Information about Sub-Saharan Africa África subsahariana
Chapter

I. The Impact of the Global Financial Crisis on Sub-Saharan Africa

Author(s):
International Monetary Fund. African Dept.
Published Date:
April 2009
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How Recent Developments in the World Economy Are Affecting Sub-Saharan Africa

Sub-Saharan Africa is clearly being affected by the global financial crisis. Initial hopes that prompt policy action in advanced economies would spare emerging and developing countries have not materialized (Figure 1.1).

Figure 1.1The Global Financial Crisis and Its Impact on Africa

Advanced economies are suffering their deepest recession since World War II, and growth in emerging and developing economies will slow sharply as export demand and commodity prices fall and external financing constraints tighten.

  • Global output—from growing at about 3¼ percent in 2008—is projected to contract by about 1¼ percent in 2009 before gradually recovering by about 2 percent in 2010, helped by fiscal stimulus, monetary easing, and financial sector measures in major economies. But the global downturn could be deeper and the financial strains even worse than expected.
  • In advanced economies, despite strong policies to stimulate recovery, output is expected to drop by about 3¾ percent in 2009, and to stabilize in 2010.
  • Growth in emerging and developing economies is now expected to slow from about 6 percent in 2008 to less than 2 percent in 2009, dragged down by falling export demand, subdued capital inflows, and lower commodity prices.

African countries with financially more developed markets were the first to feel the effects of the global financial crisis. There are at least three channels through which the effects of the crisis are being transmitted to all African economies. Most are already at work; some may gain prominence rapidly:

  • Lower global growth reduces demand for African exports, pushes commodity prices and government revenues down, and curtails the flow of remittances from abroad, thereby reducing domestic consumption. On average, a 1 percentage point decline in world growth (trade-weighted by partner countries) is associated with a drop of about 0.5 percentage point in GDP growth in sub-Saharan Africa (see Box 1.1).
  • Risk aversion has reduced FDI and reversed portfolio inflows as investors flee to more liquid or safer assets. Trade finance has become more expensive. Many countries, particularly the more financially developed ones, have lost access to market financing.1
  • While African banks have little direct exposure to the distressed assets weighing down bank balance sheets elsewhere, they are vulnerable to indirect effects: an economic slowdown will affect the quality of their credit portfolios, and they could face losses on deposits with troubled foreign correspondent banks or capital repatriations by troubled foreign parent banks.2 The global crisis could eventually cause donors to reduce their aid to Africa.

Domestic Developments and Policy Responses Thus Far

Growth

The global economic slowdown is now taking its toll on sub-Saharan Africa. After several years of robust economic expansion, growth in sub-Saharan Africa fell from nearly 7 percent in 2007 to just under 5½ percent in 2008 (Table 1.1).

Table 1.1.Sub-Saharan Africa: Selected Indicators, 2005–101
EstimateProjectionsProjections
200520062007200820092010
Percent change
Real GDP6.26.46.85.41.53.8
Of which: Oil exporters27.67.48.96.91.44.0
Oil importers5.55.95.84.61.63.6
Real non-oil GDP6.48.07.96.32.64.1
Consumer prices (average)8.87.37.211.610.57.1
Of which: Oil exporters14.88.15.710.311.58.4
Oil importers6.06.97.912.210.06.3
Per capita GDP4.14.24.63.1-0.61.6
Percent of GDP
Exports of goods and services36.537.938.940.832.133.1
Imports of goods and services33.634.437.338.538.037.6
Gross domestic saving22.824.723.624.517.618.7
Gross domestic investment19.921.322.222.423.723.3
Fiscal balance (including grants)1.94.91.02.1-4.8-3.1
Of which: Oil exporters8.811.33.47.8-7.5-2.5
Oil importers-1.21.5-0.3-1.7-3.4-3.4
Current account (including grants)-0.31.4-1.6-1.3-7.5-5.5
Of which: Oil exporters7.513.36.68.0-8.4-2.3
Oil importers-3.9-4.9-6.1-7.5-7.0-7.4
Terms of trade (percent change)9.99.65.012.2-15.36.8
Of which: Oil exporters30.818.09.029.0-44.817.9
Oil importers0.65.22.90.90.90.2
Reserves (months of imports)4.75.65.85.45.55.2
Memorandum items:
Oil price (US$ a barrel)53.464.371.197.052.062.5
GDP growth in SSA trade partners (in percent)3.64.14.02.1-2.30.9
GDP Growth in Sub-Saharan Africa (WEO definition)36.26.66.95.51.73.8
Sources: IMF, African Department database; and IMF, World Economic Outlook database.Note: Data as of April 14, 2009. Arithmetic average of data for individual countries, weighted by GDP.

Excludes Zimbabwe. See Statistical Appendix tables for the list of sub-Saharan African countries.

Consists of Angola, Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon, and Nigeria.

Includes the countries listed in the Statistical Appendix tables plus Djibouti, Mauritania, and Sudan.

Sources: IMF, African Department database; and IMF, World Economic Outlook database.Note: Data as of April 14, 2009. Arithmetic average of data for individual countries, weighted by GDP.

Excludes Zimbabwe. See Statistical Appendix tables for the list of sub-Saharan African countries.

Consists of Angola, Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon, and Nigeria.

Includes the countries listed in the Statistical Appendix tables plus Djibouti, Mauritania, and Sudan.

Sub-Saharan African economies have been somewhat more resilient in 2008 than those in other regions (Figure 1.2), mainly due to lags in the transmission of real sector shocks but partly because sub-Saharan African financial systems are less integrated with global financial markets. Anecdotal evidence suggests a decline in formal employment.

Figure 1.2.A Comparison of Growth

Growth in Africa has slowed more gradually than in other regions.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

The growth effects were felt faster and stronger in oil and other commodity exporters and middle-income countries (Figure 1.3).

