Time for a Policy Reset

• Author: Antoinette M. Sayeh

Time for a Policy Reset Finance & Development, June 2016, Vol. 53, No. 2

Antoinette M. Sayeh

Sub-Saharan Africa’s economies face severe strains and must take action to reignite sustainable growth

Over the past few years, I have been heartened by the progress on the ground in sub-Saharan Africa. Along with the extended period of strong economic growth of the past 15 years came improvements in health indicators and standards of living. Now that the region’s economy has entered a rough patch, there is a risk that the progress that has reached so many will stall. A confluence of external and domestic factors is exerting severe strain on many countries, including the largest ones. So to reignite the engine of sustainable growth that has propelled the region in the recent past and secure favorable medium-term prospects, governments must implement a strong policy reset.

The pace of economic expansion in the region declined to 3½ percent in 2015, the slowest in some 15 years. The growth outlook varies greatly across countries in the region, but the IMF projects overall growth to slow further this year to 3 percent—well below the 6 percent or so observed over the past decade, and barely above population growth. Indeed, GDP per capita growth will be under 1 percent for two years in a row for the first time since the late 1990s.

World of multiple shocksThe slowdown reflects the adverse impact of the commodity price slump on some of the larger economies, tighter financing conditions, and, more recently, the drought in eastern and southern Africa.

The sharp decline in commodity prices in recent years has severely strained many of the largest sub-Saharan African economies. While oil prices have recovered somewhat since the beginning of 2016, they are still some 60 percent below their 2013 peak levels, a shock of unprecedented magnitude. As a result, oil exporters such as Nigeria and Angola, as well as most countries in the Economic Community of Central African States, continue to face particularly difficult economic conditions.

Growth will slow further for the region’s oil exporters in 2016, to 2¼ percent, from as high as 6 percent in 2014, according to IMF projections. For example, growth in Angola will likely be slowed by limited foreign exchange supply and lower public spending. Similarly, in Nigeria, economic activity is constrained by the lower oil prices and compounded by disruptions to private sector activity through exchange rate restrictions...