IMF Regional Economic Outlook Sub-Saharan Africa April 2016

8/17/2019 IMF Regional Economic Outlook Sub-Saharan Africa April 2016

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Regional Economic Outlook

Sub-Saharan Africa Time for a Policy Reset

Wor ld Economic and Financia l Surveys

I N T E R N A T I O N A L M O N E T A R Y F U N D

16 A P R


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W o r l d E c o n o m i c a n d F i n a n c i a l S u r v e y s

Regional Economic Outlook

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Time for a Policy Reset


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©2016 International Monetary Fund

Cataloging-in-Publication Data

Regional economic outlook. Sub-Saharan Africa. — Washington, D.C.: International

Monetary Fund, 2003–

v. ; cm. — (World economic and financial surveys, 0258-7440)

Began in 2003.

Some issues have thematic titles.

1. Economic forecasting — Africa, Sub-Saharan — Periodicals. 2. Africa, Sub-Saharan —

Economic conditions — 1960 — Periodicals. 3. Economic development — Africa, Sub-Saharan

— Periodicals. I. itle: Sub-Saharan Africa. II. International Monetary Fund. III. Series: World

economic and financial surveys.

HC800.A1 R445

ISBN: 978-1-49838-813-9 (paper)ISBN: 978-1-47551-987-7 (Web PDF)

Te Regional Economic Outlook: Sub-Saharan Africa is published twice a year, in the

spring and fall, to review developments in sub-Saharan Africa. Both projections and

policy considerations are those of the IMF staff and do not necessarily represent the

views of the IMF, its Executive Board, or IMF management.

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Contents

Abbreviations ..................................................................................................................................... vi

Acknowledgments .................................................................................................................................. viiExecutive Summary ................................................................................................................................ ix 1. Time for a Policy Reset ................................................................................................................... 1 Anatomy of a Slowdown .............................................................................................................3 Outlook and Risks .....................................................................................................................11 Policies Generally Need to Adjust at a Faster Pace ......................................................................132. Weathering the Commodity Price Slump ....................................................................................25 Commodity erms-of-rade Cycles in Sub-Saharan Africa ........................................................26 Commodity Price Swings and Macroeconomic Performance .....................................................30 Policies to Enhance Resilience to Shocks ....................................................................................36

Conclusions ...............................................................................................................................40 Annex 2.1. Commodity erms of rade: Variable Construction and Methods .........................453. Financial Development and Sustainable Growth .........................................................................51 How Has the Region’s Financial Sector Developed in the Past Few Decades? ............................52 Financial Stability and Regulatory Reforms ................................................................................58 o What Extent Has Financial Development Boosted Growth and Lowered Its Volatility? .......61 What Drives or Inhibits Financial Development in Sub-Saharan Africa? ....................................66 Policy Recommendations ...........................................................................................................68Statistical Appendix ..............................................................................................................................79References .......................................................................................................................................... 113

Publications of the IMF African Department, 2009–16 ...................................................................117Boxes

1.1. Impact of the Drought in Southern and Eastern Africa ..............................................................151.2. Private Sector Credit Growth Developments in Sub-Saharan Africa ...........................................171.3. Fiscal Dominance—An Illustrative Exercise ...............................................................................191.4. Regional Spillovers Within Sub-Saharan Africa ..........................................................................211.5. Te Treat of errorism .............................................................................................................232.1. Commodity erms of rade ......................................................................................................412.2. Commodity Price Slumps Hold Back Economic Activity: Te Cases of Nigeria and

the Republic of Congo ...........................................................................................................42

3.1. Gender Inequality in Financial Access and Macroeconomic Outcomes ......................................713.2. Supporting Financial Development and Inclusion Trough Mobile Payments

and Banking Services ...............................................................................................................743.3. Te Roles of Microfinance in Promoting Financial Inclusion .....................................................763.4. Measuring Financial Development and Inclusion .......................................................................78


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REGIONAL ECONOMIC OUTLOOK: SUB-SAHARAN AFRICA

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Tables

1.1. Sub-Saharan Africa: Real GDP Growth .....................................................................................111.2. Sub-Saharan Africa: Other Macroeconomic Indicators ...............................................................122.1. Sub-Saharan Africa Commodity Exporters: Largest Commodity erms-of-rade Declines ........312.2. Impact of Commodity Shocks on Real GDP Growth: Regression Results ..................................373.1. Sub-Saharan Africa: Financial Sector Supervisory Standards.......................................................603.2. Sub-Saharan Africa: Estimation Results of Impact of Financial Development on Growth ..........633.3. Sub-Saharan Africa: Estimation Results of Impact of Financial Development on Growth

Volatility .................................................................................................................................653.4. Sub-Saharan Africa: Drivers of Financial Development ..............................................................673.5. Sub-Saharan Africa: op Ranking of Coefficients between the Distance to the Benchmark and Detailed Institutional Quality ..........................................................................................69Figures

Chapter 1

1.1. Sub-Saharan Africa: Change in Real GDP Growth, Average 2010–14 to Average 2015–16 ........21.2. Episodes of Largest 18-Month Decline in Real Crude Oil Prices, 1970–2015 .............................21.3. Emerging Market Spreads: 2014–16 ...........................................................................................31.4. Sub-Saharan Africa: rade Balance with China, 2005–15 ...........................................................41.5. Selected Average Commodity Price Changes from 2013 .............................................................41.6. Sub-Saharan Africa: Change in Current Account Balance and Nominal Exchange Rate,

2014–15 .................................................................................................................................51.7. Sub-Saharan Africa: End-of-Period Inflation, 2014 versus 2015 ..................................................51.8. Sub-Saharan Africa: Change in Expenditure and Revenue, Average 2010–13 to 2015 ................61.9. Sub-Saharan Africa: rends in Public Debt and Borrowing Costs ...............................................7

1.10. Sub-Saharan Africa: Current Account Balance and Change in Reserves, 2015.............................81.11. Sub-Saharan Africa: Change in Monetary Policy Rate since December 2014 ..............................81.12. Sub-Saharan Africa: Change in Base Money Growth, 2014–15 ..................................................81.13. Sub-Saharan Africa: Growth of Credit to the Private Sector ........................................................91.14. Sub-Saharan Africa: Nonperforming Loans, Average 2010–13 versus 2015 ................................91.15. Sub-Saharan African Selected Countries: Advances from the Central Bank,

Average 2010–13 and 2015 .....................................................................................................101.16. CFA Franc Zone: Central Bank Financing versus Commercial Banks’ Exposure to Government,

Average 2010–13 to 2015 .......................................................................................................10

Chapter 2

2.1. Selected Regions: Net Commodity Exports to GDP ..................................................................272.2. Sub-Saharan African Commodity-Exporting Countries by Decade ............................................272.3. Sub-Saharan African Energy and Metal Exporters: Net Commodity Exports to GDP,

2010–14 Average ....................................................................................................................282.4. World Commodity Prices, 1971–2015 ......................................................................................282.5. Sub-Saharan Africa and Comparator Countries: Commodity erms of rade ..........................29


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CONTENTS

2.6. Sub-Saharan African Extractive Commodity Exporters: Commodity erms of rade,2000–15 .................................................................................................................................29

2.7. Sub-Saharan Africa: Commodity erms of rade and GDP Growth, 2000–11 .........................302.8. Selected Country Groupings: Real GDP Growth during Commodity Price Upswings

and Downswings .....................................................................................................................322.9. Sub-Saharan African Energy Exporters: Key Macroeconomic Variables during Commodity

Price Upswings and Downswings ............................................................................................322.10. Sub-Saharan Africa: Exchange Rate Flexibility and Public Debt during Episodes of Low and

