Containing public debt will unlock Africa’s potential

14 Jun, 2019 - 00:06 0 Views
Containing public debt will unlock Africa’s potential

eBusiness Weekly

Taking Stock Kudzanai Sharara
The International Monetary Fund (IMF) says public debt vulnerabilities remain elevated in the sub-Saharan Africa. In total, 16 countries are classified as having either a high risk of debt distress or being in debt distress, with Zimbabwe being one of them, while only 19 have low to moderate debt vulnerabilities.

To overcome this, the IMF says sub-Saharan African countries need to press ahead with reforms aimed at striking the right balance between development needs and containing public debt levels.  In an interview I had with the IMF Zimbabwe representative Patrick Imam, he said sub-Saharan African countries need to also implement measures to raise productivity and deepen trade integration. Below are excerpts of the interview I (KS) had with Imam (PI) which covered a wide range of issues with regards to economies in the sub-Saharan Africa (SSA).

KS: What is the IMF’s growth outlook for sub-Saharan Africa?
PI:
We think the economic recovery in sub-Saharan Africa is set to strengthen with growth projected to pick up from 3 percent in 2018 to 3,5 percent in 2019. But economic performance remains split with impressive per capita convergence among the region’s more diversified economies and anaemic growth in the more resource-dependent economies.

KS: What is the IMF’s policy advise for SSA?
PI:
Sub-Saharan Africa is obviously a heterogeneous region and the policy mix required to ensure macro-economic stabilisation and to improve growth prospects depends on the circumstances of each country.

If we look at fast-growing economies, the advice is that they should hand over the reins of growth from the public to the private sector.

In many of these countries, high growth has been spurred in part by higher levels of public investment, leading to a steady increase in public debt levels notwithstanding rapid growth.

Think of countries in the East Africa region for instance. Slower growing countries, which are often commodity dependent countries, need to complete the policy adjustment to lower commodity prices. For these countries, there is a pressing need to complete the fiscal and external account adjustments to lower commodity prices, reforms to facilitate economic diversification and promptly address the policy uncertainties that are holding back growth. This is the case for many of the Central African countries.

But overall, sub-Saharan African countries need to press ahead with reforms aimed at striking a balance between development needs and containing public debt levels. Sub-Saharan African countries need to also implement measures to raise productivity and deepen trade integration.

KS: Quite a few countries are faced with the challenge of spiralling public debt which could hurt growth and make it more expensive to borrow from the international market. What is your assessment of this and what other options do they have?
PI:
You are absolutely right; public debt vulnerabilities remain elevated in the region. In total, 16 countries are classified as having either a high risk of debt distress or being in debt distress, with Zimbabwe being one of them, while only 19 have low to moderate debt vulnerabilities. For most middle- and upper- income countries, public debt remains sustainable under current projections.

However, debt ratios are close to or exceed risk thresholds in a many lower-income countries. Average public debt in sub-Saharan Africa was estimated at close to 57 percent of GDP at the end of 2018, with a wide heterogeneity in debt dynamics across countries.

Oil exporters have seen some debt reductions, while other resource-intensive and non-resource-intensive countries continue to see increases in debt. Debt reductions mostly reflect fiscal consolidation in non-resource-intensive countries and a growth rebound in oil exporters.

Looking ahead, public debt ratios are expected on average to stabilise or even decline but this depends on the implementation of fiscal consolidation plans. For countries that have low or moderate debt vulnerabilities but have been experiencing rapid increase in debt because of public high investment, there is a need to make sure that the return on that investment is high and look for alternative approaches to create fiscal space for further development spending. This entails higher domestic revenue mobilisation, stronger public financial management, and improved public investment efficiency.

KS: What is the role of China in sub-Saharan African’s development? Do you think that China’s loans to sub-Saharan African countries could be a detriment to their debt situation?
PI:
China and sub-Saharan Africa’s economic relationship has been mutually beneficial. China is the region’s largest trading partner, accounting for about 20 percent of total trade. About 70 percent of the region’s exports to China are related to commodities, particularly oil, minerals, and metals.

To give you a sense of the importance of China, one can look at import numbers. The last data from the Fund shows that China amounted to $85 billion of imports in 2017, compared with $14 billion imports from US and $80 billion imports from Europe.

At the same time, China has become a major creditor for the region, providing significant lending to several countries as well as foreign direct investment, which now accounts for 5 percent of total foreign direct investment.

China’s direct investment into the region is typically in metals and energy and flows primarily to resource-intensive countries. These investments are then channelled back into China through exports of metals and minerals. Looking forward, it doesn’t matter whether the money comes from China or from other development partners.

