## 1. Recovery and Rising Risks

## Source details

**Canonical URL:** [1. Recovery and Rising Risks](https://www.imf.org/-/media/files/publications/reo/afr/2018/october/pdf/ssareo-10-18-ch1.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/reo/afr/2018/october/pdf/ssareo-10-18-ch1.pdf.md)
- [Structured JSON version](/-/media/files/publications/reo/afr/2018/october/pdf/ssareo-10-18-ch1.pdf.json)

---

### Policy recommendations and near-term priorities
- Implement fiscal strategies designed to reduce debt vulnerabilities consistent with a steady fiscal consolidation; proceed with implementation even during temporary commodity price upswings or ahead of elections in the next year in many larger economies, including Nigeria, Senegal, and South Africa.
- Advance revenue mobilization: tax revenues are, on average, at 3–5 percent of GDP below estimated potential; successful episodes focused on basic institutions, effective and modern tax policy and administration, measures to build the tax base, simplify the tax system, and tackle exemptions and incentives; reforms must be tailored to country circumstances (IMF 2018a).
- Enhance expenditure efficiency, in particular to address the re-emergence of energy subsidies, by implementing automatic fuel pricing mechanisms (examples: Ghana and Mozambique) and undertaking mitigating measures to compensate the poor.
- Allow greater exchange rate flexibility where institutional setups permit and barring balance sheet vulnerabilities.
- Address growing financial sector weaknesses in a timely manner; recent progress includes reducing NPLs (Equatorial Guinea, Guinea-Bissau), strengthening capital buffers (Angola, Ghana, Mozambique), and adopting new prudential rules (CEMAC, WAEMU); persistent NPLs require comprehensive NPL reduction strategies.
- Pursue policies to foster private investment and enhance potential growth, including opening to trade (notably in the context of the African Continental Free Trade Area), promoting digital connectivity and a flexible education system, removing market distortions, encouraging financial deepening, ensuring a sound business environment, better allocating public spending, and ensuring adequate provision of public goods (including well-developed infrastructure).

### External environment and financial flows
- Global growth is projected at 3.7 percent in 2018 and 2019, down from the 3.9 percent projection of the April 2018 WEO.
- Rising trade tensions, anticipated monetary policy normalization, and volatility in asset markets increase uncertainty for the region.
- International sovereign bond issuances by sub-Saharan African frontier markets in 2018 reached US$13.8 billion in the first half of the year, higher than the annual total in any previous year, compared with US$7.6 billion for the whole year 2017.
  - Senegal issued US$2.2 billion Eurobonds in March 2018 (five times oversubscribed).
  - Angola and Ghana issued Eurobonds worth US$3 billion and US$2 billion, respectively, in May 2018 (three and four times oversubscribed, respectively).
  - In July 2018, Angola reopened the May Eurobond issuance and raised an additional US$500 million.

### Growth outlook and composition
- Average growth for the region (weighted by GDP in purchasing power parity terms) is expected to reach about 3.1 percent in 2018, up from 2.7 percent in 2017.
- The recovery is expected to contribute about 0.7 percentage points to the region’s average growth in 2018 and lift activity in Nigeria’s trading partners through stronger remittances, financial spillovers, and import demand (IMF 2018b).
  - Spillovers to Benin’s and Niger’s growth are estimated to be ½ and ⅓ percentage points, respectively.
- Country highlights:
  - Nigeria is expected to grow by 1.9 percent in 2018, up from 0.8 percent in 2017, mostly owing to fewer disruptions in oil production and some pick-up in the non-oil economy.
  - Growth in South Africa is expected to be about 0.8 percent in 2018; on current policies growth is expected to stabilize at about 1.8 percent over the medium term.
- Across countries:
  - Non-resource-intensive countries continue to grow at about 6 percent on average.
  - Resource-intensive countries have seen some pickup but remain below pre-2014 levels.
  - One-third of the population of sub-Saharan Africa lives in countries where GDP per capita fell in 2017 and is expected to fall further in 2018 and 2019.
- Medium-term prospects:
  - On current policies, growth is expected to accelerate over the medium term to about 4 percent, or 1½ percent in per capita terms.
  - The region needs to create on average 20 million jobs every year during 2018–35 to absorb new entrants to the labor market; this is twice as many as has been created on average over the past five years.

### Inflation, commodities, and reserves
- Global commodity outlook:
  - Energy outlook points to higher prices relative to April 2018 projections; metals and other commodities exported by the region show a mixed outlook.
  - Prospects for energy prices benefit oil producers but worsen terms of trade for oil importers (three-quarters of countries in the region).
- Inflation:
  - Average inflation in oil-exporting countries is expected to fall from 17 percent in 2017 to about 13 percent in 2018.
  - Elsewhere inflation remains relatively low; dynamics reflect slow recovery, some monetary tightening or higher agricultural production, and incomplete pass-through of higher oil prices.
- Reserves:
  - Despite current account adjustments for oil-exporting countries, foreign exchange reserve buffers are expected to remain below levels deemed adequate based on metrics derived from emerging and developing countries’ crisis experiences.
- Fuel prices and subsidies:
  - Fuel prices are on average about US$1.09 per liter (April/May 2018), implying an estimated average fuel subsidy of 2 percent of GDP per annum once transportation and distribution costs, profit margins, and taxes are taken into account.
  - Median pass-through coefficient between early 2017 and April 2018 was zero for oil exporters and 47 percent for oil importers.

### Fiscal consolidation, revenues, and expenditure quality
- Baseline projections: average fiscal deficit for the region is set to shrink from 4.2 percent of GDP in 2017 to 3.3 percent in 2018.
- Fiscal balance dynamics:
  - Fiscal balances are expected to improve in oil-exporting countries, remain unchanged in non-resource-intensive countries, and deteriorate somewhat in other resource-intensive countries.
  - Improvement in oil exporters largely from increased oil-sector revenues and cuts in capital expenditures; Nigeria is an exception where public investment has doubled over the last two years from low levels.
  - Radical cuts in capital expenditure risk undermining medium-term growth if not offset by private sector investment.
- Revenue mobilization:
  - Progress has been elusive; under current medium-term fiscal plans the revenue gap, estimated at 3–5 percent of GDP on average across countries, is not expected to be closed.
  - Domestic revenues are envisaged to rise by about 2½ percent of GDP in oil-exporting countries, and only by ½ percent of GDP in other countries.
- Quality risks:
  - The re-emergence of fuel subsidies threatens the quality of fiscal adjustment; many countries have not raised domestic prices in response to recent international fuel price increases.

### Balance sheet vulnerabilities and debt risks
- In 2017, 15 sub-Saharan African countries were classified at high risk of debt distress or in debt distress (listed in source).
- Debt dynamics for countries in debt distress or at high risk mainly reflect large primary deficits that widened sharply with the commodity price collapse.
- Exchange rate depreciations in several cases have produced negative balance sheet effects and contributed to deterioration in debt solvency and liquidity indicators.
- Public debt:
  - Reflecting fiscal consolidations and a growth rebound, the average level of public debt in 2018 is expected to remain around its 2016 level, at about 57 percent of GDP, with wide heterogeneity across countries.
  - Debt reduction mainly reflects adjustments in oil exporters and to a lesser extent in non-resource-intensive countries.
  - In some highly indebted countries (Republic of Congo, The Gambia) improved revenue performance and higher GDP growth are expected to yield significant improvements in debt servicing capacity.

