A funding squeeze has hit African region hard-IMF
Persistent global inflation and tighter monetary policies have led to higher borrowing costs for sub-Saharan African countries and have placed greater pressure on exchange rates. Indeed, no country has been able to issue a Eurobond since spring 2022, says the International Monetary Fund (IMF) Regional Economic Outlook for Sub-Saharan Africa, released on April 2023
The interest burden on public debt is rising, owing to a greater reliance on expensive market-based funding combined with a long-term decline in aid budgets.
The lack of financing affects a region that is already struggling with elevated macroeconomic imbalances. Public debt and inflation are at levels not seen in decades, with double-digit inflation present in about half of the countries—eroding household purchasing power and striking at the most vulnerable. In this context, the economic recovery has been interrupted.
Growth in sub-Saharan Africa will decline to 3.6 percent this year. Amid a global slowdown, activity is expected to decelerate for a second year in a row. Still, this headline figure masks significant variation across the region.
The funding squeeze will also impact the region’s longer-term outlook. A shortage of funding may force countries to reduce resources for critical development sectors like health, education, and infrastructure, weakening the region’s growth potential.
The Outlook forecasts that growth in sub-Saharan Africa (SSA) is expected to slow to 3.6 percent as a “big funding squeeze”, tied to the drying up of aid and access to private finance, hits the region. This is the second consecutive year of an aggregate decline in SSA growth.
If no measures are taken, this shortage of funding may force countries to reduce fiscal resources for critical development like health, education, and infrastructure, holding the region back from developing its true potential.
The IMF is playing its part. Between 2020 and 2022 the IMF provided more than 50 billion dollars to the region, more than twice the amount disbursed in any 10-year period since the 1990s. And as of March 2023, the IMF had lending arrangements with 21 countries, with more requests under consideration.
Sub-Saharan Africa is far from powerless. Four policies can help navigate the current turmoil: i) consolidating public finances and strengthening public financial management, ii) containing inflation, iii) allowing exchange rates to adjust, while mitigating the adverse effects on the economy, and iv) ensuring important efforts to tackle climate change do not crowd out financing for basic needs like health and education.
