Most countries in sub-Saharan Africa ‘need to reduce macroeconomic imbalances’ and there are three policy options: ‘These are difficult choices, but inaction is not an option,’ says the International Monetary Fund (IMF).
The International Monetary Fund (IMF) has listed low growth, difficult financing conditions, political fragility and social unrest as the main obstacles to development in sub-Saharan Africa. The report on the Regional Economic Outlook, entitled ‘Reforms in a Context of High Expectations’, was released at the end of October as part of the IMF and World Bank Annual Meetings. According to the estimates, sub-Saharan Africa should maintain the 3.6 per cent growth recorded last year, accelerating to 4.2 per cent in 2025, in a context of great inequalities between countries.
Most sub-Saharan African countries ‘need to reduce macroeconomic imbalances’, otherwise vulnerabilities will worsen. At this point, the choices are ‘difficult’, the IMF recognises, but it argues that ‘inaction is not an option’.
The three difficult choices
With regard to monetary policy, ‘the main decision at present is whether to cut key interest rates and when, given that inflationary pressures are easing in many countries,’ the document reads. As far as fiscal policy is concerned, ‘the challenge for many countries is to find measures to combat debt vulnerabilities and ensure sustainability, while at the same time satisfying high pressures to spend on public services, and facing political resistance to tax increases’.
‘The challenge for many countries’ is to find a balance between debt, ‘high pressures to spend on public services and facing political resistance to tax increases,’ says the IMF
The third of the difficult policy choices that African finance ministers have to make has an external origin and is revealed in the decision on exchange rate policy: ‘Allowing an exchange rate devaluation is often unavoidable, due to low foreign exchange reserves, and justifiable, to promote competitiveness and reduce adjustment costs, but it can generate sudden rises in inflation (including for imported essential goods), and pose risks to financial stability.’
Poor countries’ accounts
According to World Bank data, the debt of low-income countries rose by almost 9 percentage points of GDP last year, the highest figure in more than two decades, to an average of 72 per cent of GDP, and almost half of these countries are either over-indebted or at risk of falling into this category.
On the other hand, their ability to raise external finance has been significantly reduced in recent years, with official development aid as a percentage of GDP falling to 7 per cent in 2022, the lowest figure in 20 years, making the Association for International Development, the concessional arm of the World Bank, the largest source of foreign aid for these countries, which include the Portuguese-speaking countries of Guinea-Bissau and Mozambique.
In this context, at recent meetings in Washington, the IMF announced a series of measures aimed at increasing the amount available for loans to the poorest countries and, at the same time, changes to the rates charged to beneficiary countries.
At stake is an increase in the Poverty Reduction and Growth Trust (PRGT), which was set up in the wake of the covid-19 pandemic to help the most indebted countries, including many sub-Saharan African nations, relaunch their economies.
The changes announced
Among the changes is the use of IMF reserves to generate around 8 billion dollars in additional resources for the PRGT over the next five years, which, together with other measures, ‘will increase the annual envelope available to around 3.6 billion dollars, more than double the level before the pandemic, helping to bring together significant additional flows from public and private sources’.
In addition to increasing the financial capacity of this fund, the IMF also announced a review of the policy of surcharges that apply to loan repayments, responding to criticism made months ago by various institutions, which claimed that the countries most in need were the ones that were being harmed the most because they were paying more.
The measures approved will cut costs by 36 per cent, amounting to 1.2 billion dollars (1.1 billion euros) a year, with the number of countries having to pay this surcharge falling from 20 to 13 in the 2026 fiscal year.
Africa’s outlook
The economic outlook for Africa in 2024 and 2025 shows a moderate recovery after slower growth in 2023, affected by external shocks, climate change and political instability. According to the African Development Bank (AfDB), the continent’s average growth should reach 3.7 per cent in 2024 and 4.3 per cent in 2025, reflecting improvements in global conditions and more effective domestic policies. But North and Southern Africa have below-average growth rates.
Text: Newsroom – Photo: D.R.
