information and to deepen the tax base. - The chapter includes analysis of the economic impact of revenue mobilization on growth and income distribution, with a focus on CEMAC countries post‑2014 commodity price declines. *Source: sreo0518 - REFERENCES.* ### 2. DOMESTIC REVENUE MOBILIZATION IN SUB-SAHARAN AFRICA: WHAT ARE THE POSSIBILITIES? ### 2. DOMESTIC REVENUE MOBILIZATION IN SUB-SAHARAN AFRICA: WHAT ARE THE POSSIBILITIES? ### Regional revenue challenge and fragility - Median non-resource-revenue-to-GDP ratio was less than 14 percent in 2015 for fragile states, compared with 18 percent for nonfragile states. - Several fragile states benefit from natural resource revenues but tend to struggle in non-resource-revenue mobilization. ### Trends in PIT and CIT rates and productivity - Average top PIT rate in sub-Saharan African countries has been reduced from about 44 to 32 percent since 2000. - Average top CIT rates have been reduced by more than 5 percentage points during the same period. - Despite rate reductions, total direct taxes (PIT and CIT) as a percentage of GDP have been trending upward. - CIT productivity is defined as: CIT Productivity = (CIT Revenue as a share of GDP)/(CIT rate). - On average, sub-Saharan African countries’ CIT productivity lags that of advanced and emerging market economies. - Substantial cross-country differences in CIT productivity exist; some countries show high productivity due to more streamlined tax incentives and differing fiscal regimes for special economic zones (SEZs). - Examples of SEZ rates from the source: reduced tax rate of 15 percent for companies in SEZs in Senegal and South Africa; zero CIT rate in Côte d’Ivoire, Rwanda, and Tanzania. ### VAT adoption, efficiency, and growth considerations - Most sub-Saharan African countries have introduced a VAT, replacing general sales taxes; countries still relying on sales taxes include Angola, Comoros, Guinea-Bissau, Liberia, and São Tomé and Príncipe. - VAT C-efficiency is defined as: VAT C-Efficiency = (VAT Revenue)/((Total final consumption net of VAT revenue)*VAT rate). - Focusing on VAT efficiency is generally more growth friendly than raising VAT rates. - For countries where the rate is below 13 percent, a 2 percent rate increase would have virtually no negative impact on growth. - For countries with a rate between 13 and 18 percent, a 1 percent increase would not have much effect on economic activity. - With rates above 18 percent, even small increases in the VAT rate can have a substantial negative impact on growth. - Zero-rating can have a more negative impact on collections than exemptions because the seller can claim a VAT refund for the VAT paid on inputs when zero-rated, whereas exemptions prevent producers from claiming input VAT refunds. - In countries that have adopted a VAT, VAT efficiency is relatively low compared with other regions and varies widely across the region. - Factors contributing to low VAT efficiency: - Narrow tax bases due to proliferation of exemptions and zero-rating. - Different registration thresholds for taxpayers (PIT and VAT thresholds vary widely; some PIT exempted thresholds exceed three times per capita GDP in Burundi, Zambia, and Zimbabwe, while Botswana, Senegal, South Africa, and Tanzania have exempted thresholds similar to per capita GDP). - Weaknesses in VAT refund systems, including varied refund mechanisms (VAT credits against future tax payments; quarterly refunds; refunds following audit verification) that can produce administrative delays and buildup of unpaid claims (cited examples: Zambia and Zimbabwe). ### Underexploited taxes and administrative priorities - Excise taxation: - In 2015, on average, sub-Saharan African countries collected 1.4 percent of GDP from all forms of excise taxes—less than half the level in emerging Europe. - Wide cross-country differences: several countries (Benin, Côte d’Ivoire, Madagascar, Mozambique, Nigeria, Sierra Leone) collected excise revenues of less than 1 percent of GDP. - Policy design choices: specific taxes (monetary amount per quantity) tend to address externalities, produce more predictable revenue, and are simpler to administer; ad valorem taxes are based on value and can in some cases result in lower consumption prices. - Property taxation: - Property tax revenues are quite limited but offer a stable, reliable source less susceptible to short-term fluctuation and harder to evade. - Previous studies suggest sub-Saharan African countries can raise 0.5 to 1 percent of GDP via property taxation. - Many countries still rely on one-time payments (examples from the source: Botswana, Lesotho, Malawi, Swaziland, Zimbabwe depend on stamp duties or registration fees). - Rollout of recurrent property taxation requires capacity-building (property registries, annual appraisal systems), coordination between central and subnational governments, and can leverage geo-spatial technology in urbanized areas. - Customs administration: - Customs administrations collected, on average in 2015, a third of nonresource revenue through customs at the border. - Customs reforms can deliver revenue mobilization gains relatively quickly due to fewer taxpayers in international trade. - Typical reforms: modernization/digitalization of customs processes, strengthening clearance procedures, anti-smuggling units, channeling goods through a few major ports with adequate controls to reduce leakage. - International corporate taxation and cross-border rules: - Thin capitalization rules across sub-Saharan Africa had set debt-to-equity ratios of up to 4:1 by end-2016; recent international trends suggest countries with ratios above 2 could look to further limit interest deductions (countries cited with higher ratios include Botswana, Equatorial Guinea, Namibia, Rwanda, Tanzania, Zambia, Zimbabwe). - Transfer pricing (intragroup transactions) requires “arm’s length” principles and monitoring frameworks to limit tax avoidance; rules are needed where absent. ### Structural factors, tax frontier, and tax potential - Tax frontier (theoretical tax capacity) concept: the highest level of tax revenue (percent of GDP) expected given macroeconomic and institutional conditions. - Model approach: a stochastic panel data model covering 121 countries during 2002–16 using variables including income per capita, trade openness, share of agriculture in GDP, income inequality, public spending on education, measures of corruption, and government effectiveness. - Determinants positively associated with higher tax-to-GDP ratios: higher income levels, more trade openness, higher spending on education, better government effectiveness; lower income inequality and lower corruption also tend to be associated with higher tax ratios. - Average tax frontier for sub-Saharan African countries is around 7½ percentage points of GDP lower than the average tax frontier for the rest of the world. - The average tax gap (tax potential) for sub-Saharan African countries ranges between 3 and 5 percent of GDP. - The average tax gap is slightly lower in sub-Saharan Africa than elsewhere, implying that controlling for structural factors, sub-Saharan African countries are not, on average, less efficient in tax collection than other regions. - Given lower overall tax revenues, addressing inefficiencies may be a priority because the cost of inefficiency is higher in absolute terms. *Source: sreo0518 - 2. DOMESTIC REVENUE MOBILIZATION IN SUB-SAHARAN AFRICA: WHAT ARE THE POSSIBILITIES?* ### 2. DOMESTIC REVENUE MOBILIZATION IN SUB-SAHARAN AFRICA: WHAT ARE THE POSSIBILITIES? ### 2. DOMESTIC REVENUE MOBILIZATION IN SUB-SAHARAN AFRICA: WHAT ARE THE POSSIBILITIES? ### Main findings - Improvements in tax-system functioning can help close tax gaps but are unlikely to be sufficient to attain key fiscal objectives such as supporting higher levels of public spending to achieve the Sustainable Development Goals. - Additional revenue mobilization requires reforms tackling underlying structural factors—notably corruption, government effectiveness, and inequality—that currently constrain revenue performance. - The tax frontier is on average similar across country groups in sub-Saharan Africa, but large variations exist in tax effort and tax gaps. - Oil producers have the lowest tax effort and highest average tax potential, at 5 percent of GDP or more. - Other resource and nonresource countries show lower levels of tax potential of about 3 percent of GDP. - The relatively lower tax frontier in sub-Saharan Africa implies that improvement in macroeconomic fundamentals and institutional factors could raise the tax frontier and increase possibilities to mobilize greater tax revenue. - Regression analysis comparing tax frontiers based on changes in income inequality, corruption, and government effectiveness shows that policies addressing institutional weakness could help boost revenue collection (for example, via increased tax compliance as citizens perceive more transparent and efficient spending). ### Tax frontiers, gaps, and country groups - Most sub-Saharan African countries still have considerable potential to collect higher taxes through reforms. - Countries grouped by tax-collection levels face different challenges and opportunities: - Low tax collection (below the tipping point): Countries that have not reached a minimum threshold of about 12½ to 13 percent of GDP will need reforms to increase collection efficiency and also measures to push the tax frontier higher (structural reforms to reduce corruption, improve governance, or increase spending on education, which can reduce inequality and create incentives to collect more taxes). - Medium tax collection (tax-to-GDP ratio in the 13–18 percent range): These countries tend to have larger tax gaps and could mobilize, on average, about 3½ percent of GDP in additional revenues through reforms aimed at improving efficiency of current systems (for example, a thorough review of existing taxes and exemptions). Some countries, such as Côte d’Ivoire, Ethiopia, and Mali, appear relatively close to the tax frontier and will need structural reforms to push the frontier higher. - High tax collection (over 18 percent of GDP): These countries already have a relatively elevated tax frontier. Despite comparatively high tax-to-GDP ratios, there remains an average distance to the frontier of about 4 percent of GDP, indicating potential for additional revenue mobilization, though some countries may choose lower taxes as a public policy choice (desired size of government). ### Lessons from successful revenue mobilization episodes - Sustained revenue mobilization is difficult: analysis covering 44 sub-Saharan African countries from 2000–16 finds only six episodes of sustained revenue mobilization. - Definition of a successful episode: a total increase of 2 percentage points of nonresource GDP over a three-year period, with no substantial declines in the revenue ratio within or immediately following the period. - Observed outcomes from the six episodes: - The nonresource revenue gain during the three-year episodes ranges from 2.2 to 8 percent of nonresource GDP. - Average annual increase during episodes: 1.2 percentage points. - Average