### Debt vulnerabilities and contingent liabilities
- The share of foreign-currency denominated public debt in total public debt increased from an average of 23 percent in 2011–13 to 32 percent of GDP in 2017.
- Private banks and bondholders now hold about 15 percent of public debt; concessional financing share has remained unchanged while official creditors remain the largest group.
- Borrowing from non-Paris Club countries, especially from China, has been rising.
- Government domestic arrears amount to about 5 percent of GDP on average (end-2017 mean) and exceed 20 percent in several countries (Equatorial Guinea, Gabon, The Gambia).
- In most countries, government arrears to suppliers of goods and services account for the bulk of domestic arrears; arrears also to private firms, workers, and SOEs.
- Accumulated SOE liabilities to the economy have occasionally reached 10 percent of GDP or more (Cabo Verde, Cameroon, Ghana, São Tomé and Príncipe, South Africa), implying contingent fiscal liabilities that may compromise debt sustainability.
- Some countries have cleared SOE arrears (Burkina Faso, Côte d’Ivoire); others increased SOE transparency via audits (Benin, Niger, Seychelles) or leveraged official SOE performance reports (Cabo Verde, Ghana, Liberia).
- Direct support of SOEs’ quasi-fiscal activities via subsidies or on-lending represents a considerable budgetary burden in some cases (Botswana, Cabo Verde, Madagascar), crowding out higher-priority public spending.

### Bank balance sheets and credit growth
- In most sub-Saharan African economies, nonperforming loans (NPLs) are high; accumulation especially rapid in state-owned banks (Angola, Gabon).
- Drivers of high NPLs: economic slowdown; poor risk management (Angola); high level or delays in repayment of government arrears to suppliers (Chad, Equatorial Guinea, Gabon, Ghana, Malawi); more stringent loan classification and earlier loss recognition after asset quality reviews (Ghana); potential understatement via evergreening in some countries.
- Bad loans have eroded commercial banks’ profitability in a few countries; in others (Nigeria, WAEMU) attractive returns on government securities have supported profitability.
- Capital ratios vary significantly; some banks experience severe shortfalls (Ghana, Guinea, Guinea-Bissau, Malawi, Nigeria, Togo).
- High NPL ratios and slowing activity contributed to slowing credit to the private sector in three-quarters of countries, most notably in Botswana, Equatorial Guinea, Gabon, Ghana, Guinea, Guinea-Bissau, Liberia, Malawi, and São Tomé and Príncipe.
- Other contributors to slowing private credit: weak growth, tighter monetary conditions (Cameroon, Equatorial Guinea), high household indebtedness (Botswana), uncertainty in economic and political outlook (Gabon, Ghana, Guinea), redirection of bank lending toward government securities (Guinea, Malawi).
- Other banking-sector concerns: foreign currency liquidity mismatches (Angola) and high loan concentration (Benin, Malawi, Namibia).

### Risks to the outlook — External risks
- Trade tensions:
  - Escalating trade conflicts could derail the global recovery and dampen medium-term growth prospects; a shift away from trade openness would hinder SDG achievement and adaptation to technological and demographic changes.
  - Trade tensions simulations (consistent with October 2018 WEO scenarios) assess tariffs imposed/announced between the United States and trading partners in several rounds (steel 25 percent, aluminum 10 percent, 25 percent on US$50 billion of imports from China; later 25 percent on US$200 billion from China with 5–25 percent Chinese response on US$60 billion; finally 25 percent on all imported cars and car parts about US$350 billion).
  - Trade tensions among the United States, other major advanced economies, and China could entail a cumulative loss of GDP in sub-Saharan Africa of up to 1½ percent of GDP during 2018–21.
  - Sub-Saharan African countries most affected would be commodity exporters and countries more integrated in global markets; impacts arise via global demand, import demand from China, commodity prices, and domestic investment.
- Tighter global financial conditions:
  - Faster-than-envisaged monetary policy normalization in advanced economies or sudden investor sentiment shifts could constrain financing and growth.
  - Frontier markets have weathered bouts of volatility, but persistent pressures could spill over from emerging markets with evident weaknesses (Argentina, South Africa, Turkey).
  - Higher US interest rates and a stronger dollar heighten financial crisis risks; the probability of a large reversal in foreign flows in sub-Saharan Africa is significantly higher as US interest rates go up, and around one-third of currency crises have been associated with a reversal in foreign flows.
  - Large amounts of maturing bonds for the region’s frontier markets in 2019–20 and in 2024–25 indicate substantial refinancing risks.
  - Growing sovereign-banks linkages increase banking-sector vulnerability to global financial tightening and fiscal challenges.

### Risks to the outlook — Domestic risks
- Policy slippages:
  - Most countries have medium-term fiscal plans aimed at sustainable debt levels, but implementation is critical.
  - Authorities should resist populist pressures to ease consolidation during temporary commodity price spikes or pre-election periods.
  - Avoiding policy slippages and high policy uncertainty is especially important for emerging and frontier economies with significant international capital market exposures, notably in the run-up to 2019 elections in Nigeria, Senegal, and South Africa.
- Security risks:
  - Elevated security risks from civil unrest and terrorism impose large human costs, drag on growth, and constrain delivery of basic public services.
  - The largest number of incidents of civil unrest and terrorism in the past five years occurred in Nigeria, though frequency has been declining.
  - Terrorist attacks in G5 Sahel countries nearly doubled in 2017.
  - UN-OCHA estimates security issues will result in more than 30 million people suffering from food insecurity in 2018.
  - Internally displaced persons rose from about 4 million in 2012 to about 11 million in 2017, with largest increases in the Democratic Republic of Congo, Ethiopia, and South Sudan.
  - In 2017 there were 4 million people seeking refuge in other sub-Saharan African countries, up from 1 million in 2010; about 170,000 migrants from sub-Saharan Africa sought asylum in Europe in 2017 and about 1 million during 2010–17.

### Policies — Strengthening foundations for sustained, strong, and inclusive growth
- Objective:
  - Create a growth model more resilient and capable of creating enough jobs to harness the demographic dividend, requiring strong, sustainable, and inclusive growth and policies to strengthen resilience and reallocate labor and capital into more productive sectors.
- Increasing fiscal space — Improve quality of fiscal adjustment:
  - Advance revenue mobilization:
    - Average revenue is estimated at 3–5 percent of GDP below potential, implying substantial scope to raise revenue.
    - Successful revenue mobilization has involved modern tax policy and administration measures: taxpayer identification numbers, semi-autonomous revenue authorities, the VAT, and taxpayer segmentation.
    - Successful countries focused on building the tax base, simplifying the tax system, and tackling exemptions and incentives.
  - Enhance expenditure efficiency:
    - Address re-emergence of energy subsidies via automatic fuel pricing mechanisms (examples: Ghana, Mozambique), paired with mitigating measures to protect the poor.
    - Improve public investment efficiency by strengthening infrastructure governance for planning, allocation, and implementation.
    - Enhance public financial management to avoid arrears and misallocation, including reforming loss-making SOEs.
    - Wage bill reform, if well designed and implemented, could improve expenditure efficiency; reforms should be carefully targeted given public-sector employment in education and healthcare.
  - Improve debt management frameworks to better manage currency and interest rate risks:
    - Strengthen capacity for cost-risk analysis of borrowing options and managing repayments on commercial borrowing (examples: Kenya, Uganda).
    - Cost-risk analysis raises awareness of debt portfolio risks and the importance of developing government securities markets in the medium term.
    - Some countries (Cabo Verde, Ghana, Kenya, Tanzania) are updating medium-term debt strategies to address contingent liability risks.
    - Deepening domestic sovereign debt markets (Ghana, Kenya, Namibia, Nigeria, Tanzania) could lower currency and interest rate risks.
  - Recent initiatives to promote bank lending (examples):
    - Cabo Verde: considers partial guarantees on loans to SMEs.
    - CEMAC: plans to update credit registry (postponed to end 2020) and to have an operating credit bureau by early 2020.
    - Guinea: operationalized a new credit information system.
    - Kenya: improving credit reference bureau information and adopted law on movable collateral registry.
    - Niger: strengthened credit bureau through March 2018 legislation obliging utilities to provide payment discipline information; preparing a law on “warrantage” (granting credit with grain as collateral in secure warehouses).

