Information about Sub-Saharan Africa África subsahariana
Chapter

II. Developments in 2006 and Prospects for 2007

Author(s):
International Monetary Fund. African Dept.
Published Date:
April 2007
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Developments in 2006

Economic growth in sub-Saharan Africa (SSA) in 2006 remained robust at 5.4 percent, after growth of 6 percent in 2004 and 2005 (Table 2.1). Growth moderated in oil-exporting countries because they had temporary difficulties in expanding oil production (Figure 2.1). Growth in the region was increasingly driven by domestic investment, rising productivity, and, to a lesser degree, government consumption, together more than offsetting the declining contribution from private consumption (Figure 2.2).1 Higher oil revenues and debt relief supported increased government spending. The recent uptick in investment augurs well for SSA’s future growth because it is broadly spread throughout the region in both OPCs and oil-importing countries.

Table 2.1.Sub-Saharan Africa: Selected Indicators, 2002-07
EstimateCurrent Projections
200220032004200520062007
Percentage change
Real GDP3.54.06.06.05.46.7
Of which: Oil exporters14.47.38.77.95.611.6
Oil importers3.33.15.25.45.35.2
Real non-oil GDP3.83.35.55.76.47.4
Consumer prices (average)29.99.76.18.17.27.1
Of which: Oil exporters18.817.012.513.27.76.6
Oil importers27.67.74.36.77.17.3
Per capita GDP1.52.04.14.03.44.7
Percent of GDP
Exports of goods and services32.433.836.039.342.140.6
Imports of goods and services32.833.334.635.938.839.6
Gross domestic saving15.518.621.022.223.221.5
Gross domestic investment16.418.719.319.220.421.4
Fiscal balance (including grants)−2.7−2.2−0.41.54.1−0.1
Of which: Grants1.51.61.51.51.41.3
Current account (including grants)−3.3−2.5−1.8−0.6−0.6−1.7
Of which: Oil exporters−8.0−3.62.58.010.67.4
Terms of trade (percent change)1.01.12.78.59.8−5.1
Of which: Oil exporters5.31.07.828.114.8−10.0
Oil importers−0.51.20.8−0.76.0−1.5
Reserves (in months of imports)34.44.14.95.36.26.8
Memorandum items:
Oil price (U.S. dollars per barrel)25.028.937.853.464.360.8
Advanced country import growth (in percent)2.64.19.16.17.44.7
Real GDP growth in other regions
Sub-Saharan Africa (WEO definition)43.74.26.06.05.76.8
Developing Asia7.08.48.79.29.48.8
Middle East3.96.55.65.45.75.5
Commonwealth of Independent States5.37.98.46.67.77.0
Sources: IMF, African Department database; and World Economic Outlook (WEO) database.Note: Data as of March 29, 2007. Arithmetic average of data for individual countries, weighted by GDP.

Defined on the basis of net oil exports; includes Angola, Cameroon, Chad, Republic of Congo, Côte d'Ivoire, Equatorial Guinea, Gabon, and Nigeria.

Excluding Zimbabwe.

Excluding South Africa.

Includes the countries covered by the IMF African Department plus Djibouti, Mauritania, and Sudan.

Sources: IMF, African Department database; and World Economic Outlook (WEO) database.Note: Data as of March 29, 2007. Arithmetic average of data for individual countries, weighted by GDP.

Defined on the basis of net oil exports; includes Angola, Cameroon, Chad, Republic of Congo, Côte d'Ivoire, Equatorial Guinea, Gabon, and Nigeria.

Excluding Zimbabwe.

Excluding South Africa.

Includes the countries covered by the IMF African Department plus Djibouti, Mauritania, and Sudan.

Figure 2.1.Sub-Saharan Africa: Real GDP Growth

(Percent)

Source: IMF, African Department database.

Figure 2.2.Sub-Saharan Africa: Contribution to GDP Growth

(Percent)

Source: IMF, African Department database.

The global environment in 2006 was favorable for SSA. Healthy economic growth in most parts of the world raised demand for the region’s exports. Global demand for fuel and other commodities was particularly strong, and their prices rose through most of the year, boosting SSA’s terms of trade, especially for OPCs. Even for oil importers the terms of trade improved in aggregate, deteriorating in only about one-third of them. For many countries the depreciation of the U.S. dollar helped buffer rising oil prices.

While SSA has profited from commodity booms in the past, they were followed by painful and protracted adjustment periods that wiped out most of the previous growth gains. This time, spending is boosted not only by higher commodity revenues but also by debt relief, but growth also seems to be supported by more prudent macroeconomic policies in most countries, making it more sustainable. The change is most obvious in resource-poor landlocked countries, where over the past three years growth has outperformed that of nonfuel-resource-intensive and coastal countries.2 As inflation has declined, it has increased the real resources available to the private sector, resulting in higher domestic savings.

Growth in per capita income exceeded 3 percent in 2006 against 4 percent in the previous two years.3 The challenge now is to accelerate growth and spread it throughout the region to achieve the income poverty goal of the MDGs. At present only about half a dozen countries seem to be on track to meet it. The limited poverty data for 19 countries covering 1984 to 2004 shows that economic growth is a critical ingredient for reducing poverty (Box 2.1). Country evidence also suggests that growth needs to be supported by targeted distribution policies to make inroads into poverty.4 As a region, SSA is off-track on all the MDGs, although some countries are making rapid progress. Six of the seven top developing countries in expanding completion rates for primary education between 2000 and 2005 are in SSA, as are 5 of the 10 countries making the fastest progress toward improving access to clean water and sanitation.

Box 2.1.Trends in Poverty and Inequality in Sub-Saharan Africa

Sustained growth and effective distribution policies will be critical to whether SSA halves poverty by 2015. From household survey data from 19 SSA countries it appears that countries that sustained real per capita growth above 1 percent between surveys have reduced the share of their population living on less than a dollar a day—except in Botswana and Lesotho, where income inequality is the highest in the region.1 (figure). Since these surveys precede the recent improved growth in SSA, its effects on poverty are still unknown. National poverty data from a subsample indicate that urban poverty is more likely than is rural to fall with high per capita growth. In part, this may reflect problems in measuring both poverty and growth, given the overlap between the urban and formal sectors in many countries.

