Sustaining High Growth in Sub-Saharan Africa

IMF News, November 6, 2017

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Political and administrative reforms: increasing checks and balances, development of regulatory and judicial frameworks, and more independent central banks.
Growth episodes:
- Since 1990, three quarters of the countries in the region have registered at least 10 years of uninterrupted growth.
- Over one-third of the countries have registered 20 years or more of uninterrupted growth.
Human development improvements over the last 25 years:
- Life expectancy increased from 50 to 60 years.
- Child and maternal mortality rates have halved.
- Primary school enrolment is up to 80 percent.

End of a long growth spell:
- Over 15 years of continuous growth in income per capita in the region came to an end last year.
- 12 of 45 countries are expecting per capita incomes to decline this year; these 12 countries are home to about 40 percent of the region’s population, or 400 million people.
Rapid public debt accumulation:
- Median public sector debt in sub-Saharan Africa rose from 34 percent of GDP in 2013 to 48 percent in 2016.
- Public debt is now above 50 percent of GDP in half of the economies in the region.
Rising debt-service burden:
- The median debt service-to-revenue ratio among sub-Saharan African countries increased from 5 percent in 2013 to nearly double that in 2017.
- In oil-exporting countries, the debt service-to-revenue ratio is at 25 percent.
- Example: In Zambia, spending on debt interest alone is over half of what the government spends on education and health; in 2011 it was just 20 percent.

By region and sector:
- In oil-exporting countries, public debt increased on average by more than 8 percentage points of GDP per year between 2013 and 2016. Drivers: large primary deficits, a growing interest bill, and balance sheet effects associated with exchange rate depreciation amid low or negative growth.
- In the rest of the region, the debt-to-GDP ratio has been increasing at an average rate of about 5 percentage points of GDP per year. Drivers: large primary deficits, valuation effects from exchange rate depreciation, and below-the-line operations such as migration of state-owned enterprise liabilities onto the government balance sheet.
Contributing factors:
- Desirable borrowing for growth-enhancing investment to close a significant infrastructure gap and support convergence given lower starting incomes and population growth.
- Political economy: strong pressures to spend on infrastructure, social services, and institutions; small coalition for fiscal prudence versus powerful coalition for postponing adjustment.
- External environment: low global interest rates increasing investor appetite for the region’s debt, lowering borrowing costs despite worsening fundamentals.

Overall objective: strike a better balance between much needed investment and debt sustainability; raise macroeconomic health to the top of the policy agenda.
Fiscal reform priorities:
- Raise domestic revenues and broaden the tax base to create space to scale-up social and other priority spending and strengthen fiscal sustainability.
- Potential to increase the tax-to-GDP ratio by 3 to 6 percentage points over the medium-term.
- Reduce inefficient fuel subsidies that disproportionately benefit the better-off and larger firms.
- Implement targeted cash transfers for the most needy to protect vulnerable groups while achieving redistribution.
- Increase transparency to identify how public resources are being raised and spent to help overcome vested interests and build support for revenue measures.
Implementation considerations:
- Design fiscal consolidations to attenuate adverse effects on growth and the most vulnerable.
- Strengthen institutions and policies (IMF offers policy advice, technical assistance and program engagement) to help countries capture returns on public investments.

Demographics:
- Most countries in sub-Saharan Africa are on the cusp of a demographic transition; by 2030 or so, half of the annual increase in the global working age population will come from sub-Saharan Africa.
Technology:
- Rapid technological change, including Fintech expansion, can facilitate greater catch-up growth and broaden financial access.
Critical challenges to realize potential:
- Climate change, deepening power sharing, ensuring inclusivity, and closing gender gaps (about half of the contribution from the growing labor force are women).
Final assessment:
- Rising public debt, if left unaddressed, will constrain the region’s growth potential.
- With tough but necessary reforms, sub-Saharan Africa can return to a path of strong growth that raises living standards for all.

Source: Speech by Abebe Aemro Selassie, Director, African Department, IMF; The London School of Economics, London, November 6, 2017.