### Policies — Addressing financial sector weaknesses
- Need for timely action to avoid disruptive adjustments and fiscal costs.
- Measures taken and recommended:
  - Reduce NPLs through strengthened creditor rights and reduced judicial delays in collateral recovery (example: Guinea-Bissau).
  - Halt net accumulation of public domestic arrears to the private sector (example: Equatorial Guinea).
  - Improve credit information systems, modernize insolvency regimes, and implement financial education programs for MSMEs.
  - Comprehensive NPL reduction strategies required: accelerate loss recognition, strengthen supervisory focus on recovery actions, reform insolvency and debt enforcement frameworks to enable swift restructuring of distressed but viable borrowers, and support consistent and efficient judicial proceedings.
  - Establish permanent macroprudential buffers (on top of micro-prudential minimums) that can be relaxed at regulators’ discretion in the event of shocks to allow NPLs to be absorbed by capital and sustain credit provision.
- Recent banking-sector strengthening:
  - Angola, Ghana, and Mozambique raised minimum statutory capital requirements; Angola to conduct an asset quality review of systemic banks.
  - CEMAC adopted new regulations on definition of systemically important institutions (aligned with Basel Committee recommendations), accelerated resolution of small MFIs, and established an emergency liquidity assistance framework.
  - WAEMU adopted new prudential rules aligned with the Basel II / III framework.

### Entrenching external adjustment
- Commodity-exporting sub-Saharan African countries experienced a historically large negative terms of trade shock in late-2014 and 2015 and saw progressive improvement in current account balances in 2016 and 2017, but did little to increase resilience to such shocks.
- The adjustment following the shock relied initially mainly on import compression and later on a gradual improvement in the terms of trade and a recovery in external demand.
- Exchange rates and relative prices played a limited role in adjustment:
  - 10 out of the 23 commodity-exporting countries maintain fixed exchange rate regimes.
  - Current account balances show low sensitivity to real exchange rate changes because of limited responsiveness of output and exports to real exchange rate changes, reflecting a small share of manufacturing.
  - The contribution of relative prices to adjustment has been largest in non-resource-intensive countries, while oil-exporting countries and non-oil-resource-intensive countries benefited little from changes in relative prices.
- The adjustment needed to align current account balances with fundamentals and desired policies is not large.
- Policy priorities to facilitate adjustment and increase resilience:
  - Reduce dependence on commodity exports.
  - Improve flexibility via structural transformation and product and labor market reforms.
  - Key product market reforms identified (country examples in parentheses):
    - Improve product market regulation and encourage competition (Angola, Côte d’Ivoire, South Africa).
    - Provide reliable sources of basic industrial inputs such as electricity (Angola, Côte d’Ivoire, Nigeria).
    - Improve efficiency and finances of SOEs in key network sectors (Angola, Cameroon, Côte d’Ivoire, South Africa).
    - Improve access to credit (Angola, Cameroon, Nigeria).
  - Labor market reforms should aim to:
    - Reduce skills mismatches through better education and vocational training (Botswana, Namibia, South Africa).
    - Minimize side effects of collective bargaining agreements.
    - Reduce hiring and firing barriers (South Africa).
- These reforms would enhance the sensitivity of current account balances to real exchange rate movements.

### Improving policies to smooth output fluctuations
- Output fluctuations in the region are highly impacted by commodity price volatility; empirical evidence suggests commodity price shocks are a key driver of real GDP volatility.
- Sensitivity of output to commodity prices:
  - In diversified economies, contribution of oil price volatility to output fluctuations ranges from 0 to 2 percent at the short- to long-term horizons.
  - In less diversified economies, the contribution can be as high as 10 percent.
- Promoting greater economic diversification would enhance resilience to commodity price fluctuations by:
  - Broadening sources of growth and productivity gains beyond commodity sectors.
  - Improving investment climate, labor mobility, infrastructure quality, and human capital.
- Fiscal policy framework improvements to enhance resilience to commodity cycles:
  - Sub-Saharan African countries tend to contract primary deficits when commodity prices are high but only by a small margin; when commodity prices are low, primary fiscal deficits tend to increase in half of oil exporters and other resource-intensive countries, indicating difficulty building fiscal buffers during good times.
  - Recommended fiscal measures:
    - Adopt fiscal rules supported by adequate Public Financial Management (PFM) systems to induce swifter consolidation during upturns. About 21 sub-Saharan African countries use some form of fiscal rule, but greater emphasis on transparency and enforcement is needed.
    - Align fiscal rules with countries’ debt-servicing capacity where necessary.
    - Strengthen PFM systems, including:
      1. A well-established medium-term budget framework focusing on medium-term fiscal priorities.
      2. A top-down budgeting process and comprehensive budget reporting.
      3. Effective budget execution systems (commitment controls and cash management).
      4. Reliable data and technical forecasting capacity.
      5. Effective internal and external audit systems.
      6. Regular publication of fiscal data for transparency.
    - Use contingent financial instruments (insurance schemes, forward markets) to hedge commodity price risk; these can lower costs of volatility, reduce policy procyclicality, enable prompt liquidity after shocks, and help preserve debt sustainability. Market-based hedging has been used in Ethiopia, Ghana, Malawi with varying degrees of success but is generally seldom used due to cost, lack of liquidity, complexity, and single-risk coverage—leading most countries to prefer self-insurance via buffers.
    - Establish adequate institutional frameworks to manage revenue inflows from natural resources for commodity exporters.
- Monetary policy recommendations to anchor inflation expectations and smooth output:
  - Reduce excess liquidity in banking systems (especially in CEMAC) through active use of open market operations and/or increasing reserve requirements.
  - Develop interbank markets by improving information on counterparty risks and developing repo transactions based on public debt securities.
  - Bring and maintain short-term interest rates to positive territory in real terms (especially in Angola, Nigeria).
  - Narrow the overnight interest rate corridor and establish a symmetrical interest rate corridor with rates linked to the key policy rate.
  - Develop robust forward-looking frameworks for forecasting liquidity and managing inflation.
  - Improve communication of monetary policy actions and objectives to the public to anchor expectations.
  - Ease interest rate controls, limit fiscal dominance, and strengthen central bank independence.

