## sreo0419 - Executive Summary ## Source details **Canonical URL:** [sreo0419 - Executive Summary](https://www.imf.org/-/media/files/publications/reo/afr/2019/april/english/sreo0419.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/afr/2019/april/english/sreo0419.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/afr/2019/april/english/sreo0419.pdf.json) --- ### Two-Track Recovery Amid Elevated Uncertainty - Aggregate growth: - Sub-Saharan Africa: 3 percent in 2018 → 3.5 percent in 2019 → stabilize at slightly below 4 percent over the medium term. - Excluding Nigeria and South Africa: about 5 percent over the medium term. - Duality in outcomes: - About half of countries (mostly non-resource-intensive) expected to grow at 5 percent or more and see faster rise in income per capita than the rest of the world on average over the medium term. - Remaining countries (mostly resource-intensive, including Nigeria and South Africa) expected to fall behind; these two countries account for more than two-thirds of the region’s total population. - External and domestic headwinds: - Global expansion losing momentum; trade tensions elevated; volatile global financial conditions tightened somewhat relative to October 2018; commodity prices expected to remain low. - Domestic shocks: climate shocks (southern Africa); policy uncertainty in several countries. - Debt vulnerabilities elevated in some countries; reserve buffers below adequate levels in more than half of countries. - High nonperforming loans and weaknesses in public financial management, with large domestic arrears affecting growth and financial systems. - Shared policy priorities: - Step up revenue mobilization; ensure efficient public investment; strengthen public financial management; contain fiscal risks from SOEs; improve debt management and transparency. - Enhance exchange rate flexibility outside monetary unions; strengthen monetary policy and financial systems. - Raise productivity and private investment; enhance market contestability; deepen trade integration (notably AfCFTA); improve access to financial services and basic services (health and education). ### Macroeconomic Developments and Prospects - Global environment: - Global growth: 3.6 percent in 2018 (0.1 percentage point less than October 2018 WEO); slow to 3.3 percent in 2019; recover to 3.6 percent in 2020. - Commodity prices: volatility increased; sharp fall in oil prices in Q4 2018; non-oil commodity prices weakened partly due to subdued demand from China; markets expect most commodity prices to weaken further in 2019–20. - Global financial conditions tightened in H2 2018; international sovereign bond issuances by sub-Saharan African frontier markets reached US$17.2 billion in 2018. - Nigeria: about US$5.4 billion of Eurobonds issuance in 2018. - Angola: about US$3.5 billion of Eurobonds issuance in 2018. - Borrowing cost at issuance for the 30-year maturity increased (example: by about 162.5 basis points for Nigeria over the past year). - Regional growth outlook: - Sub-Saharan Africa (PPP-weighted): 3.0 percent in 2018 → 3.5 percent in 2019 → 3.7 percent in 2020 (about ¼ percentage point less than October 2018 WEO). - Resource-intensive countries: - Nigeria: 1.9 percent in 2018 → 2.1 percent in 2019; under current policies plateau at about 2¾ percent over the medium term. - South Africa: 0.8 percent in 2018 → 1.2 percent in 2019; stabilize at about 1.8 percent over the medium term. - Non-resource-intensive countries: expected to grow about 6.3 percent on average in 2019–20. - Ethiopia: growth expected to accelerate to 7.7 percent. - Growth and employment: - Medium-term growth expected to plateau at about 3¾ percent for the region, or 1¼ percent in per capita terms. - This growth path is well below that needed to lift living standards to the rest-of-world average and to create the 20 million jobs a year needed to absorb new labor-market entrants. - Inflation: - Average inflation: 8.5 percent in 2018 → 8.1 percent in 2019 (pass-through of lower energy prices expected to more than offset past exchange rate depreciation). - Persistence: on average, only a quarter of each year’s inflation manifests into the next year. - External buffers and current accounts: - Simple average current account deficit: 6.6 percent of GDP in 2018 → 7.3 percent of GDP in 2019. - Projected foreign exchange reserve buffers: fall to 3.7 months of imports in 2019. - Trade-balance sensitivity: a 1 percent change in commodity terms of trade → 0.3–0.6 percent of GDP change in the trade balance. - Fiscal consolidation and terms-of-trade effects: - After a contraction in 2018 of about ½ percent of GDP, the simple average fiscal deficit expected to narrow to about 3.2 percent in 2019–20 and continue consolidation beyond 2020. - Fiscal procyclicality: revenues rise in good times for oil exporters and fall more in bad times; adjustment skewed toward revenues and capital expenditure cuts. - Domestic revenue mobilization: - Noncommodity revenue (excluding grants) increased as a ratio of GDP in 25 countries in 2018; estimated revenue gap: 3–5 percent of GDP on average across countries and not expected to be closed through the medium term. - Public debt vulnerabilities: - Sixteen countries classified as high risk of debt distress or in debt distress; 19 low-income and developing countries have low to moderate vulnerabilities. - Average public debt: close to 56 percent of GDP at end-2018. - Of the US$366 billion increase in debt between 2010 and 2017: about two-thirds due to market borrowing; about 43 percent in foreign currency; 13 percent from bilateral creditors. - Median interest payment burden doubled to about 10 percent of revenue since 2011. - Banking sector and credit growth: - Systemwide NPL ratio in Ghana: 18.2 percent at end-2018. - Concerns: foreign currency liquidity mismatches (Angola); high loan concentration (Benin, Equatorial Guinea, Eswatini, Malawi, Namibia); insufficient provisioning (Angola); increased household and corporate debts (Tanzania). - Capital increases in some countries reflect raising minimum capital requirements or resolving insolvent banks (Ghana, Kenya); some small banks remain undercapitalized (Kenya, Nigeria, Togo) and a few systemic banks remain undercapitalized. ### Risks to the Outlook - Near-term risks mainly tilted to the downside; balanced over the medium term. - Key near-term downside risks: - Escalation/broadening of trade tensions. - Stronger-than-anticipated tightening of global financial conditions. - Greater policy uncertainty. - Extreme weather given dependence on agriculture. - Growth-at-risk analysis: - Heightened trade tensions, increased US trade policy uncertainty, slower growth in China, lower commodity prices, and tighter global financial conditions could lower sub-Saharan Africa growth by 2 percentage points in 2019 and 1½ percentage points in 2020. - China linkages: - China accounts for about 20 percent of total trade with the region; about 70 percent of the region’s exports to China are commodities. - Imports from China: US$67.5 billion in 2017; from the United States: US$13.7 billion; from Europe: US$79.7 billion. - China provides about 5 percent of total FDI into the region. ### Policy calibration and options - Most countries: neutral or tight monetary policy stances; announced fiscal consolidation plans that, if implemented, would contain debt trajectories. - Policy responses: - Recalibrate policies to support growth if downside external risks materialize, consistent with credible medium-term objectives, available financing, and debt sustainability. - Fast-growing countries with elevated debt vulnerabilities should prioritize rebuilding buffers. - Slow-growing countries facing temporary shocks could seek additional financing to accommodate gradual adjustment; when financing is not available, design adjustment composition to minimize growth damage. ### Monetary policy frameworks and central banks - Policy actions recommended/underway: - Bring short-term interest rates into positive real territory (especially Angola). - Narrow the overnight interest rate corridor and establish symmetrical corridor linked to policy rate. - Develop forward-looking frameworks for liquidity forecasting and inflation management; strengthen central bank independence. - Enhance monetary transmission: - Raise caps on interest rates; move toward market-oriented operating systems; reduce fiscal dominance; improve secondary bond and interbank markets; active open market operations to reduce excess liquidity; expand collateral frameworks. ### Exchange rate flexibility and financial stability - Exchange rate context: - Large official-parallel market premiums (Angola, South Sudan, Ghana); reliance on reserves over exchange rate flexibility. - Pass-through of exchange rate changes to inflation estimated at about 40 percent. - Recommendation: - Further exchange rate flexibility, barring balance-sheet vulnerabilities and alongside product and labor market reforms, to enhance resilience and structural transformation. - Financial stability and NPLs: - Macroprudential measures: restrictions on banks’ FX positions, higher reserve requirements, higher capital requirements (Angola, Ghana, Mozambique, Nigeria). - NPL reduction strategies: accelerate loss recognition, strengthen recovery actions, reform insolvency and debt enforcement, improve creditor rights, modernize insolvency regimes, improve credit information systems. - Establish permanent macroprudential buffers that can be relaxed in shocks. - IFRS 9 transition: - IFRS 9 effective worldwide in 2018; used in about four-fifths of sub-Saharan African countries. - Transitional capital adjustment periods: South Africa (3 years), Rwanda (4 years; provisioning for government securities at zero), Nigeria (4 years), Kenya (5 years). - South African assessment: 39 percent increase in credit impairment but no capital adequacy breaches (SARB [2018]). - Loss of correspondent banking relationships (CBRs): - Countries upgraded AML/CFT frameworks (Angola, Seychelles). - IMF regional initiatives and country data monitoring frameworks in response (Angola, The Gambia, Seychelles). ### Raising medium-term growth: constraints and reforms - Binding constraints: low productivity growth; limited physical capital accumulation; access to reliable electricity; rent seeking; informality; security; tax rates; access to credit. - Policy directions: enhance market contestability; level playing field between public/private and formal/informal firms; improve governance; deepen financial systems; leverage fintech/mobile money. - Mobile money: - Usage surged faster than other regions; mobile money accounts surpassed traditional deposit accounts in sub-Saharan Africa. - East Africa leads mobile money adoption (telecom-led regulatory model; examples: Kenya—Safaricom ~70 percent market share; Tanzania—Vodacom ~50 percent market share). ### Equality of opportunities and inclusive growth - Distributional facts: - Return to capital accrues 55 percent to nonfinancial corporates, 20 percent to households. - Some poverty and inequality progress: share of income of the highest 20 percent declined; middle-income earners’ share increased. - About 40 percent of people live on less than US$1.25 a day. - High gender inequality persists. - Policy recommendations for inclusion: - Facilitate labor movement out of government and agriculture; fiscal reform to mobilize revenue and reform subsidies; deepen financial inclusion; remove legal restrictions on women’s economic participation; narrow education gender gaps; use digital technologies to expand access. ### Ensuring efficient public investment and fiscal policies - Public investment: - Improve project planning, allocation, implementation; assess macroeconomic consequences of financing strategies; rebalance spending away from nonessential recurrent spending and subsidies toward social and development spending. - Growth-friendly fiscal policies: - Cut low-priority capital and recurrent spending while protecting social outlays; improve efficiency in goods and services; reduce subsidies; clean up payrolls; limit nonwage compensation. - Revenue mobilization: - Average revenue gap estimated at 3–5 percent of GDP. - Revenue advanced in 2018 by about 0.3 percent of GDP on average, mainly from higher-than-anticipated oil prices. - Successful past cases increased revenue by an average of 1¼ percent of GDP driven mostly by noncommodity revenue (examples listed in source). - Measures: broaden tax base (introduce/reform VAT in Angola, Senegal); bring informal sector into tax net (Senegal); reduce tax expenditures (Benin, Kenya); streamline tax exemptions. - SOE fiscal risks and PFM: - Improve SOE transparency and oversight (examples listed); restructure or privatize nonstrategic SOEs where appropriate (examples listed). - Address domestic arrears (Cabo Verde, Cameroon, Ghana, São Tomé and Príncipe, South Africa, Zambia); strengthen medium-term expenditure frameworks (Angola, Botswana); adopt TSA (Republic of Congo, Côte d’Ivoire); move to performance-based budgeting (Botswana). - Debt management: - Use debt buybacks and reprofiling to ease refinancing risks (example: Ghana’s buyback of the 2022 Eurobond with proceeds from 2018 Eurobond). - Align repayment currency with foreign exchange earnings (Seychelles); use multitranche Eurobond issuances to reduce bunching of external repayments. --- ### The Economic Consequences of Conflict (Chapter 2) - Prevalence and nature: - Around 30 percent of countries affected by conflict in 2017. - Conflict evolution: from traditional civil wars to non-state-based conflicts and terrorist targeting of civilians. - Key statistics and trends: - Number of conflict-ridden countries: averaged about 15 in 1990–99 (~35 percent); fell to nine in 2004–12; rose to 17 in 2016. - Verified conflict-related deaths in 1990s: at least 825,000. - Lowest deaths: about 2,200 in 2010; resurgence with average about 14,000 a year since 2014 (below the 1990s average of 82,000). - Sahel/Lake Chad Basin: during 2010–17, Lake Chad Basin accounted for 77 percent of Sahel conflict-related deaths and about 40 percent of all sub-Saharan Africa conflict deaths. - Median conflict duration: about four years; some countries experienced decades-long involvement (DRC 29 