By Antoinette Sayeh, director of IMF's African Department
Sub-Saharan Africa is the second fastest growing region of the world today, trailing only developing Asia. This is remarkable compared to the current complicated state of the global economy, with Europe still struggling and the United States slowly on the mend. In 2012, Sub-Saharan Africa maintained solid growth, with output growth at 5% on average. The factors that have supported the region through the Great Recession -- strong investment, favorable commodity prices, and generally prudent macroeconomic management -- continued to be at play.
Within Africa, Two Speeds of Growth
However, performance varies across countries, and the region has seen growth at two different speeds. Growth was very strong among oil-exporting and low-income countries. Exports such as oil, minerals, agricultural products, and tourism supported demand in these countries. Sectors that have been particularly dynamic include construction, agriculture, and mining (especially due to new extractive industry capacity coming on stream). In contrast, growth in middle-income countries slowed significantly in 2012, reflecting their closer ties to the euroarea. South Africa was also adversely affected by labor unrest in the mining sector.
Our latest "Regional Economic Outlook" shows a broadly positive near future for the region, with a moderate acceleration of growth expected in 2013-14. This favorable prospect reflects in part the gradually improving outlook for the global economy. Domestically, investment in export-oriented sectors remains a key driver of growth. One-off factors will support growth in some countries, such as Nigeria's economy rebounding after floods, recovery of agriculture in regions previously affected by drought, and gradual normalization of activity in some post-conflict countries, such as Côte d’Ivoire.
Two-speed growth is expected to persist in the region for the next few years. Middle-income countries will continue to grapple with sluggish economic activity, with little room for policy stimulus, while we expect solid growth among oil exporters and low-income countries. We expect regional inflation to continue the downward trend begun in 2012, although a handful of countries, such as Malawi, will still probably see high inflation going forward.
Growth in Sub-Saharan Africa is subject to downside risks, originating from inside and outside the region. Medium-term risks for the global economy remain high, although the near-term risk outlook has improved. Among these outside factors, threats to sub-Saharan Africa include 1) a prolonged near-stagnation in the euroarea, and 2) a slowdown in major emerging market economies. Risk scenario analysis conducted for the "Regional Economic Outlook" indicates that these adverse shocks would affect Sub-Saharan Africa's growth, but not derail it. That said, countries with limited policy buffers and a narrow export base could experience more severe adverse effects.
Domestic risks include adverse climatic developments and internal conflicts. These events, though potentially severe in their impact on individual countries and their close neighbors, would not have significant effects on the region as a whole.
The region's positive outlook is conditional on the implementation of sound economic policies. In particular, there is a strong case for strengthening policies in the short run in a number of countries to contain or prevent imbalances:
- Sizable fiscal deficits in some countries, such as Ghana, point to the need for significant fiscal adjustments, although the pace of adjustment will need to take account of weak demand conditions in some cases.
- Large fiscal expansion plans in some oil exporters, such as Angola, Chad, and the Republic of Congo, raise concerns over absorption capacity and cost effectiveness.
- Continued higher interest rates set by the central bank are warranted in countries where inflation remains high and/or volatile, such as Ethiopia, Malawi, and Tanzania.
- Surging current account deficits in some low-income and fragile countries, although largely financed by export-oriented foreign direct investment, require careful monitoring.
In addition, with the risk of a significant global slowdown still present, rebuilding buffers to handle shocks from outside the region remains a priority in many fast-growing countries. Many countries in Sub-Saharan Africa could find it difficult to raise sufficient financing for larger deficits in the event of a downturn, although the majority of them are not constrained from borrowing by high debt as of now.
Job Creation Top Priority
Accelerating job creation and reducing unemployment is a pressing challenge across the region. Middle-income countries have seen high levels of visible unemployment, whereas robust output growth in low-income countries is not producing strong growth in wage employment. Policy recommendations to redress this situation depend on individual country characteristics, but would include the following:
- amending labor market regulations to reduce disincentives for hiring while maintaining worker protection;
- investing in education systems that deliver workers with the skill sets required by employers;
- revising hiring practices and compensation policies in the public sector to ensure an even playing field; and
- improving the business climate to boost employment demand.
Renewed Interest of Global Investors
Recently, Sub-Saharan Africa's access to international sovereign bond markets has grown significantly, as we show in our analysis. This development reflects both easy global financial conditions and the region’s favorable economic prospects. Zambia's debut Eurobond in September 2012 was massively oversubscribed and priced below Spain's 10-year bond at the time. Tanzania tapped global capital markets at the end of February 2013, and just last month Rwanda did the same.
Increasing access to global capital markets creates both opportunities and risks to Sub-Saharan African economies. To make the most of the renewed global investor interest, we recommend countries maintain prudent fiscal policies that safeguard long-term sustainability, consider bond issues against a range of financing instruments under an appropriate medium-term debt management strategy, and follow best practices to get the best possible access terms. In this context, international sovereign bonds may not be the best option for financing infrastructure investment because other funding options may provide more tailored and cost-effective financing.