/ 26 January 2009

IMF: Africa must prepare for economic storm

The International Monetary Fund (IMF) on Monday cautioned African economic policymakers to prepare a response to the economic threats now gathering on the horizon.

While economic growth in the countries of sub-Saharan Africa has been “surprisingly resilient” in the face of the latest shocks hitting the global economy, the IMF cautioned that there is no guarantee that things will not change.

According to Antoinette Monsio Sayeh, director of the IMF’s African Department, the risks to growth in sub-Saharan Africa are quite obvious: the food and fuel price shock has put pressure on inflation and external balances.

But she warned that the deepening global financial turmoil had put a brake on global growth, giving rise to the potential for lower commodity prices for Africa’s exports and reduced capital flows to Africa.

“As a result, growth in Africa could slow as well,” she warned, adding that if the clouds on the horizon develop into a storm, policymakers — including governments and central banks — must be prepared to respond.

The IMF said the current severe external challenges come when, for the first time since the 1970s, a large number of countries in sub-Saharan Africa are enjoying persistently high rates of growth in per capita income.

Sustaining and even accelerating the high growth momentum —- and extending it to low-growth countries -— is now critical for the region.

Addressing the policy challenge, such as maintaining macroeconomic stability, sheltering the poorest and taking advantage of new possibilities afforded by high food prices, is now seen as a key test for the sustainability of the current growth take-off, the IMF noted.

Among the challenges being faced by Africa is increasing inflation caused mainly by the food and fuel price shock.

It expects inflation in sub-Saharan Africa — excluding Zimbabwe — to increase to 12% in 2008 before falling back to 10% in 2009.

“As a result of rising prices, particularly of food, poverty may well be on the rise in 2009,” the IMF warned.

Higher import prices are also worsening the external balance of most countries in the region, in particular those who are net oil importers.

Meanwhile, donor support has not covered the larger import bills and the world financial crisis now risks further exacerbating external balances by reducing remittances, capital, and even aid inflows.

The IMF warned that a number of governments might have fallen behind the curve in fighting inflation.

This means many countries may need to tighten monetary policies to preserve price stability.

“A tightening of fiscal policy could usefully support this effort, particularly where monetary policy choices are limited by the exchange rate regime and where the fiscal stance has contributed to inflation. The recent easing of global commodity prices should help reduce, but does not eliminate, the challenge posed by higher inflation and current account deficits,” said Sayeh. — I-Net Bridge