### Living standards could rise faster
- Baseline and comparative projections:
  - Projected 1.5 percent per capita growth on average over the medium term for sub-Saharan Africa, commensurate with Middle East and Central Asia but much lower than Asia, developing Europe, and Latin America.
  - Many economies in sub-Saharan Africa are projected to grow far below rates expected in countries from other regions at similar per capita income levels; several large economies including Nigeria and South Africa are expected to see real per capita income fall or stagnate over the medium term.
  - Countries such as Ethiopia, Senegal, and Tanzania are poised to see per capita income rise faster than expected given their level of income.
- Sources of the growth gap:
  - Differences stem mainly from total factor productivity (TFP) growth and physical capital accumulation.
  - Productivity growth could be raised by facilitating movement of labor and capital between and within sectors, broadening productivity gains from agriculture into other sectors.
  - The Fourth Industrial Revolution could allow leapfrogging old technologies and infrastructure, increasing productivity, but may also pose challenges (e.g., reshoring of manufacturing undermining traditional export-led models).
- Policy actions to capture opportunities and raise TFP:
  - Promote digital connectivity and a flexible education system.
  - Remove market distortions and better allocate public spending.
  - Foster private investment and risk-taking through improving financial deepening, trade openness and integration (including within the continent), ensuring a sound business environment (stronger regulatory and resolution frameworks), and providing adequate public goods including well-developed infrastructure.
- Potential impact of closing efficiency gaps:
  - Closing efficiency gaps in manufacturing (~0.5 percentage points), other industries (~0.35 percentage points), and services (~0.3 percentage points) could increase average TFP growth by about 1.5–2 percentage points over the medium term.
  - Under this scenario, average medium-term growth during 2018–22 would reach about 6 percent, compared to 4 percent in the baseline scenario.
  - Higher growth could raise employment growth by an additional 0.6–0.8 percentage points over the medium term, lifting total net employment creation to about 16 million jobs by 2022, closer to the 20 million needed to absorb new entrants to labor markets.
  - Raising growth would accelerate progress toward reaching the SDGs.

### Box: The re-emergence of fuel (energy) subsidies in sub-Saharan Africa
- Context and effects:
  - Universal fuel and energy subsidies are prevalent but have drawbacks: poor targeting, negative impact on economic efficiency (fuel overconsumption), curtail investment and maintenance in oil-refining and electricity sectors, and crowd out more productive government spending.
- Recent pass-through of international fuel price changes:
  - Between early 2017 and April/May 2018:
    - Median pass-through coefficient was zero in oil exporters.
    - Median pass-through coefficient was 47 percent in oil importers.
  - During mid-2014 to early 2017 when oil prices fell sharply:
    - Oil exporters increased prices of most fuel products with a median pass-through coefficient of –19 percent.
    - Oil importers recorded a pass-through coefficient of 62 percent.
- Fiscal impact estimates:
  - Fuel subsidies in sub-Saharan Africa would have fallen by 1 to 2 percent of GDP per annum between mid-2014 and early 2017.
  - Staff analysis suggests that net fuel subsidies would have increased by an average of 2 percent of GDP between early-2017 and April/May 2018 (to about 2 percent of GDP), effectively wiping out the earlier decline.
- Experience with market-based hedging of commodity risk noted earlier is relevant given fuel subsidy vulnerabilities.

### Market Developments in Sub-Saharan African Frontier Economies in Periods of Financial Volatility (Box 1.2)
- Context and drivers:
  - Protracted trade tensions and volatility emanating from large emerging market economies (Argentina, Turkey) contributed to tightening of financial conditions in sub-Saharan Africa, manifesting as a significant increase in spreads and substantial portfolio outflows.
  - The increase in spreads since April was larger and more sustained compared to the “taper tantrum” (May 2013), but smaller than the “stock and oil crash” episode (Aug 2015).
- Key quantitative developments:
  - Peak increase in spreads during the latest episode: more than 220 basis points.
  - “Taper tantrum” spike in spreads: 150 basis points.
  - “Stock and oil crash” spike in spreads: more than 400 basis points.
  - Average level of spreads recently: about 600 basis points.
  - Peak level of spreads in January 2016: 900 basis points.
  - Portfolio outflows since April: over US$2 billion.
  - South Africa accounted for about 75 percent of these outflows.
  - For comparison, the EMBI Global index saw increases in spreads of about 100 basis points after these episodes, with the largest increase following the “taper tantrum.”
- Exchange rates and equity markets:
  - Exchange rate movements were mixed across frontier economies: the Angolan kwanza and the South African rand depreciated substantially; most other currencies experienced only moderate movements.
  - Stock prices fell in most countries during the latest episode.
- Comparative impact:
  - While financing conditions tightened substantially since April, the effects have generally been smaller than the period after August 2015.
- Risks:
  - Faster-than-envisaged tightening of monetary policy in advanced economies or continued volatility from emerging market economies could trigger further volatility for sub-Saharan African countries.
- Note:
  - Selected frontier markets in figures include Angola, Côte d’Ivoire, Gabon, Ghana, Nigeria, Senegal, South Africa, and Zambia.
  - This box was prepared by Siddharth Kothari.

### Progress Toward the Sustainable Development Goals (Box 1.3)
- Context:
  - The United Nations’ 2030 Agenda for Sustainable Development (SDGs) was initiated in 2015 and consists of 17 broad goals across areas such as poverty, hunger, health, inclusiveness, water and sanitation, energy, employment and growth, industrialization and innovation, and the environment.
- Recent achievements in sub-Saharan Africa (since 2000 and up to 2016):
  - Real per capita GDP increased on average by 50 percent.
  - Life expectancy reached 60 years by 2016.
  - Infant mortality and maternal death rates have fallen sharply.
  - Achievements in primary and higher education improved, though pre-school education remains lagging.
  - Investment in infrastructure has been at a comparable level to that in emerging economies despite a low stock and quality of public infrastructure.
  - Significant improvements in telecommunication access (see mobile phone subscriptions indicator).
- Financing needs and gaps to achieve the SDGs by 2030:
  - Initial results of studies on Benin and Rwanda estimate an additional financing need of about 20 percent of GDP a year to reach the SDGs in five key areas: education, electricity, health, roads, and water and sanitation.
  - Raising tax revenues and enhancing spending efficiency is expected to finance about 5 percent of GDP of this spending need, leaving a significant residual financing gap.
  - Higher and sustained growth would also help countries meet the SDGs.
- IMF initiatives to support progress toward the SDGs:
  - Increasing support for developing countries to boost domestic revenue mobilization, notably through increased resources allocated to technical assistance in this area.
  - Expanding infrastructure policy support through strengthening institutional capacity for public investment management.
  - Intensifying support for fragile and conflict-affected states and affected neighbors.
  - Deepening analysis and policy advice on gender, inequality, and financial inclusion.
  - Boosting financial support for low-income countries (LICs) and countries hit by natural disasters.
  - Addressing climate change issues in areas of IMF expertise—notably energy pricing.
  - Providing capacity building to strengthen national statistical systems and contributing to the development of an SDG global indicator framework.
- Note:
  - Life expectancy is measured in years; primary completion rate is measured as a percent of the relevant age group; mobile phone subscriptions are per 100 people.
  - This box was prepared by Reda Cherif.