High Resilience of Output Growth .........................................................................................332.11. Sub-Saharan Africa: Inflation during Commodity Price Upswings and Downswings by ype

of Exchange Rate Regime ........................................................................................................332.12. Sub-Saharan Africa: Effects of Commodity erms-of-rade Shocks ...........................................352.13. Sub-Saharan Africa and Other Countries: otal International Reserves ......................................392.14. Sub-Saharan Africa and Other Countries: External Debt ...........................................................392.15. Sub-Saharan Africa and Other Countries: Inflation ....................................................................39

Chapter 3

3.1. Sub-Saharan Africa: Standard Measures of Financial Depth .......................................................533.2. Sub-Saharan Africa: Sector Assets, 2012 .....................................................................................543.3. Sub-Saharan Africa: Indicators of Financial Inclusion ................................................................553.4. Sub-Saharan African Countries: Financial Inclusion...................................................................563.5. Sub-Saharan Africa: Financial Development Index, 1980–2013 .................................................573.6. Sub-Saharan Africa: Dimensions of Financial Development .......................................................583.7. Systemic Banking Crises, 1976–2010 .........................................................................................593.8. Sub-Saharan Africa: Financial Soundness Indicators, 2006–14...................................................59

3.9. Sub-Saharan Africa: Actual and Predicted Financial Development, 2013 ...................................623.10. Long-erm Impact on GDP of Relaxing Financial Constraints .................................................643.11. Sub-Saharan Africa: Impact of Financial Development on Growth Volatility .............................643.12. Sub-Saharan Africa: Financial Development and Institutional Quality in 2013 .........................68


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AMs automated teller machinesBCEAO Central Bank of West African StatesBDEAC La Banque de développement des États de l’Afrique centraleBLNS Botswana, Lesotho, Namibia, and SwazilandCEMAC Economic and Monetary Community of Central Africa CFA currency zone of CEMAC and WAEMUCPIA Country Policy and Institutional AssessmentCO commodity terms-of-trade index EMBIG Emerging Markets Bond Index Global (JP Morgan)FD financeable deficitFDI foreign direct investment

FEWS NE Famine Early Warning Systems Network GDP gross domestic productGMM generalized method of momentsHIPC heavily indebted poor countriesIPC Integrated Food Security Phase Classif icaionLFP labor force participationLICs low-income countriesMFIs microfinance institutionsNPLs nonperforming loansPABs pan-African banksRBI required fisca l improvement

REO Regional Economic Outlook (IMF)SACU Southern African Customs UnionSSA sub-Saharan Africa FP total factor productivity USAID United States Agency for International DevelopmentVAR vector autoregressionVIX Chicago Board Options Exchange Volatility Index

WAEMU West African Economic and Monetary Union WEO World Economic Outlook (IMF)

Abbreviations


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Tis April 2016 issue of the Regional Economic Outlook: Sub-Saharan Africa (REO) was preparedby a team led by Céline Allard under the direction of Abebe Aemro Selassie.

Te team included Francisco Arizala, Wenjie Chen, Larry Qiang Cui, Jesus Gonzalez-Garcia,Cleary Haines, Dalia Hakura, Mumtaz Hussain, Ahmat Jidoud, Montfort Mlachila,Bhaswar Mukhopadhyay, Monique Newiak, Marco Pani, Bozena Radzewicz-Bak, Misa akebe,im Willems, Yanmin Ye, Mustafa Yenice, and Jiayi Zhang.

Specific contributions were made by Aidar Abdychev, Corinne Delechat, Geremia Palomba,and Fan Yang.

Natasha Minges was responsible for document production, with production assistance fromCharlotte Vazquez. Te editing and production were overseen by Joanne Creary Johnson ofthe Communications Department.

Acknowledgments

Te following conventions are used in this publication:• In tables, a blank cell indicates “not applicable,” ellipsis points (. . .) indicate “not available,” and 0 or

0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totalsare due to rounding.

• An en dash (–) between years or months (for example, 2009–10 or January–June) indicates the yearsor months covered, including the beginning and ending years or months; a slash or virgule (/) betweenyears or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY(for example, FY2006).

• “Billion” means a thousand million; “trillion” means a thousand billion.

• “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent

to ¼ of 1 percentage point).


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Executive Summary

TIME FOR A POLICY RESETEconomic activity in sub-Saharan Africa has weakened markedly, but, as usual, with a large variation incountry circumstances. Growth for the region as a whole fell to 3½ percent in 2015, the lowest level insome 15 years, and is set to decelerate further this year to 3 percent—well below the 5 to 7 percent rangeexperienced over the past decade.

• Te sharp decline in commodity prices has put severe strains on many of the largest sub-Saharan Africaneconomies. Oil exporters, which include Angola and Nigeria, continue to face difficult economic con-ditions (with growth for oil exporters as a whole forecast to slow further to 2¼ percent this year from6 percent in 2014), but so do non-energy-commodity exporters, such as Ghana, South Africa, andZambia. Meanwhile, Guinea, Liberia, and Sierra Leone are only gradually recovering from the Ebolaepidemic, and several southern and eastern African countries, including Ethiopia, Malawi, and

Zimbabwe, are suffering from a severe drought.• At the same time, many other countries continue to register robust growth. Most oil importers are

generally faring better, with growth in excess of 5 percent and even higher in countries such asCôte d’Ivoire, Kenya, and Senegal. In most of these countries, growth is being supported by ongoinginfrastructure investment efforts and strong private consumption. Te decline in oil prices has also helpedthese countries, though the windfall has tended to be smaller than expected, as exposure to the decline inother commodity prices and currency depreciations have partly offset the gains in many of them.

Although this overall markedly weaker picture begs the question as to whether the region’s recentgrowth momentum has stalled, our view is that medium-term growth prospects remain favorable.Clearly, with the advent of a far less supportive external environment, the immediate outlook for manysub-Saharan African countries remains difficult and clouded by downside risks. But beyond these current

challenges, the underlying drivers of growth that have been in play domestically in the region over the pastdecade or so—most importantly, the much improved business environment—generally continue to be inplace, and favorable demographics are poised to support these drivers over the coming decades.

However, to realize this potential, a substantial policy reset is critical in many cases.

• o date, the policy response among most commodity exporters to the historically large terms-of-tradeshock has generally been behind the curve. A year and a half into the shock, and with fiscal and foreignreserves running low and financing constrained, a robust and prompt policy response is needed urgentlyto prevent a disorderly adjustment. For countries outside monetary unions, exchange rate flexibility,coupled with supportive monetary and fiscal policies, should be the first line of defense. Because thereduction in revenue from the extractive sector is expected to persist, many affected countries alsocritically need to contain fiscal deficits and build a sustainable tax base from the rest of the economy.

• With the external financing environment markedly tighter, fiscal policy will also need to be recalibratedamong the region’s market access countries where fiscal and current account deficits have been elevatedover the last few years, lest they find themselves with low buffers and vulnerable to a financial crisis ifexternal conditions worsen further.


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WEATHERING THE COMMODITY PRICE SLUMP

Te second chapter of this publication examines in more detail how the dependence on natural resourceshas made nearly half of the countries in the region vulnerable to a decline in commodity prices. As a result,

though higher commodity prices have in part supported these countries’ strong growth of the past decade orso, their exposure to commodity price fluctuations also has a strong macroeconomic impact in downturns, asrecent developments attest.

Te most vulnerable countries by far are the region’s oil exporters. For them, the commodity terms-of-tradeshock since mid-2014 has represented an income loss from oil price fluctuations of about 20 percent ofGDP. A shock of such a magnitude typically shaves annual growth by some 3 to 3½ percentage points forseveral years—which is broadly consistent with the growth deceleration observed for oil exporters since 2014.Comparatively, metal exporters have tended to be less affected, although there are important price thresholds,beyond which mines close and jobs are lost, with a detrimental impact on activity.

