IMF update

 

Policymakers in the region face additional challenges to economic growth, from the effects of the war in Ukraine.

Sub-Saharan Africa Outlook: New Shock, Little Room to Maneuver April 28, 2022 (Photo: RapidEye/iStock by Getty images) The economic recovery in sub-Saharan Africa surprised on the upside in the second half of 2021, but that progress has been jeopardized this year by the Russian invasion of Ukraine. The war has triggered a global economic shock that is hitting the region at a time when countries’ ability to respond is minimal to nonexistent. Papa N’Diaye leads the team that produces the Regional Economic Outlook for sub-Saharan Africa. In this podcast, he says growth has slowed once again and will not be enough to make up for lost ground. Papa N’Diaye heads the Regional Studies Division in the IMF African Department. Listen to the podcast Read the transcript   ***** Thanks for listening to the podcast. We're always looking to improve your experience so let us know if you have any suggestions! Send your comments to me at bedwards2@imf.org.   Bruce Edwards Producer, IMF Podcasts

Dear maria, We just published a new blog—please find the full text below.  Africa Faces New Shock as War Raises Food and Fuel Costs (PHOTO: FRANKVANDENBERGH/ISTOCK BY GETTY IMAGES) By Abebe Aemro Selassie and Peter Kovacs 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 COVID-19 pandemic and other development challenges. The effects of the war will be deeply consequential, eroding standards of living and aggravating macroeconomic imbalances. 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. 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. Oil-importing fragile states will be hit hardest, with fiscal balances expected to deteriorate by around 0.8 percent of gross domestic product compared to the October 2021 forecast—twice that of other oil-importing countries. The region’s eight petroleum exporters, however, benefit from higher crude prices. 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. 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. Countries that can’t provide targeted transfers can use temporary subsidies or targeted tax reductions, with clear end dates. If well-designed, they can protect households by providing time to adjust to international prices more gradually. To enhance resilience to future crises, it remains important for these countries to develop effective social safety nets. Digital technology, such as mobile money or smart cards, could be used to better target social transfers, as Togo did during the pandemic. Net commodity-importers, such as Benin, Ethiopia and Malawi, will need to find resources to protect the vulnerable by reprioritizing spending. Net exporters, like Nigeria, are likely to benefit from rising oil prices, but a fiscal gain is only possible if the fuel subsidies they provide are contained. It is important that windfalls are largely directed to strengthen policy buffers, supported by strong fiscal institutions such as a credible medium-term fiscal framework and a strong public financial management system. To navigate the trade-off between curbing inflation and supporting growth, central banks will need to monitor price developments carefully and raise interest rates if inflation expectations drift up. They must also guard against the financial stability risks posed by higher rates and maintain a credible policy framework underpinned by strong independence and clear communication. The need for international solidarity 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 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. Inflation to be Elevated for Longer on War, Demand, Job Markets (IMAGE: IMF) By Jorge Alvarez and Philip Barrett The war in Ukraine will quicken inflation, which we now expect to remain elevated for longer than previously forecast on higher commodity costs and broader price pressures. As the Chart of the Week shows, our latest World Economic Outlook now projects faster consumer-price increases this year for advanced economies as well as in emerging market and developing economies. These forecasts also have a high degree of uncertainty. Russia’s invasion of its neighbor will likely have a protracted impact on commodities, affecting oil and gas prices more severely this year and food prices well into next year. Four main factors shape our outlook: The war aggravated already surging commodity prices. Energy and food helped boost inflation last year, with oil and gas supplies tight after years of subdued investment and geopolitical uncertainty. This was a main inflation driver in Europe and, to a lesser extent, the United States. Rising food prices also played a major role in most emerging market and developing economies, as extreme weather reduced harvests and mounting oil and gas prices drove up fertilizer costs. Demand surged last year amid policy support, while supply bottlenecks grew on factory closures, port restrictions, shipping congestion, container shortages and worker absences. Inflation rose as a result, especially where recoveries were strongest. Demand should soften this year as policy support is withdrawn and supply bottlenecks ease, but China’s recurrent lockdowns, war in Ukraine, and sanctions on Russia will likely prolong disruptions in some sectors into next year. Demand is also rebalancing from goods to services. Spending shifted toward goods as pandemic restrictions disrupted in-person activities, with supply bottlenecks helping to boost goods prices. Though service inflation started picking up last year, pre-crisis spending patterns haven’t fully returned and goods inflation remains prominent in most countries. Services demand will increase further as the pandemic eases, and overall inflation should return to where it was before the coronavirus. Labor supply remains limited after significant tightening in some advanced economies like the United States and United Kingdom. Worker shortages, mainly in contact-intensive industries, are lifting wages, though inflation has eroded pay gains. Meanwhile, the pandemic reduced labor-force participation in advanced economies. These shifts appear related to earlier retirements and workers being unwilling or unable to return as infections continue. Some workers are putting in fewer hours. We assume labor supply will gradually improve this year as the health crisis abates, but the effects will be moderate and unlikely to significantly ease upward wage pressure. Under these conditions, we expect already-elevated inflation to persist for longer. Our projections call for the pace in advanced economies to reach a 38-year high of 5.7 percent, while price increases in emerging market and developing economies will accelerate to 8.7 percent, the fastest clip since the global financial crisis in 2008. Those rates would then cool next year to 2.5 percent and 6.5 percent, respectively. Importantly, surging prices will have the greatest effects on vulnerable populations, particularly in low-income countries. High overall inflation will also complicate the trade-offs for central banks between containing price pressures and safeguarding growth. While our baseline expectation is that inflation will eventually ease, inflation could turn out higher for several reasons. Worsening supply-demand imbalances, including from the war, and further commodity-price gains could keep the pace of inflation persistently high. Moreover, both the war and renewed pandemic flare-ups could prolong supply disruptions, further increasing costs of intermediate inputs. In a context of tight labor markets, nominal wage growth could also accelerate to catch up with consumer-price inflation as workers seek higher wages to preserve their purchasing power. This would further intensify and broaden inflation pressures, with the risk of de-anchoring inflation expectations.   We Want To Hear From You! Click here for a 3-question survey on IMFBlog. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org