Nigeria and others face deepening vulnerabilities as growth stalls

• Oil producers (like Nigeria, Angola and Gabon) are among the most vulnerable countries on the continent; their capacity to contain

   the fallout from weak oil prices will vary widely.

• The IMF’s call for exchange rate flexibility is aimed primarily at Nigeria, which is unlikely in the near term to heed the Fund’s counsel.

• Kenya and Cote d’Ivoire will buck the trend of slower growth across the continent driven by better management of more diversified economies.

The IMF again cut its growth estimate for Africa on 3 May, from 4.3% to 3%, the lowest level in two decades. The region’s economic heavyweights, Nigeria and South Africa will be the biggest drain on growth. They are projected to grow at just 2.3% and .6%, respectively. With over 50% of sub-Saharan African GDP concentrated in these two countries, it is hard to overstate their impact on regional averages. Growth in the remaining 46 countries is substantially higher, at 4.6%. Even that figure is below recent norms of about 5% growth for Africa. Moreover, the ‘lower for longer’ commodity price cycle means that the dip could last years, not months as in 2008-9). That said, the Fund takes a relatively sanguine view of the longer term, projecting growth to rise to 4% in 2017 and 4.4% in 2018, as the graphic below shows. This is due in part to expected higher commodity prices (and African output), but also due to country-specific factors.

If African growth is disproportionately driven by Nigeria and South Africa, so is it driven by commodities, particularly oil. The Fund’s research found that commodity dependence has actually increased in recent years despite diversification efforts and broader-based growth in many ‘frontier’ nations like Kenya, Cote d’Ivoire and even Nigeria. This is partly a function of rising production among the 50% of African countries that are net commodity exporters. Among these countries, the oil producers (Nigeria, Angola, Ghana, Equatorial Guinea, the Sudans, Cameroon and Republic of Congo) are the hardest hit. These countries all face difficult policy dilemmas; Angola and Ghana have taken the toughest fiscal and monetary measures of the lot while Nigeria, Republic of Congo and Gabon have yet to make painful adjustments. Mining-rich countries like Mozambique (coal), Zambia (copper) and the DRC (copper/gold) have also been hit hard. Those with soft commodities have been less impacted than the oil producers by the commodity downturn. In particular, cocoa’s relative strength has boosted export earnings for top producers Cote d’Ivoire and Ghana. The graphic below demonstrates divergent growth depending on their export profile for the next years.

The Fund calls on African nations, especially the oil producers, to ‘reset’ their policy stances to bolster their resilience. The report highlights the importance of ‘exchange rate flexibility’. While it does not really name names, it is clear that this policy prescription is directed above all at Nigeria, whose pegged naira of N197/$ trades at about N320/$ on the parallel market. The report also takes aim at import restrictions in Nigeria and Angola, but its bigger concern by far is Nigeria’s foreign exchange regime. While this is not a new critique by the Fund (it was made by Christine Lagarde herself during a recent 4-day trip to Nigeria), the report gives it a greater sense of urgency.

The IMF pressure — and foreign pressure more broadly — is unlikely to change the Buhari administration’s mind on the naira peg, which it thinks is helping to contain inflation despite its recent surge to 12.8% (please see An Expansionary budget will pass with optimistic revenue and deficit assumptions). If anything, overt IMF pressure may further undercut the reformers that are more receptive to loosening the peg. There needs to be more domestic pressure, especially from the private sector but also from governors and grassroots movements. These pressures will likely build in over the second half of the year. Central bank officials have floated the idea of creating a dual exchange regime, which some Lagos companies are championing as a viable compromise in light of the administration’s opposition to a devaluation. The secondary market would likely price somewhere in between the official and parallel price points. Many market participants are skeptical of such a plan, as a dual exchange rate already effectively exists. The hope is that this would ease up some on foreign exchange demand (assuming it nears the black market rate) but it won’t address the $5 billion of backlogged demand.

The IMF is resurgent across much of frontier Africa, giving its policy prescriptions more weight than in the recent past. The Fund has a major program underway in Ghana, while Mozambique immediately tapped its standby agreement, receiving almost half of the $283 million program last December though recent loan disclosures will continue to stall the planned $55 million second disbursement. Kenya will treat its two-year, $1.5 billion standby package as precautionary instead leaning on the Fund for technical assistance to improve fiscal and monetary policy management. Zambia is likely to follow suit after its August elections and Angola is already seeking a 3-year facility; even Zimbabwe could get a program following Mugabe’s eventual departure. The table below details these programs.

As with other regions, the Fund is de-emphasizing rigid conditionalities in Africa, but it will hold fast on calls to reduce public sector wage burdens, eliminate subsides, widen the tax base (including a new effort on property taxes in several markets) and exchange rate flexibility. The key shift in the IMF’s engagement with the region going forward will be to consider the political realities on the ground and adjust the speed with which changes must be implemented, in Zambia’s case, for example, power price subsidies will only be addressed in phases.

Philippe Pontet