By Antoinette Sayeh

Ensuring that sub-Saharan Africa emerges strongly from global recession will require both a sustained recovery in the global economy and sound domestic policies. The good news is that domestic policies are already supporting economic activity.

Many countries entered the crisis in much better shape than in the past. The region’s fiscal position was on average in balance in 2008, compared with big deficits in past cycles. Debt levels were also much lower than in the early 1990s, supported of course by recent debt relief initiatives. Inflation had been brought under control across most of the region. And, reflecting sounder and more open policies, countries had accumulated much larger buffers of foreign reserves—the median ratio of reserves to GDP was 14 percent last year, compared to about 5 percent in the early 1970s.

Nigerian market: many African economies are in better shape than during previous crises (photo: Reuters)

This favorable starting point gave many countries in the region a fair amount of breathing space. They were able to respond to the crisis by allowing fiscal deficits to rise and interest rates to fall, reaping the rewards of previous good policies.  Countries with flexible exchange rates also let them adjust to the changing external environment. Such policy responses helped economies absorb some of the impact of the external shocks. Not all countries were able to take this route, however. Faced with large macroeconomic imbalances that pre-dated the global slowdown, a few countries had to tighten their fiscal or monetary policy stance.

Spending levels maintained

Let me expand a bit on fiscal policy.

Ideally, fiscal policy should counteract the crisis, not make it worse. And indeed, as government revenues have fallen in the face of slowing growth, fiscal deficits have risen in most countries, providing some support to economic activity. True, such “automatic stabilizers” are less powerful than in higher income countries because taxes in Africa are less closely tied to employment income and there are fewer safety nets. But still, the fact that countries have been able to maintain spending levels in the face of adverse revenue effects has been very important in containing the impact of the global recession—this was not the case in the past.

Even oil exporters, which have seen large declines in revenue, have managed to avoid the blunt spending cuts that characterized past downturns and have accommodated much of the fall in revenues. Some countries in Africa—such as Botswana, Mauritius, and Tanzania—have actually increased discretionary spending, producing more aggressive countercyclical action.

Looking ahead, I see room to continue these supportive policies in many countries and even to strengthen them until we can be sure that the recovery has taken hold.

The supportive stance of  monetary policy has also helped to sustain domestic activity in many countries—and it has more to offer. Inflation in most countries has fallen to single digits, the amount of monetary policy easing to date has been modest, and the likelihood of a significant liquidity overhang seems minimal. Exchange rates have also been strengthening of late in many countries. So, except where countries are still grappling to control inflation, the time is ripe for further interest rate cuts.

Formidable challenges

Necessary though it is, I don’t want to give the impression that any of this will be easy. Nor that all countries will be in a position to benefit immediately. In fact, the challenges and risks ahead are formidable. Let me mention just five concerns.

• Where countries were already addressing macroeconomic imbalances prior to the slowdown, the options for softening its impact are very limited.  Only by reprioritizing expenditure or attracting higher concessional finance could additional spending measures be contemplated.
• Implementation capacity constraints may limit how effectively demand can be sustained from fiscal policy. We need continued efforts to improve public financial management.
• Debt sustainability indicators have worsened. Not yet a cause for strong concern, but needing a watchful eye. At the least, any fiscal stimulus measures may need to go into reverse as the recovery takes hold.
• Increased openness to trade and foreign capital is all well and good, but infrastructure gaps and other impediments to private sector-led growth are still very much an issue in the region.
• Sharp increases in bank lending in many countries during the boom years inevitably pared credit quality. This is causing strain in some banking sectors and left others more vulnerable. It needs a watchful eye.

Let’s not forget the stakes either. Even if economies do improve, many in the region will remain vulnerable and in need of continued support. Urban unemployment and rural poverty have already risen, with very limited social safety nets in place. The improvements in public services that will be essential if countries are to move toward the Millennium Development Goals may fall further behind as national and local budgets continue to be stretched. Many low-income countries, lacking the buffers provided by the strong external reserves of many oil producers, will remain heavily dependent on uncertain external assistance and private inflows, including remittances. And it is possible that aid pledges may not be fully realized.

In these circumstances, support from the international financial institutions will remain crucial. Last week, my colleague Hugh Bredenkamp discussed how the IMF is responding to the needs of the low-income countries. We have already committed almost $3 billion to sub-Saharan Africa this year—nearly three times as much as in the whole of 2008. In my next post, I will discuss in more detail how this money has been allocated and what else the IMF is doing to trying to help.

By Antoinette Sayeh

I believe that Africa’s needs must be fully reflected in any global response to this unprecedented recession. With similar intentions, leading policymakers and stakeholders in Africa gathered in Tanzania last March to discuss how to work with the IMF on this. Under the leadership of President Kikwete and IMF Managing Director Strauss-Kahn, the participants agreed to build a new, stronger partnership.

More than just rhetoric, these common goals included the IMF seeking more resources for Africa and reacting more rapidly, responsively, and flexibly. While much remains to be done, I think it is a fair to say that we have achieved a remarkable amount on both fronts—more in fact than I could have imagined when I started in my job just a little over a year ago.

My colleague, Hugh Bredenkamp has done a fine job detailing the IMF’s response to the needs of low-income countries. In  this post, I would like to talk a little about what it all means for Africa.

Sorting cashew nuts in Tanzania

As a reminder, the IMF agreed to mobilize $17 billion through 2014 for lending to low income countries, mostly in Africa—trebling our lending capacity to these countries. This goes far beyond the promise given by our Managing Director in Tanzania to seek a doubling of concessional resources. The financial terms of IMF support have also become more concessional, with zero interest until the end of 2011, and will remain more concessional thereafter.

And the IMF has moved quickly to deploy these resources in Africa. Among international institutions, it has an extraordinary capacity to react early to a country’s needs, as I know from my own experience as a policymaker in my home country of Liberia. Indeed, in the first eight months of 2009, we committed over $3 billion in new resources to countries in sub-Saharan Africa, trebling the total stock of outstanding commitments this year alone.

Addressing different needs

Plus, as Hugh explained, the Fund is also working to better tailor this financing to the needs of the countries. Different countries have different needs. Even before the recent overhaul, we had committed this year to quick, upfront, and concessional lending of about $1.5 billion to 8 countries with immediate, shorter-term needs. These countries are generally stable, but have been hurt by falling exports, tourism and capital inflows. Examples include Cameroon ($150 million), Democratic Republic of Congo ($200 million), Ethiopia ($240 million), Kenya ($175 million), Mozambique ($175 million), and Tanzania ($340 million). We are also lending a further $1.5 billion to 8 countries with longer term financing needs—these countries include Cote d’Ivoire ($560 million), Ghana ($600 million), and Zambia ($265 million).

The reforms call for the Fund to respond flexibly as well as rapidly. In four cases, countries qualified for rapid access based on current policy measures. For others, structural conditions have been re-focused on core objectives and will be evaluated on a holistic basis rather than strict compliance with specific conditions. An ongoing review of the debt sustainability framework should take account of the diversity of debt profiles in African countries.

Another critical area lies in helping Africa build more capacity to weather the storm. Strengthening capacity for macroeconomic management in Africa remains critical. Given the effects of the crisis, we have seen a marked increase in requests for assistance related to domestic revenue mobilization, including from the exploitation of natural resources. We hope to meet these increased demands while continuing to focus on improving countries’ budget processes.

Regional technical assistance centers

An increasing share of our capacity building is being delivered through our three African Regional Technical Assistance Centers (AFRITACs). Countries say they like the centers’ proximity, and the fact that all stakeholders play a role. To build on this successful model, we are aiming to raise more funds to scale up the existing centers and establish two new ones, which will enable us to extend coverage to all of the countries in the region. We are also continuing to support capacity rebuilding efforts of post-conflict and fragile states—something important to me given my own experience. This year, the countries receiving intensive and wide-ranging technical assistance include Burundi, Democratic Republic of Congo, Liberia, and Zimbabwe.

Overall, I feel the current crisis is showing the Fund at its best—as a dedicated, highly professional institution that is able to respond quickly to the needs of its members. And I am pleased that, under the leadership of Dominique Strauss-Kahn, the IMF is keeping attention focused on Africa’s needs, even as larger, higher-profile economies dominate the global headlines. Now, we must continue to live up to the high expectations that we have raised for our partnership with Africa.

By Dominique Strauss-Kahn,

Managing Director of the International Monetary Fund

This week, I’m on my third visit to sub-Saharan Africa within a year. And what a difference a year has made!

This time last year, Africa was swept up into the vortex of the global financial crisis. The global recession struck Africa through several channels—exports collapsed, banks ran into trouble as non-performing loans grew, and investment diminished. Average growth in sub-Saharan Africa fell to 2 percent in 2009 from 5.6 percent the previous year.

But improved policies in the face of the crisis helped the continent get through the storm better than expected and at the IMF we anticipate that Africa will see a relatively quick recovery, with average growth bouncing back to 4½ percent this year and 5½ percent in 2011. African countries were able to take appropriate measures to mitigate the turbulence because policies before the crisis were good, allowing them to build reserves, cut debt, and open up fiscal space to combat the recession.

