Right Time for Africa

• Author: Abdoulaye Bio-Tchané and Benedicte Vibe Christensen
• Position: Director/Deputy Director of the IMF's African Department

Africa needs to build on its recent success to catch up

Africa has come a long way. For decades after independence, countries in sub-Saharan Africa (SSA) suffered from civil strife and "stop-go" economic policies that led to macroeconomic instability and high inflation. Roads, railways, ports, and electricity systems fell into disrepair. Nor was the external environment always cooperative: countries were exposed to droughts, and commodity prices fluctuated. Countries that were rich in natural resources such as oil, gold, copper, and diamonds were often subject to the "resource curse" that left large numbers of their people worse off. External donors, while supporting the continent, did not always finance projects that would have adequate economic returns or that responded to local development needs. In country after country, debt mounted until it became unsustainable. On top of all that, Africa was besieged by malaria and HIV/AIDS, which had devastating economic as well as human effects.

Yet things seem to be changing for the better throughout the subcontinent. In most African countries, leaders are now selected through democratic elections. The decision-making process is becoming more participatory and involving greater segments of civil society. The number of countries in crisis has declined, although conflict persists in some countries and regions. The pursuit of strong macroeconomic policies and economic reforms is bearing fruit: economies are growing faster and more steadily than before, and inflation is falling. Record levels of reserves in both oil-producing and oil-importing countries act as a cushion against external shocks, such as the recent increase in oil prices. Countries pursuing economic reforms have benefited from unprecedented amounts of debt relief from a wide variety of sources. In addition, the international community has promised a significant scaling up of aid resources in the years to come, offering African countries a fresh chance to free up resources and invest in human and fixed capital to promote sustainable growth. These changes have not gone unnoticed abroad. Foreign investors are showing increasing interest in the African continent, both in the domestic debt markets and in direct investment in the extraction of natural resources.

The change in the economic environment owes much to the vision now embedded in the New Partnership for Africa's Development (NEPAD), adopted by the African Union in July 2002. It presents a vision of how Africa, in close partnership with international donors, assumes responsibility for its own development. In support of its governance objectives, NEPAD adopted the African Peer Review Mechanism, which measures progress in terms of political, economic, and corporate governance.

The challenge for African policymakers now is to carry this vision forward. While economic growth has accelerated in many countries, it still needs to translate into greater improvement in the living standards of the broader population. Governments face a dilemma. With unprecedented amounts of debt relief from multilateral and bilateral donors and promises of a scaling up of aid from the international community, which have yet to materialize, the populations hold great expectations for better education and health services, as well as for improvements in infrastructure such as roads, ports, and energy. At the same time, governments have to make sure that increased spending is consistent with absorptive capacity and with maintaining the progress in macroeconomic stability and low inflation, and they must avoid a repetition of past mistakes of misallocation of budgetary resources. This requires a tightrope balancing act.

The improvement in debt sustainability and in the economic situation is also attracting many new lenders, both private and official. Governments are tempted to contract new loans on nonconcessional terms if they cannot meet the needs for greater spending from available concessional resources. At the same time, they need to be very cautious in assuming new nonconcessional loans so as to safeguard debt sustainability. They must also be mindful of the conditions for such lending-for example, ties to bilateral trade or the mortgaging of future exports for repayment. Similarly, on foreign direct investment, whether in natural resources or in other sectors, governments should be careful about granting tax or other concessions, which might...