total revenue gain over episodes: 3.5 percentage points. - Gains continued in subsequent years, with increases averaging 1 percentage point a year over the next three years. - Data for 2016 indicate current revenue levels are at least at the same level as at the end of the episode, and on average 3.4 percent of GDP higher than the episode end point, suggesting previous gains have become permanent. - Successful episodes occurred in a diverse set of countries (varying tax effort, geography, income levels, fragility, and resource intensity). Most episodes overlapped with intensified engagement with the IMF (lending and nonlending programs) and substantial technical assistance. - Robust growth often accompanied episodes, possibly indicating tax buoyancy, but accelerated growth was not required (only Liberia saw a significant acceleration; average growth decelerated modestly from 6.7 percent prior to the episode to 5.7 percent during the episode). ### Reform features and sequencing - Success stories point to strong political commitment and comprehensive, multiyear reform strategies focused on building basic institutions and the tax base as prerequisites for success. - The reform process is tailored to country circumstances but commonly includes: - Strengthening basic building blocks: taxpayer identification number, semiautonomous revenue authority, the VAT, taxpayer segmentation. - Modernization of tax administration institutions and continued efforts to improve their functioning (reorganizations, medium-term capacity-strengthening strategies). - Broad range of tax policy and revenue administrative reforms implemented prior to and during mobilization episodes. - Examples: - Liberia and Mozambique, emerging from prolonged internal conflict, embarked on broad reform agendas; Liberia was in early stages of rebuilding and quickly introduced several basic building blocks, while Mozambique had pursued broad reforms since the mid-1990s (customs and domestic indirect tax overhauls, VAT introduction, revenue authority, large taxpayer unit). ### Identified successful episodes (countries and dates) - Senegal 2001–03 - Liberia 2006–10 - Mozambique 2007–12 - Rwanda 2012–14 - Tanzania 2005–07 - Uganda 2014–16 ### Selected numeric facts and thresholds (preserved exactly as in source) - Oil producers: tax potential "at 5 percent of GDP or more." - Other resource and nonresource countries: "about 3 percent of GDP." - Tipping point: "about 12½ to 13 percent of GDP." - Medium-collection countries potential: "about 3½ percent of GDP in additional revenues." - Average annual increase during episodes: "1.2 percentage points." - Average total revenue gain: "3.5 percentage points." - Post-episode continuation average increase: "1 percentage point a year over the next three years." - 2016 average higher level than episode end point: "3.4 percent of GDP higher." - Number of sustained episodes identified: "six episodes." - Range of nonresource revenue gain in episodes: "2.2 to 8 percent of nonresource GDP." - Growth before vs during episodes (average): "6.7 percent prior to the episode" to "5.7 percent during the episode." - Average distance to frontier for high-collection countries: "about 4 percent of GDP." - Country-specific context entries as presented: Liberia "2006–10LowOtherYesYes–2.37.6"; Mozambique "2007–12LowNonNoYes9.16.9"; Rwanda "2012–14LowNonNoYes8.07.0"; Senegal "2001–03MidNonNoYes4.14.0"; Tanzania "2005–07LowOtherNoYes6.36.5"; Uganda "2014–16LowOtherNoYes5.94.2." *Source: Regional Economic Outlook: Sub-Saharan Africa (chapter 2, “Domestic Revenue Mobilization in Sub-Saharan Africa: What Are the Possibilities?”).* ### 2. DOMESTIC REVENUE MOBILIZATION IN SUB-SAHARAN AFRICA: WHAT ARE THE POSSIBILITIES? ### 2. DOMESTIC REVENUE MOBILIZATION IN SUB-SAHARAN AFRICA: WHAT ARE THE POSSIBILITIES? ### Reform measures and administrative modernization - All countries in the study focused on building the tax base, simplifying the tax system, and tackling exemptions and incentives rather than on frequent tax rate adjustments. - Common tax-policy and administrative measures adopted: - Voiding or suspending certain tax exemptions (Liberia, Uganda). - Revising investment codes (Mozambique, Rwanda, Senegal, Tanzania). - Eliminating distortions on value-added taxation (Rwanda, Senegal, Uganda). - Introducing simplified tax regimes for small businesses (Mozambique, Rwanda, Senegal, Tanzania). - Adjusting VAT thresholds to better target high-value businesses (Tanzania, Uganda). - Expanding the network of withholding agents (Uganda). - Strengthening specialized taxes, such as property and investment income taxes (Rwanda, Senegal). - Institutional development and modernization priorities: - Improve tax administration processes and refocus core operations. - Develop effective information and communication technology (ICT) systems to reduce compliance costs and simplify registration, filing, payment, audit, collection, enforcement, and appeals. - Deploy taxpayer segmentation and specialized units for small, medium, and large taxpayers; all countries adopted some form of taxpayer segmentation. - Integrate domestic tax and customs operations and simplify customs clearance; widespread adoption of customs automation and e-tax platforms during 2011–13. - Innovations in Rwanda: mobile tax payments, integration of social contributions into the e-tax system, rollout of electronic billing machines to support VAT buoyancy. ### Political commitment, stability, and supporting factors - Need for strong and sustained political commitment: - Progress on revenue mobilization is usually slow and requires perseverance to implement reforms. - Transparency is useful to maintain reform momentum. - Evidence on pace and variability of gains: - Liberia (postconflict): nonresource revenue ratio rose by 2.6 percentage points each year over three years. - Among strong performers with prior foundational reforms: average annual increases in nonresource revenue were about 0.9 percentage point of GDP a year during the episode; after the episode, gains tended to slow to 0.7 percentage point. - Elements supporting implementation: - Medium-term revenue strategies: adopted in Senegal (2003), Tanzania (2003), Mozambique (2006), and Rwanda (2013); focus on taxpayer-centric policies, private-sector consultation, accountability, and responsiveness. - Stability: peace and stability are preconditions; fragile countries tend to have very low tax-to-GDP ratios (often below 10 percent of GDP). Long-tenured ministers of finance aided mobilization in Mozambique and Senegal. - Technical assistance and IMF engagement: all countries received prolonged IMF technical assistance and IMF-supported programs with emphasis on revenue mobilization; IMF engagement can be a useful sounding board but cannot substitute for political will. - Transparency and outreach: publishing beneficiaries of tax breaks (Tanzania, Uganda), VAT compliance gap analysis (Uganda), publishing financial accounts of revenue-generating agencies (Liberia), taxpayer education programs (Rwanda, Uganda). ### Conclusions and policy implications - Aggregate potential: - "Sub-Saharan African countries could mobilize on average up to 5 percent of GDP in additional tax revenues in the next few years." - Preconditions and priorities: - Economic and political stability are preconditions for success. - Policy design is key; inadequate tax policies cannot be offset by institutional reforms. Basic tax-policy principles for success include implementing broad-based VATs, gradually expanding the base for direct taxes (CIT and PIT), implementing systems to tax small businesses, and levying excises on a few key items. - Institutional development and ongoing revenue administration reforms based on a medium-term plan are essential. Focus areas include risk management, taxpayer segmentation, building registries of large taxpayers, and well-targeted audits. - Improving governance, controlling corruption, and enhancing efficiency and transparency of public spending support compliance and reform legitimacy. Transparent publication of tax-exemption beneficiaries and public financial management reforms are helpful. - Country-specific design: reforms must be defined at the country level using local knowledge, led by country authorities. ### Five-step roadmap for revenue mobilization (preserved wording) - 1. Identify the taxes that offer the greatest potential. For most sub-Saharan African countries, improving the VAT offers substantial potential given its current low efficiency in most cases. But there should be a systematic assessment of the potential associated with other taxes, including the CIT (where excessive tax exemptions/incentives have been eroding the base), the PIT (where there should be an effort to gradually expand coverage), and excise taxes. Despite the general decline in customs duties, stricter enforcement of customs rules and procedures could also help mobilize additional revenues. There is also potential in other areas, such as real estate taxes, though many countries have so far achieved limited progress in this area. - 2. Review the legal framework and tax policy design. Once the potential of the various taxes has been established, there will be a need to align tax policies with the new objectives. In some cases, this may mean the introduction of a VAT, or the reduction of exemptions and the introduction of sanctions for noncompliance. - 3. Assess the institutional framework. This should be done at two levels. First, there is the underlying supporting framework covering governance aspects. Countries that have weak governance are less likely to be effective in their revenue mobilization efforts. A greater emphasis on improving governance and controlling corruption seems crucial. In sub-Saharan Africa, the countries that are ranked highest in terms of control of corruption and good governance also tend to have higher levels of tax effort. And this effect is statistically significant even after controlling for the impact of per capita GDP. This finding confirms recent research on this issue (IMF 2016). But there is also the operational framework, which covers institutional arrangements that have proven effective, such as the establishment of a revenue authority that follows specific principles. - 4. Define a medium-term revenue strategy. There is consensus in the literature that this is a key step. The strategy should provide medium-term objectives and short-term goals, and could also define capacity-building needs. A convincing strategy would need to explain why the state is seeking to collect additional taxes. - 5. Build a constituency for reform. The success of the medium-term strategy will depend on the structures of horizontal and vertical accountability. Horizontal accountability refers to the capacity of the government to convince other political parties that revenue mobilization is in the broader interest of the country. This is important to avoid reversals in cases of government changes after elections, given that revenue mobilization takes time. Vertical accountability refers to the social contract between the state and its citizens to ensure compliance. The state exercises its legitimate right to collect taxes in exchange for effective and transparent government spending. Public outreach efforts would be helpful, but they would need to be based on a credible commitment to better governance and transparency. *Regional Economic Outlook: Sub‑Saharan Africa — Chapter 2 (excerpt).