The achievement is Africa’s, but the IMF and the international community played a role as well—small but important. We, and others, provided assistance during the turbulence and stepped up cooperation through policy advice and analysis.

An advocate for Africa

The IMF’s close partnership with Africa is symbolized by a historic conference that we organized with the Government of Tanzania this time last year that focused on building successful partnerships to meet Africa’s growth challenges.

At that conference, the IMF committed to improving its policies and operational approaches in Africa. And I pledged to ensure Africa’s concerns would be taken into account during the meetings of the Group of Twenty (G-20) industrialized and emerging market countries and be an advocate for Africa. Now, as I visit Kenya, South Africa, and Zambia on my third trip to the region in the past 12 months, I’d like to present the scorecard of how the IMF has delivered on our promises.

• Evenhandedness. We are working to ensure that our policy advice speaks to the needs of all our member countries and we are assisting the G-20 in a process of mutual assessment of their economic policies.
• Sharp jump in lending. We vastly increased our commitments to sub-Saharan Africa, signing new arrangements—or augmenting existing ones—with some 20 countries. In 2009, we committed $3.6 billion in zero-interest lending to Africa, more than three times greater than in 2008. Our total commitments amounted to $5 billion.
• Revamped lending terms. We have revamped our lending, moving toward less intrusive conditionality, focusing on core policy measures that are critical for stability, growth, and poverty reduction. And we make sure lending programs have sufficient measures to protect social spending and pro-poor initiatives.
• Supplementing reserves. To relieve concerns about whether countries would be able to ride out the global financial crisis, IMF members approved a general allocation of Special Drawing Rights, or SDRs—an IMF international reserve asset. The new allocation pumped some $250 billion into the world economy, spread across our 186 members, including African members.
• Better representation. We are working to reform our own governance in part so that our members in Africa and other countries have a larger say in what the IMF does.
• More technical assistance. The IMF will add two new regional technical assistance centers in Ghana and Mauritius to supplement our three well-established regional centers in Tanzania, Mali, and Gabon.
• Catalytic role. We are moving quickly to adopting a more flexible approach to looking at debt dynamics that will help countries, where infrastructure needs are so great, to access the financing they need to meet their development goals.

More challenges ahead

African policymakers met the challenges of the global financial crisis head on, but they still have a daunting to-do list.  The region will remain highly vulnerable to commodity price shocks, natural disasters and, in some cases, political instability. How to combat climate change is also a major consideration here in Kenya and elsewhere in Africa.

Over the course of this week, I look forward to discussing with and listening to a broad range of African partners—from heads of state to students, from trade unionists to aid workers, and leaders of civil society as well. Yes, we have come a long way over the past year. But we have still a very long way to go in the task of helping Africa meet the challenges of the 21st century. I will report on my discussions—and my observations—in my next post.

By Antoinette Sayeh

(Version in  Français)

Economists care about growth.  Governments care about what it can achieve:  more jobs and more income for more people.  An increasing number of African countries have been growing robustly for more than a decade. But while growth is a necessary condition for poverty reduction and employment creation, is it also sufficient?

When growth first takes off, it is typically associated with steady progress in several dimensions of poverty reduction: incomes rise and countries are able to finance more spending on health and education, which translates into much-needed progress toward the Millennium Development Goals. But after this initial spurt, other questions arise. In particular, a number of countries are increasingly concerned about how inclusive growth is; are the benefits well-spread or do they accrue only to the few? 

Inclusive growth that creates jobs and raises income matters not only because of issues of social justice, peace and political stability.

Inclusive growth matters because it can start a virtuous growth circle.  The poor typically spend more of their income to meet basic needs, so if a poor person’s income rises, they will spend most of it, creating a ripple effect. Rising incomes and rising profits support demand, which in turn fuels more growth in incomes and profits.   In addition, production on a larger scale, along with better health and nutrition, improve worker productivity, making products cheaper and more plentiful still.

Studies also suggest that high income inequality, especially in low income countries, inhibits growth.

Two factors may have played a role in limiting the benefits of economic growth:

• In some cases, growth has been concentrated in the natural resource sector.  But mining and oil enterprises are capital intensive, meaning they create little domestic employment. They can also be difficult to tax, and only a small share of the profits is retained in the country and used to reduce poverty.

• The flip side of large natural resource sectors with limited employment opportunities is that the majority of the population in most African countries continues to depend on small-scale or subsistence agriculture. With relatively little investment in public infrastructure in recent decades, and limited access to financing, agricultural productivity has often remained low and households have remained cash poor.  

A number of African countries are now taking on the fundamental challenge to bring about more inclusive growth, drawing on the successful programs in other countries with large poor populations, such as Brazil, China and India.  Some examples:

• Countries are implementing policies to create jobs by increasing productivity and diversifying economic activity, particularly in agriculture, public infrastructure, such as transportation, water, and energy, as well as regulatory reforms.  For example, Mozambique’s new poverty reduction action plan increases spending for job-creation in agriculture, while Uganda has earmarked public savings to finance a new hydro-electric project.  Tanzania is redoubling efforts to eliminate red tape impeding private enterprise.

• Countries are weaving stronger social safety nets – public resources transferred directly to the poorest – to reduce income inequality and help protect people who are vulnerable during economic downturns.  For example, Ethiopia created a cash and food transfer program that improved food security and retained livestock holdings. Rwanda established cash transfer and public works programs that reduced extreme poverty dramatically.

• Numerous countries are looking at introducing or changing tax regimes for natural resources to ensure that more profits stay in the country, including Democratic Republic of the Congo, and Liberia.  At the same time, countries are putting in place more transparent procedures to manage these resources.

The IMF is working with its member countries to support their quest for more inclusive growth:  

• Programs and policy advice to reinforce countries’ existing efforts to boost productivity and diversify production, such as processes to identify and select investment projects with widespread returns, as well as simple and transparent rules for starting businesses.

•  Technical assistance to manage natural resources, from redesigning tax systems to establishing sovereign wealth funds – special accounts to manage and safeguard the monies until needed – as well as rules for spending them as intended, and mandatory public monitoring.

• The design and financing of social safety nets, to provide social protection, and create automatic stabilizers, which rapidly expand government spending to contain the impact of economic shocks.

The IMF’s next Regional Economic Outlook for Africa, which will be released in October of this year, will explore these questions in more depth. For many countries, the first priority remains to establish economic stability and create the conditions for robust economic growth. But for an increasing number of countries, the distribution of the benefits of growth has started to dominate the agenda. As countries strive for progress toward the Millennium Development Goals by 2015, these questions are of critical importance.

By Antoinette M. Sayeh

(Version in Français)

Suddenly it’s the thing everyone is talking about. Income inequality. Not just between countries, but inequality within countries.

In North Africa and the Middle East, jobless youth sparked the Arab Spring. In the United States, the growing gap between rich and poor is the “meta concern” of the Occupy Wall Street movement. Worldwide, frustrations appear to be on the rise.

What about sub-Saharan Africa? Sustained economic growth has certainly produced some tremendous advances. But a large proportion of the population is still living in poverty. So frustrations about the inclusiveness of growth are also shared within the region.

Complex story

Is the story really as negative in sub-Saharan Africa as the relatively slow reduction in the incidence of poverty and some people’s frustration suggest? Or is the underlying situation a little more complex?

In July, I wrote about the importance of inclusive growth and whether economic growth was a necessary or a sufficient condition for poverty reduction. The IMF’s latest Regional Economic Outlook for Sub-Saharan Africa takes that thinking a step further. The new analysis looks at how living standards for the poorest households have actually been changing in some countries in the region.

Inroads to poverty reduction

First, let’s look at what the existing data tell us about poverty and growth. For the region as a whole, the percentage of the population living on less than $1.25 a day—at 2005 international prices—fell from 59 percent in 1996 to 51 percent in 2005. During the same period, the region’s average growth rate more than doubled, from 2¼ percent before1995 to over 5 percent in the early 2000s. The message seems to be that poverty fell, but that growth had a disappointingly weak impact compared with experience in other regions.

The picture changes, however, when we begin to drill down a little into the data. For a start, if we compare the rate at which poverty declined among the better-performing countries in the region, we find that growth rates did seem to matter. The faster the country was growing, the larger, on average, the reduction in poverty. The relationship seems to have been less powerful than observed elsewhere in the world, but it was still significant.

Survey data

Household survey data are more revealing. We have been digging into this data to see how individual households have been faring, so that we can compare changes in living standards of families between different parts of the population. It would not be surprising if growth reduced poverty substantially in countries where a lot of households were initially just below the poverty threshold. But we wanted to look at a wider range of households.

Amid the wealth of data in household surveys is information about what every household consumes, including food they grow themselves. And the extent to which consumption levels change over time can tell us a lot about whether growth has been inclusive. So we tracked changes in consumption—over five or six year intervals—in six fairly typical countries in sub-Saharan Africa: Cameroon, Ghana, Mozambique, Tanzania, Uganda, and Zambia.

Benefits of higher growth

The results support the idea that high growth was inclusive.

• Among the poorest 25 percent of the population, per capita consumption levels increased substantially faster than inflation in three of the four higher growing countries we studied—annual increases averaged nearly 4 percent in real terms.