*Regional Economic Outlook: Sub‑Saharan Africa — Chapter 1: Recovery and Rising Risks*

### 1. Recovery and Rising Risks

### 1. Recovery and Rising Risks

### Policy recommendations and near-term priorities
- Implement fiscal strategies designed to reduce debt vulnerabilities consistent with a steady fiscal consolidation; proceed with implementation even during temporary commodity price upswings or ahead of elections in the next year in many larger economies, including Nigeria, Senegal, and South Africa.
- Advance revenue mobilization: tax revenues are, on average, at 3–5 percent of GDP below estimated potential; successful episodes focused on basic institutions, effective and modern tax policy and administration, measures to build the tax base, simplify the tax system, and tackle exemptions and incentives; reforms must be tailored to country circumstances (IMF 2018a).
- Enhance expenditure efficiency, in particular to address the re-emergence of energy subsidies, by implementing automatic fuel pricing mechanisms (examples: Ghana and Mozambique) and undertaking mitigating measures to compensate the poor.
- Allow greater exchange rate flexibility where institutional setups permit and barring balance sheet vulnerabilities.
- Address growing financial sector weaknesses in a timely manner; recent progress includes reducing NPLs (Equatorial Guinea, Guinea-Bissau), strengthening capital buffers (Angola, Ghana, Mozambique), and adopting new prudential rules (CEMAC, WAEMU); persistent NPLs require comprehensive NPL reduction strategies.
- Pursue policies to foster private investment and enhance potential growth, including opening to trade (notably in the context of the African Continental Free Trade Area), promoting digital connectivity and a flexible education system, removing market distortions, encouraging financial deepening, ensuring a sound business environment, better allocating public spending, and ensuring adequate provision of public goods (including well-developed infrastructure).

### External environment and financial flows
- Global growth is projected at 3.7 percent in 2018 and 2019, down from the 3.9 percent projection of the April 2018 WEO.
- Rising trade tensions, anticipated monetary policy normalization, and volatility in asset markets increase uncertainty for the region.
- International sovereign bond issuances by sub-Saharan African frontier markets in 2018 reached US$13.8 billion in the first half of the year, higher than the annual total in any previous year, compared with US$7.6 billion for the whole year 2017.
  - Senegal issued US$2.2 billion Eurobonds in March 2018 (five times oversubscribed).
  - Angola and Ghana issued Eurobonds worth US$3 billion and US$2 billion, respectively, in May 2018 (three and four times oversubscribed, respectively).
  - In July 2018, Angola reopened the May Eurobond issuance and raised an additional US$500 million.

### Growth outlook and composition
- Average growth for the region (weighted by GDP in purchasing power parity terms) is expected to reach about 3.1 percent in 2018, up from 2.7 percent in 2017.
- The recovery is expected to contribute about 0.7 percentage points to the region’s average growth in 2018 and lift activity in Nigeria’s trading partners through stronger remittances, financial spillovers, and import demand (IMF 2018b).
  - Spillovers to Benin’s and Niger’s growth are estimated to be ½ and ⅓ percentage points, respectively.
- Country highlights:
  - Nigeria is expected to grow by 1.9 percent in 2018, up from 0.8 percent in 2017, mostly owing to fewer disruptions in oil production and some pick-up in the non-oil economy.
  - Growth in South Africa is expected to be about 0.8 percent in 2018; on current policies growth is expected to stabilize at about 1.8 percent over the medium term.
- Across countries:
  - Non-resource-intensive countries continue to grow at about 6 percent on average.
  - Resource-intensive countries have seen some pickup but remain below pre-2014 levels.
  - One-third of the population of sub-Saharan Africa lives in countries where GDP per capita fell in 2017 and is expected to fall further in 2018 and 2019.
- Medium-term prospects:
  - On current policies, growth is expected to accelerate over the medium term to about 4 percent, or 1½ percent in per capita terms.
  - The region needs to create on average 20 million jobs every year during 2018–35 to absorb new entrants to the labor market; this is twice as many as has been created on average over the past five years.

### Inflation, commodities, and reserves
- Global commodity outlook:
  - Energy outlook points to higher prices relative to April 2018 projections; metals and other commodities exported by the region show a mixed outlook.
  - Prospects for energy prices benefit oil producers but worsen terms of trade for oil importers (three-quarters of countries in the region).
- Inflation:
  - Average inflation in oil-exporting countries is expected to fall from 17 percent in 2017 to about 13 percent in 2018.
  - Elsewhere inflation remains relatively low; dynamics reflect slow recovery, some monetary tightening or higher agricultural production, and incomplete pass-through of higher oil prices.
- Reserves:
  - Despite current account adjustments for oil-exporting countries, foreign exchange reserve buffers are expected to remain below levels deemed adequate based on metrics derived from emerging and developing countries’ crisis experiences.
- Fuel prices and subsidies:
  - Fuel prices are on average about US$1.09 per liter (April/May 2018), implying an estimated average fuel subsidy of 2 percent of GDP per annum once transportation and distribution costs, profit margins, and taxes are taken into account.
  - Median pass-through coefficient between early 2017 and April 2018 was zero for oil exporters and 47 percent for oil importers.

### Fiscal consolidation, revenues, and expenditure quality
- Baseline projections: average fiscal deficit for the region is set to shrink from 4.2 percent of GDP in 2017 to 3.3 percent in 2018.
- Fiscal balance dynamics:
  - Fiscal balances are expected to improve in oil-exporting countries, remain unchanged in non-resource-intensive countries, and deteriorate somewhat in other resource-intensive countries.
  - Improvement in oil exporters largely from increased oil-sector revenues and cuts in capital expenditures; Nigeria is an exception where public investment has doubled over the last two years from low levels.
  - Radical cuts in capital expenditure risk undermining medium-term growth if not offset by private sector investment.
- Revenue mobilization:
  - Progress has been elusive; under current medium-term fiscal plans the revenue gap, estimated at 3–5 percent of GDP on average across countries, is not expected to be closed.
  - Domestic revenues are envisaged to rise by about 2½ percent of GDP in oil-exporting countries, and only by ½ percent of GDP in other countries.
- Quality risks:
  - The re-emergence of fuel subsidies threatens the quality of fiscal adjustment; many countries have not raised domestic prices in response to recent international fuel price increases.

### Balance sheet vulnerabilities and debt risks
- In 2017, 15 sub-Saharan African countries were classified at high risk of debt distress or in debt distress (listed in source).
- Debt dynamics for countries in debt distress or at high risk mainly reflect large primary deficits that widened sharply with the commodity price collapse.
- Exchange rate depreciations in several cases have produced negative balance sheet effects and contributed to deterioration in debt solvency and liquidity indicators.
- Public debt:
  - Reflecting fiscal consolidations and a growth rebound, the average level of public debt in 2018 is expected to remain around its 2016 level, at about 57 percent of GDP, with wide heterogeneity across countries.
  - Debt reduction mainly reflects adjustments in oil exporters and to a lesser extent in non-resource-intensive countries.
  - In some highly indebted countries (Republic of Congo, The Gambia) improved revenue performance and higher GDP growth are expected to yield significant improvements in debt servicing capacity.