A notable exception is Mozambique, where rural poverty has declined more than urban.

While inequality has been reduced in almost half the countries in the sample, it has risen further in the others, some of which started off with already large inequalities. On the Gini index, Botswana, Lesotho, and South Africa have among the least egalitarian income distributions in the region.2 Analysts have attributed inequality in SSA to historical factors, persistent hierarchical sociopolitical structures, and ethnic fractionalization (Milanovic, 2003). In SSA countries with a high Gini index, the consumption share of the richest quintile has risen, and that of the poorest has fallen; the share of the middle class (fourth through sixth deciles) is among the lowest in the region, and it fell or held constant between surveys. This distributional pattern may have undermined the emergence of the sizable middle class needed to propel foreign and domestic investment in the region.

Correlation Between Real Per Capita Growth and Change in Poverty

Source: World Bank, PovCal Net database; World Development Indicators, 2006.

Note: Change in Poverty is the fall/rise in the percentage of population living on less than a dollar a day. Growth is the average real per capita growth between survey years.

Public policy could do more to address poverty and income distribution. The incidence of government in-kind transfers like health and education spending is particularly skewed in SSA. The richest quintile receives 32 percent of education spending, and the poorest just 13 percent (Chu, Davoodi, and Gupta, 2004; Davoodi, Tiongson, and Asawanuchit, 2003). In 2000, by directing social spending to the poor, South Africa was able to lower its before-tax, before-transfer Gini of 0.57 (among the highest in the world) to 0.35, a substantial improvement from 1993, when its social spending was seen as relatively neutral (South Africa, 2003).

Note: This box was prepared by Smita Wagh.1 The analysis is based on household survey data released between 1984 and 2004. Data availability dictated the choice of countries and years for comparison (see Appendix I, Table A1 for countries and years covered), and the consistency and comparability of household surveys over time may not be reliable. Unless otherwise indicated, poverty data refer to the dollar-a-day poverty line; using national measures would have restricted the sample size.2 The Gini coefficient is calculated by dividing the area lying between the Lorenz curve (which plots cumulative income shares for a population) and a 45-degree diagonal by the total area lying under the 45-degree line. A value of 0 indicates complete equality; a value of 1, maximum inequality.

Inflation in the region was subdued, thanks to prudent macroeconomic policies and another good harvest. In aggregate, inflation (excluding Zimbabwe) declined from 8.1 percent in 2005 to 7.2 percent in 2006 (Figure 2.3), even though in many countries high international oil prices were passed through to domestic buyers.5 Inflation declined strongly in OPCs, reflecting stabilization gains in both Angola and Nigeria. Nigeria also benefited from a good harvest, as did many other SSA countries, which eased the food supply. With few exceptions bank financing of the budget deficit was negligible, and monetary policy responded early to inflationary pressures in a number of countries.

Figure 2.3.Sub-Saharan Africa: Inflation, 2000-06

(Percent)

Source: IMF, African Department database.

1 Excluding Zimbabwe.

Global demand, especially for commodities, helped strengthen the external position of many SSA countries. Oil exporter revenues from rising prices more than offset a slowdown in output (Figure 2.4). Rising nonfuel commodity prices counterbalanced the impact of high fuel prices on oil importers; in fact, in 2006 their terms of trade improved by 6 percent. Developments in late 2006 were particularly favorable for nonfuel commodity exporters because their export prices remained relatively strong while oil prices declined. SSA’s current account (including grants) was broadly in balance. With strong capital inflows (see below), the reserve position of SSA countries improved markedly; even oil importers (excluding South Africa) on average managed to raise their import cover slightly to 4.5 months of imports (Figure 2.5).

Figure 2.4.Sub-Saharan Africa: Commodity Prices

(Index 2003=100)

Sources: IMF, Commodity Prices; and UN Comtrade.

1 Composite of cocoa, coffee, sugar, tea, and wood, weighted by SSA exports.

Figure 2.5.Sub-Saharan Africa: Foreign Reserves

Source: IMF, African Department database. 1 Excluding South Africa.

1 Excluding South Africa.

With the global commodity boom, Asia and the United States have emerged as major trading partners for SSA (Figure 2.6). While the European Union is still the dominant trading partner for most SSA countries, rising exports of fuels and other commodities to destinations outside the European Union and rising textile exports to the United States generated by its AGOA have changed the pattern of SSA exports. Chapter IV presents an analysis of how SSA’s exports are evolving and discusses policies that are essential to further integrate the region into the global economy. Communication and information technologies can help SSA countries lower their costs and increase productivity. The rising use of cell phones, for example, facilitates access to financial services and a deepening of financial markets. While access to these technologies in SSA is still well below the world average, the region is slowly catching up (Box 2.2).

Figure 2.6.Sub-Saharan Africa: Destination of Exports

(Percent of total exports)

Source: IMF, Direction of Trade Statistics.

Note: 2006 data to October.

Box 2.2.Information and Communication Technologies in Sub-Saharan Africa

The spread of information and communication technologies has enabled or contributed to the transformation of the global economy, characterized by shifts in the location of economic activities, increased fragmentation of production processes, and emergence of some new types of trade, most notably in services. While access to communication services is relatively low in Africa compared with other regions, Africa is rapidly narrowing the gap—it is one of the fastest-growing markets for cellular phone services globally—which is creating opportunities for both trade and domestic businesses. Information technology (IT)-related capital deepening is estimated to have accelerated growth of GDP in SSA by about 0.2 percentage points annually, up to an additional 3 percent of GDP cumulatively over 1991-2005. This is about half the growth impact of IT investment in OECD countries.

