Article summary
- The IMF has reported a big funding squeeze in sub-Saharan Africa caused by higher borrowing costs and tighter monetary policies, as well as a decline in aid budgets.
- The funding squeeze exacerbates macroeconomic imbalances, including high levels of public debt and inflation, and is expected to negatively impact the region’s economic growth and development sectors.
- The IMF suggests four policy priorities, including consolidating public finances, containing inflation, allowing exchange rates to adjust, and balancing efforts to fund climate change and basic needs, to address these macroeconomic imbalances.
The International Monetary Fund (IMF) has revealed that Africa is facing a big funding squeeze that could hamper economic growth for the region.
The IMF made this remark as part of its briefing at the just concluded IMF Spring Meetings. The report highlights the challenges that sub-Saharan African countries face due to the funding squeeze.
It states that higher borrowing costs and tighter monetary policies, combined with a decline in aid budgets, have led to rising interest burdens on public debt. Most African countries are dealing with a severe debt crisis with the likes of Ghana failing to honour its foreign debt obligations.
According to the IMF, the higher interest rate environment exacerbates macroeconomic imbalances, including high levels of public debt and inflation, which are eroding household purchasing power and adding to social pressures.
The report suggests that the lack of financing is already impacting the region’s economic recovery, with growth expected to decline to 3.6% in 2023 down from the 3.9% projected last year. It also points out that the funding squeeze will have a long-term impact, potentially forcing countries to reduce resources for critical development sectors such as health, education, and infrastructure, which could weaken the region’s growth potential.
The Fund claims the global slowdown, higher interest rates, and a dramatic pickup in global inflation have pushed many countries closer to the edge.
Impact on inflation
In addition to the funding squeeze, the IMF also pointed out the possible impact of imported inflation on sun-Saharan Africa suggesting that it could drop if global energy prices continue to recede.
- “Consistent with the expected receding of global inflation, the median inflation for the region is projected to be down at 5 percent by the end of 2024 (year-over-year), still above pre-pandemic levels but half that at the end of 2022. Sub-Saharan Africa is a large importer of food and energy items, which average 50 percent of the region’s consumption basket. Thus, the recent onset in the decline in global food and fuel prices that is projected to continue throughout this year and next is expected to contribute much to the slowdown in regional headline inflation.“
The IMF also expects inflation in Sub-Saharan Africa to remain above pre-pandemic levels throughout 2027. It also worried about the challenge of balancing keeping inflation in check while being mindful of the still-fragile recovery.
They also painted. brighter future suggesting that as global food inflation continues to reduce globally could have a positive effect on African countries. However, it suggested that inflation will remain sticky as the pass-through could take some time to materialize.
Nigeria’s Bureau of Statistics recently announced the country’s inflation rate rose to 22.04% in the month of March 2023.
Impact on Exchange Rate
The IMF also suggests currency adjustments aka devaluation due to the realities of rising global interest rates and limited access to funding.
It also recommended countries that face inflation pressures induced by exchange rate devaluation should continue to tighten monetary policy. Nigeria ostensibly belongs to this category. It also recommends countries that have government spending-induced inflation cut back on spending.
The IMF also has some advice for countries that have sufficient external reserves but multiple exchange rates can support the forex market via interventions but risk reduction of their reserves. Nigeria also falls into this category and has supported the official market with forex. However, Nigeria’s external reserves have gone from about $39 billion a year ago to $36.4 billion recently.
The report proposes four policy priorities to address the macroeconomic imbalances, which include consolidating public finances and strengthening public financial management, containing inflation, allowing the exchange rate to adjust while mitigating its adverse effects on the economy, and ensuring that important efforts to fund and address climate change do not crowd out basic needs.
The report also provides analytical notes on topics of current interest, including the need to build resilience in sub-Saharan Africa, manage exchange rate pressures, and close the gap on concessional climate finance.