_Regional Economic Outlook: Sub‑Saharan Africa — Chapter 1: Recovery and Rising Risks_

### 1.  RECOVERY AND RISING RISKS

### 1.  RECOVERY AND RISING RISKS

### Debt vulnerabilities and contingent liabilities
- The share of foreign-currency denominated public debt in total public debt increased from an average of 23 percent in 2011–13 to 32 percent of GDP in 2017.
- Private banks and bondholders now hold about 15 percent of public debt; concessional financing share has remained unchanged while official creditors remain the largest group.
- Borrowing from non-Paris Club countries, especially from China, has been rising.
- Government domestic arrears amount to about 5 percent of GDP on average (end-2017 mean) and exceed 20 percent in several countries (Equatorial Guinea, Gabon, The Gambia).
- In most countries, government arrears to suppliers of goods and services account for the bulk of domestic arrears; arrears also to private firms, workers, and SOEs.
- Accumulated SOE liabilities to the economy have occasionally reached 10 percent of GDP or more (Cabo Verde, Cameroon, Ghana, São Tomé and Príncipe, South Africa), implying contingent fiscal liabilities that may compromise debt sustainability.
- Some countries have cleared SOE arrears (Burkina Faso, Côte d’Ivoire); others increased SOE transparency via audits (Benin, Niger, Seychelles) or leveraged official SOE performance reports (Cabo Verde, Ghana, Liberia).
- Direct support of SOEs’ quasi-fiscal activities via subsidies or on-lending represents a considerable budgetary burden in some cases (Botswana, Cabo Verde, Madagascar), crowding out higher-priority public spending.

### Bank balance sheets and credit growth
- In most sub-Saharan African economies, nonperforming loans (NPLs) are high; accumulation especially rapid in state-owned banks (Angola, Gabon).
- Drivers of high NPLs: economic slowdown; poor risk management (Angola); high level or delays in repayment of government arrears to suppliers (Chad, Equatorial Guinea, Gabon, Ghana, Malawi); more stringent loan classification and earlier loss recognition after asset quality reviews (Ghana); potential understatement via evergreening in some countries.
- Bad loans have eroded commercial banks’ profitability in a few countries; in others (Nigeria, WAEMU) attractive returns on government securities have supported profitability.
- Capital ratios vary significantly; some banks experience severe shortfalls (Ghana, Guinea, Guinea-Bissau, Malawi, Nigeria, Togo).
- High NPL ratios and slowing activity contributed to slowing credit to the private sector in three-quarters of countries, most notably in Botswana, Equatorial Guinea, Gabon, Ghana, Guinea, Guinea-Bissau, Liberia, Malawi, and São Tomé and Príncipe.
- Other contributors to slowing private credit: weak growth, tighter monetary conditions (Cameroon, Equatorial Guinea), high household indebtedness (Botswana), uncertainty in economic and political outlook (Gabon, Ghana, Guinea), redirection of bank lending toward government securities (Guinea, Malawi).
- Other banking-sector concerns: foreign currency liquidity mismatches (Angola) and high loan concentration (Benin, Malawi, Namibia).

### Risks to the outlook — External risks
- Trade tensions:
  - Escalating trade conflicts could derail the global recovery and dampen medium-term growth prospects; a shift away from trade openness would hinder SDG achievement and adaptation to technological and demographic changes.
  - Trade tensions simulations (consistent with October 2018 WEO scenarios) assess tariffs imposed/announced between the United States and trading partners in several rounds (steel 25 percent, aluminum 10 percent, 25 percent on US$50 billion of imports from China; later 25 percent on US$200 billion from China with 5–25 percent Chinese response on US$60 billion; finally 25 percent on all imported cars and car parts about US$350 billion).
  - Trade tensions among the United States, other major advanced economies, and China could entail a cumulative loss of GDP in sub-Saharan Africa of up to 1½ percent of GDP during 2018–21.
  - Sub-Saharan African countries most affected would be commodity exporters and countries more integrated in global markets; impacts arise via global demand, import demand from China, commodity prices, and domestic investment.
- Tighter global financial conditions:
  - Faster-than-envisaged monetary policy normalization in advanced economies or sudden investor sentiment shifts could constrain financing and growth.
  - Frontier markets have weathered bouts of volatility, but persistent pressures could spill over from emerging markets with evident weaknesses (Argentina, South Africa, Turkey).
  - Higher US interest rates and a stronger dollar heighten financial crisis risks; the probability of a large reversal in foreign flows in sub-Saharan Africa is significantly higher as US interest rates go up, and around one-third of currency crises have been associated with a reversal in foreign flows.
  - Large amounts of maturing bonds for the region’s frontier markets in 2019–20 and in 2024–25 indicate substantial refinancing risks.
  - Growing sovereign-banks linkages increase banking-sector vulnerability to global financial tightening and fiscal challenges.

### Risks to the outlook — Domestic risks
- Policy slippages:
  - Most countries have medium-term fiscal plans aimed at sustainable debt levels, but implementation is critical.
  - Authorities should resist populist pressures to ease consolidation during temporary commodity price spikes or pre-election periods.
  - Avoiding policy slippages and high policy uncertainty is especially important for emerging and frontier economies with significant international capital market exposures, notably in the run-up to 2019 elections in Nigeria, Senegal, and South Africa.
- Security risks:
  - Elevated security risks from civil unrest and terrorism impose large human costs, drag on growth, and constrain delivery of basic public services.
  - The largest number of incidents of civil unrest and terrorism in the past five years occurred in Nigeria, though frequency has been declining.
  - Terrorist attacks in G5 Sahel countries nearly doubled in 2017.
  - UN-OCHA estimates security issues will result in more than 30 million people suffering from food insecurity in 2018.
  - Internally displaced persons rose from about 4 million in 2012 to about 11 million in 2017, with largest increases in the Democratic Republic of Congo, Ethiopia, and South Sudan.
  - In 2017 there were 4 million people seeking refuge in other sub-Saharan African countries, up from 1 million in 2010; about 170,000 migrants from sub-Saharan Africa sought asylum in Europe in 2017 and about 1 million during 2010–17.

### Policies — Strengthening foundations for sustained, strong, and inclusive growth
- Objective:
  - Create a growth model more resilient and capable of creating enough jobs to harness the demographic dividend, requiring strong, sustainable, and inclusive growth and policies to strengthen resilience and reallocate labor and capital into more productive sectors.
- Increasing fiscal space — Improve quality of fiscal adjustment:
  - Advance revenue mobilization:
    - Average revenue is estimated at 3–5 percent of GDP below potential, implying substantial scope to raise revenue.
    - Successful revenue mobilization has involved modern tax policy and administration measures: taxpayer identification numbers, semi-autonomous revenue authorities, the VAT, and taxpayer segmentation.
    - Successful countries focused on building the tax base, simplifying the tax system, and tackling exemptions and incentives.
  - Enhance expenditure efficiency:
    - Address re-emergence of energy subsidies via automatic fuel pricing mechanisms (examples: Ghana, Mozambique), paired with mitigating measures to protect the poor.
    - Improve public investment efficiency by strengthening infrastructure governance for planning, allocation, and implementation.
    - Enhance public financial management to avoid arrears and misallocation, including reforming loss-making SOEs.
    - Wage bill reform, if well designed and implemented, could improve expenditure efficiency; reforms should be carefully targeted given public-sector employment in education and healthcare.
  - Improve debt management frameworks to better manage currency and interest rate risks:
    - Strengthen capacity for cost-risk analysis of borrowing options and managing repayments on commercial borrowing (examples: Kenya, Uganda).
    - Cost-risk analysis raises awareness of debt portfolio risks and the importance of developing government securities markets in the medium term.
    - Some countries (Cabo Verde, Ghana, Kenya, Tanzania) are updating medium-term debt strategies to address contingent liability risks.
    - Deepening domestic sovereign debt markets (Ghana, Kenya, Namibia, Nigeria, Tanzania) could lower currency and interest rate risks.
  - Recent initiatives to promote bank lending (examples):
    - Cabo Verde: considers partial guarantees on loans to SMEs.
    - CEMAC: plans to update credit registry (postponed to end 2020) and to have an operating credit bureau by early 2020.
    - Guinea: operationalized a new credit information system.
    - Kenya: improving credit reference bureau information and adopted law on movable collateral registry.
    - Niger: strengthened credit bureau through March 2018 legislation obliging utilities to provide payment discipline information; preparing a law on “warrantage” (granting credit with grain as collateral in secure warehouses).

