Washington, DC — For African leaders, input from the International Monetary Fund is factor that must be considered when economic policies are decided. During the 1980s and 1990s, the Fund was frequently criticized for 'structural adjustment' programs that made free-market policies a condition for much-needed financial assistance. A more collaborative working relationship with less-developed member countries including those from Africa, has softened the public image. In a statement published by AllAfrica last October, African finance ministers called the IMF "a steady partner, disbursing unprecedented resources including debt forgiveness for the poorest countries." Critics continue to fault IMF policies that are seen to cause harm for the poorest (see Oxfam report on pandemic-related loans), but the Fund remains a critical provider of financial support and data for most African governments. The latest IMF assessment for sub-Saharan Africa published this week takes a hard look at prospects and policy options and concludes that current shocks leave Africa with little maneuver room.
The Regional Economic Outlook (REO) for Sub-Saharan Africa – one of a semi-annual series on each region and the world – focuses on the challenges Africa is facing. Since publication of the last regional outlook in October, when modest growth was projected, "sub-Saharan Africa has experienced a series of adverse shocks." More recently, the war in Ukraine, which has result in higher commodity prices, has added to the ongoing impact of the pandemic, Africa's low vaccination rates and damage caused by the climate crisis as well as political instability and conflict in several areas. Growth across the region is expected to slow this year to 3.8 percent, down from 4.5 percent in 2021. A projected growth rate of four percent in 2023 will not be sufficient "to make up for lost ground from the pandemic," the report states.
In an interview with AllAfrica, the IMF African Department director, Abebe Aemro Selassie, discussed the REO findings and defended the level of support the Fund is mobilizing to help African countries navigate challenges and restore the pre-pandemic growth. Selassie, who was appointed to his current post in 2016, is an Ethiopian economist who has spent nearly three decades at the Fund. The interview has been edited for clarity and length.
Let me begin by asking you to describe what the report lists as major "adverse shocks" Africa is currently experiencing.
First, Russia's invasion of Ukraine and all of the negative effects that it has had. Our region was making a slower recovery than most other parts of the world. And now you have this huge setback just as countries were beginning to address these very severe challenges. The particular way in which this war is impacting our countries is through the commodity price channel. Food prices, fuel prices. This is really particularly hurtful for many of our countries, because, in the consumption basket of average Africans, about 40% goes towards food - much higher than in most advanced countries - and an even bigger share in the poorest households goes towards food.
We have eight countries in sub-Sahara Africa that export fuel; their balance of payments will benefit to some degree in coming months, provided fuel prices stay higher. Even in those countries, but certainly for the rest of the fuel importing countries, we shouldn't underestimate how much the increase in fuel prices will feed through into inflationary pressures, eroding living standards, hitting people's pockets in a very direct way. Over and above this, there's important inputs into economic production, like fertilizer, the price of which shot through the roof. This is the point that we're making - another severe shock, with limited room to maneuver to deal with all of its effects.
Severe shocks with limited room to maneuver
How is the pandemic affecting economic performance?
Thankfully, the number of cases has not been as bad as many other parts of the world. But the economic effects of the pandemic were as acute if not more acute for our countries than elsewhere. What worries us about the pandemic is, with vaccination rates as low as they are, the possibility of more dangerous variants emerging that may leave our countries vulnerable to the spread of the infection. So we worry that the threat continues to loom.
Rising food insecurity - Challenges for Sub Saharan Africa will increase >>
What is the IMF advising countries to do in response to these myriad of pressures? I realize that every country is different.
Yeah, exactly. First and foremost the focus has to be on protecting the most vulnerable households - doing whatever can be done to mitigate, particularly the effect on food prices. This is really a first-order priority at a moment like this. Second is also trying - depending on fiscal space - to mitigate the effects of higher fuel prices on most vulnerable households. This is something that finance ministers are thinking about. Central banks also have a very delicate balancing act to do. Growth has not recovered fully to the pre pandemic trajectory. You now have inflationary pressures accelerating. On the one hand, inflation argues for tightening liquidity conditions, but, doing that in an environment where growth is still anemic, is not easy. What central banks perhaps can do, again, depends on country circumstances.
First and foremost focus is protecting the most vulnerable households
At the IMF, we stand ready to stand by countries, as we have throughout the pandemic. In sub-Saharan Africa, we provided close to $50 billion in financing since the onset of the pandemic, about $26 billion through emergency financing, augmenting regular facilities $26 billion, and $23 billion through the SDR allocation that happened last August and another billion also in debt relief to the poorest of the most vulnerable countries. We remain committed to helping countries weather the storm.
Government subsidies are controversial and often involve the two expenditures you've highlighted - food and energy. The IMF is seen as pressing for eliminating or reducing subsidies, and that can have major repercussions. What is your assessment?
There's no easy answer. And the specific response is going to depend on country circumstances - domestic political calculus, quite honestly, because these decisions are tax and spending decisions, and so they're deeply political. What we advise countries is the considerations to take into account.
Let's start with food. It's the most essential and incredibly important price that you have to worry about in terms of government's social contract with people. Whatever is needed to make sure that the most vulnerable households do not go without food is imperative. Subsidies have to be part of the answer for basic staples. But the issue is how best to use the limited resources most governments have. I think it's by making sure that you provide support to the most vulnerable households.
In general, fuel price subsidies tend to be regressive. Richer households tend to consume more fuel than poorer households. But again, given how sharp the increase in fuel prices has been right now, it could be something that governments balk at. This is a very delicate balancing act that governments have to strike.
