Sub-Saharan Africa’s economic outlook; Policies to raise growth
A modest economic recovery is underway in sub-Saharan Africa. This is good news for the region which has been experiencing a sharp slowdown in economic growth over the last few years.
The bounce back has much to do with a more supportive global economy, especially higher commodity prices.
Policy makers in the region have also taken some difficult decisions to put the recovery on the right track. But more needs to be done to secure a return to the more rapid growth rates needed to deliver meaningful improvements in living standards for all.
While the objective of generating gains in economic and social outcomes is shared broadly, there is huge diversity in economic prospects across countries. Oil exporters are dealing with the legacy of the largest shock to oil prices since 1970.
The unexpected decline in oil prices in 2015/16 led to sharp falls in growth and the recovery so far in these countries has been muted. At the other end of the spectrum, several economies have been growing at sustained rates of six per cent or more.
The underpinnings of growth in these countries vary. For some, they have benefitted from a more diversified export base, for others sustained public investment is the key driver, while others are emerging from conflict.
In shaping policies to deliver growth, there are two key trends that policy makers should remain alert to.
First, domestic macroeconomic vulnerabilities have risen. There has been a marked increase in public debt in many countries in recent years, giving rise to increased interest payments which divert resources away from much-needed social and development spending.
Second, the supportive global environment may not be here to stay. Growth in advanced economies is expected to taper off and borrowing terms for the region’s frontier markets may become less favourable as the United States (US) monetary policy normalises.
Taken together, domestic safety buffers in the region have been run down at a time of heightened global risks in the medium term. Thus, policy makers need to seize the opportunity provided by the current growth uptick to turn the recovery into a durable growth spell.
This requires domestic policy steps to reduce vulnerabilities and raise medium-term growth potential. These are the main issues covered in the International Monetary Fund’s (IMF’s) semi-annual Regional Economic Outlook for Sub-Saharan Africa, published yesterday.
The report provides an overview of economic developments in the region, analysis of recent trends and policy advice. In light of the twin challenges of managing the rise in public debt and the need to boost growth, the report focuses on raising domestic revenues and private investment. The main messages on each of these issues are set out below.
Mobilising domestic revenues to create room for sustainable development goals
Stepping up domestic revenue mobilisation provides the much-needed resources to finance social spending and service the interest on debt, which has been used for public investment. Most countries in the region have considerable potential to collect higher revenue.
Despite substantial progress in revenue mobilisation over the past two decades, it remains below its potential. Our estimates suggest that countries can mobilise between three to five percentage points in tax revenue; this is far more than what the region receives each year in international aid.
This is an ambitious target but it is achievable. It requires strengthening Value Added Tax (VAT) and income tax systems, streamlining exemptions and broadening the tax base.
Such efforts will be most effective if implemented as part of a medium-term revenue strategy which has a broad base of supporters and a credible commitment to improve governance and transparency.
Private investment to rejuvenate growth
The level of private investment in sub-Saharan Africa remains well below the level of other countries at similar levels of economic development. To move this agenda forward, policies which deliver a sound business environment, well-developed infrastructure, trade openness and financial development can lift private investment.
But as these reforms take time, countries have also pursued other avenues to jump-start private investment—such as public-private partnerships, special economic zones and mechanisms to target foreign direct investment. These avenues can be successful if associated risks are well managed.
Overall, our policy advice will always be country and context specific. There is huge potential for boosting growth in the region and the current global environment provides the opportune time to push forward these reforms.
The writer is a Director, African Department, IMF