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Africa’s Recent Economic Performance and Challenges
and the Role of the IMF

A Presentation by Evangelos A. Calamitsis
Director of the African Department
of the International Monetary Fund
at the Seminar of the Foundation for
Advanced Studies on International Development

Tokyo, Japan, July 10, 1998


I.  Introduction

It is a great pleasure for me to speak to you today about Africa’s recent economic performance, as well as the main challenges and opportunities facing the continent at the dawn of the new century. These themes were very much a part of the discussions of the African Heads of State and Government at the recent Summit of the Organization of African Unity in Burkina Faso, which the Managing Director of the IMF had the privilege to address. They will probably be of great interest as well at the Second Tokyo International Conference on African Development, to be held later this year.

In many respects, the Africa of today is quite different from that of the 1980s. For the first time in a generation, there is encouraging economic progress in many countries, reflecting the implementation of sound economic policies, coupled with a steady movement toward rules-based institutions and participatory forms of government that foster consensus between the state and civil society.

But it is also clear that Africa still has a long way to go to make up for the ground lost during the 1980s. Economic growth rates are still not high enough to make a real dent in the pervasive poverty. Investment remains subdued, limiting the efforts to diversify economic structures and accelerate growth. Furthermore, a number of countries have only recently emerged from civil wars that have severely set back their development efforts, while new flames of conflict have sadly erupted in other parts of the continent.

Africa therefore faces major challenges: to raise growth and to reduce poverty; to build up its human resources; and to create an environment that encourages the development of the private sector. At the same time, globalization has raised the stakes for all countries, especially those in Africa, offering greater opportunities for faster economic growth but also significantly raising the risk of marginalization for those that fail to integrate into the global economy. Moreover, the recent crisis in Asia has made it clear that it is not enough merely to open up economies. Sound and fully transparent macroeconomic policies, solid and well-supervised financial systems, and good governance are also essential in order to avoid serious problems and to benefit fully and durably from access to globalized markets.

II.  An Encouraging Economic Recovery

Recent economic performance in most of Africa has been encouraging. After almost two decades of stagnation and decline, real GDP in sub–Saharan Africa is now growing at an average rate of 4–5 percent a year, and real per capita incomes are rising in about 40 countries. Average inflation came down from a peak of some 45 percent in 1994 to an estimated 13 percent in 1997, and only 15 sub–Saharan African countries still had double–digit inflation rates in 1997, compared with 35 in 1994. Internal and external financial imbalances have also been reduced. The average overall fiscal deficit (before grants) was halved between 1992 and 1997, to about 4½ percent of GDP, while the average external current account deficit (again before grants) fell from 5½ percent of GDP to 4 percent over the same period. These improvements have been accompanied by a slight upturn in investment ratios.



Sub-Saharan Africa: Selected Economic and Financial Indicators, 1992-981


1992 1993 1994 1995 1996 1997 1998






Est. Proj.


(Changes in percent)

Real GDP 0.1 1.5 2.2 4.1 4.9 4.0 4.2

Real GDP per capita

-3.9 -2.4 -0.6 1.7 1.6 0.8 1.1

Consumer prices (average)

37.7 39.1 44.4 40.5 32.8 13.2 9.1


(In percent of GDP)

Domestic investment 16.6 16.1 17.6 17.9 17.7 17.1 18.3

Domestic saving

14.7 13.7 15.5 15.5 16.8 15.9 15.5

Central government fiscal balance2

-9.1 -8.6 -7.8 -6.1 -5.8 -4.6 -4.4

External current account balance2

-5.5 -6.0 -5.7 -6.1 -3.3 -4.0 -6.0
External public debt outstanding 55.5 62.5 70.4 65.7 64.1 60.3 59.6

Source: IMF, African Department.
1Including Nigeria and South Africa.
2Excluding official transfers.

 
Unlike other "recoveries" in the past, the present upturn has been largely homegrown. It reflects the good policies that an increasing number of sub–Saharan African countries have been implementing for several years, often in the context of structural adjustment programs supported by the Fund and the World Bank. And because it has been homegrown, it is more likely to endure. Prudent financial policies have reduced domestic and external imbalances. At the same time, important structural reforms, including the removal of domestic price controls, the liberalization of exchange and trade systems, the restructuring or privatization of public enterprises, and reforms of labor legislation and investment codes, have contributed to eliminating distortions and strengthening overall economic efficiency. Many countries have also carried out substantial reforms of their agricultural marketing systems, often allowing higher prices to be paid to producers and thus directly raising rural incomes.

