April 2023 Regional Economic Outlook for Sub-Saharan Africa |28 June 2023
The workshop in progress
IMF says Sub-Saharan Africa region is hit by a funding crisis
The resident representative office of the International Monetary Fund (IMF) in Seychelles has presented the April 2023 Regional Economic Outlook for Sub-Saharan Africa.
The presentation took place on Wednesday June 21 at Maison de Mahé, Victoria.
The IMF reported that the Sub-Saharan Africa (SSA) region is hit by a funding crisis. Three manifestations of the crisis have been noted. First, the borrowing costs have increased for Sub-Saharan African countries both on domestic and international markets. Sovereign spreads have soared – more than doubled since 2021. Second, all Sub-Saharan African frontier markets have been cut off from market access since spring 2022. Finally, the US dollar effective exchange rate reached a 20-year high last year, increasing the burden of dollar-denominated debt service payments.
The recent funding squeeze is mainly attributed to two global factors namely, (i) the rapid tightening of global monetary policy, prompted by the pickup in inflation, which has led to higher interest rates worldwide; and (ii) the higher uncertainty which has also led to risk repricing, disproportionately affecting Sub-Saharan African countries because of their lower credit ratings.
The lack of financing affects a region that is already struggling with elevated macroeconomic imbalances. Public debt and inflation are at levels not seen in decades. Inflation has increased significantly since the pandemic. Median inflation in the region is 10% compared to about 5% pre-pandemic. Double-digit inflation is present in half of the countries. The report has shown that the main drivers of inflation in SSA are rising international food and fuel prices. Core inflation, which excludes these items, has increased much less than headline inflation.
Another effect of the funding squeeze is that the economic recovery has been interrupted. Growth in SSA will decline to 3.6 percent in 2023. The activity is expected to decelerate for a second year in a row. Still, this headline figure masks significant variation across the region. Many countries will register a small pickup in growth this year, especially non-resource-intensive economies, but the regional average will be weighed down by sluggish growth in some key economies, such as South Africa. SSA is poised to rebound next year and grow at 4.2 percent in 2024. Non-resource-intensive countries are projected to grow by above 6 percent in 2024, reflecting more dynamic and resilient economies and aided by the recovery in non-mining activities including agriculture.
The REO also highlighted four main policies (fiscal policy, monetary policy, exchange rate policy and structural reforms) that could help policy makers to navigate the current situation. The first policy priority is to reduce debt vulnerabilities. Most countries with elevated debt vulnerabilities need to consolidate their public finances to preserve fiscal sustainability. For some, adjustment needs are moderate, but for others, adjustment needs are very large, and it is unlikely that fiscal consolidation alone will be enough to ensure fiscal sustainability. In this case, the necessary adjustment could be accompanied by some debt reprofiling or restructuring.
Beyond fiscal consolidation, authorities can take additional steps to adapt to a world of tighter financing constraints. First, managing fiscal risks resulting from the funding squeeze will be critical to improve fiscal sustainability. Given tighter budgets, the risk of fiscal slippage rises along with the temptation for governments to accumulate arrears, increase off-budget spending, extend guarantees and contingent liabilities. Secondly, effective, and proactive debt management is also important to lower debt risks. This includes enhancing debt reporting, lengthening maturities, and avoiding bunching of repayments to mitigate refinancing risks. Also, by reinvigorating efforts to boost domestic revenue mobilisation, countries can generate more resources for development spending, and attract more financing because a country’s revenue stream is a main metric for its debt repayment capacity. For some countries that are likely to experience aggravated debt vulnerabilities and require debt reprofiling or restructuring, a well-functioning debt-resolution framework is vital to create fiscal space.
Almost all central banks in the region have hiked policy rates since end 2021. Policymakers need to adjust the pace of monetary policy tightening to both the level and trajectory of inflation. In cases where countries are still experiencing very high inflation, continued acceleration, or significant volatility, authorities need to continue to tighten policy rates decisively because these countries aresusceptible to second-round effects and de-anchoring of inflation expectations. Tackling both after they become entrenched will be very difficult. In countries that have signs of inflation peaking, but where inflation is still relatively elevated, authorities need to steer monetary policy cautiously until inflation is firmly on a downward trajectory, and inflation projections return within the target band of the central bank in the medium term. Countries with pegs or heavily managed floats have generally experienced lower inflation than those without pegs, but their currency arrangement constrains their ability to control the pace of monetary policy tightening. Peggers need to keep policy rates in lock with the anchor policy rate to preserve external stability and foreign exchange reserves.
SSA faced significant exchange rate pressures last year. These were predominantly brought on by shifts in global fundamentals, including higher US interest rates and shifts in the terms of trade. Many countries have taken actions to contain these pressures in the past year. Tighter monetary policy has helped, but some countries also intervened in foreign exchange markets, while others applied administrative measures or rationing. The general advice is that, in the face of shifting fundamentals, countries should let their exchange rates adjust.
As traditional channels of development finance become less reliable, structural reforms are more important than ever to alleviate the government financing constraints and generate new resources. This means, (i) better mobilising domestic resources, namely taxes but also deepening domestic financial markets; (ii) continuing to diversify the economic structure (especially for commodity producers), since the lack of diversification can aggravate the procyclical tightening; (iii) attracting new forms of international finance, including climate and private; and (iv) creating a business-friendly environment to develop the private sector.
Reforms will also need to respond effectively to accelerating climate change – enhancing countries’ resilience and setting the preconditions for a green transition. Climate funding remains far short of climate needs. Today, climate finance flows received by the region are on the order of $20 billion a year, compared to adaptation costs of $50bn a year and much more for mitigation costs. In coming years, climate change will create new spending pressures and aggravate further the financing shortage. Thus, more international concessional funding is a key priority. To help unlock additional financing (both concessional and private), development partners – including the IMF – can support countries in building and strengthening local capacity. The IMF’s new Resilience and Sustainability Facility is an important new financing instrument that will help SSA address longer-term structural challenges such as climate change.
Present at the workshop were officials from the Ministry of Finance, National Planning & Trade and the Central Bank of Seychelles.
Press release from the Ministry of Finance, National Planning & Trade