Regional Economic Outlook, October 2015 : Sub-Saharan Africa

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 2015
• eBook ISBN: 9781513597331

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1. Dealing with the Gathering Clouds

Economic activity in sub-Saharan Africa has weakened markedly. To be sure, growth—at 3¾ percent this year and 4¼ percent in 2016—still remains higher than in many other emerging and developing regions of the world. Still, the strong growth momentum evident in the region in recent years has dissipated in quite a few cases.

To understand the slowdown, it helps to consider three key factors that have supported the high growth in the region over the past decade. Perhaps the most dominant of these factors has been the vastly improved business and macroeconomic environment that policymakers have put in place, supporting higher investment. Another important factor has been high commodity prices, which played a particularly central role in the region’s eight oil exporters (notably, Nigeria and Angola) but also in several hard metals exporters (for example, Guinea, Sierra Leone, South Africa, and Zambia). The third factor has been the highly accommodative global financial conditions, which have boosted capital flows to many countries in the region, facilitating higher private and public investment.

Of late, though, two of the three factors have become much less supportive—commodity prices have fallen sharply and financing conditions have become more difficult. The upshot is a deceleration in economic growth in the region. Within this overall difficult picture, however, there is considerable variation across the region.

• In most low-income countries, growth is holding up, as ongoing infrastructure investment efforts continue and private consumption remains strong. The likes of Côte d’Ivoire, the Democratic Republic of the Congo, Ethiopia, Mozambique, and Tanzania are projected to register growth of 7 percent or more this year and next. But even within this group, some countries are feeling the pinch from lower prices for their main export commodities, even as lower oil prices ease their energy import bill. On average, activity for this group is now projected to expand by 6 percent in 2015, some three-quarters of a percentage point lower than foreseen a year ago.
• The region’s eight oil-exporting countries, conversely, are being hit hard by the continued weakness in oil prices. Falling export incomes and resulting sharp fiscal adjustments are taking their toll on activity, now expected to expand by 3½ percent this year, down from the 7 percent expected before oil prices started falling. Headwinds are particularly strong in Angola and Nigeria, but also among oil exporters in the Central African Economic and Monetary Community (CEMAC).
• Several middle-income countries are also facing unfavorable conditions. A combination of supply shocks (for example, curtailed electricity production in Ghana, South Africa, and Zambia), more difficult financing conditions in a context of large domestic imbalances (Ghana and Zambia), and weaker commodity prices (Botswana, South Africa, Zambia) are set to lower growth.

Moreover, there is a risk of still lower growth if the external environment continues to weaken. Existing vulnerabilities, especially on the fiscal front, could also come to a head if the external environment were to turn even less favorable, via further declines in commodity prices, stronger growth deceleration in China, or a disorderly global asset reallocation. In that context, some countries would be forced into a sharp adjustment of policies, further adding to the growth slowdown currently at play. Finally, security-related challenges still prevail in a number of countries.

The policy implications are threefold.

• On the fiscal front, for the vast majority of the countries in the region, there is only limited scope to counter the drag on growth. For oil exporters, the sharp, and seemingly enduring, decline in oil prices makes fiscal adjustment unavoidable; and while a few can draw on buffers or borrow to smooth the adjustment, such room for maneuver is increasingly becoming very slim. For most other countries, including both those that are slowing down and those that are still growing at a fast clip, policies need to continue to be guided by medium-term spending frameworks, paying heed to debt sustainability considerations, on the one hand, and to addressing development needs, on the other. As such, there is very limited case for deviating from these polices to support near-term growth. Only among countries where public debt is low and the initial fiscal position comfortable, perhaps in the case of Botswana and the Seychelles, does there seem to be room for countercyclical policies if growth were to slow down markedly.
• On the monetary front, wherever the terms-of-trade decline has been large and the exchange rate is not pegged, it is appropriate to allow for exchange rate depreciation to absorb the shocks. Resisting downward pressures on the currency not only risks depleting reserves, but also means that the adjustment to the shock would instead have to be borne via import compression and lower growth. But even countries that are not heavily reliant on commodity exports have seen their currency come under pressure of late. Here too, given the strong global forces behind them, resisting these pressures risks losing scarce reserves. Accordingly, interventions should be limited to disorderly movements of the exchange rate. Monetary policy should only respond to second-round effects, if any, of exchange rate pass-through and other upward shocks to inflation.
• Risks to the financial sector from the commodity price declines, especially in oil-exporting countries, and from exchange rate depreciation require careful monitoring. Supervision should be stepped up to contain balance sheet effects from these shocks and mitigate potential risks from currency mismatches.

In the rest of Chapter 1, we first elaborate on how recent global developments are creating powerful headwinds for sub-Saharan Africa. Second, we look at the domestic environment in which the countries in the region are entering this period of external headwinds and how these macroeconomic conditions, most notably large fiscal deficits, create additional vulnerabilities. Against this backdrop, a third section presents the near-term outlook and the risks associated with the forecasts, and a final section explores options to create fiscal space by improving domestic revenue mobilization.

In subsequent chapters, we turn to two other aspects essential for longer-term growth in the region:

• Chapter 2 asks whether sub-Saharan Africa is sufficiently competitive to sustain its recent robust growth pattern as external tailwinds fade. A range of indicators suggest that competitiveness has deteriorated for the region as a whole, but with heterogeneity across countries. The chapter also finds a strong connection between competitiveness and the ability of countries to sustain growth, and highlights policies to boost competitiveness in the long term.
• Chapter 3 documents the extent to which high levels of income and gender inequality in the region weigh on macroeconomic performance. While these high levels of inequality might partly reflect an earlier stage of development compared with other regions, the chapter shows that reducing inequality to levels observed in some fast-growing Asian emerging market economies could yield significant growth payoffs. It highlights targeted fiscal and financial policies, as well as the removal of gender-based legal restrictions, as tools to facilitate access to opportunities for low-income households and women.

Strong Headwinds from the External Environment

Global growth is expected to decline from 3.4 percent in 2014 to 3.1 percent in 2015, before picking up to 3.6 percent in 2016. Yet, even this modest overall recovery masks a generally difficult external environment for many sub-Saharan African economies.

Commodity Prices Set to Remain Weak

After a steady rise in prices since the early 2000s, the decade-long commodity cycle seems to have come to an end. This represents a formidable shock for many of the sub-Saharan African countries that are still substantial commodity exporters, as it cuts into export values and fiscal revenues.¹ As was described in the April 2015 issue of this report, oil exporters are particularly affected, as their fiscal and external positions tend to be the most dependent on extractive activities. But even among oil importers, which are benefiting from cheaper energy imports, a wide range of count...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Abbreviations
• Acknowledgments
• Executive Summary
• 1. Dealing with the Gathering Clouds
• 2. Competitiveness in Sub-Saharan Africa: Marking Time or Moving Ahead?
• 3. Inequality and Economic Outcomes in Sub-Saharan Africa
• Statistical Appendix
• References
• Publications of the IMF African Department, 2009–15
• Boxes
• Footnotes