* ### Box 2.1. Looking ahead: Digital Revenue Mobilization ### Box 2.1. Looking ahead: Digital Revenue Mobilization ### Digitalization and tax policy/administration - Digitalization has enabled a massive increase in the capacity to capture, retain, and process vast amounts of data. - Its impact on tax policy and administration is multifaceted: - It empowers tax policymakers with quick access to more reliable information. - It reduces costs for both administrators and taxpayers, as digital infrastructure eliminates numerous manual processes related to recording, counting, and collecting tax files and payments. - It can deepen the tax base by reducing the use of cash and facilitating analysis of chains of transactions. - It can significantly benefit the business climate by clarifying tax rules and speeding up processes. ### Adoption in Sub-Saharan Africa and implementation hurdles - Sub-Saharan African tax authorities have seized upon digitalization as an opportunity to leapfrog from basic infrastructure to recent technologies. - Examples of introduced technologies: - Online e-tax portals - Mobile tax payments - Online reimbursement of value-added tax (VAT) credits - Progress has been uneven and halting because implementation faces important hurdles in the region, including: - Low levels of internet penetration that limit the reach of some platforms. - Inherent complexity, where platforms require extensive development and adaptation in a context of incomplete or low-quality data, with potentially significant financial and reputational risks. - Sociopolitical challenges, including weak enforcement and little trust in government. ### Peer-to-peer learning, pilot ideas, and country examples - A number of peer-to-peer learning workshops on technology-enabled ideas and navigating the political economy of such reforms have been organized, including: - The 2016 Hackathon in Senegal - The 2017 Ideas Workshop in Uganda - Purpose and process: - Events brought together participants from different nations, institutions, and the private sector to identify issues and brainstorm solutions. - Experts evaluated homegrown proposals and selected the most practicable areas for further work. - Country-specific considerations and proposals identified: - Senegal: expanding the menu of mobile options could help improve e-tax accessibility. - Uganda: encouraging the deployment of electronic fiscal devices—portable and increasingly inexpensive devices that record business transactions—to improve compliance with sales taxes and the VAT. - Participants also suggested establishing a gateway for the collection of third-party data to help identify and cross-check tax liabilities. ### Design principles and policy recommendation - These initiatives suggest a useful approach to building ownership: - Ensure reforms are homegrown and driven by an intimate knowledge of local circumstances. - Inform reforms through a pragmatic dialogue among policymakers and practitioners. - Recommendation for country authorities: - In the preparation of specific medium-term revenue mobilization plans, country authorities should consider organizing similar seminars to draw on inputs and ideas from a broad range of stakeholders. *Box 2.1. Looking ahead: Digital Revenue Mobilization — Regional Economic Outlook: Sub‑Saharan Africa* ### Annex Table 2.1.2. Estimates of Sub-Saharan African Countries’ Tax Frontier ### Annex Table 2.1.2. Estimates of Sub-Saharan African Countries’ Tax Frontier ### Model specifications and data notes - Source: IMF staff calculations. - Models A, B and C are based on the specifications listed in Annex Table 2.1.1, with log of tax to GDP as the dependent variable. - Model A includes institutional factors and public spending on education. - Model B includes public spending on education but not corruption or government effectiveness. - Model C does not include corruption, government effectiveness or public spending on education. - ¹ Data correspond to 2015 in most cases, with the exception of Comoros, Seychelles, and Swaziland (all 2014), and Cabo Verde, Democratic Republic of the Congo, and Guinea-Bissau (all 2013). Year selection requires data availability for the set of independent variables in the model. ### Summary of substantive findings on private investment (chapter highlights) - Regional and group-level private investment ratios and trends: - Sub-Saharan Africa (SSA) averaged 15 percent of GDP in private investment during 2010–16. - Developing economies in Asia averaged 22 percent of GDP in private investment during 2010–16. - Europe averaged 18 percent, Latin America averaged 17 percent, and Middle East and North Africa (MENA) averaged 16 percent over 2010–16. - Within SSA, private investment ratios averaged: - about 14 percent in oil-exporting countries, - 17 percent in other resource-intensive countries, - 15 percent in non-resource-intensive countries during 2010–16. - Historical growth rates and recent dynamics: - Private investment in SSA grew at an average rate of 14 percent a year during the decade of rapid growth (early 2000s decade). - Since 2010, private investment grew on average at 5 percent a year through 2014 and contracted during 2015–16. - Investment in the region contracted by 4 percent each year on average in 2015–16. - The slowdown in investment in SSA was less pronounced during 2010–14 but became stronger since 2015. - Association with poverty and investment growth: - Figure regression: y = –0.06***x – 0.53 (relationship between change in poverty headcount at $2 a day and average yearly real investment growth, 2000–16), with significance indicated by ***. - Contribution to GDP growth: - Weaker investment has weighed on GDP growth. In oil-exporting countries, declining private investment’s negative impact on growth was compounded by sharp cuts in public investment. In other countries, weaker private investment was in part offset by more public investment, but rising debt and debt servicing costs constrain fiscal space. ### Determinants and country experiences - Factors associated with surges in private investment: - Macroeconomic stability and stronger institutions. - Discovery of natural resources and elevated commodity prices. - Resolution of long-standing conflicts (noted cases: Côte d’Ivoire, Ethiopia, Rwanda, Uganda). - Strong current and prospective economic activity. - A strong regulatory and insolvency framework, efficient public infrastructure, greater trade openness, and deeper financial systems. - Country-specific shocks and drivers of declines: - Sharp fall in commodity prices reduced investment in commodity-exporting countries, especially oil exporters (Cameroon, Gabon, Nigeria). - Policy and political uncertainty weakened investment in South Africa. - Slowdowns in large countries (Angola, Nigeria, South Africa) created adverse spillovers to the rest of the region (combined GDP weight of about 50 percent of the region). - Idiosyncratic shocks: e.g., Kenya experienced a sharp slowdown in credit growth; Namibia’s investment slowed after completion of a large mining project. ### Policy implications and options to alleviate constraints to private investment - Public investment: - Public investment can support private investment by providing better infrastructure. - Policymakers should be mindful that public investment may crowd out private investment when competing for scarce financial resources or facing binding supply bottlenecks. - Mitigation: promote alternative sources of financing and ensure associated risks are well managed. - Alternative and complementary strategies: - Promote alternative financing through public-private partnerships (PPPs). - Attract foreign direct investment (FDI). - Set up special economic zones (SEZs) while noting that the experience with SEZs has been mixed. - Deepen domestic financial markets and promote new financial technologies (“fintech”) to improve financing availability and allocation. - Institutional and macro priorities: - Sustain macroeconomic stability. - Strengthen institutions, regulatory and insolvency frameworks. - Improve public infrastructure, trade openness, and financial system depth to increase firms’ incentives and ability to invest. *Italic: Source — Annex Table 2.1.2. Estimates of Sub-Saharan African Countries’ Tax Frontier; Regional Economic Outlook: Sub-Saharan Africa (selected chapter excerpts and annex notes).* ### 3. Non-Resource-Intensive ### 3. Non-Resource-Intensive Countries ### Determinants and Empirical Approach - Estimation sample: an unbalanced panel of 101 emerging market and developing economies covering 1980–2015. - Estimator: system generalized method of moments (system GMM). - Private investment measure: private gross fixed capital formation, current prices, deflated by GDP deflator. - Key explanatory variables (structural and institutional): real GDP growth, public investment, relative price of investment (fixed capital formation deflator to GDP deflator ratio), real interest rate, lagged private-investment-to-GDP ratio, regulatory quality, insolvency and resolution framework, infrastructure (paved roads, access to electricity), trade openness, financial development, capital account openness. - Expected effects noted: - Real GDP growth (accelerator effect) → positive effect on private investment. - Public investment → ambiguous (complements vs. crowding out). - Higher cost of capital (relative price, real interest rate) → expected to reduce private investment. - Investment ratios show persistence → inclusion of lagged private-investment-to-GDP ratio. ### Strong Economic Activity Is Key - Private investment increases when real GDP growth is high (above the country historical average) but not when it is low (below the country historical average). - Nonlinear impact of GDP growth: possible "wait-and-see" behavior or presence of idle productive capacity during rebounds. ### Institutional and Structural Amplifiers of the Growth–Investment Link - Regulatory quality and insolvency/resolution frameworks: - Private investment reacts more strongly to growth if regulatory quality is better and insolvency costs are lower. - Infrastructure: - Private sector invests more when growth is supported by better public infrastructure (larger share of paved roads; greater access to electricity). - Trade openness: - Firms more likely to invest in response to strong activity in more open economies. - Capital account openness: - The impact of GDP growth on investment is stronger in countries with less open capital accounts. - Financial deepening: - Very low levels of financial development can be a binding constraint: firms do not invest in new capital in response to stronger demand when financial development is very low. ### Magnitude of Interaction Effects (Table 3.1) - Effect on private investment ratio of a 1 pp increase in GDP growth (pps): - Whole Sample: 0.21 - Low