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MASTER FILES ROOM C-525 001 This is a Working Paper and the author would welcome any comments on the present text. Citations should refer to a IMF WORKING PAPER Working Paper of the International Monetary Fund, men- tioning the author, and the date of issuance. The views expressed are those of the author and do not necessarily © 1994 International Monetary Fund represent those of the Fund. WP/94/109 INTERNATIONAL MONETARY FUND African Department Economic Trends in Africa: The Economic Performance of Sub-Saharan African Countries Prepared by Pierre Dhonte, Daudi Ballali, Gilbert Terrier, and Stephane Cosse JL/ September 1994 Abstract This paper highlights selected recent developments in the economies of sub-Saharan Africa. It notes that the outlook for commodity prices has improved, and with it the outlook for economic activity beyond 1994; it also notes, however, the need for higher savings and investment to sustain growth over the medium term. The paper also covers two aspects of structural adjustment: the liberalization of exchange and trade systems, which has been extensive and has resulted in a sharp reduction in exchange market distortions; and the momentum of regional integration in the CFA countries and in the Southern Africa region. JEL Classification Number: 055 \J The authors thank G. Windsperger and D. Nuven for extensive research assistance. ©International Monetary Fund. Not for Redistribution - ii - Contents Page Summary iv I. Introduction 1 II. Background 1 1. The recovery of commodity prices 2 2. External financing 3 III. Current Economic Developments 5 1. Real effective exchange rates 5 2. Aggregate output and price trends 6 3. Basic ratios 8 a. Investment and savings 8 b. Fiscal indicators 11 c. External debt ratios 11 IV. Structural Changes 14 1. Exchange and trade liberalization 14 a. Liberalization of the exchange systems 16 b. Liberalization of the trade and payments systems 18 c. Results 20 2. Regional arrangements 21 a. CFA countries 21 b. Southern Africa 23 Tables 1. Recent Reschedulings of Official Bilateral Debt 4 2. Output, 1993-94 7 3. Savings and Investment, 1993-94 9 4. Central Government Accounts, 1985-94 12 5. Financial Balances, 1993-94 13 6. Sources of Government Debt Accumulation 15 7. Spread Between Official and Parallel Market Exchange Rates 17 Charts 1. Export Prices, 1972-1995 2a 2. Net Transfers From Abroad, 1985-95 4a 3. Exchange Rates and Terms of Trade 1985-94 6a 4. Real GDP per Capita, 1985-94 8a ©International Monetary Fund. Not for Redistribution - Ill - Contents Page Annex Are Country Groups Meaningful? 26 Appendix Tables I. Distribution of Exports by Commodity (1985-87 average) 29 II. Market Shares for Main Export Commodities (1985-87 average) 30 III. Population 31 IV. Real GDP 31 V. Real per Capita GDP 32 VI. Changes in CPI 32 VII. Merchandise Imports and Exports 33 VIII. Public Debt Outstanding 33 IX. Current Account Balance 34 X. Fiscal Balances 34 XI. Total Capital Formation 35 XII. Total Primary Saving 35 XIII. Terms of Trade 36 XIV. Real Effective Exchange Rates 37 XV. Exchange Arrangements as of June 30,1994 38 ©International Monetary Fund. Not for Redistribution - iv - Summary This paper finds that the economic outlook for sub-Saharan Africa is better today than it has been for a long time. The external environment is finally becoming somewhat more favorable for most countries, notably the cotton and coffee producers. More important, the far-reaching adjustments in relative prices and in trade and payments practices in many countries are paying off and are being powerfully reinforced by policy adjustments in the CFA countries. There remain, however, major difficulties, including an insufficient level of domestic savings in most countries, a high rate of inflation in many, and an inclination to revert to restrictive policies in some. Despite the brighter outlook, the paper notes that the region's total real GDP growth will continue to be low--on the order of 2-2 1/2 percent in 1994. Growth will benefit from increased non-oil exports and from a pickup in capital formation. Investment could rise by 1 percentage point, to 17 percent of GDP in 1994; on average, that level remains likely to be lower than necessary to sustain positive real income growth per capita over the medium term, suggesting a need for higher savings and, in many cases, for greater efficiency of investment. A more significant pickup in the region's growth performance could be expected in 1995. The paper highlights differences in performance and in structural characteristics between country groups. Three groups are identified: the CFA countries, Nigeria, and a group of "other" countries. The first group is notably characterized by a weaker output performance over the medium term and by the stability of its real exchange rate, which contrasts with the fall in its terms of trade. The other groups have achieved a better balance between terms of trade