Increasing attention has also been paid to achieving what the Managing Director of the IMF has called high–quality growth—with lasting employment gains and poverty reduction, greater equality of income through greater equality of opportunity, and environmental protection. Indeed, Fund–supported programs have emphasized increasingly the protection of public spending on health care, education, and other basic social services. Thus, on average, countries implementing such programs have raised their spending on health and education both in terms of total government expenditure and of GDP during the program periods, and many have achieved noticeable improvements in their health and education indicators.

III.  The Need for Higher Growth

Although recent trends have been encouraging, there are several reasons why the improvements of the last few years are not enough, and why more needs to be done to accelerate economic growth. In my view, two key considerations need to be borne in mind:

  • Growth must increase in order to achieve a lasting reduction in poverty
    As Africa’s population has been growing at about 2.8 percent a year over the last decade, real GDP should rise at least twice as fast to achieve a significant reduction in poverty and to catch up with other developing countries. Looked at from another perspective, much faster growth is required to absorb the rapidly rising labor force and materially improve living conditions. There is thus a need to raise average real GDP growth rates to some 7–8 percent a year on a sustainable basis. These rates may seem high compared to past performance in Africa, but several countries in the continent (such as Côte d’Ivoire, Mozambique, and Uganda) have already demonstrated that they are not out of reach.

  • Saving and investment must increase
    Other things being equal, attaining such high growth rates over long periods of time would imply investment-to-GDP ratios in excess of 25 percent, similar to those achieved in the periods of sustained high growth in Asian countries. Although investment ratios in Africa have risen to 17–18 percent of GDP in recent years, these levels are clearly too low. This means that, compared to other developing regions, Africa is absorbing less of the more-advanced technology embodied in new capital goods, and its productive efficiency is consequently lower than it could be. Given its low saving and its small share of capital flows into the developing world, Africa remains heavily dependent on official development assistance for financing investment. But this assistance has been on a downward trend in recent years. Africa will therefore have to achieve substantially higher rates of domestic saving and attract foreign direct investment in order to accelerate its growth and development.

IV.  Policies for More Dynamic and Sustainable Growth

Private investment requires a conducive environment, one that provides confidence in the predictability and appropriateness of macroeconomic policies; the availability of the necessary core infrastructure and qualified labor; an evenhanded, efficient, and transparent regulatory framework; and a clear government commitment to foster private sector development. The reform efforts under way in most African countries have represented important steps in the right direction, but they need to be accelerated and extended to add credibility to the commitment of the authorities, particularly to the rule of law and good governance. Such an acceleration will signal to the private sector, both at home and abroad, that African governments are indeed seeking to address all the structural shortcomings of their economies and create the conditions for productive private economic activity.

As we reflect upon Africa’s economic reform agenda for the period ahead, let me highlight two overarching concerns. First, I believe it is critically important to establish and nurture an environment of economic security that would foster private saving and investment and, hence, promote more dynamic and sustainable growth. In many, if not most, African countries, the legal and regulatory framework is still fraught with weaknesses and uncertainties that hamper investor decision making. And the judicial system, after many years of neglect and political interference, is often ill–equipped to administer justice fairly and impartially. Private property rights are not adequately protected, and commercial contracts are not well enforced. Thus, quite apart from the specific aspects of Africa’s economic policies, a key element of the reform agenda must be a far–reaching reform of the legal and regulatory framework and its administration, with a view to creating economic security and strengthening confidence. Second, good governance in all of its aspects needs to be forcefully promoted. In

particular, every effort should be made to eliminate unproductive government spending, and to ensure full transparency and accountability in the management of public resources. Government operations must be conducted in an irreproachable manner, and all forms of corruption, nepotism, and cronyism should be shunned.

Apart from these overarching concerns, which should be at the heart of Africa’s reform agenda, there are, of course, many other areas where parallel actions will have to be pursued. I am sure you will not be surprised when I say that most African countries still need to fully restore and consolidate macroeconomic stability by continuing to implement prudent fiscal and monetary policies. In particular, fiscal consolidation and an increase in public saving will be essential, requiring, inter alia, a strengthening of tax and customs administration. African countries also need to strengthen their human resource base and institutional capacity through improvements in basic health care, primary education, and vocational training, as well as to rehabilitate and extend key economic infrastructure. Finally, they need to accelerate and deepen structural reforms in several areas. Apart from economic security and good governance, I would stress five areas where a more determined pace of policy implementation is critical to Africa’s future growth and development:

  • More rapid trade liberalization
    Although the process of trade liberalization has been launched throughout Africa—most countries have reduced or eliminated nontariff barriers, often replacing them with tariff equivalents—trade regimes are still significantly more restrictive and complex than in most other regions of the world. Tariff rates remain too high and too dispersed, in part because governments are very dependent on import tariffs for budgetary revenue, but also owing to the prevalence of statutory and ad hoc exemptions. Eliminating these exemptions, preferably in the context of a comprehensive medium–term tax reform, would allow tariffs to be reduced at a much faster pace. The objective here should be to achieve a simpler and more transparent tariff structure, with only a few rates in the range of 0–20 percent and average tariffs of about 10 percent, within a period of three to five years. A faster pace of trade liberalization would enhance the efficiency and competitiveness of domestic producers and foster a deepening of trade links, helping Africa to integrate more fully into the world economy and better exploit the opportunities of globalization. It should be noted that complex and discretionary trade regimes are prone to abuse and create opportunities for corruption. Therefore, in addition to the efficiency gains that trade liberalization engenders, it also helps improve the quality of governance.