years; Nigeria 27 years). - Persons of concern from sub-Saharan Africa: rose from <5 million in 1980s to 18 million in 2017; refugees ~6 million and asylum seekers ~1 million in 2017. - Aggregate economic impacts: - Conflicts associated with large and persistent decline in per capita GDP and significant spillovers to nearby regions and countries. - Simple comparisons: real GDP growth about 2.5 percentage points lower where there is conflict; high-intensity conflicts worse. - Econometric finding: increase in conflict-intensity from no conflict to top quartile (29 deaths per million) → reduction in real GDP per capita growth of 3.2 percentage points a year. - Onset of high-intensity conflict lowers output per capita by 5 percent in year 1; about 7.5 percent after five years; counterfactual analyses imply per capita GDP may be 15–20 percent lower five years after conflict onset. - Spatial and spillover effects: - Conflicts often localized: on average only 40 percent of states within a country experience conflict-related deaths when country-level conflict exists. - Night-light evidence: conflicts with 100 fatalities associated with 17 percentage point lower night-light growth → ~6.5 percent lower real GDP growth at state level. - 100 fatalities in neighboring states within 500 km associated with ~2 percentage point reduction in growth in nearby states. - Fiscal implications: - Real tax revenues fall on average by over 10 percent in intensive conflict cases (about 2 percent of GDP). - Increase in conflict intensity associated with ~9 percent higher real military spending (about 0.6 percent of GDP) and ~9 percent lower real capital expenditures. - Net effect: fiscal deficit increase ~1.7 percent of GDP; public debt-to-GDP ratio increases by 9 percentage points during intense conflicts (up to 16 percentage points in first two years and almost 20 percentage points by year five in intense episodes). - Social impacts and vulnerable groups: - Education: primary school enrollment rates in intense-conflict cases almost 13 percentage points lower for girls and 9 percentage points lower for boys. - Children: malnutrition rates higher by ~8 percentage points in major-conflict countries; long-term effects on height, cognition, schooling, lifetime earnings. - Women: increased gender-based violence; constrained mobility and access to education and employment; in refugee camps one in six women among irregular migrants is a survivor of gender-based violence. - Policy guidance: - Prevent conflicts via inclusive economic development, institutional capacity building, and social cohesion. - For countries in conflict: protect social and development spending; maintain institutions; well-targeted and coordinated humanitarian aid and concessional financial assistance to provide relief and create room to respond despite fiscal pressures. - External assistance essential for countries suffering spillovers to protect displaced populations and relieve host-country strains. --- ### Is the African Continental Free Trade Area (AfCFTA) a Game Changer? (Chapter 3) - Agreement scope: - Eliminate tariffs on most goods; liberalize trade in key services; address nontariff obstacles; aim for continental single market with free movement of labor and capital. - Key findings and quantitative estimates: - Africa trade openness: about 53 percent of GDP in 1990 → 67 percent of GDP in 2017. - Intraregional trade: ~5 percent of total African imports in 1990 → ~12 percent in 2017. - Intraregional exports composition (2007–17): manufactured goods ~40 percent, minerals 44 percent, agricultural products 16 percent; exports to rest of world: ~75 percent minerals, 16 percent manufactured goods. - Eliminating tariffs on 90 percent of existing intraregional trade flows → increase regional trade by about 16 percent, or US$16 billion, over time. - Improving trade logistics and addressing poor infrastructure could be up to four times more effective in boosting trade than tariff reductions. - CGE and review findings: eliminating tariffs alone increases welfare up to 0.5 percent; combining tariff elimination with halving nontariff barriers increases welfare up to 0.6–3.8 percent and GDP by about 1 percent. - Nontariff bottlenecks and quantified impacts: - Logistics: bringing logistics quality to global average (about 19 percent improvement) → intraregional trade increase >12 percent. - Infrastructure: bringing infrastructure quality to global average (about 40 percent improvement) → intraregional trade increase ~7 percent. - Credit: 23 percent change to reach world mean; complementarity between infrastructure improvements and tariff reductions especially strong for landlocked countries. - Fiscal implications: - Customs revenue (2010–15): averaged about 2.5 percent of GDP (16 percent of total tax revenue). - Static estimated average revenue loss from eliminating all tariffs on intraregional imports (and VAT losses): about 0.3 percent of GDP; using MFN effective rates: about 0.5 percent of GDP. - Dynamic estimates accounting for trade diversion and GDP changes: average revenue loss about 0.5–0.8 percent of GDP; some countries could face losses as large as 3–5 percent of GDP. - Countries with potential large revenue losses should define clear domestic revenue mobilization policies when entering AfCFTA. - Distributional effects: - Trade openness effect on Gini: estimated decline of 0.2 percent in Gini per 1 percent increase in trade flows; a 16 percent trade increase could reduce Gini by as much as 3 percent from initial level. - Sectoral heterogeneity: agriculture-oriented economies may see inequality decline; manufacturing exporters may see inequality increase. - Policy recommendations to maximize benefits and manage costs: - Combine tariff reductions with policies addressing nontariff bottlenecks (customs modernization, trade logistics, infrastructure). - For less-diversified and agriculture-based economies: pair trade policies with structural reforms to improve agricultural productivity. - Invest in infrastructure, develop regional payment systems, consider swap arrangements across central banks and a multicurrency clearing center, harmonize supervision of pan-African banks with adequate prudential frameworks. - Improve access to credit, business climate, human capital, and coordinate liberalization of trade in services. - Mitigate temporary adverse distributional effects through targeted social measures and training programs to ease worker mobility. *Prepared by IMF staff teams as described in the source.* *Source: sreo0419 - Executive Summary (Regional Economic Outlook: Sub‑Saharan Africa, April 2019).* ### Executive Summary ..................................................................................................... ### sreo0419 - Executive Summary ### Two-Track Recovery Amid Elevated Uncertainty - Chapter title: "Two-Track Recovery Amid Elevated Uncertainty" (Chapter 1). - Major subsections listed: - Macroeconomic Developments and Prospects - Risks to the Outlook - Policies - Key figures and tables associated with Chapter 1 (selection): - 1.1. Sub-Saharan Africa: Real GDP per Capita, 1990–23 - 1.2. Global Growth Projections: Current versus October 2018 - 1.3. Real Commodity Price Indices: Volatility of Changes in Price Indices, 2000–08 and 2009–17 - 1.4. Sub-Saharan Africa: Goods Terms of Trade Growth, 2013–21 - 1.5. Sub-Saharan African Frontier and Emerging Market Economies: Volatility of Equity and Bond Flows, 2005–11 and 2012–18 - 1.6. Sub-Saharan Africa: Real GDP Growth, 2013–23 - 1.7. Sub-Saharan Africa: CPI Inflation - 1.8. Sub-Saharan Africa: Savings-Investment Balance, 2014–19 - 1.9. Sub-Saharan Africa: Reserve Buffers - 1.10. Sub-Saharan Africa: Overall Fiscal Balance, 2018–19 - 1.11. Cyclicality of Fiscal and Terms of Trade Cycles, 2000–17 - 1.12. Sub-Saharan Africa: Medium-Term Fiscal Plans, 2018–23 - 1.13. Sub-Saharan Africa: Debt Risk Status for PRGT Eligible Low-Income Developing Countries, 2008–17 - 1.14. Sub-Saharan Africa: Public Debt to GDP, 2011–23 - 1.15. Sub-Saharan Africa: Nonperforming Loan Ratio - 1.16. Sub-Saharan Africa: Nonperforming Loan Ratio and Real Nonfinancial Private Credit Growth - 1.17. Sub-Saharan Africa: Regulatory Capital Ratio - 1.18. Trade Tensions, China Slowdown, and Global Financial Conditions - 1.19. Sub-Saharan Africa and China Trade and Investment Flows, 2005–16 - 1.20. Net Financial Flows: Estimated Cumulative Impact of External Factors - 1.21. Sub-Saharan African Frontier and Emerging Market Economies: Maturity of International Sovereign Bonds - 1.22. Impact of Droughts on GDP - 1.23. Sub-Saharan Africa: Cumulative Impact of Intense Conflicts on GDP - 1.24. Sub-Saharan Africa: Interest Payments - 1.25. Sub-Saharan Africa: Public Investment Incremental Capital Output Ratio and Public Debt - 1.26. Sub-Saharan Africa: Exchange Market Pressure, 2017–18 - 1.27. Real GDP Growth Decomposition - 1.28. Selected Emerging Market and Developing Regions: Major Constraints to Business Operations - 1.29. Sub-Saharan Africa: Labor Productivity and Earnings Relative to Government Sector - Boxes in Chapter 1: - 1.1. Transitioning to International Financial Reporting Standard 9 - 1.2. Financial Development and Mobile Money Growth in Sub-Saharan Africa - 1.3. Sub-Saharan African Demographic Trend and Gender Gaps in Education ### The Economic Consequences of Conflicts - Chapter title: "The Economic Consequences of Conflicts" (Chapter 2). - Major subsections listed: - Prevalence and Intensity of Conflicts - Conflict and Economic Growth - Spatial Impact of Conflict - Fiscal Implications of Conflict - Table associated with Chapter 2: - 2.1. Sub-Saharan Africa: Share of Countries in Conflict by Geographic Region and Economic Classification - Key figures and analyses referenced: - 2.1. Selected Regions: Share of Countries in Conflict - 2.2. Number of Countries in Conflict, 1989–2017 - 2.3. Total Conflict-Related Deaths, 1989–2017 - 2.4. Sub-Saharan Africa: Countries in High-Intensity Conflict, 1989–2017 - 2.5. Number of Conflict-Related Deaths in Sahel Region, 1989–2017 - 2.6. Distribution of Conflict-Related Deaths in Sahel Region, 2011–17 - 2.7. Sub-Saharan Africa: Nature of Conflict - 2.8. Sub-Saharan Africa: Conflict Exit Probabilities - 2.9. Persons of Concern from Sub-Saharan Africa,1980–2017 - 2.10. Destination of Sub-Saharan African Refugees, 2017 - 2.11. Sub-Saharan Africa: Average Growth Rate by Country Type - 2.12. Sub-Saharan Africa: Conflict Episodes: Growth Rates and Cumulative GDP per Capita Losses - 2.13. Emerging Market and Developing Economies: Impact on Growth of Increase in Conflict Intensity - 2.14. Sub-Saharan Africa: Effect on Growth of Different Conflict Intensity Levels - 2.15. Impact on Growth of Increase in Conflict Intensity, Role of Institutions and Fiscal Fundamentals - 2.16. Impulse Response of per Capita GDP in Response to Shock to Conflict Intensity - 2.17. Sub-Saharan Africa: Impact of Conflict on Investment, Exports, and Productivity Growth - 2.18. Sub-Saharan Africa: Impact of Conflict on Social Indicators - 2.19. Sub-Saharan Africa: Index of Real GDP per Capita, Actual versus Forecast - 2.20. Sub-Saharan Africa: Index of Real GDP per Capita, Actual versus Synthetic Control - 2.21. Nigeria: Change in Conflict and Night-Light Growth, 2008–10 versus 2011–13 - 2.22. Sub-Saharan Africa: Conflict and Economic Activity at State Level Using Night-Light, Direct and Spillover Effects - 2.23. Sub-Saharan Africa: Impact of Increase in Conflict on Real Growth of Fiscal Variables - 2.24. Sub-Saharan Africa: Effect of Different Conflict Intensity Levels on Real Growth of Selected Fiscal Variables - 2.25. Sub-Saharan Africa: Impact on Debt-to-GDP Ratio of Increase in Conflict Intensity - 2.26. Sub-Saharan Africa: Cumulative Change in Debt-to-GDP Ratio during Conflict Episodes - Box in Chapter 2: - 2.1. The Impact of Conflict on Women and Children ### Is the African Continental Free Trade Area a Game Changer for the Continent? - Chapter title: "Is the African Continental Free Trade Area a Game Changer for the Continent?" (Chapter 3). - Major subsections listed: - Regional Trade Integration in Africa: Key Patterns - How Can the AfCFTA Support Regional Trade Integration in Africa? - Implications of the AfCFTA for African Countries: Welfare, Income Distribution, and Fiscal Revenue - Summary and Policy Implications - Key figures and analyses referenced: - 3.1. Africa: Trade Openness, 1990–2017 - 3.2. Intra-African and Trade Partners’ Trade Shares, 1990–2017 - 3.3. Intraregional Trade in Selected Regions, 2007–17 - 3.4. Trade Integration, 2015 - 3.5. Intra-African Trade versus Trade with the Rest of the World, 1990–2017 - 3.6. Regional Trade Integration and Export Sophistication, 2015 - 3.7. Grubel-Lloyd Intra-Industry Index across Regions, 2015 - 3.8. Africa: Average Tariff Rates by Regional Economic Community, 2010–17 - 3.9. Africa: Trade Integration in RECs - 3.10. Role of Country Features in Regions’ Trade - 3.11. Trade Gaps in African Subregional Economic Communities - 3.12. Africa: Intraregional Trade Gap by Industry - 3.13. Elasticity of Intraregional Trade to Tariffs by Industry - 3.14. Nontariff Trade Costs, 2015 - 3.15. Elasticity of Intraregional Trade - 3.16. Importance of Nontariff Bottlenecks - 3.17. Africa: Potential Increase in Regional Trade - 3.18. Infrastructure and Trade Logistics Gaps in Africa - 3.19. Additional GDP Impact of Trade Expansion under Structural Reform Scenarios, Agricultural Exporter - 3.20. Change in Gini Coefficients and Income Shares - 3.21. Customs Revenue in African Countries, 2010–15 - 3.22. Estimated Static and Dynamic Revenue Losses from Tariff Reductions ### Publication metadata and supporting materials - Document: Regional Economic Outlook: Sub-Saharan Africa, April 2019 issue (REO). - Statistical Appendix: pages indicated (Statistical Appendix begins on page 55). - Background Paper and Expanded Statistical Appendix: listed as Online. - Abbreviations and List of Country Abbreviations are provided (selected examples included in the document). - Acknowledgments list lead and team members, production, editing, and conventions used in the publication (including definitions for "billion", "trillion", and "basis points"). *Source: sreo0419 - Executive Summary (Regional Economic Outlook: Sub-Saharan Africa, April 2019).