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E&M Magazine: Growth in Sub-Saharan Africa is Diverging

E&M Magazine: Growth in Sub-Saharan Africa is Diverging

  • Saad Quayyum & Nikola Spatafora & Sanghamitra Mukherjee & Hamza Mighri • Africa Department of the International Monetary Fund (IMF)

Sub-Saharan Africa comprised nine of the twenty fastest growing economies in the world in 2024. These astonishing statistics, however, rarely feature in discussions about the region’s prospects. Instead, the headline figures usually emphasise the relatively modest average economic performance. This discrepancy reflects a two-speed growth pattern, in which a significant part of the region underperforms.

Over the last ten years, growth in the resource-intensive countries (RICs) of sub-Saharan Africa – and especially in fuel-exporting economies such as Angola, Chad and Nigeria – has slowed markedly, lagging far behind growth in non-RICs (such as Ethiopia, Rwanda and Senegal). In essence, RIC incomes have stagnated. This marks a sharp contrast with the decade leading up to 2014, when they experienced rapid growth in line with the region’s strong overall performance.

The post-2014 divergence between RICs and non-RICs was largely driven by a combination of two factors. Firstly, the BER, and especially fuel exporters, experienced a dramatic decline in their commodity export prices around 2014-15, as the commodity ‘supercycle’ – a period of sharply rising prices – came to an end. Since then, the decline in the terms of trade has only been partially reversed.

Secondly, and critically, the impact of the terms of trade shock in the BER was exacerbated by pre-existing structural vulnerabilities, including a poor business environment, limited human capital, weak governance and mismanagement of resource revenues.

Weak governance, systemic corruption and an unfavourable business climate affect productivity and production – and the effects are most marked when commodity prices fall. These weaknesses affect both the resource sector itself and the prospects for diversifying the economy into other sectors. For example, the potential for oil production theft undermines production efficiency and diverts precious resources from more productive uses.

‘Reversing this divergence in growth is a regional priority… It is also a humanitarian priority’

Another example: weak governance can be a central impediment to private sector investment more broadly. Fuel exporters outside the region, with generally stronger governance, have weathered the fall in commodity prices much better.

IMF staff analysis confirms that terms of trade shocks have a stronger and more lasting impact on growth in countries with weak governance. We estimate that for every 1 per cent increase in a country’s terms of trade, medium-term growth is around a quarter of a percentage point higher in countries with lower governance challenges.

In addition, poor resource management has exacerbated the original shock through a pro-cyclical fiscal trend. Fiscal policy in RICs, including sub-Saharan Africa, is generally much more correlated with economic shocks, intensifying their effects, compared to other countries. For example, when commodity prices are high, many RICs, especially fuel exporters, embark on expensive capital projects that are often poorly planned and implemented.

When raw material prices fall, there are sharp reductions in capital expenditure. In addition, many exporting countries also provide considerable fuel subsidies, the cost of which rises as oil prices rise, limiting the ability to save during boom times, while crowding out growth-favouring development spending. The average oil-exporting country in sub-Saharan Africa has consistently, since 2011, spent all of its oil revenues in the year in which they were accrued.

Accumulating human capital is one of the strategic measures towards growth

Reversing this divergence in growth is a regional priority, since the RICs account for around two-thirds of sub-Saharan Africa’s GDP and population. It is also a humanitarian priority. Poor growth performance has translated into poor development results – progress in fighting poverty in the RICs was effectively halted in 2014. Compared to children in other parts of the region, a child born in a BER today is expected to live four years less on average and is 25 per cent more likely to live in poverty.

See Also

The revival of lasting growth will require a stable macroeconomic environment. More prudent and consistently implemented fiscal frameworks can help address the challenges of resource mismanagement – and also help ensure that growth is more resilient in the future.

In addition, wide-ranging reforms to address structural weaknesses – strengthening governance, improving the business environment, building up human capital and addressing infrastructure bottlenecks – can help countries diversify and grow. And for fuel exporters facing the global transition to green energy, the need to diversify is increasingly urgent.

Text: Newsroom – Photo: D.R.

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