Sub-Saharan Africa faces a myriad of challenges to regain growth momentum. Among these challenges is the slowdown of investment growth, which had decelerated sharply over the decade prior to the pandemic.
Investment growth in Sub-Saharan Africa slowed from nearly 6.8 percent in 2010–13 to 1.6 percent in 2020–21, well below the long-term average over 2000–19 of about 6.1 percent.
The deceleration of investment growth in the region has pulled down the investment share in GDP by nearly 3 percentage points of GDP.
The deceleration has been broad-based, as the share of countries in the region with declining investment growth went from nearly 25 percent in 2010 to a peak of 68 percent in 2020.
This deceleration is sharper in Eastern and Southern Africa (AFE) where the growth of investment decelerated from 5.6 percent in 2010–13 to an average contraction of 0.1 percent in 2020–21—thus leading to a decline in the investment-to-GDP ratio of more than 4 percentage points over the period.
The sluggishness in investment growth is less marked for Western and Central Africa (AFW) countries, with the growth rate declining from an annual average of 6.9 percent in 2010–13 to 3 percent in 2020–21—which implies a drop in the subregion’s average investment ratio of 1.8 percentage points of GDP.
Investment growth deceleration is also observed across various groups of countries in Sub-Saharan Africa, depending on their extent of resource abundance and fragility.
Oil abundant countries exhibit the largest and most persistent downswing in investment relative to the other groups.
After exhibiting annual average growth of nearly 8 percent in 2010–13, oil abundant countries on average have experienced a contraction in investment since the 2014–15 plunge in international oil prices.
The downturn in investment is also sharp among metal abundant countries in the region, although coming from a higher growth rate at the beginning of the 2010s.
Non-resource abundant countries showed the slowest deceleration of investment growth—as their annual average rate declined from 6.3 percent in 2010–13 to 2.2 percent in 2020–21 (which is still well below their long-term average growth of 6.1 percent).
Investment growth stayed below the long-term average across fragile countries in the aftermath of the plunge in commodity prices.
The sharp drop in investment growth in the region is also evident across public, private, and foreign investment. An important observation that emerges is that the growth of investment, regardless of the type of agent that undertakes it (public, private, or foreign), lies below the long-term average (2000–19) in most of the years under analysis.
The decline in private investment growth was relatively larger (from 5.9 percent in 2014–15 to 3.1 percent in 2020–21) compared to that of public investment growth (from 3.3 percent in 2014–15 to 1.6 percent in 2020–21), and the growth of the former has been more volatile throughout the period.
In contrast, foreign direct investment (FDI) has contracted on average since the onset of the 2014–15 plunge in commodity prices. It shifted from annual average growth of 1.9 percent in 2014–15 to a contraction of 3.7 percent in 2016–19, and an even larger downswing (5.1 percent per year) after the onset of COVID-19 (2020–21).
The contraction of FDI since 2016 can be attributed to declining and volatile international prices of extractives as well as insufficient investment in new or mature exploration and production oil fields.
The regional trend masks differences across the AFE and AFW subregions. Annual average growth of public and private investment in AFE is below the long-term trend since 2010.
While private sector investment has contracted since 2014–15, public investment growth was still positive although modest (0.4 percent in 2020–21).
After fast growth in 2010–13 (8.1 percent per year), FDI contracted at an annual rate of 4.3 percent per year during the COVID-19 period.
Unlike AFE, private and public investment growth in AFW remained positive throughout 2010– 21. Additionally, public investment provided some support to economic activity in AFW by growing at a slightly faster pace than the long-term average in 2016–19 and 2020–21.
In AFW, foreign investment increased at a higher rate than the long-term average in 2016–19; however, it contracted by 1.94 percent per year during the COVID-19 period.
Remittances, another source of financing, remained relatively resilient to the various shocks that took place throughout 2010–21—including the COVID-19 pandemic.
Growth of remittance inflows for the region as a whole remained above the long-term average from 2010 to 2015 (with an average annual growth of remittances above 6 percent), and then decelerated to positive growth of 3.5 percent per year during the COVID-19 period (2020–21). However, the evolution of remittance inflows over time differed considerably across the subregions (figure 1.14).
Remittance inflows to AFE countries have grown near or above the long-term growth average since 2016, and especially during the COVID-19 period (6.6 percent per year in 2020–21).
In contrast, in AFW countries, remittances grew near or above trend during 2010–15 and decelerated after the plunge in commodity prices—reaching a growth rate of 1 percent per year in 2020–21.
The resilience of remittances in the COVID-19 period among countries in the region (and, particularly, AFE countries) can be partly attributed to the surge in remittance growth among resource abundant countries (both oil and minerals and metals).
However, remittances grew at rates below trend among fragile countries and contracted among non-resource abundant countries during the COVID-19 period.
Amid the economic fallout of the COVID-19 pandemic and the war in Ukraine, investment growth is expected to remain modest and below the average growth rate of the past two decades.
This trend is not specific to the region but widespread across EMDEs.8 Empirical analysis suggests that the deceleration of investment growth could be associated with downswings in economic activity, terms-of-trade deterioration, weak real credit growth, and stalled investment in climate reforms.
Slower growth of investment in the region is holding back long-term growth of potential output and per capita income, as well as progress on meeting the Sustainable Development Goals.
Amid substantial financing needs, limited fiscal space, and rising borrowing costs, policy makers in the region will be required to improve the efficiency of spending.
Scaling up investment will require additional financing from the private sector and the international community, accelerating reforms to improve the institutions that support private sector growth, developing local capital markets, improving the quantity and quality of public infrastructure, enhancing the efficiency of utilities, and strengthening domestic resource mobilization.
Inflation remains persistently high, fuelled by food prices and weaker currencies Inflation in Sub-Saharan Africa accelerated in 2022 to 9.2 percent, from 4.5 percent in 2021.
The slowdown in global demand, declining commodity prices, and the effects of the monetary policy tightening across the continent are expected to reduce inflation to 7.9 percent in 2023, and further to 5 percent in 2024 and 2025.
Headline inflation is still above the ceiling of the central bank target bands for all countries with an explicit nominal anchor. Consumer prices rose at a faster pace in 2022 amid supply chain disruptions, pent-up demand associated with pandemic restrictions being lifted, and the war in Ukraine.
The number of countries with a two-digit average annual rate of inflation for the year increased from 9 in 2021 to 21 in 2022—that is, about 45 percent of the countries in the region recorded two-digit inflation rates last year. This number is expected to decline to 12 countries in 2023 and drop even further to 6 in 2025.
Rising food and fuel prices as well as the depreciation of the exchange rate were the main drivers of inflationary pressures in the region—and, particularly, in countries like Ghana, Sudan, and Malawi.
The Ghanaian cedi, the worst performing currency in the region during 2022, posted a depreciation of about 40 percent.
It has weakened an additional 20 percent so far in 2023. Other currencies with significant losses last year include those of Sudan (23.6 percent), Malawi (20.7 percent),11 The Gambia (14.6 percent), and Nigeria (10.2 percent).
Furthermore, rising food and energy prices continued to fuel headline inflation. An inspection of monthly information available for 39 Sub-Saharan African countries by January 2023 shows that year-over-year food inflation remains high.
About 75 percent of the countries in the region registered double-digit year-over-year inflation rates at the end of 2022, with the fastest increases experienced in Zimbabwe, Sudan, Ghana, Rwanda, Sierra Leone, Burundi, Malawi, and Ethiopia (figure 1.16).
Domestic food inflation in Africa has remained sticky in some African countries while it has decelerated in others—although at a much slower pace than the disinflation of food prices in global markets.
This might be attributed to currency depreciation—as countries in the region import most of their food staples— as well as high input costs (high oil and natural gas prices affecting transportation and refrigeration, and nitrogenous fertilizers) and extreme weather events (for instance, droughts in the Horn of Africa).