* ### Executive Summary ### Executive Summary ### Two-Track Recovery Amid Elevated Uncertainty - Aggregate growth in sub-Saharan Africa is set to pick up from 3 percent in 2018 to 3.5 percent in 2019 and stabilize at slightly below 4 percent over the medium term—or about 5 percent, excluding the two major economies, Nigeria and South Africa. - Duality in growth prospects: - About half of the region’s countries, mostly non-resource-intensive, are expected to grow at 5 percent or more, and see a faster rise in income per capita than the rest of the world on average over the medium term. - The remaining countries, comprising mostly resource-intensive countries, are expected to fall behind. These include Nigeria and South Africa, which are home to more than two-thirds of the region’s total population. - External and domestic headwinds: - Global expansion is losing momentum, including in key trading partners such as China and the euro area; trade tensions remain elevated; global financial conditions are volatile and have tightened somewhat relative to October 2018; and commodity prices are expected to remain low. - Domestic shocks: climate shocks likely to impact agricultural output in southern Africa; policy uncertainty is weighing on growth prospects in several countries. - Debt vulnerabilities remain elevated in some countries; reserve buffers are below levels typically considered adequate in more than half of the countries in the region. - High nonperforming loans continue to strain financial systems; weaknesses in public financial management are manifesting in large domestic arrears with potential effects on growth and domestic financial systems. - Policy implications: - Build fiscal space, enhance resilience to shocks, and foster an environment conducive to sustained, high and inclusive growth. - Accelerate reforms and calibrate the size and pace of policy adjustments to ensure consistency with credible medium-term macroeconomic objectives, available financing, and debt sustainability. - Shared policy priorities across country groups: - Step up revenue mobilization, ensure efficient public investment, strengthen public financial management, contain fiscal risks from state-owned enterprises, improve debt management and resolution frameworks, and enhance debt transparency. - Enhance exchange rate flexibility in countries outside monetary unions; strengthen monetary policy and financial systems. - Raise productivity and private investment while ensuring a more equitable sharing of benefits by enhancing market contestability, addressing salient constraints to business operations, deepening trade integration (notably through the African Continental Free Trade Area, AfCFTA), and improving access to financial services and basic services (including health and education). ### Macroeconomic Developments and Prospects - Global environment: - Global growth is estimated at 3.6 percent in 2018, 0.1 percentage point less than projected in the October 2018 WEO, and is expected to slow to 3.3 percent in 2019 before recovering to 3.6 percent in 2020. - Over the medium term, global growth is expected to remain below the average prior to the global financial crisis amid weak productivity growth and a declining labor force growth in advanced economies. - Volatility in commodity prices increased, with a sharp fall in oil prices during the last quarter of 2018; non-oil commodity prices have weakened partly due to subdued demand from China; markets are expecting most commodity prices to weaken further in 2019–20. - Global financial conditions tightened in the latter half of 2018; foreign investor appetite remained elevated, with issuances of international sovereign bonds by sub-Saharan African frontier markets reaching US$17.2 billion in 2018. - Nigeria accounted for about US$5.4 billion of Eurobonds issuance in 2018 and Angola about US$3.5 billion. - Borrowing cost at issuance for the 30-year maturity has increased (for example, by about 162.5 basis points for Nigeria over the past year). - Regional growth outlook: - Sub-Saharan Africa’s average growth (weighted by GDP in purchasing power parity terms) is expected to increase from 3.0 percent in 2018 to 3.5 percent in 2019 and 3.7 percent in 2020, about ¼ percentage point less than envisaged in the October 2018 WEO. - Heterogeneity persists between resource-intensive and non-resource-intensive countries. - Resource-intensive countries: - Nigeria: Growth was 1.9 percent in 2018 and is expected to reach 2.1 percent in 2019, driven by recovering oil production and a pickup in the non-oil economy after the election; under current policies growth is projected to plateau at about 2¾ percent over the medium term, implying that per capita income will remain broadly unchanged. - South Africa: Expected to grow at 0.8 percent in 2018 and 1.2 percent in 2019; under current policies growth is expected to stabilize at about 1.8 percent over the medium term, barely above population growth. - Non-resource-intensive countries: - Expected to continue growing rapidly at about 6.3 percent on average in 2019–20. - Ethiopia: Growth expected to accelerate to 7.7 percent as political uncertainty abates and reforms hand the reins of growth to the private sector. - Growth drivers in several countries: rapid public investment (Senegal) and private consumption (Côte d’Ivoire, Kenya). - Policy calibration and options: - Most countries have neutral or tight monetary policy stances and have announced fiscal consolidation plans which, if implemented, would contain debt trajectories. - Policies may need recalibration to support growth if downside external risks materialize; any shift must be consistent with credible medium-term macroeconomic objectives, available financing, and debt sustainability. - Fast-growing countries with elevated debt vulnerabilities should prioritize rebuilding buffers. - Slow-growing countries facing temporary shocks could seek additional financing to accommodate a more gradual adjustment; where additional financing is not available, design macroeconomic adjustment composition to minimize near- and medium-term growth damage. ### The Economic Consequences of Conflict (Chapter 2) - Conflict prevalence and nature: - Although conflict intensity in recent years is lower than in the 1990s, the region remained prone to conflicts, with around 30 percent of the countries affected in 2017. - Conflicts have evolved from traditional civil wars to non-state-based conflicts, including targeting of civilians through terrorist attacks. - Economic impacts: - Conflicts are associated with a large and persistent decline in per capita GDP and significant spillover effects on nearby regions and countries. - Fiscal strains: conflicts lower revenue, raise military spending, and shift resources away from development and social spending, aggravating economic and social costs. - Policy guidance: - Prevent conflicts by promoting inclusive economic development, building institutional capacity, and social cohesion. - For countries in conflict, focus on limiting loss of human and physical capital by protecting social and development spending. - Well-targeted and coordinated humanitarian aid and concessional financial assistance can provide relief despite fiscal pressures. ### Is the African Continental Free Trade Area (AfCFTA) a Game Changer? (Chapter 3) - Agreement scope: - The AfCFTA envisions elimination of tariffs on most goods, liberalization of trade of key services, addressing nontariff obstacles that hamper intraregional trade, and eventually creating a continental single market with free movement of labor and capital. - Potential effects: - The AfCFTA can significantly boost intra-African trade, particularly if countries tackle nontariff bottlenecks including physical infrastructure, logistical costs, and other trade facilitation hurdles. - More diversified economies and those with better logistics and infrastructure will benefit relatively more from trade integration. - Fiscal revenue losses from tariff reductions are likely to be limited on average, with a few exceptions. - Deeper trade integration is associated with a temporary increase in income inequality. - Policy recommendations to maximize benefits and manage costs: - In addition to tariff reductions, reform efforts should address country-specific nontariff bottlenecks. - For less developed and agriculture-based economies, combine trade policies with structural reforms to improve agricultural productivity and competitiveness. - Facilitate reallocation of labor and capital across sectors through active-labor market programs (training and job-search assistance) and measures that enhance competitiveness and productivity. - Bolster safety nets (income support and social insurance programs) to alleviate temporary adverse effects on the most vulnerable. *Prepared by a team led by Papa N’Diaye and coordinated by Nkunde Mwase; chapter authors include Seung Mo Choi, Jesus Gonzalez-Garcia, Cleary Haines, Andresa Lagerborg, Miguel Pereira Mendes, and Torsten Wezel.* ### 3.1 percent on average. ### 3.1 percent on average. ### Growth Outlook and Employment - For the region as a whole and based on current policies, medium-term growth is expected to plateau at about 3¾ percent, or 1¼ percent in per capita terms. - This growth path is well below what is needed to lift living standards to the average of the rest of the world and to help create the 20 million jobs a year needed to absorb new entrants to labor markets. ### Inflation - Average inflation in sub-Saharan Africa is projected to decline to 8.1 percent in 2019 from 8.5 percent in 2018, reflecting the large decline in global energy prices. - The pass-through of lower energy prices is expected to more than offset the lingering effects from past exchange rate depreciation. - Demand pressures have played a limited role in inflation dynamics; on average across countries, only a quarter of each year’s inflation manifests itself into the next year. ### External Buffers and Current Accounts - The (simple) average current account deficit is projected to widen to 7.3 percent of GDP in 2019 from 6.6 percent of GDP in 2018, mainly reflecting a larger deficit in non-resource-intensive countries and oil-exporting countries. - The deficit in oil-exporting countries is expected to widen owing to projected lower oil prices. - Public savings-investment deficits are about three times as large as for the private sector in non-resource-intensive countries. - A 1 percent change in the commodity terms of trade translates into a 0.3–0.6 percent of GDP change in the trade balance, with effects varying across countries and between positive and negative shocks. - Projected foreign exchange reserve buffers are expected to fall to 3.7 months of imports in 2019, weakening particularly in oil exporters and remaining below levels deemed adequate based on metrics derived from crisis experiences of emerging market and developing economies. ### Fiscal Consolidation and Terms of Trade Effects - Following a significant contraction in 2018 by about ½ percent of GDP, the (simple) average fiscal deficit in the region is expected to narrow to about 3.2 percent in 2019–20 and continue on a consolidation path beyond 2020. - The consolidation path primarily reflects the evolution of fiscal positions in oil-exporting countries, which are now expecting much lower oil revenue. - Fiscal procyclicality: an increase in the terms of trade above trend raises revenues in oil exporters during "good times," while a decline below trend in "bad times" causes revenues to fall by an even larger margin. - In the face of adverse terms-of-trade shocks, fiscal adjustment tends to be uneven and skewed toward revenues and capital expenditure, particularly for oil exporters. - Recurrent expenditures are much less sensitive to terms-of-trade cycles. ### Domestic Revenue Mobilization - Noncommodity revenue (excluding grants) increased as a ratio of GDP in 2018 in 25 countries, with the largest increases in the Democratic Republic of the Congo, Equatorial Guinea, Niger, Sierra Leone, and Togo. - Progress reflected: (1) tax policy reforms, including through lower exemptions; and (2) improvements in revenue administration (assigning tax identification numbers to commercial importers, improving the land registry, strengthening tax audits). - In some countries, non-commodity-related revenue remained broadly unchanged or declined (Botswana, Republic of Congo, Nigeria). - The estimated revenue gap for sub-Saharan African countries is 3–5 percent of GDP on average across countries and is not expected to be closed through the medium term. ### Public Debt Vulnerabilities - Sixteen sub-Saharan African countries are classified as having either a high risk of debt distress or being in debt distress (listed in source). - The remaining 19 low-income and developing countries have low to moderate debt vulnerabilities. - Average public debt in sub-Saharan Africa was estimated at close to 56 percent of GDP at the end of 2018, with wide heterogeneity across countries. - Under current consolidation plans, public debt ratios are expected to stabilize or even decline across country groupings on average, but trajectories are subject to significant uncertainties, including foreign exchange and rollover risk. - Fiscal uncertainties related to state-owned enterprises (SOEs) and the accumulation of public domestic arrears weigh on public balance sheets in several countries (Cameroon, Ethiopia, The Gambia, Mozambique). - In some cases SOEs pose significant fiscal and financial risks due to their relative economic size (Angola, Cabo Verde, South Africa) and have contributed to crowding out higher-priority public spending (Botswana, Cabo Verde, Madagascar). ### Banking Sector and Credit Growth - Nonperforming loans (NPLs) remain high in many countries and have continued to rise, particularly in some already-elevated cases (Central African Economic and Monetary Community [CEMAC]). - Systemwide NPL ratio in Ghana reached 18.2 percent at end-2018; write-offs are helping reduce the overhang there. - High NPL levels are weighing on credit growth and encouraging banks to hold more government bonds. - Despite some improvements in capital adequacy ratios, pockets of vulnerability remain; increases