Washington, DC — That the latest International Monetary Fund regional survey on Sub-Saharan Africa released today offers a stark assessment of the current economic outlook is clear from the title: "Living on the Edge." Modest recovery that was beginning in 2021 "has been abruptly interrupted", the survey says. "The near-term outlook is extremely uncertain, and policymakers "face the most challenging environment in years." The current economic challenges are shared across the globe, as is clear from the other regional surveys released this week as government ministers and bankers gather here for the latest of the twice-yearly meetings convened by the Fund and the World Bank.
To explore what policies the IMF is recommending to address these challenges, AllAfrica's Reed Kramer spoke with Catherine Pattillo, deputy director of the IMF Africa Department.
Can we start with an overview of the economic outlook?
The region has been buffeted by a series of shocks. Even before the pandemic, a number of countries had limited fiscal buffers. And the pandemic had a very large impact and exacerbated fiscal and debt vulnerabilities. We were starting to see some recovery in 2021 before the impact of spillovers from the war on Ukraine, including higher fuel prices and the cost-of-living shocks.
READ: Living on the Edge - IMF REGIONAL ECONOMIC OUTLOOK REPORT OCTOBER 2022
Social and political conditions in many countries make it more challenging to operate in this very difficult external environment, with deteriorating global growth, tightening global financial conditions and increasing interest rates. Policymakers have this really difficult external environment plus the difficult domestic conditions that make it super challenging to manage these shocks.
Talk about the policy priorities in the Survey, including addressing food security and shifting monetary policies.
As we point out, 123 million people in the region face food insecurity – 12 percent of the population. What is so striking is that this is two-thirds of the world's food insecure population. And one third of that number has become acutely insecure during the pandemic.
What can policymakers do? A lot of the food insecurity is being driven by the increase in food prices. In the near-term, our advice is to allow those prices to pass through and to support vulnerable populations with targeted cash transfers, using social safety nets. But it's really difficult for Sub-Saharan African countries to do that when they don't often have well-developed social safety nets. Countries have been using second-best approaches, which are subsidies or tax cuts or import tariff reductions. These are measures that, as an expedient, countries should take. But they need then to phase these out as appropriate and continue building the foundations for being able to develop better social safety nets.
But how many countries actually can afford to the price tag?
Yes, subsidies and tax cuts are quite costly. On the fuel side, where the costs are higher, the rationale is less straightforward, because they are regressive and inefficient and not conducive to adjustment. So countries without the space to afford those are going to need to make those adjustments more quickly.
In the region, you've seen an increase in inflation, as in the rest of the world. And policymakers have to be able to confront this this increase by adjusting their monetary policy, that is increasing their policy rates. [We've] seen that type of response in most countries, so around two-thirds of countries have increased their policy rates in order to contain inflation. The average increase has been about 150 to 200 basis points less than you've seen in advanced economies. But we think that this is a largely appropriate response because a lot of the increase in inflation in the region is driven by these external factors - by the increases in food and fuel prices. You're not seeing domestic price pressures. And core inflation has actually been relatively stable.
So our message is for policymakers to adjust their monetary policy rates gradually but not to be complacent. They need to make sure that inflation expectations don't get un-anchored and lead to much higher inflation. There are countries where they'll need to tighten faster or more decisively. And there would be countries where there are more acute domestic demand pressures, or where inflation is very high.
This brings us to managing public finances and debt, which is a rising challenge for many African countries.
In the Africa department we have been discussing this for a number of years, because debt vulnerabilities have been rising. Right now, 19 of 35 low income countries are either at high risk of debt distress or are in debt distress. The rising global interest rates and the financial markets dislocations are adding to these challenges, because they're drying up international market financing for many countries. But it's important to be clear. Overall, we do not see a widespread debt crisis. There are several countries that have reached this critical point, and they've appropriately started discussions with their creditors. We need to consider each on a case by case approach.
It's also good to note that, in the face of these debt challenges, a lot of countries are facing the challenges head-on. They're planning and implementing fiscal consolidation. Interest revenue ratios are very high, so the importance of mobilizing domestic revenues is getting more and more recognized. And there's a lot of engagement with development partners.