Bringing down inflation and anchoring inflation expectations should continue to be a priority for policy makers, to prevent further deterioration of people’s incomes and food security and avert social unrest and conflict.
The rate of inflation is expected to have peaked for most countries in the region. Average annual inflation forecasts project that about 70 percent of the countries in the region are expected to have a lower inflation rate in 2023 compared with that in 2022.
The median inflation for the group of countries where inflation is expected to have peaked last year drops to 7 percent in 2023 (from nearly 10 percent in 2022).13 However, despite the declining inflation rates across many countries in the region, the rates of consumer price growth are still high, above target, and above pre-pandemic levels.
In contrast, the rate of inflation in three countries in the region is expected to accelerate by more than 3 percentage points in 2023 from last year, namely, Ghana, Uganda, and Burundi.
Cross-country differences in the evolution of external and fiscal balances as well as debt dynamics are also present in countries’ inflation rates.
Inflation is expected to remain contained in resource-rich countries—and, particularly, oil-rich countries where the impact of food and fuel inflation as well as the currency has been limited through a series of monetary and fiscal measures.
The median rate of inflation in oil exporting countries in the region is expected to decline to 5.2 percent in 2023 and edge down to 4 and 3 percent in 2024 and 2025, respectively.
In non-resource-rich countries, inflation was elevated in 2022 (8.3 percent) and is set to decline slowly to 6.5 percent in 2023 and stabilize at 5 percent in 2025.
Central bank policies need to anchor still high inflationary expectations
As inflation reached historical records in 2022, monetary policy makers in the region reacted rapidly and aggressively by hiking policy rates to levels not seen in many years.
Since January 2022, central banks have hiked their key benchmark rates by a cumulative of 350 basis points in Lesotho, and Uganda; 400 basis points in South Africa and Mozambique; 650 basis points in Nigeria; and 1,500 basis points in Ghana. Notwithstanding these early and sizable interest rate hikes over the past two years, inflation remains above target in many Sub-Saharan African economies— thus, suggesting a limited monetary policy transmission.
Reduced effectiveness of monetary policy can be attributed, among other factors, to the importance of persistent supply shocks driving inflation (say, commodity prices and climatic shocks), perceived lack of central bank autonomy, foreign exchange distortions that widened parallel exchange rate market premia, and fiscal dominance.
There is evidence of rising fiscal dominance in some Sub-Saharan African countries, as central banks’ net claims on the central government have increased since the start of the pandemic and remain high for some countries.
This links fiscal developments to inflation expectations. Despite these limits, some monetary policy committees have started to slow down the pace of the tightening cycle (South Africa) or put it on pause (Kenya, Mozambique, and Uganda) as inflation rates started to peak in late 2022.
Newly released data on inflation in the United States and some European countries signal that underlying inflationary pressures are still strong and inflation may not decline steadily, thus prompting fears of more interest rate hikes.
The fight against inflation is far from over in Sub-Saharan Africa: inflationary pressures remain stubbornly high and above target.
Curbing inflation remains essential to boost people’s incomes and reduce uncertainty about consumption and investment plans.
Governments have additionally resorted to fiscal instruments to limit the impact of increased inflation, especially on households—such as subsidies, tariff waivers, and income support, among others.
This could mount fiscal pressures in countries with depleted fiscal space. Coordination of monetary and fiscal policy to anchor inflationary expectations is essential.
Rising inflation amid global shocks and domestic vulnerabilities is putting a temporary pause on fiscal consolidation in Sub-Saharan Africa
The process of consolidation that started across most Sub-Saharan African countries in the aftermath of the coronavirus pandemic was halted by the war in Ukraine.
In response to rising food and fuel prices, policy makers in the region resorted to supporting the most vulnerable through a series of measures that limit the rise of inflation—especially food inflation—such as direct price subsidies, temporary waivers of tariffs and levies, and income support (through cash and food transfers), among others.
Other relevant factors include the sizable reduction in official development assistance (due to conflict and military takeover in some African countries, and diversion to countries outside Africa), and lack of access to external borrowing (for those countries participating in the Common Framework).
These developments set back the consolidation process as the fiscal deficit remains elevated and creates additional pressure on the budget—especially for governments in the region with an almost depleted fiscal space.
The (median) fiscal deficit in Sub-Saharan Africa is projected to have widened from 4.8 percent in 2021 to 5.2 percent in 2022.
It is expected to narrow to 4.3 percent in 2024 and to an average of 3.0 percent in 2024–25 (figure 1.19). The widening of the fiscal deficit in 2022 was mainly driven by the deterioration in fiscal outcomes among mineral and metal exporters in the region—and despite oil countries projecting a surplus of 3 percent of GDP.
Liberia and Sierra Leone were among the metal and mineral exporters in the region that experienced an expansion of their fiscal deficits of more than 2 percentage points in 2022.
Expenditure overruns associated with macro and policy shocks and, in some cases, lower export proceeds may explain the deterioration of the fiscal accounts among these countries.
Throughout the forecast horizon (2023– 25), the process of fiscal consolidation is expected to resume. Fiscal balances will remain in surplus among oil exporting countries, while deficits retreat for mineral and metal exporters as well as non-resource-rich countries, to averages of 3.2 and 3.3 percent of GDP, respectively, in 2024–25.
In 2023, the Republic of Congo and Chad will have the largest fiscal surpluses in the region— revenues in both countries are expected to exceed expenditure by more than 4 percent of GDP.
The surplus will gradually decline but still settle above 3 percent of GDP in both countries. The fiscal performance of these countries is due to rising oil-based revenues.
In the Republic of Congo, revenue growth was underpinned by reforms—including greater efficiency of government spending, introduction of electronic payment systems, and collection of tax arrears, among others.
Improvement was also experienced in Chad in terms of digitalization of public finances as well as tax and customs administration. Other countries that are expected to post a fiscal surplus in 2023 are Gabon, Equatorial Guinea, Lesotho, and Angola.
The surplus declines over time in Equatorial Guinea, Angola and Lesotho, while it remains firm in Gabon. In contrast, the fiscal deficit exceeds 7 percent of GDP in Mauritius, Zambia, and Malawi.
The deficit in Ghana will remain elevated throughout 2023–25, with the large deficit being compounded by severe financing constraints resulting from a limited ability to issue long-term domestic debt and a lack of access to international capital markets.
Successful agreement on and implementation of an International Monetary Fund (IMF)–supported program would help contain the deficit and provide the necessary financing, including via the ongoing debt restructuring negotiations.
In Zambia, fiscal consolidation will eventually bring the deficit down to 6.9 percent in 2025. The path to consolidation will be supported by improved tax efficiency measures and containing public expenditure by strictly adhering to priority projects, cutting wasteful subsidies, and strengthening procurement procedures.
Finally, higher government spending in South Africa on social grants, wage pressures, tapering of global commodity prices, and weaker domestic growth will weigh on the budget deficit this year.
The fiscal outlook is compounded by the conditional debt relief arrangement for the state power utility Eskom, which raises financing needs by an average 1.1 percent of GDP over the medium term.
The budget deficit is estimated at 4.2 percent of GDP in 2022 and projected at 4.4 percent in 2023.
Current account deficits in the region are projected to narrow slightly over the next three years
Despite the downward trend in commodity prices, the regional current account deficit is projected to remain invariant at 5.6 percent of GDP in 2023 compared with the previous year.
The region’s deficit is projected to shrink steadily to 4.8 percent of GDP in 2024 and 4.2 percent of GDP in 2025.
Notwithstanding some softening of energy prices (crude, natural gas, and coal), they remain above trend levels, which will help oil-exporting countries to register a substantial surplus of 4.2 percent of GDP in 2023.
However, these countries’ surplus is set to shrink to 2.1 percent of GDP in 2025, reflecting a softening in projected energy prices.