in capital ratios may be masked by zero risk weighting of government bonds if sovereign risk materializes. - Specific banking-sector concerns include foreign currency liquidity mismatches (Angola), high loan concentration (Benin, Equatorial Guinea, Eswatini, Malawi, Namibia), insufficient provisioning (Angola), and increased household and corporate debts (Tanzania). - In several countries, capital increases reflect measures to raise minimum capital requirements, resolve insolvent banks, or support illiquid ones (Ghana, Kenya); however, a number of small banks remain undercapitalized (Kenya, Nigeria, Togo), and in a few cases systemic banks remain undercapitalized as well. ### Risks to the Outlook - Near-term risks are mainly tilted to the downside and balanced over the medium term. - Key near-term downside risks: escalation and broadening of trade tensions, stronger-than-anticipated tightening of global financial conditions, greater policy uncertainty, and extreme weather given dependence on agriculture. - Growth-at-risk analysis indicates that heightened trade tensions, increased trade policy uncertainty in the United States, slower growth in China, lower commodity prices, and tighter global financial conditions could lower growth in sub-Saharan Africa by 2 percentage points in 2019 and 1½ percentage points in 2020. - Countries most affected by trade tensions would be commodity exporters and those with stronger linkages to China and global markets, and those with large refinancing needs. - China is the region’s largest trading partner, accounting for about 20 percent of total trade; about 70 percent of the region’s exports to China are commodities (particularly oil, minerals, and metals). - Imports from China amounted to US$67.5 billion in 2017, compared with US$13.7 billion imports from the United States and US$79.7 billion imports from Europe. - China provides significant lending and about 5 percent of total foreign direct investment into the region; direct investment is typically in metals and energy and flows primarily to resource-intensive countries. - A sharper-than-anticipated slowdown in China could affect the region significantly, mainly through trade linkages and demand for commodities, with attendant effects on commodity prices. - If trade differences are resolved without increasing distortionary barriers, improved sentiment and continued easing financing conditions could lift global growth with positive effects on sub-Saharan Africa. *Source: sreo0419 - 3.1 percent on average.* ### 1. Composition of Exports to China ### 1. Composition of Exports to China ### Channels and Quantified Impacts of a China Slowdown - Empirical estimates indicate that, over a one-year horizon, a 1 percent fall in industrial production in China leads to a 5–7 percent fall in metals and fuel prices (see IMF 2016b). - Effects can be compounded by: - A reduction in China’s investment in resource-intensive countries. - Increased volatility in global financial markets raising uncertainty about economic prospects in China. - Increased volatility could tighten financing conditions for the region’s frontier economies. ### Tighter Global Financial Conditions: Triggers and Risks - Stronger-than-anticipated tightening of global financial conditions could be triggered by: - Escalating trade tensions. - Higher-than-expected inflation in the United States. - A “no-deal Brexit” withdrawal of the United Kingdom from the European Union. - A deeper-than-envisaged slowdown in China. - Transmission and risks: - Tighter global financial conditions likely manifest as higher US interest rates, a stronger US dollar, and lower commodity prices. - Consequences include capital outflows and refinancing risks—particularly given the lumpy maturity of bonds—raising the likelihood of a balance of payments crisis in sub-Saharan Africa. - Second-round effects can be substantial, compounded by growing sovereign-bank linkages that increase banking sector vulnerability and fiscal challenges. - Evidence cited: - Figures indicate net financial flow declines and concentrated maturities of international sovereign bonds for frontier and emerging market economies. ### Climate Shocks: Magnitude and Regional Patterns - Climate shocks such as excessive rains or delayed rainfall can: - Lower agricultural output. - Increase food imports. - Reduce export and tax revenue capacity. - Increase public spending needs. - Quantified impacts: - Below-average precipitation can reduce growth by up to 1½ percentage points within the same year in extreme cases. - Cyclone Idai (March 2019) affected more than 2.6 million people and caused widespread infrastructure and farmland damage. - Regional vulnerability: - El Niño could cause droughts in southern Africa (Botswana, Lesotho, Malawi, Mozambique, South Africa, Zambia, Zimbabwe) and above-average rainfall in east Africa (Ethiopia, Kenya, Tanzania, White Nile Basin). - Southern African countries likely to suffer lower crop production; east Africa may see mixed effects (abundant production in some areas, flooding in others). ### Security and Conflict: Economic Costs - Heightened security risks have displaced millions; the number of internally displaced persons is estimated at 18 million in 2018 alone. - Economic impacts: - Intense conflicts could lower output by a cumulative 7½ percentage points through the medium term. - Large conflicts (involving 100 fatalities or more) in neighboring states within 500 kilometers are associated with a reduction in growth of about 2 percentage points. - Conflicts raise expenditure (including military spending) and lower revenue, placing strains on public finances and hindering government responses. ### Macro-Fiscal Challenges and Public Debt Dynamics - The period of strong growth since the mid-1990s stalled after 2015 for resource-intensive countries; the 2014 terms-of-trade shock (real oil price decline) is a major factor. - By 2023, more than half of sub-Saharan African countries won’t see a narrowing in their per capita income gap with the rest of the world. - Investment needs remain large (infrastructure, education, health) while public debt has risen for varied country-specific reasons. - Key concerns with rising debt: - Seven countries, mainly fragile and/or hard-hit by the commodity price slump, have been unable to service their debt and needed restructuring (Chad, Mozambique, Republic of Congo are included). - Median interest payment burden has doubled to about 10 percent of revenue since 2011. - Of the US$366 billion increase in debt between 2010 and 2017: - About two-thirds was due to market borrowing (subject to repricing risk). - About 43 percent was in foreign currency (sensitive to exchange rate movements). - 13 percent was from bilateral creditors. ### Policies: Priorities and Specific Recommendations - Overarching challenge: balance investing in human and physical capital, keep public debt manageable, and create jobs for some 20 million new entrants into the labor market each year. - Ensuring efficient public investment - Improve project planning, allocation, and implementation. - Assess macroeconomic consequences and risks of alternative financing strategies and public investment trajectories. - Baseline projections assume higher efficiency in public investment for countries with high debt. - Rebalance spending away from nonessential recurrent spending and subsidies toward social and development spending where appropriate. - Implementing growth-friendly fiscal policies - Cut low-priority capital and recurrent spending while protecting social outlays. - Improve efficiency in goods and services, reduce subsidies, clean up payrolls, and limit nonwage compensation. - Simulations: reducing income and gender inequality in WAEMU could boost real GDP per capita by 0.5 percentage point on average and reduce GDP growth volatility. - Stepping up revenue mobilization - Average revenue gap estimated at 3–5 percent of GDP. - Revenue advanced in 2018 by about 0.3 percent of GDP on average across countries, mainly from higher-than-anticipated oil prices. - Successful past cases increased revenue by an average of 1¼ percent of GDP driven mostly by noncommodity revenue (examples: Liberia, Mozambique, Rwanda, Senegal, Tanzania, Uganda). - Measures under consideration: broadening the tax base (introducing or reforming VAT in Angola, Senegal), bringing the informal sector into the tax net (Senegal), reducing tax expenditures (Benin, Kenya), streamlining tax exemptions via rules-based transparent processes. - Improving economic efficiency and containing fiscal risks from SOEs - Increased transparency: publishing SOE performance reports (Cabo Verde, Cameroon, Ghana). - Strengthen SOE oversight agencies (Angola, Ghana); audit SOE governance and operations (The Gambia, Niger, Seychelles); update legal frameworks (Cameroon, Guinea, Mozambique); outsource SOE management (Guinea-Bissau). - Restructuring options include resolving insolvent SOEs (Angola) and possible privatization of nonstrategic SOEs (Angola, Cabo Verde, Chad, Ethiopia, South Africa). - Reducing procyclicality of spending - Develop fiscal rules and fiscal stabilization funds to manage oil revenue and reduce procyclicality (Angola, Senegal, Uganda). - Strengthening public financial management (PFM) - Address large domestic arrears (Cabo Verde, Cameroon, Ghana, São Tomé and Príncipe, South Africa, Zambia). - Enhance medium-term expenditure frameworks (Angola, Botswana); adopt Treasury Single Account (Republic of Congo, Côte d’Ivoire); move to performance-based budgeting (Botswana); enforce internal controls (Angola, Uganda). - Improve capital project selection (Benin, Senegal, Seychelles, Tanzania) to enhance investment efficiency and reduce risks from SOEs and PPPs (Seychelles). - Improving debt management frameworks - Use debt buybacks and reprofiling to ease near-term refinancing risks (example: Ghana’s buyback of the 2022 Eurobond with proceeds from the 2018 Eurobond, Ghana’s first 30-year bond). - Better align repayment currency with foreign exchange earnings (Seychelles). - Use multitranche Eurobond issuances to reduce bunching of external loan repayments. - Caution: delayed buybacks with Eurobond proceeds can result in unnecessary carry costs. ### Strengthening Monetary Policy Effectiveness - The monetary transmission mechanism has strengthened overall but varies widely across countries. - Stronger transmission correlated with clear communication of policy objectives, instruments, and strategies; transparency reduced surprise policy decisions (Mozambique, South Africa). - Recent reversals in some countries (Kenya, Malawi, Nigeria) linked to: - Central bank financing. - Redirecting bank lending toward government securities (Malawi). - Crowding-out effects (Nigeria). - Lending rate caps reducing the signaling effect of the policy rate (Kenya). - Policy actions to enhance transmission: - Raise caps on interest rates. - Move toward more market-oriented monetary policy operating systems and reduce fiscal dominance. - Improve secondary bond and interbank markets. - Reduce excess liquidity via active open market operations. - Enhance interbank market transactions and address counterparty risk (new collateral mechanisms for bank refinancing operations in CEMAC, WAEMU). - Expand collateral frameworks to include all government securities (CEMAC, Botswana). *Regional Economic Outlook: Sub‑Saharan Africa (excerpt).* ### 1. TWO-TRACK RECOVERY AMID ELEVATED UNCERTAINTY ### 1. TWO-TRACK RECOVERY AMID ELEVATED UNCERTAINTY ### Monetary policy frameworks and central banks - Policy actions recommended or underway: - Bring short-term interest rates into positive territory in real terms and keep them there (especially in Angola). - 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. - Strengthen the independence of central banks. ### Enhancing real exchange rate flexibility - Context and constraints: - Lower external buffers have increased exchange rate pressures and exacerbated foreign exchange shortages. - Large premiums exist between official and parallel market exchange rates, particularly for oil exporters (Angola, South Sudan) and some other resource-intensive countries (such as Ghana). - Countries have generally relied more on reserves than on exchange rate flexibility. - Concerns limiting exchange rate flexibility include large foreign-currency-denominated liabilities, significant pass-through of exchange rate changes to inflation (estimated at about 40 percent), and limited responsiveness of output and exports to real exchange rate changes due to the small size of the manufacturing sector. - Recommendation: - Further exchange rate flexibility, barring balance sheet vulnerabilities and as part of broader product and labor market reforms, would enhance resilience and facilitate structural transformation. - In countries with de jure fixed exchange rate regimes, flexibility would mainly stem from relative price adjustments and require further structural reforms to enhance wage and price flexibility. ### Securing financial stability and addressing NPLs - Macroprudential measures implemented: - Restrictions on banks’ foreign exchange positions, higher reserve requirements, and higher capital requirements in countries including Angola, Ghana, Mozambique, Nigeria. - Measures to reduce nonperforming loans (NPLs) and strengthen borrower protections: - Strengthen creditor rights and reduce lengthy judicial processes for recovering collateral. - Halt net accumulation of public domestic arrears to the private sector (Equatorial Guinea). - Improve credit information systems and modernize insolvency regimes. - Implement financial education programs for medium-size corporates. - Provide adequate safeguards to borrowers, including customer protection measures. - Longer-term strategies and recommendations: - Implement comprehensive NPL reduction strategies: accelerate loss recognition, strengthen supervisory focus on recovery actions, and reform insolvency and debt enforcement frameworks to enable swift restructuring of distressed but viable borrowers. - Establish permanent macroprudential buffers (on top of a microprudential minimum) that can be relaxed at regulators’ discretion in the event of shocks to allow NPLs to be absorbed by capital while permitting