Economic growth in the countries of sub-Saharan Africa has been surprisingly resilient in the face of the latest shocks hitting the global economy, notably the food and fuel price increases and financial market turbulence.
However, there is no guarantee that this resilience can be maintained.
That will require a determined response from the economic policymakers, governments as well as central banks.
The risks to growth in sub-Saharan Africa are quite obvious: the food and fuel price shocks has put pressure on inflation and external balances.
And the deepening global financial turmoil has put a brake on global growth giving rise to the potential for lower commodity prices for Africa's exports and reduced capital flows to Africa.
As a result, growth in Africa could slow as well.
If the clouds on the horizon develop into a storm, policymakers must be prepared to respond.
One of the challenges arising from the food and fuel price shock of 2007–08 is increasing inflation.
The International Monetary Fund expects inflation in sub-Saharan Africa – excluding Zimbabwe – to increase to 12 per cent in 2008 before falling back to 10 per cent in 2009.
The rise in inflation is caused mainly by the food and fuel price shock. In a number of countries demand pressures have also contributed to inflation, sometimes reflecting expansive fiscal policies. As a result of rising prices, particularly of food, poverty may well be on the rise in 2008.
Higher import prices are also worsening the external balance of most countries in the region, in particular those who are net oil importers. Meanwhile, donor support has not covered the larger import bills.
The world financial crisis, which has come on top of the food and fuel price shock, now risks further exacerbating external balances by reducing remittances, capital, and even aid inflows.
In the face of these challenges, policymakers should attempt to preserve economic stability while shielding the poor.
In the absence of more aid, countries cannot afford to import as much as they did before.
This means that they need to pass on the increase in food and fuel prices to the economy over time to encourage adjustment.
With food accounting for a major part of household expenditure, the resulting loss in the purchasing power of the poor is a serious concern.
To protect the poor, policymakers have so far tended to reduce taxes and tariffs on fuel and food items and increased subsidies for these items.
But not only have these measures tended to benefit a broader segment of the population and, therefore, been of limited value to the poor; they are also costly for government budgets in the longer term.
Thus, measures to cushion the impact of higher food and fuel prices on the poor need to be better targeted.
They also need to be better supported by donors. So far most of the pledges for increasing support made by donors have not yet materialised.
Furthermore, a number of governments may have fallen behind the curve in fighting inflation.
In many countries, monetary policies may therefore need to be tightened to preserve price stability.
A tightening of fiscal policy could usefully support this effort, particularly where monetary policy choices are limited by the exchange rate regime and where the fiscal stance has contributed to inflation.
The recent easing of global commodity prices should help reduce, but does not eliminate, the challenge posed by higher inflation and current account deficits.
The current severe external challenges come when, for the first time since the 1970s, a large number of countries in sub-Saharan Africa are enjoying persistently high rates of growth in per capita income.
Sustaining and even accelerating the high growth momentum—and extending it to low-growth countries—is critical for the region.
Adressing the policy challenges—maintaining macroeconomic stability, sheltering the poorest, and taking advantage of new possibilities afforded by high food prices—will be a key test for the sustainability of the current growth take-off.
The International Monetary Fund is keen to assist African nations in these efforts.
We provide policy advice to all our members, and also financing for a large number of countries in sub-Saharan Africa.
To enhance this work we will – jointly with President Kikwete of Tanzania, Chairman of the African Union – convene a high-level conference on the successes of economic reforms in Africa, the challenges facing Africa in the 21st century, and the role of the IMF in assisting its African members in Dar es Salaam, Tanzania, on March 10-11, 2009.
Article by Antoinette Monsio Sayeh