Wednesday, May 10, 2017 12:40 PM/IMF
Restoring the Conditions for Strong and Sustainable Growth
The sub-Saharan African economic outlook remains clouded. Growth slowed sharply in 2016, averaging 1.4 percent, the lowest in two decades.
About two-thirds of the countries in the region, together accounting for 83 percent of the region’s GDP, slowed down—although some countries still continued to expand strongly.
A modest rebound in growth to 2.6 percent is expected in 2017, but even that rebound will be to a large extent driven by one-off factors in the three largest countries—a recovery in oil production in Nigeria, higher public spending ahead of the elections in Angola, and the fading of drought effects in South Africa, combined in all three countries with modest improvements in the terms of trade.
At this rate, growth for the region as a whole will continue to fall well short of past trends and barely deliver any per capita gains.
Unfortunately, this deteriorated outlook is partly a result of delayed and still limited policy adjustments, with an ensuing increase in public debt, declining international reserves, and pressures on financial systems placing stress on private sector activity:
The countries hardest hit by the oil price shock (Angola, Nigeria, and the countries of the Central African Economic and Monetary Community, CEMAC) are still struggling to deal with the unusually large terms-of-trade shock and implied budgetary revenue losses.
The pains from this shock continue to do damage to these economies, with the risk of generating even deeper difficulties both within and across borders if unaddressed.
Some other commodity exporters, such as Ghana, Zambia, and Zimbabwe, are also grappling with larger fiscal deficits in a context of already high debt levels and concerns about growth.
Elsewhere, nonresource-intensive countries, such as Côte d’Ivoire, Kenya, and Senegal, have generally maintained high growth rates.
However, while budget deficits have remained elevated for a number of years as governments rightly sought to address social and infrastructure gaps, vulnerabilities are now starting to emerge in some of these countries.
In particular, public debt is on the rise, and reliance on domestic financing as foreign financing declined, has increased borrowing costs.
In some cases, arrears are emerging and nonperforming loans in the banking sector are increasing, even in a context of strong growth.
Furthermore, on the external front, the somewhat improved global outlook comes with significant uncertainties and downside risks.
External financial conditions for frontier economies in the region have loosened from the peaks reached in early 2016, but they still remain tighter than conditions for emerging markets in the rest of the world.
They could rapidly tighten further against the backdrop of fiscal policy easing and monetary policy normalization in the United States.
A faster-than expected pace of interest rate hikes in the United States could also trigger a more rapid tightening in global financial conditions and a sharp U.S. dollar appreciation.
Importantly, even the recent increase in commodity prices is not expected to provide much relief. Oil prices have recovered somewhat from the trough reached in early 2016, but they are still far below the average price in 2011–13, and are not expected to recover much further.
More broadly, even if improvements in commodity prices provide welcome breathing space, they will not be enough to address the current liquidity stress and the large imbalances in the resource-intensive countries.
Additional policy actions are therefore urgently needed to address growing imbalances and ensure macroeconomic stability—both to restore the conditions for strong and sustainable growth in resource-intensive countries and to preserve the existing momentum elsewhere.
For the hardest-hit resource-intensive countries, fiscal consolidation remains urgent to halt the sharp decline in international reserves and offset revenue losses that the recent firming up of commodity prices will not erase.
This is especially the case in CEMAC, where fiscal measures should be complemented by binding limits on central bank financing to governments.
In countries where the exchange rate instrument is available (such as Angola and Nigeria), allowing greater exchange rate flexibility, as part of a coherent package of adjustment measures, and lifting exchange rate restrictions would remove distortions that are inflicting serious damage on the real economy.
Even if, initially, the required adjustment further dampens activity, additional delays would be even more damaging, risking a sudden stop and ultimately an even sharper adjustment.
Additional financing, preferably on concessional terms where appropriate, could usefully complement a credible multi-year plan to restore macroeconomic stability and smooth the impact on overall activity.
For other countries, reducing emerging vulnerabilities by strengthening fiscal and external buffers should become a priority, lest the current growth momentum comes under threat.
While the expansionary fiscal stance has been appropriate so far, with debt and borrowing costs rising, now is the time to shift the fiscal stance toward gradual fiscal consolidation.