### Policies — Addressing financial sector weaknesses
- Need for timely action to avoid disruptive adjustments and fiscal costs.
- Measures taken and recommended:
  - Reduce NPLs through strengthened creditor rights and reduced judicial delays in collateral recovery (example: Guinea-Bissau).
  - Halt net accumulation of public domestic arrears to the private sector (example: Equatorial Guinea).
  - Improve credit information systems, modernize insolvency regimes, and implement financial education programs for MSMEs.
  - Comprehensive NPL reduction strategies required: accelerate loss recognition, strengthen supervisory focus on recovery actions, reform insolvency and debt enforcement frameworks to enable swift restructuring of distressed but viable borrowers, and support consistent and efficient judicial proceedings.
  - Establish permanent macroprudential buffers (on top of micro-prudential minimums) that can be relaxed at regulators’ discretion in the event of shocks to allow NPLs to be absorbed by capital and sustain credit provision.
- Recent banking-sector strengthening:
  - Angola, Ghana, and Mozambique raised minimum statutory capital requirements; Angola to conduct an asset quality review of systemic banks.
  - CEMAC adopted new regulations on definition of systemically important institutions (aligned with Basel Committee recommendations), accelerated resolution of small MFIs, and established an emergency liquidity assistance framework.
  - WAEMU adopted new prudential rules aligned with the Basel II / III framework.

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

### 1.  RECOVERY AND RISING RISKS

### 1.  RECOVERY AND RISING RISKS

### Entrenching external adjustment
- Commodity-exporting sub-Saharan African countries experienced a historically large negative terms of trade shock in late-2014 and 2015 and saw progressive improvement in current account balances in 2016 and 2017, but did little to increase resilience to such shocks.
- The adjustment following the shock relied initially mainly on import compression and later on a gradual improvement in the terms of trade and a recovery in external demand.
- Exchange rates and relative prices played a limited role in adjustment:
  - 10 out of the 23 commodity-exporting countries maintain fixed exchange rate regimes.
  - Current account balances show low sensitivity to real exchange rate changes because of limited responsiveness of output and exports to real exchange rate changes, reflecting a small share of manufacturing.
  - The contribution of relative prices to adjustment has been largest in non-resource-intensive countries, while oil-exporting countries and non-oil-resource-intensive countries benefited little from changes in relative prices.
- The adjustment needed to align current account balances with fundamentals and desired policies is not large.
- Policy priorities to facilitate adjustment and increase resilience:
  - Reduce dependence on commodity exports.
  - Improve flexibility via structural transformation and product and labor market reforms.
  - Key product market reforms identified (country examples in parentheses):
    - Improve product market regulation and encourage competition (Angola, Côte d’Ivoire, South Africa).
    - Provide reliable sources of basic industrial inputs such as electricity (Angola, Côte d’Ivoire, Nigeria).
    - Improve efficiency and finances of SOEs in key network sectors (Angola, Cameroon, Côte d’Ivoire, South Africa).
    - Improve access to credit (Angola, Cameroon, Nigeria).
  - Labor market reforms should aim to:
    - Reduce skills mismatches through better education and vocational training (Botswana, Namibia, South Africa).
    - Minimize side effects of collective bargaining agreements.
    - Reduce hiring and firing barriers (South Africa).
- These reforms would enhance the sensitivity of current account balances to real exchange rate movements.

### Improving policies to smooth output fluctuations
- Output fluctuations in the region are highly impacted by commodity price volatility; empirical evidence suggests commodity price shocks are a key driver of real GDP volatility.
- Sensitivity of output to commodity prices:
  - In diversified economies, contribution of oil price volatility to output fluctuations ranges from 0 to 2 percent at the short- to long-term horizons.
  - In less diversified economies, the contribution can be as high as 10 percent.
- Promoting greater economic diversification would enhance resilience to commodity price fluctuations by:
  - Broadening sources of growth and productivity gains beyond commodity sectors.
  - Improving investment climate, labor mobility, infrastructure quality, and human capital.
- Fiscal policy framework improvements to enhance resilience to commodity cycles:
  - Sub-Saharan African countries tend to contract primary deficits when commodity prices are high but only by a small margin; when commodity prices are low, primary fiscal deficits tend to increase in half of oil exporters and other resource-intensive countries, indicating difficulty building fiscal buffers during good times.
  - Recommended fiscal measures:
    - Adopt fiscal rules supported by adequate Public Financial Management (PFM) systems to induce swifter consolidation during upturns. About 21 sub-Saharan African countries use some form of fiscal rule, but greater emphasis on transparency and enforcement is needed.
    - Align fiscal rules with countries’ debt-servicing capacity where necessary.
    - Strengthen PFM systems, including:
      1. A well-established medium-term budget framework focusing on medium-term fiscal priorities.
      2. A top-down budgeting process and comprehensive budget reporting.
      3. Effective budget execution systems (commitment controls and cash management).
      4. Reliable data and technical forecasting capacity.
      5. Effective internal and external audit systems.
      6. Regular publication of fiscal data for transparency.
    - Use contingent financial instruments (insurance schemes, forward markets) to hedge commodity price risk; these can lower costs of volatility, reduce policy procyclicality, enable prompt liquidity after shocks, and help preserve debt sustainability. Market-based hedging has been used in Ethiopia, Ghana, Malawi with varying degrees of success but is generally seldom used due to cost, lack of liquidity, complexity, and single-risk coverage—leading most countries to prefer self-insurance via buffers.
    - Establish adequate institutional frameworks to manage revenue inflows from natural resources for commodity exporters.
- Monetary policy recommendations to anchor inflation expectations and smooth output:
  - Reduce excess liquidity in banking systems (especially in CEMAC) through active use of open market operations and/or increasing reserve requirements.
  - Develop interbank markets by improving information on counterparty risks and developing repo transactions based on public debt securities.
  - Bring and maintain short-term interest rates to positive territory in real terms (especially in Angola, Nigeria).
  - Narrow the overnight interest rate corridor and establish a symmetrical interest rate corridor with rates linked to the key policy rate.
  - Develop robust forward-looking frameworks for forecasting liquidity and managing inflation.
  - Improve communication of monetary policy actions and objectives to the public to anchor expectations.
  - Ease interest rate controls, limit fiscal dominance, and strengthen central bank independence.

