Twin deficits threaten to end Africa’s growth spurt. The International Monetary Fund and World Bank are basking in the continent’s recent successes – devoting much of their meeting in Washington this week to discussing the region. Sub-Saharan Africa is enjoying the fastest growth since independence in the 1960s. But profligate spending and current account deficits can still spoil the party.
Economic success stories are in short supply around the globe, given sluggish growth in rich nations and a slowdown in the BRICs. That makes Africa stand out all the more. A blistering 5.5 percent average annual growth rate for sub-Saharan Africa over the past decade is more than twice the pace of the 1990s. That helps explain the unusual focus on Africa at the fund and World Bank.
Yet IMF figures also point to looming economic clouds. Spoiled by high commodity prices, many African nations let discipline slide. The budget deficit of copper-rich Zambia, for instance, ballooned to 8.6 percent of GDP last year, more than double the previous year. Despite elevated global prices for its agricultural and gold exports, Ghana has run a deficit of over 10 percent of GDP for the past two years. Overall the region’s budget shortfall has soared fourfold relative to GDP since 2008.
While nations including Tanzania and Uganda have increased spending on public goods, like infrastructure, that can increase growth, Ghana and Zambia have boosted government payrolls and fruitless subsidies. Such spending will be hard to curtail if commodity prices continue to weaken.
Making matters worse, the region’s overall current account deficit has also increased eightfold relative to GDP since 2008, to 4 percent. For ultra-low income countries with steady aid flows and foreign direct investment, such as Tanzania and Mozambique, this is sustainable. But Kenya’s hefty deficit of 6.2 percent of GDP is only made possible by hot money flows into stocks and bonds. Such funds can disappear suddenly if confidence wanes. South Africa suffers from a similar vulnerability.
The IMF believes such dangers can and will be held at bay, with the region’s economy growing by about 5.5 percent in each of the next two years. That looks complacent. With risks to growth on the rise, the IMF and World Bank may find themselves less eager to talk about Africa at future annual confabs.
The economies of sub-Saharan Africa expanded by 4.9 percent in 2013 – faster than all of the BRIC nations, with the exception of China, according to the International Monetary Fund’s World Economic Outlook, published on April 8.
But the fund’s Fiscal Monitor, published on April 9, pointed to rapid rises in African government spending and high fiscal deficits. The budget deficit in Ghana has been above 10 percent of GDP for the past two years, up from 6.5 percent of national income in 2011. The country’s current account deficit was also 13 percent of GDP in 2013, the outlook showed.
Both Tanzania and Uganda are on track for current account deficits above 10 percent of GDP for each of the next two years, the IMF forecasts. Kenya’s budget deficit exceeded 6 percent of GDP in each of the past two years, up from 5 percent in 2011. The country is also running a current account deficit of 8.3 percent of GDP.
The International Monetary Fund and World Bank are holding their spring meetings in Washington between April 11 and April 13.