Sub-Saharan Africa's Outlook: Time for a policy reset

By Antoinette M. Sayeh      
    
After an extended period of strong economic growth, sub-Saharan Africa's (SSA) economy has entered a rough patch. The pace of economic expansion declined to 3.4% in 2015, the lowest level in some 15 years.

Further, we project growth to decelerate further this year to 3% — well below the 6% or so of the past decade and barely above population growth. Indeed, GDP per capita growth will be below 1% for two years in a row for the first time since the late 1990s.

Multiple shocks

The slowdown reflects the adverse impact of the commodity price slump on some of the larger economies and, more recently, the drought in eastern and southern Africa.

The sharp decline in commodity prices has put severe strains on many of the largest sub-Saharan African economies.

While oil prices have recovered somewhat compared to the beginning of the year, they are [more than 60%] below their 2013 peak levels. That is a shock of unprecedented magnitude.

As a result, oil exporters such as Nigeria, Angola and most of the Central African Economic and Monetary Community (CEMAC) countries, continue to face particularly difficult economic conditions.

We forecast growth to slow further for the region's oil exporters in 2016 to 2.2% from as much as 6% in 2014. Non-energy commodity exporters such as Ghana, South Africa and Zambia are also hurt by the decline in commodity prices.

In addition, several southern and eastern African countries are suffering from a severe drought that is putting millions of people at risk of food insecurity. We expect that growth will be significantly affected in a number of countries, including Ethiopia, Malawi and Zambia.

Several countries are also facing pressures on their budgetary and external positions, with additional humanitarian assistance needs.

Many countries are still doing well

Does this mean that the region's growth momentum has stalled? We do not think so for several reasons:

Many countries continue to register robust growth. In particular, most oil importers are generally faring better, with growth in excess of 5% in the likes of Côte d'Ivoire, Kenya, Senegal and many low-income countries.

In most of these countries, growth is supported by ongoing infrastructure investment and strong private consumption. The decline in oil prices has also benefitted many of these countries, although the drop in other commodity prices and currency depreciations has partly offset the gains.

While the near-term outlook for many countries remains difficult and clouded by downside risks, medium term prospects remain favourable.

The underlying drivers of growth at play domestically over the last decade generally continue to be in place.

In particular, the much improved business environment and favorable demographics should play a supportive role going forward.
Reset policies to secure favourable prospects

However, to achieve this strong potential, a substantial policy reset is critical in many cases. This reorientation is particularly urgent in two groups of countries, given that their policy response has so far generally been insufficient.

•    Faced with rapidly declining fiscal and foreign reserves and constrained financing, commodity exporters should respond to the shock promptly and robustly to prevent a disorderly adjustment. For countries outside monetary unions, exchange rate flexibility - as part of a wider macroeconomic policy package - should be the first line of defense.

As revenue from the extractive sector is likely to be reduced over the long run, many affected countries also critically need to contain fiscal deficits and build a sustainable tax base from the rest of the economy. In their consolidation efforts, countries should aim at preserving priority spending, such as social expenditures and growth-friendly capital investments, also with a view to not setting back their longer-term development goals.

•    Given the substantially tighter external financing environment, countries with access to global financial markets in which fiscal and current account deficits have been elevated over the last few years will also need to recalibrate their fiscal policies. Such recalibration would help them to rebuild scarce buffers and therefore mitigate vulnerabilities if external conditions worsen further.

Now is the time to reset policies to address current challenges and ensure the continuation of SSA's success over the past 15 years. The required measures may come at the expense of slower growth in the short term, but they will prevent an otherwise costlier, disorderly adjustment. With that, we believe that countries in the region will be well positioned to reap the substantial economic potential that lies ahead.

The writer is the Director of the African Department at the International Monetary Fund