• But there was much less sign of improvement in per capita consumption of poor households in the two low-growth countries.

• Results for the sixth country were ambiguous because of uncertainty about the measurement of price changes.

Our analysis also suggests that job creation in rural areas, particularly in the agricultural sector, is associated with more inclusive growth, increasing poor households’ consumption growth and improving their living standards. This makes good sense, given that rural households account for about two-thirds of the population in the six countries we studied. More specifically:

• In Uganda and Cameroon, we found that real per capita consumption increased faster among poor households than it did among rich households. At the same time, agricultural employment grew strongly.

• In contrast, the poorest households in Mozambique and Zambia experienced weak or negative per capita consumption growth, while rural agricultural employment opportunities declined.

Policy considerations

It also seems that characteristics such as levels of educational attainment and household location go a long way towards explaining differences in consumption. This provides important guidance for policymakers.

• Providing budget resources for improving and targeting health and educational services for instance, can greatly improve vulnerable individuals’ well being and earning potential.

• Well targeted transfer programs can help to make growth more inclusive by redistributing its benefits more widely.

• Policies to enhance agricultural productivity—through improved inputs or infrastructure investment in energy, irrigation, or transportation—will further contribute to improved inclusiveness.

The frustrations of the poor are all too understandable. But maybe there is more hope than some measures of poverty suggest. Growth is bringing gains, albeit fewer than we would like.

However, the goal should be to do more. And we hope the findings in our analysis can help equip policymakers to better target support to those who most need it and design policies most likely to promote more equitable and lasting growth.

By Antoinette M. Sayeh 

Sub-Saharan Africa is the second fastest-growing region of the world today, trailing only developing Asia.  This is remarkable compared to the current complicated state of the global economy, with Europe still struggling and the United States slowly on the mend.

In 2012, Sub-Saharan Africa maintained solid growth, with output growth at 5 percent on average. The factors that have supported the region through the Great Recession—strong investment, favorable commodity prices, and generally prudent macroeconomic management—continued to be at play.

Within Africa, two speeds of growth

However, performance varies across countries, and the region has seen growth at two different speeds. Growth was very strong among oil-exporting and low-income countries. Exports such as oil, minerals, agricultural products, and tourism supported demand in these countries. Sectors that have been particularly dynamic include construction, agriculture, and mining (especially due to new extractive industry capacity coming on stream). In contrast, growth in middle-income countries slowed significantly in 2012, reflecting their closer ties to the euro area. South Africa was also adversely affected by labor unrest in the mining sector.

Our latest Regional Economic Outlook shows a broadly positive near future for the region, with a moderate acceleration of growth expected in 2013–14. This favorable prospect reflects in part the gradually improving outlook for the global economy. Domestically, investment in export-oriented sectors remains a key driver of growth. One-off factors will support growth in some countries, such as  Nigeria’s economy rebounding after floods, recovery of agriculture in regions previously affected by drought, and gradual normalization of activity in some post-conflict countries, such as Côte d’Ivoire.

Two-speed growth is expected to persist in the region for the next few years. Middle-income countries will continue to grapple with sluggish economic activity, with little room for policy stimulus, while we expect solid growth among oil exporters and low-income countries.  We expect regional inflation to continue the downward trend begun in 2012, although a handful of countries, such as Malawi, will still probably see high inflation going forward.

Remaining risks

Growth in sub-Saharan Africa is subject to downside risks, originating from inside and outside the region. Medium-term risks for the global economy remain high, although the near-term risk outlook has improved.

Among these outside factors, threats to sub-Saharan Africa include (i) a prolonged near-stagnation in the euro area and (ii) a slowdown in major emerging market economies. Risk scenario analysis conducted for the Regional Economic Outlook indicates that these adverse shocks would affect sub-Saharan Africa’s growth, but not derail it. That said, countries with limited policy buffers and  a narrow export base could experience more severe adverse effects.

Domestic risks include adverse climatic developments and internal conflicts. These events, though potentially severe in their impact on individual countries and their close neighbors, would not have significant effects on the region as a whole.

Policy challenges

The region’s positive outlook is conditional on the implementation of sound economic policies. In particular, there is a strong case for strengthening policies in the short run in a number of countries to contain or prevent imbalances:

• Sizable fiscal deficits in some countries, such as Ghana, point to the need for significant fiscal adjustments, although the pace of adjustment will need to take account of weak demand conditions in some cases.
• Large fiscal expansion plans in some oil exporters, such as Angola, Chad, and the Republic of Congo, raise concerns over absorption capacity and cost effectiveness.
• Continued higher interest rates set by the central bank are warranted in countries where inflation remains high and/or volatile, such as Ethiopia, Malawi, and Tanzania.
• Surging current account deficits in some low-income and fragile countries, although largely financed by export-oriented foreign direct investment, require careful monitoring.

In addition, with the risk of a significant global slowdown still present, rebuilding buffers to handle shocks from outside the region remains a priority in many fast-growing countries. Many countries in sub-Saharan Africa could find it difficult to raise sufficient financing for larger deficits in the event of a downturn, although the majority of them are not constrained from borrowing by high debt as of now. 

Job creation top priority

Accelerating job creation and reducing unemployment is a pressing challenge across the region. Middle-income countries have seen high levels of visible unemployment, whereas robust output growth in low-income countries is not producing strong growth in wage employment. Policy recommendations to redress this situation depend on individual country characteristics, but would include the following:

• Amending labor market regulations to reduce disincentives for hiring while maintaining worker protection;
• Investing in education systems that deliver workers with the skill sets required by employers;
• Revising hiring practices and compensation policies in the public sector to ensure an even playing field; and
• Improving the business climate to boost employment demand.

Renewed interest of global investors

Recently, Sub-Saharan Africa’s access to international sovereign bond markets has grown significantly, as we show in our analysis. This development reflects both easy global financial conditions and the region’s favorable economic prospects. Zambia’s debut Eurobond in September 2012 was massively oversubscribed and priced below Spain’s 10-year bond at the time. Tanzania tapped global capital markets at end-February 2013, and just last month Rwanda did the same.

Increasing access to global capital markets creates both opportunities and risks to sub-Saharan African economies. To make the most of the renewed global investor interest, we recommend countries maintain prudent fiscal policies that safeguard long-term sustainability; consider bond issues against a range of financing instruments under an appropriate medium-term debt management strategy; and follow best practices to get the best possible access terms. In this context, international sovereign bonds may not be the best option for financing infrastructure investment, because other funding options may provide more tailored and cost-effective financing.

By Antoinette M. Sayeh

When meeting with people outside Africa, I’m often asked whether Africa’s growth takeoff since the mid-1990s has been simply a “commodity story”—a ride fueled by windfall gains from high commodity prices. But finance ministers and other policymakers in the region, and I was one of them, know that the story is richer than that.

In this spirit, in our latest Regional Economic Outlook: Sub-Saharan Africa a team of economists from the IMF’s African Department show that Africa’s continued success is more than a commodity story.  In fact, quite a few economies in the region have become high performers without basing their success on natural resources—thanks in no small part to sound policymaking.

In reaching their conclusions, my colleagues looked closely at six countries (Burkina Faso, Ethiopia, Mozambique, Rwanda, Tanzania, and Uganda) over the 1995–2010 period. All of these countries laid the foundation for sustained growth by turning around their macroeconomic situation, often after a period of destructive conflict. In particular, I was impressed that all these countries had encompassing visions and strategic frameworks that made their turnaround possible.

• Burkina Faso worked hard on its institutions and focused early on medium-term macroeconomic planning. It also skillfully managed the cotton sector, which is important for the country and provides a living for a large number of poor people.

• Ethiopia, by far the most populous country in the sample, accelerated growth by actively supporting agriculture and certain export products and services (cut flowers, tourism, and air travel).

• Mozambique attracted significant foreign investment and other external capital flows in the late 1990s, which funded capital-intensive megaprojects to produce and transmit electricity and gas, with the former used to produce aluminum.

• Rwanda experienced a rebound effect after achieving political stability, underpinned by a national recovery strategy that successfully focused on specific sectors, such as tourism and coffee.

• Tanzania achieved sustained high growth by three well sequenced waves of macroeconomic and structural reforms, which reached across all sectors.

• Uganda started to carry out significant macroeconomic and structural reforms just before 1990, stimulated private investment, and launched a policy to diversify its export base to include nontraditional products.

The main takeaway from the country cases is what my colleagues called a virtuous circle—all six countries carried out sensible and medium term–oriented policymaking and important structural reforms, which in turn attracted higher aid flows and made it possible for these countries to receive debt relief, releasing their own resources. These gains translated into “fiscal space” to expand social spending and capital investment, in particular infrastructure, which in turn contributed to higher growth.

Importance of agriculture

When we look at the structure of these six economies, we immediately see that agriculture is still of enormous importance in most countries, employing about 80 percent of the active labor force in Mozambique and Burkina Faso, 71 percent in Uganda, and 65 percent in Tanzania. We also know that the poor are concentrated in rural areas, and most of the extremely poor rely on subsistence farming for their livelihoods.

