IMF on how regional economic recovery will be affected by shocks

The recovery in sub-Saharan Africa picked up in the third quarter of 2021 and held up despite the onset of a fourth Covid-19 wave at the end of the year with growth estimated to have hit to 4.5per cent, the International Monetary Fund for Regional Economic Outlook for Sub-Saharan Africa notes. The release however notes that tragically, the progress has been offset by recent events. The Russian invasion of Ukraine has triggered a sharp rise in commodity prices—straining the fiscal and external balances of commodity-importing countries and increasing food-security concerns across the region. As a result, economic activity is expected to slow to 3.8 percent this year, and is subject to an extraordinary range of risks, the International Monetary Fund (IMF) said. Abebe Aemro Selassie, Director of the IMF’s African Department noted that the war in Ukraine has already reshaped the near-term outlook for sub-Saharan Africa. “The shock to global commodity markets will add to inflation, hit the region’s most vulnerable households, exacerbate food insecurity, raise poverty rates, and possibly add to social tensions. Higher oil prices may generate a windfall gain for the region’s 8 oil exporters. But for the other 37 countries, they will worsen trade imbalances and increase living costs. Indeed, over the past couple of months we have increased our inflation projections significantly—lifting the regional average for 2022 by a full 4 percentage points, and representing the worst outcome since 2008. This year, eleven countries will face double digit inflation; almost all of these have flexible exchange rates, and almost half of these are fragile,” Selassie added. For most countries, the new crisis comes at an extremely difficult time—as the Covid-19 pandemic enters its third year, fiscal and international buffers are already under strain, and policy space is limited. In this context, Selassie pointed to key policy priorities such as needs to accelerate further the pace of vaccination to contain the risk of new Covid-19 waves. The IMF noted that on economic policy, governments will face three immediate challenges over the short run. “First, shielding their most vulnerable households without undermining debt sustainability. Public debt ratios are at their highest level in over two decades, and many low-income countries are either in, or close to, debt distress,” the IMF observed. Among recommendations include that fiscal policy needs to protect vulnerable households from rising food and energy prices, without adding to debt vulnerabilities. This include targeted transfers to vulnerable households as the first-best response as well as targeted tax reductions or price subsidies (both with clear sunset clauses) may be a second-best alternative, especially for countries with weak social safety nets. The second challenge will be to contain inflation without undermining the recovery. With rising inflationary pressures and output levels below pre-pandemic trends in most countries, central banks face a difficult balancing act between curbing inflation and supporting growth. The third challenge was cited as countries needing to address exchange rate pressures stemming from higher global interest rates and increased uncertainty . “Looking beyond the pandemic and current geopolitical tensions, creating jobs and meeting the Sustainable Development Goals will require strong, inclusive, and sustainable growth in sub-Saharan Africa,” Selassie observed.

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IMF on how regional economic recovery will be affected by shocks