The International Monetary Fund (IMF) accepts a modest recovery in sub-Saharan Africa, and projects growth to increase from 2.7% in 2017 to 3.1% in 2018 and 3.8% in 2019.
It says the latest projections reflect the region’s policy adjustments, continued global growth, higher commodity prices, and accommodative external financing conditions.
“Growth is set to improve most notably for oil exporters, while non-resource intensive countries continue to grow strongly, with quite a few growing at 6% or more,” says Abebe Aemro Selassie, director of the IMF’s African Department.
The IMF notes that as inflation abates and fiscal imbalances remain subdued in many countries, growth is expected to accelerate to about 4% over the medium term – but has cautioned that the current growth trajectory remains too low to create the number of jobs needed to absorb the anticipated new entrants into the labour market.
Cross-border capital flows surge
The latest report shows a sharp increase in cross-border capital flows to sub-Saharan Africa from non-official sources since the global financial crisis, with portfolio flows driving the increase.
While portfolio flows have not historically been strongly associated with either domestic investment or growth in the region, they are often subject to cyclical movements. “This is often an insight we do not internalise when we’re talking about sub-Saharan Africa, but reliance on these capital flows is a double-edged sword as some part of these portfolios are subject to volatility,” says Selassie.
Nigeria and South Africa drag down growth outlook
Despite growth projections for sub-Saharan Africa coming in at 3.1% for 2018, the IMF’s growth projection for the region excluding Nigeria and South Africa is 4.6%.
The IMF recently revised South Africa’s GDP growth rate to 0.8%, down from a forecast of 1.5% in July. The latest revision following Nigeria’s, where the IMF trimmed the oil producer’s growth expectations for 2018 to 1.9% from 2.1% last April.
“For South Africa, the challenge is really on the structural front,” says Selassie. “But we strongly welcome some of the initiatives that have been outlined, such as the approval of the mining charter and the move to auction the broadband spectrum – these are all initiatives that need to continue.”
The Fourth Industrial Revolution and job creation
The Bretton Woods Institutions (the IMF and the World Bank) warn that the current wave of technological advances is set to shake up the job landscape across the world, and that sub-Saharan Africa needs to use these advances to create the 20 million jobs per year that will be needed over the next two decades to absorb its growing workforce.
Sub-Saharan Africa is currently creating around 10 million jobs annually. “This is something that policymakers cannot ignore,” says Selassie. “Some of the technology in the revolution could replace low-end manufacturing type jobs with automation, yet these are jobs Africa is already looking to attract.”
Higher non-performing loans amid strong Eurobond uptake
While the region has experienced elevated financial sector vulnerabilities this year – high non-performing loans, low bank profitability, and significant shortfalls in capital ratios – attractive returns on government securities have supported bank profitability.
On the external side, while current account balances are little changed, financial inflows were strong, with Eurobond issuances at record highs in the first half of 2018. The IMF has warned that governments will have to reduce their reliance on borrowing and shore up domestic tax mobilisation since many African countries still have meagre tax-to-GDP ratios of below 15%.
“Going forward, there is limited scope to continue relying on debt financing to address all the development financing,” says Selassie. “We see some countries with potential to raise three-to-five percentage points over the medium term, but we think a reasonable target is to aspire to raise half a percentage point of GDP each year.”
The latest sub-Saharan Africa outlook comes on the back of a warning from IMF MD Christine Lagarde that current global trade disputes if escalated further, could deliver a shock to a broader range of emerging and developing economies.