Country projections show a mixed picture of the evolution of the current account deficit across oil exporting countries. For example, Angola, Gabon, and the Republic of Congo are expected to post current account surpluses in 2022 and to maintain a surplus in the coming three years, albeit at declining levels.
Nigeria, the largest African oil producer, is not expected to reach a current account surplus in 2022.
The country’s higher crude oil export revenues are more than offset by higher imports of refined petroleum products, lower remittances, and lower capital inflows.
Nigeria’s projected current account deficit will remain at an average of 0.3 percent of GDP in 2023–25 as a result of declining prices and stagnant oil production.
Unlike oil-rich countries, the metal and mineral resource-rich countries in the region failed to turn their current account position positive into a surplus despite high commodity prices.
Their expected current account deficit is widened to 9.3 percent of GDP in 2022 as export earnings from rising metal prices were insufficient to offset the significant increase in import bills due to high food and energy prices.
The expected improvement in global economic activity and lower energy prices will support metal and mineral prices, which were already up nearly 20 percent in January 2023 from October 2022.
Consequently, the average current account deficit in metal and mineral exporting countries in the region is projected to narrow gradually from 8.0 percent in 2023 to almost half (3.4 percent of GDP) in 2025, echoing the fall in food and energy prices.
Like oil exporting countries, metal and mineral exporters also display a mixed picture of current account deficits. Most metal and mineral exporters are experiencing current account deficits, such as the Democratic Republic of Congo, Guinea, Liberia, Niger, and Sierra Leone. For example, the current account deficit in the Democratic Republic of Congo deteriorated to 2.9 percent of GDP in 2022 (from a deficit of 0.9 percent of GDP in 2021) despite solid export earnings, which were more than offset by rising food and fuel import bills.
Notwithstanding the projected decline in food and fuel prices, the country will continue to have a current account deficit in the next few years, partly because of deteriorating terms of trade.
While many metal and mineral exporting countries experienced double-digit current account deficits in 2022, a few of these countries, including Zambia and Botswana, strengthened their current account position.
In Zambia, the current account surplus is expected to shrink from an average 10 percent of GDP in 2020-21 to 2.3 percent of GDP in 2022 as copper prices drop and imports pick up. However, Zambia’s current account surplus is projected to bounce back this year to 3.4 percent of GDP, before reaching 4.3 percent of GDP in 2024.
In South Africa, many factors contributed to deterioration of the current account balance. Exports suffered partly from the flooding that caused damage to the Durban port and the country’s deteriorating terms of trade.
Consequently, South Africa’s current account balance shifted to a deficit of 0.5 percent of GDP in 2022 (from a surplus of 3.7 percent of GDP in 2021). The deficit will widen to 1.6 percent in 2023.
Finally, increased import bills on account of high energy and food prices will cause a deterioration of the current account deficit for non-resource-rich countries.
However, the size of these countries’ median current account deficit (6.1 percent of GDP) was lower than that of the region’s metal and mineral resource-rich countries (9.3 percent of GDP) in 2022.
About two-thirds of the countries with double-digit current account deficits in 2022 (9 of 14 countries) are non-resource-rich countries; the remaining are metal and mineral exporting countries.
Mozambique is expected to have the highest deficit in the region (36 percent of GDP) in 2022, with the sharp increase in the deficit being primarily driven by the import of the offshore liquefied natural gas platform, which was fully financed through a Special Investment Vehicle.
São Tomé and Príncipe and Burundi are expected to have high current account deficits of about 20.6 and 15.5 percent of their respective GDP in 2022.
In Côte d’Ivoire, the trade balance turned negative, at -1.7 percent of GDP in 2022, causing a widening of the current account deficit from 4.0 percent of GDP in 2021 to an estimated 6.5 percent of GDP in 2022, owing to sustained infrastructure-related imports and generally high import bills for food and fuel.
The country is projected to improve its current account deficit gradually, with the softening of food and fuel prices over the next three years. Box 1.2 provides a taxonomy of countries depending on their fiscal and external balances—thus identifying countries with a twin deficit problem.
Debt levels remain high and vulnerabilities persist
Public debt in Sub-Saharan Africa has more than tripled since 2010, with a sharp increase prior to the onset of the COVID-19 crisis. Nominal public debt at the end of 2022 is estimated at about US$1.14 trillion, up from US$354 billion in 2010.
Nominal public debt in the region increased faster before the onset of the global pandemic, at an average annual growth rate of 12 percent during 2010–19, compared to 9 percent during 2020–22.
The fast accumulation of public debt, together with sluggish growth, resulted in an increase in the median public debt-to-GDP ratio from 32 percent in 2010 to 57 percent in 2022.
Estimates point to a greater reliance on domestic public debt in the region, which accounted for nearly half of outstanding public debt by the end of 2021.
Over the past decade, the composition of public debt has been shifting gradually toward domestic debt, and data suggest that there was even greater reliance on domestic debt to meet COVID-19-related financing needs.
AFE has recorded a higher level of public debt than AFW; however, AFW’s public debt has increased faster in recent years—especially during the pandemic.
Nominal public debt in AFW quadrupled from US$109 billion in 2010 to US$437 billion in 2022; it tripled in AFE from US$246 billion in 2010 to US$707 billion in 2022.
Prior to the pandemic, the average growth rate of public debt in AFW was already higher than that in AFE (13 and 10 percent per year, respectively).
The dynamics further diverged during 2020–22, when public debt increased on average by 12 percent in AFW and 7 percent in AFE.
Nevertheless, the lower nominal debt levels in AFW translate into lower public burdens relative to GDP, with a median public debt-to-GDP level of 56 percent at the end of 2022, compared to 64 percent in AFE. Persistent primary deficits were the main driver of public debt increases in the region.
They have increased public debt by nearly 20 percent of GDP since 2015. The real exchange rate has contributed to increasing public debt by nearly 7 percent of GDP since 2015, with larger contributions in 2015, 2016, and 2018.
On the one hand, unobserved debt drivers—which include the materialization of fiscal risks or increases in debt coverage—drove debt creation by 12 percent of GDP.
On the other hand, real GDP growth helped to contain public debt and reduced its accumulation by nearly 13 percent of GDP on average since 2015 (figure 1.22).
Debt increases in the region have come along with a changing landscape of external creditors. Between 2010 and 2021, Sub-Saharan African countries increased their reliance on Eurobonds and Chinese loans.
Since 2010, more than 15 countries in the region have issued bonds in international markets, which increased the share of public and publicly guaranteed (PPG) external debt from 18 percent in 2010 to 27 percent in 2021.
The share of official bilateral debt, excluding China, declined from 12 to 5 percent during the same period, while the share of bilateral debt owed to China increased—particularly from 2013 to 2016. By 2021, about 11 percent of the PPG external debt of the region was owed to Chinese creditors.
The share of multilateral debt in PPG external debt decreased gradually over 2010–19; however, it rebounded in 2020–21 as international financial institutions provided multilateral emergency financing.
Debt distress risks in Sub-Saharan Africa have increased significantly on the back of rising debt levels and increased non-concessional borrowing.
As of December 2022, the number of countries in the region at high risk of external debt distress or in debt distress had already increased to 22 (from 20 in 2020)—thus representing 58 percent of International Development Association (IDA)–eligible countries in the region.
By contrast, no country in the region is at low risk of debt distress (figure 1.24). Under the Low-Income Country Debt Sustainability Framework, four countries in the region have seen their risk of debt distress rating deteriorate since the onset of the COVID-19 pandemic.
At the start of 2023, Ghana requested to restructure its bilateral debt under the G20 Common Framework, thus joining Chad, Ethiopia, and Zambia, which signed up early in 2021.
Other countries in the region are engaged in bilateral restructuring negotiations. Significant downside risks could further worsen public debt vulnerabilities in the region, although the wave of defaults that some observers expected has yet to materialize.