All countries still have significant potential to increase their agricultural output going forward, which will be important to achieve more inclusive growth—growth that is shared more equally across all segments of the populations, including the poorest. Ethiopia and Rwanda have already shown that government programs to provide more access to seeds and fertilizers can improve agricultural yields dramatically.

Services were also an important driver of growth in our six sample countries, reflecting to some extent the expansion of the telecommunications sector. Mobile phones have now become an important tool for communication across African populations—and they also provide important information such as market prices for crops. Of course, they can also be used for mobile banking in some countries, including in remote areas where land lines are not available. I am excited about this financial inclusion through mobile phones of very poor people—people that remain outside the formal financial system.

Room in the budget

I would also like to point out that our six countries have created and used their fiscal space wisely. Fiscal space is room in the budget for productive investment and other priority expenditure. The six countries benefited early from debt relief, and also received relatively large external flows, both in the form of budgetary aid and foreign direct investment—again a testimony to their advanced policymaking and strategic vision.

And I can say that these resources fell into a productive environment. Investment rates for the sample countries were higher than for their peers, and they invested in infrastructure and in the health and education sectors. Mozambique even experimented with public-private partnerships to develop its infrastructure, in particular for railway lines, ports, and toll roads.

Looking ahead, tough challenges remain, but I am also reassured by big opportunities. Despite massive investment, infrastructure in the sample countries still has a long way to go to meet the population’s basic needs. Businesses are also hard to run if there are continuous power cuts and electricity shortages. Farmers cannot market their products properly, as there are no roads to connect them with urban centers. Therefore, sustained and high investment in infrastructure, particular in the energy and transportation sector, remains crucial

Overall, though, the six countries my colleagues have have studied—Burkina Faso, Ethiopia, Mozambique, Rwanda, Tanzania, and Uganda—have transformed themselves into high performers, even without being natural resource producers, and I believe that, with the right policies, they are on the trajectory to becoming emerging markets.

By Min Zhu

(Version in 中文,Français, Português, and Español)

There is a group of fast-growing low-income countries that are attracting international investor interest—frontier economies. Understanding who they are, how they are different, and how they have moved themselves to the frontier matters for the global economy because they combine huge potential with big risks. 

Get to know them  

The first thing to note is that some of these countries already have moved to the lower-middle income group. While a working definition of frontier economies is subject to further discussion, broadly speaking, these countries have been deepening their financial markets, such as Bangladesh, Kenya, Nigeria, Mozambique, and Vietnam.

Some also have been able to tap the international capital markets, such as Bolivia, Ghana, Honduras, Mongolia, Nigeria, Senegal, Tanzania, Vietnam, and Zambia. Their markets are, however, not as deep and liquid as those of the emerging markets, but compared to the latter, they offer higher returns and the benefits of a diversified portfolio.

How they got there

Many frontier countries are growing at a fast pace, in most cases helped by sustained efforts to achieve macroeconomic stability, and by building business-friendly institutions ( Chart 1). These economies have also made significant efforts to lower inflation through prudent fiscal and monetary policy ( Chart 2).

Most of these countries have made progress in strengthening their policy making apparatus, reducing excessive red tape and lowering trade restrictions. Reforms to change their economic structure have helped them unlock their potential, including  greater weight on the services sector, such as in Tanzania and Kenya.

In many countries, alleviation of their debt burden over the past decade has freed up money for investments in physical and human capital. Several countries received debt relief under the Highly Indebted Poor Country Initiative, but others reduced their debt outside this initiative, such as Kenya, Mongolia, Nigeria, and Vietnam.

These countries have deepened their financial markets at a fast pace—they offer more domestic financial services and products than their peers.

Some have attracted international investor interest in their domestic bonds market and several have issued sovereign bonds in the international capital markets ( Chart 3).

Access to international capital markets means these countries can attract financing to address gaps in infrastructure, such as roads and railways, which could provide further impetus to growth. But as described below,
market access also poses new financial risks that countries need to carefully manage.

Influences from outside their borders

Low interest rates combined with advanced economies shedding debt have pushed investors to search for higher returns on their investments, which has expanded their interest to invest in frontier economies.

The quest for resources by emerging economies has contributed to improved terms of trade and a surge in both domestic and foreign investment in resource-rich countries, such as Bolivia, Ghana, Nigeria, and Mongolia.

Domestic public investment has increased as the low debt burden, favorable external borrowing rates, and high commodity prices have increased access to private financing sources outside their borders. 

Risks and the policies to manage them

These capital flows also mean that frontier economies face a number of risks and policy challenges.

• Access to external private capital has brought frontier economies  greater market scrutiny  and  exposed more weaknesses in domestic macroeconomic policies, such as weakening fiscal and external positions. So it is important that frontier economies preserve their hard-won economic stability and fiscal sustainability.

• As interest rates begin to rise in the United States and monetary policy returns to normal, capital flows into frontier economies could begin to slow down.

Some countries that have benefited from foreign investment in their domestic government bond markets and exhibit significant fiscal and current account imbalances have experienced volatile exchange rates in recent months, and a rise in spreads (Chart 4).

The IMF’s recent paper on managing capital flows offers a policy framework to help countries manage risks associated with these flows.

• The limited size and liquidity of government bonds issued by frontier economies in international capital markets mitigates the risk of a reversal in capital flows. But new issuances could face higher spreads, and maturing bonds could have a hard time finding new buyers.

It is thus important to continue efforts to build adequate external reserves, and bolster economic and institutional fundamentals including domestic savings.

Further structural reforms, including in the labor and trade sectors as well as regulation and higher investment, would enhance productivity, and help these countries move up the value chain.

• Even though frontier economies have deeper financial markets than some of their low-income peers, there are still a number of areas for improvement.  This includes deepening of the domestic bonds market to allow more efficient intermediation of financial flows.

•  We also encourage countries to monitor the build-up in risks and to preserve fiscal and debt sustainability. Countries should use the proceeds of government bonds for high yielding projects, whether issued domestically or in international capital markets.

Frontier economies show great promise, and reforms to their policies and institutions are central to their continued success. They need to remain committed to macroeconomic stability, fiscal and external sustainability, and continued improvements in investor-friendly institutions. Capital flows could be a double-edged sword—policymakers should optimize benefits, but also take actions to address related risks.

By Chris Papageorgiou, Lisa Kolovich, and Sean Nolan 

(Version in Español)

Low-income countries have spent a lot of time thinking about how they can achieve faster growth, and we have done some research to help them. We found that pursuing export diversification is a gateway to higher growth for these economies. Using a newly constructed diversification toolkit, our empirical analysis shows that both the range and quality of the goods a country produces has a direct impact on growth 

Country trends 

Low-income countries have historically depended on a narrow range of primary products and few export markets for the bulk of their export earnings.

But export diversification is associated with higher per capita incomes, lower output volatility, and higher economic stability—relationships that can be tracked using our new publically available  dataset, which gives researchers and policymakers access to measures of export diversification and product quality for 178 countries from 1962-2010.

We have looked at two measures of export diversification and their impact on economic growth.  One measure captures diversification into new product lines, the other development of a more balanced mix of existing products.  Analysis using these measures shows that export diversification in low-income countries is indeed among the most effective drivers of economic growth.

Since the mid-1990s, there has been a notable increase in export diversification in low income countries, particularly in South Asia, and a shift from agriculture to manufacturing production in many of these economies.  For instance, Vietnam transformed its economy from a low-end agricultural exporter to a successful middle-range manufacturing exporter in less than two decades.

Countries in sub-Saharan Africa have had more varied experiences with diversification compared to other regions.  For example, Tanzania, Uganda, and Kenya underwent significant export diversification in the last 20 years, yet many other countries in the region have not.

Typically diversification in East and South Asia has been accompanied by a rapid decline in the share of agricultural exports—from 40 percent in 1965-1970 to 15 percent in 2006-2010—along with a steady increase of the manufacturing sector—from 17 percent in 1965-1970 to 66 percent in 2006-2010.  But in Africa, the sizable shift away from agricultural exports has been met with only a small rise in the share of manufacturing exports.

All regions, including sub-Saharan Africa, have made significant progress in diversifying their exports across partners. This trend is related to the ongoing process of globalization and a clear shift in low-income country trade away from the European Union and towards Asia—China in particular— and sub-Saharan Africa. 

Quality, not quantity

New products and trading partners underpin economic development, and so do quality improvements to existing products.

Low-income countries’ small economic size and limited potential to exploit economies of scale may imply that the cost of moving into many new products is high, making quality upgrading within existing products a more feasible route to diversify.

To quantify quality upgrading—producing higher-quality varieties of existing products—we developed a new dataset that measures quality for 851 products in almost all countries. 

The new data show that since the mid-1980s, developing countries in the East Asia and the Pacific region have seen a steady increase in the overall quality of their exports quality, driven mainly by upgrades in the manufacturing sector.  On the other hand, sub-Saharan Africa experienced a steady decrease due to limited quality upgrading in the manufacturing sector, coupled with a significant fall in quality upgrading in agriculture.

We see particularly rapid quality upgrading during the early stages of development, which is associated with higher growth.  This relationship holds strongest in the manufacturing sector.

But we also find that ample quality upgrading opportunities exist in agriculture, which is particularly important since in low-income countries, this sector still employs a large share of the population.