The IMF is very much supporting these efforts for the countries that are trying to tackle these debt problems. We have 22 active IMF-supported programs. We have a number of other countries that are approaching the Fund. Our message is that countries need to address rising debt vulnerabilities, and the international community also has an important role to play because countries are going to continue to need financing for development. These are countries that really have a lot of development needs, in infrastructure and human capital, in the social sectors. And the international community and financial markets need to keep engaged country by country. Where debt is not sustainable, then we have venues to address this.
In the medium term, the key thing is helping countries to support recovery and making sure that these financing challenges, these debt problems, don't overwhelm the future potential of our countries and that liquidity challenges in some countries don't get mistaken for unsustainable debt everywhere.
The IMF role here is critical. Are there enough resources available to the IMF to do what's needed?
The fund is resourced well to support our low-income countries. We are continuing to encourage countries with SDRs [Special Drawing Rights] that they could re-channel to make sure that our facilities that support low-income countries are well sourced for the current challenges and for accentuated challenges. We're encouraging more contributions to our Poverty Reduction and Growth Trust (PRGT), which is the workhorse which supports concessional lending to low income countries, as well as the Catastrophe Containment Trust, which allowed us to provide debt-service relief during the pandemic. And also now the Resilience and Sustainability Trust, which is going to be the vehicle that will allow the longer-term concessional lending for resilience building for climate and pandemic preparedness.
So back to the PRGT, we continue to encourage contributions, both on the loan-resource side, which in general is working well in terms of the contributions and, importantly, the subsidy resources, because that's what allows it to maintain the conditionality. Right now, in Sub-Saharan Africa, the number of programs is high relative to the past, and the number of countries who are potentially interested in programs is increasing. We see that demand, and we're able to meet that demand.
Your fourth recommendation to African policymakers is to pursue sustainable and greener growth?
Sustainable growth has been a priority for some time. But it becomes even more urgent in the context of the global energy transition. Building sustainable growth is key for improving living standards. Right now, there's a lot of attention to the sustainability of growth. We have COP27 coming up in November and a lot of recognition that this region is one of the most vulnerable to climate change, while having contributed least to global emissions.
The energy transition poses a lot of challenges for the region, because of the lower demand for oil and the need for oil exporters to have a growth model that's less dependent on hydrocarbons. But it's also opening a lot of opportunities for the region, which is rich in both renewables as well as some of the minerals that are really important for the transition. There is the need to scale up energy capacity for a growing population and, potentially, to leapfrog some of the older development models. And that's going to require policymakers themselves to take a number of steps as well as a lot of international support.
Climate finance has not been adequate. Promises of $100 billion per year have not been fulfilled. Of the amounts being dispersed, more has been for mitigation. and not much for adaptation. There's this need for private and public sources to support the energy transition and climate adaptation. And that would be key for food security and agriculture and more sustainable growth.
One issue that doesn't get a lot of attention in the report but clearly has a major impact on economic growth is instability and conflict. From an economic perspective, how does conflict resolution contribute to sustainable and equitable growth?
Clearly, without stability, prospects for growth are very much dimmer. And in the last Regional Outlook, we did have a box that discussed how much conflict and regional spillover from conflict is associated with lower growth. It's very costly. And the causes of conflict are complicated and country specific. In addition, you have the climate shocks that weigh on resource availability - water and access to land etc.
We have a number of approaches in the context of our fragile and conflict-affected states. In the Sahel, there's an ongoing working relationship with a number of development partners. We know we need to engage more with other partners, like people in the security world and some of the branches of the United Nations, who are able to discuss at deeper levels the political and security dimensions of conflict and the complex drivers of conflict.
The Survey concludes with an upbeat declaration that Africa's "ultimate potential remains undimmed" and is poised – with help – "to finally fulfill the promise of the African century, contributing to a more prosperous, greener future for the region and for the world."
Yes, we have this enormous demographic potential dividend of a continent with a youth population which is entrepreneurial and vibrant. In areas like digitalization and FinTech, there's already lots of innovation and growth. As I mentioned, in the climate area, there also is potential. With support from the international community, the outlook is positive.
