Last week, my colleague Hugh Bredenkamp talked about how the IMF is helping the low-income countries overcome the global economic crisis. This week, I want to follow this theme, but hone in more on sub-Saharan Africa. I know this region reasonably well, both from current and past vantage points. In my present role, I am the director of the IMF’s African department. Previously, I was minister of finance in Liberia and, before that, I spent a significant part of my long World Bank career working on African countries. Grappling with the kinds of economic challenges that affect the lives of millions of Africans is a passion for me.
In this first post, I want to talk about growth prospects for Africa. Let’s take a step backwards. Before the global recession, sub-Saharan Africa was generally booming. Output grew by about 6½ percent a year between 2002 and 2007—the highest rate in more than 30 years. This acceleration was broader than ever before, going beyond the typical short-lived commodity driven booms and touching many more countries. Hopes were high that the region was slowly but surely turning the corner.
Then, in a great reversal of fortune, the global economy went into a tail-spin. Initially, we hoped that the fallout in Africa would be limited. And, indeed, when the global financial tsunami made landfall, it first hit the relatively small number of countries with well-developed financial linkages to international capital markets. South Africa in particular faced difficult challenges as portfolio outflows spiked. Together with Ghana, Uganda and several other frontier markets, its currency plunged, confidence dipped, and foreign direct investment slowed.
But the impact didn’t stop there. Falling export demand and commodity prices battered economic activity in many more countries, including oil exporters in western and central Africa, causing fiscal and external balances to deteriorate significantly. Remittances from the diaspora shrank and credit dried up. The result, in many countries, was stalled growth.
Different this time round
In previous global downturns, such shocks would have had chipped away at economic stability in African countries. Without the ability to finance rising deficits, they would have put up the shutters—applying administrative constraints on imports, slashing government spending, or simply failing to pay bills. This time around, thanks to a step improvement in macroeconomic policies over the past decade, and helped by debt relief, things are different. Healthy foreign exchange reserves provide cushions to pay for imports, with flexible exchange rates also playing their part. Falling government revenues are accommodated by higher borrowing in a number of countries. So some of the shocks coming from the world economy have been absorbed, allowing much of domestic activity to be sustained.
Still, nobody is escaping. Oil exporters have inevitably seen the greatest reversal in performance, mirroring the sharp swing in oil prices. The more developed countries in the region have also been pummeled. South Africa, the continent’s largest economy and a driving force for growth in the region, has been badly bruised by its close integration with global financial markets and strong trade links with the rest of the world. It is suffering its first recession in over two decades, and negative spillovers from this powerhouse are spreading across the continent. The dubious honor of the steepest declines in output goes to Botswana and the Seychelles, which rely heavily on diamonds and tourism respectively. In both cases, GDP has fallen at double digit rates.
Some good news
There is some good news however in all of this. It comes from among the region’s low-income countries, which have been least affected by global developments. Of course, countries that went into the crisis with significant economic imbalances—such as the Democratic Republic of Congo, Ethiopia, and Ghana—are still faring poorly. And vulnerabilities and poverty remain high in all low-income countries. But some countries seem poised to escape relatively lightly, with modest slowdowns.
In part this is simply because they are less integrated into the global economy. Many are also being helped by the fall in food and fuel prices from the spike last year that caused much disruption and hardship before the global recession hit. Some commodity exporters with a broad mix of commodities have seen their overall terms of trade improve. Reconstruction is also driving economic activity in a number of post-conflict countries, including Côte d’Ivoire, Burundi, Liberia, and Sierra Leone.
But, given the vulnerability of Africa’s population, the stakes are higher than in other regions of the world.. The slowdown will dent the otherwise downwards trend in income poverty in the region. All sectors are feeling the impact, from cotton farmers receiving lower prices, to unemployed mineworkers, to informal workers in urban centers facing stiffer competition. And governments are having greater difficulty in maintaining services. The effects of these also threaten to linger long after the global recession has ended, through increased malnutrition and diminished levels of education and health.
So where do we go from here?
What does the more positive news on the world economy of the last few weeks mean for Africa? It is too early to say whether the worst is behind us. Evidence is patchy at best. Production in South Africa continued to fall through the second quarter. In most other countries, we do not have good high-frequency indicators that might pinpoint the bottom of the cycle. But the indirect evidence, such as monthly data on imports, exports, and tax revenues, is consistent with many having hit their nadir in the first half of this year.
The question now is whether the region will be able to recover relatively quickly and preserve the hard-won gains of the last decade. Or if, instead, growth in the region will be anemic, as has typically been the case during past, when the pick-up in Africa has lagged well behind the rest of the world. This will be the subject of my next two blog posts.