Main Highlights
● Africa’s GDP will rise in the next three years from 3.4 to 4.8%.
● Borrowing costs are high even as Kenya, Cote d’Ivoire, and Benin tapped markets recently.
● Inflation will slow and commodity exporters will perform better.
● African governments should focus on reducing spending, boosting tax revenues, and investing in
education and infrastructure.
● IMF congratulates Cameroon for reducing its debt burden while maintaining critical investments
in infrastructure
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The IMF’s outlook for Africa is very positive. At a time when climate change, unemployment, and social strife are ravaging the continent there are many bright spots and the IMF outlook reflects that. It is difficult to provide a prognosis for a diverse and unique continent, but there has been a notable broad-based improvement in the fiscal and economic outlook.
The overall regional economic outlook is positive and improving, with economic activity picking up from 3.4% in 2023 to 3.8% and 4% in 2024 and 2025. Over 70% of countries are expected to grow and the economic recovery will continue well into 2025. Meanwhile, median inflation has halved from 10% in November 2022 to 6% in February 2024.
The funding squeeze is due to a reduction in funding sources, especially Official Development Assistance. Gross external financing needs for low-income countries in Sub-Saharan Africa is estimated at $70 billion annually (6% of GDP) throughout four years. Governments are looking for alternative funding sources as concessional lending is associated with higher interest rates, less transparency, and shorter maturities. At a time when most African countries are trying to reduce their debt burdens, it is essential to find new sources of debt. The cost of borrowing – external and internal debt – has increased and remains elevated for most African countries. In 2023, government interest payments were estimated at 12% of revenues (excluding grants), more than double from a year ago.
The private sector has also started to feel the pinch of higher interest rates.
In particular, inflation has come down significantly and the median headline inflation has dropped about 6% in February from a peak of 10% in November 2022. This reflects the effects of tightening monetary policy across many countries. However, inflation will ease in countries with growing food production capacity and stay elevated for importers like Benin and Cameroon who recently withdrew fuel subsidies. However, the IMF estimates that inflation will fall to 1.9% and 1.5% in 2024 and 2025.
Recommendations
● Improved public finances will focus on revenue mobilization as the first line of defense. Countries like Cameroon have broadened the tax base to combat higher interest rates and narrow funding options. However, the top priority continues to be fiscal consolidation while maintaining essential investments in vital infrastructure as well as education, etc. As such there is a need to boost capacity in concessional spending.
● Monetary policy should focus on ensuring price stability as inflation drops across more countries. This will provide them with space to cut interest rates and allow greater coordination between fiscal and monetary policy as well as interest rates. Most central banks in Africa target inflation, but a few have their currencies pegged to the Euro such as CEMAC member countries. As a result, it may be time for central banks to move away from currency pegs towards inflation targeting because inflation is rising quickly and while pegs ensure financial stability, it will be unwise for central banks to focus on monetary stability when inflation is rising. Secondly, most of the inflation in African countries is imported, as a majority of African countries rely on imports from Europe, Asia, and North America to feed and clothe their people. Now is the time for monetary policy to accompany fiscal policy and boost local capacity in the production of goods.
● Implementing structural reform such as accelerating trade integration and improving the business environment will attract more foreign direct investment, thereby diversifying their sources of funding and their local economies. Sub-Saharan African countries will need more support from the international community through regional and multilateral development banks. Africans have created and signed the African Continental Free Trade Area (AfCFTA) that will create a single market for goods and reduce tariff and non-tariff barriers. However, businesses must begin trading under it and policymakers should ensure the requisite information is available for civil society actors.
Public Debt is Easing and Capital Flow Reversals are Rising
Authorities have continued their fiscal consolidation efforts with the median fiscal deficit narrowing to 4% of GDP in 2023, the lowest since the pandemic started. Consequently, public debt ratios have largely stabilized around 60% of GDP in 2023 and are projected to ease this year. There are also tentative signs that capital flows are making a comeback in the region. After several years of sluggish inflows, foreign direct investment (FDI) rose to 2% of GDP in 2023, indicating a continuation of post-pandemic recovery. Even more promising is the higher number of announced FDI projects in Sub-Saharan Africa which increased by about 10% in 2023 from last year.
Even countries that have accepted international markets are still borrowing at elevated rates. At the end of March, the average yield on the region’s Eurobonds in non-distressed countries was averaging 11%, much higher than the pre-pandemic level of 7.3% – making it unaffordable for most countries. For example, Kenya issued a bond at 10.4% yield to maturity, much higher than the 6.9% yield at issuance of its bond during this year.
This allowed the country to clear most of its immediate debt and push back repayments by seven years. Similarly, Côte d’Ivoire faced its highest borrowing cost in a decade with a USD-denominated Eurobond. Sub-Saharan African sovereign issuers have generally been paying higher yields than equally risky issuers in other regions, although the often-referenced “African premium” appears to be relatively small. Furthermore, this premium essentially disappears when comparing sub-Saharan African state-owned enterprises (SOEs) and corporates with similar issuers elsewhere.
From 2000 to 2024, sub-Saharan Africa’s real income per person grew by almost 75 percent, outstripping that of advanced economies, which only saw a 35% increase. Nonetheless, this achievement dims when compared to emerging market and developing economies (EMDEs) outside the region, where real income per person more than tripled over the same period. More worryingly, since 2014, growth in sub-Saharan Africa’s real per capita income has seen a marked slowdown, diverging further away from other EMDEs.
Elevated geopolitical risks and escalation of the conflict in the Middle East could result in further disruptions to supply chains, transport routes, and commodity production will drive up the prices of commodities. The IMF estimates that oil and gas will rise by 15% in 2024 and 2025. However, countries that are less reliant on natural resources will experience a marked downturn, with growth estimated at 1.3%.
Author
Mr. Henri Kouam is the Founder and Executive Director of the Cameroon Economic Policy
Institute (CEPI). He is equally a contributor to the Economist Intelligence Unit (EIU) and
was previously a consultant for the North American Treaty Alliance (NATO). Prior to this,
we worked as a consultant on the Demographic Dividend sponsored but Bill and Melinda
Gates Foundation in 2017 and worked for London-based macroeconomic research firm
Continuum Economics.
