By Online Desk
Sub-Saharan African countries find themselves facing another severe and exogenous shock. Russia’s invasion of Ukraine has prompted a surge in food and fuel prices that threatens the region’s economic outlook. This latest setback could not have come at a worse time—as growth was starting to recover and policymakers were beginning to address the social and economic legacy of the Covid-19 pandemic and other development challenges. The effects of the war will be deeply consequential, eroding standards of living and aggravating macroeconomic imbalances, the International Monetary Fund (IMF) said on Thursday.
“We now expect growth to slow to 3.8 percent this year from last year’s better-than-expected 4.5 percent, according to our latest Regional Economic Outlook. Though we project annual growth to average 4 percent over the medium term, it will be too slow to make up for ground lost to the pandemic. Inflation in the region is expected to remain elevated in 2022 and 2023 at 12.2 percent and 9.6 percent respectively—the first time since 2008 that regional average inflation will reach such high levels,” a statement issued by IMF said.
According to IMF, there are three main channels through which the war is impacting countries—with notable differentiation both across and within countries:
Prices for food, which accounts for about 40 percent of consumer spending in the region, are rising rapidly. Around 85 percent of the region’s wheat supplies are imported. Higher fuel and fertilizer prices also affect domestic food production. Together, these factors will disproportionately hurt the poor, especially in urban areas, and will increase food insecurity.
Higher oil prices will boost the import bill for the region’s oil importers by about $19 billion, worsening trade imbalances and raising transport and other consumer costs.
The shock is set to make an already delicate fiscal balancing act more difficult: increasing development spending, mobilizing more tax revenues, and containing debt pressures. Fiscal authorities generally aren’t well-positioned for additional shocks after the pandemic. Half of the region’s low-income countries are already in or at high risk of distress. Rising oil prices also represent a direct fiscal cost for countries through fuel subsidies, while inflation will make reducing these subsidies unpopular. Spending pressures will only increase as growth slows, while rising interest rates in advanced economies may make financing more costly and harder to obtain for some governments.
The IMF said that countries need a careful policy response to address these daunting challenges. Fiscal policy will need to be targeted to avoid adding to debt vulnerabilities. Policymakers should as much as possible use direct transfers to protect the most vulnerable households. Improving access to finance for farmers and small businesses would also help.
The international community must step up to ease the food security crisis. The IMF’s recent joint statement with the World Bank, the United Nations World Food Programme and the World Trade Organization called for emergency food supplies, financial support, including grants, increased agricultural production and unhindered trade, among other measures.
Following through on the commitment by the Group of Twenty countries to re-channel $100 billion of their IMF Special Drawing Rights allocation to vulnerable countries would be a major contribution to the region’s short-term liquidity needs and longer-term development. There are options for re-channeling SDRs, for example through the IMF’s Poverty Reduction and Growth Trust or the newly created Resilience and Sustainability Trust, which has received almost $40 billion in pledges.
Finally, for some countries, restoring debt sustainability will require debt re-profiling or an outright restructuring of their public debt. To make this a reality, the G20 Common Framework needs to better define its debt restructuring process and timeline, and the enforcement of the comparability of treatment among creditors. Importantly, debt service payments should be suspended until an agreement is reached.