  • Among middle-income countries, the deceleration of growth reflected mainly the impact of the financial crisis on South Africa. The decline in external demand and commodity prices and a contraction in private consumption as bank lending standards became more stringent contributed to the slowdown. The slowdown quickly spilled over to neighboring Lesotho, Namibia, and Swaziland, while a marked decline in demand for diamonds has resulted in a sharp slowdown in Botswana.
  • Among oil exporters, country-specific supply-side effects have also been important, such as declining production in Equatorial Guinea’s maturing main oil field, and strikes and delays in bringing marginal fields on-stream in Gabon.
  • Low-income, particularly fragile, oil importers have fared better, but the effects have been uneven. Idiosyncratic factors limited the negative impact in Burkina Faso, Mali, and Guinea, where good harvests helped sustain growth. The growth slowdown in Kenya was due partly to the political crisis early in 2008. The plunge in copper prices helped reduce growth in Zambia. In several fragile countries, growth increased slightly due in part to a peace dividend that resulted from political stabilization and improved domestic fundamentals, including liberalization and reform, economic stability, and debt relief.

Figure 1.3.Growth in Sub-Saharan Africa

The decline in growth was stronger among oil exporters and middle-income countries.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Note: The size of the bubble corresponds to the PPP GDP in each group.

Box 1.1.The Impact of the Global Slowdown in Africa

To quantify the link between growth in sub-Saharan Africa and global developments, average growth in sub-Saharan African domestic output was regressed on world growth (trade-weighted by partner countries) using a dynamic fixed-effect panel model with variables capturing the income effect of changes in oil and non-oil commodity prices. The 40-country sample uses annual data for 1970–2007.

Spillovers from the world economy have been significant. Three results stand out:

  • A 1 percentage point slowdown in GDP growth in the rest of the world leads on average to an estimated 0.5 percentage point slowdown in sub-Saharan Africa. Part of the effect is felt contemporaneously (0.2 percentage point) and part in the following year (0.3 percentage point).
  • An oil price shock tends to be significant only above a certain threshold (5 percent increase in prices). A sub-Saharan African oil-importing country, with oil imports of some 20 percent of GDP and facing a decline in oil prices of 50 percent (and a resulting income increase of 10 percent), could expect its growth rate to increase by 0.3 to 0.4 percentage point. The impact is proportional to price changes above the threshold and to the oil-intensiveness of the economy.
  • A 10 percent reduction in income from a nonfuel-commodity price decline (assuming, for instance, exports of about 40 percent of GDP—equivalent to the weighted average for sub-Saharan African countries—and a 25 percent drop in nonfuel prices) tends to reduce growth in sub-Saharan Africa by about 1.5 percentage points after two years.

Sub-Saharan Africa and the World: Real GDP Growth1

Source: IMF, World Economic Outlook.

1 Periods of U.S. recessions shaded (National Bureau of Economic Research).

While results are robust across different specifications and in line with reported structural cross-country regressions (Ndulu and others, 2007), three caveats are in order:

  • The results explain only a small part of growth variation among sub-Saharan African countries. Numerous domestic factors also matter.
  • The impact may be stronger in the current environment than historical estimates suggest because of the simultaneity of the crisis around the globe. The specification also does not control for an explicit financial channel, which is likely growing.
  • Estimates reflect short-term effects of changes in the external environment on sub-Saharan African growth. Some authors (Collier and Goderis, 2007) attempt to differentiate between the short- and long-run impact of changes in commodity prices and terms of trade, with a view to distinguishing between temporary effects and those that are more permanent.Note: This box was prepared by Paulo Drummond.

Inflation and Monetary Policy

Throughout sub-Saharan Africa, inflation declined markedly, reflecting the slump in commodity prices in the second half of 2008 and the later global slowdown. This pattern was widespread, cutting across countries with different exchange rate regimes, economic structures, and degrees of financial development (Table 1.2).

Table 1.2.Sub-Saharan Africa: Quarterly Inflation by Groups of Countries, 2008

(Quarter-on-quarter annualized percent change, weighted by PPP GDP)

Q1Q2Q3Q4
Sub-Saharan Africa17.924.315.32.9
By exchange rate regime
Floating exchange rates18.825.515.83.5
Fixed exchange rates12.618.012.7-0.2
Of which CFA zone12.416.613.2-3.0
By country groups
Oil-exporting countries10.323.615.54.3
Middle-income countries13.616.514.3-1.0
Low-income countries34.035.016.95.9
Fragile countries15.929.113.65.3
By financial development
Emerging economy (South Africa)13.816.014.6-2.1
Pre-emerging markets19.125.713.57.3
Financially developing20.531.018.22.7
Sources: IMF, International Financial Statistics; and African Department database.
Sources: IMF, International Financial Statistics; and African Department database.

The remaining inflation pressures appear to reflect mostly delayed first-round effects of the 2008 food and fuel price changes; second-round effects are being contained and core inflation is declining in a number of countries (Figure 1.4).3 Several countries that did not fully pass through the earlier increase in fuel prices delayed reducing retail prices after wholesale import prices plunged in order to recoup local distributors’ profit margins. For food, insulated, segmented, and self-sufficient domestic markets may also have limited the pass-through. This seems to be particularly true of low-income countries, especially in the East African Community (EAC). Nonetheless, even there core inflation peaked in the third quarter of 2008 and is currently declining. Ghana, where inflationary pressures were driven by expansionary fiscal policy during an election year, and Nigeria, where monetary policy has been loosened, were exceptions.

Figure 1.4.Sub-Saharan Africa: Core Inflation in Selected Countries, 2008

Inflation has declined from 2008 peaks.

Source: IMF, African Department Database.

The global financial crisis and declines in oil and food prices in the second half of the year required a reassessment of monetary policy. While most central banks in sub-Saharan Africa tightened their policy targets in response to the increase in global food and fuel prices (Figure 1.5, left panel), about half those that did so in the first half of 2008 started to reverse these policies in the second half (Figure 1.5, right panel). The Democratic Republic of Congo and Malawi, among others, have kept policies unchanged. Real interest rates have declined in several countries (Figure 1.6).

Figure 1.5.Sub-Saharan Africa: Changes in Monetary Policy

(Percent of Sub-Saharan African countries)

Monetary policy was loosened in many countries in line with declines in inflation.

Source: IMF staff estimates

Figure 1.6.Sub-Saharan Africa: Real Interest Rates in Selected Countries

Real interest rates have continued to fall in many countries.

Source: IMF, International Financial Statistics.

1 Real interest rates are the treasury bill rates adjusted by inflation.

Fiscal Policy

Developments in the overall fiscal balance in 2008 mirror the challenges and opportunities that arose for Africa as a result of changes in the world economy. Through September, policymakers calibrated their fiscal policies in response to food and fuel prices. While the fiscal positions of oil importers came under pressure, those of oil exporters improved significantly due to skyrocketing oil prices. As a result, the overall fiscal balance for the region (including grants) improved by about 1 percentage point, to a surplus of 2 percent of GDP (Figure 1.7).

