Excerpted from the executive summary of “Light on the Horizon?”, the International Monetary Fund’s October 2023 Regional Economic Outlook for Sub-Saharan Africa:
2023 has been a difficult year for activity in sub-Saharan African economies. The inflationary shock following Russia’s war in Ukraine has prompted higher interest rates worldwide, which has meant slowing international demand, elevated spreads, and ongoing exchange rate pressures. As a result, growth in 2023 is expected to fall for the second year in a row to 3.3 percent from 4.0 percent last year.
The region is expected to rebound next year, with growth increasing to 4.0 percent in 2024, picking up in four-fifths of the sub-Saharan Africa’s countries, and with strong performances in non-resource intensive countries. Macroeconomic imbalances are also improving — inflation is falling for most of the region, and public finances are gradually being put on a more sustainable footing.
But the rebound is not guaranteed. A slowdown in reform efforts, a rise in political instability within the region, or external downside risks (including from China slowing down) could undermine growth. Moreover, four clouds are on the horizon which require determined policy action in the face of difficult tradeoffs:
- First, inflation is still too high. It is in double digits in 14 countries. And it remains above target in most countries with explicit targets.
- Second, the region continues to face significant exchange rate pressures.
- Third, debt vulnerabilities are elevated. The funding squeeze is not over, as borrowing rates are still high, and rolling over debt is a challenge. And half of the low-income countries in the region are at high risk or in debt distress.
- Finally, while the recovery is underway, economic divergences within the region are widening — in particular, per capita incomes in resource intensive economies remain subdued.
Against this background the policy priorities are as follows:
Addressing inflation: For countries where inflation is high but falling, a “pause” may be warranted, with rates held at existing elevated levels until inflation is firmly on the path to target. In countries with still rising inflation, further monetary tightening may be required until there are clear signs that inflation is cooling.
Managing exchange rate pressures: For pegged countries, monetary policy needs to be aligned with the anchor country to preserve external stability and prevent further losses of reserves. In countries with floating exchange rates, currencies should be allowed to adjust as much as possible, since efforts to resist fundamentals-based movements come at a significant cost. The adjustment should be accompanied by other policy measures — tighter monetary policy to keep inflation in check, targeted support for the poor, structural reforms to strengthen the export sector, and fiscal consolidation where the fiscal deficit is adding to exchange rate pressures.
Managing debt obligations while creating space for development spending: For much of the region, fiscal policy must adapt to a tighter financing envelope and elevated debt vulnerabilities. This involves better mobilizing domestic revenue, a strategic approach to spending, borrowing prudently, and anchoring fiscal policy through a credible medium-term framework. In the few countries where debt is unsustainable, debt restructuring may also be needed. With large development needs and limited fiscal space, most countries need greater financial support from donors.
Improving living standards and potential growth, particularly in resource intensive countries: Boosting income per capita will require wide-ranging structural reforms, including investment in education, better natural resource management, improved business climate and digitalization, and a commitment to trade integration.