There has been a substantial improvement in access to communication services in SSA over the past ten years (figure). Most notably, cell phone subscriptions grew 60 percent annually between 1994 and 2004, while mainline services grew moderately at only 6 percent annually. As a result access to communication services in SSA has almost doubled (to 19 percent) relative to the global average between 1991 and 2004. The number of Internet users has also grown briskly, to 14 percent of the global average.

Sub-Saharan Africa: Subscriptions to Communication Services, Relative to Global Average

Source: Author's calculations, based on data from the International Telecommunications Union.

While GDP per capita appears to be a primary determinant of access to information and communication technologies, domestic policies and regulation also have an effect. For example, the quality of the regulatory environment matters, and greater competition among service providers lowers prices and translates into higher coverage of cell phone services. A more competitive market for cell phones is also associated with lower prices for mainline services.

Note: This box was prepared by Markus Haacker; see also Haacker (2007a and 2007b).

SSA’s external debt continued to decline in 2006 as a result of comprehensive debt relief from the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, the Multilateral Debt Relief Initiative (MDRI), and the Paris Club agreement with Nigeria. Reflecting these factors and strong GDP growth, debt in SSA (excluding South Africa) declined by 18 percentage points, to 24 percent of GDP (Figure 2.7). Nigeria’s debt to Paris Club creditors was reduced by $18 billion.6 Sixteen countries in SSA received MDRI debt relief from the IMF in 2006 valued at $3.0 billion, including Cameroon, which reached the HIPC completion point in April, and Malawi and Sierra Leone, which reached it in August and December, respectively. Eight more SSA countries could qualify for MDRI relief once they reach the HIPC completion point.7

Figure 2.7.Sub-Saharan Africa: External Debt, 2000-06

(Offical creditors, percent of GDP)

Source: IMF, African Department database.

The scaling up of aid promised at the Gleneagles Economic Summit is yet to materialize. Official grants to SSA (excluding Nigeria and South Africa) were broadly unchanged in 2006 at 2.7 percent of GDP—about the average for the past decade. Rising grants due to the MDRI were offset by lower disbursements to Ethiopia, Rwanda, Niger, Burundi, and some of the mature stabilizers, notably Uganda and Tanzania.8 While total bilateral official development assistance (ODA) to SSA rose by more than 30 percent in real terms in 2005, the increase was almost entirely due to the Paris Club agreement with Nigeria and a moderate increase in emergency assistance. Without the debt relief to Nigeria, ODA flows to SSA have been basically flat since 2003 (Figure 2.8). In contrast, emerging creditors such as China have increased their financial assistance to SSA, be it in the form of loans, grants, debt relief, or direct investment. The additional resources are welcome as part of scaled-up assistance from the international community. It will be important that the terms and volume of this assistance be compatible with preserving debt sustainability over the longer term, be provided in a transparent manner, and be aligned with national priorities of the receiving countries as formulated in their Poverty Reduction Strategy Papers (PRSPs).

Figure 2.8.Sub-Saharan Africa: Components of Total Net Official Development Assistance

(Constant 2004 U.S. dollars, billions)

Source: OECD, DAC-ODA. Data as of January 15, 2007.

Rising oil revenue and capital inflows drove appreciation of the real exchange rates in many countries. Oil revenues pushed the real exchange rate in oil-exporting countries up by over 3 percent by the end of 2006 (Figure 2.9). In oil-importing countries, two developments stand out: the depreciation in South Africa by 14½ percent and, to a smaller degree, in Namibia; and the real appreciation of 250 percent in Zimbabwe. Excluding both South Africa and Zimbabwe, real exchange rates for oil importers in the aggregate were stable. In Ethiopia, Kenya, and Madagascar, among others, real exchange rates appreciated by more than 5 percent. Except in Kenya this was a result of factors like scaled-up expenditures, aid, and high nonfuel commodity exports; in Kenya appreciation was driven by increased tourism receipts, remittances, and capital inflows.

Figure 2.9.Sub-Saharan Africa: Real Effective Exchange Rate

(Index, Jan-2004=100)

Source: IMF, Information Notice System.

1 Excluding South Africa and Zimbabwe.

Countries confronted with real exchange rate appreciation should be alert to Dutch disease effects. Real exchange rate appreciation is increasingly an issue for both commodity exporters and importers, fueled by rising inflows of commodity revenues, aid, and capital as well as increased spending. Macroeconomic policies need to address the challenges of Dutch disease, including through close coordination between fiscal and monetary policies, raising productivity and strengthening the supply side of their economies by promoting private sector activity, and liberalizing their trade regimes.9

Investor interest has been boosted by the region’s growth performance, the commodity boom, and comprehensive debt relief. Net foreign direct investment (FDI) (excluding South Africa) almost doubled since 2002, reaching $18 billion in 2006.10 Resource intensive countries, mainly oil-producers, attracted almost four-fifths of FDI, but non-resource-intensive countries (excluding South Africa) also recorded rising inflows. Investor interest is also evident from the activity of hedge funds and institutional investors in local currency debt markets. Nigeria received inflows of about $1 billion in the first half of 2006, and there have been significant inflows into Ghana, Kenya, Uganda, and Zambia (Figure 2.10). Investors have been attracted by high yields relative to the perceived risk, better macroeconomic fundamentals, and diversification benefits.11 While the improved investor sentiment is supported by rising ratings for sovereign SSA debt (Box 2.3), most SSA countries still need substantial structural reforms, including strengthening their institutional framework, to develop functioning debt markets and to improve their capacity to manage domestic debt (Chapter V).

Figure 2.10.Sub-Saharan Africa: Debt Trading Volumes

(Billion US$)

Source: EMTA; and IMF, Financial Market Update.

Box 2.3.Debt Relief and Credit Rating in Sub-Saharan Africa

The number of SSA countries rated by international rating agencies has grown in recent years. Financed by two donor-led initiatives, in 2006 Standard and Poor’s (S&P) rated 14 countries, including South Africa (first figure), while Fitch rated 12 countries by end-September 2006 (second figure).1 The sovereign ratings are based on such considerations as external and domestic indebtedness; sustainability of macroeconomic policies; the degree of development; financial sector and political stability; transparency in government operations; and the quality of domestic institutions.