Regulatory Quality (SSA average) – High Regulatory Quality (non-SSA EMDEs average): 0.29 – 0.48 - High Insolvency Cost (SSA average) – Low Insolvency Cost (non-SSA EMDEs average): 0.02 – 0.24 - Higher Proportion of Paved Roads: 0.28 - Higher Access to Electicity: 0.33 - Higher Trade Openness: 0.26 - Lower Capital Account Openness: 0.33 - Higher Financial Development: 0.47 - Benchmarks and interpretation: - For the whole sample, a 1 percentage point increase in GDP growth raises the private investment ratio by 1/5 of 1 percentage point (0.21 pps). - Countries with stronger regulatory quality see an increase of 1/2 percentage point (0.48 pps) per 1 percentage point GDP growth. - Countries with more developed infrastructure or trade openness show increases around 1/3 percentage point (0.26–0.33 pps). - Countries with more developed financial systems see about 1/2 percentage point (0.47 pps). ### Public Investment: Complementarity versus Crowding Out - Channels through which public investment may crowd out private investment: - Competing for scarce physical and financial resources (debt issuance, bank credit, higher taxes, inflation). - State enterprises producing output in direct competition with private sector. - Increased macroeconomic instability when public investment is financed by unsustainable debt accumulation. - Empirical finding on interaction with financial development: - Public investment crowds out private investment when the financial system is less developed and crowds it in when the financial system is more developed. - Example magnitudes given observed financial development levels: - A 1 percentage point increase in the public investment ratio → a ½ percentage point contraction of the private investment ratio in the average sub-Saharan African country. - A 1 percentage point increase in the public investment ratio → a ½ percentage point increase in other emerging market and developing economies included in the sample. - Policy-relevant factors determining the ultimate impact: project financing (domestic vs. external), project efficiency, and country-specific constraints (low financial development, large infrastructure gaps, scarce resources, limits on foreign financing and debt servicing). ### Alleviating Constraints to Private Investment - Deepening financial systems: - Evidence that availability and access to credit are major constraints in sub-Saharan Africa. - Comparative observations: - Bank financing of investment is the lowest, while equity financing is the highest compared with other regions (2011–14). - Lowest share of firms that did not need a bank loan and highest share identifying access to credit as a major constraint. - Small and medium-sized firms face greater obstacles to financing than larger firms. - Banking-dominated landscape; stock exchanges and bond markets are underdeveloped but expanding rapidly. - Banking systems display relatively high capital ratios; a negative association is observed between capital ratios and credit availability to firms in sub-Saharan Africa (regression line: y = –1.17**x + 41.75). - Rapid expansion of bond and equity allocations observed (Dec-10 through Dec-17, equities and bonds in billions of US dollars). - Room for further financial market deepening (percent of GDP and index series 2000–16 across regions). - Preconditions for bond market development: registries, central depositories, clearing and settlement systems, large heterogeneous investor base, sound banking system, market-determined interest rates. - For equity markets: regional integration of stock exchanges to enhance liquidity and efficiency. - Need for cautious financial deepening to reduce risks of financial instability; stressed financial systems supply less credit. - Positive relationship between the strength of the financial system (z-score) and provision of private credit; z-score definition provided. - Reforms required: strengthen judicial independence, investor protection, auditing standards, and financial market infrastructure. - Fintech highlighted as potential leapfrogging opportunity for greater financial industry efficiency, financial depth, and inclusion. - Public-Private Partnerships (PPPs): - Theoretical benefits: improve infrastructure quality, bring private expertise, alleviate financing constraints. - Practical caveat: global experience does not support that PPPs are necessarily more efficient than public procurement; PPPs imply complex arrangements (further discussion in source). *Source: IMF, World Economic Outlook database.* ### 1. Index of Financial Development ### 1. Index of Financial Development ### Public-Private Partnerships (PPPs): role, distribution, and risks - Definition and typical structure: - Broadly defined as long-term contracts between a private party and a government entity to provide a public asset or service in which the private sector carries a significant portion of the risks and payment is in the form of future income streams. - Typical private-party responsibilities: financing, design, construction, operation for contract life; compensation via user fees or government payments. - Regional importance and averages: - Sub-Saharan Africa has the highest average ratio of PPP projects to GDP in the world: average ratio since 2000 has been 1.4 percent, compared with 1 percent of GDP in other regions. - Distribution within sub-Saharan Africa (average ratio of PPP projects as share of GDP, 2000–16): - Non-resource-intensive countries: 2¼ percent of GDP. - Non-oil resource-intensive countries: 1¾ percent of GDP. - Oil-exporting countries: 1¼ percent of GDP. - Sectoral concentration: - PPPs mainly concentrated in the energy and transportation sectors. - In the last five years, energy sector projects represent the largest share of total PPPs. - Low share of ICT projects explained by many ICT projects being developed under modalities that are not strictly PPPs (no risk sharing between private and public sectors). - Successful examples and scale: - South Africa: power purchase agreements — 60 projects over three years, total commitment of 118 billion rand (about 2½ percent of 2017 GDP). - SANRAL concessions: 1,288 km concessioned of a 19,700-km road network under long-term PPP-type concessions. - Chapman’s Peak Toll Road and Gautrain Rapid Rail System cited as engineering/operational successes. - Fiscal and institutional risks: - PPPs can bypass budgetary constraints, require public sector support (capital grants), debt guarantees or minimum revenue guarantees (contingent liabilities), and generate long-term payment commitments that introduce budget rigidity. - Since 2006, the value of disputed projects in sub-Saharan Africa as a share of countries’ GDP has averaged ¾ percent of GDP — the highest ratio among emerging market and developing economies. - Evidence links higher disputed-contract rates and lower-quality PPP selection to weaker public investment management institutions. - Instruments and capacity building: - PPP Fiscal Risk Assessment Model (P-FRAM): evaluates potential fiscal costs and risks from PPPs, including sensitivity analysis and contract termination scenarios; aims to help authorities develop risk-mitigation strategies. - P-FRAM pilots conducted in: Côte d’Ivoire, Mauritius, and Niger. - Public Investment Management Assessments (PIMA): identify weaknesses in public investment practices and provide country-tailored solutions (not PPP-specific but related). - PIMA conducted in: Botswana, Burkina Faso, Cameroon, Côte d’Ivoire, Ghana, Liberia, Madagascar, Mauritius, Mozambique, Togo, and Zambia. - Policy implications (implicit from text): - Strengthen institutional and legal frameworks to quantify, assess, and control PPP-related risks. - Improve public investment management quality and budget transparency to reduce disputes and fiscal exposure. - Use P-FRAM and PIMA tools to design mitigation strategies and identify weaknesses. ### Foreign Direct Investment (FDI): patterns and determinants - Role of FDI: - FDI complements domestic resources and brings transfers of knowledge and technology. - Regional performance: - Over the past decade, sub-Saharan Africa has been the main recipient of FDI in percent of GDP among emerging market and developing regions. - Its ratio of FDI to GDP over the past decade has averaged slightly above 5 percent. - Other regions show ratios ranging from 2.5 to 4 percent. - Country concentration and examples: - Countries with ratios since 2000 well above the regional average of about 4 percent: Cabo Verde, Mauritius, Mozambique, Seychelles, São Tomé and Príncipe, and The Gambia. - Two-thirds of countries in the region have ratios below the regional average. - Note: some countries have other important financial-flow sources (portfolio and loans), including Kenya, Senegal, and South Africa. - Determinants of FDI (literature summary): - Factors that attract FDI: large domestic markets and natural resources; provision of infrastructure; level of education of the labor force; openness to trade; macroeconomic and political stability; quality of institutions. - Policy implications: - Improve macroeconomic and political stability. - Provide better infrastructure services and a more skilled labor force. - Improve the institutional environment to foster stronger FDI inflows. ### Special Economic Zones (SEZs): experience and policy options - Role and mixed record: - SEZs are second-best compared with economy-wide reforms but can catalyze structural transformation and attract FDI. - Experience in sub-Saharan Africa over past two decades has been mixed; many SEZs underperformed or fell short of expectations. - Common shortcomings: - Reliance primarily on corporate tax holidays with little non-tax incentives or regulatory facilitation. - Taxes are not the only factor in investment location decisions. - Positive recent experiences: - Rwanda and Ethiopia cited as improved approaches yielding better results. - Success factors: developing clusters to foster competition and quality, focusing on comparative advantages. - Sector focus and examples: - Many SEZs focus on apparel, textile, and agroprocessing (Ethiopia, Ghana, Kenya, Madagascar, Malawi, Mauritius, Seychelles, Zimbabwe). - Few economies have established SEZs in capital-intensive industries (Mozambique, Namibia, Nigeria, South Africa, Zambia — automotive and aluminum). - Ways to increase SEZ effectiveness: - Integrate SEZ programs into national and regional development strategies. - Promote investments better linked to domestic firms and encourage stronger ownership by foreign investors. - Improve provision of infrastructure and energy. - Promote relationships and joint ventures between local firms and foreign investors. - Develop training and education aligned with SEZ labor requirements. - Improve compliance with global production and environmental standards. - Ensure SEZs catalyze broader economic transformation for long-term success. ### International initiatives to support private investment - Belt and Road Initiative (BRI): - Framework (Silk Road Economic Belt and 21st Century Maritime Silk Road) to connect China with south, central, and west Asia, Europe, and Africa via trade, infrastructure, investment, and