Evidence from past downswings also highlights the critical role of exchange rate flexibility as a shock absorberfor countries that are not part of a currency union. Countercyclical policies too can be important to smooth

temporary shocks, and in the last few years, commodity exporters have indeed allowed fiscal deficits to widenin response to declining revenues. However, with fiscal space rapidly diminishing among sub-Saharan Africancommodity exporters, and commodity prices foreseen to remain low for long, adjustment is increasingly calledfor. Better domestic revenue mobilization offers substantial potential to strengthen the fiscal balance, whileefforts to improve the prioritization, quality, and efficiency of public investment and to enhance the businessclimate should be actively pursued, so as to further economic diversification and increase economic resilience.

FINANCIAL DEVELOPMENT AND SUSTAINABLE GROWTH

Te third chapter documents the substantial progress made by the region in financial development,including in financial services based on mobile telephone and through large home-grown pan-African banks.Empirical evidence suggests that financial development has indeed supported growth and reduced its volatilityin the region, as it helped mobilize and allocate financial resources, and supported other economic policies inenhancing growth and stabilizing the economy.

Even so, there is still considerable scope for further financial development, especially compared to otherregions—a gap that, if filled, could yield as much as 1½ percentage points of additional growth on averagefor countries in the region. With the exception of the region’s middle-income countries, both financial marketdepth and institutional development remain lower than in other developing regions.

Te region’s improving financial development has been largely driven by better macroeconomic fundamen-tals, but hindered by weak institutional quality, and policies should focus especially on improving legalframeworks and corporate governance to further support financial development.


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Economic activity in sub-Saharan Africa in 2015slumped to its lowest level in some 15 years.Output expanded by 3.4 percent, just a littleabove population growth, down from 5 percentin 2014 and the still higher growth rates that werecustomary in recent years. Te main reason for theslowdown is the sharp decline in commodity prices, which has placed a number of the region’s largercountries under severe strain, with a pronouncedimpact on the regionwide aggregate.

Much in the same vein, this year is set to be anotherdifficult one. We project growth to be still lower

at 3 percent as many countries grapple with themore difficult external environment. Beyond that,drought (particularly in eastern and southern Africa) is set to be an added source of economicdifficulties for several countries.

Tere is, though, considerable heterogeneity ingrowth performance over 2015–16, which isevident from the three broad country groupings(Figure 1.1):

• In close to half of the 45 countries in theregion, growth has dropped from their

trajectory prior to the advent of the moredifficult external environment, in some casessignificantly so. Tis group includes the region’soil exporters (Angola, most CEMAC countries,1 and Nigeria) and several non-energy-resourceexporters (such as Ghana, South Africa, andZambia). Also in this category are Liberia andSierra Leone, which had been severely impactedby the recent Ebola epidemic and are nowsuffering from lower commodity prices, as wellas several countries in southern and eastern Africa that are suffering from the drought.

• In one-third of countries—all oil-importers—and most with limited dependence oncommodity exports, growth looks set toremain broadly unchanged relative to recentyears.2 Indeed, in many of these countries,especially low-income countries, this representsa continuation of the strong growth trend ofrecent years, stimulated by strong domesticinvestment and supported by lower oil prices.In a few countries though, this represents apersistence of lackluster growth.

• In a third (much smaller) group of countries

growth prospects in 2015–16 havestrengthened, reflecting either (1) a reboundfrom severe shocks or attenuation of conflict(such as in the Central African Republic); or(2) elevated public infrastructure investment,a good agricultural season, and an improvedbusiness environment (such as in Côte d’Ivoireand Senegal); and (3) a positive impact from thelower oil prices.

Te overall weaker outturns beg the question as to whether the region’s recent growth momentum hasstalled with the advent of a more difficult external

environment. We remain optimistic about theregion’s medium-term growth prospects. For one,as noted above, even the current growth pictureis highly varied across countries. Second, andperhaps more important, the underlying drivers ofgrowth over the medium term (including favorabledemographics) remain in place. What the currentslowdown shows instead is that the region is notimmune to the multiple transitions afoot in theglobal economy. Te high growth over the lastdecade was made possible by economic reforms andsound policies on the domestic front, coupled with

a highly favorable external environment, includinghigh commodity prices and ample inexpensive

2 Tis corresponds to growth remaining within a 1 percentband of its pre-shock average over 2010–14.

1. Time for a Policy Reset

Tis chapter was prepared by a team led byBhaswar Mukhopadyay comprised of Francisco Arizala,Cleary Haines, Monique Newiak, Marco Pani, andim Willems.1 Te Economic and Monetary Community of Central AfricanStates (CEMAC) includes Cameroon, the Central AfricanRepublic, Chad, Republic of Congo, Equatorial Guinea, andGabon.


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2

capital inflows.3 With the external environmentnow much less supportive though, a policy reset is

needed to reinvigorate the growth momentum.In the broadest of terms, the policy reset required isas follows:

• For natural resource exporters, a robust andprompt policy response is needed given theprospect of an extended period of sharplylower commodity prices. o date, the policyresponse—particularly among oil exporters—toa terms-of-trade decline of historic magnitude(Figure 1.2) has to a large extent been hesitantand insufficient. But with fiscal and foreignexchange reserve buffers limited and financingconstrained, the required adjustment willhappen, one way or another: the options reallyare between orderly and disorderly adjustment. And by far the best way to lay the groundworkfor a quicker, durable, and inclusive economicrecovery lies in an orderly adjustment process. Accordingly, for countries outside monetaryunions, exchange rate flexibility coupled withsupportive policies should be the first line ofdefense. As revenue from the extractive sectoris expected to be durably reduced, countriesneed to contain fiscal deficits, with the urgency

of adjustment depending on the extent ofmacroeconomic and debt vulnerabilities, andavailable external and fiscal buffers. o theextent possible, this adjustment should take

3 Of course, though high commodity prices benefited naturalresource exporters, they adversely impacted a majority ofcountries in the region that do not rely much on mineralsexports.

place on the revenue side where there is muchscope in many countries (see October 2015

Regional Economic Outlook: Sub-Saharan Africa ). However, expenditure measures willalso be necessary where adjustment needs areurgent and benefits from revenue measures willtake time to materialize.

• In the region’s market access countries,adequate policy recalibration consistent with themore difficult external financing environmentis also needed. Mainly playing off the favorableexternal financing environment of recent years,fiscal and external current account deficits havebeen elevated in many of the region’s frontier

markets as they have sought to address extensiveinfrastructure gaps. However, the externalfinancing environment has now tightenedmarkedly—the increase in financing costs forsub-Saharan African borrowers has been muchmore pronounced than for most emergingmarkets (Figure 1.3). Against this backdrop,

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Figure 1.1. Sub-Saharan Africa: Change in Real GDP Growth, Average 2010–14 to Average 2015–16

Source: IMF, World Economic Outlook database.

Note: See page 82 for country abbreviations.

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Figure 1.2. Episodes of Largest 18-Month Decline in Real CrudeOil Prices, 1970–2015

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1. TIME FOR A POLICY RESET

it is important that fiscal deficits are curtailed,depending on country circumstances, throughbetter prioritization of spending initiatives and/or stronger revenue mobilization. If deficits are

not curbed, these countries will be left withoutbuffers and, worse still, remain vulnerable toa financing crisis (should external financingconditions get even more difficult).

Te rest of Chapter 1 outlines the strong externalheadwinds the region is facing, highlights theirimpact on growth performance across variouscountry groupings, and gives an overview of howdomestic policies have dealt with this unfavorableenvironment. It presents the outlook and risks forthe region, and ends with policy recommendations.

Complementing the analysis, evidence from pastswings in commodity prices in sub-Saharan Africasuggests that commodity price cycles have long-lasting effects on key macroeconomic variables butthat stronger macroeconomic policies, in particularexchange rate flexibility, substantially mitigatethe impact of commodity price shocks. Chapter 2elaborates in detail on these findings.