continued provision of credit. - Progress and implementation challenges: - CEMAC adopted regulations on systemically important institutions, accelerated resolution of small microfinance institutions, and an emergency liquidity assistance framework. - WAEMU adopted new prudential rules aligned with Basel II/III principles. - Transitioning to IFRS 9 will require further strengthening of banks’ balance sheets because increased provisioning may require raising capital for many countries; the macro-financial effects during transition are uncertain. ### Transitioning to IFRS 9 (Box 1.1) - Key facts: - IFRS 9 became effective worldwide in 2018. - IFRS 9 is used in about four-fifths of sub-Saharan African countries. - The new standard shifts from incurred-loss provisioning (IAS 39) to a forward-looking expected credit loss framework, likely increasing provisions and potentially requiring banks to raise capital during transition. - Transitional arrangements cited: - South Africa: allowed adjustment of capital over three years. - Rwanda: allowed adjustment of capital over four years; set provisioning for government securities at zero. - Nigeria: allowed adjustment of capital over four years. - Kenya: allowed adjustment of capital over five years. - Evidence and concerns: - A quantitative assessment for South African banks found a 39 percent increase in credit impairment but no breaches of capital adequacy ratios (SARB [2018]). - In Rwanda, provision coverage ratios trended up after adopting IFRS 9, while credit growth remained lower than the 2017 average. - Causality from IFRS 9 adoption to credit growth remains hard to establish, particularly given transitional arrangements. ### Loss of correspondent banking relationships (CBRs) - Responses and risks: - Countries have upgraded anti-money-laundering/combating the financing of terrorism frameworks and made related legal and regulatory amendments (Angola, Seychelles). - Decline in CBRs has increased concentration in remaining relationships, posing financial stability risks if a remaining correspondent bank struggles to honor obligations. - Ongoing actions and initiatives: - Reforms to strengthen financial stability frameworks (for example, international capital adequacy requirements in Seychelles) are expected to reduce the risk of further CBR loss. - Authorities are engaging with correspondent banks and their supervisors to better understand reasons for losses (Seychelles). - The IMF has established regional initiatives to facilitate policy dialogue and identify solutions to CBR issues, including a high-level workshop on CBR withdrawal for Southern African Development Community (SADC) countries in 2018 and three more events covering all of Africa planned for 2019. - Some countries are implementing a data monitoring framework with IMF capacity support (Angola, The Gambia, Seychelles). ### Raising medium-term growth: constraints and reforms - Binding constraints to productivity and private-sector development: - Low productivity growth and limited physical capital accumulation relative to peers in Asia, developing Europe, and Latin America. - Salient constraints to business operations include access to reliable electricity provision, rent seeking, informal sector practices, security concerns, tax rates, and access to credit. - Policy directions to raise growth: - Enhance contestability of markets and nurture a dynamic private sector by removing major constraints to business operations. - Level the playing field between public and private firms and between formal and informal firms, improve governance, and foster trade openness and integration. - Deepen financial systems and improve access to finance, particularly for small and medium-size enterprises. - Leverage fintech (for example, mobile money) for greater financial inclusion. - Estimated impact of regional trade integration: - Further trade integration through the AfCFTA could boost intra-African trade and efficiency, with an estimated 1 percent increase in GDP levels if tariffs are eliminated and nontariff barriers are halved. ### Deepening financial markets and inclusion - Measures and country actions: - Promote credit/collateral registries (Angola, Benin, Tanzania). - Enhance financial literacy (Seychelles). - Develop regional capital markets and leverage fintech/mobile money. - Mobile money and financial development (Box 1.2): - Financial development—excluding mobile money transactions—has grown faster in sub-Saharan Africa than in other regions, though overall levels remain lower than other economies. - During 2011–16, financial markets development outpaced financial institutions development; progress was stronger among countries with initially lower financial development (Burkina Faso, Chad, Democratic Republic of the Congo, Republic of Congo, Côte d’Ivoire, Gabon, Sierra Leone, Togo). - Usage of mobile money accounts surged faster than in other regions; mobile money accounts have surpassed traditional deposit accounts in sub-Saharan Africa. - Country examples for mobile money accounts per 1,000 adults are shown for: BOT, ESW, GHA, GIN, KEN, MDG, RWA, UGA, ZMB, ZWE, BEN, BFA, BWA, CAF, CIV, CMR, COD, COG, GNB, LSO, LBR, MLI, MUS, MOZ, NGA, NER, SEN, SWZ, SYC, TGO (figures displayed in source charts). ### Equality of opportunities and inclusive growth - Distributional observations: - Most of the return to capital in sub-Saharan Africa accrues to nonfinancial corporates (55 percent), while households receive 20 percent, and the households’ share has been declining over time. - Within corporates, firms with high levels of state ownership appear to enjoy higher benefits, including greater access to credit. - Some progress toward greater equity: the share of income earned by the highest 20 percent of the income distribution has declined, and the share of the “middle-income earners” has increased, suggesting a rising middle class. - Persisting challenges: - Some 40 percent of people in sub-Saharan Africa still live on less than US$1.25 a day. - The region has among the highest levels of gender inequality in the world. - Policy recommendations to foster inclusion: - Facilitate movement of labor toward sectors other than government and agriculture to generate efficiency gains. - Undertake fiscal reform, including domestic revenue mobilization and subsidy reform, to create space for targeted transfer mechanisms to the poor and efficient spending on physical and human capital. - Deepen financial systems with greater financial inclusion to reduce inequalities. - Enhance women’s participation in the economy, including abolishing legal restrictions for women to open bank accounts or accept jobs, and address inequality in education to strengthen inclusivity of growth and growth potential. - Promote flexible education systems and ensure full enrollment, with recourse to digital technologies to overcome bottlenecks. *Summary prepared from "1. TWO-TRACK RECOVERY AMID ELEVATED UNCERTAINTY" (sreo0419).* ### 1. Sub-Saharan Africa ### 1. Sub-Saharan Africa ### Two-track recovery, mobile money, and infrastructure lessons - East Africa has the highest mobile money usage in sub-Saharan Africa and developed an infrastructure that built on latent demand for mobile financial services. - Regulatory model: - East African countries favored a telecom-led regulatory model in which the telecom provider works with the financial regulator to establish mobile payments infrastructure. - The telecom-led model has proved more successful in attracting users than the bank-led model used in other sub-Saharan African countries. - Market structure and interoperability: - Kenya: Safaricom has a share of nearly 70 percent of the market. - Tanzania: Vodacom has a market share of close to half. - Having a large market share allowed most mobile payment users to operate on a single platform, though this raises concentration and potential stability concerns. - Mobile money interoperability is increasingly allowing transactions between users of different service providers. - Identification systems: - East African countries, particularly in the East African Community, have national identification systems that facilitate faster mobile payment adoption rates and enable more secure transactions. ### Demographic trends and gender gaps in education - Population projections and dependency: - The region’s population could double in the next three decades, and quadruple by the end of the century. - The large entry of young people into the labor force is associated with a decline in the dependency ratio as fertility rates are expected to decline from current levels. - Conditions to harness a demographic dividend: - Declining dependency ratios need to be complemented by creating jobs to absorb new entrants and scaling up human capital through improvements in health and education. - Gender gaps in education: - While gender gaps in education have narrowed substantially in many countries, some still see fewer than three girls enrolled in secondary education for every four boys in some sub-Saharan African countries. - Policies associated with narrower education gaps include higher public spending on education; better infrastructure (in particular, improvements in sanitation facilities and women’s health); and, in some cases, raising the legal age of marriage for men and women. - These policies should be complemented by measures to level the playing field for economic participation by women, including in the context of rapid technological advances, including automation. - Overall, such measures could result in higher productivity growth and stability gains. ### The economic consequences of conflicts — key findings - Scope of analysis: - Based on country- and state-level data for a sample of 45 sub-Saharan African countries during 1989–2017. - Trends in conflict: - After peaking in the late 1990s, the number of conflict incidents and deaths fell substantially during the 2000s. - Since 2010, there has been a resurgence in conflict-related deaths, especially in the Sahel region, although they remain below 1990s levels. - The nature of conflicts has changed, with traditional civil wars being largely replaced by non-state-based conflicts, including the targeting of civilians through terrorist attacks. - Macroeconomic impact: - On average, annual growth in countries in conflict is about 3 percentage points lower. - The cumulative impact on per capita GDP increases over time and is mainly attributable to intense conflicts (those with at least five conflict-related deaths per million people). - Conflicts affecting key economic/commercial hubs within a country have a larger effect on macroeconomic growth than conflicts located in the periphery. - Stronger institutions and fiscal fundamentals help mitigate the adverse economic impact of conflicts. - Counterfactual analysis suggests conflicts imply a drop in real GDP per capita of 15 to 20 percent over five years compared with a no-conflict scenario. - Local and spillover effects: - Satellite-based night-lights data at the state level show a statistically significant reduction in night-light activity during conflicts, indicating a strong local impact on economic activity. - State-level data indicate strong spillover effects: growth is lower in nearby regions, with the spillover effect being one-third of the effect in the home state. - Channels of impact: - Decreased investment, trade, and productivity. - Human and physical capital destruction, including through forced displacement and effects on education and health care. - These factors lead to a persistent decline in productive capacity. ### Fiscal implications of conflict - Revenue and spending: - Real tax revenues fall, on average, by over 10 percent in intensive conflict cases relative to no-conflict cases. - On average, conflicts do not show a statistically strong effect on total public spending, but the composition shifts away from capital expenditures toward military spending. - Fiscal balance and debt: - The fiscal balance deteriorates and there is a sharp increase in public debt over the conflict period. - Policy implications for countries in conflict: - Focus on limiting loss of human and physical capital by protecting social and developmental spending. - Try to maintain well-functioning institutions to lessen long-term economic effects. - Well-targeted and coordinated humanitarian aid and concessional financial assistance could provide relief and create room to respond to the ravaging effects of conflicts. - Assistance may be essential for countries suffering spillover effects to protect displaced populations and alleviate economic and social strains in host countries. ### Prevalence and intensity—selected statistics and historical context - Number of countries affected: - The number of conflict-ridden countries averaged about 15 during 1990–99 (about 35 percent of the total number of countries in the region). - The average number of countries affected dropped to nine during 2004–12. - The trend reversed with the number of countries in conflict reaching a peak of 17 in 2016. - Conflict-related deaths: - Verified conflict-related deaths in the 1990s totaled at least 825,000 (over two-thirds of global conflict deaths). - The number of conflict-related deaths in the region fell sharply, reaching its lowest level of about 2,200 deaths in 2010. - A resurgence implies an increase: conflict-related deaths have averaged about 14,000 a year since 2014 (well below the average of 82,000 seen during the 1990s). - Conflict intensity: - In the 1990s, eight sub-Saharan African countries, on average, had a ratio of conflict-related deaths to population in the top quartile of the world distribution; by 2010 that number fell to zero. - Since 2013, about four countries have (on average) experienced intense conflict that places them in the top quartile (including Central African Republic, Democratic Republic of the Congo, South Sudan, and several Sahel countries). - The top quartile corresponds to about 29 conflict-related deaths per million. *REGIONAL ECONOMIC OUTLOOK: SUB-SAHARAN AFRICA* ### Annex Figure 2.4). Among the different types of ### sreo0419 - Annex Figure 2.4). Among the different types of ### Nature of Conflict - Conflict remains more prevalent among oil exporters and least prevalent among