• Donor contributions are drying up
• The sequelae of recent crises are still palpable
• Borrowing costs are rising
En the margins of its annual meeting, in early April 2023, the International Monetary Fund (IMF) published its Regional Economic Outlook for Sub-Saharan Africa. And growth projections remain weak. It should stand at 3.6% in 2023. In question, according to the IMF, a “serious shortage of financing”. Three reasons explain this drying up, according to the institution.
Borrowing costs are rising
“Financing options for countries in the region have narrowed significantly over the past year. The accelerated tightening of monetary policies worldwide, caused by the rapid rise in inflation following the outbreak of the Russian-led war in Ukraine, led to higher interest rates around the world and an increase in borrowing costs for sub-Saharan African countries, both in domestic and international markets,” reads the IMF document.
The IMF also explains this situation by the climate of uncertainty, revived by the pandemic and the war in Ukraine. A situation that has led to a reassessment of the risks from which the countries of sub-Saharan Africa are the first to suffer, due to the weakness of their credit ratings. This has led to an increase in borrowing costs, with eurobond issuances by countries in the region rising from $14 billion in 2021 to $6 billion in the first quarter of 2022. this increase, there is the decrease in aid budgets for the countries of the region, which has led some of them to turn to the financial markets, “which is more expensive”, says the IMF. Finally, capital flows from China, which once represented a considerable source of financing, have clearly marked time in recent years. This funding shortage comes at the worst possible time, as the region already suffers from severe economic imbalances. Inflation remains high and subject to significant fluctuations. The median inflation rate in the region was around 10% in February 2023, more than double the rate seen at the start of the pandemic. About half of the countries in the region have headline inflation above 10%, and about 80% of them also had food inflation above 10% in February.
A level of debt not seen for 20 years
The share of public debt in GDP is relatively high. Sub-Saharan Africa’s public debt-to-GDP ratio stood at 56% in 2022. “A level not seen since the early 2000s,” the IMF document continues. Since the start of the pandemic, budget deficits have been widening due to multiple crises, slowing growth and the depreciation of local currencies, which translates into an acceleration of indebtedness.
High levels of public debt raise concerns about debt sustainability, as 19 of the region’s 35 low-income countries were already in debt distress or at high risk of becoming so by 2022. Most currencies in the region have lost value against the dollar in 2022. These depreciations have also contributed to increasing general government debt, as 40% of sub-Saharan Africa’s debt was external in nature in 2021.
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framed
Priorities, according to the IMF
Four main priorities for public action
Lhe slowdown in global activity, rising interest rates and soaring global inflation have put many countries on a tightrope. The following four priorities should enable policy makers to remedy macroeconomic imbalances in a context of severe financial constraints.
Conduct of fiscal policy in a context of tighter financial conditions
Governments in sub-Saharan Africa must adapt to tighter financing conditions, which has two major consequences for the conduct of fiscal policy. Over the next few years, countries in the region are expected to have some of the highest interest expense to government revenue ratios in the world, above 50% in some cases. A significant portion of the outstanding Eurobond debt will mature in the next two years alone, amounting to around $6 billion in 2024 and another $7 billion in 2025.
Conduct of monetary policy in a context of high inflation
By early 2023, inflation had started to level off in nearly half of sub-Saharan African countries; in the rest of the region, however, it continues to increase or be marked by high volatility. Inflation is projected to exceed pre-pandemic levels until 2027. The public authorities must therefore continue to preserve a fragile balance, by endeavoring to curb inflation without stifling the incipient recovery.
Exchange rate management in a context of strong depreciation pressures
Sub-Saharan African countries experienced significant exchange rate depreciations in 2022, which exacerbated the financing crisis by increasing their external debt service burden. Governments can take various measures to guard against the economic costs that the necessary adjustment in the value of currencies is likely to entail. In countries where exchange rate depreciation fuels inflation, a more restrictive monetary policy stance could play a beneficial role in moderating inflation expectations and limiting capital outflows, while supporting capital inflows .
Meeting the challenge of climate change without sacrificing the basic needs of the population
Due to the current shortage of funding, essential areas of development such as schools, health and infrastructure are at risk of being underfunded. It is important that the allocation of resources to climate action does not come at the expense of the coverage of basic needs and the achievement of other development objectives. It is necessary that advanced countries increase their amounts of aid to ensure the financing of essential development needs and promote strong, resilient and inclusive growth in African countries.o