What new programs is the IMF undertaking to address current stresses? For the new Resilience and Sustainability Fund, what input do African governments have in deciding priorities and what is the timetable for roll-out?
Longest-term financing we've ever done - the Resilience and Sustainability Fund
In addition to the support that we've provided to countries, the other major thing that we've done over the last couple of years is to effect a transfer by countries that hadn't received SDR (Special Drawing Rights) allocation to countries that really need the financing. The commitments by a number of heads of states, endorsed by the G20, will transfer resources by our existing facility, the PRGT (Poverty Reduction and Growth Trust), and give us more resources that we can use to for indebted countries. And this new facility - the Resilience and Sustainability Trust is innovative, and we really are very proud of it for two things. One, it provides, by far the longest-term financing that we've ever done at the Fund - the 10-year grace period and 20-year maturity financing. Second, it is designed to help countries address pressing, transformational challenges that we've seen them facing in recent years. Adapting to climate change in the case of many countries in our region, but also pandemic-preparedness initiatives. We hope that before the annual meetings in October to begin the rollout of new programs.
African finance ministers are asking about the decision-making process for new SDR allocations and other initiatives. Who will set priorities?
In coming up with initiatives like the Resilience and Sustainability Trust, I cannot say enough about how much intense discussions formally and informally we've had with African ministers of finance. Staff and management worked as robustly as I've seen in my 28 years here to strike a balance, a compromise between the countries that are providing these resources and countries making use of them. There's been a very collaborative dialogue. Priorities are set by each country, right. All our countries are, for example, spending on addressing the effects of climate change, but the specific priority varies from country to country. It's up to each country to come up with what type of financing they need. When they rely on IMF financing for this particular area of need that they have, it releases other resources that can be deployed to other priorities.
The IMF has been criticized for imposing conditionality on low-income countries. A recent Oxfam report says the Fund is forcing countries with pandemic-related loans to adopt austerity measures like taxes on food and fuel that harm the neediest. What is your response?
We disagree. Strongly disagree. I made the point earlier that we provided incremental financing on the order of $50 billion over the last couple of years, financing that helped countries create fiscal space. That's completely the opposite of what the Oxfam report is arguing. It's important to distinguish between the normal trajectory that you would expect in fiscal accounts and calling it austerity.
What do I mean by this? It was absolutely right and that's exactly why we provided financing in 2020 and 2021, when governments supported their people in the pandemic. But as growth recovers, you expect fiscal deficits to begin narrowing. To call that austerity, I think is really not right. A very important part of the challenge that countries face is making sure that they strengthen the social contract. They collect more tax revenues to address the development spending needs that they have - broadening the tax base in an equitable way, in a progressive way, so people pay their fair share of taxes for the goods and services they get from government. Those initiatives are part and parcel of good public finance management. The adoption of expanding tax bases to make sure that multinational corporations pay their fair share, tax holidays are minimized. It is very important for countries to have the resources they need to advance development. So, this is another thing that we disagree with in the Oxfam report.
The Regional Outlook talks about "enhancing resilience" of African economies. What does that mean in specific terms?
Getting growth back to the dynamic rates that we were seeing in the 'Africa Rising' years is going to be the way in which we build resilience. When growth is robust, we create jobs. We need the millions and millions of jobs, which is first priority. Second, that's also when you can rebuild the sovereign balance sheet, which has come under strain with rising debts.
Keys to promoting resilience - removing constraints on investment and prioritizing infrastructure
We have to look at what policies are needed to facilitate robust growth? Again, there's going to be a lot of countries specificities. In some cases, it's policy-induced barriers to investment [or] misaligned exchange rates. In other cases, it's areas of investment that are not open to the private sector. But the first order is addressing policy-induced constraints on investment. Second is prioritizing investments into areas which will help unlock more economic activity.
Infrastructure often comes up as a key issue, be it electricity, roads - again, depends country to country. And linking that with ways it can be paid for. In the technology area, we've seen this to be dramatic and incredibly successful. Telecom penetration in our region, FinTech penetration in our region, has happened to an incredible degree - all by the private sector, unlocking tremendous growth. Can we think of innovative ways in which infrastructure in a similar way can be financed in our countries tapping a lot of private investment?
And third is that the pandemic has damaged development. You've seen the effects that it has had in learning outcomes in many countries. Poverty has spiked. Focusing on investments to help kids make up for the pandemic years, doing whatever can be done to support people to earn income incomes, to reverse the increase in poverty is also an important emphasis. But again, the specifics will vary from country to country.
Before we wrap up, please address the importance of regional integration and the contribution the Africa Continental Free Trade Area (AfCFTA) can make to recovery and growth.
I want to be very specific on this answer. I had a meeting this morning with the EAC (East African Community) ministers of finance and central bank governors, congratulating them on DRC (Democratic Republic of the Congo) joining the EAC. When I lived in Uganda years ago, one of the most memorable trips I had was to the border - all dirt road at the time. There was a classic torrential tropical storms, this road had truck after truck trying to crawl up to the mountain, packed with building materials, cooking oil, maize flour, manufactured products - you name it - being exported to eastern DRC. With infrastructure as bad as it was, there was still incredible trade going on. Imagine if you had better infrastructure, if you had better border- crossing facilities, how much trade would take place.
With barriers removed, cross-border trade would flourish
The AfCFTA coming to fruition as quickly as it has is just tremendous. Addressing how we link our countries with each other is going to be really important to make AfCFTA work. Also payment systems that are developing. will It will take time but tremendous, tremendous opportunity comes from this. That's why we champion integration between our countries as much as humanly possible.
