Rallying oil prices on the back of the Russia-Ukraine war has presented great opportunities for Nigeria and other oil-exporting countries, particularly in sub-Saharan Africa (SSA), to build buffers that could shield them from further economic shocks, the International Monetary Fund (IMF) advised on Thursday.
The IMF is particularly worried that the promising recovery in the region has been disrupted by the war in Ukraine which has exacerbated the already bad fiscal conditions created by the COVID-19 pandemic, leaving no room for manoeuvre.
Economic recovery in the region picked up in the third quarter of 2021 and held up despite the onset of a fourth COVID-19 wave at the end of the year. Estimated growth in 2021 has been revised upward from 3.7 to 4.5percent.
But this progress has been offset by recent events, especially the Russian invasion of Ukraine which triggered a sharp rise in commodity prices—straining the fiscal and external balances of commodity-importing countries and increasing food-security concerns across the region.
As a result, economic activity is expected to slow to 3.8 percent this year and is subject to an extraordinary range of risks, the IMF said in the report.
“The war in Ukraine has already reshaped the near-term outlook for sub-Saharan Africa,” Abebe Aemro Selassie, Director of the IMF’s African Department stressed on Thursday during the press conference on the main findings of the Fund’s latest Regional Economic Outlook for Sub-Saharan Africa, titled: “A New Shock and Little Room to Maneuver”
“Why we are very concerned relative to 2008/9 in Sub Saharan Africa is at least back in 2008/9 financial crisis, countries had some buffers some room for manoeuvre. Debt levels were very limited. So countries were able to have a robust fiscal response to that crisis.
“This time, one reason why we’re very worried is that room for manoeuvre has been exhausted even before the pandemic debt levels were of course elevated in the region and countries were beginning to address that. Then came the pandemic which exhausted what limited space remained in many cases, and now you have this shock which is impacting the most vulnerable households in the most vulnerable countries acutely and governments are going to have to provide some support. So that limited room for manoeuvre is a cause for concern.
“In commodity-exporting countries, particularly the region’s oil exporters, it will be important of course, to ensure that the windfall gains from higher commodity prices are used optimally including by rebuilding policy buffers,” he stated.
Selassie noted that the shock to global commodity markets, as already being seen, will add to inflation, hit the region’s most vulnerable households, exacerbate food insecurity, raise poverty rates, and possibly add to social tensions.
Higher oil prices may generate a windfall gain for the region’s 8 oil exporters. But for the other 37 countries, they will worsen trade imbalances and increase living costs.
In fact, over the past couple of months, the IMF has raised its inflation projections significantly—lifting the regional average for 2022 by a full 4 percentage points and representing the worst outcome since 2008.
This year, eleven countries are projected to face double-digit inflation; almost all of them have flexible exchange rates, and almost half of these are fragile.
“For most countries, the new crisis comes at an extremely difficult time—as the COVID-19 pandemic enters its third year, fiscal and international buffers are already under strain, and policy space is limited.”
Against this backdrop, policymakers in Sub Saharan Africa face an extremely challenging, uncertain and complicated policy outlook. One with rising, concessional financing needs and heightened risks.
“Really my heart goes out to Ministers of Finance central bank governors and other policymakers,” Selassie stated, adding that “it is exactly because the room for manoeuvre that countries have is limited, that very difficult trade-offs are going to have to be made.”
For most countries, the new crisis comes at an extremely difficult time—as the COVID-19 pandemic enters its third year, fiscal and international buffers are already under strain, and policy space is limited.”
In this context, Selassie pointed out that aside from accelerating vaccination, policymakers face three immediate priorities, including; addressing the local impact of the war; balancing inflation versus growth; and managing exchange-rate adjustment.
Also, looking beyond the current set of crises, decisive policy action is needed to enhance economic diversification, promote regional integration (including through AfCFTA), unleash the private sector’s potential, and address the challenges posed by climate change. In all these areas, continued international solidarity and cooperation will remain vital.
According to Selassie, Fiscal policy needs to protect vulnerable households from rising food and energy prices, without adding to debt vulnerabilities. Targeted transfers to vulnerable households are the first-best response, and for those countries with tighter fiscal constraints, finding the resources to protect the vulnerable may require a reprioritization of spending.
He assured us that the IMF is ready to help. Last year, the $23 billion allocations of IMF special drawing rights (SDRs) helped finance urgent expenditures during the pandemic.
Looking forward, the G20’s pledge to channel an additional $100 billion in SDRs to vulnerable countries is another important step, and the newly created Resilience and Sustainability Trust (RST) will help ensure that these resources are used to provide critically needed policy support and longer-term funding.
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“But the international community should go further, for example by removing obstacles to the implementation of the Common Framework and allowing for swift and efficient debt restructurings where needed.”
The second challenge will be to contain inflation without undermining the recovery,
He advised authorities to carefully monitor inflation and be prepared to raise interest rates, if necessary while maintaining credible and clearly communicated policy frameworks.
Thirdly, he said many countries will need to address exchange rate pressures stemming from higher global interest rates and increased uncertainty.
For pegged currencies, he urged authorities to find the right balance between monetary and fiscal policy to maintain the credibility of the peg.
For countries with more flexible arrangements, depreciation can act as a valuable shock absorber, but may also complicate the outlook for those with foreign-currency debt or where depreciation quickly passes through to local inflation.
“Looking beyond the pandemic and current geopolitical tensions, creating jobs and meeting the Sustainable Development Goals will require strong, inclusive, and sustainable growth in sub-Saharan Africa,” Selassie observed.
To this end, decisive policy action is needed to enhance economic diversification, unleash the private sector’s potential, and address the challenges posed by climate change.
Given sub-Saharan Africa’s exposure to weather-related disasters and reliance on rain-fed agriculture, means that investment in adaptation is equally critical.
Selassie is of the opinion that International financial support would be important to help finance the cost of adaptation, enable sub-Saharan Africa to seize the opportunities offered by the transition to a greener economy and ensure fair and affordable access to energy.
“Such measures may not be easy, but they are essential if the region—and the world—is to benefit from the long-promised African century,” he stated.
