Diverging Growth in Sub Saharan African Resource and Non Resource Rich Countries: A Compilation of the IMF Paper with Zero Equilibrium Remarks.

By Chinedu Okoye 

We reviewed the paper by the International Monetary Fund on Diverging Growth in Sub Saharan African Countries. We present a summary of the paper based on our notes and make our remarks (in Italics) below, in an attempt to make sense of a thought that resonates with our thinking.

Overall View:

Growth slowed in the past decade – relative to the deaced leading to 2014 – in resource rich countries (RICs), and mostly fuel exporting Nations, the IMF noted. This is in contrast to Non-RICs.

The decade before that saw rapid growth in these RICs in line with the regions performance. But for the RICs, it was more about commodity prices.

The Post-2014 RIC - NonRIC Divergence:

"Over the past ten years, growth in sub-Saharan Africa’s resource-intensive countries (RICs)—and especially in fuel exporting economies such as Angola, Chad, and Nigeria—has slowed down sharply, falling far below growth in non-RICs (such as Ethiopia, Rwanda, and Senegal"

The chart below shows GDP per capita growth purchasing power parity adjusted for international USD prices. That is, how much the average income (or economic output) per person in a country has grown over time, after adjusting for differences in cost of living and inflation around the world.

From 2014 up until 2024; fuel exporting countries GDP per capita has grown almost negative 2%, all RICs have grown at around +0.2%, Non Fuel RICs increased 1.1% and GDP per capita for Non-RICs in general grew at around 1.9%.

(Source: IMF Blog

https://content.govdelivery.com/accounts/USIMF/bulletins/3c1b498)

Reasons for the Decline:

Factors leading to decline were narrowed down to two;

 1. Commodity "Super Cycle" ended, and these countries faced a sharp decline. Which affected terms of trade which are yet to be fully recovered.

 2. Pre-existing Structural Vulnerabilities: The RICs had the following characteristics in common which exacerbated the shock;

  a. Poor Business Environment,

  b. Limited Human Capital,

  c. Weak Governance,

  d. Poor Resource Revenue Management.

The terms of trade shock had a stronger and longer lasting impact in countries with weak governance and all the above characteristics thereof.

The abscence of a financial Buffer, (for example Excess Crude Account and Foreign Reserves were abysmally low in Nigeria in 2015, whoch marked the beginning of an Oil price crash). This underscores poor management of Foreign Exchange receipts from Crude Oil).

Poor Resource management reinforced the original shock through "Pro-Cyclical Fiscal Bias", meaning where resource prices were high, these governments embarked on "costly capital projects that are poorly planned and implemented, with corresponding sharp declines when commodities prices fell".

An example was given with fuel subsidies, which limit the ability to save whilst crowding out growth-friendly development spending.

In Nigeria, foreign exchange was pegged and thus, essentially subsidized from oil resources revenues, even as the country depended on imported refined petroleum.

This essentially places a tax on exports and subsidizes imports. In an economy like that, businesses are disadvantaged on pricing absent adequate infrastructure eg, power supply transportation, etc.

So when the prices of these resources fall or global market share is lost, and there is no savings (ECA) to rely on debt becomes the only option as there's little capital space.

Way Forward: IMF Suggestions:

From the article;

RICs make up two-thirds of Sub Saharan African GDP and population, and so improving the economy of these resources rich countries is essential for improving the economy of the region.

Prudent and consistent fiscal frameworks can help address poor resource management and ensure more resilient growth.

Zero Equilibrium Remarks:

In order to achieve this, we revert back to our thesis on a balanced fiscal policy approach.

A Balanced Fiscal Policy Framework:

At this point;

Most of these economies are have budgets encumbered or crowded out by debts. These debts servicing costs limit spending on key capital and infrastructural projects as there is only so much capital (Revenue+ Debt) available to the government.

Sustainable Deficit Financing in the face of New Realities:

As a result these economies would likely run budget deficits going into the next decade as the spending needs outweigh current income and revenue, as capital expenditures need to be funded aongisde recurrent expenditures, including debt servicing.

A mix of debt and revenue is needed alongside budgetary overhauls that can direct funds to growth oriented spending. But this doesn't mean revenues should be increased, but that the tax net widened to include more of the informal economy which will invariably increase total revenue collection, without necessarily increasing the tax burden on any one man.

Higher revenues reduce deficits, making the country borrow relatively lesser than it would or able to borrow more than it would, without a marked improvement in revenue. The efficiency at which these funds are collected and allocated, would determine it's perceived credibility by the market.

With higher credibility comes increased access to funds at the capital markets.

Should these funds be allocated to growth oriented spending say on key industries, like Oil and Gas in Nigeria, production expands increasing overall government income that could then be spent supporting the development of other industries and sectors.

Prudence, Policy Innovation and Consistency is Key:

The sustainability of this deficit spending approach depends on the extent to which these governments are able to improve marginal efficiency of capital. This would require an actionable long-term strategy bodering on leveraging resources for sustainable deficit financing.

Policy consistency and gradual improvements reduce the risk premium on these countries sovereign debts overtime and can make it cheaper to borrow in the future as long as revenue keeps us with debt in a subjectively defined proportion. Market sentiments adjusts gradually to new realities, so these governments would basically have to create the optimism that would drive growth in essence.

Paper By IMF's African Department:

Saad Quayyum and Nikola Spatafora (Senior Economists)

Sanghamitra Mukherjee (Economist) and,

Hamza Mighri (Research analyst, all in the IMF’s African Department).