Sub-Saharan Africa: Challenges for 2010

The impact of the global crisis on Africa. The IMF is extremely concerned that the worst financial crisis since World War II threatens to push millions of people back below the poverty line. Estimates by the World Bank indicate that 8-10 million more people could be pushed into poverty if the world does not respond quickly. That is unacceptable.

The Fund has been one of the leading voices in the world in warning about the impact of the crisis on the developing world and in calling for increased resources—especially to protect vulnerable groups and to ensure continued increases in spending on priority sectors, such as health and education.

Today I will focus my remarks on the impact of the crisis on sub-Saharan Africa, and the challenge of regaining the momentum of the past decade as the recovery gets underway.

Impact of the crisis on Africa

First, let me turn to the impact of the crisis on Africa. Projections from the latest Regional Economic Outlook for sub-Saharan Africa–which we launched last month in Istanbul– show countries in the region are being hit hard by the crisis:

• Between 2002 and 2007 output grew annually by some 6½ percent–the highest rate in more than 30 years. Moderate or low levels of inflation, and macroeconomic stability accompanied the growth takeoff in most countries. What was striking about this upswing compared to the previous ones was that it was broad-based, and not concentrated in just a few countries.

• But then a large number of African countries were hit by two global economic shocks, not in any way of their own making:

i) First, the spikes in fuel and food prices in late 2007 and early 2008;

ii) Then, later in 2008, was the onset of the Great Recession.

• African countries were heavily affected. As a result, output is projected to expand by just 1 percent in 2009. For the first time in a decade, we expect to see average per capita income decline in SSA in 2009.

• The more exposed they were to the global economy, the more severe the impact was. South Africa, Ghana, Uganda, and several other frontier markets were especially hard hit at the onset of the crisis. Export demand and commodity prices battered economic activity in many more countries, including oil exporters in western and central Africa. The result, in many countries, was stalled growth.

• The good news is that many countries, including some low-income countries, had built policy space that allowed for a relaxation of fiscal and monetary policies and, in some cases, explicit stimulus.

So how are African countries responding to the crisis?

The short answer is likely better than in the past. In previous downturns, countries had very limited room for maneuver in responding to global economic slowdowns. Budget deficits were large and monetary policies too loose, leaving countries very vulnerable going into past crises. The high budget deficits and high debt levels meant that when the economy slowed down, there was no room to use fiscal policy to cushion the fall in economic activity. Instead countries were forced to resort to restrictive polices, such as expenditure rationing, import quotas, foreign exchange controls, and intervention in their domestic economies. This was exactly the wrong response.

There is reason to think that this time may be different. Most economies were in much better shape at the outset of the downturn:

• For starters, budgets for the region as a whole were broadly balanced in 2008, and some countries even posted moderate surpluses.

• Debt levels were also much lower than in the early 1990s, thanks in part to recent debt relief initiatives.

• Inflation had been brought under control across most of the region.

• As a result, countries had accumulated much larger buffers of savings, particularly, foreign reserves.

This favorable starting point gave many countries in the region a cushion, which many are now trying to use:

• We think that budget deficits may increase this year in three out of four countries, as governments seek to preserve public spending despite a large drop off in revenues. Some countries in Africa—such as Botswana, Mauritius, and Tanzania—have signalled their intention to go further and increase discretionary spending in an attempt to take more aggressive countercyclical action.

• Inflation risks have remained subdued, allowing many countries to ease monetary policy.

This hard-earned flexibility to ease policies should help to dampen the adverse impact of the crisis on poverty and social indicators. But the key to success will be how this policy space is being used on the ground. Is it being used, for example, to protect social spending or sustain criticial infrastructure projects? Its too early to say at this stage [but its an issue on which we plan to focus in the spring edition of our Regional Economic Outlook for sub-Saharan Africa].

And we should not forget, of course, that not all countries were in a position to ease policies during the crisis. For some countries, where economic fundamentals were weaker (such as Ghana, Seychelles, and Ethiopia), there has simply been no room to use macroeconomic policies to support short-term growth. These countries will be heavily reliant on higher aid flows to mitigate the effect of the slowdown on vulnerable groups.