finance. - Expected to raise up to $1 trillion in financing from China over 10 years, mainly for infrastructure development. - Specific plans involving sub-Saharan African countries include transport and energy infrastructure and more SEZs. - Early focus: Kenya (maritime ports and railways); other seeking involvement: Ethiopia, Mozambique, South Africa, Tanzania. - China more than doubled its pledges ($60 billion) in project finance and technical assistance to support Africa’s development at FOCAC in 2015. - G20 Compact with Africa (CwA): - Launched in early 2017 with cooperation of G20, African Development Bank, IMF, World Bank, and participating countries. - Focus: coordinate efforts to facilitate projects for private investment. - Monitoring mechanism being set up (with IMF and World Bank support) to assess progress across three pillars: - Macroeconomic framework: maintain macro stability while providing adequate investment in infrastructure. - Business framework: make countries more attractive for private investors. - Financing framework: increase availability of financing with reduced costs and risks. - Sub-Saharan African participants (eight countries): Benin, Côte d’Ivoire, Ethiopia, Ghana, Guinea, Rwanda, Senegal, and Togo. - Progress on reforms is mixed; participating countries are at various stages, and some joined only recently. - Country example under CwA: - Ghana: measures under CwA focus on renewable energy and energy efficiency to promote private investment, complemented by training and improved access to financing; government engaged in structural energy-sector reforms including debt restructuring and privatization plans. *Source: Regional Economic Outlook: Sub‑Saharan Africa (chapter content provided).* ### 3. PRIVATE INVESTMENT TO REJUVENATE GROWTH ### 3. PRIVATE INVESTMENT TO REJUVENATE GROWTH ### Country-level initiatives to promote private investment - Côte d’Ivoire - Priorities: promoting private activity and employment; increasing capacity of the electricity sector while maintaining its financial sustainability. - Projects to support value addition in the cocoa industry. - Rwanda - Three focus areas: ensuring an investor-friendly tax regime without eroding the tax base; strengthening government responsiveness to private sector concerns; establishing instruments to ease access to finance for private investors in specific sectors. - Related measures: improving coordination between national development authorities; establishing a quarterly investor roundtable; putting in place an investor response mechanism to provide faster private sector feedback to the authorities. - Senegal - Plan: develop regional development poles with special economic development zones to accelerate reforms for a sustainable export-oriented industry and job creation for unemployed young people and women. - IMF, World Bank, and other international institutions supporting these efforts. - Ethiopia - Focus: align participation in the CwA with implementation of national growth and transformation plan. - Priorities: targeted export-oriented industrialization; development of industrial parks; creation of plug-and-play business environments. - Togo - Recently joined the CwA after preparing a policy matrix and investment prospectus to improve conditions for private investment. - Benin and Guinea - In process of developing policy matrices and implementation requirements; involvement of bilateral G20 partners under preparation. ### Conclusions and policy recommendations - Context and diagnosis - Private-investment-to-GDP ratios in sub-Saharan Africa remain the lowest compared with other countries at similar levels of economic development despite increases since 2000. - Macroeconomic and institutional prerequisites to increase private investment sustainably - Macroeconomic: ensure macroeconomic stability; improve current and prospective economic activity; open to trade; deepen financial systems; build efficient public infrastructure. - Institutional: strengthen judicial, regulatory, and insolvency frameworks. - Conflict resolution: resolution of long-standing conflicts is typically followed by increases in private investment. - Public investment and crowding out risks - Large public infrastructure projects can support private investment but can, in specific circumstances, crowd out private investment. - Mitigating crowd-out: promote alternative financing sources for public and private investment (including deepening domestic financial markets and PPPs) while ensuring associated risks are well managed. - Promote FDI; experiences with SEZs in attracting investment have been promising. ### Box 3.1 — Policy Reform and Private Investment Growth: analytical framework and key findings - Scope and sample - Focus: private investment growth and impact of macroeconomic stability and policy reforms. - Sample: 97 emerging market and developing economies over 1996–2015; excludes populations of less than 3 million. - Sub-Saharan Africa sample list is provided in the box. - Definitions - Governance spurts and setbacks: as in World Bank (2017). - Macroeconomic spurts (setbacks): two-year decrease (increase) larger (smaller) than the mean minus (plus) one standard deviation in the public-debt-to-GDP ratio or inflation. - Episodes with simultaneous improvement in one measure and setback in another are excluded. - Empirical strategy - Panel regression with dependent variable: real private investment growth. - Regressors: dummy variables for spurts (t) and setbacks (s) over the ([t−2, t+2] [s−1, s+2]) window. - Controls: time fixed effects and country fixed effects; economic growth and per capita income growth included but coefficients tend to be statistically insignificant. - Key findings - Strong and sustained improvements in public debt, inflation, and strengthened institutions are associated with increases in private investment growth. - Policy setbacks are generally associated with reductions in private investment growth. - Event study coefficients (Table 3.1.1: Dependent Variable: Private Investment Growth) - Period t − 1 of reform spurt: 1.15 ; 1.35 - Period t of reform spurt: 1.46 ; 1.23 - Period t + 1 of reform spurt: 2.42 ; 1.29 * - Period s − 1 of reform setback: −3.99 ; 1.25 *** - Period s of reform setback: −1.51 ; 1.15 - Period s + 1 of reform setback: 1.89 ; 1.23 - Period s + 2 of reform setback: −0.01 ; 1.10 - Number of observations: 1582 - R-squared: 0.135 - Note: Robust standard errors; significance indicated as ***p < 0.01; **p < 0.05; *p < 0.1. - Interpretation - Private investment increases after key improvements in public debt, inflation, and institutional quality. - Setbacks tend to be anticipated by investors who curtail investments. ### Box 3.2 — Public Investment Efficiency in Sub-Saharan Africa: findings and policy implications - Overall assessment - Public investment efficiency in sub-Saharan Africa compares unfavorably with other regions and could be improved by about 35 percent. - Drivers and determinants - Quality of institutions is the most important factor determining public investment efficiency (cross-country regressions covering 2000–15). - Other explanatory variables: official development assistance; percentage of urban population; dependence on natural resources (dummy for countries rich in nonrenewable natural resources). - Positive correlation: public investment efficiency and quality of institutions. - Negative association: dependence on natural resources and public investment efficiency. - Variation across country groups (Table 3.2.2: Average Efficiency Score by Groups; values are three indicators: Physical Infrastructure / Quality Infrastructure / Hybrid Indicator) - Sub-Saharan Africa: 0.460 / 0.803 / 0.642 - CEMAC: 0.305 / 0.625 / 0.511 - EAC: 0.487 / 0.874 / 0.735 - WAEMU: 0.369 / 0.814 / 0.619 - Oil exporters: 0.196 / 0.594 / 0.269 - Non-resource-intensive countries: 0.446 / 0.858 / 0.698 - Other resource-intensive countries: 0.602 / 0.813 / 0.656 - Regional comparison (Table 3.2.1: Average Efficiency Score by Regions) - Commonwealth of Independent States: 0.935 / 0.716 / 0.788 - Emerging and Developing Asia: 0.501 / 0.788 / 0.659 - Emerging and Developing Europe: 0.753 / 0.708 / 0.727 - Latin America and the Caribbean: 0.580 / 0.769 / 0.709 - Middle East, North Africa, Afghanistan, and Pakistan: 0.472 / 0.791 / 0.676 - Sub-Saharan Africa: 0.460 / 0.803 / 0.642 - Advanced Economies: 0.733 / 0.888 / 0.880 - Institutional reforms to improve efficiency - Strengthen planning and selection of PPPs. - Improve credibility of multiyear budgeting. - Enhance effectiveness of project appraisal and selection. - Improve monitoring of projects during implementation. - Ensure registration of infrastructure assets. - Quantified institutional impact - A 10 percent increase in the Control of Corruption Index or the Regulatory Quality Index could lead to a reduction in the efficiency gap in sub-Saharan African countries of about 12 percent. - PIMA (Public Investment Management Assessment) findings (pilot results for 21 countries) - Regulatory frameworks: sub-Saharan Africa has slightly better frameworks in national and sectoral planning, multiyear budgeting, and project management relative to other regions. - Weaker areas: central-local coordination; management of PPPs; regulation of firms; monitoring of assets. - Effectiveness gap: in management of PPPs, multiyear budgeting, project appraisal and selection, project management, and monitoring of assets regulations exist but are not used effectively. ### Box 3.3 — Developing domestic debt markets in sub-Saharan Africa: status and requirements - Recent developments - Several African countries have extended maturities on domestic debt through government bond market development. - Example countries: Côte d’Ivoire, Namibia, and Uganda have more than doubled issuance of local currency government bonds, with the stock of local currency bonds in these countries now equivalent to 8.5 percent of GDP on average. - Average maturity of bonds issued rose from 1.5 years to 6.4 years. - Some countries (Ghana, Kenya, Namibia, Nigeria, and Tanzania) issuing local currency bonds at maturities of or over 15 years. - Conditions required to develop a sustainable bond market - A stable political environment for credible policymaking. - A suitable environment for domestic issuance and effective coordination of debt management and monetary policy. - A legal and regulatory framework facilitating primary and secondary markets and settlement systems; a clear, modern legal framework for government securities. - Adherence to sound debt management policies and practices, including a medium-term debt management strategy and a publicly available annual borrowing plan. - Government commitment to pay market interest rates (avoid captive investor base or regular intervention to manage yields). - A sound financial system (banks as initial investors; soundness to prevent added government burden from bank failures). - Market infrastructure for trading, transparency, and financial stability (clearing, settlement, custody frameworks). - A diversified investor base with varied risk preferences, horizons, and trading motives to