Sub-Saharan African countries face multiple challenges, including tightening financial conditions, high inflation, the economic effects of the Russian invasion of Ukraine, and the lingering COVID-19 crisis.
These factors could further worsen macroeconomic conditions and push more countries with strained solvency and liquidity into default. Public gross financing needs have steadily increased and remain higher than historical averages in Sub-Saharan Africa.
They increased from a median of 3 percent of GDP in 2008–14 to 8 percent of GDP in 2015–19, and remained high in 2020–22, at 11 percent of GDP.
The average gross financing needs in the region for the upcoming five years is projected to remain at levels close to 10 percent of GDP, with greater financing needs in AFE compared to AFW.
External debt service in the region increased from US$6 billion in 2010 to almost US$34 billion in 2021, with the AFE subregion showing the largest increase, from US$4 billion in 2010 to almost US$22 billion in 2021.
External PPG debt service in the Sub-Saharan Africa region increased from US$10 billion in 2010 to almost US$43 billion in 2021.
The AFE subregion showed higher levels of external PPG debt service, rising from US$7 billion in 2010 to nearly US$31 billion in 2021.
The increase in external debt service translated into higher ratios of total debt service to exports and debt service to revenue; in 2021, Sub-Saharan Africa reached 28 and 41 percent, respectively.
The sell-off of developing countries’ Eurobonds and increasing investor fears about the global outlook amplify the risks for Sub-Saharan African countries facing large Eurobond redemptions.
More than 15 countries in the region have (repeatedly) tapped international markets.
Despite the halt in international bond issuances in 2020 after the onset of the pandemic, several countries (including Angola, Benin, Ghana, and Kenya) issued Eurobonds in 2021 and early 2022.
However, the spreads have increased and narrowed the number of countries with market access, which increases refinancing risks for countries with large Eurobond redemptions, including Kenya (US$2 billion in 2024) and Angola (around US$1.7 billion in 2025).
Consequently, an increasing number of countries have negotiated IMF-funded programs to meet their gross financing needs. Benin, Ghana, Uganda, and Rwanda have recently secured IMF staff-level agreements. Malawi and Burkina Faso reached staff-level agreements through the Food Shock Window of the Rapid Credit Facility.
Côte d’Ivoire is negotiating a new three-year Extended Credit Facility/Extended Fund Facility arrangement with the IMF that will be focused on revenue-based fiscal consolidation and debt sustainability.
In December 2022, the IMF’s Executive Board concluded the 2022 Article IV Consultation and Fourth Review of the Extended Credit Facility for Somalia.
The Somali authorities are making steady progress in meeting the requirements for the Heavily Indebted Poor Countries initiative, which will mean that the country is eligible for full and irrevocable debt relief.
Addressing higher debt levels and heightened debt vulnerabilities has been challenging for Sub-Saharan African countries.
Countries in the region have used credit enhancement and/or liability management operations to address their debt problems. Benin received a partial guarantee from the African Development Bank to lower the cost of the country’s new external commercial loan.
Benin and Angola used parts of the proceeds from new Eurobond issuances for partially buying back outstanding bonds. Several institutions, such as the International Committee of the Red Cross and the Global Fund, are proposing debt swap arrangements.
Several countries have reverted to debt restructurings to resolve sustainability issues and rebuild fiscal space. Chad, Ethiopia, Ghana, and Zambia applied for external debt treatments under the Common Framework, adding China, India, and Saudi Arabia to the Paris Club restructuring process.
So far, only the restructuring in Chad has been completed. In Ethiopia, political instability has halted the process. In Zambia, bondholders are pushing back against assumptions of the World Bank/IMF debt sustainability analysis, and China has called for the inclusion of multilateral debt and non-resident domestic debt holders in the debt treatment.
Ghana requested a Common Framework debt treatment in early 2023; hence, progress has yet to be made. In conjunction with the Common Framework engagement, Ghana conducted a voluntary domestic debt exchange program.
Other countries engaged with private creditors and bilateral donors engaged in external restructuring efforts through bilateral engagements (Malawi).
Yet, these efforts cannot replace a comprehensive and well-coordinated solution for countries in debt distress. High liquidity and solvency pressures may push more countries into an unsustainable situation that requires a comprehensive restructuring of their obligations.
The G-20 Common Framework for Debt Treatments is the closest framework for debt resolution available to address sovereign debt crises. International financial institutions like the World Bank support this framework but point out that more can be done to strengthen the Common Framework.
This includes improving the process through clear and time-bound implementation steps, introducing a debt service standstill for applicants, providing greater clarity on the enforcement of comparability of treatment, and expanding the Common Framework to currently noneligible countries.
OUTLOOK
Growth in Sub-Saharan Africa is projected to remain modest, at 3.1 percent in 2023, but it appears to be bottoming out as economic activity is estimated to pick up to 3.7 and 3.9 percent in 2024 and 2025, respectively.
The projected growth of the region in 2023 has been revised downward by 0.4 percentage point compared to the October 2022 Africa’s Pulse forecast.
The growth deceleration in 2023 reflects several short-term headwinds, including the slowdown in the global economy (particularly in the United States, the euro area, and China), the lingering effects of the coronavirus pandemic, elevated inflation, rising financial risks owing to high public debts reaching unsustainable levels, continued supply disruptions, and the war in Ukraine.
From the expenditure side, growth in 2023 is supported by subdued contributions from private consumption and gross fixed investment (lower than in 2022).
This reflects the impact of central banks hiking interest rates to anchor inflationary pressures, and commodity prices stabilizing at a lower level than at the onset of the war in Ukraine.
Government consumption continues to contribute negligibly to real GDP growth in 2023. Exports have held up in 2023, while import growth has declined, resulting in lower but still negative net exports.
On the production side, an uptick in industry and a modest recovery in agriculture will support growth in 2023 and 2024.
The service sector will retreat in 2023 before recovering in 2024. The growth forecast differs across subgroups. For instance, growth in the region excluding large countries, such as Angola, Nigeria, and South Africa, is projected at 4.3 percent in 2023, and set to expand to 5.1 and 5.2 percent in 2024 and 2025, respectively.
The stronger performance of non-resource-rich countries can be attributed to gains enjoyed from lower import bills and an expansion in services. Real GDP growth in resource-rich countries will remain subdued, at 2.4 percent in 2023, but will rebound slightly to 2.9 and 3.0 percent in 2024 and 2025, respectively—still below the growth rate of 3.7 percent in 2021.
Growth for this group of countries is dragged down by lower commodity prices, pointing to strong dependence on the extractive sector.
Growth across the subregions remains sluggish, but it is projected to bottom out in 2023 Growth for the region hides significant heterogeneity in the performance of the subregions, as well as individual countries.
In the AFE subregion, growth in economic activity is expected to grow at 3.0 percent in 2023, down from 3.5 percent in 2022, but to accelerate to 3.7 and 3.9 percent in 2024 and 2025, respectively.
The economic performance of the AFE subregion is dragged down by the lower than the average regional performance of two of its largest economies, namely, South Africa and Angola.
In South Africa, economic activity is set to weaken further as structural constraints—particularly, the energy crisis—and headwinds persist throughout the forecasting period.
Growth will decelerate to 0.5 percent in 2023 (from 2.0 percent in 2022), and it is expected to rebound to 1.3 percent in 2024 and 1.6 percent in 2025.
The projected weak performance is inadequate to address the problems of high unemployment and rising inequality in the country. Private consumption expenditure growth is set to moderate to 1.7 percent in 2023, from 2.6 percent in 2022.
While structural problems and adverse global shocks add to the uneven recovery from the pandemic, high inflation and the lingering effects of the monetary tightening cycle, the deteriorated labour market, and weak (business and consumer) confidence are expected to weigh on the growth of private consumption.
