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The East African : May 5th 2014
The EastAfrican OUTLOOK MAY 3-9,2014 Q &A WI T H RO G E R N O R D What African nations need to stay on the path of economic growth African finance executives, economists and IMF officials will meet in Mozambique at the end of May to take stock of the continent’s economic performance. The IMF deputy director of African Department tells BERNA NAMATA how African countries can harness new resources to boost their economies and reduce poverty The IMF will hold a conference in Mozambique at the end of May. What are the issues that will be addressed? The objective of the meeting is to take stock of Africa’s successes over the past 20 years and to recommend ways of achieving more inclusive growth for the next generation. How do you view economic growth in Africa? The good news is that much of sub-Saharan Africa continues to show robust growth. The IMF projection for growth in 2014 is around 5.5 per cent, which is an increase from an estimated 5 per cent in 2013 and in a number of countries it is well above that level. For the past 15 to 20 years, in some countries, growth has been strong. Has this growth been well shared? Has it created jobs? The answer here is twofold. On the one hand, growth has reduced poverty on average. Poverty has fallen from about 58 per cent to 48 per cent, according to the World Bank — which means it has been benefiting the poorest. But in many countries, inequality has widened. Growth that has benefited the wealthy more than the poor. And jobs created have been fewer than hoped for. In Mozambique, which is one of the fastest growing economies in Africa, job creation has been well below expectation, partly because growth has been coming from industries that are not labourintensive. What does this mean for policy makers? For policy makers, it underlines two things: Growth needs to be sustained for a long time to have an impact and policies must stimulate productivity and job creation. There is a need to improve pro- ductivity in agriculture because most of the poor depend on it. And it is not just public investment in agriculture that will improve productivity; rural electrification and rural roads have an impact too. We must also emphasise financial inclusion — policies to promote access of financial services to a larger population. Some countries like Kenya have been making good progress in improving financial inclusion. African countries have resumed external borrowing by issuing international bonds, but experts are cautioning that if not checked, this could lead to a situation where African countries need debt relief again. What are the risks? rica is Public debt in sub-Saharan Aflow — around 35 per cent of GDP — compared with many advanced or emerging economies whose debt to GDP ratios are approaching or above 100 per cent. This is as a result of debt relief and the prudent macroeconomic policies African countries have implemented. The low level of debt opens up opportunities to borrow, especially as grants and concessional financing are not easily available. But there are risks. If you issue a bond, you will need to repay or roll over and you do not know what the interest rate will be in the future, or whether you will have access to the financial markets. Not all countries in Africa are issuing bonds. Over the past two years Zambia, Rwanda and the traditional issuers Ghana and South Africa have issued bonds. It is not just bonds that are risky; non-concessional borrowing at higher interest rates can be risky if the project does not have high returns. What African countries need to do is to improve project selection and public financial management so that when money is borrowed it is used effectively. There are risks but those risks are containable because debt levels are still low. Most African countries are grappling with the need to boost domestic revenues and attract foreign investment by offering tax incentives. How can they strike a balance? The revenue base in many African countries is too low to sustain the spending needed to maintain a well functioning government. Many countries still receive significant foreign support to finance their budgets and this is not sustainable. Domestic revenue bases will have to be stronger. This is important for the convergence criteria, for instance in the East African Community, where the target is 25 per cent of GDP, but most countries are well below that. Investment incentives can be costly but where they are costly and ineffective, they can be eliminated. There is nothing wrong with incentives, the question is how much does it cost to provide them and are they effective? The IMF has de- veloped a tool called revenue gap analysis, which looks at what revenue would be if there were no ex- BIO EDUCATION: He holds an economics degree from the University of St. Gallen, Switzerland, as well as an MBA from the University of Chicago, US. BACKGROUND: At the IMF’s African Department, Roger Nord oversees relations with West and East Africa. He has led IMF teams to Tanzania, Uganda, and Gabon. Earlier in his career, he was the IMF’s Regional Representative in Central Europe and advisor to Managing Director Horst Köhler. PUBLICATIONS: He is the lead author of Tanzania: Story of an African Transition (2009) emptions, or if you fully applied the tax code to the entire economy and identified the actual revenue gap at the actual collections. If the gap is wide, it makes recommendations on what needs to be done to reduce it. We are using it in Uganda and Rwanda. East Africa has discovered oil and gas. How can the countries avoid the Dutch disease or resource curse? This is an opportunity for coun- tries to strengthen their revenue base. It is estimated that in Uganda, oil revenue will add 8 percentage points to the tax revenue, which is welcome. In exploiting natural resources, you need to put in place a tax regime that is fair to the country and the investors. It has to be flexible to ensure that, for instance, when prices go up, the excess funds do not accrue to one party. The IMF is providing technical assistance to new producers such as Uganda, Kenya, Tanzania and, outside the EAC, Mozambique. The other important aspect is the economics of large revenue flows that could lead to the Dutch disease — a situation where these revenue flows are so significant that they push up wages and the national currency. Then exports decline, which in turn makes countries more dependent on natural resource exports. Addressing this problem has a lot to do with how the proceeds are used. For example, if you get additional revenue and you use it to increase public service wages, you are likely to fuel inflation and hurt the competitiveness of the economy. But if you use natural resource revenues to invest in infrastructure, then you do not push up domestic prices and you are creating a more productive environment for the economy. 25 IMF: Af≥ica set to ≥ealise mo≥e ≥obust development By JEFF OTIENO The EastAfrican THE ROBUST growth recorded in sub-Saharan Africa will continue in 2014, riding on high commodity prices and sound macroeconomic policies. The latest Regional Economic Outlook issued by the International Monetary Fund shows that subSaharan Africa’s GDP will grow by 5.2 per cent this year, up from five per cent last year. The projections are similar to the World Bank’s, which recently estimated that the region will grow by 5.2 per cent this year and 5.5 per cent next year. According to the IMF, the growth will be driven by large investments in infrastructure and mining, maturing investments in transport and telecommunications, and a rebound in agricultural output. “The strong economic perform- ance of 2013 was mainly driven by domestic demand while external demand provided a modest contribution to growth in the region, as world economic activity and commodity prices remained relatively subdued during most of the year,” said the IMF report. Global improvement Antoinette Sayeh, director of African Department at the IMF, said the region is also expected to benefit from the recent global improvement driven by advanced economies like the United States. The US economy is expected to grow by 3.6 per cent this year, up from 3 per cent last year. Ms Sayeh, however, warned that slow growth in emerging economies which may affect the continent’s growth rate. “Slower growth in the emerg- ing markets like Brazil and India, which are key partners of African countries, may be a problem for the region,” she said. China is also experiencing slow economic growth and there are fears that if the trend continues, demand for commodities like coal, iron ore and copper by the Asian country may decline, affecting the earnings of mineral-dependent countries. “Should growth in emerging markets, particularly in China, slow much more than currently envisaged, many countries in the region would face lower export demand,” said Ms Sayeh. But she said international prices for commodities like tea, cocoa and coffee were still stable. She warned that phasing out of unconventional monetary policies in advanced economies could result in higher borrowing costs, especially in emerging markets and African economies.
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