Growth in sub-Saharan Africa (SSA) is expected to hit 6.7 percent in 2008, up from 6 percent in the current year (see table). According to the IMF’s latest Regional Economic Outlook (REO), SSA is experiencing its strongest growth and lowest inflation in more than 30 years.
The expansion is attributable to rising production in oil exporters and strong domestic investment in oil importers, fueled by progress on macroeconomic stability and reforms in most countries. The region also benefited from strong demand for its commodities, increased capital inflows, and debt relief. The REO, released on October 20, organizes SSA’s 44 countries into four groups: oil exporters, and non-oil-exporting middle-income, low-income, and fragile countries (those that are generally susceptible to political instability and conflicts).
Growth in the oil exporters should accelerate to about 10½ percent in 2008. The middle-income countries should grow by about 4 percent; low-income countries by 7 percent, fueled by agriculture and construction; and fragile countries by 5½ percent.
SSA countries have kept inflation under control at 7½ percent despite higher commodity prices. Average inflation is expected to drop further in the oil exporters this year, partly because of stabilization gains in Angola and Nigeria. In the middle-income countries, inflation is expected to accelerate to about 6½ percent this year, and in most low-income countries, inflationary pressures are expected to ease further, partly because of a more plentiful food supply and monetary policies that have helped check inflation expectations and the effects of higher oil prices. In the fragile countries, average inflation remains high, albeit with large differences among countries.
The expansion cuts across country groups but is strongest in the oil exporters.
Can SSA sustain the growth?
Sustaining growth, the REO says, is one of the region’s primary challenges and depends on each country’s ability to use higher income to accelerate socio-economic development. This effort will require continued structural and institutional reforms to increase productivity, strengthen countries’ resilience to shocks, and attract private investment to noncom modity sectors.
The region’s past growth episodes have generally been shorter than in other regions and often ended with a collapse in output. The causes, says the REO, are volatile term of trade and other shocks and weak institutions. In the current expansion, many oil exporters have saved more of the oil revenue windfall and improved their policies. Many other countries have also continued to grow, even with stagnating or deteriorating terms of trade. The strong growth reflects institutional improvements, structural reforms, and more rigorous policies. Thanks to better economic conditions and greater stability, investment is rising and income volatility is falling.
Risks to the outlook
The REO describes a positive outlook but notes that it is clouded by external and internal risks. The external risks stem from the possibility of a global economic slowdown, the internal risks mainly from weak policy implementation and, possibly, security and political problems. In particular, if the prices of nonfuel commodities declined significantly and unexpectedly, output could drop by about 1.5 percent. An unexpected rise in oil prices would worsen the current account and net foreign asset positions of oil-importing countries.
A few SSA countries have recently enjoyed strong portfolio inflows, whose reversal would reduce external financing and hurt growth. So far, most SSA markets have shown little reaction to the turbulence in global financial markets, but this could change. Moreover, the repricing of risk might make it more difficult for African countries to raise funds in global markets or to privatize.
The REO notes that some African countries are taking advantage of vigorous global growth and buoyant commodity markets to institute reforms. Still, few are on track to halve poverty by 2015. For many others, it is difficult to even evaluate their progress toward the Millennium Development Goals (MDGs) because statistics are so weak.
To make progress toward reaching the other MDGs, African policymakers should consolidate stabilization gains, improve infrastructure, reduce the costs of doing business and boost productivity, overcome financing constraints, and expand trade and markets.
Grants to the region, excluding Nigeria and South Africa, are projected to be 3 percent of GDP this year, with a slight rise to the low-income countries. Although official development assistance from the industrial countries has been broadly flat since 2003, emerging creditors, particularly China, are giving more, generally in the form of project assistance and export credits.