Selassie: Measures Must Be Taken to Address Funding Squeeze in Sub-Sahara Africa

Director, African Department, International Monetary Fund, Abebe  Aemro Selassie in this interview at the just concluded IMF/World Bank spring meetings in Washington DC, spoke on the challenges Nigeria and Sub-Saharan Africa are being faced with in attracting funding, policy priorities for Nigeria and the continent and other pertinent issues. Nume Ekeghe presents excerpts.

Sub-Saharan Africa’s report is named the Big Funding Squeeze. Please, can you tell us more about where the region is standing from your team’s work perspectives?

The region’s resilience is being severely tested. We project growth to decelerate to 2.6 percent, down from 3.9 percent last year; and an important factor influencing this outcome is the big funding squeeze their countries are facing. External market access has been sharply curtailed. Oversees development assistance continues to trend downward, and the region has seen a recent reduction in other investments also.

Sub-Saharan Africa is not alone, of course. There is a global slowdown in the region, as elsewhere, is feeling the effects of tighter monetary policy, the increased cost of living, and the strength of the dollar which has appreciated relative to many other currencies.

Our latest regional outlook finds that this big funding squeeze is hitting countries hard, and many countries are facing tough decisions when it comes to investing in crucial areas like health, education, and infrastructure. This will not only impact them now but also in the years to come. And by 2040 or so, a third of the new entrance, new labor market entrance will be from Sub-Saharan Africa. Skilled educated workers will be vital to the health and stability of the global economy, but today’s funding squeeze may impact the region’s ability to provide them.

I’ve always said that this is the African century, but if measures are not taken to address this funding squeeze now, the region may be held back from developing its potential. Here at the IMF, we’re playing our part. As of last month, we had 21 lending arrangements with countries in the region, and we’ve still more programs under request and under discussion; between 2020 and 2022, we provided more than $50 billion dollars through programs, emergency financing, and special drawing rights allocation. We also, of course, continue to provide capacity development and technical assistance, and training to our members, and will continue to do so in the coming months.

In terms of policy priorities, we are flagging that there’s a need to first consolidate public finances and strengthen public finance management. This needs to rely on continued revenue mobilization that is the management of fiscal risks and more proactive debt management.

In countries where debt levels are elevated and debt is clearly unsustainable, restructuring is going to be unavoidable, and a well-functioning debt resolution framework will be vital to create the required fiscal space.

A second priority is to contain inflation. The inflation rates are varied across the region but remain elevated much more so than we’ve seen it for many years now, and monetary policy needs to focus on keeping inflation firmly on a downward trajectory and make sure that it pertains to Central Bank’s target range.

Third, I think, is a need to allow, in those countries where exchange rates are flexible, the exchange rates to adjust while mitigating adverse effects on the economy.

And then, finally, climate change is, of course, increasingly, something that is weighing on policymakers in the region, on our people and tackling this, including with support from the international community will be very, very important. The region is not a source of emissions, as you know but, rather, is at the receiving end of a lot of the climatic changes that have taken place and pursuing policies to help with climate adaptation and mitigation in a few cases where that is a challenge will be important going forward.

Nigeria is planning to take away subsidies and, recently, the World Bank granted Nigeria $800 million, do you think this is a sustainable practice?

On fuel subsidies, as I said earlier, how and whether to subsidize and to what extent. Honestly, it is a varied, deeply domestic and deeply political question. If governments want to do that, that’s fine; but, we think, it’s suboptimal, as I said, for reasons I explained earlier that the benefits of subsidies tend to accrue to richer households. But if that’s what government is deciding, that’s fine. Removing them also, I think, is, of course, part of this political and domestic debate that needs to be had. We know, of course, in Nigeria that food subsidies eat up tremendous, tremendous amount of resources at the same time that the government doesn’t have resources to address the huge investment needs from, health, to education, to infrastructure; but this is a choice for Nigerian government, Nigerian civil society to make.

We have also heard the discussion that’s going on, the debate that’s going on whether that is ideal. We try and inform that debate with numbers, with best practices elsewhere and I think that’s our role; and look forward to whatever decision the government takes.