non-resource-intensive countries. - Large-scale, state-based conflicts (examples: Angola, Eritrea, Ethiopia, Sierra Leone) largely drove conflict-related deaths in sub-Saharan Africa during the pre-2000 period. - Since the pre-2000 period, the share of non-state-based conflict deaths has increased significantly; non-state-based conflicts include conflicts between two nongovernmental armed groups and one-sided violent events targeting civilians. - The number of terrorist incidents has increased in the Sahel region and elsewhere, with the Democratic Republic of the Congo, Kenya, and Nigeria affected the most. - Definitions and classifications: - Uppsala Georeferenced Dataset classifies conflicts as state-based, non-state-based, and one-sided; in this chapter non-state-based jointly refers to the latter two categories. ### Geographic and Resource Patterns - Table 2.1: Share of countries in conflict (percent of country-years in conflict) - Geographic regions, Pre 2000 / Post 2000: - Central Africa: 42.4 / 36.4 - Eastern Africa: 35.2 / 27.4 - Western Africa: 35.2 / 24.4 - Southern Africa: 20.0 / 1.1 - By resource intensity, Pre 2000 / Post 2000: - Oil exporters: 52.0 / 39.9 - Other resource-intensive countries: 35.2 / 25.2 - Non-resource-intensive countries: 29.3 / 20.5 ### Sahel Region Trends - The Sahel region has experienced a significant increase in violence in the post-2000 period, especially since 2010. - Lake Chad Basin (states and areas: Yobe, Borno, Adamawa in Nigeria; Diffa cercle in Niger; Lac region in Chad; Extreme-Nord in Cameroon) saw a particularly significant increase in violence during 2010–17. - During 2010–17, the Lake Chad Basin accounted for 77 percent of all conflict-related deaths in the Sahel, and about 40 percent of all conflict-related deaths in sub-Saharan Africa. - Figure 2.5 shows Number of Conflict-Related Deaths in Sahel Region, 1989–2017 (visual data not reproduced here). ### Persistence of Conflict - Conflict in sub-Saharan Africa tends to be persistent; median conflict duration in the region is about four years. - Some countries experienced very long involvement: - Democratic Republic of the Congo: 29 years of involvement in some form of conflict during the sample period. - Nigeria: 27 years of involvement in some form of conflict during the sample period. - Probability of exiting conflict increased from 20 percent in the pre-2000 period to about 24 percent post-2000 (aggregate trend). - Exception: Sahel region conflicts became substantially more persistent in the post-2000 years. ### Population Displacement - Persons of concern from sub-Saharan African countries (United Nations–recognized: IDPs, asylum seekers, refugees) rose from fewer than 5 million in the 1980s to 18 million in 2017. - As of 2017: - Close to 6 million refugees and 1 million asylum seekers originated in sub-Saharan Africa. - The majority of these refugees and asylum seekers had resettled within the region. - Refugees constituted more than 3 percent of the population of Chad and Uganda in 2017. - Internally displaced people (IDPs) in the region rose from fewer than 2 million to 10 million over the past two decades. - Countries with the most IDPs in 2017: - Democratic Republic of the Congo: 4.4 million - South Sudan: 1.9 million - Nigeria: 1.7 million - Comparisons: Syria and Iraq IDP figures in 2017 were 6.2 million and 2.6 million, respectively. ### Conflict and Economic Growth: Aggregate Impacts - Simple comparisons indicate real GDP growth is, on average, about 2.5 percentage points lower where there is conflict. - Growth is lowest in cases of high-intensity conflict. - Commodity exporters (especially non-oil commodity exporters) have suffered the most in conflict cases. - When the onset of intense conflict episodes can be clearly identified: - The conflict’s effect on growth is most pronounced in the first year, then gradually declines. - Real GDP per capita is 12 percent lower five years after the onset of the conflict (based on median of 11 conflict episodes). ### Econometric Findings - An increase in the conflict-intensity measure from no conflict to the top quartile (29 conflict-related deaths per million people) is associated with a reduction in real GDP per capita growth of 3.2 percentage points a year. - Effect magnitude by conflict intensity (quartiles relative to no conflict): - First quartile: (visual data in Figure 2.14; significance indicated) - Second quartile: (visual data) - Third quartile: (visual data) - Fourth quartile: (visual data) - Note: The effect stems mostly from more intense conflicts (those involving at least five conflict-related deaths per million people). - Both state and nonstate conflicts have a statistically strong impact on growth. ### Conditional Effects: Institutions and Fiscal Fundamentals - Conflict impacts on growth are conditional on macroeconomic characteristics at onset: - Institutional quality: - Increase in conflict intensity is associated with about 1.5 percentage points lower growth in countries with relatively strong institutions (top quartile of Institutional Quality Index). - The same increase is associated with about 3 percentage points lower growth where institutions are weaker (bottom quartile). - Fiscal fundamentals: - A country with a negligible fiscal deficit experiences a growth decline of 2.4 percentage points as conflicts break out. - A country with a fiscal deficit of 5 percent of GDP experiences a growth decline of 3.4 percentage points as conflicts break out. ### Dynamics and Magnitude over Time - Onset of a high-intensity conflict (29 conflict-related deaths per million or 75th percentile) estimated impacts: - Lowers output per capita by 5 percent in the first year. - Effect reaches about 7.5 percent after five years and remains statistically significant. - Effects of conflicts are dynamic and last at least five years after onset. ### Channels of Disruption - Key channels through which conflicts affect the economy: - Investment: Increase in conflict intensity from no conflict to the top quartile associated with lower real investment growth of 4.5 percentage points. - Private sector credit: Decline driven partly by a decline in private sector credit growth. - Exports: Conflicts reduce export growth by 5.5 percentage points. - Productivity: Conflicts reduce productivity growth by 1.3 percentage points. - Contributing factors to these channel effects include: - Greater security concerns hindering business operations. - Disruption of traditional trade routes (example: Lake Chad Basin and the Boko Haram insurgency). - Destruction of human capital and physical infrastructure. - Displacement of skilled labor. - Disruption and weakening of institutions. - Rise in economic and political uncertainty delaying long-horizon investment. ### Social Well-Being Impacts - Education: - Primary school enrollment rates in intense-conflict cases are almost 13 percentage points lower for girls and 9 percentage points lower for boys compared with nonconflict cases. - Health: - Life expectancy is significantly lower during conflicts, partly due to direct conflict-related deaths. - Other health indicators, such as maternal mortality, also deteriorate. - Women and children are often disproportionately affected, with higher malnourishment rates among children noted. *Italic: Source — Content extracted from sreo0419 (Regional Economic Outlook: Sub-Saharan Africa chapter "The Economic Consequences of Conflicts").* ### Annex 2.1 for details. The 10 cases include all the episodes listed in Annex Table 2.9 except Liberia (1990), as WEO pro ### sreo0419 - Annex 2.1 for details. The 10 cases include all the episodes listed in Annex Table 2.9 except Liberia (1990), as WEO pro ### Permanent output losses - At conflict onset (t = 1), the actual median growth rate falls to minus 6 percent, versus the projected growth rate of almost 1 percent—implying a decline in real GDP per capita of about 7 percent (Figure 2.19). - Five years after the conflict began: - Per capita GDP is, on average, 8 percent below its preconflict level compared with a projected increase of 7 percent—suggesting a decline in per capita GDP of about 15 percent as a result of the conflict. - Synthetic control results: - Five years into the conflict, the synthetic control group saw an increase in per capita GDP of 12 percent on average, compared with a decline of 10 percent in the conflict cases (Figure 2.20). - Counterfactual summary: - Counterfactual analysis suggests that real GDP per capita may be as much as 20 percent lower five years after the start of a conflict compared with a no-conflict scenario. ### Spatial impact of conflict - Conflicts are often localized: conditional on a country being in conflict, on average only 40 percent of states within the country experience conflict-related deaths (Annex Figure 2.14). - Night-light proxy evidence: - Economic activity in northeast Nigeria declined after 2010, coincident with increased violence from the Boko Haram insurgency (Figure 2.21). - Conflicts that result in 100 fatalities (around the median at the state level) are associated with, on average, a 17 percentage point lower growth in night-light activity in sub-Saharan Africa—translating into about 6.5 percent lower real GDP growth at the state level (Figure 2.22). - Spillover effects: - Controlling for state and time fixed effects, 100 fatalities in neighboring states within 500 kilometers are associated with about a 2 percentage point reduction in growth; the effect is statistically insignificant for more distant states (Figure 2.22). ### Fiscal implications of conflict - Revenue effects: - An increase in conflict intensity from no conflict to the top quartile is associated with a decline in total revenue of about 12 percent in real terms or about 2 percent as a share of GDP (Figure 2.23). - Expenditure composition: - An increase in conflict intensity is associated with, on average, 9 percent higher real budgetary military spending (or about 0.6 percent of GDP), while real capital expenditures decrease by about 9 percent. - Total public spending does not increase significantly during conflicts, implying a shift from growth-friendly capital expenditures to military spending. - Fiscal balance and debt: - The net effect of an increase in conflict intensity is an increase in the fiscal deficit of about 1.7 percent of GDP. - The ratio of public debt to GDP increases by an average of 9 percentage points during intense conflicts. - For intense-conflict episodes, the public-debt-to-GDP ratio increases 16 percentage points of GDP in the first two years, with the effect increasing to almost 20 percent of GDP by the fifth year (Figure 2.26). - Intensity gradient: - Fiscal effects stem mainly from high-intensity conflicts: both real revenue and real capital expenditures fall significantly when conflict intensity is in the top quartiles, whereas military spending increases (Figure 2.24). ### Social consequences and vulnerable groups (Box 2.1) - Children: - Malnutrition rates are higher by approximately 8 percentage points for children in major-conflict countries compared with nonconflict countries. - Exposure to conflict has been shown to affect children's height in Burundi, Côte d’Ivoire, and Nigeria; long-term effects include lower cognitive performance, school enrollment, and lifetime earnings. - Surviving child soldiers in Uganda were found to attend school for one year less than children who were not soldiers, with a significant impact on later earnings. - Women: - Women are more likely to experience gender-based violence during conflicts; gender-based violence and trafficking are used to subjugate civilian populations. - Insecurity constrains movement of girls and women, limiting access to schools and employment opportunities. - Women in refugee camps are particularly vulnerable: one in six women in refugee camps and among irregular women migrants is a survivor of gender-based violence. - Policy implication from Box 2.1: - Protecting children and women during conflicts could help mitigate long-term adverse economic effects of conflicts. ### Conclusions and policy recommendations - Key findings: - There has been an uptick in conflicts in recent years in sub-Saharan Africa after declines in the early 2000s. - Conflicts impose large economic costs domestically and on neighboring states, with costs increasing with conflict intensity due to destruction of human and physical capital, reduced investment, trade, and productivity. - Conflicts reduce revenue, shift spending away from capital to military expenditures, and increase public debt—jeopardizing socioeconomic stability and increasing risk of prolonged conflict. - Prevention and mitigation priorities: - Preventing conflicts is imperative; economic and structural factors associated with higher likelihood of conflict include low income levels, poor growth outcomes, weak state capacity, and inequality of opportunity—especially across ethnic, religious, and regional groups. - For countries in conflict, focus on limiting loss of human and physical capital by protecting social and development spending and trying to maintain well-functioning institutions to lessen long-term economic harm. - Well-targeted and coordinated humanitarian aid and concessional external assistance can help create room to respond to conflict effects despite fiscal pressures. - External assistance may be essential for countries suffering spillover effects to protect displaced populations and alleviate economic and social strains in host countries. *IMF Regional Economic Outlook: Sub-Saharan Africa (excerpt).