I believe that Africa’s needs must be fully reflected in any global response to this unprecedented recession. With similar intentions, leading policymakers and stakeholders in Africa gathered in Tanzania last March to discuss how to work with the IMF on this. Under the leadership of President Kikwete and IMF Managing Director Strauss-Kahn, the participants agreed to build a new, stronger partnership.
More than just rhetoric, these common goals included the IMF seeking more resources for Africa and reacting more rapidly, responsively, and flexibly. While much remains to be done, I think it is a fair to say that we have achieved a remarkable amount on both fronts—more in fact than I could have imagined when I started in my job just a little over a year ago.
As a reminder, the IMF agreed to mobilize $17 billion through 2014 for lending to low income countries, mostly in Africa—trebling our lending capacity to these countries. This goes far beyond the promise given by our Managing Director in Tanzania to seek a doubling of concessional resources. The financial terms of IMF support have also become more concessional, with zero interest until the end of 2011, and will remain more concessional thereafter.
And the IMF has moved quickly to deploy these resources in Africa. Among international institutions, it has an extraordinary capacity to react early to a country’s needs, as I know from my own experience as a policymaker in my home country of Liberia. Indeed, in the first eight months of 2009, we committed over $3 billion in new resources to countries in sub-Saharan Africa, trebling the total stock of outstanding commitments this year alone.
The shape of the global recovery is on everybody’s mind. But how will it affect sub-Saharan Africa? A key lesson from the past is that global cycles matter for Africa.
For sure, there have been definite idiosyncrasies in sub-Saharan African cycles–as will be discussed more fully in the forthcoming October issue of our Regional Economic Outlook—but the global dimension remains paramount.
Previous global cycles—and I’m talking here about the regular fluctuations in global economic growth that bottomed out in 1975, 1982, and 1991—followed some clear patterns. Typically, the end of an unsustainably high period of global growth coincided with the emergence of production bottlenecks and a burst of inflation triggered by accelerating commodity prices (particularly oil), prompting a tightening of monetary policy. The subsequent downturns were relatively short and growth rates typically bounced back fairly
quickly to previous levels.
By and large, Africa followed this pattern too. But the timing and the strength of the recovery were a bit different. Growth rates stayed high during the first year of the global slowdown, and they tended to bottom out later. The rebound was slower, lagging global growth by a year or two. Critically, when growth did recover, it was generally hesitant and low.
What can the past tell us about the present? It is clear that the initial shock to sub-Saharan Africa has been greater than in the past. This reflects both the magnitude of the global crisis and the deeper integration between the region and the world, both in trade and in financial markets.
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.
Low-income countries face vast development needs. One of the biggest impediments to rapid growth is a massive “infrastructure deficit.”
In sub-Saharan Africa, for example, indicators of road and rail infrastructure are only about half those in developing countries as a whole—comparisons with advanced economies, of course, would look even bleaker. Insufficient power generation capacity and telecommunications networks are also a big constraint. It is clear that large-scale investment programs, sustained over many years, will be needed to close these gaps. Both private and public sectors will have a role to play.
The snag, of course, is that investment spending typically has to be financed by borrowing, and until quite recently, the ability of low-income country governments to take on more debt has been severely hampered by legacies from the past. Many had built up unsustainable debt as a result of bad borrowing and spending decisions, poor project implementation, weak revenue systems (governments could not collect the taxes needed to service the debts), and often bad luck (as their economies were hit by global shocks). In effect, these countries were caught in a debt trap.
But the world is changing. Large-scale debt relief, as well as big improvements in policies and public institutions, means that an increasing number of countries can now ramp up investment spending more efficiently than in the past, and borrow more aggressively for that purpose. They are starting with a clean slate. But not all countries are at this point. In fact, the majority still have more to do to on the policy and institution building front, and will need to borrow cautiously in the interim. Nevertheless, the greater diversity we see now among low-income countries needs to be reflected in how IMF-supported programs are designed (alert readers will notice that this has been a theme in my blogs this week).
What does this mean in practice? Well, for a start, we need a more flexible policy for setting limits on government debt in programs. For the past 30 years, the traditional low-income country program has permitted only highly concessional borrowing (that is, on subsidized terms), which generally rules out financing from the private sector, or from lenders who are not willing or able to provide sufficiently generous terms. There were case-by-case exceptions, but this was bascially the way it worked.
We are now moving (effective in December) to a new framework with built-in flexibility, linked directly to the circumstances of individual countries. Those with the lowest debt vulnerabilities and strongest capacity to manage public resources (assessed on the basis of widely-used indicators) will have much greater leeway than in the past to pursue borrowing strategies that mix concessional and nonconcessional sources of finance.
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.