Information about Sub-Saharan Africa África subsahariana
Journal Issue

CHAPTER 3 How Have Countries Responded to the Shocks?

International Monetary Fund
Published Date:
December 2009
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Information about Sub-Saharan Africa África subsahariana
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Monetary and Exchange Rate Policy

Monetary and exchange rate developments have generally reflected the shocks in trade and capital flows in the region. While policy responses differed across countries, some broad movements seem to be have been common:

  • Slow foreign asset growth has affected growth in money stocks (relative to income) in all countries (Figure 9).
  • Lower liquidity coupled with more cautious lending by banks has reduced credit growth in all countries (Figure 10).
  • While the intensity of exchange rate movements differed across countries, they tended to initially depreciate in nominal terms, with adjustments partly reflecting the countries’ current account positions (Figure 11). Except Uganda, the real effective exchange rate, however, has appreciated.
  • Real interest rates have dropped and became negative in all countries (Figure 12 shows treasury bill rates as an illustration).

Figure 9.Foreign Assets and Growth in Money Stocks

Counterparts to Money Supply in EAC Changes in foreign asset decumulation led to a slowdown in money stocks

Source: IMF, International Financial Statistics.

Figure 10.Slowdown in Credit Growth in the EAC

Credit to the Private Sector in East African Countries

Source: IMF, International Financial Statistics.

Figure 11.Exchange Rate Adjustments and Current Account Balances

Source: IMF, International Financial Statistics.

Figure 12.Real Interest Rates in the EAC

Treasury-Bill Rates in East African Countries1

Source: IMF, International Financial Statistics.

1Interest rates are real and backward looking.

Fiscal Policy

Most countries in the EAC responded to the shock with some fiscal stimulus. The overall fiscal balance for the region (including grants) deteriorated by about 1½ percentage points, to a deficit of close to 3 percent of GDP in 2008 (Figure 13). As expenditure growth outpaced both revenue and GDP growth in these countries, fiscal deficits widened, both actual and structural. Fiscal policy was expansionary in Kenya, Tanzania, and Uganda in 2008/09. But the magnitude of the stimulus has varied across countries: in Tanzania, the budgeted stimulus was unparalleled in the region, while in Rwanda, the change in policy stance lagged one year. In most countries, due to capacity constraints in the execution of fiscal spending projects, the actual stimulus may turn out to be less than planned.

Figure 13.Fiscal Deficits in the EAC

Overall Fiscal Balance

Source: IMF, Regional Economic Outlook.

Adjusting for the cycle, two broad patterns can be distinguished in terms of how fiscal stimulus was provided in response to the global crisis (Figure 14):

  • Initial stimulus, followed by broadly neutral stances and some fiscal withdrawal later in the cycle: Tanzania (exceptionally large initial stimulus, and moderate withdrawal late in the cycle); Kenya (large initial stimulus with substantive withdrawal early in the cycle); and, Rwanda (large but lagged initial stimulus with moderate withdrawal late in the cycle).
  • Moderate and gradual stimulus from the time of the shock extending into the medium-term: Uganda.

Figure 14.Cyclically Adjusted Fiscal Deficits in the EAC

Change in Fiscal Policy Stance Adjusted for Cyclical Position, 2008-20121

1Change in primary balance adjusted for cyclical position, in percent of GDP relative to previous year.

A positive number indicates a more expansionary fiscal impulse.

Assumes an income elasticity of tax revenues equal to 1, and that all expenditure is structural. Applies a simple cyclical correction to actual revenue calculated based on estimates of potential GDP (as calculated by desks).

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