support demand and secondary market liquidity. - Availability of sufficient resources for bond market development (staff and capacity in debt management office, central banks, regulators, private sector); authorities must bear start-up costs such as higher yields and greater rollover risk. *Source: sreo0518 - 3. PRIVATE INVESTMENT TO REJUVENATE GROWTH (IMF Regional Economic Outlook: Sub-Saharan Africa chapter)* ### 3. PRIVATE INVESTMENT TO REJUVENATE GROWTH ### 3. PRIVATE INVESTMENT TO REJUVENATE GROWTH ### Developing domestic debt markets - Domestic bond issuance (corporate or public) complements funding from external sources and banks. - Benefits listed: - support the implementation of monetary policy, - strengthen financial markets, - reduce foreign exchange risks, - enable the market for private savings, - facilitate the availability of longer-term financing for infrastructure. - Developing debt markets should be part of a broader strategy to mobilize domestic finance. - Risks addressed: - Eurobond issuances have surged during a prolonged period of low interest rates since the global financial crisis; global interest rates are starting to move higher, and capital flow reversals could coincide with the initial wave of Eurobonds reaching maturity. - Refinancing risk could become acute, particularly for countries with macroeconomic imbalances; in this context, domestic markets could become even more important. - Financial stability implications of deeper domestic bond markets: - A more dynamic market that may attract international investors can help diversify the investor base and possibly extend maturities. - Foreign capital inflows may be especially valuable in countries without large nonbank financial institutions with ongoing demand for securities. - Foreign investor demand may reduce crowding out. - External capital flows may be especially sensitive to risk and relative returns, making national markets susceptible to slight changes in global interest rates and resulting in booms and busts in asset price and credit flows. - Regional holdings cited: - nonresidents hold about 40 percent of domestic government bonds in South Africa, - about 50 percent of domestic government debt in Ghana, - compared with an average of 25 percent for emerging market economies. ### Box 3.4 — Fintech in Sub‑Saharan Africa - Definition and role: - Fintech: development of financial technology based on innovations of processes, applications, products, and business models. - Can promote efficiency in the financial industry by transforming delivery of payments, borrowing and saving, risk sharing, and allocation of capital. - How fintech can support private investment: - Use existing mobile platforms to reduce frictions in intermediation between savers and investors. - Mobile-payment providers leverage experience, mature technological platforms, and large customer bases to provide financial intermediation services (examples from the region). - Examples: - M-Pesa offers mobile banking services M-Kesho and M-Shwari to provide access to savings accounts and microcredit products in Kenya. - Zoona has partnered with a crowd-lending platform to offer funding services to entrepreneurs. - EasyEquities enables investment in shares in a variety of products (equities, exchange-traded funds, exchange-traded notes, etc.). - Sub-Saharan Africa is a world leader in mobile money payments, with successful systems such as M-Pesa in Kenya, Tanzania, and other countries. - Success factors likely include: - large unfulfilled demand for payment services in a market with a relatively developed mobile infrastructure, - an appropriate pricing structure to attract customers, - adequate regulation of central banks that provide M-Pesa with space to enter the market. - Infrastructure and market development: - Fintech can improve efficiency in payment, settlement, and clearing systems, which are underdeveloped in sub-Saharan Africa compared with other regions. - Infrastructure development helps reduce systemic, credit, and liquidity risks and can promote growth of financial markets such as derivatives, bond, or money markets. - Examples of potential benefits: - central counterparties can improve functioning of derivatives markets, helping banks transfer credit risk more efficiently; - riskless settlement securities systems reduce trading frictions in bond markets, facilitating issuance of corporate bonds for investment projects. - Distributed ledger technologies are being explored for potential efficiency gains. - Safety-efficiency trade-off: - Efficiency gains from fintech are not free of social costs. - Fintech may exacerbate known vulnerabilities of financial systems or create new weaknesses (BCBS 2017). - Possible negative effects: - increased complexity of financial services delivery, making it more difficult to manage and control operational risk; - increased difficulties in meeting compliance requirements, obligations concerning money laundering and combating the financing of terrorism; - challenges for effective management of cyber-risks. - Empirical/regional indicators (figure references preserved in source): - Figure 3.4.1. Selected Regions: Mobile Subscriptions and Mobile Money Accounts (regional comparisons shown for SSA, Asia, EURCIS, LAC, MENA). - Note: EURCIS = Europe and Commonwealth of Independent States; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = sub-Saharan Africa. ### Annex 3.1 — Calculation of the Real Investment Index and Regional Growth Rates - Method overview: - For each country i, total annual real investment growth is decomposed into private and public components: - expressions in source: ��,� = ��,��� �,� �� + �1�� �,��� �� �,� �� = ��,� �� + ��,� �� - � �,��� is the share of private investment over total investment in country i; � �,� �� and � �,� �� are growth rates of private and public investment, respectively. - Weighted averages across countries use purchasing-power-parity GDP weights so regional total investment growth rate decomposes as � � = � � �� + � � ��. - Real Investment Index � � is computed recursively using � � = � ��� � � �� + � ��� � � ��, starting from � ���� = 1, and � ���� �� = � ���� and � ���� �� = 1 �� ����. - Definition of � �: - � � = ∑ �� �,� � �,� � � ∑ � �,�� - Robustness and computation notes: - To control for extreme values and be consistent with decomposition, regional private and public investment growth rates for each year are computed as: - �� � �� = � � �� � ��� - �� � �� = � � �� 1 �� ��� - Thus the regional total investment growth rate can be expressed as a weighted average between private and public component growth rates: - � � = � ��� �� � �� + � 1 �� ��� � �� � ��. - Starting values and shares are defined in the source text equations. ### Annex 3.2 — Determinants of Private Fixed Investment Ratios in Emerging Market and Developing Economies - Objective: - Present empirical approach for analysis of institutional drivers of private fixed investment ratios in emerging and developing economies; details on econometric methodology, data, and estimation results. - Baseline regression specification: - The ratio of private investment to GDP is explained by its lagged value and traditional determinants identified in the literature, using a dynamic fixed-effects panel data equation. - Functional form in the source (symbols preserved): - (equation) ln, it: I/Y is private-fixed-investment-to-GDP ratio; IG/Y is public-fixed-investment-to-GDP ratio; Ypc is real GDP per capita in purchasing power parity; PI/PY is ratio of deflator of gross fixed investment to the GDP deflator (relative price of capital); IR is the real interest rate; g is the real GDP growth; ηi and γt denote country and year fixed effects; εi,t is the error term. - Sample and estimation: - Final estimation sample comprised of 101 emerging and developing economies over the years 1980 to 2015. - The estimation uses the system GMM estimator (Arellano and Bover 1995; Blundell and Bond 1998) to address the Nickell (1981) bias from the lagged dependent variable and possible endogeneity issues. - Time-series properties: - The null hypothesis of the Im-Pesaran-Shin test that all panels have a unit root is rejected at less than 0.1 percent significance level. - Implementation details: - GMM regressions use the two-step procedure with Windmeijer’s finite-sample correction. - The lagged dependent variable is treated as predetermined and instrumented with one to two lags. - Other regressors are treated as endogenous and instrumented with two lags and more. - Fixed effects and some institutional variables (e.g., regulatory quality or cost of resolving insolvencies) are treated as exogenous. - Validity of instruments is tested using the Hansen test, with the number of instruments being lower than the number of countries to limit weakening of the Hansen test (as suggested by Roodman 2009). - The absence of serial correlation of residuals is tested (details and results appear in the source). - Country coverage (sample of 101 countries listed in source; list preserved there). *Regional Economic Outlook: Sub‑Saharan Africa — Chapter 3 (excerpt provided).* ### Annex 3.2. Determinants of Private Fixed Investment Ratios in Emerging and Developing ### Annex 3.2. Determinants of Private Fixed Investment Ratios in Emerging and Developing Economies ### Econometric methodology - Model: dynamic fixed-effects panel data equation with private fixed investment-to-GDP ratio (I/Y) explained by its lagged value and traditional determinants of investment. - Regression form (variables as defined in source): I/Y, IG/Y, Ypc, PI/PY, IR, g, country fixed effects (ηi), year fixed effects (γt), and error term (εi,t). - Estimation sample: 101 emerging and developing economies over the years 1980 to 2015. - Estimator: system GMM (Arellano and Bover 1995; Blundell and Bond 1998) to address Nickell (1981) bias from the lagged dependent variable and potential endogeneity. - Implementation details: - Two-step procedure with Windmeijer’s finite-sample correction. - Lagged dependent variable treated as predetermined and instrumented with one to two lags. - Other regressors treated as endogenous and instrumented with two lags and more. - Fixed effects and some institutional variables (e.g., regulatory quality, cost of resolving insolvencies) treated as exogenous. - Validity of instruments tested using the Hansen test; number of instruments kept lower than the number of countries to limit weakening of the Hansen test (Roodman 2009). - Absence of serial correlation tested using AR(2); AR(1) test rejected in all regressions (first-order serial correlation of the differenced error term present). - Im-Pesaran-Shin unit-root test: null rejected at less than 0.1 percent significance level. ### Baseline regression results (Annex Table 3.2.1) - Persistence: - Private-investment-to-GDP ratio, one-year lagged: coefficients range reported, e.g., 0.793*** (z = 10.58) to 0.858*** (z = 14.30) across specifications. - Public investment: - Public-investment-to-GDP ratio: negative and significant in baseline regressions, e.g., –0.557** (z = –2.45) and –0.514*** (z = –2.76), consistent with a crowding-out effect. - Interaction: crowding-out effect is mitigated when financial development is higher (column (2): Financial development × public investment ratio = 5.946** (z = 2.02)). - Growth: - Real GDP growth is statistically and economically significant: a 1 standard deviation increase in real GDP growth (+6.2 percent) translates into a 1.3 percentage point increase in the investment ratio. - Reported coefficients for real GDP growth include 0.209* (z = 1.86), 0.239* (z = 1.91), 0.181* (z = 1.83), 0.190*** (z = 2.86), and 0.542* (z = 1.67) in different specifications. - Relative price of investment: - Relative price of investment in logs reduces private investment ratios: e.g., –1.516** (z = –2.39), –1.751*** (z = –2.70), –1.354** (z = –2.00). - Other controls: - Real GDP per capita (in logs) is not significant in baseline specifications (examples: 2.885 (z = 0.96); 1.465 (z = 1.63)). - Real interest rate not significant in baseline specifications (examples: –0.034 (z = –1.01); 0.211 (z = 2.14) in one robustness where significance is marginal). - Additional controls considered (inflation, REER, terms of trade, oil prices interacted with oil-exporter dummy, FDI, stocks of public and private capital, public consumption share of GDP, public external debt, current account) were not significant and did not modify main results. - Diagnostic statistics (examples across tables): - Observations: e.g., 2,194; 2,185; 2,194; 1,623; 1,432; 1,185 (varies by specification). - Number of countries: e.g., 101; 100; 99; 100; 98. - Number of instruments: ranges reported, e.g., 51, 58, 54, 59, 60. - AR(2) test p-value: examples 0.693, 0.544, 0.603, 0.979, 0.863. - Hansen test p-value: examples 0.303, 0.305, 0.347, 0.425, 0.402. ### Interaction effects: GDP growth with institutions and country-group heterogeneity (Annex Table 3.2.2) - General approach: - Interactions between real GDP growth and structural/institutional variables (World Bank Doing Business, Worldwide Governance, ICRG) are included; sample size reduced because these indicators are available mainly from the end of the 1990s or mid-2000s. - Countries also classified into groups (above/below sample median) for paved roads, access to electricity, trade openness, financial development, and capital account openness following Servén (2003). - For each country, real GDP growth is considered high (low) if it is above (below) the country-specific historical mean over the estimation period. - Key interaction findings: - Regulatory quality: - Real GDP growth × regulatory quality = 0.425** (z = 2.39): effect of GDP growth on investment is larger when regulatory quality is higher. - Cost of resolving insolvency: - Real GDP growth × cost of resolving insolvency = –0.030*** (z = –3.35): higher costs of resolving insolvency reduce the positive effect of growth on investment. - Country-group results (examples): - High-paved-roads country: Real GDP growth × high-paved-roads country = 0.281* (z = 1.93). - High-access-to-electricity country: Real GDP growth × high-access-to-electricity country = 0.332** (z = 1.99). - High-trade-openness country: Real GDP growth × high-trade-openness country = 0.257* (z = 1.78). - Low-capital-account-openness country: Real GDP growth × low-capital-account-openness country = 0.331* (z = 1.77). - High-financial-development country: Real GDP growth × high-financial-development country = 0.465*** (z = 3.28). - Nonlinearities: - Decomposing GDP growth into low and high levels indicates nonlinear effects (column (3) of baseline extensions). - Real GDP growth, squared terms included in some regressions: e.g., real GDP growth, squared = –0.011** (z = –2.18); –0.002** (z = –2.09); –0.003* (z = –1.95). - Interpretation: - The effect of real GDP growth on investment is significant only in richer countries of the sample (countries with average GDP per capita above the sample median of $5,072 in 2011 PPP terms), suggesting better institutions mediate the growth–investment link. ### Data definitions and sources (Annex Table 3.2.3) - Private fixed gross capital formation (percent of GDP): IMF, World Economic Outlook database; United Nations National Accounts. - Public gross fixed capital formation (percent of GDP): IMF, World Economic Outlook database; United Nations National Accounts. - Real GDP growth: IMF, World Economic Outlook database; United Nations National Accounts. - Real GDP per capita, in purchasing power parity: IMF, World Economic Outlook database; United Nations National Accounts. - Relative price of investment (capital formation price index to GDP deflator): Penn World Tables 9.0. - Real interest rate: World Bank, World Development Indicators. - Regulatory quality: World Bank, Doing Business Indicator database. - Cost of resolving insolvency (percentage of business real estate): World Bank, Worldwide Governance Indicators database. - Roads paved, percent of total roads: World Bank, World Development Indicators. - Access to electricity, percent of population: World Bank, World Development Indicators. - Trade openness ((imports + exports), percent of GDP): IMF, World Economic Outlook database. - De jure financial openness (Chinn–Ito Index): Chinn and Ito (2006), updated July 2017. - Financial Development Index: Svirydzenka (2016). ### Main substantive findings and implications - Private investment ratios exhibit strong persistence (lag coefficients around 0.76–0.88 across specifications). - Public investment tends to crowd out private investment (negative and significant coefficients), but this crowding-out is mitigated by higher financial development. - Real GDP growth materially increases private investment ratios: a 1 standard deviation increase in real GDP growth (+6.2 percent) yields a 1.3 percentage point increase in the investment ratio. - The relative price of investment negatively affects private investment ratios. - Institutional and structural conditions matter for the translation of growth into private investment: - Better regulatory quality and lower insolvency resolution costs strengthen the positive effect of growth on investment. - High levels of paved roads, access to electricity, trade openness, and financial development amplify the growth-to-investment channel. - The growth–investment effect is stronger in countries with GDP per capita above the sample median ($5,072 in 2011 PPP terms). - Many commonly considered controls (inflation, REER, terms of trade, oil prices, FDI, public consumption share, public external debt, current account) are not significant in these specifications. *Source: IMF staff calculations, Annex 3.2. Determinants of Private Fixed Investment Ratios in Emerging and Developing Economies.* ### Chapter 2, World Economic Outlook. Washington, DC, ### Chapter 2, World Economic Outlook. Washington, DC, October. ### Data coverage and projection vintage - Data and projections presented in this Regional Economic Outlook are IMF staff estimates as of March 30, 2018, consistent with the projections underlying the April 2018 World Economic Outlook (WEO). - The data and projections cover 45 sub-Saharan African countries followed by the IMF’s African Department. - Data definitions follow established international statistical methodologies to the extent possible; in some cases, data limitations limit comparability across countries. ### Country groupings and classification criteria - Countries are aggregated into three non-overlapping groups: - Oil exporters: countries where net oil exports make up 30 percent or more of total exports. - Other resource-intensive countries: countries where nonrenewable natural resources represent 25 percent or more of total exports. - Non-resource-intensive countries: those not classified as either oil exporters or other resource-intensive countries. - Countries are also aggregated into four overlapping groups: oil exporters, middle-income countries, low-income countries, and countries in fragile situations. - Classification into these groups reflects the most recent data on per capita gross national income (averaged over three years) and the World Bank Country Policy and Institutional Assessment (CPIA) score (averaged over three years). - Middle-income countries: per capita gross national income in the years 2014–16 of more than US$1,005.00 (World Bank, using the Atlas method). - Low-income countries: average per capita gross national income in the years 2014–16 equal to or lower than US$1,005.00 (World Bank, Atlas method). - Countries in fragile situations: average CPIA scores of 3.2 or less in the years 2014–16 and/or had the presence of a peace-keeping or peace-building mission within the last three years. ### Regional cooperation bodies and aggregation notes - Membership of sub-Saharan African countries in major regional cooperation bodies is shown in the Statistical Appendix (page 90) and includes: - WAEMU (West African Economic and Monetary Union) - CEMAC (Economic and Monetary Community of Central African States) - COMESA (Common Market for Eastern and Southern Africa) - EAC-5 (East Africa Community, EAC-5 aggregates include data for Rwanda and Burundi, which joined the group only in 2007) - ECOWAS (Economic Community of West African States) - SADC (Southern African Development Community) - SACU (Southern Africa Customs Union) ### Country group membership (as listed) - Oil exporters: Angola; Cameroon; Chad; Congo, Republic of; Equatorial Guinea; Gabon; Nigeria; South Sudan. - Other resource-intensive countries: Botswana; Burkina Faso; Central African Rep.; Congo, Dem. Rep. of; Ghana; Guinea; Liberia; Mali; Namibia; Niger; Sierra Leone; South Africa; Tanzania; Zambia; Zimbabwe. - Non-resource-intensive countries: Benin; Burundi; Cabo Verde; Comoros; Côte d’Ivoire; Eritrea; Ethiopia; Gambia, The; Guinea-Bissau; Kenya; Lesotho; Madagascar; Malawi; Mauritius; Mozambique; Rwanda; São Tomé & Príncipe; Senegal; Seychelles; Swaziland; Togo; Uganda. - Middle-income countries: Angola; Botswana; Cabo Verde; Cameroon; Congo, Republic of; Côte d’Ivoire; Equatorial Guinea; Gabon; Ghana; Kenya; Lesotho; Mauritius; Namibia; Nigeria; Senegal; Seychelles; São Tomé & Príncipe; South Africa; Swaziland; Zambia. - Low-income countries: Benin; Burkina Faso; Burundi; Central African Rep.; Chad; Comoros; Congo, Dem. Rep. of; Eritrea; Ethiopia; Gambia, The; Guinea; Guinea-Bissau; Liberia; Madagascar; Malawi; Mali; Mozambique; Niger; Rwanda; Sierra Leone; South Sudan; Tanzania; Togo; Uganda; Zimbabwe. - Countries in fragile situations: Burundi; Central African Rep.; Chad; Comoros; Congo, Dem. Rep. of; Congo, Republic of; Côte d’Ivoire; Eritrea; Gambia, The; Guinea; Guinea-Bissau; Liberia; Madagascar; Malawi; Mali; São Tomé & Príncipe; Sierra Leone; South Sudan; Togo; Zimbabwe. ### Methods of aggregation for appendix tables - 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 database. - 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 US dollars at market exchange rates as a share of total group GDP. - 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 World Economic Outlook database. - Tables SA27–SA28: country group composites are calculated as the unweighted arithmetic average of data for individual countries. ### Statistical appendix notes and sources - List