### Living standards could rise faster
- Baseline and comparative projections:
  - Projected 1.5 percent per capita growth on average over the medium term for sub-Saharan Africa, commensurate with Middle East and Central Asia but much lower than Asia, developing Europe, and Latin America.
  - Many economies in sub-Saharan Africa are projected to grow far below rates expected in countries from other regions at similar per capita income levels; several large economies including Nigeria and South Africa are expected to see real per capita income fall or stagnate over the medium term.
  - Countries such as Ethiopia, Senegal, and Tanzania are poised to see per capita income rise faster than expected given their level of income.
- Sources of the growth gap:
  - Differences stem mainly from total factor productivity (TFP) growth and physical capital accumulation.
  - Productivity growth could be raised by facilitating movement of labor and capital between and within sectors, broadening productivity gains from agriculture into other sectors.
  - The Fourth Industrial Revolution could allow leapfrogging old technologies and infrastructure, increasing productivity, but may also pose challenges (e.g., reshoring of manufacturing undermining traditional export-led models).
- Policy actions to capture opportunities and raise TFP:
  - Promote digital connectivity and a flexible education system.
  - Remove market distortions and better allocate public spending.
  - Foster private investment and risk-taking through improving financial deepening, trade openness and integration (including within the continent), ensuring a sound business environment (stronger regulatory and resolution frameworks), and providing adequate public goods including well-developed infrastructure.
- Potential impact of closing efficiency gaps:
  - Closing efficiency gaps in manufacturing (~0.5 percentage points), other industries (~0.35 percentage points), and services (~0.3 percentage points) could increase average TFP growth by about 1.5–2 percentage points over the medium term.
  - Under this scenario, average medium-term growth during 2018–22 would reach about 6 percent, compared to 4 percent in the baseline scenario.
  - Higher growth could raise employment growth by an additional 0.6–0.8 percentage points over the medium term, lifting total net employment creation to about 16 million jobs by 2022, closer to the 20 million needed to absorb new entrants to labor markets.
  - Raising growth would accelerate progress toward reaching the SDGs.

### Box: The re-emergence of fuel (energy) subsidies in sub-Saharan Africa
- Context and effects:
  - Universal fuel and energy subsidies are prevalent but have drawbacks: poor targeting, negative impact on economic efficiency (fuel overconsumption), curtail investment and maintenance in oil-refining and electricity sectors, and crowd out more productive government spending.
- Recent pass-through of international fuel price changes:
  - Between early 2017 and April/May 2018:
    - Median pass-through coefficient was zero in oil exporters.
    - Median pass-through coefficient was 47 percent in oil importers.
  - During mid-2014 to early 2017 when oil prices fell sharply:
    - Oil exporters increased prices of most fuel products with a median pass-through coefficient of –19 percent.
    - Oil importers recorded a pass-through coefficient of 62 percent.
- Fiscal impact estimates:
  - Fuel subsidies in sub-Saharan Africa would have fallen by 1 to 2 percent of GDP per annum between mid-2014 and early 2017.
  - Staff analysis suggests that net fuel subsidies would have increased by an average of 2 percent of GDP between early-2017 and April/May 2018 (to about 2 percent of GDP), effectively wiping out the earlier decline.
- Experience with market-based hedging of commodity risk noted earlier is relevant given fuel subsidy vulnerabilities.

*Source: IMF staff calculations and analysis as presented in "1.  RECOVERY AND RISING RISKS."*

### 1.  RECOVERY AND RISING RISKS

### 1.  RECOVERY AND RISING RISKS

### Market Developments in Sub-Saharan African Frontier Economies in Periods of Financial Volatility (Box 1.2)
- Context and drivers:
  - Protracted trade tensions and volatility emanating from large emerging market economies (Argentina, Turkey) contributed to tightening of financial conditions in sub-Saharan Africa, manifesting as a significant increase in spreads and substantial portfolio outflows.
  - The increase in spreads since April was larger and more sustained compared to the “taper tantrum” (May 2013), but smaller than the “stock and oil crash” episode (Aug 2015).
- Key quantitative developments:
  - Peak increase in spreads during the latest episode: more than 220 basis points.
  - “Taper tantrum” spike in spreads: 150 basis points.
  - “Stock and oil crash” spike in spreads: more than 400 basis points.
  - Average level of spreads recently: about 600 basis points.
  - Peak level of spreads in January 2016: 900 basis points.
  - Portfolio outflows since April: over US$2 billion.
  - South Africa accounted for about 75 percent of these outflows.
  - For comparison, the EMBI Global index saw increases in spreads of about 100 basis points after these episodes, with the largest increase following the “taper tantrum.”1
- Exchange rates and equity markets:
  - Exchange rate movements were mixed across frontier economies: the Angolan kwanza and the South African rand depreciated substantially; most other currencies experienced only moderate movements.
  - Stock prices fell in most countries during the latest episode.
- Comparative impact:
  - While financing conditions tightened substantially since April, the effects have generally been smaller than the period after August 2015.
- Risks:
  - Faster-than-envisaged tightening of monetary policy in advanced economies or continued volatility from emerging market economies could trigger further volatility for sub-Saharan African countries.
- Note:
  - Selected frontier markets in figures include Angola, Côte d’Ivoire, Gabon, Ghana, Nigeria, Senegal, South Africa, and Zambia.
  - This box was prepared by Siddharth Kothari.

### Progress Toward the Sustainable Development Goals (Box 1.3)
- Context:
  - The United Nations’ 2030 Agenda for Sustainable Development (SDGs) was initiated in 2015 and consists of 17 broad goals across areas such as poverty, hunger, health, inclusiveness, water and sanitation, energy, employment and growth, industrialization and innovation, and the environment.
- Recent achievements in sub-Saharan Africa (since 2000 and up to 2016):
  - Real per capita GDP increased on average by 50 percent.
  - Life expectancy reached 60 years by 2016.
  - Infant mortality and maternal death rates have fallen sharply.
  - Achievements in primary and higher education improved, though pre-school education remains lagging.
  - Investment in infrastructure has been at a comparable level to that in emerging economies despite a low stock and quality of public infrastructure.
  - Significant improvements in telecommunication access (see mobile phone subscriptions indicator).
- Financing needs and gaps to achieve the SDGs by 2030:
  - Initial results of studies on Benin and Rwanda estimate an additional financing need of about 20 percent of GDP a year to reach the SDGs in five key areas: education, electricity, health, roads, and water and sanitation.
  - Raising tax revenues and enhancing spending efficiency is expected to finance about 5 percent of GDP of this spending need, leaving a significant residual financing gap.
  - Higher and sustained growth would also help countries meet the SDGs.
- IMF initiatives to support progress toward the SDGs:
  - Increasing support for developing countries to boost domestic revenue mobilization, notably through increased resources allocated to technical assistance in this area.
  - Expanding infrastructure policy support through strengthening institutional capacity for public investment management.
  - Intensifying support for fragile and conflict-affected states and affected neighbors.
  - Deepening analysis and policy advice on gender, inequality, and financial inclusion.
  - Boosting financial support for low-income countries (LICs) and countries hit by natural disasters.
  - Addressing climate change issues in areas of IMF expertise—notably energy pricing.
  - Providing capacity building to strengthen national statistical systems and contributing to the development of an SDG global indicator framework.
- Note:
  - Life expectancy is measured in years; primary completion rate is measured as a percent of the relevant age group; mobile phone subscriptions are per 100 people.
  - This box was prepared by Reda Cherif.

*Source: ssareo-10-18-ch1 — 1.  RECOVERY AND RISING RISKS.*

---


_Source: https://www.imf.org/-/media/files/publications/reo/afr/2018/october/pdf/ssareo-10-18-ch1.pdf_