The median rating of countries in SSA, excluding South Africa, is B. This is far below investment grade (see the figures). Fitch also rates two monetary zones (WAEMU and CEMAC), which peg their currency to the euro, at BBB-, i.e., at the investment grade level, mainly because of the support from France embodied in the zone arrangements.

Sub-Saharan Africa: Average Rating Levels of Sovereigns, 2002–061

Source: www.fitchratings.com

1 The number of countries rated are indicated in the parenthesis below each year.

Sub-Saharan Africa: Sovereign Ratings by Category, 2006

Source: Standard and Poor's, 'Report Card: African Sovereigns', April 25, 2006.

Rating agencies view HIPC and MDRI debt relief as voluntary debt restructuring, not selective default, because it is not initiated by debtors.2 These initiatives have lowered external debt in the relevant countries to levels found in peer B-rated or even BB- rated countries. However, the debt relief itself has not resulted in immediate upgrades in ratings, albeit it has improved the outlook for some countries. For these, it does present an opportunity to access international capital markets (Ghana, Senegal, and to lesser extent Benin, Burkina Faso, Mozambique, and Mali) so long as the borrowed funds are growth-enhancing and debt sustainability is ensured.3 The other countries must continue to rely on concessional financing even after the MDRI. But even for the good performers, rating agencies warn that borrowing strategies must be cautious and supported by continued sound macroeconomic policies so that the benefits of hard-won debt sustainability are not squandered.

Note: This box was prepared by Piroska M. Nagy.1 First ratings of SSA sovereigns were sponsored by United Nations Development Program (UNDP) and U.S. Agency for International Development (USAID).2 See Fitch Ratings, Republic of Ghana (April 25, 2006), and Sub-Saharan Africa – 2006 Outlook (May 2006).3 See Standard & Poor’s, Filling the Funding Gap for African Sovereigns After Debt Relief (April 2006), and Report Card: African Sovereign (April 2006).

Food security has improved as the result of another good harvest in 2006. It is estimated that cereal production in Africa increased in the 2006 agricultural season, with bumper harvests in several West and Southern African countries. But severe floods and outbreaks of disease are threatening food security in East Africa, in particular in parts of Ethiopia, Kenya, and Uganda. Conflict and refugee movements are jeopardizing food security in Chad and the Central African Republic. In Zimbabwe high inflation, foreign exchange shortages, and poor agricultural policies—in particular insecurity in land tenure and distorted pricing—are undermining food security, especially in rural areas. Overall, some 18 million people in SSA are considered to be at risk of starvation. There is also growing recognition that climate change due to the emission of greenhouse gases could precipitate more floods and drought in SSA (Box 2.4).

Box 2.4.Macroeconomic Implications of Climate Change in Sub-Saharan Africa

Scientists agree that global warming has already begun and will continue for centuries (Intergovernmental Panel on Climate Change, 2001). There is strong evidence that the earth’s temperature has been rising in recent decades as concentrations of greenhouse gases (GGs) increased in the atmosphere. This is likely to have implications for global climate patterns, with potentially severe negative consequences for human life and economic activity (Stern, 2006).

Addressing the challenges posed by climate change will necessitate a concerted and costly effort (Stern, 2006). The required response comprises mitigation (reduction in GG emissions) and adaptation (dealing with the consequences of climate change). Forceful mitigation by high-income and emerging economies—the principal emitters of GGs—is essential. Adaptation, on the other hand, is the chief concern for sub-Saharan Africa (SSA), the region that contributes the least to GG emissions but that is uniquely vulnerable because it is already hot and under substantial environmental stress (Rice, 2006; United Nations, 2006b). There is a case for additional aid flows to the region to compensate it for the deleterious effects of climate change for which it has not been responsible.

The impact of climate change on SSA could be dramatic (Nkomo, Nyong, and Kulindwa 2006; United Nations, 2006a). Declining and more variable rainfall could jeopardize already-scarce water resources so that by 2025 the number of people short of water on the continent of Africa could increase by 60 percent, to 480 million. Rising temperatures and more frequent floods are likely to increase the incidence of diseases like malaria. Agricultural production in rain-fed areas is likely to be affected; certain activities, such as coffee growing in Uganda or nomadic livestock husbandry in Kenya (Beaumont, 2006), might be completely wiped out. Rising sea levels could threaten both important agricultural areas and coastal communities, including major commercial centers like Cape Town, Dar Es Salaam, and Lagos. Subsistence farmers and other poor people are likely to bear the brunt of the adverse impact of climate change. Worst of all, perhaps, competition for scarce resources could exacerbate conflict in the region.

Climate change could present governments in the region with macroeconomic challenges. Inflationary pressures could surface as the supply of domestically produced food falls and budgets must devote increasing resources to preparing for climate contingencies. If governments import more—because, for example, persistent droughts mean more foodstuffs must be imported—the balance of payments could deteriorate. If, in contrast, they spend more on domestically produced goods and services—because, for example, rising sea levels require labor-intensive infrastructure upgrades—the real exchange rate would appreciate, undermining competitiveness. While separate estimates for SSA are not available, for the developing countries as a whole the annual costs of adapting to climate change could amount to tens of billions of dollars (Stern, 2006). Mitigation by high-income and emerging economies could partially alleviate these challenges, by both reducing GG emissions and supporting the transfer of resources to SSA. The latter could be via trade in emissions caps and/or investment in SSA’s emission-reducing projects under the Clean Development Mechanism.

Governments have three avenues for adapting to climate change (Stern, 2006):

  • Adopt policies to achieve high and sustainable economic growth so as to increase resources for covering the cost of the challenges arising from climate change;
  • Promote risk-sharing through efficient insurance markets and establish cost-effective and well-targeted social safety nets; and
  • Allocate resources to critical projects to, for example, improve water supplies, build up coastal defenses, upgrade roads and bridges to enable them to withstand more extreme weather events, and invest in health and education.
Note: This box was prepared by Dmitry Gershenson.

