24 April 2007
Economic growth in sub-Saharan African countries over the past three years has been the best in more than three decades, driven by higher oil revenues, high commodity prices and debt relief.
The International Monetary Fund’s (IMF’s) Regional Economic Outlook for Sub-Saharan Africa, released in early April, predicts that growth in the region will rise to about 6.5% in 2007, driven mainly by rising oil production in a number of countries.
The report adds that even oil-importing countries will experience economic growth at about 5%.
Inflation for the region is projected to remain unchanged at about 7%, with three-quarters of the countries expected to record single-digit inflation.
Economic growth in sub-Saharan Africa stood at 5.4% in 2006, slightly lower than the 6% experienced in 2005. Economic growth in oil-producing countries dropped, however, from 7.9% in 2005 to 5.6% in 2006, due to capacity constraints in expanding oil production.
According to the IMF report, African oil-exporting countries have taken advantage of large windfall profits in recent years and, in contrast to previous commodity price booms, have saved a significant part of this additional revenue.
“The challenge for public policy and policymakers is to create the necessary space for higher and effective public spending,” the IMF said in a statement.
Demand for commodities boosts exports
Growth in oil-importing countries remained almost unchanged at 5.3%, supported by a strong demand for non-fuel commodity exports, a good agricultural season and rising investment.
“The higher growth trend in sub-Saharan Africa is attributable both to positive external developments, such as foreign demand and high commodity prices, and strong domestic investment and productivity gains,” the IMF said.
The region’s economic growth is also being driven by Asian demand for its commodities, providing it with an opportunity to reverse the long-term decline in the region’s share in world trade.
“Commercial exchanges with Asia, particularly China, have expanded dramatically, although European Union countries and the United States still account for two-and-a-half times the export shares of Asia,” the report states.
Another factor driving regional economic growth has been an improved macroeconomic performance, as well as debt relief, that has led to domestic debt markets becoming more active and attracting increasing numbers of foreign portfolio investors.
Risks and challenges
Despite the positive outlook, the IMF warns, near-term risks remain. These include an unanticipated sharp decline in global demand, while increases in oil prices and a drop in non-fuel commodity prices could also adversely affect growth and inflation in sub-Saharan Africa.
“Many countries in the region remain vulnerable to droughts and other natural disasters, others struggle with the high prevalence rates of HIV/Aids, and there are still political and security risks in a number of countries in the region,” the report states.
“Faced with historically high prices and finite resources, oil producers must now deal with the complexities of managing their resources so as to improve living standards and make decisive progress toward the United Nations Millennium Development Goals.”
The report argues that strengthening governance, especially in public financial management systems, is critical to ensuring that resources are used efficiently and transparently, thus ensuring fiscal sustainability.
“Unless properly managed, scaling up spending risks putting substantial upward pressure on prices and the real exchange rate,” the report warns, adding the problem can be resolved through liberalising trade, reducing the costs of doing business and making labour markets more flexible.
The report also notes that most sub-Saharan countries have not managed to increase their exports of labour-intensive manufactured goods or to move up the value chain of their commodity-based exports, which it blames on a lack of infrastructure and the high cost of doing business in the region.
“Experience from other parts of the world shows that trade could be an important engine of growth,” the IMF says. “Tackling structural impediments to growth and trade in valued-added industries linked to agriculture and commodities is therefore important for sub-Saharan Africa to realise its growth potential.”