External Risks Threaten Sub-Saharan Africa's Steady Recovery

IMF News, October 11, 2018

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Growth is projected to increase from 2.7 percent in 2017 to 3.1 percent in 2018.
Recovery reflects a combination of domestic policy adjustments and a supportive external environment.
It is not a single story: oil exporters such as Angola and Nigeria experienced sharp declines after the 2014 commodity price shock and have recovered to levels well below pre-2014; non-resource-intensive countries continue to sustain high growth.

The average fiscal deficit for the region is set to shrink from 4.2 percent of GDP in 2017 to 3.3 percent in 2018.
To date, deficit reduction largely reflects:
- the oil price rebound for oil exporters, and
- sharp cuts in capital spending in a number of countries.
Progress on improving domestic revenue mobilization has been elusive and remains far short of the region’s potential.
Further revenue-based adjustment is needed to reduce debt vulnerabilities and generate resources for development.

In 2017, 15 low-income sub-Saharan African countries were classified at high risk of debt distress or in debt distress:
- High risk of debt distress or in debt distress: Burundi, Cameroon, Cabo Verde, Central African Republic, Ethiopia, The Gambia, Ghana, São Tomé and Príncipe, and Zambia.
- In debt distress: Chad, Republic of Congo, Eritrea, Mozambique, South Sudan, and Zimbabwe.
Debt dynamics for these countries mainly reflect large primary deficits and, in several cases, exchange rate depreciations.
Debt reduction mainly reflects adjustment in oil exporters.
Improving debt management frameworks could help better manage risks.

The global economy is entering a period of unusually elevated policy uncertainty with significant risks that could adversely impact many countries in the region.
Escalating trade conflicts threaten to derail the global economic recovery in the near term and dampen medium-term growth prospects.
Trade tensions between the United States, other major advanced economies, and China could entail a cumulative loss of GDP in sub-Saharan Africa of up to 1½ percent of GDP during 2018–21.
Sub-Saharan African countries most affected by the trade war would be the commodity exporters and those countries (commodity exporters and importers alike) that are more integrated in global markets.
Increased exposure to an unexpected tightening of global financial conditions:
- Tighter global financial conditions could result from faster-than-envisaged monetary policy normalization in advanced economies or a sudden shift in investors’ sentiment.
- Frontier markets have weathered bouts of volatility that hit a few large emerging markets since mid-April 2018.
- Higher U.S. interest rates and a stronger dollar heighten risks, and the probability of a large reversal in foreign flows in sub-Saharan Africa is significantly higher as U.S. interest rates go up.

Medium-term growth of 4 percent is too low for sub-Saharan Africa.
The region needs to raise growth to create the additional 20 million jobs per year needed to absorb new entrants to labor markets.
Steps to create strong, sustained, and inclusive growth include:
- Deepening trade and financial integration (including in the context of the African Continental Free Trade Area).
- Facilitating the movement of labor and capital through a better allocation of public spending.
- Embracing opportunities from the 4th industrial revolution by promoting digital connectivity and a flexible education system.
- Removing market distortions.
- Undertaking policies that will foster private investment and risk-taking.
Policies need to focus on reducing vulnerabilities and strengthening policy frameworks to shield the recovery against shocks.

Source: External Risks Threaten Sub-Saharan Africa's Steady Recovery, IMF News, October 11, 2018