Roger Nord - Deputy Director, Africa Department, IMF
Isabella Massa - Research Fellow, International Economic Development Group (IEDG), ODI
Razia Khan - Head of Regional Research, Africa, Standard Chartered
Nicola Cantore - Research Fellow, IEDG, ODI
Andrew Norton - Director of Research, ODI
This event hosted by ODI will launch the IMF's Regional Economic Outlook for Africa report 'Sustaining Growth amid Global Uncertainty'. The report focuses on recent economic developments and prospects for the region, against the backdrop of the tentative global recovery and remaining large uncertainties.
Downside risks remain elevated, renewed turbulence in Euro area financial markets for instance would adversely affect both exports and investment flows across the continent, slowing growth in most countries. A surge in oil prices, stemming from supply concerns, would pose familiar challenges for oil-importing countries, squeezing real incomes and adding to external financing needs. So far, economic activity in most sub-Saharan African countries seems to be holding up well, providing more evidence for sub-Saharan Africa’s ’s welcome resilience to global economic developments.
However, can this last and what are the immediate challenges for countries in the region? Apart from a general overview of the economic growth forecasts and challenges, this year’s report will also look at the impact of the current global financial turmoil on Sub-Saharan Africa banking systems and at recent performance and policy challenges of Africa’s natural resource exporters.
Roger Nord (Deputy Director, Africa Department, IMF) launched the IMF's Regional Economic Outlook for Sub-Saharan Africa report 'Sustaining Growth amid Global Uncertainty' at ODI. The report, composed of an overview of the macroeconomic situation in Sub-Saharan Africa (SSA) and two chapters focusing on the African banking systems and natural resource management, aims to identify the challenges lying ahead of Africa against the global backdrop.
Sustained growth in Sub Saharan Africa (SSA) – Looking back to 1995, the average growth has been of 5-6%, so the present growth rates observed are not a new phenomenon. The underlying factors to this growth include commodity prices, but not only. Other elements such as capital investment which has been continuously rising, credit to private sector, or increases in average labour productivity growth (only second to Asia's) are also part of the equation. Other reasons behind the sustained growth in Africa point to its relatively strong fiscal situation. A lot of this can be attributed to debt forgiveness but also to the role of disciplined public policy. During the 2009 financial crisis, two out of three SSA countries were able to let their deficits widen instead of cutting spending – some even increased their spending. This worked like a shock absorber and it will be crucial to rebuild these buffers for potential future shocks.
Sustained growth and poverty reduction – What do all these achievements mean for poverty reduction? A decrease in poverty has occurred since 1995 but numbers still fall short of the MDG target. Other parts of the world, such as East Asia, have made faster progress.
Two major risks ahead – Roger stressed that two risks stand out for SSA in the global uncertainty:
1. The Euro crisis – the World Economic Outlook used a 2% cut in world GDP to simulate a shock and see the implications for Africa. The results show that growth will by lower by about 1% which doesn’t look dramatic. But it is fair to ask whether the 2% figure is an underestimate of a Euro crisis impact.
2. Weaker growth for the emerging economies – at the last downturn, SSA shifted a lot of its trade flows from traditional partners to emerging partners. This diversification or reorientation helped Africa when advanced economies experienced a shock. However a very severe crisis will inevitably affect China, Brazil etc. so that will represent a risk for Africa as well.
Natural resource management is extremely important to Africa as a majority of countries rely on natural resources (NR) and new ones are appearing (e.g. oil in Uganda, natural gas in Mozambique). Countries whose economies are based on NR are much more exposed to volatility and have to withstand more shocks. This has large implications for domestic policies (e.g. having good policies to make sure a boom in the resource price doesn’t lead to a boom in expenditure). Natural resources rich countries face medium term challenges such as using NR to bring a long term productive base to their economy requiring good institutions and good spending. This is the main objective of countries which are becoming NR producers. A lot of the debate is on how you make sure you are spending productively.
Some general guidelines – Overall SSA countries are in one of three situations:
1. Large fiscal deficit, fast growth offering an opportunity to rebuild their buffers;
2. Growth is more anaemic and fiscal consolidation is not a priority, priority is on growth (e.g. South Africa);
3. High inflation, the priority is on bringing it down with monetary and fiscal policies.
Roger concluded by saying that to really reduce poverty, a country needs to grow for a very long period of time, 10-20 years is not enough. He added that in the end it’s not about growth but what the growth makes possible. Who benefits from it? The reality is that in the fast growing African countries, the poor are often the ones who benefit least.