  • In 2008 oil exporters received an average of US$90 for each barrel of oil they exported—80 percent more than in 2007. Chad and the Republic of Congo more than doubled their fiscal surpluses. All oil exporters except Equatorial Guinea increased revenue as a share of GDP. The non-oil primary deficit of oil exporters rose on average somewhat (Table 1.3).
  • High food and fuel prices put pressure on net oil importers, which responded with a variety of policy instruments, including temporary tax rate decreases and exemptions and increases in subsidies and transfers. Partly as a result of the fiscal cost of these mitigation measures, the fiscal deficits (including grants) of oil importers increased by about 1½ percent of GDP, to about 1¾ percent in 2008. Since the decline in commodity prices, a number of countries have been reversing these measures (see Box 1.2).
  • For members of the South African Customs Union (SACU) the slowdown in growth and trade, particularly in South Africa, translated into lower imports, which in turn lowered the SACU revenue pool and transfers to neighboring countries. Lesotho, where SACU transfers account for more than 60 percent of revenues, was particularly hard hit.

Figure 1.7.Sub-Saharan Africa: Overall Fiscal Balance, Including Grants

(Percent of GDP)

The fiscal position of oil exporters improved significantly due to skyrocketing oil prices.

Source: IMF, African Department database.

Table 1.3.Sub-Saharan Africa: Non-Oil Primary Fiscal Deficits in Oil Exporters, 2003–08

(Percent of non-oil GDP)

200320042005200620072008
Angola69.961.160.950.356.961.3
Cameroon0.72.70.0-30.21.56.8
Chad3.24.35.214.819.328.0
Congo, Rep. of28.228.633.553.156.845.5
Equatorial Guinea47.368.263.766.061.375.6
Gabon8.99.117.518.013.315.1
Nigeria32.230.233.434.134.333.4
Average (unweighted)27.229.230.629.434.837.9
Source: IMF, African Department database.Note: (–) denotes surplus.
Source: IMF, African Department database.Note: (–) denotes surplus.

Balance of Payments, Terms of Trade, and Exchange Rates

Like commodity prices, terms of trade in sub-Saharan Africa underwent a large swing in 2008. Although oil prices fell in the second half, oil exporters still had sizable terms of trade gains for the year (Figure 1.8).

Figure 1.8.Terms of Trade in Sub-Saharan Africa, 2007 and 2008

Despite the slump in oil prices, oil exporters still experienced sizable terms of trade gains…

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Note: The size of the bubble corresponds to the PPP GDP in each group.

The external position of many sub-Saharan African countries weakened somewhat as the current account deficits of oil importers widened and reserves declined (Figure 1.9). Despite declining oil prices, toward the end of 2008 their current account deficits deteriorated, driven by a still-high food import bill, a collapse in prices for nonfuel commodities, falling export volumes, and in some cases declining remittances and tourism receipts.

Figure 1.9.Sub-Saharan Africa: External Current Account Balance, 2007 and 2008

…and large current account surpluses in 2008.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

Major declines in commodity exports were particularly noticeable in the Central African Republic (timber and diamonds), the Democratic Republic of Congo and Zambia (copper), and Gabon (manganese). Cape Verde and Gambia reported declines in tourism receipts in the last quarter. In South Africa, the current account deficit started to improve as factor payments declined owing in part to falling profits. Most oil exporters managed to maintain current account surpluses in 2008, though these were lower than projected earlier because of plunging oil prices and OPEC production cuts.

Portfolio outflows and sharp declines in FDI are pushing down a number of currencies. Foreign exchange reserves declined in many countries (Figure 1.10). Angola, Nigeria, Mauritius, and Zambia lost more than 15 percent of their reserves from September 2008 to early 2009, though balances remained comfortable in several countries. A real effective exchange rate depreciation was particularly notable in South Africa, where the rand was embattled by significant portfolio outflows, and in Zambia, as copper prices plunged. A weaker euro temporarily helped reverse previous real appreciations in the CFA franc zone. A stronger dollar and a persistent inflation differential contributed to a continued real effective exchange rate appreciation in some oil exporters (Figure 1.11).

Figure 1.10.Sub-Saharan Africa: Changes in International Reserves since September 2008

Foreign reserve losses were significant in many countries.

Source: IMF,International Financial Statistics.

Figure 1.11.Sub-Saharan Africa: Real Effective Exchange Rates in Oil Exporters and Oil Importers by Exchange Rate Regime

Real exchange rate developments were mixed.

Source: IMF, International Notice System.

Box 1.2.Fiscal Responses to the Food and Fuel Crisis

The surge in food and fuel prices that began in 2007 and continued through 2008 left governments around the world struggling to find ways to mitigate the impact on their citizens. Many sub-Saharan African countries used fiscal policy to respond—by December nearly three-fourths had taken some fiscal measure. The most common fiscal policy measure was a tax decrease. Food taxes were decreased in 4 African countries in 2007, but in 28 in 2008. Fuel taxes were decreased in 8 countries in 2007 and in 13 countries in 2008. In the SACU area, tariffs on some food imports, notably sugar, were reduced. In Madagascar, Mali, and Sierra Leone import tariffs on rice were lowered. Several countries also introduced or increased subsidies on food, fuel, and agricultural products. For example, Zambia and Nigeria expanded their fertilizer subsidy programs. Other countries chose to ban exports of agricultural products to prop up domestic supply. The fiscal costs associated with these responses doubled between 2007 and 2008, averaging 1 percent of GDP in 2008; in Angola they reached 6.6 percent of GDP.

As commodity prices began to fall in late 2008, Seychelles abolished the rice subsidy it had introduced the previous year. Burkina Faso, Niger, Mozambique, and Senegal phased out temporary suspensions of customs duties and taxes. As a result of such reversals, the fiscal costs of responses to the food and fuel crisis are expected to drop by an average of 0.4 percent of GDP in 2009 (to 0.6 percent of GDP). But 4 in 10 African countries have not yet announced intentions to reverse fiscal measures targeted at reducing domestic food and fuel prices, which in many cases means they will collect less revenue.

