IMF projects improved growth for Africa but debt and limited taxes still prompt concern

Following a series of setbacks in recent years, including the pandemic, record inflation, tighter monetary policy, and escalating debt burdens, Africa’s economy is now rebounding. The International Monetary Fund (IMF) projects that the continent’s economic growth will reach 3.5% in 2024 and 4% in 2025.

“Nearly two thirds of the countries on the continent are anticipating higher growth this year, on the back of the modest easing in global financial conditions and a recovery in private investment and consumption,” reads a statement from Wale Edun, Nigeria’s minister of finance and chair of the African caucus, and Kristalina Georgieva, managing director of the IMF. The outlook is similarly rosy for the sub-Saharan African region, where growth is expected to rise from 3.4% in 2023 to 3.8% in 2024.

Some of the factors fuelling this optimism include the fact that inflation has almost halved, public debt ratios have broadly stabilised, and several countries have issued Eurobonds this year, ending a two-year hiatus from international markets.

“After peaking at almost 10% in late 2022, inflation has nearly halved to around 6% in the early part of the year thanks to decisive action by central banks,” Abebe Aemro Selassie, the director of the African department at the IMF, told reporters during the Fund’s spring meetings this April.

He emphasised that lower inflation has translated to slower food price increases, terming this as a “positive development” for a region where the cost-of-living crisis has been acute in recent years. “In addition, fiscal consolidation efforts are starting to pay off, with the median public debt stabilising at around 60% of GDP, halting a 10-year upward trend,” he observed.

Not out of the woods yet

“These are encouraging signs. But the region is not out of the woods yet,” cautions Selassie, citing concerns around high borrowing costs amid a crippling funding squeeze facing several countries on the continent. “Far too many countries still face a funding squeeze. Their borrowing costs are high, and funding sources curtailed. Government interest payments now account for about 12% of revenues, more than double the level a decade ago. And official development assistance has become scarcer.”

The impact of these challenges on Africa is significant. Rather than increasing investment in critical areas such as health, education, agriculture, and infrastructure – sectors that can drive development and lift millions out of poverty – governments are allocating essential funds toward debt servicing. This has implications for the region’s growth prospects and its ability to withstand future shocks, argues Selassie, who oversees the IMF’s operations and engagement with 45 countries across sub-Saharan Africa.

He believes that in the face of these challenges, governments in the region should prioritise domestic resource mobilisation, laying emphasis on tax policies that help governments cut their deficits. Specifically, he called for African countries to “cut back tax expenditures” that undermine equity. Tax expenditures are special provisions in the tax code – such as exclusions, deductions, deferrals, credits, and preferential tax rates – that benefit specific activities or groups of taxpayers. He also called for continued digitization of tax procedures to boost efficiency and transparency.

Getting African countries to pay more tax, while ensuring that the burden is equitably shared and economic stability and growth are not compromised in the process, will be key in bolstering Africa’s efforts to reduce its unhealthy reliance on international debt markets.

Many African countries receive a much lower proportion of their GDP in tax than do countries on other continents, according to a report by the Organisation for Co-operation and Economic Development (OECD). The report, which covers tax revenue data for 30 African countries between 1990 and 2018, shows that the average tax-to-GDP ratio for the 30 African countries was 16.5% in 2018. This compared with an average of 34.3% in the 38 OECD member states; and 23.1% for the Latin American and Caribbean nations.

Calls for global financial architecture reform grow louder

Africa’s challenge in collecting sufficient taxes partly stems from international firms exploiting loopholes in the global taxation system to evade paying taxes on the continent, leading African countries to an unhealthy reliance on international debt markets.

“A new global tax system attentive to the needs of the global south is a key priority,” notes Brahima Coulibaly, vice president and director of global economy and development, Brookings Institution. There are positive signs that the global taxation system is moving toward greater equity. Last year, an Africa-backed resolution at the United Nations (UN) paved the way for transferring control of international tax rules from the OECD – comprising 38 wealthy countries – to the UN. This shift ensures that all 193 member states are on a more equal footing, giving African countries a fairer chance at shaping outcomes on negotiations relating to international taxation.

