THE economic growth performance of sub-Saharan Africa over the past decade or so has been very impressive. More recently, however, economic activity has weakened markedly in quite a few countries.
To be sure, the growth projected for the region as a whole — 3.75% this year and 4.25% next year — is higher than in many other parts of the world. But the strong growth momentum of recent years has dissipated, at least temporarily.
To understand the reasons behind this slowdown, it is useful to consider three key factors that supported growth in recent years. Perhaps the most important factor has been the vastly improved business and macroeconomic environment that policy makers have put in place. But, in addition, high commodity prices and highly accommodative global financial conditions have played a role. These last two factors have become much less supportive of late: commodity prices have fallen sharply and global financing conditions have tightened. The upshot is the slowdown in activity that we are seeing in a range of countries.
This difficult picture masks variations. In most low-income countries, growth is generally holding up, supported by strong infrastructure investment and private consumption. Countries such as Ivory Coast, Ethiopia and Tanzania are expected to continue growing at 7% or more.
Others, however, are feeling the pinch from lower prices of their main commodity exports, even as cheaper oil eases their energy import bills.
Even more hard-hit are the region’s oil exporters including Nigeria and Angola, as falling export incomes and sharp fiscal adjustments take a toll.
Middle-income countries such as Ghana, SA and Zambia, are facing challenges ranging from weak commodity prices to electricity shortages to sharply higher borrowing costs.
It also does not help that, in many countries, savings from the recent period of rapid growth have been small, and fiscal and external deficits are generally larger than at the onset of the 2008 global financial crisis. This means that there is now less fiscal space to mitigate the slowdown in activity.
So how should policy makers respond? We see three broad, near-term implications.
First, on the fiscal front, for the vast majority of the countries in the region, there is limited scope to counter the slower growth.
For oil exporters, the sharp and seemingly lasting decline in oil prices makes fiscal adjustment unavoidable, and the buffers used to spread this adjustment over time — be they borrowing or using reserves — are shrinking rapidly. For most other countries, fiscal policies need to continue to balance debt sustainability considerations and development needs. That is an increasingly challenging task because higher interest rates and lower growth will now add to debt burdens.
Second, on the monetary front, countries that are not members of a monetary union and that have experienced a large decline in their terms of trade, should allow the exchange rate to depreciate and absorb part of the shock. Exchange rates have also come under pressure in countries that are not heavily reliant on commodity exports.
Given the strong global forces behind these pressures, resisting depreciation risks depleting scarce foreign exchange reserves. Accordingly, central bank intervention should focus on containing disorderly exchange rate movements.
Finally, the risks to the financial sector arising from declining commodity prices and exchange rate depreciation will need to be monitored carefully.
Sub-Saharan Africa stands at a crossroads. If the region is not only to weather its current difficulties, but also to continue on its trajectory of high growth, it will be essential to adjust and continue on the path of sound macroeconomic policies. It will not be easy, but the stakes for the region have never been higher.
• Sayeh is director of the African Department of the International Monetary Fund.