Private consumption growth is projected to remain stable in 2024–25. Investment growth will decelerate slightly to 4.2 percent in 2023, down from 4.7 percent in 2022. Significant investment in infrastructure—including in the energy sector—is expected to support this increase.
Investment growth is expected to moderate to 4.4 percent during 2024–25. Fiscal consolidation is set to cut government consumption by 2.7 percent in 2023—with a smaller contraction (of 0.5 percent) during 2024–25.
On the supply side, the agriculture sector will support growth in 2023, with growth of 2.7 percent, up from 0.3 percent. Industry will remain under pressure in 2023, after a contraction of 2.3 percent in 2022.
The service sector, which has been supporting growth since 2021, is set to moderate in 2023 before recovering in 2024. Angola’s growth rate is expected to decelerate to 2.6 percent in 2023 (from 3.5 percent in 2022) and stabilize at 3.1 percent in 2025.
Despite improving by late 2022, oil production remains below the OPEC+ quota. Lower oil prices may hurt economic performance in Angola, as the economy still relies heavily on growth of the oil sector. Gross fixed capital formation is set to increase by 2.7 percent in 2023, up from a 1.2 percent contraction in 2022. Private consumption growth is projected to slow down from 4.1 percent in 2022 to 2.6 percent in 2023.
Oil production and diamond production are expected to pick up in 2023. Lower oil prices will likely cut external receipts substantially since they will not be offset by the upturn in production.
The current account surplus will narrow, from 12.7 percent of GDP in 2022 to 6.7 percent of GDP in 2023, on account of the declining value of exports. On the production side, the agriculture and service sectors will remain robust over the forecast horizon.
Excluding South Africa and Angola, the AFE subregion is expected to grow at 4.4 percent in 2023, and it is set to speed up to 5.1 and 5.3 percent in 2024 and 2025, respectively.
The performance is above the subregional growth, with a minor downward revision of 0.1 percentage point for 2023.
Kenya is expected to grow at 5 percent in 2023 (down from 5.2 percent in 2021) and set to expand at 5.2 and 5.3 percent in 2024 and 2025, respectively.
The slowdown in economic activity in 2023 is attributed to a deceleration of growth in private consumption associated with the impact of higher interest rates that are aimed at curbing inflation.
Growth of private consumption is set to decline to 5 percent in 2023, from 5.2 percent in 2022. Investment growth will show some resilience amid tighter financing conditions, growing by 7.7 percent in 2023—up from 7 percent in 2022.
On the production side, growth in Kenya reflects strong increases in activity across all sectors in 2023—with growth accelerating to 3.8 percent in agriculture and 4.9 percent in industry.
Growth in services will remain resilient, at 5.4 percent in 2023, although down from 7.5 percent in 2022. In Ethiopia, real GDP is set to grow steadily from 6.0 percent in 2023 to 6.6 and 7.0 percent in 2024 and 2025, respectively.
With the peace agreement between the government and the Tigray People’s Liberation Front, the upswing in economic activity is attributed to a recovery in investment—with growth rates of 5.9 percent in 2023 and an average of 6.9 percent in 2024–25.
On the supply side, the agriculture sector will pick up due to improved weather conditions. Zambia is set to grow by 4.2 percent in 2023 and accelerate to 4.7 percent in 2024–25.
This growth acceleration is attributed to strong performance in services, a rebound in mining, and improvement in manufacturing.
Over the medium term, output growth might be hampered by the lingering uncertainty associated with the conclusion of the ongoing debt restructuring negotiations.
Additionally, inadequate electricity generation—associated with the low water levels in the Kariba dam—may weaken production across different sectors of the economy.
In the AFW subregion, economic activity is expected to grow at 3.4 percent in 2023, down from 3.7 percent in 2022, and it is expected to accelerate to 3.9 and 4.0 percent in 2024 and 2025, respectively.
The economic performance of the AFW subregion is dragged down by the lower than the average regional performance of Nigeria— its largest economy.
The Nigerian economy is set to grow by 2.8 percent in 2023, down from 3.3 percent in 2022. It is expected to accelerate slightly to an average annual rate of 3 percent in 2024–25.
This translates into growth per capita of 0.2 percent in 2023 and 0.4 percent in 2024–25, which is insufficient to reduce extreme poverty in the country.
Growth will continue to be driven by services, trade, construction, manufacturing, and agriculture. Oil production is projected to remain subdued in 2023, because of inefficiencies and insecurity, and recover slightly in 2024– 25.
On the production side, growth in 2023 will be supported by industry (with growth of 5.6 percent) with the mega-refinery project. Economic activity in the AFW subregion excluding Nigeria is expected to grow at 4.2 percent in 2023, rising to 5.3 percent in 2024–25 (figure 1.29).
Growth in 2023 and 2024 is predicted to lose 0.7 and 0.2 percentage point, respectively, from the October 2022 forecasts.
The downward revision is accounted for by the still high rates of inflation, tightening monetary and fiscal policies, continued conflict in the Sahel region, and slowdown of the global economy.
The expansion of the AFW subregion in 2023 (3.4 percent) is higher than that of its counterpart, AFE (3.0 percent).
Growth of WAEMU countries is expected at 5.5 percent in 2023, slightly down from 5.6 percent in 2022, and these countries will grow at a faster pace in 2024 (7.0 percent).
The WAEMU countries will reap the benefits of declining food and fuel inflation, expansionary (or neutral at best) monetary policy, as well as investment in infrastructure.
Economic activity in Côte d’Ivoire is projected to decelerate slightly in 2023 (6.2 percent) due to global headwinds affecting exports, cutting private investment expectations, and increasing uncertainty around the path of inflation.
Still, growth is projected to remain strong at an annual average of 6.5 percent during 2024–25, driven by growth in investment as a result of pro-competitive market reforms.
In Senegal, growth is projected to accelerate slightly to 4.7 percent in 2023, from 4.2 percent in 2022, and to firm at 9.9 percent in 2024.
The strong economic performance is attributed to an increase in domestic investment and a sharp acceleration in government consumption.
Ongoing infrastructure investments—particularly in electricity, transport, and the digital economy—will boost growth in the next years. Investments in climate-smart agriculture will help alleviate the impact of climate shocks.
In contrast to WAEMU countries, weak economic performance is expected among Economic and Monetary Community of Central Africa (CEMAC) countries in 2023 (2.7 percent), down from 2.9 percent in 2022.
As the global economy slows down, the international price of oil— the main export commodity for many of the CEMAC countries—will drop, thus weighing on economic activity.
In Cameroon, the economy will maintain its post-pandemic growth with an annual average growth rate of 4.2 percent in 2023–25, supported by investment and private consumption.
On the production side, all sectors will contribute to growth. Production of liquefied natural gas, oil, and other mining commodities is projected to increase.
Economic growth in Gabon will remain unchanged at 3.1 percent in 2023 and drop slightly to 3 percent in 2024 and 2025. Growth of investment will decrease from 11.1 percent in 2022 to 1.9 percent in 2023, while growth of private consumption will increase from -0.2 to 1 percent.
On the production side, the agriculture and industrial sectors will be the main contributors to growth (and, particularly, the timber and construction sectors), while the contribution of services will remain limited.
Additionally, oil production will pick up as investment in the sector increases.
Amid high inflation and weak growth prospects in 2023, fear of stagflation is rising across some countries in the region
There is a rising fear of stagflation in the global economy—as manifested by stagnation of economic activity, higher inflation rates, and a high unemployment rate.
Sub-Saharan African economies as well as the global economy are experiencing an episode of high inflation that is driven by the COVID-19-related lockdowns and supply chain disruptions, and exacerbated by the war in Ukraine, among other factors.
The war in Ukraine escalated supply chain disruptions further and intensified volatility in energy and commodity prices.