Looking at more medium-term issues, Chapter 3finds that financial development in the regionhas increased significantly over the past decades.However, based on an analysis of sub-Saharan

Africa’s structural characteristics and a comparison

with other developing regions, the chapterhighlights that there is scope for further financialdevelopment in the region. Further developmentof financial institutions and markets could, in

turn, boost the region’s economic growth andlower its volatility. Te chapter identifies soundmacroeconomic fundamentals as a major driver offinancial development in the region, whereas weakinstitutions have impeded development in the past.

ANATOMY OF A SLOWDOWN

A world of multiple shocks

Global growth was 3.1 percent in 2015 and isexpected to remain modest at 3.2 percent in 2016,

before picking up gradually to 3.6 percent in 2017.Global growth remains broadly unchanged, butits composition has become less favorable for sub-Saharan Africa. In particular, the rebalancing andslowdown of the Chinese economy is a driving forcebehind low commodity prices. ogether with loweroil prices—associated also with increased globalsupply—and tighter global financing conditions,this is adversely affecting growth and posingsignificant policy challenges for a number of sub-Saharan African countries (see April 2016 WorldEconomic Outlook ).

• China has become the region’s major tradepartner and increasingly also a source of foreigndirect investment and other financial flows. Teregion had a surplus in its trade balance withChina for nearly 15 years, which had improvedsharply since the global financial crisis.However, as a result of the ongoing transitionin China, the trade balance has recently turnedinto a deficit. Tis is predominantly the resultof collapsing exports from the region, primarilyon account of lower prices and demand forcommodities from China. But, as is evident

from Figure 1.4, the trade deficit of countriesin the region that are not oil and resourceexporters has also deteriorated recently. Tedecline in the region’s exports to China hasfar outweighed the more moderate decline inChina’s exports to the region. Tese trendsare likely to remain a drag on growth over themedium term.

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Source: Bloomberg, L.P.

Note: Data as of March 25, 2016.1 The emerging market average includes the Emerging Market BondIndex Global (EMBIG) spreads of Argentina, Brazil, Bulgaria, Chile,Colombia, Hungary, Malaysia, Mexico, Peru, Philippines, Poland,Russia, South Africa, Turkey, and Ukraine.² The frontier markets spread includes the spreads of Côte d’Ivoire,Gabon, Ghana, Kenya, Nigeria, Senegal, Tanzania, and Zambia.


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• In the 18-month period through end-2015,crude oil prices declined more than in any other

18-month period since 1970 (see Figure 1.2).Other commodity prices have also fallen sharplysince 2013, and are expected to remain evenbelow their 2015 levels in 2016, and subduedin the medium term (Figure 1.5). For instance,under current projections, by 2020, energy andsome metal prices are expected to recover to just about half of their 2013 peak levels. Teshock is amplified by the fact that the share ofcommodities in exports has increased over thepast 15 years for most commodity exportersin the region (see Chapter 2). Furthermore,

the shock could also affect investment incountries in which exploration of oil and othercommodities is planned.

• Global financial conditions have tightenedsubstantially for most of the region’s frontiermarkets. Tis development reflects in part theinception of a gradual tightening of monetarypolicy in the United States and a broaderepisode of financial volatility amid concernsabout growth prospects in emerging markets.However, the region’s frontier markets’ spreadshave widened significantly more than for

the global emerging market group, possiblyreflecting larger vulnerabilities in some of theregion’s countries (see Figure 1.3).4 In parallel,some forms of capital flows to the region,

4 For an analysis of the general drivers of spreads, see April2015 Regional Economic Outlook: Sub-Saharan Africa, and Box1.4, including on evidence of spillovers from larger economiesof the region.

notably cross-border bank loans, on which abroader group of countries than just the frontiermarkets rely, declined significantly from its levelin 2014.

Large parts of southern and eastern Africa arefacing a severe drought, putting millions of peoplein a situation of food insecurity and impactingmacroeconomic activity (Box 1.1). Growth isexpected to be significantly affected in a numberof countries (Ethiopia, Malawi, Zambia), and food

inflation is accelerating in many countries. Severalare also facing pressures on their budgetary andexternal positions, with additional humanitarianassistance needs.

A severe impact

Te region’s growth has already slowed markedly.Growth in 2015 is estimated to have declined to3.4 percent, from 5.1 percent in 2014.

Oil exporters have been hit very hard by the greaterthan anticipated decline in oil prices.5 Teir growth

rate in 2015 is estimated to have more than halvedto 2.6 percent compared with 5.9 percent the yearbefore, and fiscal and current account balances havedeteriorated sharply.

5 See able 1.1 for a list of countries classified as oil exportersand nonrenewable resource exporters. Any country that is notan oil exporter is considered an oil importer.

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B i l l i o n s o u - a aran r ca

Sub-Saharan Africa excluding oil and nonrenewableresource exporters

Figure 1.4. Sub-Saharan Africa: Trade Balance with China, 2005–15

Source: IMF, Direction of Trade Statistics.

–40

–20

0

20

40

r c e n t c h a n g e f r o m 2

0 1 3

2015

–80

–60

I r o n o r e

C r u d e o i l

N a t u r a l g a s

C o a l

C o p p e r

C o t t o n

G o l d

D i a m o n d s

C o f f e e

T e a

C o c o a

P

2020 projections

Figure 1.5. Selected Average Commodity Price Changes from 2013

Sources: IMF, Commodity Price System; and IMF Global Assumptions.

Note: Besides oil, some of the main export commodities in the regionare copper (the Democratic Republic of Congo and Zambia), iron ore(Liberia and Sierra Leone), coal (Mozambique and South Africa), gold

(Burkina Faso, Ghana, Mali, South Africa, and Tanzania), and platinum(South Africa).


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Meanwhile, gains for oil importers have beensmaller than expected. ypically, the decline in oil

prices should have translated into an increase in realdisposable incomes and higher aggregate demand.However, abstracting from country-specific factors,two developments appear to have impeded the fullrealization of such benefits:

• Te decline in commodity prices has adverselyimpacted the exports of sub-Saharan Africa’s 15 major exporters of non-oil,nonrenewable resources in 2015. In some cases,this has more than offset the improvement inthe oil trade balance, widening current accountdeficits.

• Many currencies in the region have depreciatedsignificantly against a strong U.S. dollar(Figure 1.6), limiting the decline of oil pricesin domestic currency terms and acceleratinginflation (Figure 1.7). In addition, in somecountries, administered energy prices have notbeen adjusted to transmit the full decline oflower fuel prices to final consumers.6

Nonetheless, growth remained strong in many oil-importing countries, with the region’s non-fragilelow-income countries in particular experiencing

growth of 7.2 percent, aided in many instances bylarge ongoing infrastructure spending (for example,in some countries of the West African Economicand Monetary Union—WAEMU).6 Box 1.2 in the April 2015 Regional Economic Outlook: Sub-Saharan Africa , notes that only 35 percent of countries in theregion allow automatic adjustment of fuel prices, with theothers setting them administratively.

Fiscal policy has responded, but as yet notsufciently…

In most resource-rich countries, revenue shortfallshave been significant, and fiscal balanceshave deteriorated despite some adjustment inexpenditures.

• Oil exporters, which are more heavilydependent on resource revenues than othercommodity exporters, have in nearly all casesseen a substantial reduction in commodity

(and total) revenues compared to 2010–13levels, that is, before oil prices slumped(Figure 1.8). At the same time, spendinghas risen substantially in Cameroon and theRepublic of Congo, while other countries haveenacted spending cuts varying from substantial(Angola, Chad) to modest (Nigeria). Withfiscal adjustment or financing lagging, delays indomestic payments have increased in a numberof countries (for example, Angola, Chad,Nigeria).

