Sub-Saharan Africa’s economic outlook: Policies to raise growth

A modest
economic recovery is underway in sub-Saharan Africa. This is good news for the
region which has been experiencing a sharp slowdown in economic growth over the
last few years.

The bounce
back has much to do with a more supportive global economy, especially higher
commodity prices.

Policy
makers in the region have also taken some difficult decisions to put the
recovery on the right track. But more needs to be done to secure a return to
the more rapid growth rates needed to deliver meaningful improvements in living
standards for all.

While the
objective of generating gains in economic and social outcomes is shared
broadly, there is huge diversity in economic prospects across countries. Oil
exporters are dealing with the legacy of the largest shock to oil prices since
1970.

 The
unexpected decline in oil prices in 2015/16 led to sharp falls in growth and
the recovery so far in these countries has been muted. At the other end of the
spectrum, several economies have been growing at sustained rates of six per
cent or more.

 The
underpinnings of growth in these countries vary. For some, they have benefited
from a more diversified export base, for others sustained public investment is
the key driver, while others are emerging from conflict.

 In shaping
policies to deliver growth, there are two key trends that policy makers should
remain alert to.

 First,
domestic macroeconomic vulnerabilities have risen. There has been a marked
increase in public debt in many countries in recent years, giving rise to
increased interest payments which divert resources away from much-needed social
and development spending.

 Second, the
supportive global environment may not be here to stay. Growth in advanced economies
is expected to taper off and borrowing terms for the region’s frontier markets
may become less favorable as the United States (US) monetary policy normalizes.

 Taken
together, domestic safety buffers in the region have been run down at a time of
heightened global risks in the medium term. Thus, policy makers need to seize
the opportunity provided by the current growth uptick to turn the recovery into
a durable growth spell.

 This
requires domestic policy steps to reduce vulnerabilities and raise medium-term
growth potential. These are the main issues covered in the International
Monetary Fund’s (IMF’s) semi-annual Regional Economic Outlook for Sub-Saharan
Africa, published yesterday.

 The report
provides an overview of economic developments in the region, analysis of recent
trends and policy advice. In light of the twin challenges of managing the rise
in public debt and the need to boost growth, the report focuses on raising
domestic revenues and private investment. The main messages on each of these
issues are set out below.

 Stepping up
domestic revenue mobilization provides the much-needed resources to finance
social spending and service the interest on debt, which has been used for
public investment. Most countries in the region have considerable potential to
collect higher revenue.

 Despite
substantial progress in revenue mobilization over the past two decades, it
remains below its potential. Our estimates suggest that countries can mobilize
between three to five percentage points in tax revenue; this is far more than
what the region receives each year in international aid.

 This is an
ambitious target but it is achievable. It requires strengthening Value Added
Tax (VAT) and income tax systems, streamlining exemptions and broadening the
tax base.

 Such efforts
will be most effective if implemented as part of a medium-term revenue strategy
which has a broad base of supporters and a credible commitment to improve
governance and transparency.

 The level of
private investment in sub-Saharan Africa remains well below the level of other
countries at similar levels of economic development. To move this agenda
forward, policies which deliver a sound business environment, well-developed
infrastructure, trade openness and financial development can lift private
investment.

 But as these
reforms take time, countries have also pursued other avenues to jump-start
private investment—such as public-private partnerships, special economic zones
and mechanisms to target foreign direct investment. These avenues can be
successful if associated risks are well managed.

 Overall, our
policy advice will always be country and context specific. There is huge
potential for boosting growth in the region and the current global environment
provides the opportune time to push forward these reforms.

The writer,
Abebe Aemro Selassie, a Director, African Department, IMF