IMF Urges African Leaders to Diversify Economies: A Vital Message for Africa

Cape Town — If you want your country to grow and improve the lives of your people, you need to diversify your economy – and stop subsidising the rich at the expense of the poor.

That is one of the clearest messages sent to the leaders of Africa’s 45 sub-Saharan nations by the International Monetary Fund (IMF) at this month’s meetings in Marrakech, the first to be held on the continent in 50 years .

The meetings reinforced other recent messages from the IMF, in particular fears of a looming debt crisis among low-income countries, and the effects of the economic slowdown in China, now the region’s largest individual country trading partner.

But the principal headlines generated by the release of the IMF’s latest economic outlook for the region highlighted the fund’s expectation that after two years of falling growth, gross domestic product (GDP) will begin rising again next year in four of every five countries, to reach a level of four percent.

But as ever, the aggregate figure of four percent conceals a wide range of differing expectations for different countries and categories of country. Notable is the difference between countries whose economies are driven by the export of oil or raw materials such as minerals and those with more diversified economies.

“Both groups of economies will recover next year,” the IMF reported, “but at different paces.”

Growth in countries where net oil exports make up 30 percent or more of total exports, or where exports of non-renewable natural resources such as minerals represent at least 25 percent of total exports, is expected to rise from 2.6 percent this year to 3.2 percent next year.

However, growth in countries with more diversified economies is expected to improve from 5.3 percent this year, to “an impressive 5.9 percent” in 2024, the IMF said.

The IMF added that what it characterises as a “two-speed recovery” is a long-standing trend, which became particularly evident during the shock decline [PDF] in global commodity prices – of around 50 percent – which occurred between mid-2014 and mid-2015.

“Since that episode, the divergence between these two types of economies has become more entrenched,” the IMF outlook added. “Neither group of countries is expected to completely recover lost ground from the crisis, but non-resource countries have nonetheless proven more resilient, supported by their more diversified economies.”

An examination of predictions for individual countries illustrates the IMF’s argument.

Of eight oil exporting nations, growth is expected to exceed the regional aggregate of four percent in only three – in the Republic of Congo (4.4 percent) and Cameroon and South Sudan (4.2). It is predicted to fall below four percent in Chad, (3.7 percent), Angola (3.3) Nigeria (3.1) and Gabon (2.6), while in Equatorial Guinea, where a major company is winding down, growth is expected to fall by 5.5 percent next year.

Growth is generally expected to be better in other countries classified by the IMF as “resource-intensive”, where 10 of 16 countries will improve GDP by more than four percent, reaching 6.4 percent in Burkina Faso, 6.1 percent in Tanzania and a remarkable 11.1 percent in Niger (boosted by hydrocarbon development , although the effects of the recent military coup are unknown).

However, South Africa – hit in recent years by damaging electricity shortages – is an outlier among resource-intensive countries, with the second lowest-growth projection of all 45 countries at 1.8 percent in 2024. (The IMF notes that with South Africa comprising just under 20 percent of regional GDP, average regional growth will be heavily impacted by the rate of the country’s recovery.)

Also in this category, growth is expected to be below average in Zimbabwe (3.6 percent), in Ghana and Namibia (2.7 percent) and the Central African Republic (2.5 percent).

In contrast to economies dominated by the extraction and export of resources, the region’s 21 more diversified economies are predicted to do a lot better in 2024.

The IMF expects the GDP of 14 of 21 nations to grow by more than four percent, with the top performers projected to be Senegal (8.8 percent, also impacted by hydrocarbon development), Rwanda (7 percent), Cote d’Ivoire (6.6), Benin (6.3), Ethiopia and the Gambia (6.2) and Burundi (6 percent).

Turning to the effects of economic development on the continent’s people, the IMF report says that despite “enviable natural resources and a rapidly growing population… incomes for many of the region’s inhabitants have stagnated.”

Just as GDP has grown more slowly in resource-dependent nations, so has people’s income – and the IMF points out that two-thirds of sub-Saharan Africans live in these countries.

The IMF estimates that incomes in diversified economies could double “in as little as 20 years”, while in resource-intensive countries “this doubling may take generations, if ever.”

Looking at solutions, the IMF report returns to its well-known prescription for promoting growth – abolishing the kinds of subsidies popular with consumers but which the IMF says hinder growth.

The report records that Nigeria, Angola, Zambia and the Gambia have begun implementing “significant energy subsidy reforms”, highlighting Nigeria’s recent abolition of its $10 billion subsidy on fuel and Angola’s plan to phase out energy subsidies totalling nearly $4 billion.

“Most of these subsidies,” the fund says, “were poorly targeted and tended to benefit affluent segments of the population. Moreover, a significant amount of fuel was being smuggled out of the country, rewarding the rent-seeking behaviour of a small number of individuals and effectively subsidizing consumers (or distributors) in neighbouring states.”

At a news conference held as the meetings in Marrakech drew to a close, the impact of subsidies on Nigeria’s capacity to direct funding to development was discussed by the director of the IMF’s Africa Department, Abebe Aemro Selassie.

The IMF outlook had noted that fuel subsidies have totalled four times the amount of money Abuja has been spending on health. Subsidies entailed government resources being directed “where they perhaps should not be,” Selassie said.

Nigeria’s high interest payments on debt and its failure to generate tax revenue meant it could not pay for all the services it needed to provide. Generating tax revenue to pay for services is “by far the most important area of work that there is for any administration in Nigeria,” he concluded.

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