Catherine Pattillo: Lack of Finance, Poor Infrastructure, Corruption Obstructing Firms’ Growth in Africa

Deputy Director in the African Department at the International Monetary Fund, Catherine Pattillo, on the sidelines of the ongoing IMF/World Bank Annual Meetings in Washington DC, speaks on the need for governments and policymakers in Africa to ensure that social safety nets are put in place to protect the poor and vulnerable. She also notes that lack of access to finance, poor infrastructure, red tape and corruption are affecting the growth of firms in the region. Obinna Chima brings the excerpts:

What are the key findings in the IMF’s latest regional economic outlook for Africa?

Our report highlights a difficult period in which countries in the region are trying to implement difficult reforms to restore micro-stability. We are starting to see a lot of progress in that area, thanks to policy adjustments. Inflation is coming down, fiscal deficits are starting to narrow, and public debts have stabilised, although at a high level. These are all positive signs for the region. However, policymakers face three main hurdles in this balancing act of trying to work towards macro-stability. First, growth in the region is still low, subdued, and uneven. So, we are projecting 3.6 per cent growth this year, which is flat, and then 4.2 per cent for next year. Second, the financing conditions are still difficult, both domestic and external. Third, there is this complex interplay of poverty, lack of opportunities, weak governance, which has been compounded by a rapid increase in the cost of living and short-term effects of macro-adjustments. This means that a lot of social frustrations and political pressures are making it harder for policymakers to implement reforms. The priority has to do with protecting the vulnerable through social protection and ensuring that you are creating jobs. That is critical to continue to mobilise support. We emphasised also the importance in implementing reforms, in terms of communication, consultations and improvement in governance to improve trust.

The latest IMF’s Regional Economic Outlook for Africa report highlighted the need for countries such as Nigeria to put in place social safety nets to protect the poor and vulnerable before initiating reforms. For countries that didn’t take that advice and whose citizens are already hurting from such reforms, what advice will you give their policymakers and governments?

So, there is a need in all countries to continue to strengthen social safety nets, and doing it before reforms start is preferable because otherwise, the brunt of the adjustment would be on the poor. In some countries, we are seeing this happen as climatic disasters such as floods. So, having these safety nets before or even after and making sure that the programmes you have are accelerated and scaled up to help the population, particularly when there are big issues like food insecurity is important. I know in Nigeria, there is a large population of 31 million persons who are food insecure and have been hit hard by important reforms of fuel subsidy removal and exchange rate liberalisation at the same time, and now the floods. So, ensuring that these social transfers are accelerated and scaled up would help on the humanitarian side.

What is your assessment of Inflation in Africa and can there be a better approach by central banks in the region to win the battle against inflation?

African central banks, just like central banks across the world have had to tighten monetary policy in the aftermath of the shocks that we saw from the pandemic and the global inflationary shocks and they did what they had to do. Overall, we have seen a reduction in inflation across the region from over 10 per cent or so median to now six per cent. That is a testament to the effectiveness of policies of tight  monetary policy. So, the general direction of travel is the right one. In about half of the countries, inflation is now below our target, it is still in double-digits in some countries, including Nigeria, Ethiopia, Angola. So, the fight is still far from over. Our advice is that in those countries where inflation is still high or still rising, central banks have to maintain rates at higher levels to combat rising prices and make sure they anchor expectations. But in countries where inflation has dropped to target, then they can consider gradually easing.

But tight monetary policy comes with a cost as we see in Nigeria where cost of borrowing has risen sharply and strangulating businesses. Is there no other ways to navigate this to achieve a balancing act?

There is no easy answer to that. To address inflation, a tight monetary policy is needed. When central banks continue to build credibility and help anchor expectations, it makes their task easier, so that they can tighten less or hold tight policy for less time and that would get inflation down.

The regional economic outlook estimates that by 2030, half of the increase in the global labor force will come from Africa, requiring the creation of up to 15 million new jobs annually, what should policymakers in the continent be doing to boost job creation?

