Interview: “Hardest-Hit Countries Should Act With More Urgency”
Celine Allard, Division Chief, African Department, International Monetary Fund, talks on the challenges of economic growth in Sub-Saharan Africa.
The 2016 Regional Economic Outlook on Sub-Saharan Africa hints that growth looks set to slow to its lowest level in more than 20 years. This comes at a time commodity and oil prices as well as insecurity shocks are gradually being surmounted by countries of the region. What do you make of this?
After close to two decades of robust expansion in Sub-Saharan Africa, growth is indeed slowing down significantly. Our projections for the region are currently around 1½ per cent this year, lower than last year’s 3½ per cent and far below the 5 per cent plus experienced by the region during 2010-2014. GDP per capita will also contract for the first time in 22 years.
We should guard against swinging to excessive pessimism about the region’s prospects. The full picture is one of multi-speed growth, in which the overall growth forecast masks considerable diversity across countries.
Indeed, many countries continue to enjoy robust growth: about half of sub-Saharan African countries will still grow at more than 4 per cent this year, including Cameroon. What is particularly notable is that most non-commodity exporters continue to benefit from lower oil imports, improved business climates, and strong infrastructure investments. Countries such as Cote d’Ivoire, Ethiopia, Senegal, and Tanzania are expected to grow at 6 per cent or more in the next couple of years.
How did we get to this situation?
Two broad factors help explain this development. First, the external environment facing many of the region’s countries continues to remain unsupportive. It is true that oil prices and more broadly, commodity prices, have risen slightly recently, but they remain near multi-year lows. Financing conditions have also tightened markedly. The second element is that the policy response in many countries most affected by these shocks has been much delayed and incomplete. This delayed response has raised uncertainty, deterred private investment, and stifled new sources of growth.
This is particularly the case for many oil exporters whose near-term prospects have worsened significantly in recent months; notably Angola, Nigeria, and many countries in the Central African Economic and Monetary Union (CEMAC). Policy adjustments are seemingly not working as recommended by the IMF even when security threats that strain economic activity and public finances of Cameroon, Chad, Niger, and Nigeria, are getting better.
Is it a problem of wise spending?
In many countries most affected by the commodity price slump - including those whose difficult security situation has compounded those difficulties - the policy response has started, but it has been much delayed and is incomplete. It is essential to restore confidence. This means providing the right environment for private businesses to feel reassured in making new investments, and hence set the stage for a strong growth rebound. It is particularly important that the hardest-hit countries, especially oil exporters, act promptly - with much more urgency than they have done so far. In these countries, growth rebound will require sustained adjustment efforts based on comprehensive policies that reinforce each other to reestablish macroeconomic stability.
This calls for three broad measures. First, fully allowing the exchange rate to absorb external pressures in countries outside monetary unions; secondly, strong and orderly adjustment to contain fiscal deficits, combined with reallocation to the most efficient projects where needed. And third, tighter monetary policy stance focused on containing inflation. For countries within monetary unions, the fiscal adjustment requirements to deal with the shock are likely to be greater because exchange rate movements cannot play a role in absorbing the shocks. In addition, Central Bank financing of excessive fiscal deficits needs to be sharply curtailed. This phenomenon has pushed countries to seek funding from the financial market to meet development commitments.
Should there be any fear of increasing public debt?
We have seen increased reliance on Eurobond for Sub-Saharan African frontier market economies since 2010.This has generally been a positive development for the region. It has shown that the region was attractive to investors, and allowed funding sources to be diversified. In most cases, such financing was used to fund developmental needs, especially in much-needed infrastructure.
However, the opportunity to issue Eurobonds also comes with risks, particularly exposure to changes in market sentiments. This is evident in the recent heightened global financial volatility where investors have generally demanded higher yields from developing countries and are increasingly paying attention to worsening economic fundamentals in specific countries. This also has bearing on public debt. In this respect, we have seen over the last few years a general increase in public debt in the region. And this has happened not only among countries facing difficult situations, but also among those whose growth has remained fairly robust.
In this context, what is the IMF’s advice?
In an environment of tighter and more volatile financial markets, there is need to strike a better balance between increased investment spending and debt sustainability. Reforms aimed at increasing revenue mobilization in individual countries would be particularly helpful. This would help contain fiscal deficits while sustaining increased investment. Better scrutiny to prioritize investment projects with the highest economic and social returns would also allow governments to get the best of scarce resources.
What of Cameroon with 27.3 per cent public debt - though below the 70 per cent regional threshold?
Cameroon has its specific story. It embarked on an ambitious public infrastructure programme since 2010 during which investment spending increased by more than 50 per cent. Financing of infrastructure expansion came mostly from China, which has become Cameroon’s largest creditor. The country also issued its first Eurobonds last year. As a result, the stock of external debt more than tripled from end-2011 to end-2015, when it reached 22.2 per cent of GDP. While this level of debt remains sustainable, the higher rate at which it has been contracted - higher than in the past - and the unexpected fall in the price of its oil, are all elements that will weigh on debt sustainability.
In this sense, it will be essential that the infrastructure investment that Cameroon has embarked on and funded with this debt, delivers higher growth relatively quickly so as to generate the fiscal revenue flows needed to repay the debt.
Let me also note that CEMAC applies the 70 per cent debt-to-GDP ceiling to total public debt. We use a different measure, the “Present Value” of debt, which takes into account not the level of debt, but also the interest rate and maturity at which is it contracted. This is a better criterion for monitoring sustainability over time. Moreover, the 70 per cent ceiling is too high for a country that availed itself of HIPC debt relief 15 years ago. The joint World Bank/IMF Debt Sustainability Analysis (DSA) Framework recommends a ceiling of 40 for the ratio of Present Value of debt-to-GDP, which is projected to be breached by Cameroon in 2023. This is why the most recent DSA recommends that Cameroon should borrow on concessional terms to the extent possible.
What then should developing economies concentrate on?
Supporting durable and inclusive growth should be the key objective of economic policy. Maintaining macroeconomic stability - low fiscal and external deficits, low inflation, and sustainable debt levels - is the first prerequisite to ensure that the environment is conducive to that type of sustainable growth. But we also know that structural bottlenecks can hinder development. These range from infrastructure gaps, skill mismatches in the job market, to difficulties in accessing credit. Governments have a role to play by improving the business climate, fostering financial sector development and inclusion, and improving governance.
To finance developmental spending, there is still substantial scope to improve domestic revenue mobilization and make sure investment spending is directed towards the most productive projects. Many low income countries in Sub-Saharan Africa have improved their policy approaches and macroeconomic fundamentals over the last decade. Now, they will need to continue to build on that foundation. In this context, we were very encouraged by the global agreement on the United Nations’ ambitious Sustainable Development Goals last year.
What growth projections should we expect in 2017?
Subject to reforms being initiated quickly in the coming months, we believe that growth in Sub-Saharan Africa could recover close to 3 per cent in 2017, with higher growth rates in subsequent years. However, this pick-up in activity is highly predicated on actions to address large macroeconomic imbalances and policy uncertainties in some of the region’s largest economies. A return to sustained high growth is imperative to generate much-needed employment opportunities and improve living standards across the region. The IMF stands ready to assist governments in their actions through the extensive dialogue that our teams have with them, the technical assistance that we can provide, and if requested, financial support.