Sub-Saharan Africa: IMF lays out policies for economic recovery amid elevated uncertainty

Sub-Saharan Africa: IMF lays out policies for economic recovery amid elevated uncertainty
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15 Apr 2019

Navigating Sub-Saharan Africa’s Recovery Amid Greater Uncertainty

Sub-Saharan Africa’s economic recovery is set to continue, but along two tracks. Overall growth is set to pick up from 3 percent in 2018 to 3.5 percent in 2019, and stabilize at slightly below 4 percent over the medium term, the IMF said in its latest Regional Economic Outlook for sub-Saharan Africa.

Some 21 countries, mainly the region’s more diversified economies, are expected to grow at more than 5 percent and see income per capita rise faster than the rest of the world on average over the medium term. However, the remaining countries, comprising mostly resource intensive countries, including the largest (Nigeria and South Africa), are expected to see slower improvements in standards of living.

“External and domestic headwinds are weighing on growth prospects,” said Abebe Aemro Selassie, Director of the IMF’s African Department. “The global expansion is losing steam, including in key trading partners such as China and the euro area; as we see trade tensions persisting; and volatile global financial conditions and commodity prices. Public debt vulnerabilities remain elevated in some countries and non-performing loans remain high, partly due to large public sector domestic arrears.”

Declining budgets and a less supportive external environment complicate the challenge of finding ways to address human and physical capital investment needs, and create enough jobs to absorb the 20 million new entrants to labor markets each year. “Central to resolving this challenge is building up sufficient resources, enhancing resilience to shocks, and fostering an environment conducive to sustained, high, and inclusive growth,” said Mr. Selassie.

He pointed to two broad implications for policies. For the fast-growing economies, such as Benin, Ethiopia, and Senegal, there is need to hand over the reins of growth from the public to the private sector. In many of these countries, public investment had helped spur high growth, while also steadily increasing public debt levels.

In the more resource-intensive and slower growing economies – such as Angola, Nigeria, and South Africa – there is an urgent need to press ahead with much-needed policies to adjust to lower commodity prices and facilitate economic diversification. Prompt action would also help address the policy uncertainties that are holding back growth.

Overall, sub-Saharan African countries need to strike a delicate policy balance between containing public debt levels, investing in human and physical capital, and raising revenue.

This calls for urgent action on the fiscal front to improve tax revenue collection, public financial management, and spending efficiency, and on the trade front to reduce non-tariff barriers and deepen intra-trade integration (including in the context of the African Continental Free Trade Area – AfCFTA).

Reforms are also needed to facilitate greater private investment, raise productivity, including by promoting diversification and export competitiveness, and strengthen resilience to climatic shocks. The crippling effects of Cyclone Idai– decimating physical infrastructure and farmland, and bringing enormous suffering for the 2.6 million people affected in Southeast Africa– underscores the region’s vulnerability to weather-related disasters.

Chapter 3

Is the African Continental Free Trade Area a Game Changer for the Continent?

In 2018, member countries of the African Union took a major step to boost regional trade and economic integration by establishing the African Continental Free Trade Area (AfCFTA). They agreed to eliminate tariffs on most goods, liberalize trade of key services, address nontariff obstacles to intraregional trade, and eventually create a continental single market with free movement of labor and capital. The AfCFTA has been ratified by 22 countries and is likely to take effect in 2019, although negotiations on specific features of the agreement are ongoing. Once operational, the AfCFTA will establish a market of 1.2 billion people with a combined GDP of US$2.5 trillion. This could be an economic game changer for the continent.

Trade integration can help propel development and has prompted spectacular success stories on other continents. Trade integration allows countries to specialize in the production of goods and services for which they have comparative advantage and to exploit economies of scale, thereby improving productivity and growth. Trade integration can also foster structural transformation by spreading knowledge and technology and spurring the development of new products. A large free trade area in Africa will amplify the potential for economic transformation in the region. It will not only boost intraregional trade, it will also attract foreign direct investment and facilitate the development of regional supply chains, which have been key engines of economic transformation in other regions.

However, while trade supports growth, it may also entail costs, and its benefits may not be evenly distributed across and within countries. Policymakers are often rightly concerned that further integrating their economies with those of other countries may benefit some industries and hurt others, negatively affect earnings and employment opportunities in certain sectors and for certain skill levels, and reduce fiscal revenue.