Delaying this shift would raise the risk of a rapid slowdown in growth down the road. Notably, for the fast-growing West African Economic and Monetary Union (WAEMU) countries, implementation of planned fiscal consolidation at the country level and better policy coordination at the monetary union level are important to preserve external stability.
Likewise, fast-growing countries in East Africa need to ensure that the scaling up of public investment, which has led to rapidly rising debt, is steadily trimmed to normal levels consistent with continued fiscal and external sustainability.
While restoring macroeconomic stability is a prerequisite, this rebalancing will only be durable and protect the gains made in the past if further efforts are simultaneously made to boost domestic revenue mobilization, address structural weaknesses, and provide a social safety net well targeted to the most vulnerable segments of the population.
Those efforts would also contribute to making progress toward the authorities’ Sustainable Development Goals (SDGs) adopted just two years ago.
The rest of Chapter 1 first documents the increased uncertainty surrounding the global environment and discusses the extent and quality of policy adjustments made to date in the region.
It then highlights the implications for private sector activity, including for the financial sector, which is increasingly feeling the pinch from decelerating growth and inappropriate macroeconomic policies.
The chapter then discusses the growth outlook and near-term risks. A final section focuses on policies that would foster a stronger recovery.
Chapter 2 sheds further light on how to revive economic activity by looking at the region’s experience with growth turning points, examining the extent to which they have led to episodes of durable growth, and identifying factors that have fostered such an environment.
Achieving durable and inclusive growth also means bringing everyone on board, and Chapter 3 discusses this through a close evaluation of informality in the region.
The analysis recognizes that for the foreseeable future, the informal sector will continue to provide an important pool of jobs for the large and rising sub-Saharan African working-age population.
At the same time, by lifting the impediments to the development of formal activities, policymakers can gradually find ways to tap the region’s large unexploited growth potential hidden in mostly lower-productivity informal activities.
Limited Room for Maneuver
Mixed signals from the global environment…
The global economic outlook has improved somewhat since the October 2016 Regional Economic Outlook.
The end of 2016 and early 2017 signaled an uptick in global growth, especially in advanced economies. In addition, China’s growth was still strong reflecting continued policy support.
But overall, global growth remained modest at 3.1 percent in 2016 (see the April 2017 World Economic Outlook). While the overall forecast, ticking up to 3.5 percent in 2017, is expected to be boosted by anticipated fiscal policy easing in the United States and continued strong growth in China, these developments will have mixed implications for the region, as also discussed in Chapter 2 of the April 2017 World Economic Outlook:
On the heels of the slightly improved outlook, in particular for China, and of the deal by the Organization of Petroleum Exporting Countries to cut oil production, commodity prices have picked up from low levels.
However, they remain far below the 2013 peaks. Furthermore, they are not expected to change much over the medium term since deeper trends continue to be at play, including China’s rebalancing of its growth model from investment to less commodity- intensive consumption (Figure 1.1).
While external financial conditions have loosened from the peaks reached about a year ago, financing costs for frontier economies in the region remain higher than for other emerging markets.
They could rapidly tighten further against the backdrop of fiscal policy easing and monetary policy normalization in the United States (Figure 1.2).
In this context, issuance episodes at much higher yields since early 2016 remind us that countries with delayed adjustments should expect to continue to face higher borrowing costs.
...while 2016 was already a difficult year for sub-Saharan Africa
Meanwhile, sub-Saharan Africa started 2017 from a weak position. Activity decelerated markedly in 2016, with growth estimated to have reached only 1.4 percent (Figure 1.3).
The deceleration was broad-based, with about two-thirds of the countries—accounting for 83 percent of the region’s GDP—growing more slowly than in 2015, although to different degrees:
Most oil-exporters were in recession. Economic activity contracted by an estimated 11 percent in Nigeria, 3 percent in the CEMAC countries, and as much as 133 percent in South Sudan, while Angola’s economy stagnated.
Conditions in many other resource-intensive countries also remained difficult. Continued political uncertainty (South Africa), weak fundamentals (Ghana), and acute droughts (Lesotho, Malawi, Zambia, and Zimbabwe) compounded the effect of still-weak commodity prices in many countries.
However, some other countries continued to grow more robustly, supported by domestic factors such as investment spending and accommodative monetary policy (Burkina Faso, Mali, Niger) and strong mining and services growth (Tanzania).