Funding squeeze hits sub-Saharan Africa

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PERSISTENT global inflation and tighter monetary policies have led to higher borrowing costs for sub-Saharan African countries and placed greater pressure on exchange rates, the International Monetary Fund (IMF) has said.
Last year and the start of this year saw most countries in sub-Saharan Africa, including Zimbabwe, increasing interest rates as a measure to tame the ballooning inflation rate.

“The confluence of higher global interest rates, elevated sovereign debt spreads, and exchange rate depreciations, among other factors, has created a funding squeeze for many countries in sub-Saharan Africa.
“This challenge comes on top of policy struggles from the ramifications of the Covid-19 pandemic and the cost-of-living crisis.
“Reflecting these considerations, economic activity in the region will remain subdued in 2023, with growth at 3,6 percent before rebounding to 4,2 percent in 2024, predicated on a global recovery, subsiding inflation, and the winding down of monetary policy tightening,” IMF said in its latest regional economic outlook report.
The Bretton Woods institution said the region’s financing options have deteriorated significantly over the past year.
“The acceleration in the tightening of global monetary policy, prompted by the rapid pickup in global inflation after the onset of Russia’s war in Ukraine, has led to higher interest rates worldwide and raised borrowing costs for sub-Saharan African countries, both on domestic and international markets,” reads the report.
As a solution, IMF says sub-Saharan Africa will require international assistance in addressing the funding squeeze.
“The IMF also stands ready to support the region. As of March 2023, the IMF has lending arrangements with 21 countries in the region and has received many programme requests.
“The disbursements associated with IMF programmes, emergency financing facilities, and the special drawing rights allocation represented $50 billion between 2020 and 2022,” IMF said.
In this context, the region’s economic recovery has been interrupted and is projected to decline to 3,6 percent in 2023 with activity expected to decelerate for a second year in a row. Many countries are expected to register a small pickup in growth this year, especially non-resource-intensive economies, but the regional average will be weighed down by sluggish growth in some key economies, such as South Africa. The IMF further highlighted four policy interventions that can help address the macroeconomic imbalances in the context of current financing constraints, which include consolidating public finances and strengthening public financial management, containing inflation, allowing the exchange rate to adjust and ensuring that important efforts to fund and address climate change do not crowd out basic needs.
“This will rely on continued revenue mobilisation, better management of fiscal risks, and more proactive debt management. International assistance remains also critical to alleviating governments’ financing constraints. For countries that require debt reprofiling or restructuring, a well-functioning debt-resolution framework is vital to creating fiscal space,” IMF said.
“Monetary policy should be steered cautiously until inflation is firmly on a downward trajectory and projected to return to the central bank’s target range.”
Meanwhile, analysts say Zimbabwe’s interest rates are still too high after the central bank reduced the policy rate from 150 percent to 140 percent.
The country’s borrowing rates were raised last year to curb speculative borrowing, which the bank said was encouraged by sub-inflationary rates and stocking inflation.
The policy rate, which acts as a baseline for interest rates, was initially raised to 200 percent before being reduced to 150 percent after inflation fell slightly.
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