We highlighted this stark fact that there would be such a large number of jobs needed – 15 million new jobs need to be generated yearly by 2030, given the demographics and 80 per cent of those jobs have to be created in the low-income and fragile countries. Up till now, Africa’s growth has not created enough jobs as growth in other regions. So, what you see is a large share of informal and subsistence-paying jobs. So, what should policymakers do? First, they need to work on transforming informality from a trap to a stepping stone and that can happen through policies that don’t discourage formalisation. Second, is having the conditions for private sector growth. Sub-Saharan Africa does not have deficiencies in creating firms, it is just that the firms don’t grow. The region creates more firms than other places, but they don’t grow because they don’t have access to finance, there is no infrastructure, there is red tape and corruption. Addressing all these things so that small and informal firms can grow and create jobs to unleash movements into new sectors. The possibilities are so broad given the potential in different countries – agro-business, fintech, the creative industry, digital economy, and so many other areas with high productivity that allows for more diversification.

But there are concerns about Artificial Intelligence (AI) leading to jobs losses in the region?

In advanced economies, the expectation is that AI will take a large number of jobs, but it will also add to productivity and growth. I think the concern is less for low-income countries. That is because the types of jobs prevalent in Africa are less susceptible to AI taking over. Right now there is so much potential for digital finance, and others, to create jobs, rather than the concern that AI is going to take away jobs.

How does the IMF evaluate debt sustainability in Africa what can you recommend to address concerns of likely debt trap by some countries in the region being expressed by a lot of commentators in Africa?

For evaluating debt sustainability, we have this debt sustainability analysis which looks at the extent to which debts generally can be sustained by each country. We do this with low-income countries jointly and the World Bank. That analysis looks holistically at external debts, domestic public debts, lots of indicators, debt service, exports, etc, and it is a forward-looking analysis because you have to think about how these variables that affect debt sustainability going to evolve over the medium term. Growth, interest rates, exchange rates, etc, are also considered. So, that helps us form an assessment for each country. Now, on the question of debt trap, while there are a lot of vulnerabilities, we are not seeing a widespread debt crisis. A few countries that reached unsustainable debt levels and needed to do debt restructuring were part of the common framework which started very difficult and slow, but the process is moving better in countries such as Ghana and Ethiopia. But in other countries, they are meeting these debt challenges head-on and looking at the need to do fiscal adjustments, mobilise domestic revenues and attract more financing. There is a need for development partners to provide low-cost financing for countries and mobilise domestic revenue in to make sure that the debts stay sustainable.

What is your take on concerns about over-reliance on borrowings from China by a lot of countries in the region?

China has supported the region and borrowing from China as from all development partners has financed lots of good infrastructure. The issue is that even though the infrastructure are there and have generated growth to some extent, countries have not been able to get that kind of rates of return by getting some tax or exports so that they can repay the debt. So, they should make sure that all those borrowings are used for good projects that would yield good returns and you get the rate of return on that by taxing do that you can repay the debts.

How can investments in infrastructure contribute to economic growth and stability in Africa?

I would again speak more generally about what underlining conditions need to be in place because we do see that there are a number of countries that are more diversified in the region and they are growing faster. We see right now that the more diversified economies are growing faster. Nine of the fastest growing countries in the world are from Sub-Saharan Africa. The big difference is that the resource-intensive countries are growing at only half the rate of the other countries, with few oil exporters struggling the most. Again, it is not about picking winners, but it is about that broad set of policies, macro-stability, good business environment, good human capital, competition, and opening up to trade, that provide the platform to diversify. Just to make a point about Nigeria, the country is somewhat a diversified economy because the hydrocarbon sector only accounts for five per cent of Gross Domestic Product (GDP). But in terms of export or government revenue, then it is mainly hydrocarbon and that is when you depend on oil production and global oil prices. The same things that I mentioned earlier are also relevant for Nigeria – Financing the business environment, improving security, strengthening governance, maintaining a stable exchange rate, developing human capital, and building climate resilience against shocks. That is going to help overall to improve productivity, expand production base and make sure that non-hydrocarbon exports are competitive for diversifying into those other sectors. Again, you need your own domestic financing to get the fiscal space so that you can spend to achieve inclusive growth.