Africa expected to grow at slowest pace since 2001

Sub-Saharan Africa is projected to grow at the slowest pace since 2001, amid falling commodity prices and China’s economic downturn.

This development has raised questions over the International Monetary Fund’s bailout plans and specific country responses in rescuing troubled businesses.

The region’s economies are forecast to grow by 3 per cent this year in contrast to a high of 6.8 per cent recorded in 2004-2008.

The international prices of major African exports including crude oil, iron ore, copper, aluminium and coffee, have been on the decline, affecting countries’ growth prospects.

Oil exports have suffered the biggest blow, with prices averaging $40 per barrel since the beginning of this year compared with $60 per barrel quoted at the start of 2015. The trend is largely attributed to falling Chinese demand and growing supply by US oil firms.

China’s economic growth rates have dropped sharply from record highs of 9 per cent before 2010 to around 4-5 per cent per annum. The trend is linked to a policy effort intended to reshape growth patterns and prevent problems associated with excessive economic activity.

The IMF projects reduced growth within sub-Saharan African economies for four years following the commodity price shocks. This is likely to deplete government revenue streams and force many countries to explore external borrowing channels in order to plug funding deficits.

Although the IMF says that the use of exchange rate market interventions could help counter external shocks, some central banks in the region feel existing policies are not enough to achieve strong results.

“Reduced policy buffers reflected by high current account deficits and lower foreign currency reserves recorded before the 2009 global economic crisis have made it difficult to utilise the exchange rate tool as a shock management option,” said Dr Louis Kasekende, Deputy Governor, Bank of Uganda.

While many troubled economies could seek IMF loans, questions linger over the Fund’s ability to rescue the growing number of such countries. Zambia, Angola, Nigeria, Chad and Kenya have made loan requests to the Fund since last year.

Kenya recently received a $1.5 billion emergency loan from the IMF earlier this year while Chad also received a modest financial bailout from the Fund.

Exceptions include Nigeria, which initially applied for IMF assistance but later accepted a $6 billion loan from China last month while the Fund cancelled a $285 million loan facility allocated to Mozambique after revelations emerged about false reporting in its debt portfolio.

But the IMF insists it has enough resources for bailing out struggling economies, pointing to its Rapid Credit Facility that offers zero per cent interest charges on disbursed loans, and an increase of 50 per cent in borrowing limits issued by the Fund’s executive board of directors.

Though rising numbers of struggling businesses under pressure from low sales, high operating costs and huge tax arrears have prompted debate over the creation of stimulus funds, IMF officials and financial analysts disagree with this option, citing limited government resources and unfulfilled potential tied to ongoing policy efforts.

“Governments should instead invest more in infrastructure and social services and reduce costs of doing business in order to stimulate stronger economic growth,” said Antoinette Sayeh, director of the IMF’s African Department.

In Uganda, financial analysts are counting on the traditional lag time of soft monetary policy actions being undertaken by the central bank to boost economic growth. Uganda’s growth outlook has been slashed by 0.5 percentage points to five per cent for 2015/16.

“Government has moved to cut interest rates and the turnaround effect of its monetary policy decisions is fairly adequate to expand credit growth, output levels and profits earned by local businesses. But the general business environment requires major reforms to steer stronger growth,” said Robert Mpuga, head of treasury operations at Exim Bank Uganda Ltd.