HIV prevalence rates seem to be plateauing at a high level in most SSA countries.12 The number of people infected with HIV/AIDS in SSA rose to 24.7 million in 2006, almost two-thirds of the global total and up 2.3 percent from 2004. However, because the population also grew, the prevalence rate for adults aged 15 to 49 edged down from 6.0 percent in 2004 to 5.9 percent in 2006. Though antiretroviral treatment reached over 1 million people in mid-2006, a ten-fold increase since the end of 2003, only one-fourth of those in need of the therapy actually receive it. HIV-related mortality in the region is still rising, and the number of orphans is growing rapidly, reaching 12 million in 2005.13 The HIV pandemic continues to impose a heavy social and economic burden on the region, undermining efforts to reduce poverty and make progress toward the MDGs.

Economic developments in oil exporters

Economic growth in SSA oil-exporting countries slowed in 2006 (Figure 2.11). Overall growth dropped to 5½ percent in 2006, though non-oil GDP growth rose strongly. In Nigeria unrest in the Niger delta hindered oil production and caused GDP growth to slow, despite strong growth in the non-oil sector. In Angola a delay in the coming on-stream of new oil fields lowered growth to 15 percent. The maturing of its largest oil fields caused a steep decline in Equatorial Guinea’s growth rate; and in Chad GDP growth dropped because technical difficulties slowed oil production, and the completion of the Cameroon-Chad oil pipeline reduced non-oil sector growth. In Côte d’Ivoire, growth again stagnated. Cameroon was the only OPC where growth accelerated.

Figure 2.11.Oil-Exporting Countries: Contribution to GDP Growth

(Percent)

Source: IMF, African Department database.

Growth was supported by investment and private consumption. While the former picked up somewhat, private consumption lost steam. Similarly, government consumption, which had been slightly expansionary in 2005, slipped to neutral. The contribution of net exports to real growth was again negative. Non-oil growth in oil exporters picked up markedly, to 10 percent, higher than their overall growth rate. In Angola, Equatorial Guinea, Nigeria, Chad, and Gabon, strong non-oil activity partially offset the slowdown in the oil sector, indicating that these countries are making progress in diversifying their economies. But in Cameroon, the Republic of Congo, and Côte d’Ivoire, non-oil growth was below that in the oil sector.

Inflation in oil-exporting countries as a group dropped to 7¾ percent, reaching single digits for the first time since 1990. This reflects mainly strong stabilization gains in Nigeria and Angola, which have both sought to sterilize surging oil revenues. As noted earlier, Nigeria also benefited from falling food prices as a result of a good harvest. In the other oil-exporting countries, inflation continued at the benign levels recorded in recent years. However, strong fiscal demand and delayed pass-through of higher oil prices along with high meat prices in Chad and Gabon has pushed inflation in CEMAC OPCs well above that in WAEMU countries.

Once again the fiscal position of OPCs improved. In the aggregate they posted an overall fiscal surplus (excluding grants) of 8 percent of GDP, with Equatorial Guinea and Gabon exceeding 10 percent, and the Republic of Congo exceeding 20 percent of GDP. Bringing the average down were Chad, which recorded a deficit of 2 percent of GDP because of exceptional security expenditures, and Côte d’Ivoire, whose fiscal deficit remained at 3 percent of GDP. While improvements in the overall balance are impressive, this measure covers up vulnerabilities of the budget to fluctuations in oil prices that are better captured by the ratio of non-oil deficit to non-oil GDP. Excluding Equatorial Guinea, which is an outlier, this ratio on average improved slightly, to 27¾ percent, although with large variations between countries (Appendix I, Table A2).14 In half of the SSA oil exporters the ratio exceeded 40 percent.

In general, improvement in the fiscal position is mainly a result of increased oil revenue coupled with a comparatively moderate increase in expenditures—a confluence that has prevailed over the past four years (Figure 2.12). On average over 2002–06, a 1 percent increase in fiscal oil revenue was associated with a 0.3 percent increase in fiscal spending. However, this ratio increased in 2006 (see Chapter III).

Figure 2.12.SSA Oil-Exporting Countries: Fiscal Spending and Oil Revenues, 2002-06

(Annual percent change)

Source: IMF, African Department database.

Saved oil revenue bolstered the external position of SSA oil exporters. The surplus in their external current account (excluding grants) increased further, to 8¾ percent of GDP. On average for 2002–06, a 1 percent increase in oil export revenue was associated with a 0.8 percent increase in imports (Figure 2.13), mainly because of continuing investment in oil exploration, production, and infrastructure. Since 2002, OPCs have accumulated additional foreign exchange reserves of almost $45 billion, fed by a cumulative current account surplus of $35 billion and healthy inflows of FDI (Figure 2.14).

Figure 2.13.SSA Oil-Exporting Countries: External Spending and Oil Exports, 2002-06

(Annual percent change)

Source: IMF, African Department database.

Figure 2.14.SSA Oil-Exporting Countries: Current Account and Official Reserves

(Billions of U.S. dollars, cumulative since 2003)

Source: IMF, African Department database.

The macroeconomic policies of oil exporters continued to be broadly sound in 2006. While scaling up their spending on social and infrastructure needs, they have recognized that their absorptive and implementation capacity is limited and saved a large portion of the windfall profits from higher oil revenue. The resulting improvement in their fiscal and external position has made them more resilient to sudden declines in oil prices. Monetary policy was tightened somewhat by limiting credit to the private sector to accommodate an expansionary fiscal policy, and will need to remain vigilant to second-round effects of high oil prices. In the fiscal area, fuel price subsidies should be further reduced, and some countries will need to address emerging weaknesses in their fiscal controls—such as off-budget spending and nonconcessional borrowing—and strengthen efforts to ensure the quality of spending. While pressing development needs have expanded the role of the government in the economy, these countries must improve the business environment to facilitate private sector growth.

