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Commodities, rainfall, instability biggest challenges – African Ministers


Commodities, rainfall, instability biggest challenges – African Ministers

Commodities, rainfall, instability biggest challenges – African Ministers
Photo credit: Reuters | Benedicte Desrus

Low commodity prices, climate change, and insecurity are forcing many countries to make significant fiscal adjustments, African finance ministers said during the IMF-World Bank Spring Meetings in Washington D.C.

Ministers from four of the hardest hit countries told journalists that falling export revenues are leaving large fiscal deficits and dampening growth prospects.

South Sudan’s finance minister, Stephen Dhieu Dau, said the sharp drop in international oil prices on top of recent political instability, has Africa’s newest country experiencing an extreme income shock. “Our currency has lost 80 percent since last year, and inflation reached 730 percent in August,” he said.

Dhieu Dau, said South Sudan is trying to implement reforms as well as a peace agreement to end the civil war that started in 2013, but the country needs help. “The international community participation to help our government and our reform agenda, I think is paramount,” Dhieu Dau said.

The effects of weak global demand is not limited to the continent’s large commodity exporters. Benin’s finance minister, Romuald Wadagni said whatever happens in neighboring Nigeria is felt in Benin. “Half of our revenues come from trade with Nigeria,” he said.

Benin is looking to expand its tourism and agriculture sectors as a means to diversify revenue sources, but the country is struggling with high debt. Wadagni said they started discussions recently with the IMF about a possible program.

Meanwhile, Guinea’s first-ever woman finance minister, Malado Kaba, said her country is on the verge of favorably concluding its macroeconomic program supported by the IMF, which helped it turn the corner from the dire circumstances left by the Ebola epidemic. “So now our growth estimate is of 5.2 percent, we’ve been able to substantially reduce inflation to about 8.4 percent, and we have reconstituted our foreign reserves to three months of imports,” Kaba said.

Zambia’s Trade and Commerce minister, Felix Mutati, said the country’s mining sector has been hit hard by copper prices that have fallen by more than 40 percent, and power shortages caused by climate change. “With poor rains, our power generation was down by 50 percent,” he said.

But when asked about Africa’s future prospects, Mutati said the problems that the region is facing can be solved through greater integration and trade. “It doesn’t matter how you fall, it’s all about how you rise,” Mutati said.

» View the webcast of the African Finance Ministers’ Press Briefing here.

Extracts from the Transcript of the African Department Press Briefing

MR. SELASSIE: Good afternoon. Thank you very much for joining us today. I'll be – I'll try and be as brief as I can. Before I take your questions, I just want to lay out the economic outlook for Sub-Saharan Africa, our assessment of what the policy requirements are to address the current challenges facing the region and how promote strong, durable and inclusive growth, that's very much needed.

Economic growth in Sub-Saharan Africa this year is set to be – to drop to its lowest level in more than 20 years. We are, at the moment, projecting close to the order of 1.4 percent as you will have seen, lower than last year's 3.5 percent and indeed, much below the 5 percent and more that the region was enjoying between 2010 and 2014. Two broad factors explain this development. The external environment facing the region has deteriorated. Notably, commodity prices, of course, but also financial market conditions have tightened. The policy response in many of the countries that have been mostly affected by these shocks has also been delayed and unfortunately, incomplete, raising uncertainty, deterring private investment and stifling new sources of growth.

All this said, I think we should guard against swinging from the strong optimism of the recent years about the region's economic prospects to the excess pessimism that seems to be seeping in. The full picture that we see is one of multi-speed growth in which the regional aggregate number of 1.4 percent growth this year considerably masks the diversity that prevails across the region. In particular, close to half the countries in the region – about 19 out of 45 odd countries in Sub-Saharan Africa continue to enjoy robust growth, including the likes of Côte d’Ivoire, Ethiopia, Senegal, and Tanzania with economic output set to expand by 6 percent or more by this year.

And speaking to this point, this year, in contrast to the weighted average growth of 1.4 percent medium growth is going to be of the order of 3.8 percent. It is, however, the commodity exporters that are under severe economic strain. This is particularly the case for oil exporters, notably, Angola and Nigeria and five of the six countries in the central African monetary – economic and monetary union. The near-term prospects have worsened significantly in recent months. In these countries, the pain is spreading from the oil sector to the non-oil part of the economy.

Conditions are also particularly difficult in South Africa at the moment, another country which relies on – to a significant degree on commodity exports with outputs expansion expected to be (inaudible) this year or next year. There are, of course, also, as you may know, challenges. With these challenges are compounded in some country cases by a – the failure of acute drought in the Lesotho, Malawi, Zambia and Zimbabwe.

Looking ahead, we are projecting a modest pickup in economic activity. We think this is possible, but provided strong action is taken. Subject to reforms being initiated promptly in the coming months, growth should recover to around 3 percent next year and to highest still rates of growth beyond that. But again, I would stress that this pickup in activity is highly predicated on countries taking action to address the large imbalances and addressing the policy and certainty in some of the largest economies in the region in particular. And, of course, a return to high growth rates is imperative to address the much needed job creation in the region and to continue to bear down on poverty.

What then are the policies called for at this juncture? The hardest hit countries, especially of oil – especially oil exporters, need to act promptly as the adverse external environment that they're facing is set to endure and existing buffers have been exhausted. In these countries, growth rebound will require a sustained adjustment effort based on a comprehensive and internally coherent, consistent set of policies to re-establish macro stability. This implies allowing exchange rates to fully absorb the external pressures that these country – that those countries particularly outside monetary unions are facing, coupled with strong and orderly adjustment to contain fiscal deficits and a tight monetary stance focused on containing inflation.