This chapter examines the potential benefits and challenges of implementing the AfCFTA for African countries. It focuses on three questions:

  • How has intraregional trade in Africa evolved over time and how does it differ from Africa’s international trade? What does the experience of the African subregional economic communities suggest about the continent’s potential to integrate further?

  • What is the potential impact of the AfCFTA on intraregional trade, and what policies are needed to foster further regional trade integration?

  • How will the AfCFTA affect welfare, income distribution, and the fiscal revenue of African countries?

The analysis shows that:

  • Intraregional trade in Africa has expanded rapidly, and a few regional hubs dominate relatively well diversified trade flows. Intraregional imports, as a share of total imports, almost tripled over the past two decades to 12-14 percent, or about US$100 billion, as several new subregional economic communities (RECs) boosted trade in the region. In 2017, three-quarters of African intraregional trade took place within the main subregional communities. In the process, regional trade hubs emerged, such as Côte d’Ivoire, Kenya, Senegal, and South Africa. Unlike exports to the rest of the world, intraregional trade flows are relatively diversified, contain higher value-added goods than exports to the rest of the world, and include a sizable share of manufactured products (for example, motor vehicles and clothing).

  • Despite this expansion, significant opportunities for further regional trade integration lie ahead. After controlling for lower levels of income and economic size and generally longer distances compared with other regions, African countries’ particular features appear to limit their ability to trade (compared with countries in other regions). Some of these features are structural and would require a long-term commitment to change. Others are the result of policy, such as tariffs, trade regulations, and regulatory requirements, and their removal would boost regional integration. Opportunities to expand intraregional trade are particularly sizable for some agriculture-related commodities (for example, food products) and manufacturing industries, as well as in some African subregional economic communities that trade significantly less than their peers.

  • Tariffs and, more important, non-tariff bottlenecks are currently limiting intraregional trade integration. The experience of the subregional economic communities suggests that reducing tariffs alone is not sufficient to boost intraregional trade. Poor trade logistics and, to a lesser extent, infrastructure are major obstacles to further trade integration in the region. These bottlenecks are particularly important for landlocked and low-income countries.

  • Removing trade barriers to foster intraregional trade may unevenly affect countries in the region. Fiscal revenue losses from lower tariffs are likely to be limited, on average, but they may be significant in a few countries that still apply high export tariffs. Moreover, deeper trade integration can have adverse effects on countries’ income distribution, particularly in countries with more diversified economies and large shares of skilled labor. However, these effects are limited in size as large informality in the economy, while increasing overall inequality, isolates some segments of the population from the short-term effects of trade flows. Moreover, these effects tend to fade away over time. Finally, small countries, more diversified economies, and established regional trade hubs, already open to international competition, are likely to benefit more from deeper regional integration than economies dominated by agriculture and natural resources.

The key findings in this chapter imply that the AfCFTA could significantly boost intraregional trade in Africa if both tariffs and non-tariff policy levers are used. Tariff reductions should be comprehensive in order to have significant effects on intraregional trade flows. Eliminating tariffs on 90 percent of existing intraregional trade flows – the most ambitious target under the AfCFTA – would increase regional trade by about 16 percent, or US$16 billion, over time. Tariff reductions should be complemented with policies addressing non-tariff bottlenecks. Even small improvements in addressing such bottlenecks are likely to have sizable effects. Improving trade logistics, such as customs services, and addressing poor infrastructure could be up to four times more effective in boosting trade than tariff reductions. Moreover, reducing non-tariff obstacles to trade would improve the effectiveness of tariff reductions in boosting trade, especially in landlocked and low-income countries. Therefore, policies to reduce non-tariff bottlenecks, particularly poor trade logistics and infrastructure, should be at the center of the effort to foster deeper trade integration in Africa.

To ensure that the benefits of regional trade integration are shared by all, policies should be put in place to address the adjustment costs that integration may entail. For less-diversified and agriculture-based economies, trade policies should be combined with structural reforms to improve agricultural productivity and strengthen the competitive advantage of these economies. In some countries, measures to mobilize domestic revenues are needed to mitigate the expected revenue losses from tariff reductions. The temporary adverse effects of trade liberalization on income distribution need to be tempered – particularly in countries with more diversified economies – through targeted social (for example, income support) and training programs to ease worker mobility across firms and industries and promote employment.

Source International Monetary Fund
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Date 15 Apr 2019
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