OPCs also need to implement structural reforms to create jobs, diversify their economies, and expand their absorptive capacity. In comparison with oil producers in other regions, those in SSA suffer from a relatively poor business environment. Except for Côte d’Ivoire and Nigeria, their financial sectors are far less developed than those of OPCs elsewhere (seeFigure 3.6 in Chapter III) and even of most other SSA countries. Except for Nigeria OPCs in SSA also have a much more rigid labor market than other oil producers (Figure 2.15).

Figure 2.15.International Comparison: Doing Business Indicators

Source: World Bank, Doing Business, 2006.

1 GCC=Gulf Cooperation Council members.

Economic developments in oil importers

Growth in oil-importing SSA countries proved resilient in 2006. Aggregate growth in this group was 5¼ percent, almost unchanged from 2005. It was supported by high nonfuel commodity prices, a good agricultural season, and rising investment. Consumption was again the biggest contributor to growth, although less so than previously (Figure 2.16). Meanwhile, investment picked up markedly. The expansion of government consumption and investment reflects the stepped-up efforts of many countries in the region to attain the MDGs; related to this, real growth of imports again outstripped growth of exports. Half the countries in this group recorded GDP growth rates of 5 percent or more, including Ethiopia, Liberia, Malawi, Mozambique, São Tomé and Príncipe, and Sierra Leone where growth was buoyant. In South Africa, by far the largest economy in SSA, growth was roughly unchanged at 5 percent. Zimbabwe was the only country in SSA where real GDP declined.

Figure 2.16.Oil-Importing Countries: Contribution to GDP Growth

(Percent)

Source: IMF, African Department database.

Inflation in general was kept under control. Despite pressures from high oil prices, inflation was broadly unchanged at 7 percent (excluding Zimbabwe) as a result of prudent macroeconomic policies and good 2005/06 harvests in many countries. However, price pressures increased in over one-third of oil importers. Strong domestic and foreign demand, rising oil prices, and the depreciation of the rand pushed up inflation in South Africa, where monetary policy responded quickly to contain price pressures. In Ethiopia, Guinea, and São Tomé and Príncipe inflationary pressures resulted from fuel price increases and an expansionary monetary policy. Inflation in Zimbabwe again accelerated, to above 1,000 percent by the end of 2006.

Swift adjustment of domestic fuel prices helped safeguard the fiscal position of oil importers. Increased efforts to mobilize revenue also supported higher spending on critical programs. The decline of the U.S. dollar and slight real appreciation, especially in the CFA zone, dampened the impact of high oil prices and reduced the cost of imports.

Public spending on poverty reduction expanded the fiscal deficit excluding grants. In contrast, the fiscal balance including grants recorded a surplus of 1 percent of GDP, mainly because of MDRI relief. Fiscal spending by oil importers expanded by 0.5 percent of GDP as many countries stepped up their spending on poverty reduction. The overall revenue ratio increased by 0.5 percentage point. Landlocked and costal countries made serious efforts to increase revenue, which rose by 0.6 percent of GDP, whereas in non-oil resource-intensive countries the revenue ratio fell by 1 percentage point.

The external position improved slightly despite higher fuel prices. While imports stagnated in SSA oil importers (excluding South Africa), an increase in their exports by ¾ of 1 percentage point, to 31 percent of GDP, helped pay the higher oil bill. The current account deficit (excluding South Africa) narrowed slightly and foreign exchange reserves edged up to 4.5 months of imports, compared with 4.3 months in 2005 and 5.6 months in 2003. In South Africa strong domestic demand led import growth to exceed the brisk growth in exports, widening the current account deficit from 4 percent in 2005 to 6½ percent of GDP. Nonetheless, reserves increased slightly.

Prospects for 2007

SSA economic growth is forecast to accelerate to 6¾ percent in 2007 (Figure 2.17). A renewed rise in oil production is expected to boost growth for OPCs to more than 10 percent; in Angola growth is expected to exceed 30 percent. However, with a fall in oil prices the magnitude of fiscal and external balances is likely to be smaller. In oil importers, robust demand for nonfuel commodity exports and a positive outlook for the agricultural season are expected to keep growth steady at about 5 percent. Growth is expected to broaden further in this group, with real GDP expected to expand by 5 percent or more in almost two-thirds of those countries.

Figure 2.17.Sub-Saharan Africa: Real GDP Growth, 2007

(Percent)

Source: IMF, African Department database.

Inflation is expected to remain stable at 7 percent for the region as a whole (excluding Zimbabwe). In OPCs, further stabilization is again expected in Angola, Cameroon, and Chad, while inflation in most other oil exporters is forecast to hover around the benign levels prevailing in their currency unions. In oil importers (excluding Zimbabwe), lower fuel prices, an improved food situation, and vigilant macroeconomic policies should help contain inflation to about 7 percent. SSA countries in general have made impressive progress in recent years in bringing inflation down to single digits, with a vast majority (35 of 44 countries) expected to be in that group in 2007 (Figure 2.18). Unfortunately, in Zimbabwe inflation is projected to accelerate toward 3,000 percent.

Figure 2.18.Sub-Saharan Africa: Median Inflation and Countries with Inflation Below 10 Percent

Source: IMF, African Department database.

Fiscal and external balances (excluding grants) are likely to come under pressure, with lower prices for oil and other commodities. The overall fiscal balance for SSA (excluding grants) is projected to drop into negative territory again, with a small deficit of about ¼ percent of GDP, driven by declining balances in oil exporters and further efforts to reach the MDGs. The terms of trade for SSA as a whole are expected to worsen by 5 percent, with OPCs facing a drop of 10 percent and a reduction in their current account surplus. In contrast, the current account deficit of oil importers is expected to be stable and the terms of trade to deteriorate by only 1½ percent. SSA’s reserve position (excluding South Africa) should improve further, to almost 7 months of imports, reflecting the rising reserves of oil exporters and stable reserves of oil importers.

