May 28, 2024

IMF warns of “big funding squeeze” in sub-Saharan Africa, slowing growth to 3.6%

Director of the African Department Abebe Selassie holds the African and Sub-Saharan Africa department Press Briefing during the 2022 Annual Meetings at the International Monetary Fund. IMF Photo/Andrew Caballero-Reynolds 14 October, 2022 Washington, DC, USA Photo ref: ACR221014.014

The International Monetary Fund (IMF) has released its latest regional economic outlook for sub-Saharan Africa (SSA), which warns of a “big funding squeeze” that is expected to slow growth in the region to 3.6 percent.

The report indicates that the drying up of aid and access to private finance has hit the region hard, forcing countries to reduce fiscal resources for critical development such as health, education, and infrastructure.

The IMF provided more than $50 billion to the region between 2020 and 2022, more than twice the amount disbursed in any 10-year period since the 1990s, and has lending arrangements with 21 countries, with more requests under consideration.

However, the report emphasizes that SSA is far from powerless and that there are four policies that can help navigate the current turmoil. These include consolidating public finances and strengthening public financial management, containing inflation, allowing exchange rates to adjust while mitigating the adverse effects on the economy, and ensuring that important efforts to tackle climate change do not crowd out financing for basic needs like health and education.

“Growth across the region varies from country to country. Some countries, particularly those in the East African Community, or non-oil resource intensive countries, are expected to fare better but some major economies bring down the average SSA growth rate, like South Africa where growth is projected to decelerate sharply to only 0.1 percent in 2023,” said Abebe Aemro Selassie, Director of the IMF’s African Department.

The report also notes that public debt and inflation are at levels not seen in decades, with double-digit inflation present in half of all SSA countries, eroding household purchasing power and striking at the most vulnerable. The rapid tightening of global monetary policy has raised borrowing costs for SSA countries both on domestic and international markets, with all sub-Saharan African frontier markets cut off from market access since spring 2022.

Abebe Aemro Selassie, Director of the IMF’s African Department, warned that if measures are not taken, the funding squeeze will hamper SSA’s efforts to build a skilled and educated population and to be the driving force of the global economy in years to come. He also stresses that climate finance provided by the international community must come on top of current aid flows to ensure that important efforts to tackle climate change do not crowd out basic needs like health and education.

“People in sub-Saharan Africa are feeling the effects of a funding crisis. Since Russia’s invasion of Ukraine, cost of living is more expensive, borrowing costs have increased and access to cheaper funding is dwindling,” said Mr. Selassie.

“Coupled with a long-term decline in aid and a more recent fall in investment from partners, this means that there is less money to be spent on vital services like health, education, and infrastructure. If measures are not taken, this funding squeeze will hamper Sub-Saharan’s efforts to build a skilled and educated population and to be the driving force of the global economy in years to come,” he added.

The IMF report stressed the need for building resilience, as sub-Saharan Africa stands to lose the most in a severely fragmented world. The report also outlines the drivers and consequences of recent exchange-rate pressures and discusses policies to help soften the impact on the region’s economies, as well as the critical need for concessional finance in helping the region address climate change and explores ways in which additional flows might be unlocked.

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