For countries within monetary unions, the fiscal adjustment requirement is likely to be stronger still in dealing with this shock and central bank financing of excessive deficits needs to be curtailed. Let me also – let me stress here that for these countries that are being impacted by low commodity prices, adjustment is unavoidable given the scale and persistent nature of the shock. The options rather are between disorderly and the more orderly adjustment process. Further delays in grappling with the elevated macro imbalances are certain to undermine near-term growth and delay robust and job rates recovery.

On the other hand, adoption of a comprehensive and internally coherent set of policies we think would allow a much more orderly adjustment process and facilitate a quicker growth recovery. Indeed, if this adjustment is anchored in a credible medium-term framework and is supported by concessional financing, the place of adjustment can be made more gradual attenuating the near-term growth impact significantly.

I think at this juncture, a few words are also in order about the countries that are continuing to enjoy strong growth in the region. In many cases, despite the strong growth outcomes of recent years, fiscal deficits have widened somewhat and debt levels have started to increase. To a large extent, this reflects the stepped up in development spending countries have been undertaking. While policy action is not as urgent for us – for the hardest hit countries that I was talking about earlier, here too, with some exceptions, there is a need to strike a better balance between increased investment spending needs and debt sustainability considerations. In this respect, we're strongly advocating reforms aimed at increasing revenue mobilization which will be particularly helpful, of course, by containing fiscal deficits while sustaining increased investments.

Wrapping up, I would like to stress that we view Sub-Saharan Africa as a region of immense economic potential, but in some cases, this potential has been stymied at the moment by elevated macroeconomic imbalances and rising policy uncertainty. Addressing these challenges promptly and forcefully will be important in the coming months.

Let me stop here and would like to just mention that our semi-annual regional economic outlook for Sub-Saharan Africa, which will discuss these issues broadly supported by some analytic studies also will be published on October 25. We'll be launching this in Cameroon and Yaounde and Nairobi on that day. Thank you for your attention and I'll take – answer your questions. Thank you.

QUESTIONER: In your view, how deep is the Zambian problem and what is the outlook of the economy – going forward? And as you may be aware, Zambian government who undertake an IMF Program in rescuing the country's economy, how best should the government handle this so that the majority poor are not harmed severely?

QUESTIONER: What would you recommend to countries like, Nigeria, Cameroon and Chad that are faced with a terrible humanitarian crisis caused by the activities of Boko Haram terrorists which is draining their resources and preventing them from investing in infrastructure and even diversifying their economy? Finally, the situation in Africa is so tragic. There's poverty almost everywhere because of corruption and maybe fond ideas of slave trade. Do you think that Africa really needs a Marshall Plan at this point in time? Thank you.

MR. SELASSIE: Let me give you – perhaps take these two questions first. On Zambia, it is indeed [true] that Zambia is one of the countries that although not an oil exporter, of course, heavily relies on cooper exports and the decline in cooper prices has been a very severe shock to the economy. This has been coupled – with more domestic sources of pressure on the fiscal accounts, particularly, elevated spending in a number of areas. So, I think the government has recognized the need for adjustment. So, I think the roots – perhaps, the – the first order of priority is going to be putting in place a significant fiscal adjustment. This needs to be coupled and supported by monetary policy steps, of course. You know, a lot of the work we do and a lot of the advice that we do with countries, we try and pay heed to the effect that fiscal policy adjustment can have on the poor. So, very important aspect of our policy advice is to provide ideas, suggestions on how the tax rates can be made – taxing – tax adjustments are required and they can be made as progressive as possible. But importantly, adjustment programs are supported by safety nets that can help to minimize the impact on the poor.

One of the challenges in Zambia, I think, is going to be trying to address the significant subsidies there are - a few subsidies in particular. In general, subsidies tends to be very regressive, so it tends to take up a lot of budgetary allocation and the beneficiaries tend to be the more wealthier segments of society. So, I think there is a way to reduce the subsidy, eliminate the subsidy while putting in place protectionist measures for the people that will be impacted most and have much lower levels of income.

I think those are the two – two-fold questions. Yes, I mean, as if the challenges caused by the commodity price decline, oil price decline for Chad, Cameroon and Nigeria wasn't bad enough. You also have parts of these countries being impacted by conflict. Of course, ensuring that there is peace and stability is the first order priority and resources are going to have to be devoted for that, but I think that there should also be ways of providing resources to address the challenges being caused by conflict in the overall context of the strong adjustment measures that all three economies need. So, it is an important allocation. It is an important priority and any work the government is doing on economic policies has to carve out resources for that.

You raised an existential question about Africa. I think that we should avoid generalization about what Africa needs. I think what is needed varies from country to country. So, it's a difficult question to answer. But as a whole, do some African countries continue to need aid, official assistance? Absolutely. Some countries need – this assistance to be in the form of temporary type support. In other cases, for the poorest countries, you need more grants, concessional type financing. So, the support is needed, but equally important, I think countries building the revenue mobilization – I mean, as I mentioned in my opening in my remarks earlier, I think countries developing their tax base is going to be imperative.

QUESTIONER: My question is about one of the general themes that the IMF is bringing to the table which is the rise in the west in Europe and the United States of this sort of populous sentiment which there is a concern that that could lead to an anti-globalization movement which could be damaging to trade links and everything else

Now, the EU and the U.S. actually do want to have more reciprocal trade with Africa, but many African countries say they aren’t ready to open up their borders as much to trade coming in. Probably because they don’t feel as if they can protect their own economies as much. They’re not as competitive.

But there is advice that’s being given to the continent as a whole about opening up those borders a lot more. So at this point, do you think it’s time for African nations to really consider changing the way that they do trade and making it more reciprocal?

» View the webcast of the African Department’s Press Briefing here.


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