Filling up in Abidjan. Higher oil prices and slower world growth could dampen Africa's strong performance. (photo: Issouf Sanogo/AFP)
Sub-Saharan outlook
Policymakers face the challenge of preserving hard-won macroeconomic stability while determining their next steps on the basis of their inflation risks, external position, and state of public finances.
Sub-Saharan Africa grew at a healthy pace in 2007, and the region is now enjoying its highest growth rates in decades (see Chart 1). Real GDP expanded by about 6½ percent, fueled by growing oil production, and rising domestic investment and productivity. Solid global demand for commodities, greater flows of capital to Africa, and debt relief have helped lift growth.
Strengthened macroeconomic policies and years of structural reforms have begun to bear fruit. Moreover, armed conflicts and political instability have become less frequent. As a result, not only have investment and growth increased, but income volatility has fallen to near-30-year lows. Not surprisingly, real per capita income is improving, although fragile countries continue to lag behind. Despite double-digit food price inflation in several countries in 2007, inflation on average has been held to the 6-9 percent range (see Chart 2). Some countries, including some of the continent's leading reformers, that no longer need IMF financial assistance are, nevertheless, committing to sound policies through the Fund's Policy Support Instrument (see related story).
Sub-Saharan Africa is also witnessing an increase in financial flows from emerging creditors, particularly China, which are stepping up assistance to the region largely in the form of project assistance and export credits.
Financial market turbulence
The global financial market turbulence has, to date, had a limited impact on sub-Saharan Africa. However, countries with more globally integrated financial markets, such as South Africa, experienced some increase in sovereign spreads and volatility in their foreign exchange and stock markets.
In South Africa, an additional factor at play may have been the realization that bottlenecks in energy supply could constrain future growth. But, by and large, tighter credit conditions have not materialized.
Prospects for 2008
Global economic growth is expected to slow to 4.1 percent in 2008, down from 4.9 percent in 2007, with the slowdown in advanced economies offset somewhat by growth in emerging markets and developing countries. GDP growth for sub-Saharan Africa is projected at 6½ percent, with growth in oil exporters expected to accelerate to slightly less than 10 percent and that in oil importers to taper off at 5 percent. Inflation is expected to remain below 8 percent for the region, assuming macroeconomic policies hold firm. Unless policies change, Zimbabwe is expected to continue facing hyperinflation.
Despite sound fundamentals, the region faces risks. Inflationary pressures arise mainly from oil prices, which are expected to increase by more than 20 percent this year compared with the average price in 2007. If oil prices were to rise to $100 a barrel in 2008, rather than the $75 projected in the fall World Economic Outlook, GDP growth would be reduced by 0.2-1 percent in the region, depending on countries' production structure and energy intensity.
However, the behavior of other non-oil commodity prices will be crucial to the growth outcome. If high oil prices are accompanied by a stronger slowdown in major commodity importers, sub-Saharan Africa's exports would be hard hit. It is estimated that, for every 1 percent decline in global GDP growth, the region's GDP growth will decline by about ½ percentage point. If the current turbulence in global financial markets leads to a reversal of portfolio flows, this would also hurt growth in a few countries.
The region also faces internal risks. Conflicts still ravage the Darfur region of Sudan and the Horn of Africa, and the situation remains fragile in the Democratic Republic of Congo. Post-election violence in Kenya is likely to reduce growth in that country, and neighboring countries could also be affected—for example, through interruptions to transit routes. The unrest in Chad also has implications for neighboring countries.
Vulnerability varies
Many countries are less exposed to shifts in global economic conditions than they were in the 1990s. Smaller current account and fiscal deficits, lower inflation, lower debt levels, increased foreign reserves, and strengthened policy frameworks have all helped make the region more resilient to external shocks. But while many countries have become more resilient to shocks, vulnerability varies significantly, and the region would still be affected by a pronounced global slowdown and a deterioration in its terms of trade. (See "Southern Africa: Adapting to Shocks")
In countries with a flexible exchange rate regime, a forward-looking easing of monetary policy could help mitigate the output response to a negative demand shock. To the extent that the slowdown is temporary, countries with comfortable foreign reserves could use reserves to smooth shocks. In some countries the policy response may entail a more depreciated exchange rate to rebalance growth. A permanent shock, however, would require a real exchange rate adjustment.
Countries with a sustainable fiscal position may have room for countercyclical fiscal policy and could let their automatic stabilizers operate. But countries without this room may have to offset at least part of the effect of automatic stabilizers. The degree of fiscal easing should take into account the level of public debt; to the extent that discretionary action is taken, it should be temporary.
In several countries, especially oil exporters, the challenge will be to maintain macroeconomic stability in the face of strong foreign exchange inflows. Countries should cast spending and saving decisions in a medium-term framework that takes into account long-term fiscal sustainability. A strengthened public financial management system and institutional reforms in budgeting and project implementation would help ensure that expenditures are growth-promoting and poverty-reducing.
Comments on this article should be sent to imfsurvey@imf.org.