Sub-Saharan Africa: Percent of Countries with Fiscal Responses to the Food and Fuel Crisis, 2007–09

Source: IMF, African Department database.

Sub-Saharan Africa: Fiscal Costs of Food and Fuel Crisis, 2007–09

Source: IMF, African Department database.

1 Excluding Zimbabwe.

Countries should use the opportunity afforded by lower food and fuel prices to phase out temporary measures. Many of them proved not to be well targeted. With mounting fiscal pressures, resources could be used for more efficient social programs.

Note: This box was prepared by Irene Yackovlev.

Outlook and Challenges

The effects of the crisis are more significant than expected (Figure 1.12) because (i) the global downturn is more pronounced; (ii) most commodity prices haven fallen below 2007 levels; (iii) there are funding pressures on advanced and emerging market economies; and (iv) foreign investors have less appetite for risk. Governments therefore need to adjust in a timely, effective, and balanced way to maintain the significant economic improvements of the past decade. Which policy responses are appropriate depends on individual country circumstances, such as debt position, commodity dependence, exchange rate regime, reserves, and access to capital markets.

Figure 1.12.Sub-Saharan Africa: Current and Previous Forecast for 2009

The outlook has deteriorated markedly.

Source: IMF, African Department database.

Key Indicators and Risks

Growth projections have been revised sharply downward and fiscal and balance of payments pressures are mounting. However, in line with global growth projections, a mild recovery is projected for 2010 (Figure 1.13).

  • Growth in the subcontinent is projected to decline from just under 5½ percent in 2008 to 1½ percent in 2009 before recovering to about 3¾ percent in 2010—still below its precrisis level. Oil exporters’ growth would decline sharply by about 5½ percentage points to just under 1½ as production expands only moderately amid falling oil prices and the deceleration of non-oil sector growth (partly the result of a credit slowdown in Nigeria). At 4 percent, growth in 2010 among oil exporters will remain below its precrisis level. Oil importers’ growth would decline to about 1½ percent in 2009 as output in South Africa contracts and export prospects weaken across the continent. At about 5 percent the projected rebound brings growth in oil-importing countries (excluding South Africa) in 2010 somewhat closer to the precrisis level than in oil-exporting countries.
  • Inflation is projected to fall—from about 11½ percent in 2008 to 10½ percent in 2009 and about 7 percent in 2010—as commodity prices and global demand both decline. The decline is more gradual in sub-Saharan Africa than in advanced economies largely because of incomplete pass-through of the previous surge in international oil and food prices. In some countries depreciating exchange rates are putting upward pressure on prices.
  • The fiscal stance is deteriorating in many countries as automatic stabilizers become increasingly important. In countries where growth and exports are falling, revenues as a share of GDP are declining rapidly. The fiscal stance will loosen to the extent that countries keep expenditure at programmed levels or even consider a further fiscal expansion. Oil exporters will be particularly hard hit; fiscal surpluses (excluding grants) are projected to turn into deficits of about 7½ percent of GDP in 2009. For oil importers fiscal deficits (excluding grants) are projected to increase by 2¼ percentage points to about 5¾ percent of GDP in 2009, in part because governments are spending more. Grants are projected to plateau through 2010, reflecting uncertainties on the upside about scaling up and on the downside about how the global slowdown will affect donor commitments.
  • External positions are also expected to weaken, though the drivers will vary depending on a country’s economic structure, income, and access to international capital markets. Once again oil and other commodity exporters are particularly hard hit by the reversal in the terms of trade. In oil-importing countries, current account deficits (excluding grants) are expected to stabilize at about 9 percent through 2010 as the positive impact of cheaper oil imports compensates the negative impact of lower merchandise exports and remittances. Financing is likely to remain strained because of declining capital inflows. Generally tighter global funding conditions are expected to have noticeable effects on middle-income countries, particularly South Africa and the frontier markets of Ghana, Kenya, Nigeria, and Tanzania.

While all countries are affected by the crisis, the magnitude of the impact varies. To gauge the impact, Figure 1.14 compares projections for 2009 prepared before and after the crisis emerged.4 The analysis focuses on growth rates and reserve coverage in months of imports, key indicators for both domestic and external imbalances. The crisis is expected to have a high impact in about half of the subcontinent.5 The highly impacted group is dominated by oil exporters and countries with more financially developed markets including South Africa.

Risks to the outlook for 2009–10 from the global environment continue to be mostly on the downside:

  • The magnitude and spillover of the global slowdown may be more pronounced than expected. The global outlook is very uncertain, and financial strains persist. This may lead both households and businesses to postpone expenditure. A general lack of confidence may lead to a deeper recession in advanced economies, curtail trade finance, and constrain global trade. Linkages may be stronger than in the past if financial inflows turn out to be larger than anticipated.
  • A sharper growth slowdown in South Africa and Nigeria could seriously affect other African countries.6 Downward pressure on economic activities could worsen especially in neighboring countries with very close trade and financial linkages.
  • Inflation could decline faster if commodity prices drop further, or it could decline more slowly because of inflation expectations and delays by governments in passing through lower world oil prices. Projections may be less sanguine if unexpectedly large exchange rate depreciations and expansionary fiscal stances entrench expectations.
  • A more severe economic slowdown could cause additional fiscal pressures if revenues decline significantly and additional social spending is necessary to cushion the impact on the poor. A major slowdown in trade will affect fiscal revenues directly, because many sub-Saharan African countries rely on trade taxes, and social safety nets may have to be reinforced. Uncertainty about aid flows, declines in donor support, and tighter financing conditions could further pressure sub-Saharan African budgets.
  • External positions may worsen if projections for the decline in net exports, including tourism, and net capital inflows prove to be too optimistic. The scale of potential outflows is generally considered to be small in most countries, where inflows have not been large, but poor data add uncertainty. Foreign aid, of major importance in difficult times, may fall because of the economic slowdown in donor countries. The outlook for remittances (see Box 1.3) is also uncertain. Overall, the external positions of most countries are vulnerable to deviations in balance of payment projections, with specific flows affecting some countries more than others (see Box 1.4).
  • Other types of negative spillover are possible. Trade finance, aid, and the financial sector may all be affected (see Chapter II).
  • More power shortages in South Africa, escalation of conflict in fragile countries, and social unrest or economic hardship are also risks.

