Abebe Aemro Selassie, director of International Monetary Fund IMF African Department, presented IMF’s findings and answered questions at the “Launch of the sub-Saharan Africa Regional Economic Outlook: Fiscal Adjustment and Economic Diversification” panel held in Zimbabwe on October 30, 2017. Several points including inflation, climate change, and upcoming elections were discussed. The following is an excerpt from that panel.
ABEBE AEMRO SELASSIE: A lot of work has to be done to put in place the policy environment to get growth back up to the five-six percent to make a significant dent in poverty reduction going forward.
Our report also highlights the emerging fiscal vulnerabilities that we have seen in the region. Reflecting the slowdown in economic activity, exchange rate depreciation, and the operation of state-owned enterprises whose difficulties have migrated to the sovereign balance sheets. We have seen public debt go up from 34 pc in 2013 to 48 pc as of last year. Now, the encouraging thing about the fiscal side is that government budgets generally show a fiscal consolidation in the coming years which should help to stabilise debt at the current level. But it is one thing to articulate policies and quite another to implement them. We are highlighting the need to move from articulation to policy implementation without delay. That would be very important. Most notably we see a lot of scope for fiscal consolidation that focuses on revenue mobilisation, expanding the tax base in the countries, which should be one of the components of this revenue mobilisation. And we see, in general, scope to mobilise revenues in the range of half a percent to one percent of GDP, depending on the countries’ circumstances, each year. This should be an attainable target.
Also, on the agenda, we think, this year and the coming years has to be promoting economic diversification in our countries. The general picture that is painted of sub-Saharan Africa, in this regard, is that economic diversification has had very weak outcomes. But when you unpack this average picture and look at countries’ circumstances, you do have cases of successful diversifications. What we find is that the diversification strategies have to be country specific and play to the strengths of the countries. Botswana is an example of a country where there has been a significant improvement in the diversification dimension: moving away from diamonds to the processing of diamonds and higher value-added exports. For a country like Botswana, the strategy has to play to its strengths. It wouldn’t make sense for it to look towards more labour intensive manufacturing sector, for example. Again, country specificity is important coupled with favourable policy environment.
These are the special topics: how to address fiscal vulnerabilities and economic diversification, that we have addressed in this report. I think I will stop there.
Journalist: In light of these developments, what do you think the effect will be on inflation in the long run?
Our projections for inflation earlier in the year expected inflation to be in the low single digits. But in light of recent developments, including the injection of additional liquidity, we think inflation will be higher. We have not done the whole macroeconomic framework, so I am hesitant to say what the inflation number will be. But, I think it is important to step back and see what we think are the challenges in Zimbabwe. They are twofold: first and foremost are the constraints on a vibrant private sector activity. It is not so long ago that Zimbabwe had one of the more dynamic private sectors in the region. The manufacturing sector here was the envy of many countries. So, the question here is how do we go back to that environment that facilitates that kind of dynamism in the private sector? I think wholesale reforms are needed in the business environment to facilitate more dynamism in the private sector. That is one set of reforms.
The other one has to do with the much needed fiscal consolidation. Also, making sure that fiscal policy is not absorbing all of the liquidity in the economy, particularly with the circumstances here with regards to the monetary policy where fiscal policy is exerting a lot of pressure on bank balance sheets.
Those two are the fundamental reforms that are needed.
Journalist: How do external factors, such as climate change, affect the projection of the sub-Saharan African region in the coming year?
Our projection is for growth to accelerate 2.6 pc this year to 3.5 pc next year. We do see economic conditions continue to improve and ameliorate. But there are policy uncertainties that are out there. Particularly in 2019, we have elections in some of the large economies: South Africa and Nigeria. We are not seeing enough dynamism in those large economies at the moment for growth to go back to those potential levels in those countries. That is one of the factors that holds growth at 3.5 pc. In many other countries, we expect growth to remain fairly robust: Senegal, Ivory Coast, Tanzania, and Uganda should hit their five percent mark.
The overall picture is subject to some downside risks and medium-term challenges like climate change. But those are fairly slow-moving factors and other than natural disasters we do not see them as being a source of major downside risk across the region, although it may be a source for individual countries.
Journalist: When do you expect to conclude the negotiation for the Lima Agreement?
It is difficult for us to say. It depends on the reforms we highlighted being needed. The government has articulated policies in certain areas, but implementation will be needed. We are looking for the 2018 budget to initiate that process and the implementation to follow up.
Journalist: As of August, 2.5 billion dollars worth of treasury bills were issued to the market. The half-year reports of different banks show that more and more of them are holding on to the treasury bills. What will the long-term effects be of banks continuing to hold on to treasury bills?
This is one of the effects of the significant fiscal deficits in Zimbabwe. Financing of it is becoming increasingly difficult and is only possible by burdening bank balance sheets even more. One of the consequences of banks having less money on their balance sheets is that it will create a form of crowding out in the private sector. There is a limit to how much this can go on, which is why there is some urgency to tackling the fiscal deficit.
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