The key issue is that the terms are favourable to Africa, that loans are transparent and well spent. Well-designed investment plans are essential for African countries to fully benefit from China’s Belt and Road Initiative (BRI) and the Forum on China-Africa Co-operation (FOCAC). These plans should help ensure that financed projects are priorities for the countries, deliver good value for money, and are consistent with debt sustainability.

KS: Faced with lower export revenues, an increasing number of sub-Saharan African countries are borrowing from the IMF.  Won’t this increase their public debt?
PI:
Several countries have sought financial assistance from the IMF in the aftermath of the 2014 commodity shock. The IMF provides financing as part of a broader reform package to address countries balance of payments needs. These programmes are designed together with country authorities and seek to restore macro-economic stability and external viability. Thus, any increase in debt during the Fund arrangement is likely to be temporary and consistent with medium-term debt sustainability.

KS: Why do you always call for a reduction in subsidies in your programmes?
PI:
It is not true that we always call for subsidy cuts. When countries need to adjust their fiscal position, they typically look for ways to rationalise spending and raise more revenue. In rationalising spending, it is better to seek ways to limit unproductive recurrent spending and non-targeted subsidies that often go to inefficient and loss-making state-owned enterprises. Doing so helps create room to protect efficient capital spending and spending on social safety nets. The empirical evidence is clear on that. Social safety nets or cash transfers to the neediest are more efficient than fuel subsidies in increasing the consumption of the poorest households.

An IMF study in 2017 on sub-Saharan Africa showed that less than 15 percent of kerosene and only 3 percent of liquefied petroleum gas and gasoline subsidies are received by the bottom 20 percent. The vast majority of the subsidy goes to the richest parts of society. Over the last decade, almost all IMF-supported programmes in sub-Saharan Africa have included quantitative targets or structural benchmarks to preserve or increase social spending and a floor on priority spending such as health, education and social protection to maintain or increase social spending.

At the same time, the IMF is providing technical assistance on fuel subsidies removal where it is wanted. Many countries, such as Madagascar or Mozambique have benefited from such technical assistance, which should help them prioritise social safety nets programmes.

KS: A few years ago, the world came together to adopt the Sustainable Development Goals (SDGs). How are you supporting sub-Saharan African countries in achieving the SDGs?
PI:
To fulfil their SDGs agenda, African countries will have to invest substantial resources in infrastructure, education and healthcare in the coming years. In a context of constrained public finances, success will depend crucially on the ability to spur joint efforts from national authorities, the donor’s community, and the private sector.

The IMF has been helping countries progress toward meeting their SDGs by providing support to boost domestic revenue mobilisation, to improve infrastructure efficiency, financing for those that face Balance of Payments needs, and through its advice on policies to build resilience, and create the conditions for sustained high and inclusive growth.

KS: What are you doing about transparency, Public Financial Management and economic governance in Africa?
PI:
Shortcomings in Public Financial Management, transparency and governance can undermine sustainable and inclusive growth, as they distort spending decisions, make public investment and spending in general much less effective, discourages private investment and impair revenue collection.

Corruption, one of the main issues in governance, is a critical obstacle to growth in many countries in the region.

Systemic corruption can undermine sustainable and inclusive growth, and impairs revenue collection, distorts spending decisions, discourages private investment, and undermines political legitimacy. Half of the 30 countries with the worst global scores in corruption perception are in sub-Saharan Africa.

However, some SSA countries, such as Botswana and Seychelles, have a strong tradition of good governance and compare relatively well even against advanced economies and emerging markets.

The IMF’s engagement to improve governance and combat corruption is being strengthened in fund surveillance, capacity development and program engagement.

More specifically, our policy advice focuses on how to strengthen anti-corruption institutions, improve fiscal governance, and enhance financial sector oversight, central bank operations, regulatory frameworks, improve the rule of law, and monitoring of illicit financial flows.

KS: What is the economic outlook for Zimbabwe?
PI:
Zimbabwe is in a unique space in Africa given the current economic environment. Our current projections are for negative GDP growth in 2019, reflecting adverse weather conditions on agriculture and on electricity generation, mining disruptions from FX shortages, and headwinds from the fiscal consolidation aimed at stabilising the economy.

The depth of the contraction will depend on the authorities’ ability to access domestic financing and unlock external financing. The country’s medium-term prospects are for stronger growth, although this is conditional on the implementation of a coherent reform strategy.

This will involve addressing the public expenditure overruns and limiting the monetary financing of the deficit, which has resulted in large discounts in the parallel markets between domestic monetary instruments and US dollars. Improvements in the business climate are also critical to unlock Zimbabwe’s growth potential.

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