Seeks Investment-Debt Sustainability Balance

The International Monetary Fund (IMF), on Monday urged African nations to tackle the issue of rising public debt frontally, as it has the potential to constrain the region’s tremendous growth potential.
The fund also challenged governments across the continent to strike a better balance between the urgent need for investment and debt sustainability, while putting in place necessary fiscal reforms designed to reduce the adverse effects they can have on growth and the most vulnerable segments of society.
According to Abebe Aemro Selassie, Director, African Department, at IMF, experience has shown “that this is best achieved by raising domestic revenues and making careful decisions when it comes to public spending.
“For example, reducing inefficient fuel subsidies that we know end up benefiting the better-off and larger firms, and implementing targeted cash transfers for those most in need can help to reduce overall spending and achieve redistribution goals.”
Speaking on “Sustaining High Growth in Sub-Saharan Africa, at The London School of Economics, London, Selassie stressed that ideally, “debt-financed investments would generate growth, a larger tax base and the required revenues to repay debt. Yet, too often countries fail to capture the return on their investment.”
The IMF’s technical assistance and programme engagement, he said, “seeks to strengthen institutions and policies to help countries achieve their tax potential. On average, we see potential for the region to increase the tax to GDP ratio by 3 to 6 percentage points over the medium-term.”
He called for increased transparency to identify how public resources are raised and spent, as it “can help to overcome vested interests and contribute toward building sufficient support for raising revenues.”
He urged governments on the continent to prepare for 2030, when half of the annual increase in the global working age population will come from sub-Saharan Africa, leading to higher consumer demand and the need to provide more jobs.
While this offers a huge opportunity for sub-Saharan Africa, he warned that reaping the potential of higher living standards will not happen automatically, given the accompanying “challenges that need to be overcome—climate change, deepening power sharing, ensuring inclusivity.
“In particular, closing gender gaps will be essential since about half of the contribution from the growing labor force is women.
“My broader point is the following: much of the growth momentum over the last couple of decades has come from reforms that have alleviated constraints to growth; weak institutions, problematic governance, policy uncertainty, and elevated macroeconomic imbalances. Beyond this, there are a range of formidable challenges that I just highlighted. The last thing we need is self-induced macroeconomic policy slippages to complicate development prospects,” he added.
While the needed reforms are quite tough and not always popular, Selassie expressed confidence that it is not impossible because “sub-Saharan Africa has overcome much greater challenges in the past from a weaker starting position.
“This is why I strongly believe that the region can, and will, return to a path of strong growth that will raise living standards for all.”
He also called attention to deterioration in the macroeconomic health of many countries in the region, urging policy makers to urgently respond to such growing vulnerabilities, at a time “12 of 45 countries are expecting per capita incomes to decline this year. These 12 countries are home to about 40 percent of the region’s population, or 400 million people.
“It is also worrisome that macroeconomic imbalances have emerged in many countries. Perhaps the most concerning manifestation of this is the sharp increase in public debt, which is now above 50% of GDP in half of the economies in the region.”
He also spoke of a rapid public debt buildup, which has bloated debt servicing costs sharply, with average public sector debt in sub-Saharan Africa rising from 34% of GDP in 2013 to 48% by 2016.
“Debt accumulation has been particularly high in oil-exporting countries, but debt-to-GDP ratios have also risen in countries that have enjoyed consistently high growth rates, the non-resource-intensive countries.”
It is important to note, he added, that “part of the debt increase is desirable and central to a broader development strategy to use fiscal space for growth-enhancing investment. There remains a significant infrastructure deficit in sub-Saharan Africa. And in the context of lower starting levels of income and a growing population, convergence will require a significant amount of investment. Moreover, creating room for investment was one of the underlying motivations for the official debt relief process of the mid-2000s which, coupled with strong growth, reduced debt to historically low levels.
“What is of concern though is the pace of the increase in public debt and the contribution from adverse macroeconomic developments.”
Among oil-exporting countries, public debt, he continued, has increased, on average, by more than 8 percentage points of GDP per year between 2013 and 2016, reflecting large primary deficits, a growing interest bill and balance sheet effects associated with exchange rate depreciation, against the backdrop of low (and at times negative) economic growth rates.”
Also noteworthy, he continued, is that “debt service-to-revenue ratio among sub-Saharan African countries increased from 5% in 2013 to nearly double that in 2017,” which is worse among oil-exporting countries of the region, with debt service-to-revenue ratio at a staggering 25%.
“This is diverting much needed resources away from priority sectors such as health and education spending. For example, in Zambia – spending on debt interest alone is over half of what the government spends on education and health. In 2011 it was just 20%.
“Policy makers are of course well aware of these developments and some countries have started the required policy tightening. But in many other cases adjustment keeps getting delayed,” the IMF chief noted.