  • Financial sector reform
    Despite the progress made in restructuring the financial sector in many African countries, most central banks still lack autonomy, banking institutions remain by and large weak and inefficient, financial sectors are thin, and intermediation is inadequate. There is thus a need to accelerate financial sector reform. In particular, it is important to ensure the independence and accountability of central banks, with freedom from political interference. There is also a need to complete the rehabilitation of weak commercial banks; open the banking sectors to healthy competition, both domestic and foreign; privatize government–owned banks; establish or strengthen the institutions of prudential regulation and supervision of banks; and apply best practices in bank management. Furthermore, specialized financial institutions and instruments for mobilizing long–term savings (such as stock exchanges) must be developed, and innovative, efficient forms of extending credit to the rural sector must be found. The legal provisions for loan recovery and contract enforcement must also be rationalized and fully observed.

  • Public enterprise restructuring and privatization
    African governments need to move ahead more decisively in restructuring and privatizing public enterprises, both in order to enhance the efficiency of their operations and to expand the scope for private sector activity. Enterprises that remain in the government portfolio, however temporarily, should be operated on a fully commercial basis, with market–based pricing and employment decisions, and management autonomy and accountability. Privatization operations should be ambitious in terms of timing, but well prepared and executed in a fully transparent manner to ensure that the process does not give rise to new distortions and private monopolies.

  • Civil service reform and capacity building
    The successful formulation and implementation of economic policies has been hindered in many African countries by poor economic management capacity and cumbersome administrative and bureaucratic structures. The civil service is often much too large to be efficient or to adapt properly to changing circumstances and requirements. Nominal wage restraint has contributed to limiting expenditure growth, but rigid compensation systems and the sheer size of the civil service have not allowed for attractive and performance–based remuneration, making it difficult for governments to compete with the private sector for skilled personnel. The civil service is thus often demoralized and prone to corruption. In the circumstances, there is an urgent need to streamline administrative structures, downsize the civil service, and introduce a performance–based remuneration system as key elements of a strategy for strengthening overall capacity in public administration. These measures should help governments carry out their basic administrative functions and provide essential public services efficiently and cost–effectively.

  • Regional integration
    In various parts of the continent, African governments are deepening their economic cooperation and coordinating policies in the context of regional organizations. These trends are important and need to be reinforced, particularly in those cases where they are compatible with the process of trade liberalization on a most–favored–nation basis. Efficient regional integration would allow many of these countries to surmount the obstacles posed by their relatively small size, allow producers to realize greater economies of scale, and enhance their ability to trade on a global basis. Regional integration would also provide a framework for African countries to cooperate in developing a common economic infrastructure (in such areas as transport and telecommunications, as well as banking and insurance services), better equipping them to participate in the global economy. It will, therefore, be important for regional organizations to foster concurrently nondiscriminatory multilateral trade liberalization and closer integration into the world economy, thereby avoiding the negative effects of an inward–looking strategy. The obligations of membership in regional groupings can also help countries to maintain the momentum of adjustment and reform in difficult areas such as tariff reductions, legal and regulatory reforms, the rationalization of payments systems, financial sector restructuring, the harmonization of investment incentives and tax systems, and labor market reform.

V.  A New Image for Africa

Economic security and good governance, coupled with sound macroeconomic policies and structural reforms, should be the motto for Africa in the twenty-first century. As a number of African countries have shown in recent years, this recipe for higher, sustainable growth is certainly within the capacity of most countries. Yet Africa continues to suffer from, and to pay the price of, its poor image—one of famine and disease, poverty and helplessness, and ethnic strife and political instability. The recent conflicts in a few countries in East and West Africa have only served to reinforce this distorted view of the continent, diluting the impact of the major strides made in both economic and political reforms.

Unfortunately, it is the headlines that capture world attention. Political instability, however distant, affects the investment, especially foreign direct investment, that is sorely needed for growth throughout the region. Therefore, there is also a need to foster peace and security in Africa, both through conflict prevention and a prompt resolution of disputes. This will help create the overall environment within which sound economic and financial policies can have the best prospects for success. Although much more remains to be accomplished, considerable economic progress has been achieved in many African countries, as I mentioned at the outset. Therefore, we all need to do a better job of conveying this message to foreign investors. In this way, we would help bridge the "image gap" between the old and the emerging Africa.