Figure 1.13.Sub-Saharan Africa: Economic Outlook, 2009–10

GDP Growth

Growth is projected to decline in 2009 and to recover mildly in 2010 …

Inflation

…and inflation to fall in most countries.

Central Government Overall Fiscal Balances

Fiscal balances in the region will deteriorate, particularly among oil exporters.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

External Current Account Balances

External positions are also expected to weaken.

Figure 1.14.The Impact of the Global Financial Crisis on Sub-Saharan Africa

Many oil exporters and more financially developed markets will be hit hard.

Source: IMF, African Department database.

Note : The country borders or names in this map do not necessarily reflect the IMF’s official position.

Given all the uncertainties, Figure 1.15 provides confidence intervals around the central growth forecast based on the WEO assessment of global risks. The intervals incorporate both the historical dependence of African growth on world growth and its historical volatility. There appears to be about a one in seven chance that sub-Saharan Africa’s growth in 2009 will be negative. The probability that it might exceed 3 percent is less than one in twenty.

Figure 1.15.Sub-Saharan Africa: Growth Prospects1

One in seven chance of negative growth.

Sources: IMF, World Economic Outlook; and IMF, African Department database.

1 Including Zimbabwe

Box 1.3.The Global Slowdown and Remittances to Africa

In recent years reported remittances have substantially increased. Globally they have multiplied almost fifteenfold since 1980, to about US$265 billion. In sub-Saharan Africa remittances were estimated at US$19 billion in 2007—about 2½ percent of regional GDP (first figure), an amount equal to the official development assistance the region received.

With about 80 percent of its remittances coming from advanced countries, sub-Saharan Africa would be vulnerable to an economic slowdown there.1 A panel estimation on 36 sub-Saharan African countries suggests that the level of income in host countries, among other variables, is a significant driver of remittances.2 For instance, a 1 percentage point decline in growth in host countries would lead to a 4 percent decline in remittances. The impact of the current crisis may turn out to be stronger, given that current estimates do not take into account the widespread nature of the crisis among host countries.

Some sub-Saharan African countries could be more exposed than others. In Comoros and Lesotho, remittances account for more than 20 percent of GDP and in ten other countries, they account for more than 5 percent (second figure).

Remittances by Region, 2007

(Percent of GDP)

Sources: World Bank and Fund Staff calculations.

Sub-Saharan Africa: Top 25 Recipients of Remittances, 2008

(Percent of GDP)

Sources: World Bank and Fund Staff calculations.

Note: This box, prepared by Raju Singh, is based on a joint research project with Kyung-woo Lee (Columbia University) and Markus Haacker (London School of Hygiene and Tropical Medicine).1 For a survey of the theoretical and empirical literature, see Rapoport and Docquier (2006).2 This result is in line with previous studies: see, for instance, Elbadawi and Rocha (1992) and El-Sakka and McNabb (1999).

Poverty

Coming on the heels of the food and fuel price shock, the global financial crisis could substantially increase poverty, especially in countries where growth declines substantially. Experience from previous financial crises shows that in developing countries the macroeconomic impacts translate into a negative shock to demand for labor and hence to wages and employment. The financial crisis could impoverish specific groups via falling demand for low-skill labor, declining remittances, and tight borrowing conditions for small enterprises. Labor-intensive sectors such as manufacturing and tourism are already being hit.

Box 1.4.The Impact of Falling Inflows on Africa: Simulation Results

Simulation results make it possible to better gauge the impact of a further deterioration of the external environment. The methodology builds on previous analysis for food and fuel prices (Regional Economic Outlook: Sub-Saharan Africa, October 2008). It takes into account transmission channels identified as particularly important. The simulation—a simple partial equilibrium exercise—does not incorporate further effects on growth or demand or a specific policy response.

Main assumptions

  • IMF balance of payments projections for 2009 serve as the basis for the simulations. These projections already take into account the likely impact of the global financial crisis and in some countries initial policy adjustments.
  • The simulations assume an additional 20 percent fall in commodity prices, FDI, private transfers, and external grants.
  • Net portfolio inflows fall to the lowest level observed in 2000–07 because they are particularly sensitive to changes in the economic environment.

Source: IMF, African Department database.

Note: The country borders or names in this map do not necessarily reflect the IMF’s official position.

Results

An additional shock of this magnitude would have a serious effect on almost all sub-Saharan African countries. In about one-third of countries, the overall balance of payments would decline by more than 4 percent of GDP. This group includes some oil exporters, exporters of other commodities, and some economies with more developed financial sectors. Without additional financing, they will have to adjust their policies to keep reserves adequate.

Note: This box was prepared by Norbert Funke, Victor Lledó, and Gustavo Ramirez.

The near-term poverty impact may be compounded where domestic prices for fuel and food are still relatively high. Although world market prices for basic food staples and fuel have declined substantially since July 2008, incomplete pass-through of the previous surge in prices limits the subsequent decline in domestic prices. For food, this is further aggravated because prices still hover at double historical levels.

The absence of well-functioning social safety nets could exacerbate the impact in sub-Saharan Africa. In many sub-Saharan African countries, transfer mechanisms are not yet well targeted, fiscal space for cushioning the impact on the poor is minimal, and putting new transfer systems in place takes time and administrative capacity. The challenge is to find targeted alternatives that are affordable. Some countries have implemented public works programs for providing income support to the poor while building labor-intensive infrastructure projects. The wage rate should be set appropriately to minimize costs and to ensure that such schemes are targeted to the poor.

Confronting Challenges

The crisis poses a variety of unique challenges for policymakers, heightened because it is so complex and its duration so uncertain. Some aspects of the shock, particularly lower commodity prices, may be long-lasting, though some resource-rich countries may be able to use past savings to smooth the adjustment. After the first period of sustained growth in the region for decades, countries now need to adjust to lower external demand, significant swings in the terms of trade, and tighter financing conditions. Although circumstances differ so much by country, a priority for all sub-Saharan African countries must be to contain the adverse impact of the crisis on economic growth and poverty, while preserving important and hard-won gains of recent years— sustainable debt levels, lower inflation, progress with liberalizing trade, and structural reforms. Such gains in recent years powered the first period of sustained growth in the region in decades (see Chapter II, Regional Economic Outlook: Sub-Saharan Africa, October 2008).