* ### 3. Is the African Continental Free Trade Area a Game ### 3. Is the African Continental Free Trade Area a Game Changer for the Continent? ### Key findings - Intraregional trade in Africa has expanded and become more diversified, containing higher value-added goods and a sizable share of manufactured products (for example, motor vehicles and clothing). - Significant opportunities for further regional trade integration remain after controlling for lower income levels, smaller economic size, and longer distances compared with other regions. - Both structural features (requiring long-term change) and policy-related factors (tariffs, trade regulations, regulatory requirements) limit African countries’ ability to trade relative to peers. - Tariffs and, more important, nontariff bottlenecks currently limit intraregional trade integration; reducing tariffs alone has proven insufficient. - Eliminating tariffs on 90 percent of existing intraregional trade flows—the most ambitious target under the AfCFTA—would increase regional trade by about 16 percent, or US$16 billion, over time. - Improving trade logistics and addressing poor infrastructure could be up to four times more effective in boosting trade than tariff reductions. - Policies to reduce nontariff bottlenecks, particularly poor trade logistics and infrastructure, should be central to efforts to foster deeper trade integration in Africa. - Deeper trade integration may unevenly affect countries: average fiscal revenue losses from lower tariffs are likely limited, but may be significant in a few countries that still apply high export tariffs; temporary adverse effects on income distribution could arise, especially in more diversified economies with large shares of skilled labor. - Adjustment measures—structural reforms for agriculture-based economies, revenue mobilization in some countries, and targeted social and training programs—are recommended to ensure inclusive sharing of integration benefits. ### Regional trade integration: patterns and trends - Africa’s trade openness (imports and exports of goods and services) increased from about 53 percent of GDP in 1990 to 67 percent of GDP in 2017, after peaking around 2011. - Total imports (and exports) of services rose from US$27 billion (US$20 billion) in 1990 to about US$90 billion (US$89 billion) in 2017. - Intraregional trade rose from approximately 5 percent of total African imports in 1990 to about 12 percent in 2017 (noting that these statistics understate actual intraregional trade because of widespread informal cross-border trade). - By 2017, trade with African countries was surpassed only by trade with the European Union and with China. - Intraregional exports are more diversified than exports to the rest of the world: manufactured goods accounted for about 40 percent of intraregional trade during 2007–17, minerals 44 percent, and agricultural products 16 percent; by contrast, exports to the rest of the world averaged about 75 percent minerals and 16 percent manufactured goods during 2007–17. - Trade hubs have emerged (measured as share of total regional imports): Côte d’Ivoire, Kenya, Senegal, and South Africa; South Africa is the source of about 35 percent of all intraregional imports in Africa and about 40 percent of intraregional manufacturing imports. - Some large economies (Algeria, Egypt, Nigeria), which collectively represent about half of the region’s total GDP, account for a limited share of regional trade (about 11 percent). ### Heterogeneity across subregions and sectors - Intraregional trade in Africa is broadly in line with emerging market and developing regions but much lower than in advanced free trade areas (for example, ASEAN, NAFTA). - Intra-industry trade in Africa is lower than in other regions, signaling less regional value-chain integration. - Countries with more diversified economies tend to trade relatively more within the region; export sophistication is associated with higher intraregional exports. - Several RECs (for example, CEMAC, AMU, COMESA, ECOWAS) trade less than top-performing RECs, indicating scope for additional subregional integration. - Trade between countries in different RECs remains limited, reflecting relatively high tariffs (about 12–15 percent on average) and complications from overlapping REC memberships and differing trade rules (for example, rules of origin). ### Role of tariffs and nontariff trade costs (REC experience) - Many RECs apply near-zero preferential tariffs within the community; 75 percent of intraregional trade took place in five RECs in 2017, with the SADC accounting for half of such trade flows. - The impact of tariff reductions has been uneven across RECs: in some RECs (for example, SADC) trade flows spiked after tariff reductions, whereas in others (for example, CEMAC) tariff reductions were not associated with larger subregional trade flows, implying binding nontariff constraints. - Some RECs with limited trade also face high nontariff trade costs and relatively undiversified exports. - Improving customs services, trade logistics, and infrastructure quality matters more for boosting trade—small improvements in nontariff barriers can have sizable effects and reinforce tariff liberalization, particularly in landlocked and low-income countries. ### Empirical assessment of AfCFTA potential - Gravity-equation estimates covering 148 countries during 2000–15 suggest African countries trade less than comparable countries in other regions after accounting for size, development, distance, and cultural proximity; remaining gaps reflect structural and policy-related features (tariffs, poor logistics and infrastructure quality, limited credit). - Eliminating tariffs on 90 percent of existing intraregional trade flows would increase regional trade by about 16 percent, or US$16 billion, over time. - Complementary policies to address nontariff bottlenecks are crucial: improving trade logistics and infrastructure could be up to four times more effective than tariff reductions in boosting trade, and reducing nontariff obstacles increases the effectiveness of tariff reductions. ### Policy recommendations and measures to share benefits - Combine tariff reductions with policies addressing nontariff bottlenecks (customs modernization, trade logistics, infrastructure improvements) to maximize AfCFTA benefits. - For less-diversified and agriculture-based economies, pair trade policies with structural reforms to improve agricultural productivity and strengthen competitive advantages. - In countries facing fiscal revenue losses from tariff reductions, implement measures to mobilize domestic revenues as needed. - Mitigate temporary adverse distributional effects through targeted social measures (for example, income support) and training programs to ease worker mobility across firms and industries and promote employment. - Prioritize policies that help landlocked and low-income countries, where nontariff constraints are particularly binding. *Prepared by a team led by Geremia Palomba, coordinated by Reda Cherif and Yunhui Zhao, with Russell Green, Salifou Issoufou, Thomas McGregor, Adrian Peralta-Alva, Amadou Sy, Bruno Versailles, and Jason Weiss; research assistance by Hilary Devine and Miguel Pereira Mendes.* ### 3. IS THE AFRICAN CONTINENTAL FREE TRADE AREA A GAME CHANGER FOR THE CONTINENT? ### 3. IS THE AFRICAN CONTINENTAL FREE TRADE AREA A GAME CHANGER FOR THE CONTINENT? ### Empirical findings on intraregional trade and tariffs - Intraregional trade in goods such as food, forestry products, other primary products, and manufactured products is lower than predicted by the gravity model, indicating room for further trade expansion in these industries. - Regional Economic Communities (RECs) and near-zero preferential tariffs have positive effects on trade, but intraregional trade gaps persist, reflecting significant nontariff bottlenecks and differing trade regimes across communities. - Under the AfCFTA, countries are expected to eliminate tariffs on 90 percent of products; targeting tariff lines could yield tariff reductions as low as 15 percent only in terms of import values (UNECA 2018). - Empirical gravity-model analysis indicates: - Eliminating tariffs on 90 percent of currently taxed intraregional trade flows would increase intraregional trade by about US$16 billion or about 16 percent over recent average levels. - Estimated elasticity of trade flows to tariffs in Africa is somewhat limited, but an extensive reduction in tariffs, as planned under the AfCFTA, may have a sizable overall effect, with more limited tariff reductions producing smaller effects. ### Nontariff bottlenecks: magnitude and key channels - Distance is a greater barrier to intraregional trade in Africa than in other regions, suggesting non-tariff factors make trading goods particularly costly. - Major nontariff constraints include poor trade facilitation services (logistics and transportation infrastructure), border processes, customs practices, quotas, licenses, complex or dissimilar rules of origin, sanitary/phytosanitary and technical barriers, and an inadequate business and regulatory environment. - African countries have among the highest nontariff trade costs in the world (2015 tariff-equivalent measures). - Augmented gravity-model results find that logistics and infrastructure, along with access to credit and the business environment, play a stronger role than tariffs in hindering intraregional trade. - Machine-learning and principal component analysis confirm trade logistics are the most important nontariff factor for international trade, followed by infrastructure, credit, education, and the business climate. ### Quantified impacts of improving nontariff factors - Logistics: Bringing the quality of logistics to the global average (an improvement of about 19 percent) would lower the cost of cross-border movement of goods and increase intraregional trade by over 12 percent. Improving customs services, including clearance procedures and brokerage services, is particularly important. - Infrastructure: Bringing the quality of infrastructure to the global average (an improvement of about 40 percent) would spur a 7 percent increase in intraregional trade flows. - Credit/business climate/human capital: Further financial deepening to a level comparable to the global aggregate would support a significant expansion in trade. Better business climate and human capital would also have favorable effects. - Complementarity: For countries with poor infrastructure, improvements could potentially double the trade-increasing effect of tariff reductions; this interaction is especially strong for landlocked countries where logistics greatly enhance the impact of tariff reductions. - Figure-based percent-change benchmarks (as presented): - Credit: 23 percent change to reach the world mean (associated trade impact shown in figures) - Logistics: 19 percent change to reach the world mean - Infrastructure: 40 percent change to reach the world mean - Tariffs: 50 percent change to reach the world mean ### General-equilibrium model results and welfare effects - Computable general equilibrium (CGE) models indicate: - Eliminating tariffs on intraregional trade is estimated to increase trade in the region by about 15–25 percent over the medium term. - Reducing nontariff barriers by half would more than double the trade-increasing effects relative to tariff elimination alone. - Eliminating tariffs alone has a limited effect on welfare; only simultaneous reductions in tariffs and nontariff bottlenecks yield significant beneficial effects on welfare and GDP. - Welfare and GDP quantified findings from a review of studies: - Eliminating tariffs on intraregional trade would increase welfare up to 0.5 percent over the medium term. - Combining elimination of tariffs with reducing nontariff barriers by half would increase welfare over the medium term up to 0.6–3.8 percent, and GDP by about 1 percent. ### Structural reforms, sectoral impacts, and GDP gains - Greater trade can trigger structural change by increasing production efficiency and spreading knowledge and technologies. - A stochastic general equilibrium model calibrated for a stylized African agriculture-exporting economy shows: - Complementing the AfCFTA with structural reforms that increase agricultural productivity and allow workforce shifts significantly raises the AfCFTA’s impact on GDP for developing and agriculture-based economies. - Effective structural reforms can raise the impact on GDP of expanded trade by as much as one-third. - Sectoral heterogeneity: - More diversified and manufacturing-oriented economies, existing regional trade hubs, and small economies already relatively open to international competition are likely to benefit more from regional trade integration than agriculture-oriented and natural-resource-based economies. ### Distributional effects (inequality) and fiscal considerations - The effect of increased trade openness on income inequality over the medium term is limited overall but differs by economy type. - Model and empirical estimates: - The Gini coefficient is estimated to decline by 0.2 percent for each 1 percent increase in trade flows; therefore, if trade flows increase by 16 percent, the Gini coefficient could decline by as much as 3 percent from its initial level. - In agriculture-oriented and, to some extent, natural-resource-exporting economies, trade openness decreases income inequality slightly because higher agricultural exports raise rural incomes. - In manufacturing exporters, trade openness somewhat increases inequality because increased manufacturing exports tend to benefit firms that hire high-skilled workers, widening the wage gap. - Reducing tariffs on intermediate inputs for agriculture (for example, fertilizers and equipment) amplifies rural-income gains and inequality-reducing effects; reducing tariffs on intermediate inputs for manufacturing can amplify inequality-increasing effects. - The importance of policy measures to manage adjustment costs and ensure inclusive gains is emphasized. ### Policy recommendations and practical measures to strengthen AfCFTA outcomes - Prioritize reducing nontariff bottlenecks—especially trade logistics and customs-related services (clearance procedures, operating and brokerage services). - Invest in infrastructure (roads, railroads, electricity) to close infrastructure gaps; recent efforts to close the infrastructure gap can help countries reap AfCFTA benefits. - Promote financial integration and deepen financial infrastructure: - Develop and harmonize regional payment systems to facilitate cross-border payments. - Create swap arrangements across central banks and a multicurrency clearing center in the region to reduce risks from trading in several different regional currencies. - Further coordinate the supervision of pan-African banks to facilitate intraregional trade, accompanied by adequate prudential frameworks. - Improve access to credit for the private sector, the business climate, and human capital through medium-term policies addressing education, skills gaps, and obstacles to business. - Coordinate trade policy and domestic regulatory reforms to liberalize trade in services, recognizing the data and technical-capacity challenges and the importance of services for overall development and as an input to goods trade. *3. IS THE AFRICAN CONTINENTAL FREE TRADE AREA A GAME CHANGER FOR THE CONTINENT?