Therefore it would be a mistake to overlook agricultural development as a means of diversifying production and upgrading quality.  In fact, low-income countries will find that when they modernize and transform their agricultural sectors they can reap substantial gains in both productivity and quality.  For instance, agricultural diversification can support entry into new products and accelerate the transition from subsistence farming to production for the market.

Policies to help diversify the economy

Low-income countries should consider diversification and quality upgrading a fundamental component of their development strategy, given their important roles in enhancing growth. How then can these countries diversify into new products, and upgrade the quality of existing products?

Findings from our empirical analysis reveal that a common set of economic fundamentals and policies are associated with various dimensions of diversification.

Investment in human capital and infrastructure, institutional quality, financial deepening— increased efficiency, depth, and breadth of financial systems— and proximity to markets are all drivers of export diversification.

Economic policies can also encourage diversification and quality upgrading.  For example, increasing stability, like Vietnam’s push to reduce inflation in the late 1980s, reducing direct barriers to entry, such as the dismantling of the state distribution system in Tanzania, and reforming the agricultural and banking sectors helped promote diversification.

However, as our country case studies demonstrated, there is no universal diversification trajectory, and a one-size-fits-all approach to diversification and transformation should be avoided.

The new Diversification Toolkit provides easy access to highly disaggregated, product-level data on export diversification and product quality, enabling country authorities, policy makers and researchers to conduct more detailed, country-specific analysis.

By Min Zhu

(version in Español)

The growth story for frontier economies isn’t the same as China’s in the last two decades, or the United States a hundred years ago.  These fast growing, low-income countries have their own story, and it’s not what you might think.

In May of this year, I wrote about who they are and how they are different, and now I want to go into a bit more detail about how their economies have been on the rise and how they have moved themselves to the frontier.

Not your grandfather’s growth story

Although the countries’ economic paths vary like snowflakes— no two are the same—their growth stories have two distinct features.

First, frontier economies like Bangladesh, Tanzania, and Mozambique, to name just a few, have a different growth story from the United States or China because they are not growing by moving their economy from agriculture, to manufacturing, then to services: they are growing across all of them, as you can see in this chart:

Second, despite this different growth path, frontier economies have made progress when you compare their economic size relative to an advanced economy like the United States—a process known as convergence.

This is due in large part to more stable and predictable fiscal and monetary policies, strong investment and exports, better debt management, less red tape, stronger institutions, strong productivity gains, and access to capital markets.

The next chapter 

Looking ahead, a number of factors will help these economies continue to achieve strong growth. They will reap the benefits of a large, young, working-age population for years to come. They are well endowed with natural resources. They are making inroads in global ties. They have a growing middle class, which creates potential for new markets.

All well and good, you’re thinking, but weak global demand, tumbling oil prices and the expected end to the unconventional monetary policies in the United States could pose risks for frontier economies. All true.

Indeed, many frontier economies are established or prospective commodity exporters and have benefited from high commodity prices. A sharp decline in commodity prices could adversely affect export earnings, derail investment programs, and raise the risks associated with foreign borrowing.

Also, the recent surge in sovereign bond issuances by frontier economies could leave the latter vulnerable to roll over risks when the bonds mature, particularly given their large size relative to the countries’ reserve and other foreign assets.

We see two additional vulnerable spots to keep an eye on. Frontier economies have historically depended on a narrow range of primary products for export to make money, so they need to diversify to make themselves less vulnerable to the whims of the rest of the world, including commodity price movements.   This chart shows their progress on this issue over the last few decades:

They also need to increase the quality of what they produce and move up that proverbial ladder because faster growth in quality is associated with higher per capita incomes and higher economic stability.  Opportunities for countries to upgrade the quality of their products are strongest in manufacturing but also exist in agriculture. This is particularly important because a large portion of the population in these countries is often employed in the agricultural sector.

Chance favors the well prepared

At this point the question is how will frontier economies prepare for what happens next?

First, they need to continue to implement appropriate monetary and fiscal policies to maintain stability and weather what lies ahead. Economic stability is particularly important to manage risks associated with foreign borrowing.

Second, they need to implement the difficult next generation of reforms, such as improvements in public finance management, while they move away from policies that can exacerbate a downturn, such as cutting back on spending.  They should also deepen the linkages between their economic sectors, such as agriculture and manufacturing.

Continued efforts to improve public finance management will also help ensure that public investments are efficient and balanced against debt sustainability risks. Also, they will help improve the quality of products across all sectors as well as their exports.

By iMFdirect

It’s like the European Union but for East Africa.

In this podcast by the IMF, find out how Uganda, Kenya, Tanzania, Rwanda and Burundi stand to benefit from the creation of the East African Community.  There will be a common currency as well as more trade and investment too.  Will a union also expose them to more risk?

These five countries have already seen some benefits from regional integration.

“It took more than three weeks to move goods from Kenya or Tanzania to Uganda; now it takes four to six days,” said the IMF’s Oral Williams, one of the editors of a recent book on the East African Community.

Maybe Europe should take a page out of Africa’s playbook.  Listen and decide for yourself.

By Carla Grasso 

Versions in:  عربي (Arabic),  中文 (Chinese), Français (French),  日本語 (Japanese), Português (Portuguese), Русский (Russian), and Español (Spanish)

If there’s one thing all economists can agree on, it’s the importance of numbers. Without good data, it is difficult to assess how an economy is performing and formulate smart policies that help improve lives.

In little over twenty years, the southern African country of Mozambique has gone from having no national accounts or consumer price index to creating one of the leading statistical agencies in Sub-Saharan Africa.

I saw firsthand Mozambique’s progress in collecting data on my recent trip to Africa. It was my first trip there as an official representative of the IMF. I met with Isaltina Lucas, the then-President of Mozambique’s Institute of Statistics (and now Vice-Minister of Economy and Finance), who told me about the government’s impressive strides in compiling key economic statistics—thanks, in part, to the IMF.

Over the course of my 10-day visit in early March, I saw many more instances of how IMF technical assistance and training—which together we call “capacity development”—is helping policymakers in sub-Saharan Africa take charge of their own economic future.

Tapping the experience of peers

In Tanzania, for example, I witnessed a workshop organized jointly by the IMF and the central bank, where officials from across the region discussed their own countries’ experiences with expanding access to finance and exchanged views on how to deal with financial vulnerabilities that are emerging as a result. Many participants emphasized the importance of this type of experience-sharing—known as “peer-to-peer learning”—in building capacity.

We are hearing more and more that the knowledge-sharing that takes place outside formal courses is important for capacity development. So we have been exploring ways to cultivate peer learning and support, both in person and online. Through such platforms, policymakers facing similar challenges can not only learn from each other but also set common policy goals.

Such efforts are beginning to bear fruit.  Take, for example, Senegal, which is successfully using peer learning to implement its new development strategy with the goal of becoming an emerging market economy within the next two decades. Senegal is drawing on the experience of policymakers in Cape Verde, Mauritius, and Seychelles to introduce tax identification numbers, set up credit information bureaus, and develop tourism and special economic zones.

Hands-on learning

I also saw how capacity development is an integral part of our ongoing dialogue with member countries. When the IMF makes certain recommendations in its regular monitoring of economies, it’s not enough for us to give policy advice or leave a technical report; we need to work hands-on with officials to give them practical tools to implement that advice.

Our country teams and fiscal experts work closely together, for example, when giving advice about how to broaden the tax base or spend more productively. And we are in the process of strengthening our knowledge management systems to make sure expert knowledge can easily be shared throughout the IMF.

Capacity development does not follow the same formula everywhere—it must be tailored to country needs and integrated into development strategies. In Africa, as in other parts of the world, we anchor our capacity development in the economic realities of countries—which is easier to do when the IMF is present on the ground in regionally based centers.

In our Africa Training Institute in Mauritius, for example, I participated in a regional conference on the future of monetary integration in Africa, a topic that is highly relevant as the region makes plans to deepen monetary integration, including setting up an East Africa Monetary Union.

In addition to being tailored to country circumstances, capacity development also needs to adapt to the evolving global economic conditions. In 2014, the IMF co-sponsored a major conference in Mozambique on the theme of “Africa Rising.” We recognized at the time that, while many African countries are blessed with natural resources, this blessing can easily become a curse. So we worked with governments to begin putting in place strong fiscal frameworks to manage resource revenues for the benefit of current and future generations.

Fast forward two years, and the officials I met now see the urgency of having stronger fiscal frameworks as they grapple with the effects of oil and other commodities’ plunging price, something few saw coming. This underscores the need for countries to build cushions and develop the capacity—in good times and in bad—to respond to potential shocks.

The IMF will continue to work closely with not just the countries on the recipient end but also the many partners around the world whose financial support enables us to provide capacity development advice in the first place.

The people behind the numbers

As I reflect on my first trip to Africa for the IMF, one thing that sticks in my mind is people’s faces.

In Tanzania, I visited the Watoto Wetu orphanage (which means “Our Children” in Swahili). As I arrived, the kids were singing a song they had prepared for me. After all the meetings discussing complex economic policy choices with officials, this was a good reminder of the real purpose of our work. What we want is for those kids to have a better life, a better future—and capacity development can help us get there.