Many central banks across the globe responded by tightening their monetary policies to curb inflation. For example, the US Federal Reserve has increased its monetary policy rate by 450 basis points since March 17, 2022.
However, inflation declined slowly to 6.4 percent by January 2023—a rate that is still above the Fed’s 2 percent inflation target.
The slow disinflationary process can be attributed not only to remaining supply chain issues, but also rising wages and higher consumer savings from government stimulus checks.
Further interest rate hikes to curb inflation add more pressure to tightening global financial conditions and elevate the risk of a global economic slowdown.
One of the salient features in the current inflationary episode is the increase in food prices— which had started prior to the pandemic—due to pent-up demand as the global economy lifted COVID-19 restrictions and harsh weather conditions.
Many Sub-Saharan African countries have experienced high headline inflation fueled primarily by food inflation.
Nearly three-quarters of the countries in the region with available data for January 2023 recorded a two-digit year-over-year rate of food inflation—with Zimbabwe (264 percent), Sudan (58.7 percent), and Ghana (61 percent) exhibiting the highest rates.
Rising inflation erodes purchasing power, holds back growth, and, if not addressed, leads the government to run the risk of de-anchoring inflationary expectations—with dire consequences for financial markets.
Many countries have also accumulated mounting debt burdens since the pre-pandemic era. In this context, what are the risks of stagflation in Sub-Saharan African countries, and what are the policies needed to engage in a sustainable growth path with a stable macroeconomic environment?
Many countries in this group have also recorded two-digit unemployment rates—particularly Southern African countries, Angola, and Nigeria, among others.
Countries in the right quadrants and with a low inflation deviation from advanced countries (say, less than 0.025) show moderate to robust growth under a relatively stable inflationary environment.
For countries in the right-side quadrants with a higher inflation differential, growth recovery is accompanied by rising inflation (for instance, Ghana and Ethiopia). In those countries, the rising cost of living is already weighing on consumers and investors and may hamper economic growth.
RISKS TO THE OUTLOOK
Risks to the outlook for the region—both external and domestic—remain tilted to the downside. A slowdown in global demand—and, particularly, a less than stellar reopening of the Chinese economy—would affect global trade and commodity prices.
Food and fuel prices may remain elevated if the war in Ukraine is prolonged—and, especially, if the Black Sea Grain Initiative is not extended. Persistent inflation, and the risk of de-anchored inflation expectations, in advanced countries could accelerate the pace of the interest rate or keep interest rates higher for a long period.
In this context, further tightening of global financial conditions may raise the costs of external borrowing and restrict access to international capital markets for Sub-Saharan African countries.
Internal risks include elevated public debts in Sub-Saharan Africa, which constrain countries from frontloading needed spending for development.
Worsening of weather conditions, especially in the Sahel region and the Horn of Africa, may also weigh down the outlook.
External risks Growth prospects in Sub-Saharan Africa can be further aggravated if there is lower-than expected economic performance among the region’s major trading partners.
For instance, central banks may tip the global economy into recession as a result of accelerating their interest rate increases to curb inflation.
Added to this scenario, lower-than-expected growth in China, as a result of zero-COVID restrictions being lifted, would have an adverse impact not only on global trade, but also direct trade with Africa.
The United States, the euro area, and China account for 40 percent of Sub-Saharan Africa’s total trade.
Finally, greater financial turmoil in the United States—as a result of the collapse of Silicon Valley Bank and Signature Bank—and in China—from the real estate market—can be transmitted to African countries through lower demand for the region’s exports (particularly, commodities), supply chain disruptions, and softer commodity prices.
An escalation of the war in Ukraine has the potential to induce increases in the international prices of food, fertilizers, and energy commodities.
Failure to extend the Black Sea grain export deal between Ukraine and Russia (which was extended for at least 60 days on March 18, 2023) may create supply disruptions and elevate the prices of grains.
Ukraine was a major player in the global food commodity markets prior to the war: it accounted for nearly 10 percent of the global wheat export market, nearly half of the sunflower oil market, and 16 percent of the corn market.
Inflation across countries in Sub-Saharan Africa remains stubbornly high despite an aggressive tightening cycle in monetary policy. Further increases in inflation could not only further erode people’s purchasing power, but also lead to a financial crisis.
Additionally, food insecurity would intensify—along with greater risk of social unrest and undernourishment.
Persistent inflationary pressures, as a result of labour market tightness, could translate into an acceleration of the pace of interest rate hikes among central banks in advanced economies. Core inflation—a better gauge of the underlying inflationary pressures—remains high and above central banks’ targets.
Such developments could lead to a de-anchoring of inflation expectations and a more aggressive monetary policy tightening cycle.
Additionally, the recent turmoil in US financial markets may delay the end of the tightening cycle as the Federal Reserve navigates the trade-off between inflation management and financial stability. In this context, further tightening of global financial conditions will lead to an outflow of foreign capital from African countries, thus weakening their currencies and widening their sovereign spreads.
It could also prompt central banks in the region to tighten further their monetary policies if their currencies come under pressure. Finally, African governments will be less likely to meet their still elevated financing needs as the costs of (domestic and external) borrowing increase and access to international capital markets becomes more restricted—especially for those countries in the region with high risk of debt distress.
Internal risks
Debt levels and vulnerabilities remain high in Sub-Saharan Africa, with sluggish improvement in some countries.
The region’s countries still have little room to manoeuvre given that their fiscal space remains depleted in most cases.
The situation could worsen, especially for countries that have lost access to the credit market and are in or at risk of debt distress.
If not addressed, debt dynamics could escalate into a full-blown crisis, setting countries even further back. The international community needs to find more adequate ways to speed up debt treatments.
The current resolution mechanisms need to be strengthened so that they can effectively address a potential debt crisis, and additional instruments may need to be set in motion.
Extreme weather conditions continue to have a stranglehold on economic activity in the Horn of Africa and the Sahel, aggravating the humanitarian situation.
The Horn of Africa is experiencing an unprecedented three-year drought. A sixth failed consecutive rainfall season, as predicted by some meteorological agencies for between March and May of this year, would have devastating consequences for communities in the region.
Amid poor social safety nets and weak health systems, the poorest households will resort to unhealthy coping mechanisms (including restricting consumption), and emigration will increase further.
Finally, violence and civil insecurity remain at historically high levels not only in low-income countries in the Sahel region, but also in major regional economies (Nigeria), and homicide rates are at record high levels in South Africa.
At the same time, the region has become the global epicentre of violent extremist activity. Nearly half of all terrorism-related deaths in 2021 took place in Sub-Saharan Africa—with four countries accounting for more than one-third of these deaths (Somalia, Burkina Faso, Niger, and Mali).
Violent extremism also spread to other parts of the region, such as Mozambique, and is severely affecting lives, livelihoods, and prospects for peace and development.
In many countries, increases in fragility induced by the pandemic are further amplified by vulnerabilities to climate shocks and risk of debt unsustainability.
These multiple vulnerabilities and the lack of resilience to (economic and climatic) shocks may lead to persistent poverty and food insecurity, which, in turn, raises the probability of social unrest.
POLICY RECOMMENDATIONS
Sub-Saharan Africa faces a myriad of challenges to regain its growth momentum. The global environment remains challenging, with a reduced demand for the region’s export products and tightened global financial conditions.
At the same, African economies are being held back by high inflation, insufficient fiscal space to support the recovery, elevated domestic interest rates, high levels of debt, and reduced capacity to borrow—including restricted access to international capital markets for countries with high sovereign debt risks.
Against this background, African economies must increasingly rely on their own policy reforms and domestic space for action in three areas: First, restoring macroeconomic stability is essential for growth.
Raising interest rates and avoiding policy conflicts that reduce the effectiveness of monetary transmission (say, fiscal dominance, and foreign exchange distortions) are crucial to reduce inflation to target levels.
