Africa’s Multiple Motor Misfires

Sub-Sahara African MSCI stock market performance was lackluster through April as the IMF released a new economic outlook underscoring the urgency of “growth engine restart.” Last year’s 1.5 percent rate was the worst in two decades, with two-thirds of countries representing 85 percent of GDP slowing. The 2017 prediction is for 2.5 percent, mainly due to commodity and drought recovery in Angola, Nigeria and South Africa. The terms of trade shock will linger for members of the Central African CFA Franc zone, as well as Ghana and Zambia both turning to the Fund for rescues. Non-resource dependent Cote d’Ivoire, Kenya and Senegal have managed high 5 percent-plus range growth, but budget deficits and public debt have run up with mounting arrears and bank bad loan ratios. Fiscal consolidation is overdue in Francophone pegged currency areas, and even where the exchange rate can act as safety valve controls hamper effectiveness. External debt costs have spiked for these frontier markets with postponed access, with the average EMBI spread near 500 basis points in March. The budget gap was 4.5 percent of output in 2016 with big payment backlogs in Gabon, Cameroon, and Mozambique, now in a second round of commercial bond rescheduling. The parallel market premium reached records in Angola and Nigeria with their official restrictions and Ethiopia also imposed import permit rules.  Regional inflation is over 5 percent, and benchmark rates are often negative in real terms and central bank refinancing facilities can offset headline tightening. Current account deficits at 4 percent of GDP are double the pre-commodity price correction level, and median government debt is over 50 percent retracing the relief from last decade’s Heavily Indebted Poor Country program. Dollar appreciation against the euro has aggravated profiles and debt service-revenue indicators for oil exporters are at almost 60 percent from previous single digits.

Bank private sector credit is down, and prudential policies like Kenya’s 400 basis point loan rate cap and the absence of consumer and corporate registries and foreclosure procedures worsen the crunch. Cross-border pan-African networks, with half of deposits in 15 countries, have a larger presence than formerly dominant European banks but pose contagion risk as home and host country regulators try to forge common reporting and oversight approaches. Natural disasters are a final blow, with widespread drought and crop infestations and famine again spreading in the Sahel region. Tax revenue mobilization should be a stabilization priority, and financial sector and business climate development are key items on the unfinished structural reform agenda. In an Article IV report for Francophone West African Monetary Union members at the same time, the Fund lauded over 6 percent growth but criticized budget shortfalls toward that number and a 40 percent public credit jump. Reserves dipped below four months imports and the security situation remained precarious with terror attack and civil unrest throughout the zone. Private participation in infrastructure and better debt management would relieve pressure, and the central bank should strengthen the interbank and securities markets for improved monetary policy. Basel II and III standards are being phased in, and only half of banks meet the current capital adequacy minimum and deposit insurance and resolution regimes are still absent with the supervisory engine idling, according to the review.