VI.  The Role of Africa’s International Partners and the IMF

Africa’s success will depend largely on its own homegrown efforts. But Africa’s international partners, including the IMF, will also have an important role to play. Industrial countries can contribute to Africa’s success by pursuing economic policies that promote world economic growth and stability; opening their markets to products in which African countries have, or can develop, a comparative advantage, and phasing out distortionary protective practices; strengthening their bilateral assistance to countries committed to strong reform programs, particularly where such programs might entail additional transitional costs; cooperating actively in the fight against corruption in all its forms; and ensuring that the multilateral institutions have the necessary resources to support adjustment and reform programs.

The international financial institutions, for their part, will also have to continue to support Africa’s adjustment and reform efforts through appropriate policy advice, and financial and technical assistance, as well as training. As you know, the IMF has been very active in all of these areas, in close collaboration with the World Bank, the African Development Bank, and Africa’s major bilateral partners. In this regard, you may ask, how does the IMF see its role in Africa in the future?

  • First, the IMF is taking steps to put the Enhanced Structural Adjustment Facility, or ESAF—our concessional loan facility with an interest rate of 0.5 percent—on a permanent footing by securing the necessary resources to make it self–sustaining by the year 2005. Today, 23 sub–Saharan African countries are implementing ESAF–supported programs, with financial commitments totaling some US$3.5 billion. We are also taking steps to enhance the efficiency of the ESAF. Drawing on the recent internal and external evaluations of the implementation of ESAF–supported programs, we will be fostering national ownership of such programs, as well as strengthening our collaboration with the World Bank in order to improve the quality of our joint assistance to ESAF countries. In this context, we will be refocusing our efforts to help accelerate public enterprise and financial sector reforms; identify and address more fully the potential adverse social consequences of reforms; and assess the countries’ medium–term investment needs and their capacity to attract and absorb external financing.

  • Second, together with the World Bank, we have been moving rapidly to implement the debt Initiative for the Heavily Indebted Poor Countries (the HIPC Initiative), the majority of which are in Africa. In the 18 months since the launching of the HIPC Initiative, six countries, including four in Africa (Burkina Faso, Côte d’Ivoire, Mozambique, and Uganda) have received commitments of assistance from all creditors totaling about US$6 billion in nominal terms; in the case of Uganda, which has reached its completion point under the Initiative, the Fund’s contribution has already been disbursed. Of course, to qualify for assistance under the HIPC Initiative, eligible countries need to establish a strong track record of adjustment. I am hopeful that many more countries will do so in the period ahead, and that the list of beneficiaries will be much longer by the year 2000.

  • Third, since 1995, the IMF has had a special policy to provide emergency post–conflict assistance to countries that have undergone political turmoil, civil unrest, or international armed conflict. Rwanda is the first African country to benefit from this new policy. The Republic of Congo is the next in line, and we are having discussions with other countries as well.

  • Fourth, the Fund will continue to provide and intensify its training and technical assistance for capacity building and institutional reform, working both directly with African governments themselves and in close collaboration with other donors. Accordingly, we are expanding the training activities of the IMF Institute and intend to establish a regional training institute in Africa, jointly with other partners in the region. We are also strengthening our technical assistance programs in banking, public finance, and statistics.

  • Fifth, in recognition of the importance of good governance for macroeconomic stability and sustainable growth, the Fund’s Executive Board issued guidelines in July 1997 regarding governance issues that call for a more proactive approach in advocating policies and helping our member countries to eliminate opportunities for bribery, corruption, and fraudulent activity in the management of public resources. This approach includes encouraging Fund members to improve the accuracy, timeliness, and comprehensiveness of economic information by meeting new data dissemination standards, as well as to observe international best practices in fiscal transparency (based on a "fiscal code of conduct").

  • Finally, drawing on the lessons from the recent international financial crises, the Fund is examining ways to reform the architecture of the international financial system so as to limit the occurrence and intensity of future shocks to the system. Greater stability in world economic conditions will facilitate Africa’s efforts to compete in world markets and to attract international capital flows.

* * * * * * * * * * * * * * * *

As you can see, Africa’s reform agenda is full. However, if rigorously implemented, with the support of Africa’s international partners, it should help produce the desired results of higher, sustainable growth and a durable reduction in poverty. And as economic and social progress takes hold throughout the continent, confidence in Africa’s future will increase, and the image of Africa itself will gradually change for the better. We thus all need to work together to sustain Africa’s progress.


IMF EXTERNAL RELATIONS DEPARTMENT

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