• Some non-energy-resource exporters havealso seen a sharp drop in revenue collection(Central African Republic, Liberia, SierraLeone, and Zambia) which have not been fullycompensated by governments’ fiscal responses.Indeed, in some instances expenditures haveeven increased. Tis has been the case inZambia, where the decline in copper prices and

AGOBWA

LSO

MWIMOZ ZAF

TZA

ZMB

30

4050

60

70

80

l e x c h a n g

e r a t e l o c a l

. S .

d o l l a r ,

p e r c e n t

SWZ D e p r e c i a t i o n

BFA

BDI

CAF

COD

COG

CIVETH

GAB

GMB

LBR

STP

SYC

SSD

ZWE

–20

–10

0

10

–20 –15 –10 –5 0 5 10 15 20

C h a n g e i n n o m i n

c u r r e n c y p e r

Change in current account balance, percentage points of GDP

A p p r e c i a t i o nSLE

Change in current account balance, percentage points of GDP

Figure 1.6. Sub-Saharan Africa: Change in Current Account Balanceand Nominal Exchange Rate, 2014–15



AGO

BDI ERIETH

GHA

MWI

MOZNGA

SLE

ZMB

10

15

20

25

30

2 0 1 5 ,

p e r c e n t

BEN

CMR

CAF

TCD

COM

GNQ

ZWE –5

0

5

–5 0 5 10 15 20 25 30

2014, percent

Figure 1.7. Sub-Saharan Africa: End-of-Period Ination, 2014versus 2015




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6

electricity shortages have produced an especiallyacute shock on economic activity, as well as inNiger, where the public investment programhas been scaled up. By contrast, Ghana’s fiscalposition improved in 2015, but the high levelof its deficit and debt still puts a high premiumon further fiscal consolidation.

In a number of other countries, fiscal policy wasnot suitably consolidated. For instance, in Kenya,fiscal consolidation could help reduce the burdenon monetary policy and support the adjustment toan external environment of lower financial inflows.Côte d’Ivoire, which is investing heavily, could alsotake advantage of its presently strong growth to startconsolidating its fiscal position.

... triggering increased debt nancing underdifcult market conditions.

In the context of weak growth and elevated deficits,the region’s debt level is on the rise (Figure 1.9,panel 1). Even before 2014, debt was already risingnotwithstanding relatively strong growth rates.Between 2014 and 2015, with weaker growth,larger fiscal deficits and exchange rate depreciations,public debt increased even more markedly(the median public-debt-to-GDP ratio rose by5¼ percentage points to about 43 percent).

• In most oil-exporting and other resource-intensive countries, the decline in commodityrevenue and resulting fiscal expansion havedriven the debt dynamics as fiscal gaps have

been increasingly filled with debt creating flows(Figure 1.9, panel 2). Oil exporters, such as Angola, Cameroon, the Republic of Congo,and Gabon, experienced particularly largeincreases (17 to 33 percentage points betweenthe 2010–13 average and 2015) to levels up to65 percent of GDP. Te rise in debt in otherresource-intensive countries was smaller, withsome exceptions (Ghana, Zambia). In somecountries, a depreciating exchange rate hasalso contributed to rising debt levels(Angola, anzania).

• With a few exceptions (Cabo Verde, TeGambia, Mozambique, and Seychelles),increases were much smaller in most non-resource-intensive countries. Te sources ofdebt increases vary, but public infrastructureinvestments appear to be a commondenominator (Cabo Verde, Mozambique,São omé and Príncipe), while poor growthand a depreciating exchange rate (Cabo Verde),unsustainable policies (Te Gambia) or weakfiscal revenue (Lesotho) also played a role.

• Both external and domestic debt contributedto the increase in public debt, and debtsustainability assessments have deterioratedin a number of countries (Figure 1.9, panels3 and 4). In addition, the rise in domesticdebt has increased the exposure of commercialbanks to the government, especially amongoil exporters and other resource-intensivecountries, including notably in Angola andGabon. Conversely, Ghana and Zambia haveraised substantial funds from recent Eurobondissuances.

Furthermore, borrowing costs have generallyincreased (Figure 1.9, panels 5 and 6). Te costof external debt has increased sharply since theend of 2014, triggered by the continued declinein commodity prices, oil price volatility, andheightened risk aversion by foreign investors. Yieldson Eurobonds are now at or close to double-digitlevels in a number of the region’s frontier markets,

AGO

TCD

COG

GAB

GHA

LBR

NER

CPV

LSO

SYC

SWZBEN

MWI

BDI

GNB

STP

–22

–18

–14

–10

–6

–2

2

6

10

14

18

22

–22 –18 –14 –10 –6 –2 2 6 10 14 18 22

C h a n g e i n g o v e r n m e n t e x p e n d i t u r e ,

p e r c e n t a g e p o i n t s o f G D P

Change in government revenue,

percentage points of GDP

Resource-intensivecountries

Non-resource-intensive countries

AGO

C

AB

BDI

E

Revenues hortfall >expenditure adjustment

Expenditure increase> revenue increase

RB

x e diture aseevenueinc

Figure 1.8. Sub-Saharan Africa: Change in Expenditure and Revenue,Average 2010–13 to 2015




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Sources: Bloomberg, L.P.; Country authorities; IMF Debt Sustainability Analysis database; IMF, International Financial Statistics; IMF, World EconomicOutlook database; and IMF staff calculations.

Note: See page 82 for country abbreviations.1 Lesotho and South Sudan have been excluded due to data availability. The “Other” category comprises debt relief (Heavily Indebted Poor Countryand other), privatization proceeds, recognition of implicit or contingent liabilities, other country-specic factors (such as bank recapitalization), assetvaluation changes, and other unidentied debt-creating ows as dened in the IMF-World Bank Debt Sustainability Framework.2 For South Sudan data are average 2012–13 compared with 2015. 3 Excludes Angola and Nigeria as they are no longer classied as a low-income countries. Debt risk ratings for Cabo Verde begin in 2014 and forSouth Sudan in 2015.4 Data as of March 25, 2016.5 Data as of March 25, 2016. EMBIG = JP Morgan Emerging Market Bond Index Global.

0

20

40

60

80

100

120

C O G

A G O

S S D ²

G A B

T C D

C M R

G N Q

N G A

G H A

C A F

Z W E

Z M B

Z A F

G I N

S L E

N E R

M L I

T Z A

B F A

N A M

C O D

B W A

C P V

G M B

S T P

M O Z

S Y C

T G O

L S O

M U S

G N B

S E N

K E N

E T H

L B R

B D I

B E N

M D G

U G A

C I V

R W A

C O M

S W Z

Oil exporters Other resource-intensive countries Non-resource-intensive countries

P e r c e n t o f G D P

Average 2010–13 2015

2. Total Public Debt, 2010–15

13 138

1014

20

6

565

22

0

4

8

12

16

20

24

28

32

36

2010 2013 2015

N u m b e r o f c o u n t r i e s

Low Moderate High Distress

4. Status of Risk of Debt Distress for Low-IncomeCountries, 2010–153

CIV

GAB

GHA

KENNGA

SENZAFTZAZMB

–8

–6

–4

–2

0

2

4

6

8

10

12

-14 -12 -10 -8 -6 -4 -2 0

C h a n g e i n f i s c a l b a l a n c e 2 0 1 4 t o

2 0 1 5 , p e r c e n t a g e p o i n t s o f G D P

Fiscal balance 2015, percent of GDP

Sub-Saharan Africa

Other emerging market anddeveloping countries

AGO

CPV

GHA

KEN

LSO

MOZNAM

RWA

SYC

ZAF

SWZ

GMBUGA

ZMB

–8

–6

–4

–2

0

2

4

6

8

10

12

-14 -12 -10 -8 -6 -4 -2 0 2

C h a n g e i n f i s c a l b a l a n c e 2 0 1 3 t o

2 0 1 5 , p e r c e n t a g e p o i n t s o f G D P

Fiscal balance 2013, percent of GDP

1. Sources of Public Debt Increases 2013–151

5. Fiscal Stance and Increase in Treasury Bill Rates(Size of bubbles proportional to increase in treasury bill rate,January 2014 to latest available)4

