BY CHARLES ABUEDE
The International Monetary Fund (IMF) rolled out what has easily been termed ‘outlook of shocks’ when it said countries in sub-Saharan Africa are now facing new shocks with the war in Ukraine fuelling rising costs of food and fuel, which now threaten the region’s economic outlook, adding that the setback is coming at the time when growth was starting to recover and policymakers were beginning to address the social and economic legacy of COVID-19 pandemic and other development challenges.
In its latest outlook post, the IMF said the effects of the war will be deeply consequential, eroding standards of living and aggravating macroeconomic imbalances while projecting that the region will record a slow growth at 3.8 percent in 2022 with annual growth pegged at an average of four percent over the medium term.
According to the IMF in the post, “We now expect growth to slow to 3.8 percent this year from last year’s better-than-expected 4.5 percent, according to our latest Regional Economic Outlook. Though we project annual growth to average 4 percent over the medium term, it will be too slow to make up for ground lost to the pandemic. Inflation in the region is expected to remain elevated in 2022 and 2023 at 12.2 percent and 9.6 percent respectively — the first time since 2008 that regional average inflation will reach such high levels.”
Pointing to channels through which the war can impact countries within the region, the IMF said, “Prices for food, which accounts for about 40 percent of consumer spending in the region, are rising rapidly. Around 85 percent of the region’s wheat supplies are imported. Higher fuel and fertiliser prices also affect domestic food production. Together, these factors will disproportionately hurt the poor, especially in urban areas, and will increase food insecurity.
“Higher oil prices will boost the import bill for the region’s oil importers by about $19 billion, worsening trade imbalances and raising transport and other consumer costs. Oil-importing fragile states will be hit hardest, with fiscal balances expected to deteriorate by around 0.8 percent of gross domestic product compared to the October 2021 forecast — twice that of other oil-importing countries. The region’s eight petroleum exporters, however, benefit from higher crude prices.
“The shock is set to make an already delicate fiscal balancing act more difficult: increasing development spending, mobilising more tax revenues, and containing debt pressures. Fiscal authorities generally aren’t well-positioned for additional shocks after the pandemic. Half of the region’s low-income countries are already in or at high risk of distress. Rising oil prices also represent a direct fiscal cost for countries through fuel subsidies, while inflation will make reducing these subsidies unpopular. Spending pressures will only increase as growth slows, while rising interest rates in advanced economies may make financing more costly and harder to obtain for some governments,” the IMF said.
Addressing these challenges posed by the war to the region’s growth this year, the Bretton Woods institution postulates that SSA nations need a careful policy response to address these daunting challenges. First, it opined that fiscal policy will need to be targeted to avoid adding to debt vulnerabilities while policymakers should as much as possible use direct transfers to protect the most vulnerable households. Improving access to finance for farmers and small businesses would also help.
Also, it stressed that net exporters, such as Nigeria, are likely to benefit from rising oil prices, but a fiscal gain is only possible if the fuel subsidies they provide are contained while net commodity-importers, such as the Benin Republic, Ethiopia and Malawi, will need to find resources to protect the vulnerable by reprioritizing spending. It said it is important that windfalls are largely directed to strengthen policy buffers, supported by strong fiscal institutions such as a credible medium-term fiscal framework and a strong public financial management system.
Furthermore, it proposed that to navigate the trade-off between curbing inflation and supporting growth, central banks will need to monitor price developments carefully and raise interest rates if inflation expectations drift up. They must also guard against the financial stability risks posed by higher rates and maintain a credible policy framework underpinned by strong independence and clear communication.
Still on ways to ease the food security crisis across the SSA region, the IMF in a joint statement with the World Bank, the United Nations World Food Programme and the World Trade Organisation called for emergency food supplies to countries, rendering financial support, increase in agricultural production, coupled with unrestricted trade, among other measures.
“Following through on the commitment by Group of Twenty countries to re-channel $100 billion of their IMF Special Drawing Rights allocation to vulnerable countries would be a major contribution to the region’s short-term liquidity needs and longer-term development. There are options for re-channelling SDRs, for example through the IMF’s Poverty Reduction and Growth Trust or the newly created Resilience and Sustainability Trust, which has received almost $40 billion in pledges,” the IMF stated.
But it noted that for some countries, restoring debt sustainability will require debt re-profiling or an outright restructuring of their public debt, adding that to make this a reality, the G20 Common Framework needs to better define its debt restructuring process and timeline, and the enforcement of the comparability of treatment among creditors.
It said that importantly, debt service payments should be suspended until an agreement was reached.