of tables referenced: SA1–SA28 (various aggregation and source notes specified per table in the Statistical Appendix). - Specific source notes excerpted: - Tables SA22–SA23 source: IMF, Information Notice System. - Table SA26 sources: IMF, Common Surveillance database, and IMF, World Economic Outlook database, April 2018. - Table SA27 source: IMF, International Financial Statistics. - Table SA28 source: IMF, International Financial Statistics. - Tables SA1–SA3, SA6–SA19, SA21, SA24–SA26 sources: IMF, Common Surveillance database, and IMF, World Economic Outlook database, April 2018. - Selected footnotes and clarifications: - Note: “...” denotes data not available. - Table SA26 footnotes include: 1 As a member of the West African Economic and Monetary Union (WAEMU), see WAEMU aggregate for reserves data. 2 As a member of the Central African Economic and Monetary Community (CEMAC), see CEMAC aggregate for reserves data. 3 Fiscal year data. 4 In constant 2009 U.S. dollars. The Zimbabwe dollar ceased circulating in early 2009. Data are based on IMF staff estimates of price and exchange rate developments in US dollars. Staff estimates of US dollar values may differ from authorities’ estimates. - Table SA27 footnote: 1 Includes offshore banking assets. - Table SA28 footnote: 1 Loan-to-deposit ratio includes deposits and loans of commercial banks to the public sector. - General table notes include multiple fiscal year data markers and specific data source attributions. ### Abbreviations used in the Statistical Appendix - AGO Angola - BDI Burundi - BEN Benin - BFA Burkina Faso - BWA Botswana - CAF Central African Republic - CIV Côte d'Ivoire - CMR Cameroon - COD Congo, Dem. Rep. of - COG Congo, Rep. of - COM Comoros - CPV Cabo Verde - EGY Egypt - ERI Eritrea - ETH Ethiopia - GAB Gabon - GHA Ghana - GIN Guinea - GNB Guinea-Bissau - GNQ Equatorial Guinea - IDN Indonesia - KEN Kenya - LBR Liberia - LSO Lesotho - MDG Madagascar - MLI Mali - MOZ Mozambique - MUS Mauritius - MWI Malawi - NAM Namibia - NER Niger - NGA Nigeria - PHL Philippines - PRY Paraguay - RWA Rwanda - SEN Senegal - SLE Sierra Leone - SSD South Sudan - STP São Tomé & Príncipe - SWZ Swaziland - SYC Seychelles - TCD Chad - TGO Togo - THA Thailand - TZA Tanzania - UGA Uganda - VNM Vietnam - ZAF South Africa - ZMB Zambia - ZWE Zimbabwe *Regional Economic Outlook: Sub‑Saharan Africa — Statistical Appendix (IMF staff estimates as of March 30, 2018; projections consistent with April 2018 WEO).* ### 2009. Data are based on IMF staff estimates of price and exchange rate ### sreo0518 - 2009. Data are based on IMF staff estimates of price and exchange rate ### Real GDP Growth (Key aggregates) - Sub-Saharan Africa: 6.6 (2004-08), 3.9 (2009), 7.0 (2010), 5.1 (2011), 4.4 (2012), 5.3 (2013), 5.1 (2014), 3.4 (2015), 1.4 (2016), 2.8 (2017), 3.4 (2018), 3.7 (2019) - Median: 4.9 (2004-08), 3.3 (2009), 6.1 (2010), 5.2 (2011), 4.9 (2012), 5.3 (2013), 4.5 (2014), 3.5 (2015), 3.8 (2016), 3.9 (2017), 4.0 (2018), 4.5 (2019) - Excluding Nigeria and South Africa: 6.9 (2004-08), 3.9 (2009), 6.1 (2010), 6.1 (2011), 5.4 (2012), 6.6 (2013), 5.7 (2014), 4.7 (2015), 3.6 (2016), 4.6 (2017), 4.8 (2018), 5.4 (2019) - Oil-exporting countries: 8.7 (2004-08), 6.7 (2009), 9.2 (2010), 4.7 (2011), 3.9 (2012), 5.7 (2013), 5.8 (2014), 2.6 (2015), –1.5 (2016), 0.5 (2017), 2.0 (2018), 2.1 (2019) - Oil-importing countries: 5.3 (2004-08), 2.0 (2009), 5.4 (2010), 5.4 (2011), 4.8 (2012), 5.1 (2013), 4.6 (2014), 4.0 (2015), 3.5 (2016), 4.4 (2017), 4.3 (2018), 4.7 (2019) ### Non-Oil and Per Capita Growth - Sub-Saharan Africa (Real Non-Oil GDP Growth): 7.7 (2004-08), 4.9 (2009), 7.7 (2010), 5.5 (2011), 5.2 (2012), 6.3 (2013), 5.4 (2014), 3.5 (2015), 2.0 (2016), 2.6 (2017), 3.1 (2018), 3.5 (2019) - Sub-Saharan Africa (Real Per Capita GDP Growth): 4.2 (2004-08), 1.5 (2009), 4.6 (2010), 2.7 (2011), 1.9 (2012), 2.9 (2013), 2.7 (2014), 1.0 (2015), –0.9 (2016), 0.4 (2017), 1.0 (2018), 1.3 (2019) - Median (Per Capita): 2.9 (2004-08), 0.9 (2009), 3.3 (2010), 3.3 (2011), 2.7 (2012), 2.6 (2013), 2.4 (2014), 1.0 (2015), 1.2 (2016), 1.3 (2017), 2.0 (2018), 2.3 (2019) ### Inflation (Consumer Prices) - Consumer prices, annual average (Sub-Saharan Africa): 8.8 (2004-08), 9.8 (2009), 8.1 (2010), 9.4 (2011), 9.2 (2012), 6.6 (2013), 6.3 (2014), 7.0 (2015), 11.3 (2016), 11.0 (2017), 9.5 (2018), 8.9 (2019) - Consumer prices, end of period (Sub-Saharan Africa): 8.9 (2004-08), 9.1 (2009), 7.7 (2010), 10.0 (2011), 8.2 (2012), 6.1 (2013), 6.1 (2014), 8.1 (2015), 12.5 (2016), 10.3 (2017), 9.6 (2018), 9.3 (2019) - Median (End of period): 7.3 (2004-08), 4.7 (2009), 5.3 (2010), 7.0 (2011), 5.0 (2012), 4.4 (2013), 3.7 (2014), 4.5 (2015), 5.1 (2016), 4.7 (2017), 5.1 (2018), 4.9 (2019) - Oil-exporting countries (End of period): 9.8 (2004-08), 12.0 (2009), 10.8 (2010), 9.5 (2011), 10.5 (2012), 6.8 (2013), 7.1 (2014), 10.1 (2015), 21.0 (2016), 15.6 (2017), 14.4 (2018), 15.1 (2019) ### Investment and Savings - Total investment (Percent of GDP), Sub-Saharan Africa: 20.3 (2004-08), 22.6 (2009), 21.3 (2010), 20.5 (2011), 21.1 (2012), 21.1 (2013), 22.1 (2014), 22.0 (2015), 19.8 (2016), 19.9 (2017), 20.4 (2018), 21.4 (2019) - Gross national savings (Percent of GDP), Sub-Saharan Africa: 22.6 (2004-08), 20.3 (2009), 20.5 (2010), 19.6 (2011), 19.1 (2012), 18.3 (2013), 18.2 (2014), 16.1 (2015), 15.9 (2016), 17.6 (2017), 17.5 (2018), 18.2 (2019) - Investment minus savings (implied trend): investment remained above 20 percent of GDP across the series while gross national savings moved in the high-teens to low-20s, indicating recurring reliance on external financing for investment at regional aggregate levels. ### Fiscal Balances and Public Debt - Overall fiscal balance, including grants (Sub-Saharan Africa): 1.7 (2004-08), –4.6 (2009), –3.6 (2010), –1.2 (2011), –1.8 (2012), –3.2 (2013), –3.8 (2014), –4.5 (2015), –4.6 (2016), –5.0 (2017), –4.0 (2018), –3.9 (2019) - Overall fiscal balance, excluding grants (Sub-Saharan Africa): 0.4 (2004-08), –5.6 (2009), –4.4 (2010), –2.0 (2011), –2.5 (2012), –3.9 (2013), –4.5 (2014), –5.1 (2015), –5.2 (2016), –5.5 (2017), –4.7 (2018), –4.4 (2019) - Government revenue, excluding grants (Percent of GDP), Sub-Saharan Africa: 22.9 (2004-08), 24.5 (2009), 24.8 (2010), 24.9 (2011), 24.2 (2012), 20.0 (2013), 19.1 (2014), 17.4 (2015), 16.4 (2016), 17.0 (2017), 17.8 (2018), 17.5 (2019) - Government expenditure (Percent of GDP), Sub-Saharan Africa: 23.3 (2004-08), 26.3 (2009), 27.9 (2010), 28.5 (2011), 28.5 (2012), 30.1 (2013), 32.4 (2014), 38.9 (2015), 44.0 (2016), 45.9 (2017), 48.1 (2018), 47.6 (2019) - Government debt (Percent of GDP), Sub-Saharan Africa: 34.7 (2004-08), 39.0 (2009), 37.3 (2010), 36.2 (2011), 36.1 (2012), 35.0 (2013), 35.8 (2014), 37.2 (2015), 37.0 (2016), 35.9 (2017), 35.6 (2018), 35.9 (2019) ### Money, Credit, and Financial Sector Indicators - Broad money (Percent of GDP), Sub-Saharan Africa: 34.7 (2004-08), 39.0 (2009), 37.3 (2010), 36.2 (2011), 36.1 (2012), 35.0 (2013), 32.4 (2014), 38.9 (2015), 44.0 (2016), 45.9 (2017), 48.1 (2018), 47.6 (2019) - Broad money growth (Percent), Sub-Saharan Africa: 25.4 (2004-08), 14.8 (2009), 13.5 (2010), 12.6 (2011), 15.9 (2012), 7.7 (2013), 15.3 (2014), 11.1 (2015), 11.4 (2016), 8.2 (2017), 13.1 (2018), 14.0 (2019) - Claims on nonfinancial private sector (Percent change), Sub-Saharan Africa: 30.7 (2004-08), 16.2 (2009), 8.3 (2010), 13.0 (2011), 13.3 (2012), 12.5 (2013), 15.5 (2014), 11.4 (2015), 12.5 (2016), 3.3 (2017) - Claims on nonfinancial private sector (Percent of GDP), Sub-Saharan Africa: 32.5 (2004-08), 27.8 (2009), 30.4 (2010), 33.6 (2011), 31.0 (2012), 29.5 (2013), 26.7 (2014), 22.7 (2015), 22.1 (2016), 23.7 (2017), 25.0 (2018), 24.0 (2019) - Banking penetration (Total banking sector assets in percent of GDP), Sub-Saharan Africa: 42.4 (2004-08), 49.2 (2009), 51.9 (2010), 52.0 (2011), 52.8 (2012), 54.6 (2013), 55.9 (2014), 58.1 (2015), 58.9 (2016), 63.2 (2017) ### External Sector: Trade, Current Account, FDI, Reserves - Exports of goods and services (Percent of GDP), Sub-Saharan Africa: 30.3 (2004-08), 30.3 (2009), 30.6 (2010), 32.8 (2011), 31.9 (2012), 30.7 (2013), 30.4 (2014), 29.5 (2015), 27.1 (2016), 26.6 (2017), 28.0 (2018), 27.3 (2019) - Imports of goods and services (Percent of GDP), Sub-Saharan Africa: 30.4 (2004-08), 26.7 (2009), 27.6 (2010), 36.2 (2011), 34.1 (2012), 35.8 (2013), 35.7 (2014), 35.0 (2015), 30.4 (2016), 27.9 (2017) - Trade balance on goods (Percent of GDP), Sub-Saharan Africa: 6.0 (2004-08), 2.6 (2009), 4.5 (2010), 5.7 (2011), 3.5 (2012), 3.0 (2013), 0.7 (2014), –3.1 (2015), –2.0 (2016), –0.1 (2017) - External current account (Percent of GDP), Sub-Saharan Africa: 2.2 (2004-08), –2.4 (2009), –0.8 (2010), –0.6 (2011), –1.7 (2012), –2.2 (2013), –3.8 (2014), –6.0 (2015), –4.1 (2016), –2.6 (2017), –2.9 (2018), –3.1 (2019) - Net foreign direct investment (Percent of GDP), Sub-Saharan Africa: 2.0 (2004-08), 2.9 (2009), 2.9 (2010), 2.2 (2011), 2.2 (2012), 1.4 (2013), 1.7 (2014), 2.1 (2015), 3.0 (2016), 2.3 (2017), 2.5 (2018), 2.8 (2019) - Reserves (Months of imports of goods and services), Sub-Saharan Africa: 5.1 (2004-08), 5.1 (2009), 4.1 (2010), 4.5 (2011), 5.2 (2012), 4.9 (2013), 5.2 (2014), 5.8 (2015), 5.2 (2016), 5.0 (2017), 5.3 (2018), 5.1 (2019) ### External Debt and Terms of Trade - External debt, official debt, debtor based (Percent of GDP), Sub-Saharan Africa: 19.6 (2004-08), 13.5 (2009), 12.4 (2010), 12.5 (2011), 13.5 (2012), 13.9 (2013), 14.8 (2014), 17.2 (2015), 20.8 (2016), 22.5 (2017), 22.8 (2018), 22.5 (2019) - Terms of trade on goods (Index, 2010 = 100), Sub-Saharan Africa: 88.2 (2004-08), 91.1 (2009), 100.0 (2010), 109.7 (2011), 108.9 (2012), 107.6 (2013), 105.0 (2014), 92.0 (2015), 92.7 (2016), 98.3 (2017), 99.8 (2018), 97.7 (2019) ### Key cross-cutting patterns (from table aggregates) - Growth: Regional growth recovered after 2009, with Sub-Saharan Africa growth moving from 3.9 in 2009 to 7.0 in 2010 and moderating thereafter; oil-exporting countries displayed higher volatility and sharper contractions in some years. - Inflation: Regional annual average inflation remained in single digits for many countries but exhibited spikes in several series (median annual average 7.2 in 2004-08, rising to double digits in some country-year combinations). - Fiscal: Aggregate balances deteriorated markedly after 2008–09 (overall fiscal balance, excluding grants, moved from 0.4 to –5.6 in 2009) and remained in deficit in the 2010s, with government expenditure rising faster than revenue at the regional level. - External: The external current account swung from a surplus in 2004-08 to deficits after 2009 at the regional aggregate; net FDI remained a recurring financing source (around 2–3 percent of GDP). - Financial depth and stability: Broad money and banking penetration show rising financial depth over the decade, while claims on the private sector remained significant as a share of GDP but with heterogeneous growth dynamics. *Sources: IMF, World Economic Outlook database, April 2018; data in constant 2009 U.S. dollars and IMF staff estimates as noted in the source content.* --- _Source: https://www.imf.org/-/media/files/publications/reo/afr/2018/may/pdf/sreo0518.pdf_