So where does Africa go from here?

What does the more positive news on the world economy of the last few months mean for Africa? It is too early to say whether the worst is behind us. Evidence is patchy at best. In most countries, we do not have good high-frequency indicators that might pinpoint the bottom of the cycle. But the indirect evidence, such as monthly data on imports, exports, and tax revenues, is consistent with economic activity in most countries having bottomed out in the first half of this year. The question now is whether the region will be able to recover relatively quickly and preserve the hard-won gains of the last decade.

We are cautiously optimistic about the recovery. In the light of this positive policy response in sub-Saharan Africa and an improving world outlook, our growth forecast for Africa in 2010 is just over 4 percent.

However, there are significant downside risks if the global recovery does not materialize or policies take a turn for the worse. Thus, continued vigilance is needed by governments and their development partners.

And a return to the unusually supportive pre-crisis global environment cannot be taken for granted—the latest IMF projections suggest that the global economy is beginning to grow again, but the recovery is uneven and remains dependent on policy support.

Thus new engines to drive strong growth will be needed in the post-crisis period. Measures to improve the business environment, develop well-regulated capital markets, increase labor productivity, and enhance efficiency in the public sector will be crucial.

Let’s not forget the stakes either. Even if economies do improve, many in the region will remain vulnerable and in need of continued support. Urban unemployment and rural poverty have already risen, with very limited social safety nets in place. The improvements in public services that will be essential if countries are to move toward the Millennium Development Goals may fall further behind as national and local budgets continue to be stretched. Many low-income countries, lacking the buffers provided by the strong external reserves of many oil producers, will remain heavily dependent on uncertain external assistance and private inflows, including remittances.

Let me now turn to how the IMF been responding to the crisis in Africa and in other low-income countries.

First, we have been increasing our resources available to Africa:

• We have sharply increased concessional financing to low-income countries over the past year. As of September 2009, new commitments to Sub-Saharan Africa reached $3 billion, compared with $1.1 billion for the whole of 2008 and $0.2 billion in 2007. [incl. $320 million for Tanzania, $201 million for Kenya under ESF, and $600 million for Ghana).]

• We are planning to do more. We are committed to: (i) increasing our concessional lending, (ii) making our financing cheaper, (iii) taking a more flexible approach to debt, and (iv) providing financial support through a special allocation of Special Drawing Rights worth nearly US$12 billion.

Second, we are also changing the way we lend:

• Recognizing that different countries have different needs, we have introduced a variety of different lending windows to make lending more flexible and better tailored to the needs of the country.

• We will insure that our programs do not prevent counter-cyclical policies. Fiscal targets have been loosened in close to 80 percent of African countries (18 of 23) with active Fund programs. On average, fiscal deficits are widening by 2 percent of GDP.

Case for continuing support from the international community

Many low-income countries will remain heavily dependent on uncertain external assistance and private inflows, including remittances. In these circumstances, support from the international financial institutions will remain crucial.

We are doing our best to step up to this challenge. We think that the IMF can provide about one-third of the additional external financial need of low-income countries over the next two years [which is estimated at $25 billion per year in 2009-10]. Other international institutions are contributing too. But donors also need to play their part. A further scaling up of aid, at least in line with Gleneagles commitments is needed urgently.

Let me conclude by making three summary points:

• The IMF has recognized from the outset that this crisis would have a serious impact on low-income countries and put at risk the progress that has been made towards the Millennium Development goals, and in particular on poverty reduction. Momentum was building just as the two crisis hit the world.

• Our policy advice has been clear – that the war against poverty and the fight for the MDGs must continue in the face of the global recession. This required short-term relaxation of budgetary and monetary targets in many low-income countries. It was time to use the policy space built for a rainy day.

• But more financial assistance was also needed quickly. The IMF was there when needed and will continue to assist. We have increased the amounts we lend and changed the way we lend. But we cannot do this alone – the international community must pitch in to ensure adequate financing is available.

Remarks by Ms. Antoinette Sayeh
Director, African Department of the International Monetary Fund

The Brookings Institution–November 19, 2009 

IMF Release