6. Fiscal Stance and Increase in Sovereign Bond Spreads(Size of bubble proportional to change in EMBIG spread, basis pointchange since December 2014)5

11.515.4

5.7 8.612.4 15.9

22.428.5

17.5

20.4

9.912.1

25.6

29.4 17.7

20.9

0

5

10

15

20

25

30

35

40

45

50

Avg.2010–13

2015 Avg.2010–13

2015 Avg.2010–13

2015 Avg.2010–13

2015

Sub-Saharan

Africa

Oil exporters Other resource-

intensive countries

Other oil importers

P e r c e n t o f G D P

Domestic debtExternal debt

3. Public Sector Debt Decomposition, Average 2010–13 and 2015

–6

–2

2

6

10

14

18

Oil exporters Other resource-intensive countries Other oil importers Sub-Saharan Africa

M e d i a n , p e r c e n t a g e p o i n t s

Primary deficit Real interest rate contribution Real GDP growth contributionExchange rate depreciation Other Change in debt

Figure 1.9. Sub-Saharan Africa: Trends in Public Debt and Borrowing Costs


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8

compared to about a 4½ percent to 8 percent rangeat the end of 2013. reasury bill rates have alsoincreased beyond the increase in inflation, mostlyin countries with large or expanding fiscal deficits,

and some countries have not been able to mobilizeneeded financing as treasury bill auctions haveon occasion been undersubscribed (Te Gambia,Ghana, Kenya, anzania, Zambia). Looking ahead, with the external environment projected to remainunfavorable, mobilizing sufficient financing maybecome even more challenging.

Exchange rate and monetary policy measureshave been attempted to mitigate the shock

Te severe external shock has triggered exchangerate pressures to which monetary policy responses

have varied.• In some cases, terms-of-trade shocks have been

exacerbated by reduced net inflows of capitalfrom official and private sources triggered, forinstance, by policy uncertainty (South Africa,Zambia), or delayed monetary tightening(Mozambique).

• In general, countries have allowed theircurrencies to adjust, but many have triedto smooth the exchange rate depreciationby dipping into already scarce international

reserves (Figure 1.10). In the CEMAC, whichmaintains a fixed peg to the euro, the declinein international reserves has been substantial,despite the depreciation of the euro against the

U.S. dollar.• In addition, the pass-through of nominal

exchange rate depreciation and the impactof the drought on food supply (for example,Lesotho, South Africa, Zambia; Box 1.1)have pushed up inflation in some countries.o mitigate these pressures, many monetaryauthorities have lowered the growth inmonetary aggregates (Madagascar did not),or raised their policy rates. Nigeria initiallylowered its policy rate but partially reversed thisstance in late March (Figures 1.11 and 1.12).

AGOBEN

BFABDI

CMR

CPVCAFTCD

COMCOD CIV

ERI

ETH

GABGMB

GHA

GNB

KEN

LSO

MDG

MWI

MLIMUSNAM

NER NGARWA

STP SEN

SYCSLE

ZAF SWZTZA

TGOUGA

ZMBZWE SSD

CEMAC

WAEMU

–

–1

0

1

2

3

4

g e i n r e s e r v e s i n m o n t h s o f

i m p o r t s ,

2 0 1 4 –

1 5

CEMAC countriesWAEMU countriesOthers

BWA

BFABDI

GNQ

–4

–3

–2

–20 –15 –10 –5 0 5 10

C h a n g e i

Current account balance 2015, percent of GDP

COG (-14.2, -6.8)

Figure 1.10. Sub-Saharan Africa: Current Account Balance andChange in Reserves, 2015


Note: International reserves are pooled within the WAEMU and withinthe CEMAC and thus regional reserves are available to all membercountries of the respective currency union. However, this chart depictschanges in international reserves for individual WAEMU and CEMACmember countries as this information helps assess individual countries’balance of payments pressures. CEMAC = Economic Communityof Central African States; WAEMU = West African Economic andMonetary Union. See page 82 for country abbreviations.

100

200

300

400

500

600

700

B a s i s p o i n t s

–200

–100

U g a n d a

G h a n a

Z a m b

i a

K e n y a

A n g o

l a

S o u t h A f r i c a

M a u r i t i u s

N i g e r i a

Figure 1.11. Sub-Saharan Africa: Change in Monetary Policy Ratesince December 2014

Source: Haver Analytics.

–15

–10

–5

0

5

10

15

P e r c e n t a g e p o i n t s

–25

–20

M a l a w i

B u r u n d i

T h e G a m b i a

S e y c h e l l e s

E t h i o p i a

S i e r r a L e o n e

M o z a m b i q u e

T a n z a n i a

C o n g o ,

D e m .

R e p .

R w a n d a

M a d a g a s c a r

Figure 1.12. Sub-Saharan Africa: Change in Base Money Growth,2014–15

Source: IMF, International Financial Statistics.


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10

with an inflation objective suggests that thesize of the fiscal deficit in some of them may

not be consistent with their inflation targetsand some stylized notions of sustainable debt(Box 1.3). Tis illustrative exercise highlights thatfiscal vulnerabilities must be addressed, if thesecountries are to avert further tensions betweenfiscal and monetary policies, including the riskof resorting to monetary financing at the cost ofhigher inflation.

Indeed, most recent data highlight that directfinancing from the central bank has increasedin many countries (Figure 1.15). In the CEMAC,limits for statutory advances to the government

were increased in August 2015 (from 20 percent offiscal receipts in 2008 to 20 percent of fiscal receiptsin 2014, representing increases in individualcountry limits of up to 1¼ percent of 2015 GDP).Nonetheless, most of the union’s countries havealready reached their new limits for direct centralbank financing (in the case of Chad even with anexceptional increase in the limit). Direct financingby the central bank to the government has alsoincreased in other countries compared to 2014,such as anzania (within existing legal limits),Guinea and Sierra Leone (largely due to the Ebola

outbreak), and Ethiopia. In Te Gambia, overdueadvances have been securitized into long-term loansbut remain on the central bank’s balance sheet.In most cases, direct financing has taken place atbelow-market rates (for example, Ethiopia, TeGambia, Zambia). Bucking that trend, Ghanaeliminated large previous balances in 2015 as partof the government’s adjustment program.

In some other cases, the provision of financingby the central bank to the banking system

has facilitated the placement of new domesticgovernment debt (Figure 1.16). In the WAEMUin particular, the positive spread between theCentral Bank of West African States’ (BCEAO)key refinancing rate and rates on treasury bills andbonds has increased banks’ incentives to borrowfrom the central bank to invest in public debt,increasing maturity mismatches on banks’ balancesheets (IMF 2015f). Meanwhile, the CEMAC’sregional central bank injected $660 million intothe regional development bank, the Central AfricanState Development Bank (BDEAC), in Januaryto support its role in financing regional publicand private investment projects, blurring the linebetween the traditional role of a central bank anddevelopment financing.

2

4

6

8

10

12

14

f - p e r i o d s t o c k , p e r c e n t o f G D P

Average 2010–13 2015

0

C O G

C A F

G N Q

T C D

G A B

C M R

T Z A

K E N

R W A

E T H

M W I

G I N

Z M B

N G A

M D G

S L E

G H A

G M B

CEMAC EAC Other

E n d -

Figure 1.15. Sub-Saharan African Selected Countries: Advances from the Central Bank, Average 2010–13 and 2015

Sources: Country authorities; and IMF staff estimates.

