Harnessing the gains of economic reform

This is an exciting time for Africa. Sub-Saharan Africa as a region is experiencing its best economic performance in 30 years. Many countries continue to excel as they record historically high economic growth rates and impressive economic stability. The global economy has been expanding steadily over the last five years. The major emerging market economies are leading the way, and most regions around the world continue to participate in the rising trend. While the recent financial market turmoil has cast a shadow on the global outlook, our assessment is that while it may well put a dent in the global expansion, it should not derail it. We expect the global economy to remain strong, growing at about 5 percent in 2007 and 2008. In this environment, Sub-Saharan Africa continues to experience its fastest economic expansion in three decades. Over the last three years, growth has remained between 5 and 6 per cent. This is attributable in part to the supportive external environment, but also to strong domestic investment and productivity gains supported by sound economic policies in most countries. All across the region, countries are using increased resources from commodity exports, debt relief, and private inflows to raise spending in pursuit of the Millennium Development Goals (MDGs). In the East African Community (EAC) as a group, economic growth has kept pace with broader sub-Saharan African growth since 2002, and has even exceeded it in the past two years. This is especially noteworthy, considering that growth in the EAC countries has been propelled not so much by foreign demand as by improved economic policies and reforms. The IMF expects growth in sub-Saharan African to accelerate to well over 6 per cent in 2007 and 2008. While oil-exporting countries will drive much of this acceleration, non-oil producing low-income countries will also contribute. Growth in the EAC should rise even further, to about 7 per cent in 2007 and 2008. Of course there are risks to this positive outlook, including that of an unanticipated strong slowdown of the global economy, or of lower access to financing due to the ongoing re-pricing of risk in global financial markets. Aid flows could also fall short of expectation, especially as so far the promised scaling-up of aid from international donors has not fully materialized. Despite these risks, the current expansion gives Africa a unique opportunity for development. The challenge now is to sustain and broaden the growth momentum, building on a virtuous cycle of reform, stabilization, and growth that seems to be emerging in the region. A dynamic private sector is key to raising and sustaining growth, reducing poverty and integrating the region into the global economy. In bringing this about, the public sector has a pivotal role to play in establishing an environment conducive to private sector activity. Achieving this will require maintaining economic stability, investing in infrastructure, strengthening the financial sector and public institutions, and liberalizing business regulations. Developing human capital, alongside infrastructure, is important too. Stronger efforts to improve health and education are critical to this objective. The importance of private sector development is also recognized in the new UN sponsored MDG Africa Working Group to accelerate African countries’ progress toward the Millennium Development Goals. To address the pressing development needs, a strengthening of public financial management and governance is needed. To speed improvements in these areas, the IMF and the World Bank have started joint pilot projects in a number of countries. Strengthening public financial management and governance not only helps to make the most out of limited resources, it also helps unlock aid and attract investors. However, experience shows that higher aid and spending create new challenges, both to preserving economic stability and to external competitiveness. Since foreign financing alone may not raise investment to the level needed to achieve development goals, countries must also put more emphasis on developing the local financial sector. This would help boost domestic savings and increase the private sector’s access to financing. In tackling impediments to economic growth, the IMF has maintained close ties to the East African Community. The Fund’s concessional lending under its Poverty Reduction and Growth Facility remains an important resource for many low-income countries. This is complemented by other facilities as well as technical assistance. However, not all low-income countries necessarily want or need IMF financial assistance. As countries’ needs change, the IMF has naturally adapted to meet these needs. Accordingly, the Fund’s emphasis is shifting from financing to policy support. The Policy Support Instrument allows the Fund to address the needs of low-income countries that seek IMF advice, monitoring, and endorsement of their economic policies but not Fund financial support. Two EAC members, Uganda and Tanzania, are among the countries making use of this facility. The IMF has also quite dramatically increased its capacity-development assistance over the last five years to EAC countries, and its East African Regional Technical Assistance Centre, now about to mark its fifth year, has been instrumental in this regard. The IMF realizes that going forward, more needs to be done, beyond economic stabilization, for EAC countries to move toward middle-income status. The IMF will remain a committed partner to sub-Saharan Africa and the EAC as they continue to progress toward realizing their economic ambitions. The writer is the Deputy Managing Director of the International Monetary Fund (IMF)

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Harnessing the gains of economic reform