Is IMF concerned about Nigeria’s and Sub-Saharan Africa’s indebtedness to China and, does IMF have any recommended limits for debt to GDP ratio for African countries?

On debts, whether debt is sustainable or not, is not dependent on just one number, one threshold but, rather, you have to look at a lot of indicators to assess the trajectory, whether debt will be sustainable in the coming years or not. And, I think, so it’s really when we make an assessment and we classify countries as being a moderate risk or a high-risks, or we talk about vulnerabilities being elevated, it takes into account, what we think out of the kind of policies that the government is going to pursue; and, of course, certain assumptions about the global environment.

The last several years has been full of shocks, so it has made countries’ ability, to bring debt under a sustainable trajectory more difficult but, they have been compensating for that also with stronger economic policies. For a country like Nigeria also, the future trajectory of its economy is going to depend on a whole host of variables and the reforms that the government pursues, how effectively it uses the resources it has, the oil price trajectory. It is a combination of those factors that will determine the sustainability of Nigeria’s debt.

Right now, it looks manageable, but it is really also important, of course, and contingent on what policies will be pursued in the coming months and years.

You have encouraged Central Banks to continue tightening the monetary policies to fight inflation, yet, in Africa, inflation seems to be mainly imported. Although there has been a slight decline in the rate of inflation. Don’t you think that raising policy rates is an outdated solution in the context of our region?

On the inflation challenge, again, this tends to be, of course, unless you are part of a monetary union, there’s a lot of variation in inflation, and also a country-specific assessment that has to be done on the causes of inflation. So, yes, to a significant degree, we have seen imported, the pressure on inflation has been imported, so if you’re an oil importing country, you’re facing higher international oil prices right now. And depending on the extent to which it’s being passed on, that’s a source of inflation. Similarly, food prices have been elevated after Russia’s invasion of Ukraine, which also is a channel through which inflation has risen. But, as we look across the region, there are also countries where clearly, it’s domestic demand pressure or monetary policy has been loose in the recent past that is causing inflation. I think you have to look at the totality of those factors.

But increasingly, I think what we cannot say is, things like interest rates do not work. Of course, they do because that’s the standard monetary policy response and our economies are now, more so than in the past, I would say, a lot more influenced by the normal way in which monetary policy transmission works. I think raising interest rates is part of the answer to addressing inflation, but again, how you calibrate that depends on country-specific circumstances.

A few days ago, eight OPEC countries announced drastic cuts in their oil production; and given that, many countries of the region are oil producers, including Nigeria. What impact do you anticipate this decision will have in the short term, and on the economic revenues of the Sub-Saharan African countries?

OPEC oil price increase as always in sub-Saharan Africa, it will be asymmetric. In general, it will be negative because I think out of the 45 countries, only about 8 are net-oil exporters, so those other things being equal whether you have subsidy or not, et cetera should benefit from higher oil prices. But for most other countries, it will be a source of negative shock. So, it will amplify imports, foreign exchange demand, and the marginals of inflation.

There was a pushback in Nigeria after the World Bank President said that Nigeria should release some of the trade protections that the President put in place in the past few years. Is that your opinion here at the IMF that some of the trade protections that were put in place should be dismantled by the incoming administration,

On Nigeria, there’s a lot of speculation about what’s going to happen, what’s not. I think it’s really difficult to respond on hypotheticals. I think a source of frustration for the government itself, policymakers, and businesses, over the last several years has been that the trade regime, and the foreign exchange regime, have all been very challenging and have not allowed Nigeria to robust the very strong rates of growth that the country needs desperately.

Second, I think it’s appropriate that you look at policies in terms of their effectiveness, so the question that we have is the policies that have been pursued over the last three, four years, have they indeed helped achieve the diversification that it was intended to achieve.

The new administration will see what they do. We will be supportive of measures, policies that respond and are effective, in terms of addressing the diversification objective Nigeria has, but also addressing the near-term challenges that macroeconomically the country is facing from revenue mobilization to ensuring that there are sufficient resources to spend on health, education and infrastructure.