* ### 2. Manufacturing Exporter ### 2. Manufacturing Exporter ### Informality, inequality, and trade integration - The informal sector in African countries is large and is associated with higher inequality if concentrated in low-skill activities. - The informal sector is concentrated in nontradable goods and services and is therefore relatively insensitive to the effects of trade integration, insulating a large share of the population from the impact of trade (Online Annex 3.6). - Empirical analysis findings: - In aggregate, greater trade integration is not associated with increased income inequality over the medium term. - Greater trade integration is associated with higher inequality in the short term, with a possible decline in the share of income accruing to the poorest. - The initial adverse distributional effect of trade openness tends to fade as economies adjust over time. - There is some indication that increased trade integration is not associated with higher poverty. - Trade liberalization is associated with better income distribution in economies with relatively larger agricultural sectors. - Informality is associated with greater income inequality but tends to mitigate the short-term effects of trade liberalization on income distribution (Online Annex 3.7). ### Customs revenue, regional trade shares, and heterogeneity - During 2010–15: - Customs revenue averaged about 2.5 percent of GDP (16 percent of total tax revenue). - Overall regional imports, including zero-rated imports within RECs, averaged about 17 percent of total imports. - Most countries’ customs revenues averaged less than 2 percent of GDP, but in a few countries they exceeded 5 percent of GDP. - For some countries, imports from the region exceed 35 percent of total imports (examples: Côte d’Ivoire, Malawi, Zambia, Zimbabwe), indicating risks of large revenue losses. ### Estimated fiscal revenue losses from AfCFTA tariff reductions - Methodology notes: - For each country i, total customs revenue is calculated as the sum (over all types of products and all countries) of the average effective tariff imposed by country i on good Z imported from country y* multiplied by the value of such imports, accounting for tariff differences due to bilateral or subregional economic communities. - The analysis reports an upper bound since the AfCFTA requires elimination of tariffs on only 90 percent of trade items. Results are confirmed using most-favored-nation (MFN) effective rates. - Static estimates: - Assuming elimination of all tariffs on intraregional imports and accounting for VAT losses, the average estimated revenue loss is about 0.3 percent of GDP (Online Annex 3.8). - Using MFN effective rates, the average loss is estimated at about 0.5 percent of GDP. - For some countries, static revenue losses could exceed 1 to 2 percent of GDP (examples: Democratic Republic of the Congo, Sierra Leone, Zimbabwe). - Dynamic estimates (accounting for trade diversion and GDP changes using conservative elasticities): - On average, the revenue loss would amount to about 0.5–0.8 percent of GDP, depending on assumed elasticities. - In a few countries revenue losses may be as large as 3–5 percent of GDP (Figure 3.22; Online Annex 3.8). - Policy implication for affected countries: - Authorities in countries facing large potential revenue losses should define clear domestic revenue mobilization policies when entering the AfCFTA. ### Summary of trade integration impacts and constraints - Africa’s fast-growing intraregional trade has significant room for further expansion. - Reducing tariffs and, more important, addressing nontariff bottlenecks would support further regional trade integration. - The largest potential to boost regional trade integration lies in improving trade logistics and, to a lesser extent, infrastructure—especially for landlocked and low-income countries. - Experience of RECs in Africa indicates that reducing tariffs alone may not suffice to boost intraregional trade because nontariff factors also hamper trade flows. ### Policy recommendations - Complement tariff reductions with policies to reduce nontariff bottlenecks to trade; these policies should be central to fostering regional trade integration. - Priorities to boost intraregional trade: - Address poor infrastructure and trade logistics, including customs services and clearance procedures. - Establish a mechanism to identify and monitor the removal of other nontariff barriers such as quotas, licenses, subsidies, restrictive application of rules of origin, and sanitary and phytosanitary measures. - Further develop regional payment systems, introduce swap arrangements across central banks, and consider a multicurrency clearing center to support trade integration. - Liberalize trade in services, which may require coordinating trade policies and domestic regulatory reforms. - To ensure broad sharing of economic and welfare benefits: - Combine trade policies with structural reforms that boost agricultural productivity in agriculture-based and less diversified countries to leverage comparative advantage. - Design domestic tax revenue-raising strategies for countries likely to face substantial revenue losses, being mindful of possible growth and distributional effects. - Mitigate potential adverse effects of trade integration on income distribution—particularly in more diversified economies—through targeted social programs (for example, income support) and training programs to ease worker mobility across industries and promote employment. *Source: sreo0419 - 2. Manufacturing Exporter* ### REFERENCES ### sreo0419 - REFERENCES ### References - African Development Bank (AfDB). 2012. “Informal Cross Border Trade in Africa: Implications and Policy Recommendations.” Africa Economic Brief 3 (November). - African Development Bank (AfDB). 2019. African Economic Outlook 2019. Abidjan. - Cherif, R., F. Hasanov, and L. Wang. 2018. “Sharp Instrument: A Stab at Identifying the Causes of Economic Growth.” IMF Working Paper 18/117, International Monetary Fund, Washington, DC. - Hansen, B. 1999. “Threshold Effects in Non-Dynamic Panels: Estimation, Testing, and Inference.” Journal of Econometrics 93 (2): 345–68. - International Monetary Fund (IMF). 2015. “Global Value Chains: Where Are You? The Missing Link in Sub-Saharan Africa’s Trade Integration.” Regional Economic Outlook: Sub-Saharan Africa. Washington, DC, April. - International Monetary Fund (IMF). 2016. “Global Trade, What’s behind the Slowdown?” World Economic Outlook. 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Washington, DC, May. - International Monetary Fund (IMF). 2018c. “Regional Spillovers in Sub-Saharan Africa.” IMF Spillover Note 18/01, Washington, DC. - International Monetary Fund (IMF). 2019. “Online Annexes— Opportunities and Challenges of the AfCFTA” Background Paper: https://www.imf.org/~/media/Files/Publications/REO/AFR/2019/April/English/backgroundpapers.ashx?la=en - Jaumotte F., S. Lall, and C. Papageorgiou. 2013. “Rising Income Inequality: Technology, or Trade and Financial Globalization?” IMF Economic Review 61 (2): 271–309. - Medina, L., A. W. Jonelis, and M. Cangul. 2017. “The Informal Economy in Sub-Saharan Africa: Size and Determinants.” IMF Working Paper 17/156. International Monetary Fund, Washington, DC. - Ravallion M. 2017. “Inequality and Globalization: A Review Essay.” ECINEX Working Paper 2017/435. Society for the Study of Economic Inequality, Milan. - United Nations Economic Commission for Africa (UNECA). 2018. “African Continental Free Trade Area: Towards the Finalization of Modalities on Goods.” Addis Ababa. - World Bank. 2012. “De-Fragmenting Africa.” Washington, DC. ### Data and projections - Data and projections presented in this Regional Economic Outlook are IMF staff estimates as of March 30, 2019, consistent with the projections underlying the April 2019 World Economic Outlook. - The data and projections cover 45 sub-Saharan African countries in the IMF’s African Department. - Data definitions follow established international statistical methodologies to the extent possible. However, in some cases, data limitations limit comparability across countries. - Additional tables for historical and forecasts for key macroeconomic variables are posted online in the Background Paper and Expanded Statistical Appendix. https://www.imf.org/~/media/Files/Publications/REO/AFR/2019/April/English/backgroundpapers.ashx?la=en ### Country groupings (non-overlapping and overlapping) - Countries are aggregated into three (non-overlapping) groups: oil exporters, other resource-intensive countries, and non-resource-intensive countries. - The oil exporters are countries where net oil exports make up 30 percent or more of total exports. - The other resource-intensive countries are those where nonrenewable natural resources represent 25 percent or more of total exports. - The non-resource-intensive countries refer to those that are not classified as either oil exporters or other resource-intensive countries. - Countries are also aggregated into four (overlapping) groups: oil exporters, middle-income, low-income, and countries in fragile situations. - The middle-income countries had per capita gross national income in the years 2015–17 of more than US$995.00 (World Bank, using the Atlas method). - The low-income countries had average per capita gross national income in the years 2015–17 equal to or lower than US$995.00 (World Bank, Atlas method). - The countries in fragile situations had average CPIA scores of 3.2 or less in the years 2015–17 and/or had the presence of a peace-keeping or peace-building mission within the last three years. - The membership of sub-Saharan African countries in the major regional cooperation bodies is shown (as listed on page 56 of the source) for: CFA franc zone (WAEMU and CEMAC), COMESA, EAC-5, ECOWAS, SADC, and SACU. EAC-5 aggregates include data for Rwanda and Burundi, which joined the group only in 2007. ### Regional group memberships (as listed) - The West African Economic and Monetary Union (WAEMU) - Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo - Economic and Monetary Community of Central African States (CEMAC) - Cameroon, Central African Rep., Chad, Congo, Republic of, Equatorial Guinea, Gabon - Common Market for Eastern and Southern Africa (COMESA) - Burundi, Comoros, Congo, Dem. Rep. of, Eritrea, Eswatini, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Uganda, Zambia, Zimbabwe - East Africa Community (EAC-5) - Burundi, Kenya, Rwanda, Tanzania, Uganda - Southern African Development Community (SADC) - Angola, Botswana, Congo, Dem. Rep. of, Eswatini, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Tanzania, Zambia, Zimbabwe - Southern Africa Customs Union (SACU) - Botswana, Eswatini, Lesotho, Namibia, South Africa - Economic Community of West African States (ECOWAS) - Benin, Burkina Faso, Cabo Verde, Côte d’Ivoire, Gambia, The, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo ### Country classification lists (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, Eswatini, Ethiopia, Gambia, The, Guinea-Bissau, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Rwanda, São Tomé & Príncipe, Senegal, Seychelles, Togo, Uganda - Middle-income countries - Angola, Botswana, Cabo Verde, Cameroon, Congo, Republic of, Côte d’Ivoire, Equatorial Guinea, Eswatini, Gabon, Ghana, Kenya, Lesotho, Mauritius, Namibia, Nigeria, São Tomé & Príncipe, Senegal, Seychelles, South Africa, 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, Malawi, Mali, São Tomé & Príncipe, South Sudan, Togo, Zimbabwe ### Methods of aggregation - In Tables SA1 and SA3, country group composites for real GDP growth and broad money are calculated as the arithmetic average of data for individual countries, weighted by GDP valued at purchasing power parity as a share of total group GDP. The source of purchasing power parity weights is the World Economic Outlook (WEO) database. - In Table SA1, country group composites for consumer prices are calculated as the geometric average of data for individual countries, weighted by GDP valued at purchasing power parity as a share of total group GDP. The source of purchasing power parity weights is the WEO database. - In Tables SA2–SA4, country group composites except for broad money, 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. ### Statistical Appendix — Tables and notes - List of Appendix Tables SA1—SA8 (as referenced): - SA1. Real GDP Growth and Consumer Prices, Average (Table SA1 appears on page 58) - SA2. Overall Fiscal Balance, Including Grants and Government Debt (Table SA2 appears on page 59) - SA3. Broad Money and External Current Account, Including Grants (Table SA3 appears on page 60) - SA4. External Debt, Official Debt, Debtor Based and Reserves (Table SA4 appears on page 61) - Sources for Appendix tables: - Tables SA1–SA3: Sources: IMF, Common Surveillance database and IMF, World Economic Outlook database, April 2019. - Table SA4: Sources: IMF, Common Surveillance database, and IMF, World Economic Outlook database, April 2019. - Footnotes and special notes (as listed): - 1 Fiscal year data. - 2 In February, 2019, Zimbabwe adopted a new local currency unit, the RTGS dollar, which has become the official unit of account. Efforts are underway to revise and update all national accounts series to the new RTGS dollar. Current data are based on IMF staff estimates of price and exchange rate developments in US (and RTGS) dollars. Staff estimates of US dollar values may differ from authorities’ estimate. - Note: “...” denotes data not available. - Additional footnotes specific to individual country rows are included in the tables (see pages 57–61). *Regional Economic Outlook: Sub‑Saharan Africa — References and Statistical Appendix (pages 55–61).* --- _Source: https://www.imf.org/-/media/files/publications/reo/afr/2019/april/english/sreo0419.pdf_