Note: Data for 2015 are latest available month. CEMAC = Economic Community of Central African States; EAC = East African Community.See page 82 for country abbreviations.

0

2

46

8

10

12

14

16

18

20

0 2 4 6 8 10 12 14 16

C o m m

e r c i a l b a n k s ' c l a i m s

o n t h e g o v e

r n m e n t , p e r c e n t o f a s s e t s

Commercial banks' liability to central bank, percent of assets

CEMAC countries

WAEMU countries

TGO

CIV

BEN

GNQ

NER

BFA

SEN

CAR MLI

GAB

TCD

CMR

COG

Figure 1.16. CFA Franc Zone: Central Bank Financing versusCommercial Banks’ Exposure to Government, Average 2010–13to 2015

Source: IMF, International Financial Statistics.

Note: Arrows point from average 2010–13 to 2015. CEMAC = EconomicCommunity of Central African States; WAEMU = West African Economicand Monetary Union. See page 82 for country abbreviations.


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OUTLOOK AND RISKS

A subdued macroeconomic outlook …

In light of the environment sketched in the previous

section, sub-Saharan Africa is set to continue on atrajectory of subpar growth in 2016 (ables 1.1 and1.2). As the severe external shocks persist, averagegrowth for the region in 2016 is expected to reach just 3 percent, revised downward by 1¼ percentagepoints since the October 2015 Regional EconomicOutlook , and the lowest rate since 1999. However,the observed heterogeneity in growth for countriesacross the region is expected to persist in 2016.In 2017, helped by a small rebound in commodityprices and timely policy implementation,particularly in those countries that are most affected

by the shock, growth is expected to recover to4 percent.

Te outlook in 2016 remains grim for oil exportersand a number of other commodity exporters.

• Growth in oil-exporting countries is expected todecline to 2.2 percent. In particular, growth isforecast to slow further in Angola, given, amongother factors, limited foreign exchange supplyand lower levels of public spending, and inNigeria as the adverse impact of lower oil pricesis compounded by disruptions to private sector

activity through exchange rate restrictions.

In the Republic of Congo though, growthis expected to pick up owing to the plannedincrease in oil production.

• In a number of large non-oil commodityexporters, growth is also expected to remaindepressed. Indeed, activity is expected tofurther slow in Zambia because of depressedcopper prices, electricity shortages, and weakdomestic demand, and to halve to just 0.6percent in South Africa on the back of lowinvestor confidence, tighter policies, the declinein commodity prices, and the incidence ofdrought. In Ghana, non-oil growth is expectedto be stable, albeit at a low level, while totalGDP growth is expected to pick up slightly onaccount of increased oil production.

• Growth in the countries affected by the Ebolaepidemic is expected to remain low in 2016. As the epidemic abates, however, growth inGuinea and Liberia is expected to pick up (bymore than 3 percentage points in each case, to4.1 percent and 2.5 percent, respectively), andto reach 5.3 percent in Sierra Leone, after adouble-digit contraction in 2015.

In most other countries, growth is projected toremain relatively robust. Stimulated by strongdomestic investment and lower oil prices, growth

in oil-importing countries (excluding South Africa)

2004 –08 2009 2010 2011 2012 2013 2014 2015 2016 2017

Sub-Saharan Africa 6.8 4.0 6.6 5.0 4.3 5.2 5.1 3.4 3.0 4.0

Of which:

Oil-exporting countries 9.2 7.0 8.5 4.6 3.8 5.7 5.9 2.6 2.2 3.4

Of which: Nigeria 8.6 9.0 10.0 4.9 4.3 5.4 6.3 2.7 2.3 3.5

Middle-income countries 6.9 3.8 6.5 4.5 4.2 4.6 4.6 2.6 2.5 3.4

Of which: South Africa 4.8 –1.5 3.0 3.2 2.2 2.2 1.5 1.3 0.6 1.2

Low-income countries1

7.7 6.3 7.6 7.6 6.2 7.0 7.2 7.2 5.6 6.5

Fragile states 3.5 3.3 5.6 3.1 3.4 7.2 6.1 3.9 4.2 5.2

Memorandum:

World economic growth 4.9 0.0 5.4 4.2 3.5 3.3 3.4 3.1 3.2 3.5Sub-Saharan Africa resource-intensive countries

27.0 3.9 6.7 4.9 3.9 5.0 4.7 2.6 2.4 3.4

Sub-Saharan Africa frontier and emerging market economies3

7.1 4.4 6.8 5.0 4.5 5.1 5.0 3.5 3.0 3.9

Table 1.1. Sub-Saharan Africa: Real GDP Growth(Percent change)

Source: IMF, World Economic Outlook database.1 Excluding fragile states.2 Includes oil exporters: Angola, Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon, Nigeria, South Sudan; and nonrenewable resourceexporters: Botswana, Burkina Faso, Central African Republic, Democratic Republic of Congo, Ghana, Guinea, Liberia, Mali, Namibia, Niger, SierraLeone, South Africa, Tanzania, Zambia, and Zimbabwe. 3 Includes Angola, Cameroon, Côte d’Ivoire, Ethiopia, Gabon, Ghana, Kenya, Mauritius, Nigeria, Rwanda, Senegal, South Africa, Tanzania, Uganda,and Zambia.


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POLICIES GENERALLY NEED TO ADJUSTAT A FASTER PACE

Te previous sections highlight a number of

worrying trends.• Rising fiscal deficits and more costly external

and domestic financing conditions areincreasing macroeconomic vulnerabilitiesand, in some cases, impeding central banks’pursuit of their primary objectives, such as pricestability.

• Tese conditions are adding to exchangerate pressures, and many central banks haveresponded by raising interest rates. Tis, incombination with large government borrowing,

has increased private sector borrowing costs—thereby undermining growth.

• Countries, having already entered this episodeof pressures with lower buffers than at theonset of the global financial crisis (see October2015 Regional Economic Outlook: Sub-Saharan Africa ), have drawn substantially on theiravailable buffers to mitigate the shock, severelylimiting room for additional countercyclicalpolicy.

• Sovereign risks associated with large commercialbank exposures to government debt and relatedgovernments’ rollover risks have increased insome cases, posing risks to financial stability.

In view of these trends, governments shouldconsider a set of policy options tailoring theurgency of adjustment to the extent of domesticvulnerabilities. Commodity prices have fallensharply and, for energy prices, at an unprecedentedpace. Oil and other commodity exporters areadjusting, but given the extent of the shock they arefacing, policies are currently “behind the curve.”Because the shock is likely to persist, and buffers

have been depleted, adjustment is unavoidable.• For countries that are not members of a

currency union, exchange rates should adjust asneeded to absorb the shock. Interventions bythe central bank should be limited to mitigationof disorderly market movements, and more

generally, administrative measures on foreignexchange should be avoided. Central banks mayneed to tighten their monetary policy stance when inflationary pressures are persisting as

a result of exchange rate depreciation, whendrought-related spikes in food-price inflationare having second-round inflationary effects,or if warranted on macroprudential grounds.Such policies are likely to be needed to preservemacroeconomic stability, notwithstandingthe adverse effect of tighter monetary policieson private sector activity through higherborrowing costs.

• Fiscal adjustment is urgently needed tosafeguard macroeconomic stability, especiallyin the region’s oil-exporting countries. In the

CEMAC, the exchange rate tool is not available,and governments are reaching the limit ondirect financial support by the central bank. Forthese countries, although it is appropriate touse international reserves to smooth the shock,the magnitude of the shock and the expectationthat the reduction in resource income willpersist, renders significant fiscal consolidationunavoidable (IMF 2015b), even at the costof short-term output losses. More generally,the speed of fiscal consolidation across theregion should be guided by countries’ available

buffers, domestic vulnerabilities, and financingconstraints.