Many sub-Saharan African countries have fewer or less effective policy instruments than advanced economies to counter an economic slowdown. Compared to most advanced economies, fiscal multipliers are likely lower, financing constraints more binding, and debt sustainability considerations more pressing. Currency arrangements limit monetary policy options for many countries. Four principles can be used to guide economic policy through these difficult times:

  • Use available fiscal space.
  • Where possible, ease monetary policy and let the exchange rate adjust to the external environment.
  • Closely monitor financial vulnerabilities and be prepared to act promptly.
  • Keep medium-term goals in sight.

Use Available Fiscal Space

Countries should use their available fiscal space to help cushion the impact of the global financial crisis. Reining in spending in the midst of this severe crisis would risk setting back Africa’s economic and political progress over the past two decades. Eventually, however, all countries need to adjust to the new external environment. If policy responses are not carefully thought out, fiscal deficits will be higher on a lasting basis.

A fiscal expansion may be able to help smooth the impact of the shock, maintaining critical government services and investment programs in support of domestic demand. It can be implemented (i) by allowing automatic stabilizers to work, that is, letting noncommodity-related revenue and expenditure items adjust to offset fluctuations in economic activity without active policy intervention; (ii) through other nondiscretionary effects (including accommodating declines in commodity-related revenues); or (iii) through discretionary policy actions, that is, fiscal stimulus.7 For low-income countries, automatic stabilizers work mostly on the revenue side. While a slowdown in economic activity tends to lower tax revenues, there are few if any automatic stabilizers, such as social safety nets, on the expenditure side. To the extent that expenditure is kept at budgeted levels when revenues decline, the fiscal balance will deteriorate. Direct policy intervention, such as a reduction in taxes or additional increases in expenditures, could achieve some fiscal stimulus.

Which policy response is appropriate will depend on the country—especially its macroeconomic conditions and debt burden (see Box 1.5). A key question is whether a larger fiscal deficit could be financed. Because financing requirements will be higher, at a minimum existing donor support should be maintained. Declines in commodity-related revenues may be accommodated in some cases. A few countries may also have scope for discretionary fiscal stimulus to sustain demand. As in the case of many advanced economies, discretionary measures should be timely, targeted, and temporary, with a definite exit strategy for reducing debt ratios as the crisis eases.

  • Countries without binding public debt sustainability and financing constraints that achieved macroeconomic stability have scope to let automatic stabilizers work. Automatic stabilizers would facilitate a more timely and (to the extent that the shock is short-lived) temporary response. By keeping spending at budgeted levels, this option would also impose few political and administrative demands.8
  • Exporters of oil or other commodities that saved recent windfalls may be able to accommodate declines in commodity revenues and adjust gradually. The extent to which they can or should maintain spending depends on the expected duration of the shock and their fiscal position relative to what is sustainable in the long term. In countries where spending increased significantly during the recent commodity price boom, the higher level may no longer be sustainable. Those without sufficient reserves may need to retrench and create the fiscal space to protect social spending through other measures, such as rationalizing spending or increasing its efficiency.
  • In other countries, debt sustainability and financing constraints may curtail the available fiscal space. Here scaled-up donor support would be critical to lessen the need for fiscal adjustment. Without additional support, countries will need to adjust forcefully. To preserve priority spending, these countries would need to reprioritize spending and focus on revenue measures, but these take time to implement. One short-term possibility would be to phase out subsidies, which are often poorly targeted, that were implemented to temporarily offset the cost of rising food and fuel prices.
  • In designing the fiscal policy response and reprioritizing expenditure, policymakers should be mindful of the economic impact and of the composition of spending. Expansionary fiscal policy may not substitute directly for a decline in external demand. Borrowing should also not crowd out the domestic private sector. In all cases, spending plans should be cast in a medium-term context, with targeted measures to protect the most vulnerable. Government spending should focus on projects that bolster domestic demand, especially those that create employment and have a low import content.

Box 1.5.The Scope for Fiscal Expansion in Sub-Saharan Africa

Sub-Saharan African countries will need to respond to the effects of the global financial crisis promptly, effectively, and in a way that does not compromise economic gains over the past decade. If financing is available, a fiscal expansion may be desirable in many countries to cushion the decline in growth.

In analyzing the desirability of a fiscal expansion, the crucial questions are:

  • How big is the output gap? Data limitations make it difficult to accurately estimate output gaps in sub-Saharan African countries. Analysis using a Hodrick-Prescott filter suggests that most African countries will grow below trend in 2009, with an average output gap of about 1 percent of GDP. A fiscal expansion tends to be more desirable where the output gap is larger.
  • Can a higher fiscal deficit be financed? Without additional donor support, countries with previously strong fiscal positions, low public debt, large foreign reserves, or well-developed domestic financial markets will find a higher deficit easier to finance. In countries where financing is constrained, additional donor support is urgently needed.
  • Will the resulting debt be sustainable? Based on recent debt sustainability analyses, almost two-thirds of sub-Saharan African countries at low to moderate levels of debt distress (mainly due to earlier debt relief) would have some scope for a fiscal expansion.
  • What other considerations are important? Fiscal expansions need to be timely and well targeted. Policymakers should think about how different types of tax and expenditure measures will affect the fiscal multiplier. Lags in identifying and implementing suitable measures and weaknesses in public financial management systems in some countries would raise the risk that a discretionary stimulus will come too late. Fiscal policy could become procyclical. Given the narrow tax base in most sub-Saharan African countries, tax cuts are unlikely to stimulate demand. The primary focus should therefore be on expenditure, particularly on labor-intensive infrastructure projects that bolster employment and have low import content. Public wage increases should be avoided because they are not well targeted and are difficult to reverse.

Sub-Saharan Africa: Risk of Debt Distress, 2009

(Number of countries, 44 total)

Source: African Department database.

In sum, a number of sub-Saharan African countries would have scope for a fiscal expansion. For example, in Gabon, low domestic debt is conducive to the operation of automatic stabilizers because the financial crisis hits the three main industries—oil, manganese, and timber—hard. Countries such as Mozambique and Tanzania, which have little debt, are well placed to maintain expenditure as revenues decline. A few countries may also have scope for discretionary fiscal stimulus to sustain demand.

Note: This box was prepared by Norbert Funke, Victor Lledó, and Irene Yackovlev.