(Photo:Jackson Shelutete)

by iMFdirect

The IMF’s latest regional economic outlook for Sub-Saharan Africa shows growth at its lowest level in more than 20 years. In this podcast, the African Department’s new Director, Abebe Aemro Selassie, says it’s a mixed story of struggling oil-exporters and strong performers.

The report shows the region is going through a difficult period, but Selassie is optimistic.

“Looking ahead, and if countries pursue the right policies, I do see a bright future for the region,” says Selassie, and describes a “multispeed Africa, with multispeed growth.”

The three largest countries in the region—Angola, Nigeria and South Africa—face acute economic imbalances, Selassie says, because governments have not taken steps to cope with the drop in export earnings due to low commodity prices—notably oil.

While the hardest hit countries are a drag on the region’s overall growth, Selassie says countries like Cote d’Ivoire, Senegal, and Tanzania continue to grow at 6 percent or more.

The most important way to cope with the tough times inside and outside their borders is for countries to get their economic house in order.  For everyone, that means decisions on reallocating spending, changing tax systems, and eliminating fuel subsidies, while not increasing the burden on the poor and vulnerable groups.  It also means mobilizing government revenues to help reduce deficits.

Selassie highlights the need for investment in infrastructure and in the development of people, through education and health care.  He sees huge potential for technology, including financial, to help the big parts of the region that remain underbanked. Technology allows money transfers to be cheaper and more secure, and can enhance productivity.

Listen to the whole interview with Abebe Selassie:

By Antoinette M. Sayeh 

Sub-Saharan Africa is the second fastest-growing region of the world today, trailing only developing Asia.  This is remarkable compared to the current complicated state of the global economy, with Europe still struggling and the United States slowly on the mend.

In 2012, Sub-Saharan Africa maintained solid growth, with output growth at 5 percent on average. The factors that have supported the region through the Great Recession—strong investment, favorable commodity prices, and generally prudent macroeconomic management—continued to be at play.

Within Africa, two speeds of growth

However, performance varies across countries, and the region has seen growth at two different speeds. Growth was very strong among oil-exporting and low-income countries. Exports such as oil, minerals, agricultural products, and tourism supported demand in these countries. Sectors that have been particularly dynamic include construction, agriculture, and mining (especially due to new extractive industry capacity coming on stream). In contrast, growth in middle-income countries slowed significantly in 2012, reflecting their closer ties to the euro area. South Africa was also adversely affected by labor unrest in the mining sector.

Our latest Regional Economic Outlook shows a broadly positive near future for the region, with a moderate acceleration of growth expected in 2013–14. This favorable prospect reflects in part the gradually improving outlook for the global economy. Domestically, investment in export-oriented sectors remains a key driver of growth. One-off factors will support growth in some countries, such as  Nigeria’s economy rebounding after floods, recovery of agriculture in regions previously affected by drought, and gradual normalization of activity in some post-conflict countries, such as Côte d’Ivoire.

Two-speed growth is expected to persist in the region for the next few years. Middle-income countries will continue to grapple with sluggish economic activity, with little room for policy stimulus, while we expect solid growth among oil exporters and low-income countries.  We expect regional inflation to continue the downward trend begun in 2012, although a handful of countries, such as Malawi, will still probably see high inflation going forward.

Remaining risks

Growth in sub-Saharan Africa is subject to downside risks, originating from inside and outside the region. Medium-term risks for the global economy remain high, although the near-term risk outlook has improved.

Among these outside factors, threats to sub-Saharan Africa include (i) a prolonged near-stagnation in the euro area and (ii) a slowdown in major emerging market economies. Risk scenario analysis conducted for the Regional Economic Outlook indicates that these adverse shocks would affect sub-Saharan Africa’s growth, but not derail it. That said, countries with limited policy buffers and  a narrow export base could experience more severe adverse effects.

Domestic risks include adverse climatic developments and internal conflicts. These events, though potentially severe in their impact on individual countries and their close neighbors, would not have significant effects on the region as a whole.

Policy challenges

The region’s positive outlook is conditional on the implementation of sound economic policies. In particular, there is a strong case for strengthening policies in the short run in a number of countries to contain or prevent imbalances:

• Sizable fiscal deficits in some countries, such as Ghana, point to the need for significant fiscal adjustments, although the pace of adjustment will need to take account of weak demand conditions in some cases.
• Large fiscal expansion plans in some oil exporters, such as Angola, Chad, and the Republic of Congo, raise concerns over absorption capacity and cost effectiveness.
• Continued higher interest rates set by the central bank are warranted in countries where inflation remains high and/or volatile, such as Ethiopia, Malawi, and Tanzania.
• Surging current account deficits in some low-income and fragile countries, although largely financed by export-oriented foreign direct investment, require careful monitoring.

In addition, with the risk of a significant global slowdown still present, rebuilding buffers to handle shocks from outside the region remains a priority in many fast-growing countries. Many countries in sub-Saharan Africa could find it difficult to raise sufficient financing for larger deficits in the event of a downturn, although the majority of them are not constrained from borrowing by high debt as of now. 

Job creation top priority

Accelerating job creation and reducing unemployment is a pressing challenge across the region. Middle-income countries have seen high levels of visible unemployment, whereas robust output growth in low-income countries is not producing strong growth in wage employment. Policy recommendations to redress this situation depend on individual country characteristics, but would include the following:

• Amending labor market regulations to reduce disincentives for hiring while maintaining worker protection;
• Investing in education systems that deliver workers with the skill sets required by employers;
• Revising hiring practices and compensation policies in the public sector to ensure an even playing field; and
• Improving the business climate to boost employment demand.

Renewed interest of global investors

Recently, Sub-Saharan Africa’s access to international sovereign bond markets has grown significantly, as we show in our analysis. This development reflects both easy global financial conditions and the region’s favorable economic prospects. Zambia’s debut Eurobond in September 2012 was massively oversubscribed and priced below Spain’s 10-year bond at the time. Tanzania tapped global capital markets at end-February 2013, and just last month Rwanda did the same.

Increasing access to global capital markets creates both opportunities and risks to sub-Saharan African economies. To make the most of the renewed global investor interest, we recommend countries maintain prudent fiscal policies that safeguard long-term sustainability; consider bond issues against a range of financing instruments under an appropriate medium-term debt management strategy; and follow best practices to get the best possible access terms. In this context, international sovereign bonds may not be the best option for financing infrastructure investment, because other funding options may provide more tailored and cost-effective financing.

By Antoinette M. Sayeh

When meeting with people outside Africa, I’m often asked whether Africa’s growth takeoff since the mid-1990s has been simply a “commodity story”—a ride fueled by windfall gains from high commodity prices. But finance ministers and other policymakers in the region, and I was one of them, know that the story is richer than that.

In this spirit, in our latest Regional Economic Outlook: Sub-Saharan Africa a team of economists from the IMF’s African Department show that Africa’s continued success is more than a commodity story.  In fact, quite a few economies in the region have become high performers without basing their success on natural resources—thanks in no small part to sound policymaking.

In reaching their conclusions, my colleagues looked closely at six countries (Burkina Faso, Ethiopia, Mozambique, Rwanda, Tanzania, and Uganda) over the 1995–2010 period. All of these countries laid the foundation for sustained growth by turning around their macroeconomic situation, often after a period of destructive conflict. In particular, I was impressed that all these countries had encompassing visions and strategic frameworks that made their turnaround possible.

• Burkina Faso worked hard on its institutions and focused early on medium-term macroeconomic planning. It also skillfully managed the cotton sector, which is important for the country and provides a living for a large number of poor people.

• Ethiopia, by far the most populous country in the sample, accelerated growth by actively supporting agriculture and certain export products and services (cut flowers, tourism, and air travel).

• Mozambique attracted significant foreign investment and other external capital flows in the late 1990s, which funded capital-intensive megaprojects to produce and transmit electricity and gas, with the former used to produce aluminum.

• Rwanda experienced a rebound effect after achieving political stability, underpinned by a national recovery strategy that successfully focused on specific sectors, such as tourism and coffee.

• Tanzania achieved sustained high growth by three well sequenced waves of macroeconomic and structural reforms, which reached across all sectors.

• Uganda started to carry out significant macroeconomic and structural reforms just before 1990, stimulated private investment, and launched a policy to diversify its export base to include nontraditional products.

The main takeaway from the country cases is what my colleagues called a virtuous circle—all six countries carried out sensible and medium term–oriented policymaking and important structural reforms, which in turn attracted higher aid flows and made it possible for these countries to receive debt relief, releasing their own resources. These gains translated into “fiscal space” to expand social spending and capital investment, in particular infrastructure, which in turn contributed to higher growth.

Importance of agriculture

When we look at the structure of these six economies, we immediately see that agriculture is still of enormous importance in most countries, employing about 80 percent of the active labor force in Mozambique and Burkina Faso, 71 percent in Uganda, and 65 percent in Tanzania. We also know that the poor are concentrated in rural areas, and most of the extremely poor rely on subsistence farming for their livelihoods.

All countries still have significant potential to increase their agricultural output going forward, which will be important to achieve more inclusive growth—growth that is shared more equally across all segments of the populations, including the poorest. Ethiopia and Rwanda have already shown that government programs to provide more access to seeds and fertilizers can improve agricultural yields dramatically.

