Smith School's Emerging Markets Forum Explores Sub-Saharan Region
SMITH BRAIN TRUST – When former Liberian finance minister Antoinette Monsio Sayeh spoke in Washington, D.C., last week, her topic was “Investment-Fueled Growth: Leveraging Its Impact on Sub-Saharan Africa’s Growth Prospects.” But the subtext to her message was that leveraging growth can only happen with the right policies.
For much of the past two decades, the overarching economic theme in sub-Saharan Africa has been “Africa Rising.” But in 2016, growth in the region was “alarmingly poor,” she said, with a sharp decline in commodity prices contributing to negative per capita income growth. It was the first contraction in 20 years.
The next year, the economies rebounded, managing slim positive regional growth for 2017. “A further uptick of growth is expected for this year and next year,” said Sayeh, a distinguished visiting fellow at the Center for Global Development. “But momentum has slowed.”
Sayeh was a keynote speaker at the eighth annual Emerging Markets Forum: Business Powering Africa Forward, hosted by the University of Maryland’s Robert H. Smith School of Business and its Center for Global Business.
She said the path toward more stable growth in the sub-Saharan region can be paved with a dual focus on implementing corrective macroeconomic policies in oil-exporting countries and initiating fiscal consolidation to address the worrisome vulnerability of increased debt levels in countries without resource riches.
To get there, she recommends an increased emphasis on revenue mobilization, on reducing debt vulnerabilities, and on policies that foster improved competitiveness and broader trade and economic diversification.
“There’s significant potential for raising tax revenue, especially in oil exporting countries,” she said, citing Nigeria as an example. At just 6 percent of gross domestic product, Nigeria’s tax ratio is lowest in the region and, she added, “most certainly does not reflect its potential.”
The International Monetary Fund estimates that the average sub-Saharan African country could increase its tax-to-GDP ratio by 3 to 5 percentage points, with the oil-exporting countries having potential to raise them the most, at as much as 8.25 percent.
For much of the world, a push to increase tax revenue would seem incompatible with any push to increase global competitiveness. Not so for sub-Saharan Africa, Sayeh said. The region has seen the largest tax revenue increase worldwide since 2000, at about 18 percent of GDP as of 2016, but the median tax ratio continues to be relatively low.
“The good progress in increasing tax revenues in sub-Saharan Africa will need to be sustained if, in the face of limited aid, rising borrowing costs and debt-sustainability concerns, the region is going to make further progress,” she said.
That progress will require addressing the still-existing gaps in infrastructure, building human capital and attracting private development funds.
Reducing debt vulnerabilities
Sub-Saharan Africa’s debt vulnerabilities have become the subject of increased focus in recent months. And deservedly so, Sayeh said.
“Debt stocks have risen rapidly,” she said, “throughout the region, but especially for oil exporters.” Rising debt levels are alone not a bad thing, Sayeh said, but the pace of debt accumulation in recent years is “indeed worrisome.”
That’s because the steep rise in debt in the region has been largely driven by fiscal deficits. And meanwhile the cost to service the debts has increased, particularly for oil exporters and other net exporters of natural resources. And this could set the stage for dire fiscal crises.
“In Zambia, for example, in 2011 interest payments on debt were about 20 percent the amount the amount spent on health and education. But by 2017, they had risen to 50 percent,” she said. Nigeria’s debt service costs, meanwhile, have risen from 22 percent of revenues in 2016 to more than 60 percent in 2016, she explained.
The number of sub-Saharan African low-income countries in debt distress or at risk of debt distress increased to 12 in 2016, from only seven in 2013. And several countries with sovereign debt ratings have seen credit downgrades in that time.
“Many of the factors that had propelled growth since the mid-1990 have ended or are receding,” she said. Among them were higher aid flows, debt relief, record high commodity prices, and the uptick in global liquidity from advanced economies’ unconventional monetary policies in the aftermath of the global financial crisis.
“Stronger recovery and safeguarding debt sustainability requires steadfast implementation,” she said. “Fiscal consolidation is easier pronounced than achieved and can harm growth if it’s not designed appropriately.”
She cited “encouraging research” from the IMF that shows that when accomplished through increased revenues, fiscal consolidation required for containing debt is less damaging to growth.
Sub-Saharan Africa in the past 15 years has seen a loss of competitiveness, Sayeh said, and the decline was most pronounced among commodity-exporting countries.
“Improving the region’s competitiveness by further trade liberalization, by addressing needed reforms in the financial sector and in the business environment, are critical. So are high-return infrastructure investments that help reduce private investment costs,” she said.
Poor infrastructure has long been blamed as the central drag on private investment and growth in sub-Saharan Africa. And it has been a key focus for African policymakers and their development partners.
“I know this from my eight years leading the IMF’s African Department, when financing infrastructure was really what dominated our policy dialogue,” Sayeh said. “I also lived that, of course, as Liberia’s minister of finance in the immediate aftermath of our devastating civil war, when infrastructure was nonexistent.”
It is essential, she added, that countries throughout the region finance infrastructure in a way that protects the domestic revenue base, while also mitigating fiscal risk.
“Domestic resources -- tax and nontax revenues but also domestic borrowing -- constitute and currently provide the bulk of financing for infrastructure in the region and increasing them will remain the best means of doing so in the future,” she said. “But I want to be clear that with manageable debt levels, countries can and should borrow to expand needed infrastructure.”
But doing so in a sustainable manner, she added, means using concessional financing, rigorous priority setting and a cost-benefit analysis that seeks out the highest possible returns on investments.
After domestic resources and external borrowing, the the third source of infrastructure financing is private public partnerships, or PPPs, which have grown in popularity in recent years. She cautioned that “poorly designed PPPs” can result in contingent liabilities, often in the form of guarantees to private partners, and reducing risks requires great care. She recommended that countries who enter PPPs also move to significantly strengthen institutional and legal frameworks and draft a “clear, strong role” for the ministry of finance in such partnerships.
Trade and diversification
Over the span of 20 years, the sub-Saharan African region’s trade profile made a dramatic transformation.
Its export-to-GDP ratio expanded to 27.5 percent in 2013 from 20.5 percent in 1995. And its trade partners transformed as well. The region’s export destination shifted significantly to emerging economies, from advanced ones over that period. China became the region’s most important trading partner.
More progress has been made in some regional economic communities, such as a East African Community, and the West African Economic and Monetary Union. The recent signing of the African Continental Free Trade Area agreement by 44 countries is “a welcome development that holds promise for greater regional economic integration, provided of course that Nigeria and South Africa, the region’s two largest economies, do eventually join,” she said.
“The increased interconnectedness expected from these developments can best avert the risk of negative cross-border spillovers,” she added. Nigeria, South Africa and Angola are the region’s three largest economies, accounting for 60 percent of sub-Saharan Africa’s economy.
Despite its two-decades-long expansion, the region continues to trade below its potential, Sayeh said. Reducing tariff and non-tariff barriers, improving access to credit for the private sector, creating better infrastructure and enabling a better business environment would all help the region to better seize opportunities in global trade more effectively.
“I know that at a time of increased protectionist pressures, in this country and in some other countries, this is a difficult message to give to African policymakers, but it is one that remains nonetheless pertinent,” Sayeh said. “Trade openness helped spur the region’s past growth and can certainly continue to do so in the future.”
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