In their consolidation efforts,countries should aim at mobilizing revenues andpreserving priority expenditures, such as socialexpenditures, also with a view to not settingback their longer-term development goals.

• Several countries that are not significantnonrenewable commodity exporters are morefavorably placed to weather the shocks andhave so far coped reasonably well. In someof these countries, however, efforts to meeturgent spending needs, in particular to close

infrastructure gaps, have led to widening deficitsand increasing debt levels. Tese countriesshould use their current strength to buildbuffers and reduce their vulnerability to asudden worsening of the economic climate.


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14

• Central banks should limit the use of advancesto the government to the mitigation of short-term financing constraints and avoid easingcommercial banks’ liquidity constraints with a

view to facilitating lending to the government.Moreover, central banks should abstain ingeneral from providing structural developmentfinancing.

• Governments must remain vigilant to any signsof increasing financial stress and, in this context,step up early warning systems and cross-bordercooperation in supervision.

• Beyond immediate policy reactions, the currentchallenges are also a strong reminder of theneed to advance the economic diversificationagenda.


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Box 1.1. Impact of the Drought in Southern and Eastern Africa

Large parts of southern and eastern Africa are facing a severe drought, potentially threatening food security for about40–50 million people. Te drought, linked to the ongoing El Niño pattern, is affecting countries through two channels:

reducing agricultural output and, in some cases, hampering hydroelectric power generation. As a result, growth is projectedto slow sharply in Ethiopia, Malawi, and Zambia, and food inflation is accelerating almost everywhere in the subregion.Several countries also face pressures on their budgets and external positions. Te drought may intensify during the year, andthe macroeconomic situation could deteriorate further.

A severe drought affecting millions of people in southern and eastern Africa is expected to intensify over the year,threatening a regionwide food crisis. Rainfall so far this season has been the lowest in the last 35 years, 40 percentbelow its long-term average, following an already poor season last year. Ethiopia, Lesotho, Malawi, and Zimbabwehave appealed for humanitarian assistance, and several other countries have declared drought emergencies.Botswana, Namibia, South Africa, and Swaziland are limiting water usage because of low water levels at reservoirs.Low water levels are also affecting power generation in Zambia and Zimbabwe, resulting in extensive power outages.Forecasts suggest a continuation of below-average rainfall and another year with poor crop performance in 2016.

Te World Food Program and the United States Agency for International Development predict that about 40–50million people are at risk of inadequate food supply by end-2016, including 2.5 million already identified to be inan acute food crisis, with varying repercussions across countries.1 If the abnormally hot and dry conditions persist,a regional food security crisis, including a substantial increase in the size of the extremely vulnerable population,could emerge in 2016 and early 2017. However, even if rainfall normalizes, crop reserves and seed banks are severelydepleted, leaving farmers vulnerable for the upcoming planting season. According to the Famine Early WarningSystems Network, a large share of the future harvest will be lost because of poor seeding (particularly maize). Tedrought will hit particularly hard the most vulnerable people living in rural areas that depend on agricultural pro-duction. Te urban poor will be affected by higher food prices.

Te macroeconomic impact of the drought is expected to be particularly severe in some of the most vulnerablecountries in the region:

• Growth. IMF staff project that in 2016 GDP growth will be significantly impacted in Ethiopia, and

decline by 2.3 percentage points in Malawi mainly because of poor agricultural output. In additionto its impact on agriculture, the drought has severely crippled the supply of water and the productionof electricity. A number of reservoirs are almost entirely dried up or at very low levels, and the lack of

water is affecting electricity production, in particular in Zambia (lowering growth by 1.2 percentagepoints) and Zimbabwe, where prolonged power outages have become the norm. In most of the otheraffected countries in the subregion, the drought is estimated to reduce growth by up to 0.5 percentagepoint.

• Inflation. Food inflation is on the rise in several countries, although the impact on headline inflationhas so far been muted by a decline in other items in the consumer price index basket, particularly fuel.For example, notwithstanding low international food prices, wholesale maize prices in South Africaand other neighboring countries are more than 50 percent higher than a year earlier, while retail maizeprices have doubled in Malawi and Mozambique.

• Fiscal . Te drought is exerting pressure on the government budget in Ethiopia, which released a recentsupplementary budget; in Swaziland, where the cost of emergency plans amount to 1 percent of GDP;

Tis box was prepared by Geremia Palomba, Aidar Abdychev, and Monique Newiak.

1 As classified in Integrated Food Security Phase Classification (IPC) Phase 3. IPC is used to measure the nature and severity of afood security crisis (for example, IPC 4: Humanitarian Emergency and IPC 5: Famine/Humanitarian Catastrophe).


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and in Zambia, where emergency imports of electricity are estimated at 1½ percent of GDP. Othercountries envisage additional drought-related outlays of up to ½ percent of GDP, mainly for drought-

relief efforts.

• External. Significant pressures on the external position are likely to emerge in the period ahead. Importsof food and, in some countries, electricity are expected to increase and significantly deteriorate thecurrent account, especially in Zambia (1½–2 percent of GDP), while other countries face humanitarianneeds, mainly related to food imports, of about ½ percent of GDP.

Te response to the crisis has so far been uneven. In Zimbabwe, the funding of the drought response plan is report-edly below 50 percent, compared to more than 90 percent in Malawi. More generally, relief agencies indicate asignificant gap in funding, and according to international organizations, such as the World Food Program, mostcountries in the region are not adequately prepared to deal with the potential humanitarian impact. Moreover, notmuch progress has been made in building an agricultural infrastructure resilient to changing weather conditions,including introducing drought-resistant seeds, new farming techniques, water harvesting, and conservation farming.

Box 1.1. (continued)


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Box 1.2. Private Sector Credit Growth Developments in Sub-Saharan Africa

In the majority of sub-Saharan African countries, private credit growth has slowed (Figure 1.2.1). Te recent declineis examined against the background of rapid credit growth in 2010–13, when commodity prices were on the rise

and financing conditions favorable.

Te period of favorable financing conditions and high commodity prices was associated with dynamic public andprivate credit growth, helping many countries to increase credit depth, often from low levels.1 With the end of thecommodity prices boom, credit growth is now declining, most markedly in energy exporters. Against this back-ground, the following questions arise:

• Did countries in the region, and especially commodity exporters, experience an unusually high increasein credit (a “credit bubble”) during the previous commodity prices boom or did countries experiencehealthy financial deepening?

• In that context, what does this imply in terms of financial stability risks, in particular for nonperformingloans (NPLs)?

o answer these questions, a benchmarking analysis of credit developments is used to evaluate possible risks associ-ated with the recent episode of fast credit growth. Following Marchettini and Maino (2015), we identify countriesin which credit to the private sector has expanded (1) faster compared to a longer-term trend (“trend gap”), and(2) beyond a level consistent with countries’ structural characteristics (“frontier gap”—Figure 1.2.2). Te analysissuggests the following conclusions:2

1 In the case of resource-intensive countries, levels of credit to the private sector are often low because the exploitation of naturalresources is often financed through public resources or foreign direct investment.2 Te trend gap is the average deviation in 2010–13 of a country’s private-credit-to-GDP ratio from a long-term trend using abackward-looking Hodrick-Prescott filter. Te frontier gap is the average deviation in 2010–13 of the private-credit-to-GDPratio from its statistical benchmark, a fitted value from a quantile regression of private-credit-to-GDP ratio on countryfundamentals and cyclical factors. Fundamentals include population size and density, GDP per capita and its square, agedependency ratios, and dummies for being a frontier market, an oil exporter, a financial center, or land-locked country(see Feyen, Kibuuka, and Sourrouille 2016).

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IMF Regional Economic Outlook Sub-Saharan Africa April 2016

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