Commentary around recent developments in the economies of sub-Saharan Africa has centered on a trifecta of threats: low commodity prices, China’s slowdown, and the rising cost of external borrowing. The region’s robust growth over 2000-2014, analysts say, is slowing down. Commodity exporters in particular are confronting an array of macroeconomic challenges—from growing fiscal deficits to inflation and currency volatility. But do these discouraging trends signal an end to Africa’s rise? Should African governments, businesses, and economists prepare themselves for continued stagnation in the years ahead?
According to the International Monetary Fund (IMF), no. In fact, this is the opportune time for reflection and change, Director of the IMF’s Africa Department Antoinette Sayeh argued at a recent Brookings event launching the IMF’s Regional Economic Outlook for sub-Saharan Africa. As debates on the right mix of policies to address these shocks remain ongoing, Sayeh and panelists Steven Radelet, nonresident senior fellow at Brookings, and Amadou Sy, director and senior fellow of the Brookings Africa Growth Initiative, provided their views on the most effective strategies to respond to the commodity slump, increase financing in African countries, and leverage new sources of revenue.
Commodity shocks undermine growth
In an April 2016 research paper, “Growth in Sub-Saharan Africa: The Role of External Factors,” Brookings Senior Fellows Amadou Sy and Ernesto Talvi emphasize that understanding the external economic environment—and specifically, building up safeguards against future shocks—is vital to maintaining robust economic growth in sub-Saharan Africa. Based on an analysis of the region’s seven largest economies, they find that “almost half of sub-Saharan Africa’s output fluctuations since 1998 can be explained by a small set of external factors—namely, GDP growth in G-7 countries, GDP growth in China, oil and non-oil commodity prices, and borrowing costs for emerging economies in international capital markets.”
Indeed, Sayeh emphasized the magnitude of dropping commodity prices on many countries (Figure 1): Oil exporters like Angola, Republic of Congo, Equatorial Guinea, and Gabon experienced a decline in their commodity terms of trade ranging between 25 percent to 45 percent of GDP since 2011. Metal exporters have similarly taken a major hit. In the end, she argued, a scenario of “lower for longer”—or rather, no immediate rebound from the oil price slump—will be the case going forward.
Yet low oil and other commodity prices have not hindered growth across the board in sub-Saharan Africa, Sayeh noted. For example, non-resource-rich countries have not experienced the same dip in growth as in their resource-rich neighbors (Figures 2 and 3). Oil importers such as Côte d’Ivoire, Kenya, and Senegal have actually seen a reduction in their energy import bill and are generally faring better than oil exporters, as a result of the price slump.
Still, resource-rich countries, the IMF report stresses, require a “robust, prompt policy response,” including fiscal adjustment and exchange rate flexibility, to preserve macroeconomic stability. For countries outside of currency unions, allowing currencies to depreciate and exchange rates to absorb the shock can help limit the impact on growth. Countries in currency unions, on the other hand, do not have the exchange rate tool at their disposal and should make event greater efforts at fiscal consolidation, by limiting spending and avoiding excessive monetary financing. Meanwhile, non-resource-rich countries should use this boon of low oil prices to build buffers for softening future shocks.
Costs of financing increases
Just as the need for financing has increased—to fill the mounting fiscal gaps among commodity exporters—African frontier markets are facing “substantially tighter global financial conditions,” Sayeh noted. Investors are demanding higher risk premiums from the region’s borrowers with greater vulnerabilities. According to the IMF, the average sub-Saharan Africa bond spread is far higher than the emerging market group’s spread (Figure 4). This is largely driven by a few of the hardest hit commodity exporters (Gabon, Ghana, Nigeria, Tanzania, and Zambia, to name a few). On the other hand, sovereign bond spreads of net oil importers Côte d’Ivoire, Kenya, and Senegal have remained relatively stable, given their greater resiliency to the drop in oil prices.
Domestic resource mobilization
Finally, Sayeh also recognized that many African countries are still missing out on an important source of revenue: domestic resource mobilization (see Figure 5). In the run-up to the Third International Conference on Financing for Development (FfD) in Addis Ababa last year, Sy argued a similar point. Despite improvements in government revenue collection mechanisms, tax collection in the region remains below what it should be. Sayeh recommended that African countries focus on “expanding both the tax base and tax compliance…with a view to not overburdening a given category of tax payers.”
Similar calls for increasing domestic resource mobilization are echoing across the continent. In February of this year, at a Brookings private event, former President Thabo Mbeki of South Africa and the High-Level Panel on Illicit Financial Flows from Africa discussed how illicit financial flows from Africa are one of the biggest hindrances to domestic resource mobilization. As one discussant pointed out, strengthening the capacity of African countries’ tax administrations would help make taxes harder to evade.
Moreover, some participants at the February event noted that governments should re-examine their tax systems to ensure that they do not unduly impact the poor and ultimately exacerbate inequality in some of the poorest and most unequal countries in the world. Oxfam International Director Winnie Byanyima in a January 2016 Africa in Focus post argued that tax systems in Africa are particularly regressive—which disproportionately affect poor people—with indirect taxes such as value-added tax making up on average 67 percent of tax revenues in sub-Saharan Africa. Byanyima points out that governments and their multilateral partners should promote more progressive and efficient forms of taxation, contending that “governments can both raise and spend more progressively.”