May 22, 2024

IMF Director warns of enduring financing challenge for African countries at Oxford conference

Zambia Minister of Finance Situmbeko Musokotwane and Head of IMF’s African Department Abebe Aemro Selassie participate in a Governor Talk during the 2022 Spring Meetings at the International Monetary Fund. IMF Photo/Allison Shelley 19 April 2022 Washington, DC, United States
Zambia Minister of Finance Situmbeko Musokotwane and Head of IMF’s African Department Abebe Aemro Selassie participate in a Governor Talk during the 2022 Spring Meetings at the International Monetary Fund. IMF Photo/Allison Shelley 19 April 2022 Washington, DC, United States Photo ref: 651A8225.cr3

IMF African Department Director Abebe Aemro Selassie recently spoke at the 2023 Oxford Center for the Study of African Economies Conference at St Catherine’s College in Oxford. Selassie highlighted the economic consequences of the COVID-19 pandemic on African countries, stating that unlike much of the rest of the world, these countries had limited ability to use fiscal and monetary policies to dampen its negative effects on their populations.

Selassie stressed that the region is facing a brutal financing squeeze and that this is not unique to African countries. However, this region is the one that can least afford the implications of this squeeze, given Africa’s much-higher level of poverty and remaining development gaps.

Selassie said his worry is that the current financing challenge is one that looks set to endure. He said, “unfortunately, beyond the odd nod of the head here and there, this is not something that is being acted upon with the seriousness and urgency that it needs—either by the international community or the region’s policymakers. Certainly, awareness is not in line with the profound implications for our futures. And I dare say that it is not garnering much attention by the academic community.”

He believes that Africa is where much of the incremental global demand for investment and consumption will happen in the coming years, as the region is where all incremental global population growth is set to happen. Selassie outlined a story in three acts that has led to the funding squeeze currently faced by African countries, stating that the region’s most pressing economic problem right now is the funding squeeze.

Selassie warned that this funding squeeze is not just an immediate concern but can have lasting effects with implications for longer-term development. During the recent crisis—unlike major advanced economies—Africa had limited fiscal space, hampering policymakers’ ability to mount an effective response. With insufficient funding, authorities were less able to protect their most vulnerable and were also forced to divert resources from critical development sectors such as health, education, and infrastructure, curtailing the region’s growth prospects.

He said that we don’t know how the current squeeze will evolve. However, his sense is that the current difficult environment is likely to persist. He said, “the global fight against inflation has been much more complicated than we had hoped, and tighter financial conditions will likely be with us for some time to come. Second, we are moving into a more volatile world—in which larger and larger shocks seem to be arriving more and more frequently. This has clear implications for risk premia and borrowing costs. But it also means that future flows, such as official assistance, may be somewhat less reliable.”

Selassie concluded by saying that in this world, countries have to be more cautious about the type and composition of their financing, and they should be much more deliberate. Countries have to carefully consider their funding mix and hope for the best, but plan for the worst.

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