Preserving recent stabilization gains and broadening growth will require vigilance and continued reform. Lower fuel prices are giving some respite and should help to further consolidate macroeconomic stabilization gains. On the other hand, expectations of the people are very high in many African countries because of debt relief and the promised scaling-up of aid flows. Many governments in the region face pressures for increased outlays on infrastructure, in the social sectors, and for rural development. The development needs are genuine, but policymakers will have to manage the expectations well if they are to preserve macroeconomic stability. To effectively absorb higher aid, fiscal and monetary policies need to be well coordinated. Domestic absorption can be raised by liberalizing trade.

Reforms to increase the domestic supply response to higher aid flows and enhance productivity should be pursued. Here the role of the private sector is critical, but the stagnation of credit to private nonbank businesses indicates that more needs to be done if the private sector is to be the engine of growth (Box 2.5). Structural reforms to enhance the business climate and investment in key infrastructure would further increase the region’s growth potential. While still at the bottom in the World Bank’s Doing Business survey for 2007, SSA for the first time was among the top three reforming regions. Ghana and Tanzania were among the top 10 reforming countries, and Nigeria and Rwanda were among a select group that were implementing three or more reforms. The challenge is for more countries to adopt reforms to reduce the cost of doing business.

Box 2.5.Policies to Promote Private Sector Development in Sub-Saharan Africa

A dynamic private sector is essential for raising SSA’s growth rates, reducing poverty, and integrating Africa into the global economy. Currently entrepreneurs in SSA face more regulatory obstacles than in any other region of the world. The World Bank’s Doing Business 2007 report ranked 175 countries on ease of doing business; the average SSA country rank was 131. Obstacles span the range of private sector activity, from licensing through employment and credit to administrative transactions. For instance, it takes about 11 procedures and 2 months to start a business in SSA compared with 8 procedures and 1 month in South Asia, and it costs three times as much in terms of income per capita. Labor market regulations in SSA are among the most rigid in the world; they undermine private sector development, weaken external competitiveness, and discourage foreign investors.

Recently reform of the business environment has picked up. After lagging behind for years, two-thirds of SSA countries implemented at least one positive reform in 2005/06. Only Eastern Europe, Central Asia, and OECD high-income countries did better. While these reforms were relatively easy (“stroke of a pen”), a broader agenda remains pressing, such as reforming the financial sector and streamlining and enhancing the transparency of the legal and administrative system.

In its core area of responsibility, the IMF helps members achieve and maintain macroeconomic stability, which is a precondition for private sector development. In doing so, policies have to be targeted to bring about sufficient public expenditures for human and physical infrastructure, adequate credit to the private sector, and tax systems free of distortions. The IMF continues to emphasize the importance of good governance.

Developing and strengthening financial systems in SSA countries is important for increasing savings and investment. To enhance efficiency and competitiveness in the banking sector, financial sector reforms should focus on

  • restructuring major banks and nonbank financial institutions;
  • reducing state ownership in banking systems;
  • encouraging the entry of new institutions, including foreign banks;
  • liberalizing interest rates and eliminating directed credit programs;
  • strengthening prudential supervision and modernizing banking laws;
  • improving payments systems; and
  • giving central banks more autonomy and increasing their reliance on indirect rather than direct monetary policy instruments.

The development of functioning financial markets would be a next step that could help reduce outflows of portfolio capital from SSA and attract inflows. Other measures to broaden access to credit are to facilitate the recovery of collateral, expand microfinance and rural credit, and provide working capital and long-term financing for smaller firms.

Reducing internal barriers would increase intraregional trade and make SSA more attractive for foreign and domestic investors. Expanding and improving infrastructure would help reduce the high shipping costs that impede trade within Africa and limit the scope for economies of scale. Reducing nontariff barriers, such as quantitative restrictions, import bans, roadblocks, and high administrative charges, would also foster trade. Complicated and restrictive rules of origin under various regional trade arrangements should be simplified, and the efficiency and governance of customs administrations need to be strengthened to promote intra-and extraregional trade.

Finally, countries should seek to collaborate with private investors. The IMF is supporting national investors councils that bring together African leaders and local and foreign business executives to identify investment opportunities, obstacles to private investment, and options for removing the latter.

Note: This box was prepared by Ulrich Jacoby.

Risks to the Outlook

The outlook for SSA in 2007 is positive, and the risks seem moderate and manageable. Moreover, the policies of most countries support recent stabilization gains. The primary downside risks are the pace of slowdown in the global economy and how it will affect oil and other commodity prices, interest rates, and private investor sentiment.

Economic growth in SSA in 2007 could be negatively affected if an abrupt unanticipated slowdown in the United States spilled over into the global economy. Short of that, correlations between the U.S. economy and SSA have historically been weak, although trade linkages have expanded in recent years.15 There is evidence of a stronger correlation between SSA and Europe (Figure 2.19 and 2.20).16 Thus, any economic slowdown in the euro area could have a more significant impact on growth in SSA.

Figure 2.19.Sub-Saharan Africa, Euro Area, and the United States: Real GDP Growth1

(Percent)

Source: IMF, World Economic Outlook.

1 Periods of U.S. recessions shaded (National Bureau of Economic Research).

Figure 2.20.Sub-Saharan Africa, Euro Area, and the United States: GDP Growth Correlation1

(Centered 9-year correlation coefficient)

Source: IMF, World Economic Outlook.

1 Periods of U.S. recessions shaded (National Bureau of Economic Research).

While the co-movement of growth in SSA and in Asia has traditionally been weak, this is changing as the two regions become more integrated. For example, Asia now receives about 25 percent of SSA’s exports, twice as much as a decade ago. China and India together account for about 10 percent of both SSA’s exports and imports. They are also making substantial investments in SSA.

If the slowdown in the world economy is worse than expected, it could hurt commodity prices. Real commodity prices, both oil and nonoil, have risen steadily since the early 2000s—to SSA’s benefit. While in 2006 oil-exporting countries in SSA saw another dramatic improvement in their terms of trade, those of oil importers also increased, by 6 percent, because nonfuel commodity export prices rose significantly. A sudden decline in commodity prices because of a sharp downturn in the global economy is a risk to commodity exporters in the region.