Where Possible, Ease Monetary Policy and Let the Exchange Rate Adjust to the External Environment

The disinflationary plunge in commodity prices has reduced the need for many countries to tighten monetary policy and in some cases may even create room for countercyclical monetary policy. Exchange rate changes may help to restore competitiveness and growth in the face of permanent commodity price falls or lower financing flows. But in some countries, sharp currency depreciations in the wake of balance of payments pressures could feed through to inflation.

It is important that central banks reiterate their commitment to meet their inflation targets, even if at this stage monetary policy has to be loosened. Coordinating monetary, fiscal, and exchange rate policy is necessary to facilitate adjustment and avoid undermining other policy objectives.

In countries with low inflation (some even have negative monthly inflation rates), little inflationary pressure, and managed floats, looser monetary policy can facilitate adjustment. Easing monetary policy could to some extent offset the negative impact of a decline in external revenues on domestic demand and also keep inflation from falling below its target. In some countries, it may be optimal to loosen policy even when inflation is currently above the target if the authorities expect downward inflation pressures to increase soon. Where fiscal tightening is necessary due to concerns about fiscal sustainability, a countercyclical monetary policy could help offset the demand implications.

In countries with flexible exchange rate regimes that have experienced an adverse terms of trade shock or lower capital flows, real exchange rates should be allowed to depreciate to keep the economy stable, and careful coordination of monetary and fiscal policy is needed to avoid a devaluation-inflation spiral.

Using reserves to support a fundamentally overvalued exchange rate would probably be futile. Where capital outflow seems generalized or where a persistent current account deficit can no longer be financed by inflows, a depreciation of the exchange rate would help smooth the adjustment. However, this decision should be informed by an assessment of possible negative balance sheet effects for financial institutions and corporations. This might warrant initial implementation of measures to address weaknesses in bank balance sheets so that the depreciation can support the adjustment.

Countries with fixed exchange rate regimes or de facto targets for exchange rate stability have generally less scope for countercyclical monetary policy. Even when capital mobility is limited, maintaining an exchange rate peg requires enough reserves, which could be quickly depleted if monetary policy becomes overly expansionary. But in the West African Economic and Monetary Union (WAEMU) and the Central African Economic and Monetary Community (CEMAC) areas, there could be some limited scope for monetary easing, given the marked decline in inflation, weakening demand, the absence of pressures in reserves, and the monetary policy stance in the euro area. To counter the recent liquidity squeeze, the Central Bank of West African States (BCEAO) has increased liquidity injections through a new facility (see Box 2.5, Chapter II).

Countries experiencing continued demand pressures and relatively high inflation may have to tighten monetary policy. The monetary and fiscal policy mix must be able to contribute to external balance without undermining internal balance. Combining an expansionary fiscal deficit with looser monetary policy could be highly inflationary because it would place excessive pressure on nominal exchange rates to facilitate external adjustment.

In countries affected by a capital flow shock, as risk premiums rise monetary policy may also need to be tightened. Failure to raise domestic rates relative to foreign rates may bring in depreciation pressures, depending on the degree of capital mobility and the composition of capital inflows. But historically low interest rates internationally should help reduce the need for nominal interest rate increases.

In sub-Saharan African low-income countries in particular, capital controls have generally been ineffective under normal conditions. Nevertheless, each country’s circumstances should be independently evaluated; it is conceivable that some controls could make sense in specific circumstances. If so, the first recourse could be to enforce existing controls rather to introduce new ones.

Closely Monitor Financial Vulnerabilities and Be Prepared to Act Promptly

Sub-Saharan Africa has not faced a systemic financial crisis and its banks have few direct linkages with the toxic assets affecting major financial centers (see Chapter II). However, as the slowdown continues, monetary authorities need to monitor and safeguard against financial vulnerabilities such as rising credit risk and possible cross-border contagion, considering that many financial institutions in Africa are foreign-owned. Moreover, regulatory oversight should encompass the entire financial sector:

  • Monetary authorities should identify banking system vulnerabilities, starting by identifying banks most likely to experience difficulties. Banking supervisors should also insist on high-frequency data so they can continuously assess bank liquidity and solvency and conduct credit risk diagnostics and stress-testing. Supervision should be as comprehensive as possible, covering foreign currency risk, bank risk management practices, lending standards, and funding reliability. It should extend to all deposit-taking and credit-creating institutions, including nonbank financial institutions.
  • Procedures for handling a systemic crisis or failures within all the financial services markets should be drawn up promptly in preparation for contingencies.
  • The region should track current G-20 initiatives to strengthen regulation of cross-border financial flows and restore investor confidence in order to unfreeze international credit markets and encourage capital inflows and intraregional lending.

Governments should plan how they will react should a banking crisis erupt, recognizing that resources to support their financial systems may be limited. The liquidity and usability of reserve assets, the status of nonperforming bank loans, and the availability of trade credit deserve special attention. Governments, central banks, and bank supervisors should aim to coordinate their actions closely to better monitor liquidity and solvency risks as well as to prevent the adoption of excessive regulations.

Government funds should be used only to protect the safety and functioning of the financial system. Where a single bank has problems, the authorities should first assess whether it is suffering a liquidity or a solvency problem and what would be the systemic implications of its failure. Banks facing solvency problems should receive support only when their failure would threaten overall financial stability either directly or because, in the judgment of the authorities, failure would undermine market confidence. Public funds should be provided transparently and with a view to minimizing moral hazard.

Keep Medium-Term Goals in Sight

The gloomy environment puts an even higher premium on keeping economies stable. Countries need to avoid imposing new restrictions on trade flows as they work to mitigate the impact of the global crisis.

Box 1.6.The Gleneagles Commitments and the Global Financial Crisis

In 2005 the international community renewed its commitments at the G-8 summit in Gleneagles, Scotland, to double aid to low-income sub-Saharan African countries in order to help them progress toward the Millennium Development Goals (MDGs). Aid was to be doubled to US$85 per person by 2010. In June 2007, United Nations Secretary-General Kofi Annan set up an Africa Steering Group, which includes representatives of the IMF and the World Bank, to promote realization of the Gleneagles commitment.

The IMF staff has produced quantitative macroeconomic assessments of the Gleneagles commitments for six sub-Saharan African countries: Benin, Central African Republic, Niger, Rwanda, Sierra Leone, and Togo. The assessments are based on two models: (1) a traditional macroeconomic model with a standard demand side; a production function (extended to include capital projects with near-term pay off, such as roads, and human capital projects with a long-term payoff); and reduced-form trade equations for the external sector; and (2) a dynamic stochastic general equilibrium model with nominal rigidities and multiple sectors.