Services were also an important driver of growth in our six sample countries, reflecting to some extent the expansion of the telecommunications sector. Mobile phones have now become an important tool for communication across African populations—and they also provide important information such as market prices for crops. Of course, they can also be used for mobile banking in some countries, including in remote areas where land lines are not available. I am excited about this financial inclusion through mobile phones of very poor people—people that remain outside the formal financial system.

Room in the budget

I would also like to point out that our six countries have created and used their fiscal space wisely. Fiscal space is room in the budget for productive investment and other priority expenditure. The six countries benefited early from debt relief, and also received relatively large external flows, both in the form of budgetary aid and foreign direct investment—again a testimony to their advanced policymaking and strategic vision.

And I can say that these resources fell into a productive environment. Investment rates for the sample countries were higher than for their peers, and they invested in infrastructure and in the health and education sectors. Mozambique even experimented with public-private partnerships to develop its infrastructure, in particular for railway lines, ports, and toll roads.

Looking ahead, tough challenges remain, but I am also reassured by big opportunities. Despite massive investment, infrastructure in the sample countries still has a long way to go to meet the population’s basic needs. Businesses are also hard to run if there are continuous power cuts and electricity shortages. Farmers cannot market their products properly, as there are no roads to connect them with urban centers. Therefore, sustained and high investment in infrastructure, particular in the energy and transportation sector, remains crucial

Overall, though, the six countries my colleagues have have studied—Burkina Faso, Ethiopia, Mozambique, Rwanda, Tanzania, and Uganda—have transformed themselves into high performers, even without being natural resource producers, and I believe that, with the right policies, they are on the trajectory to becoming emerging markets.

By Min Zhu

(Version in 中文,Français, Português, and Español)

There is a group of fast-growing low-income countries that are attracting international investor interest—frontier economies. Understanding who they are, how they are different, and how they have moved themselves to the frontier matters for the global economy because they combine huge potential with big risks. 

Get to know them  

The first thing to note is that some of these countries already have moved to the lower-middle income group. While a working definition of frontier economies is subject to further discussion, broadly speaking, these countries have been deepening their financial markets, such as Bangladesh, Kenya, Nigeria, Mozambique, and Vietnam.

Some also have been able to tap the international capital markets, such as Bolivia, Ghana, Honduras, Mongolia, Nigeria, Senegal, Tanzania, Vietnam, and Zambia. Their markets are, however, not as deep and liquid as those of the emerging markets, but compared to the latter, they offer higher returns and the benefits of a diversified portfolio.

How they got there

Many frontier countries are growing at a fast pace, in most cases helped by sustained efforts to achieve macroeconomic stability, and by building business-friendly institutions ( Chart 1). These economies have also made significant efforts to lower inflation through prudent fiscal and monetary policy ( Chart 2).

Most of these countries have made progress in strengthening their policy making apparatus, reducing excessive red tape and lowering trade restrictions. Reforms to change their economic structure have helped them unlock their potential, including  greater weight on the services sector, such as in Tanzania and Kenya.

In many countries, alleviation of their debt burden over the past decade has freed up money for investments in physical and human capital. Several countries received debt relief under the Highly Indebted Poor Country Initiative, but others reduced their debt outside this initiative, such as Kenya, Mongolia, Nigeria, and Vietnam.

These countries have deepened their financial markets at a fast pace—they offer more domestic financial services and products than their peers.

Some have attracted international investor interest in their domestic bonds market and several have issued sovereign bonds in the international capital markets ( Chart 3).

Access to international capital markets means these countries can attract financing to address gaps in infrastructure, such as roads and railways, which could provide further impetus to growth. But as described below,
market access also poses new financial risks that countries need to carefully manage.

Influences from outside their borders

Low interest rates combined with advanced economies shedding debt have pushed investors to search for higher returns on their investments, which has expanded their interest to invest in frontier economies.

The quest for resources by emerging economies has contributed to improved terms of trade and a surge in both domestic and foreign investment in resource-rich countries, such as Bolivia, Ghana, Nigeria, and Mongolia.

Domestic public investment has increased as the low debt burden, favorable external borrowing rates, and high commodity prices have increased access to private financing sources outside their borders. 

Risks and the policies to manage them

These capital flows also mean that frontier economies face a number of risks and policy challenges.

• Access to external private capital has brought frontier economies  greater market scrutiny  and  exposed more weaknesses in domestic macroeconomic policies, such as weakening fiscal and external positions. So it is important that frontier economies preserve their hard-won economic stability and fiscal sustainability.

• As interest rates begin to rise in the United States and monetary policy returns to normal, capital flows into frontier economies could begin to slow down.

Some countries that have benefited from foreign investment in their domestic government bond markets and exhibit significant fiscal and current account imbalances have experienced volatile exchange rates in recent months, and a rise in spreads (Chart 4).

The IMF’s recent paper on managing capital flows offers a policy framework to help countries manage risks associated with these flows.

• The limited size and liquidity of government bonds issued by frontier economies in international capital markets mitigates the risk of a reversal in capital flows. But new issuances could face higher spreads, and maturing bonds could have a hard time finding new buyers.

It is thus important to continue efforts to build adequate external reserves, and bolster economic and institutional fundamentals including domestic savings.

Further structural reforms, including in the labor and trade sectors as well as regulation and higher investment, would enhance productivity, and help these countries move up the value chain.

• Even though frontier economies have deeper financial markets than some of their low-income peers, there are still a number of areas for improvement.  This includes deepening of the domestic bonds market to allow more efficient intermediation of financial flows.

•  We also encourage countries to monitor the build-up in risks and to preserve fiscal and debt sustainability. Countries should use the proceeds of government bonds for high yielding projects, whether issued domestically or in international capital markets.

Frontier economies show great promise, and reforms to their policies and institutions are central to their continued success. They need to remain committed to macroeconomic stability, fiscal and external sustainability, and continued improvements in investor-friendly institutions. Capital flows could be a double-edged sword—policymakers should optimize benefits, but also take actions to address related risks.

By Chris Papageorgiou, Lisa Kolovich, and Sean Nolan 

(Version in Español)

Low-income countries have spent a lot of time thinking about how they can achieve faster growth, and we have done some research to help them. We found that pursuing export diversification is a gateway to higher growth for these economies. Using a newly constructed diversification toolkit, our empirical analysis shows that both the range and quality of the goods a country produces has a direct impact on growth 

Country trends 

Low-income countries have historically depended on a narrow range of primary products and few export markets for the bulk of their export earnings.

But export diversification is associated with higher per capita incomes, lower output volatility, and higher economic stability—relationships that can be tracked using our new publically available  dataset, which gives researchers and policymakers access to measures of export diversification and product quality for 178 countries from 1962-2010.

We have looked at two measures of export diversification and their impact on economic growth.  One measure captures diversification into new product lines, the other development of a more balanced mix of existing products.  Analysis using these measures shows that export diversification in low-income countries is indeed among the most effective drivers of economic growth.

Since the mid-1990s, there has been a notable increase in export diversification in low income countries, particularly in South Asia, and a shift from agriculture to manufacturing production in many of these economies.  For instance, Vietnam transformed its economy from a low-end agricultural exporter to a successful middle-range manufacturing exporter in less than two decades.

Countries in sub-Saharan Africa have had more varied experiences with diversification compared to other regions.  For example, Tanzania, Uganda, and Kenya underwent significant export diversification in the last 20 years, yet many other countries in the region have not.

Typically diversification in East and South Asia has been accompanied by a rapid decline in the share of agricultural exports—from 40 percent in 1965-1970 to 15 percent in 2006-2010—along with a steady increase of the manufacturing sector—from 17 percent in 1965-1970 to 66 percent in 2006-2010.  But in Africa, the sizable shift away from agricultural exports has been met with only a small rise in the share of manufacturing exports.

All regions, including sub-Saharan Africa, have made significant progress in diversifying their exports across partners. This trend is related to the ongoing process of globalization and a clear shift in low-income country trade away from the European Union and towards Asia—China in particular— and sub-Saharan Africa. 

Quality, not quantity

New products and trading partners underpin economic development, and so do quality improvements to existing products.

Low-income countries’ small economic size and limited potential to exploit economies of scale may imply that the cost of moving into many new products is high, making quality upgrading within existing products a more feasible route to diversify.

To quantify quality upgrading—producing higher-quality varieties of existing products—we developed a new dataset that measures quality for 851 products in almost all countries. 

The new data show that since the mid-1980s, developing countries in the East Asia and the Pacific region have seen a steady increase in the overall quality of their exports quality, driven mainly by upgrades in the manufacturing sector.  On the other hand, sub-Saharan Africa experienced a steady decrease due to limited quality upgrading in the manufacturing sector, coupled with a significant fall in quality upgrading in agriculture.

We see particularly rapid quality upgrading during the early stages of development, which is associated with higher growth.  This relationship holds strongest in the manufacturing sector.

But we also find that ample quality upgrading opportunities exist in agriculture, which is particularly important since in low-income countries, this sector still employs a large share of the population.