At the core of the fight against inflation, central bank independence can be complemented by fiscal policy anchored on debt sustainability.
Finally, actionable policies can be implemented to stabilize debt-to-GDP ratios as well as seeking debt reduction for countries with high risk or already in debt distress.
Strengthening the Common Framework to be more inclusive of countries with sovereign risk as well as having a more transparent and faster process plays a crucial role.
Second, structural reforms that foster private investment should be at the top of the pro-growth policy agenda of countries in the region.
A premium should be put on policy measures that boost long-term competitiveness—including actions to improve market contestability and promote a sound regulatory framework.
Expanding public investment would be challenging for governments with severe fiscal constraints and restricted access to capital markets. Public investment, hence, needs to be very selective—with the scarce fiscal resources being allocated to projects with high quality and large output and employment multiplier effects.
Finally, public policies to attract FDI are needed—including expanding and upgrading transportation and other trade-related infrastructure to boost economic integration in the region.
Third, African policy makers need to seize the opportunities that are available to them during the low carbon transition.
The transition toward the low-carbon economy is irreversible and will be intensive in minerals that are abundant in many countries in the region.
The governments of resource abundant countries in the region can harness their resource wealth—and more specifically the abundant resources in extractives industries—to: (1) address their existing fiscal challenges by boosting government revenues, (2) drive economic transformation by leveraging the African Continental Free Trade Area (AfCFTA) and unlocking regional value chains to create jobs, and (3) improve access to energy, with a gradual shift in the energy mix from fossil fuels to more renewable resources—with natural gas playing a role as a transition energy resource.
Tapping into the existing energy resources and associated fiscal revenues to achieve universal access to reliable and affordable electricity is also essential.
Restoring macroeconomic stability Taming inflation is central to achieving macroeconomic stability.
Inflation rates across countries in the region remain elevated and above target despite the early and sizable interest rate increases undertaken by their central banks.
Taming inflation will remain a challenge for monetary authorities in Sub-Saharan Africa, especially for those with ineffective inflation-targeting policies, inadequate tools for policy implementation, or without policy independence.
Monetary policy tightening has also been ineffective in countries with unorthodox interventions such as fiscal monetization, direct lending interventions, and untargeted subsidy programs.
Foreign exchange restrictions that widened parallel market premia also contributed to derail disinflationary efforts.
The risk of de-anchoring inflation expectations would fuel further inflation, accelerate interest rate increases, and raise the probability of a downturn in economic activity.
Easing or putting a pause on the monetary tightening cycles appears to be premature given that inflationary pressures across Sub-Saharan African countries remain high.
In this context, guaranteeing central bank independence (in policy instruments and decision making) and strengthening the institutions that support a sound, transparent, and accountable monetary policy are essential to curb inflation.
Close coordination with fiscal policy is required, with actions that should not jeopardize inflation targets and fiscal sustainability.
A fiscal policy anchored in debt sustainability, along with an autonomous and credible central bank, can help in the fight against inflation.
Amid mounting fiscal pressures and restricted access to financing, inflation expectations may react to monetary policy tightening in a way that is contrary to that was intended.
Rising interest rates may increase the risk of fiscal stress, thus leading to currency depreciation and a higher rate of inflation.
In this context, reducing fiscal and debt sustainability risks via domestic resource mobilization and greater spending efficiency is critical.
Boosting domestic resource mobilization includes actions to diversify the base and digital solutions to improve tax administration and tax collection (for instance, taxpayer electronic registration, e-filing, and e-payment of taxes).
Redesigning tax incentives toward growth-enhancing activities (for instance, research and development and the digital economy) is also critical.
On the expenditure side, reforms to strengthen public investment management systems include (1) the adoption of stricter and more transparent arrangements for the appraisal, selection, and approval of investment projects; (2) more rigorous oversight of public-private partnerships; and (3) enhanced integration between national strategic planning and capital budgeting.
Targeting of social protection programs can be enhanced by the use of digital technologies. Income support measures, such as cash transfers, should continue to be deployed to protect the most vulnerable from persistently high inflation rates—and particularly food inflation.
Finally, repurposing public support toward high-return investments will yield large benefits for governments with depleted fiscal space.
Accelerating debt reduction and restructuring is essential to shore up stability for growth. Amid the pandemic crisis, a series of initiatives were introduced to alleviate the liquidity and solvency problems of governments in low-income countries, including debt restructuring.
One of these initiatives, the Common Framework for Debt Treatments, was designed to address a wide range of sovereign debt challenges and ensure broad participation of creditors with fair burden sharing.
Four Sub-Saharan African countries are seeking debt restructuring via the Common Framework: Chad, Ethiopia, and Zambia, and, more recently, Ghana.
Chad is the only country that has reached an agreement with its creditors under the Common Framework—albeit an agreement that does not include an actual debt reduction.
So far, the different initiatives launched during the pandemic have not successfully reduced the debt levels and vulnerabilities of IDA-eligible countries.
Addressing the debt crisis in Sub-Saharan Africa would require a comprehensive solution from borrowing countries and greater coordination with creditors.
Comprehensive debt solutions will require debt suspension, reduction, resolution, and transparency.
So far, countries that received IMF and World Bank financing during the pandemic have committed to specific governance measures to improve accountability and transparency—including arrangements to track COVID-19-related spending.
At the same time, the World Bank and IMF are collaborating with other development partners to help strengthen governance, accountability, and transparency.
Advances in these areas among debt-distressed countries will facilitate debt reconciliation and restructuring.
Accelerating debt treatments under the Common Framework is essential as bringing in a more diverse and complex group of creditors for negotiation has proven challenging.
Measures to formalize the implementation process—such as a clear timeline for the different stages of the process, assessment of the parameters of the comparability of treatment, and transparent rules and procedures—could help reduce the time taken to provide debt relief.
This could be complemented by other measures to increase the uptake of the framework, such as suspending debt service to official creditors for all applicants during the negotiations and broadening the eligibility requirements to include other heavily indebted and vulnerable lower-middle-income countries.
The Common Framework will also need a mechanism to encourage private sector participation. For instance, bringing commercial creditors into the negotiating from the beginning may help align the incentives of commercial creditors with those of government creditors and sovereign borrowers.
Clarifying the methodology of how to assess different types of debt relief from private creditors would also help in assessing private sector comparability and encourage creditor participation.
In the case of countries with unsustainable debt, creditors should aim for an outright debt reduction.39 The lack of a predictable, orderly, and rapid process of debt restructuring at the sovereign level is costly—and will limit recovery prospects and heighten uncertainty.
Deepening structural reforms to foster inclusive growth Weak investment growth adds to the macro-financial pressures weighing on economic activity in Sub-Saharan Africa.
Structural reforms that bolster private investment should put a premium on boosting the long-term competitiveness of African businesses.
In Sub-Saharan Africa, markets are often characterized by anticompetitive practices and structures—with monopolies, most of them owned by the government, holding large market shares in the key economic sectors of many countries.
Countries in the region have much to gain from fostering competition. The policy agenda that enhances competitiveness includes (1) product market reforms that scale down structural and regulatory barriers to private sector participation in goods and services markets, (2) an effective competition policy framework comprising sound competition laws and an independently funded and staffed enforcement agency, (3) trade and FDI policies that improve foreign competition and enhance access to intermediate inputs, and (4) fiscal policies and procurement systems that support competition.
These mutually reinforcing structural reforms as well as sound macroeconomic policies are needed to attract investment.
Moreover, strengthening cooperation among national competition authorities is essential to address the anticompetitive practices of large firms amid rising regional trade and integration.
Public investment, an engine of growth for many countries in the region over the past decades, may remain lower in the foreseeable future for governments with severe fiscal constraints and restricted access to capital markets.
