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.
In my last post, I explained how the IMF has dramatically scaled up its concessional financial assistance to its low-income country members to help them cope with the current global financial crisis.
Today, I want to get beyond how much is being lent, and turn to the how. It’s not enough simply to push out money—vital though that is. We also need to meet the particular needs of the country in question, and these are quite varied. Precisely with this in mind, the IMF has been changing the way it lends to low-income countries. In the jargon, we call this “facilities reform.”
We want to make lending more flexible, and better tailored to the different needs of an increasingly diverse group of low-income countries. It’s a question of horses for courses, as the expression goes.
What was the case beforehand? Well, the centerpiece of the IMF’s concessional financial support for low-income countries for the last decade has been the Poverty Reduction and Growth Facility (PRGF). Established in 1999, the PRGF addressed deep-seated balance of payments constraints—the very constraints that prevented low-income countries, year after year, from importing necessary goods and services, including the investment goods they needed to grow and develop. With these kinds of problems, there was no quick fix. So country programs under the PRGF emphasized deep structural reform, implemented over several years and supported by concessional loans from the Fund—backed by debt relief in certain cases—to create the conditions for strong, sustainable growth.
It’s no secret that IMF lending to low-income countries attracted some criticism over the years. Some people thought the adjustment policies were too harsh, or even misguided. It is true that, for a while, the results were not encouraging. But all the pieces began to fall into place early in this decade. Governments took heart as outcomes improved, and this created a virtuous circle, with better policies leading to still better results. A strong global economy for much of this time helped too. If we look back now at the overall record, the countries’ efforts paid off—PRGF programs have helped them achieve higher growth and lower inflation, supported by higher levels of foreign aid.