At a policy roundtable attended by African Business at the Brookings Institution’s headquarters in Washington DC, Coulibaly stressed that reforming the global financial architecture could mitigate Africa’s high borrowing costs. He highlighted the impact of Covid-19, which lowered borrowing costs for developed economies while increasing yields for African economies, as an example of the inadequacies of the current financial system. Notably, post-pandemic stimulus in advanced economies reached 10% of GDP, whereas it was only 3% in developing economies, putting many countries in Africa on the backfoot in terms of closing the inequality gap with advanced economies.

Experts that African Business spoke to about the global financial architecture reform agenda overwhelmingly emphasised the need to revamp the G-20 Common Framework for Debt Treatments. Originally established during the Covid-19 pandemic, this framework aimed to address debt distress in low-income countries. However, it has faced widespread criticism for its slow progress in debt negotiations and relief efforts. Notably, African nations like Zambia have been mired in prolonged discussions for three years without a resolution, while Ghana and Ethiopia have been denied access to concessional funding sources as they await agreements despite months of negotiations. This imposes additional costs on their already pressured economies.

Economic transformation will foster resilience

Reforming the global financial architecture will set Africa on a more sustainable path towards economic growth. However, the growth must be accompanied by economic transformation for it to be resilient in the face of future shocks, argues Mavis Owusu-Gyamfi, executive vice president of the African Center for Economic Transformation (ACET).

She tells African Business in an exclusive interview that many African countries are falling behind on key economic transformation indicators like diversification. “Our studies have shown that Africa is regressing on key indicators like diversification,” she says, linking diversification to economic resilience. “We found that countries that were more diversified rebounded faster after the Covid-19 pandemic.”

Economic transformation involves fundamental changes in the structure and composition of an economy. It goes beyond mere growth by reshaping the underlying economic processes and sectors and emphasises qualitative shifts, including diversification, industrialization, and upgrading of production methods. Key drivers of economic transformation include innovation, human capital development, institutional reforms, and the transition from low-value-added activities (such as primary agriculture) to higher-value-added sectors (such as agro-processing, manufacturing and services).

Experts agree that Africa should focus on economic transformation policies that enhance its integration into the global economy and promote regional trade under the Africa Continental Free Trade Area (AfCFTA). These policies should seize opportunities arising from the climate transition and digital transformation, including the advent of artificial intelligence (AI). Africa’s wealth of natural resources and its youthful population position it as a promising participant in the global economy. Notably, the continent’s critical minerals—such as cobalt, manganese, and platinum—are vital for energy transition technologies.

Higher for longer

While there’s reason to be optimistic about Africa’s economic growth prospects, borrowing costs are likely to remain elevated in the near term as global inflation has not come down to levels that policymakers believe is satisfactory to loosen monetary policy.

The World Bank’s recent Commodity Markets Outlook indicates that global commodity prices are levelling off following a significant drop that contributed to the reduction in global inflation last year. The slowdown in commodity price declines may pose challenges for central banks aiming to reduce interest rates swiftly. Additionally, the report highlights the potential for escalated conflict in the Middle East to reverse the downward trend in inflation witnessed over the previous two years.

“Global inflation remains undefeated,” said Indermit Gill, the World Bank Group’s chief economist and senior vice president. “A key force for disinflation—falling commodity prices—has essentially hit a wall. That means interest rates could remain higher than currently expected this year and next. The world is at a vulnerable moment: a major energy shock could undermine much of the progress in reducing inflation over the past two years.”

Although there are positive signs of economic recovery and expectations of looming interest rate cuts due to lower inflation, African economies might face elevated interest rates for a longer period than initially expected – if commodity prices stop falling or start rising again. This underscores the need for careful fiscal management, even as African finance ministers and central bankers eagerly await signals from the US Federal Reserve regarding potential global interest rate reductions.