The scarce fiscal resources then need to be allocated to high-quality investment projects with output and employment multiplier effects. Improving public investment efficiency in Sub-Saharan Africa involves strengthening the credibility of multiyear budgeting, the effectiveness of project appraisal and selection, among others.
Additionally, fostering the transparency and surveillance of public investment projects includes improving procurement processes, enhancing data transparency (including the budget process), and conducting audits and independent diagnoses of the current public investment private management systems.
Finally, public policies to attract foreign investment and getting the most from it must address three important areas: infrastructure, institutions, and incentives.
Expanding and upgrading the transportation system and ports, enhancing the reliability of and access to electricity, and fostering the efficient use of existing infrastructure are essential to boost economic integration in the region.
Institutional reforms should include enhancing investment and export promotion agencies, border control authorities, and customs.
Providing the right incentives to foreign investors involves maintaining competitive real exchange rates; regulatory frameworks that foster transparency, competition, and innovation; and trade policies that are designed to reduce anti-export bias.
Getting the most from foreign investment flows entails improving backbone network services and financial services to advance growth in industry, and the creation of local content units—especially in the case of extractives.
Leveraging resource wealth during the low carbon transition
The untapped resource potential of resource abundant countries in the region provides an additional pathway to address existing fiscal challenges and support the economic recovery.
This includes tax policies that optimize the value captured from the extractives sector while providing a stable fiscal environment, improved management of the commodity price boom-bust cycle, and policies designed toward asset portfolio diversification—thus fostering investment in human and physical capital, alongside the protection of renewable natural capital.
The following policies would support these efforts. Maximize the value captured from both fossil fuels and mining. Resource-rich countries can harness a greater share of value from their resources for development.
Resource rents are estimated to account for 9 percent of resource-rich Sub-Saharan Africa’s GDP. However, this figure far exceeds the revenues captured by governments, with rents on average 2.6 times higher than the government’s take.
This finding implies that countries may fail to capture their full share of the rents. More can be done in the following areas: (1) taxing the sector effectively to capture a greater share of rents without deterring sufficient investment, and (2) investing these revenues in the economy, to accumulate productive capital in the form of infrastructure, an educated workforce, and a healthy, productive environment, including land, water, and forests.
Countries like Zambia have been able to increase mining investment while also pursuing policies that improve the capture of revenues for the government.
Finally, countries can promote new investment to capture upside potential from new discoveries and exploration, by supporting clear and consistent approaches to sector policies—including fiscal terms that do not require cyclical revisions but capture a share of revenues in both high- and low-price conditions.
Manage the boom-bust cycle, learning the lessons from previous cycles. Policy makers should beware of the “presource” curse. Countries need to be mindful of policies that are consistent with managing expectations and ensuring fiscal sustainability.
Avoiding the presource curse, where countries can find themselves in debt distress or facing low growth even before the production of resources begins, means tempering the pressure to borrow and spend ahead of revenues.
Improve the economic sustainability of the economy, using revenues from the resource sector.
To move from negative to positive adjusted net savings, governments need to invest in human capital, including education and health; produced capital, particularly infrastructure; and natural capital such as forests, cropland, and nature-based tourism. Revenues generated from the mining and petroleum sectors can be used to finance these forms of capital.
Disclosure of resource-backed loans should be increased to improve value for money and protect countries.
The Democratic Republic of Congo, for example, has published contracts involving resource-backed loans between its state-owned mining companies and a consortium of Chinese companies and with a large commodity trader.
To encourage more progress, countries can put in place legal requirements for disclosure of loan contracts. Prepare for the future, including via investing in asset diversification.
Due to pressure from the Dutch disease, policy makers in resource-rich countries may have more success working toward asset diversification rather than export diversification.
The Changing Wealth of Nations 2021 report suggests that targeting asset portfolio diversification—investing in the expansion of human and physical capital—instead of export diversification may be a successful policy for sustainable economic growth.
Countries should support the transition to automation and mechanization. Given the expected decline in mining jobs resulting from mechanization, identifying new ways to increase employment opportunities is critical.
Transferable skills and value chains that are not carbon-linked will be important. Therefore, government support should avoid favouring fossil fuel sectors via subsidies—or under-taxation—and instead promote broad-based skill development, linkage development, and value addition.
Use the AfCFTA to build regional value chains. The resource wealth in Sub-Saharan Africa can play an important role in driving the creation of (more, better, and inclusive) jobs and economic transformation by building value chains in the context of the AfCFTA, and providing additional sources of energy and investments to foster universal access to reliable and affordable electricity.
Work toward tariff harmonization and reduction of non-tariff barriers. In the short term, no new tariffs should be erected.
In the medium term, countries should jointly harmonize mining taxes and royalties. Tax harmonization has three components: an equalization of tax rates, a common definition of national tax bases, and uniform application of agreed-on rules.
The lack of a harmonized tax policy can undermine regional integration, even with the establishment of a customs union, a common market, and a monetary union.
A powerful first step would be creating a common floor rate. Implementation of harmonized tariffs and regulations requires data and strong institutions that have coordination and enforcement capabilities.
Establishing and regularly updating an online tax database that provides comprehensive data on national tax structures can be useful for understanding disparities. It would also offer a source of accountability because it publicly identifies countries deviating from regional efforts.
Address policy impediments that inhibit intraregional trade. Shift from nationally defined export restrictions to a continental and regional approach.
Stringent national export restrictions in Africa can make all the countries involved worse off. Not only can these restrictions adversely affect domestic mining production by deterring in
vestment, but also, they affect other sectors, including transportation and logistics, services, and construction.
This can impede countries’ ability to establish regional value chains, where some degree of regional specialization and comparative advantage may unlock new opportunities that a national approach cannot achieve.
In the medium term, countries may be better able to utilize regional or continental export restrictions, meaning that restrictions are not imposed on exports to other countries within the regional economic community or African Union region, but are in effect restrictions on exports moved outside the region, consistent with the goals of the AfCFTA.
Easing infrastructure constraints, including in transportation and power, can support the development of regional value chains. Replace local content policies with continental and regional (regional economic community) approaches to content policies instead of nationally defined targets and approaches.
Many African countries have skills shortages and limited capacity to produce or access key inputs when working at the national level. Regional content policies can reduce the burden of ongoing constraints by enabling countries to access a larger pool of skilled labor and requisite inputs.
Firms operating in the region can implement training programs and capacity building for micro, small, and medium-size enterprises in parallel with regional sourcing
Tap into energy resources to improve access to energy in Sub-Saharan Africa. Africa faces a significant challenge to meet its universal, high-quality energy access goals.
In 2022, 600 million people in Africa, or 43 percent of the continent, lacked access to electricity. However, Africa’s resource base and associated investments could help accelerate progress toward the goals by developing diverse energy sources.
Invest in domestic energy access, attracting investment to domestic gas supply to promote domestic energy access and boost export revenues.
Develop and maintain stable investment policies to leverage domestic gas supplies for export revenue and domestic consumption.
Exploiting natural gas reserves requires substantial investments. Given the capital-intensive and long-term nature of these investments, countries must develop and maintain clear and consistent fiscal policies that support exports and domestic consumption, alongside capturing the full value of the resource.
Utilize fiscal revenue from, and investments in, the mining, oil, and gas sectors to support universal energy access. Fiscal revenues generated from the extractive sector are critical to bridge the financing gap for renewable energy.
In 2018, the International Energy Agency estimated that Sub-Saharan African countries would require US$28 billion per year until 2030 to attain universal access to electricity.
This would include US$13 billion for mini-grids, US$7.5 billion for grid, and US$6.5 billion for off-grid investments.
Given the high levels of debt distress across the region, countries should focus on leveraging fiscal revenue from the extractive sector rather than relying on external debt, much of which has become inaccessible or expensive amid sovereign downgrades.
Curled from World Bank’s Africa Pulse report 2023