Results from Benin indicate that the assessment is robust across model specification. The additional aid inflows (averaging 2.4 percent of GDP in 2008–10 and 2.0 percent in 2011–15) can be accommodated by the authorities’ IMF-supported program without major disruptions to economic stability as long as the inflows are highly concessional and are used effectively. However, the scaling-up scenario has two major risks: (1) Benin has limited absorptive and administrative capacity, which may mean the additional aid would have minimal impact on growth and poverty reduction; and (2) the impact of the global financial crisis may affect the availability of concessional financing to scale up aid.

Honoring the Gleneagles commitments could help sustain sub-Saharan African growth and mitigate the impact of the global financial crisis. In particular, the Gleneagles scenario represents an opportunity to provide financing for countercyclical fiscal policies so that sub-Saharan African countries can maintain their growth momentum and continue making progress toward the MDGs.

Benin: Macroeconomic Impact of the Gleneagles Commitment, 2007–15

1 See IMF (2008b) and Mongardini and Samake (2009).

It is important now to move ahead with planned structural reforms such as those to

  • Strengthen public financial management systems so as to improve the targeting, efficiency, and oversight of resources and thus broaden fiscal space and the effectiveness of expansionary fiscal policies.
  • Implement or scale up targeted and temporary social safety nets by introducing automatic stabilizers on the expenditure side, which could enhance the role of countercyclical fiscal policy.
  • Adopt “quick win” measures to reduce the cost of doing business in export-oriented sectors that need to improve their competitiveness, secure foreign demand in the downturn, and, in the case of pegged regimes, support a real exchange rate adjustment.

How Can the International Community and the IMF Help?

All these measures require the support of the international community. A lack of resources could set Africa back by several years in terms of reducing poverty and providing infrastructure.

This is the time where international commitments to double annual aid promised by the G-8 Heads of State in the Gleneagles summit in 2005 need to be honored and even increased. Aid would be particularly useful now when fiscal pressures are building up, to prevent undue compression of investment budgets and make it possible to maintain the scope and size of social safety nets. Although many donor countries face problems of their own, because aid flows are still a relatively small share of their budgets, they can be accommodated even with the new demands. Current financing constraints also make it even more important for donors to ensure that, in keeping with the Paris Declaration, aid is predictable, transparent, and aligned with the policy priorities of the recipients.

Scaled-up aid to Africa would also benefit rich nations by boosting global demand, for example, for machinery and equipment needed for infrastructure projects in sub-Saharan African countries. In fact, a coordinated fiscal stimulus would have more traction if directed toward the neediest, which have a higher marginal propensity to consume—and to import. Scaled-up donor support to Africa and other low-income countries should therefore be considered part of the global policy response. More aid will come at a small marginal cost since the Gleneagles commitment would amount to a fraction of the proposed fiscal stimulus packages in advanced economies. Simulations by IMF staff for a number of countries (see Box 1.6) have shown that scaled-up aid could be accommodated without undermining economic stability.

Stalled global trade talks need to be resumed to stimulate global growth and welfare. Successful conclusion of the Doha Round would help to better integrate developing countries—including those in sub-Saharan Africa—into the global trading system, which would spur global and regional growth and facilitate African attainment of the Millennium Development Goals (MDGs). Temptations to respond to weakening balance of payments positions with protectionist measures need to be avoided. Less global trade would likely harm all countries.

The IMF is playing its part: It will increase its financial support to countries affected by the crisis. To meet the diverse and evolving needs of its low-income members, the IMF is revising its lending instruments to make them more flexible and working to double concessional lending to low income countries. It will also continue to provide policy advice and extensive technical assistance for strengthening economic policymaking in Africa and help design more sophisticated frameworks for macroeconomic management and progressive integration into the world economy.

Note: This chapter was prepared by Norbert Funke, Victor Lledó, Gustavo Ramirez, and Irene Yackovlev with editorial assistance from Anne Grant and Martha Bonilla, and administrative assistance from Natasha Minges.

1

Countries with more developed financial markets are Nigeria, among oil exporters; Botswana, Cape Verde, Mauritius, Namibia, Seychelles, and South Africa among middle-income oil importers; and Ghana, Kenya, Mozambique, Tanzania, Uganda, and Zambia among low-income oil importers. With the exception of South Africa, which is considered an emerging market, all other countries in this group are referred to as frontier emerging markets.

2

Chapter II looks at the impact of the global financial crisis on African financial systems in more detail.

3

First-round effects are defined as the direct impact of oil and world food prices on the consumer price index and the indirect effect on consumer prices that results from the use of oil as an intermediate input in the production of local goods. Second-round effects refer to a longer-term increase in inflation as a result of a one-off price shock. Core inflation is defined as headline inflation excluding food and fuel items.

4

April 2008 and current 2009 WEO projections were used, respectively, as before- and after-crisis projections. Although factors other than the crisis may have affected the change in projections, the presumption is that the impact of the crisis dominates in most countries.

5

Highly impacted (H) countries are those for which the decline in growth projections equals or exceeds 2.5 percentage points and/or the deterioration in reserve coverage equals or exceeds 2.5 months of imports. Moderately impacted (M) countries are those that are not highly impacted for which the decline in growth projections is between 0.5 and 2.5 percentage points and/or the deterioration in reserve coverage is between 0.5 and 2.5 months of imports. Countries experiencing a low impact (L) are those for which both the decline in growth projections and the deterioration in reserve coverage are lower than 0.5 percentage point and 0.5 month of imports, respectively.

6

Estimates by IMF staff (Arora and Vamvakidis, 2005) indicate that South African growth has a significant impact on growth in other African countries. A 1 percentage point decline in South African growth is associated with a ½–¾ percentage point decrease in growth in the rest of Africa.

7

Commodity-related revenues are largely influenced by commodity prices and are not perfectly correlated with output fluctuations; hence the separate treatment of fiscal expansion modalities.

8

Some countries in the region have faced difficulties in prioritizing effectively owing to sudden demands to cut spending, as evidenced by the tendency to cut investment spending owing to aid shortfalls (Celasun and Walliser, 2008).

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