Ensuring that sub-Saharan Africa emerges strongly from global recession will require both a sustained recovery in the global economy and sound domestic policies. The good news is that domestic policies are already supporting economic activity.
Many countries entered the crisis in much better shape than in the past. The region’s fiscal position was on average in balance in 2008, compared with big deficits in past cycles. Debt levels were also much lower than in the early 1990s, supported of course by recent debt relief initiatives. Inflation had been brought under control across most of the region. And, reflecting sounder and more open policies, countries had accumulated much larger buffers of foreign reserves—the median ratio of reserves to GDP was 14 percent last year, compared to about 5 percent in the early 1970s.
This favorable starting point gave many countries in the region a fair amount of breathing space. They were able to respond to the crisis by allowing fiscal deficits to rise and interest rates to fall, reaping the rewards of previous good policies. Countries with flexible exchange rates also let them adjust to the changing external environment. Such policy responses helped economies absorb some of the impact of the external shocks. Not all countries were able to take this route, however. Faced with large macroeconomic imbalances that pre-dated the global slowdown, a few countries had to tighten their fiscal or monetary policy stance.
Spending levels maintained
Let me expand a bit on fiscal policy.
Ideally, fiscal policy should counteract the crisis, not make it worse. And indeed, as government revenues have fallen in the face of slowing growth, fiscal deficits have risen in most countries, providing some support to economic activity. True, such “automatic stabilizers” are less powerful than in higher income countries because taxes in Africa are less closely tied to employment income and there are fewer safety nets. But still, the fact that countries have been able to maintain spending levels in the face of adverse revenue effects has been very important in containing the impact of the global recession—this was not the case in the past.
Even oil exporters, which have seen large declines in revenue, have managed to avoid the blunt spending cuts that characterized past downturns and have accommodated much of the fall in revenues. Some countries in Africa—such as Botswana, Mauritius, and Tanzania—have actually increased discretionary spending, producing more aggressive countercyclical action.
Looking ahead, I see room to continue these supportive policies in many countries and even to strengthen them until we can be sure that the recovery has taken hold.
The supportive stance of monetary policy has also helped to sustain domestic activity in many countries—and it has more to offer. Inflation in most countries has fallen to single digits, the amount of monetary policy easing to date has been modest, and the likelihood of a significant liquidity overhang seems minimal. Exchange rates have also been strengthening of late in many countries. So, except where countries are still grappling to control inflation, the time is ripe for further interest rate cuts.
Necessary though it is, I don’t want to give the impression that any of this will be easy. Nor that all countries will be in a position to benefit immediately. In fact, the challenges and risks ahead are formidable. Let me mention just five concerns.
- Where countries were already addressing macroeconomic imbalances prior to the slowdown, the options for softening its impact are very limited. Only by reprioritizing expenditure or attracting higher concessional finance could additional spending measures be contemplated.
- Implementation capacity constraints may limit how effectively demand can be sustained from fiscal policy. We need continued efforts to improve public financial management.
- Debt sustainability indicators have worsened. Not yet a cause for strong concern, but needing a watchful eye. At the least, any fiscal stimulus measures may need to go into reverse as the recovery takes hold.
- Increased openness to trade and foreign capital is all well and good, but infrastructure gaps and other impediments to private sector-led growth are still very much an issue in the region.
- Sharp increases in bank lending in many countries during the boom years inevitably pared credit quality. This is causing strain in some banking sectors and left others more vulnerable. It needs a watchful eye.
Let’s not forget the stakes either. Even if economies do improve, many in the region will remain vulnerable and in need of continued support. Urban unemployment and rural poverty have already risen, with very limited social safety nets in place. The improvements in public services that will be essential if countries are to move toward the Millennium Development Goals may fall further behind as national and local budgets continue to be stretched. Many low-income countries, lacking the buffers provided by the strong external reserves of many oil producers, will remain heavily dependent on uncertain external assistance and private inflows, including remittances. And it is possible that aid pledges may not be fully realized.
In these circumstances, support from the international financial institutions will remain crucial. Last week, my colleague Hugh Bredenkamp discussed how the IMF is responding to the needs of the low-income countries. We have already committed almost $3 billion to sub-Saharan Africa this year—nearly three times as much as in the whole of 2008. In my next post, I will discuss in more detail how this money has been allocated and what else the IMF is doing to trying to help.