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IMF releases Regional Economic Outlook

The International Monetary Fund (IMF) recently released its Regional Economic Outlook for Sub-Saharan Africa (SSA). The Fund expects the region to continue to record commendable growth in 2015, but notes that the recent drop in international commodity prices will have heterogeneous effects on the various economies across SSA. More specifically, the IMF expects the region to record real GDP growth of 4.5% this year, notably lower than the 5.2% and 5% expansions recorded in 2013 and 2014, respectively. Commodity dependence, particularly that of oil, will force many governments to undertake significant fiscal adjustments, with adverse implications for economic growth. In turn, the Fund notes that near-term prospects remain quite favourable for much of the rest of the region, with many countries benefiting from lower oil prices.

NKCIMF

The IMF expects a strong economic performance from the region overall, but the report does highlight some potential headwinds. Firstly, large fiscal and external deficits in some countries amid tighter global financial conditions could force governments to implement tighter-than-planned fiscal policies, with capital spending particularly vulnerable to spending cuts. This will have a detrimental effect on economic development, and postponing policy adjustments would only give rise to macroeconomic imbalances and policy uncertainty. Secondly, the uneven global recovery could have unfavourable effects on demand for African exports, as Europe and China – two regions with largely uncertain economic outlooks – are two of SSA’s largest trading partners. In addition, dollar strength – due to a recovery in the US – would make imports more expensive, while also increasing the debt-service burden and adversely affecting balance sheets of banks and private entities. Finally, domestic security concerns in some countries will generate fiscal and near-term development risks, while also depressing the political and business climates, thus deterring domestic and foreign investment.

Furthermore, the IMF emphasises that sustaining strong, diversified, and durable economic growth should remain the key policy priority across the region. Exchange rate flexibility will be important in preserving scarce external reserves, and commodity-dependent economies will inevitably have to undertake fiscal adjustments. On a positive note, the Fund points out that current circumstances provide an opportunity to introduce politically difficult energy subsidy reforms, and could push economic diversification to the top of the policy agenda. Concerning the latter, the report notes:

“…addressing the infrastructure gap remains critical to allow new higher-productivity sectors to develop, generate jobs for the rapidly growing young population, and foster integration into global value chains. In scaling up investment to address infrastructure bottlenecks, though, countries will have to remain mindful of the need to preserve debt sustainability.”

It should be noted that the slump in international energy prices has a notable effect on the region’s overall economic growth figures due to the size of oil-exporting economies relative to the rest of SSA (while South Africa is an oil importer, the country faces its own idiosyncratic headwinds and will also be a drag on the region’s overall growth figures). Consequently, the weighted growth figures could distort the positive effects experienced by most African economies. Not only will lower fuel prices boost Africans’ spending power, but central banks from oil importing countries across the region will also have additional scope to ease monetary conditions. That being said, many countries in SSA remain dependent on commodity exports, and the general downturn in commodity prices will have adverse effects on both fiscal and external balances. In addition, the expected normalisation of monetary policy in the US has already had devastating effects on domestic currencies across the region, particularly in countries with more liquid capital markets. This has offset some of the potential gains from lower energy prices, while also increasing the costs of most other non-energy imports. Furthermore, debt sustainability will be an omnipresent issue going forward, particularly when considering the ambitious infrastructure investment programmes undertaken by most countries in the region. This is exacerbated by the availability of cheap finance by some external sources, particularly China. Overall, the difficulties faced by some SSA economies due to lower international commodity prices could reinvigorate economic diversification efforts, but will require tactful and prudent policy management to maintain macroeconomic stability while navigating through current headwinds.Jacques Nel (Economist)

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