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IMF Regional Outlook Report Cites Africas Continued Robust Growth and Highlights Financial Sector Reform to Accelerate Growth

The International Monetary Fund (IMF) today released the Spring2006 Africa Regional Economic Outlook. Abdoulaye Bio-Tchané, Director of the IMF’s African Department, highlighted the report’s main findings:

Despite increasing oil prices in 2005, real GDP in sub-Saharan Africa  grew strongly at 5.3 percent, while average inflation increased only slightly, to 10.8 percent, reflecting in part the impact of higher oil prices. Oil-importing countries were able to maintain their growth because they generally adopted sound macroeconomic policies in response to higher oil prices and benefited from rising prices of non-oil commodity exports. Economic activity expanded by more than 7 percent in Burkina Faso, Ethiopia, Mozambique, and Sierra Leone. In South Africa, growth reached 5 percent, driven by domestic demand, and increasingly supported by exports. Growth in Nigeria accelerated by nearly one percentage point to 6.9 percent, thanks to strong performance in both the oil and non-oil sector. Nevertheless, the current growth rate in SSA, even if sustained, still falls short of the 7 percent that is needed to achieve the Millennium Development Goal (MDG) of halving income poverty by 2015.

For 2006, economic growth and inflation are projected to remain broadly unchanged. Growth prospects are likely to be enhanced by increased aid and debt relief under the Multilateral Debt Relief Initiative (MDRI). However, political and economic risks persist, related particularly to the development of oil and other commodity prices. Growth could also be negatively affected by the spread of avian flu. Meanwhile, millions of people in Eastern and Southern Africa are still in urgent need of food and humanitarian assistance.

The countries of sub-Saharan Africa will need a comprehensive strategy to meet the macroeconomic challenges of increased aid (including from the MDRI). This strategy must ensure sound public expenditure management, rigorous auditing of public expenditures, and good governance. Higher spending in such areas as removing infrastructure bottlenecks would help mitigate the potential Dutch disease effects of aid, as would trade liberalization. In this regard, DFID/IMF organized a workshop at Fund headquarters during April 19-20 to discuss the macroeconomic challenges facing countries receiving scaled up aid. This workshop was attended by a number of ministers, governors and government officials from Africa, Fund/Bank staff, and representatives of donor agencies and other international organizations.

Building up sub-Saharan Africas financial sectorthe least developed in the worldis vital for growth and poverty reduction, and the report emphasizes this point. Financial sector weaknesses have depressed savings and limited access to credit, which has also been constrained by weak property rights, unclear land titles, and the attractiveness to banks of providing funds to the government. The problem is further compounded by real lending rates that are among the highest in the world. sub-Saharan Africa should give high priority to comprehensive financial sector reform that will eliminate distortions arising from interest rate controls, directed lending, and supervisory forbearance. It will be important to resolve the problems of weak banks through more effective supervision; avoid new specialized state-owned institutions; increase market size through financial integration and a harmonized approach to regulation; promote legal reforms that facilitate the use of collateral; and use alternative instruments to overcome bottlenecks from weak property rights.

Fiscal decentralization is particularly important for poverty reducing expenditures in sub-Saharan Africa and is increasingly seen as a way to improve the efficiency of public spending.  The central government must strengthen coordination with subnational governments in formulating budgets, and enforce rules for subnational borrowing. Budget controls must be strengthened, and budget allocations published and tracked. The central government could also set  benchmarks for service delivery and provide incentives to improve sub­national revenue collection. Subnational governments must be held accountable to citizens while increasing their capacity to deliver public services.

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