and real effective exchange rate developments and a better growth record. In this context, the recent devaluation of the CFA franc represents a major adjustment, which, as the paper indicates, is supported by policies that aim at increasing substantially the domestic savings ratio and the investment ratio. An important focus of the paper is the discussion of progress in liberalizing exchange and trade systems. The paper reviews in some detail recent experience in this regard, describing the typical sequence of steps followed by the countries; it sums up the results in showing that spreads between official and parallel exchange markets have been narrowed very significantly. Finally, the paper discusses current developments in regional integration. It describes the steps taken in the CFA region, in the wake of the devaluation of the currency, to move on from monetary to economic integration. The paper also provides an overview of the arrangements for economic cooperation in the Southern Africa region. ©International Monetary Fund. Not for Redistribution I. Introduction This paper is a continuation of a collective effort in the Fund's African Department to develop a regional perspective on sub-Saharan Africa. I/ It draws on updates of selected WEO series (the "Economic Trends in Africa" (ETA) tables) to summarize overall economic performance and to highlight the diversity of selected country groups. The focus is on current economic developments, with some assessment of the outlook for the current year. No attempt is made to be comprehensive, and in some cases issues are flagged rather than fully discussed. A year ago output growth continued to be sluggish in the face of a persistent weakness of demand in the industrialized world and low world commodity prices. The present situation elicits a more positive assessment. First, there are signs that the European economies are picking up, which should help boost exports and growth in sub-Saharan Africa. Second, a strong recovery is under way in the world commodity markets, which should improve significantly the terms of trade of most African countries. Third, and most encouraging, the economic policies of sub-Saharan African countries are evolving in a more realistic direction. This realism was attested last January by the decision of the member countries of the CFA franc zone to devalue their currency by 50 percent in foreign currency terms. In many other sub-Saharan countries, such realism is demonstrated by their shifting to market-determined exchange rates, often accompanied with the full or virtual unification of the foreign exchange markets. The paper is organized as follows: Section II describes the external environment, focusing on commodity prices and external financing; Section III describes recent economic developments and presents the main findings of projections for 1994; and Section IV deals with structural changes and policy trends, focusing on liberalization of the exchange and trade systems and on the move toward regional integration. II. Background During the 1985-93 period, sub-Saharan African countries registered a strong decline in their terms of trade, which averaged 4.4 percent a year. 2/ However, a turnaround was observed in commodity prices during the first half of 1994, which is projected to result in a very significant improvement in their terms of trade in 1994 and 1995. !/ Sub-Saharan Africa in this paper includes the countries in AFR, excluding South Africa and a few non-reporting countries (see page 5). Previous publications drawing on this source include P. Dhonte et al, "Economic Trends in Africa." (WP/93/71, September 1993) and M. Hadjimichael et al., "Effects of Macroeconomic Stability on Growth, Savings and Investment in Sub-Saharan Africa," (Draft, May 1994.) 2/ International Monetary Fund. World Economic Outlook. May 1994 (page 137). ©International Monetary Fund. Not for Redistribution - 2 - 1- The recovery of commodity prices Although most commodity prices remained depressed during 1993, a significant turnaround was registered in the first half of 1994. Sharply higher prices were recorded for coffee, cocoa, palm oil, cotton, petroleum, and copper; this was offset in part by lower prices for bananas and meat. Computed on the basis of current trends, the price index of non-oil export commodities for sub-Saharan Africa, based on the structure of their export earnings, points to an increase of 32.4 percent in 1994 and to a further increase of 18.2 percent in 1995 (Chart 1, and Appendix Tables I and II). In the second half of 1993, crude petroleum prices declined, reflecting the combination of a high level of production and weak demand. In recent months, however, prices have firmed up, following an increase in demand associated with economic recovery in industrialized countries. Neverthe- less, for 1994 as a whole, prices are projected to be slightly below the average registered in 1993; in 1995, petroleum prices would increase by about 4 percent.