Higher-than-envisioned oil and commodity prices would hurt net commodity importers like Malawi, Madagascar, Senegal, and Uganda, which would suffer significant GDP losses.17 Accumulating reserves, adopting flexible exchange rate policies, and fully passing through oil price increases are policy responses that will help protect these economies against unanticipated price increases.

A reversal of portfolio flows would pose major macroeconomic challenges for a few SSA countries. In the search for high yields, some SSA countries are attracting increased inflows of portfolio capital. A sudden shift in investor sentiment could cause these flows to reverse. SSA countries should continue to strengthen public debt management and enhance supervision of the banking system to track capital flows and the repayment schedules on government securities held by nonresidents. Monetary and exchange rate policies will need to be sufficiently flexible to respond to volatile movements in capital.

A number of security and political risks currently face the region. Chief among these is the continuing crisis in the Darfur region of Sudan, the current conflict engulfing Ethiopia and Somalia, the political problems affecting Côte d’Ivoire and Guinea, and fragilities remaining after the recent elections in the Democratic Republic of Congo. The recurring disruptions to oil production in the Niger delta pose an economic risk to Nigeria, which also faces the risk of an election-year relaxation in policies. Management of the security risks will in most cases require action by the African Union and the international community.

Note: This chapter was prepared by Sanjeev Gupta, Ulrich Jacoby, and Calvin McDonald.
1After negative growth in Africa in the first half of the 1990s, productivity turned positive after 1996 and has been steadily accelerating since 2000. While still below gains in most other developing regions, productivity reached almost 3 percent in 2006 (IMF, 2007, Figure 1.14). An earlier study found that total factor productivity growth (TFP) improved strongly in the second half of the 1990s for the first time since the 1960s, and that growth accelerations were accompanied by strong productivity growth. The improvements were closely associated with sound macroeconomic policies, growth in trade, and institutional improvements. See IMF (2005, Chapter IV).
2In addition to countries being classified as oil importers or exporters, they were also classified as resource-intensive, with subgroups oil and non-oil; and nonresource-intensive, with subgroups coastal and landlocked. These groupings follow Collier and O’Connell (2006), who show that the effect of resource endowments is independent of location and thus classify all SSA economies by endowment and location. A country is classified as resource-intensive if primary commodity rents, that is, revenue minus extraction costs, exceed 10 percent of GDP (on this criterion South Africa is not resource-intensive). In terms of location, countries are classified by whether they have ocean access (coastal) or are landlocked. A country is classified as landlocked if its access to the sea is limited and is likely to be a significant impediment to trade; hence, the Democratic Republic of the Congo is classified as landlocked. For further details, see the section on Data and Conventions in the Statistical Appendix.
3Volume GDP underestimates the increase in real incomes and purchasing power that may be induced by changes in the terms of trade, The command GDP indicator adjusts for these by deflating exports with the import price deflator, a measure of how terms-of-trade shifts affect a country’s purchasing power—i.e., its ability to command goods and services. On the basis of command GDP, per capita income growth in SSA averaged about 8.5 percent annually for 2004-06, reflecting the large terms-of-trade gains of oil exporters. However, those gains are probably overstated because a portion of revenues from the oil exports accrue to foreign oil companies. For oil importers, the corresponding rates are close to annual per capita GDP growth.
4The Global Monitoring Report 2007 (World Bank and IMF, 2007, forthcoming) finds that although between 1999 and 2004, poverty in SSA was reduced by almost 5 percentage points, to about 41 percent, due to population growth the number of people living below the poverty line was unchanged at about 300 million.
5In a survey of 31 SSA countries, it was found that the average pass-through of higher international prices to domestic prices was 105 percent for gasoline. Pass-through in oil importers was higher at 120 percent (exceeding 100 percent due to ad valorem taxation and transportation costs), while oil exporters averaged slightly more than half of that (IMF, 2006)
6The second tranche of the October 2005 Paris Club agreement with Nigeria was implemented in May 2006. About 60 percent of Nigeria’s debt to Paris Club creditors has been canceled as part of the agreement, Nigeria also cleared arrears and repaid early a substantial portion of outstanding debt.
7They are Burundi, Chad, the Democratic Republic of the Congo, The Gambia, Guinea, Guinea-Bissau, Republic of Congo, and São Tomé and Príncipe. Another six SSA countries (Central African Republic, Comoros, Côte d’Ivoire, Eritrea, Liberia, and Togo) met the income and indebtedness criteria of the enhanced HIPC Initiative (based on end-2004 data) and may wish to be considered for debt relief.
8Since MDRI relief is reflected in both grants and a reduction of scheduled debt service, the grant data shown in Table SA20 of the Statistical Appendix do not fully capture it. In addition, classification in the fiscal and external accounts varies by country depending on the classification system (government finance statistics and balance of payment statistics), accrual or cash budgeting, and the arrangements between central bank accounts and the budget for transfer of the IMF’s MDRI relief.
9See also Gupta (2006), Chapter 2 on managing the real exchange rate.
10A recent study by the Multilateral Investment Guarantee Agency (MIGA) benchmarked FDI competitiveness in nine SSA economies. While FDI partners cited various advantages to operating in SSA, such as preferential trade access, climate, access to regional markets, and low labor costs, they also reported significant problems including reliability of supply and cost of key utilities, scarcity of skilled labor, and cumbersome business procedures (MIGA, 2006).
11Settlement costs for SSA securities have also been declining because increasingly they can be settled on standard international trading platforms.
12If not stated otherwise, all data are from UNAIDS/WHO (2006).
14In some countries, the improvement in the non-oil deficit was partially due to their inability to expand spending rapidly.
15Factors that determine co-movements include trade linkages, sectoral linkages, and financial integration.
16The median real growth correlation between SSA and the United States between 1971 and 2005 is not significant (estimated at .08), but the correlation was stronger for some countries during the 1991–2005 period.

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