Therefore it would be a mistake to overlook agricultural development as a means of diversifying production and upgrading quality.  In fact, low-income countries will find that when they modernize and transform their agricultural sectors they can reap substantial gains in both productivity and quality.  For instance, agricultural diversification can support entry into new products and accelerate the transition from subsistence farming to production for the market.

Policies to help diversify the economy

Low-income countries should consider diversification and quality upgrading a fundamental component of their development strategy, given their important roles in enhancing growth. How then can these countries diversify into new products, and upgrade the quality of existing products?

Findings from our empirical analysis reveal that a common set of economic fundamentals and policies are associated with various dimensions of diversification.

Investment in human capital and infrastructure, institutional quality, financial deepening— increased efficiency, depth, and breadth of financial systems— and proximity to markets are all drivers of export diversification.

Economic policies can also encourage diversification and quality upgrading.  For example, increasing stability, like Vietnam’s push to reduce inflation in the late 1980s, reducing direct barriers to entry, such as the dismantling of the state distribution system in Tanzania, and reforming the agricultural and banking sectors helped promote diversification.

However, as our country case studies demonstrated, there is no universal diversification trajectory, and a one-size-fits-all approach to diversification and transformation should be avoided.

The new Diversification Toolkit provides easy access to highly disaggregated, product-level data on export diversification and product quality, enabling country authorities, policy makers and researchers to conduct more detailed, country-specific analysis.

By Min Zhu

(version in Español)

The growth story for frontier economies isn’t the same as China’s in the last two decades, or the United States a hundred years ago.  These fast growing, low-income countries have their own story, and it’s not what you might think.

In May of this year, I wrote about who they are and how they are different, and now I want to go into a bit more detail about how their economies have been on the rise and how they have moved themselves to the frontier.

Not your grandfather’s growth story

Although the countries’ economic paths vary like snowflakes— no two are the same—their growth stories have two distinct features.

First, frontier economies like Bangladesh, Tanzania, and Mozambique, to name just a few, have a different growth story from the United States or China because they are not growing by moving their economy from agriculture, to manufacturing, then to services: they are growing across all of them, as you can see in this chart:

Second, despite this different growth path, frontier economies have made progress when you compare their economic size relative to an advanced economy like the United States—a process known as convergence.

This is due in large part to more stable and predictable fiscal and monetary policies, strong investment and exports, better debt management, less red tape, stronger institutions, strong productivity gains, and access to capital markets.

The next chapter 

Looking ahead, a number of factors will help these economies continue to achieve strong growth. They will reap the benefits of a large, young, working-age population for years to come. They are well endowed with natural resources. They are making inroads in global ties. They have a growing middle class, which creates potential for new markets.

All well and good, you’re thinking, but weak global demand, tumbling oil prices and the expected end to the unconventional monetary policies in the United States could pose risks for frontier economies. All true.

Indeed, many frontier economies are established or prospective commodity exporters and have benefited from high commodity prices. A sharp decline in commodity prices could adversely affect export earnings, derail investment programs, and raise the risks associated with foreign borrowing.

Also, the recent surge in sovereign bond issuances by frontier economies could leave the latter vulnerable to roll over risks when the bonds mature, particularly given their large size relative to the countries’ reserve and other foreign assets.

We see two additional vulnerable spots to keep an eye on. Frontier economies have historically depended on a narrow range of primary products for export to make money, so they need to diversify to make themselves less vulnerable to the whims of the rest of the world, including commodity price movements.   This chart shows their progress on this issue over the last few decades:

They also need to increase the quality of what they produce and move up that proverbial ladder because faster growth in quality is associated with higher per capita incomes and higher economic stability.  Opportunities for countries to upgrade the quality of their products are strongest in manufacturing but also exist in agriculture. This is particularly important because a large portion of the population in these countries is often employed in the agricultural sector.

Chance favors the well prepared

At this point the question is how will frontier economies prepare for what happens next?

First, they need to continue to implement appropriate monetary and fiscal policies to maintain stability and weather what lies ahead. Economic stability is particularly important to manage risks associated with foreign borrowing.

Second, they need to implement the difficult next generation of reforms, such as improvements in public finance management, while they move away from policies that can exacerbate a downturn, such as cutting back on spending.  They should also deepen the linkages between their economic sectors, such as agriculture and manufacturing.

Continued efforts to improve public finance management will also help ensure that public investments are efficient and balanced against debt sustainability risks. Also, they will help improve the quality of products across all sectors as well as their exports.

By iMFdirect

It’s like the European Union but for East Africa.

In this podcast by the IMF, find out how Uganda, Kenya, Tanzania, Rwanda and Burundi stand to benefit from the creation of the East African Community.  There will be a common currency as well as more trade and investment too.  Will a union also expose them to more risk?

These five countries have already seen some benefits from regional integration.

"It took more than three weeks to move goods from Kenya or Tanzania to Uganda; now it takes four to six days,” said the IMF's Oral Williams, one of the editors of a recent book on the East African Community.

Maybe Europe should take a page out of Africa’s playbook.  Listen and decide for yourself.

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By Carla Grasso 

Versions in:  عربي (Arabic),  中文 (Chinese), Français (French),  日本語 (Japanese), Português (Portuguese), Русский (Russian), and Español (Spanish)

If there’s one thing all economists can agree on, it’s the importance of numbers. Without good data, it is difficult to assess how an economy is performing and formulate smart policies that help improve lives.

In little over twenty years, the southern African country of Mozambique has gone from having no national accounts or consumer price index to creating one of the leading statistical agencies in Sub-Saharan Africa.

I saw firsthand Mozambique’s progress in collecting data on my recent trip to Africa. It was my first trip there as an official representative of the IMF. I met with Isaltina Lucas, the then-President of Mozambique’s Institute of Statistics (and now Vice-Minister of Economy and Finance), who told me about the government’s impressive strides in compiling key economic statistics—thanks, in part, to the IMF.

Over the course of my 10-day visit in early March, I saw many more instances of how IMF technical assistance and training—which together we call “capacity development”—is helping policymakers in sub-Saharan Africa take charge of their own economic future.

Tapping the experience of peers

In Tanzania, for example, I witnessed a workshop organized jointly by the IMF and the central bank, where officials from across the region discussed their own countries’ experiences with expanding access to finance and exchanged views on how to deal with financial vulnerabilities that are emerging as a result. Many participants emphasized the importance of this type of experience-sharing—known as “peer-to-peer learning”—in building capacity.

We are hearing more and more that the knowledge-sharing that takes place outside formal courses is important for capacity development. So we have been exploring ways to cultivate peer learning and support, both in person and online. Through such platforms, policymakers facing similar challenges can not only learn from each other but also set common policy goals.

Such efforts are beginning to bear fruit.  Take, for example, Senegal, which is successfully using peer learning to implement its new development strategy with the goal of becoming an emerging market economy within the next two decades. Senegal is drawing on the experience of policymakers in Cape Verde, Mauritius, and Seychelles to introduce tax identification numbers, set up credit information bureaus, and develop tourism and special economic zones.

Hands-on learning

I also saw how capacity development is an integral part of our ongoing dialogue with member countries. When the IMF makes certain recommendations in its regular monitoring of economies, it’s not enough for us to give policy advice or leave a technical report; we need to work hands-on with officials to give them practical tools to implement that advice.

Our country teams and fiscal experts work closely together, for example, when giving advice about how to broaden the tax base or spend more productively. And we are in the process of strengthening our knowledge management systems to make sure expert knowledge can easily be shared throughout the IMF.

Capacity development does not follow the same formula everywhere—it must be tailored to country needs and integrated into development strategies. In Africa, as in other parts of the world, we anchor our capacity development in the economic realities of countries—which is easier to do when the IMF is present on the ground in regionally based centers.

In our Africa Training Institute in Mauritius, for example, I participated in a regional conference on the future of monetary integration in Africa, a topic that is highly relevant as the region makes plans to deepen monetary integration, including setting up an East Africa Monetary Union.

In addition to being tailored to country circumstances, capacity development also needs to adapt to the evolving global economic conditions. In 2014, the IMF co-sponsored a major conference in Mozambique on the theme of “Africa Rising.” We recognized at the time that, while many African countries are blessed with natural resources, this blessing can easily become a curse. So we worked with governments to begin putting in place strong fiscal frameworks to manage resource revenues for the benefit of current and future generations.

Fast forward two years, and the officials I met now see the urgency of having stronger fiscal frameworks as they grapple with the effects of oil and other commodities’ plunging price, something few saw coming. This underscores the need for countries to build cushions and develop the capacity—in good times and in bad—to respond to potential shocks.

The IMF will continue to work closely with not just the countries on the recipient end but also the many partners around the world whose financial support enables us to provide capacity development advice in the first place.

The people behind the numbers

As I reflect on my first trip to Africa for the IMF, one thing that sticks in my mind is people’s faces.

In Tanzania, I visited the Watoto Wetu orphanage (which means “Our Children” in Swahili). As I arrived, the kids were singing a song they had prepared for me. After all the meetings discussing complex economic policy choices with officials, this was a good reminder of the real purpose of our work. What we want is for those kids to have a better life, a better future—and capacity development can help us get there.

(Photo:Jackson Shelutete)