Isabella Massa (Research Fellow, ODI) commented on the risks for SSA associated to the euro zone crisis mentioned by Roger. She agreed that SSA's weak integration in global financial markets means risks will spread mainly through channels such as declines in exports of goods and services, direct investment, remittances and over time, aid flows. However, she stressed that financial contagion effects must not be overlooked. Indeed, such effects were significant during the 2008-09 global financial crisis in countries such as Zambia, DRC and Kenya, and they are also becoming evident in the context of the euro zone crisis in countries such as Nigeria and Kenya. She also highlighted that the euro crisis may spread through exchange rate effects which may affect SSA countries in two opposite directions: (i) countries with currencies pegged to the euro will be more competitive in world export markets if the euro depreciate but will also experience an erosion in the value of their foreign reserves; (ii) those countries with dollar-linked currencies will suffer from the dollar appreciating against the Euro.
Isabella emphasized that SSA countries are now much less resilient than in 2007 because of their more limited policy space, and highlighted that the degree of vulnerability to the impacts of the euro crisis is very heterogeneous across the SSA region depending on each country characteristics.
She finally mentioned the increasing role of China in Africa and how it has become a key trading partner and investor in the region. In the previous crisis, China helped SSA recover but a repeat seems less likely if China's economy slows due to global economic developments. Isabella concluded asking Roger about the new role that intra-regional trade might play in SSA given the current global uncertainties.
Nicola Cantore (Research Fellow, ODI) mentioned that the term sustainability in the report only seems to relate to growth and not to environmental sustainability. He then picked on some of the issues raised in the IMF report and linked this with work he is carrying out around resource exporting countries, in particular oil exporters. He noted that NR exporters have experienced faster economic growth than other SSA economies during 2010-12 but this was not necessarily accompanied by improved social indicators. He went on to discuss the role of foreign reserves in helping countries cope with commodity price shocks. Finally, he agreed with Roger that using rents to invest in the future and ensuring a good quality of fiscal spending are crucial challenges for resource rich countries.
Razia Khan (Head of Regional Research, Africa, Standard Chartered) highlighted the increasing discussions around how meaningful African growth is and asked how much structural reform it has led to. Another key question is how threatening is the Euro crisis for Africa. Africa’s trade growth with new emerging partners may reach limits since they are also dependent on trade with the Euro area.
Razia explained that SSA’s sustained growth throughout the 2008-09 crisis had been made possible by the growth momentum the sub-continent was experiencing when the crisis started. She then questioned to what extent SSA can still rely on these factors to support its growth in the event of a new crisis. In her opinion, it will not be easy to achieve this again.
After touching on the SSA financial institutions and structural reforms, Razia concluded that the decade of growth, coupled with sound commodity prices, may have masked real problems in terms of human development indicators and the changes that are not happening rapidly enough to sustain economic growth for a long enough time.
Q: Would intra-regional trade promotion be sufficient to weather the Eurozone crisis and the slowdown of emerging economies?
A: Intraregional trade is low in Africa, but it has doubled in the last decade. So, promoting intra-regional trade would contribute not only to weather the crisis but also to make the SSA region more attractive to investors. There is political will for further integration, notably in terms of intraregional trade, in the East African Community (EAC). In the long term an integrated EAC will represent a market of over 100 million people which will increase the member countries’ attractiveness in the eye of investors.
Q: With regard to the countries mentioned as strong economies (i.e. Tanzania, Uganda, and Mozambique) is there any evidence in the data that their high inflation is already on the decline? In terms of the perennial resource curse questions, will they fare any better than their predecessors?
A: Inflation in East Africa is not the result of resource discoveries. How will these countries avoid reproducing their predecessors’ mistakes? For political reasons, those countries have built over the past more robust democratic institutions than early oil producers have. They ‘start from scratch’ and that should give them a better chance.
Q: Because SSA LICs’ buffers have gone down, should the IMF be thinking about larger facilities to protect countries in case of shocks?Does private sector credit growth raise questions?
A: The IMF is constantly thinking about new facilities. It has the ability to respond very quickly to shocks as shown in 2009 and it can easily scale up the amount of financing in countries. On private sector credit growth, yes we need to look at what the quality of this lending is; but that this is typically what you find out later. Banking systems in Africa are much more robust than they used to be.
Q: In terms of GDP, fragile states fall well behind other LICs, but in later years they seem to be catching up. How can this be explained?
A: This is heavily influenced by Cote d’Ivoire who still falls under the fragile state category.
Q: What is the capital investment mentioned in the presentation in?
A: A large amount of investment is in a variety of sectors such as construction, telecoms, foreign investment.
Q: Any long term resilience for Africa depends on the green economy. Has the IMF been involved in Africa’s green economy in any way?
A: On the IMF’s green fund, there are contributions the IMF can make on the financial side. The 2009 proposal made by the IMF in Copenhagen still stands but the international community is not on the same page so the proposal was not picked up. There needs to be a consensus first.
Q: SSA has a population of young people with frustrated expectations. What is the IMF’s perspective on the social consequences?
A: For sustained growth, you need social consensus and if you have groups who are not benefitting from growth, it will be very hard to sustain it. But the poor have also seen growth, maybe less than the rich but they have not been entirely left out. The distribution could have been better and to sustain growth, you have to distribute it better.