Building Resilience to Global Risks: Challenges for African Central Banks

African economies tend to be less integrated into the world economy than those in other emerging regions. But this does not mean that they are immune to shocks from outside the continent. In recent years, global developments such as the rise in global risk aversion during the Great Financial Crisis (GFC), the search for yield in its aftermath, and the slump in commodity prices had significant repercussions on economies in Africa. At the same time, economic activity in Africa can also affect other countries, not least through migration flows.
Over the past year, the global environment has been evolving rapidly. World growth has gathered momentum. Monetary policy in the largest advanced economies has ceased to be the major driver of financial markets. Instead, a series of political events, most notably the United Kingdom’s Brexit referendum and the US presidential election, has brought political risks to the fore. Political uncertainty has risen sharply, with some of key elements of the global economic order put into question. This note examines the fallout of the evolving global economic and political risks on Africa, with a particular emphasis on the policy challenges for central banks.
Global economic and political risks
Global growth picked up in the second half of 2016 and is now expected to reach 3.5% in 2017. Indeed, by early 2017 virtually all major economies were expanding. Growth in China remained steady, not least as a result of policy stimulus. Commodity prices have rebounded, even though they remain well below the mid-2014 commodity boom peak. Still, macroeconomic risks remain. Inflation could increase more than forecast, as more and more countries reach full employment and close their output gaps, forcing central banks in major economies to normalise policies faster than expected. And low productivity growth in many advanced and emerging market economies (EMEs) could be a drag on global growth in the medium term.
Policy challenges for African economies
Many African economies are seeing relatively weak, albeit recovering, growth and high and rising inflation. Following a decade of strong growth in the majority of African economies, growth plunged in commodity-exporting countries in the wake of the sharp drop in oil and metals prices after mid-2014. Commodity exporters are still reeling from this collapse, even if prices have recovered somewhat since mid-2016. By contrast, non-resource-intensive countries, including Côte d’Ivoire, Kenya, Rwanda, Senegal and Tanzania, continued to enjoy strong growth. Inflation picked up across the board, in part owing to the impact of exchange depreciation and food price increases linked to the severe drought in Eastern and Southern Africa.
Strained fiscal positions and limited international reserves have reduced policy space in many economies. During the boom in the past decade, several countries raised public expenditures, not least to finance infrastructure investment. Then, falling commodity export revenues and depreciating currencies pushed up external debt. Public external debt increased by an average of 10% of GDP in sub-Saharan Africa during 2014–16 to an average of 56 percent, and by 7 percentage points to 68 percent in North Africa. Private sector debt also increased in several countries. A number of countries nearly depleted their international reserves as they supported the currency (Christensen (2016). As a result, the oil exporters’ reserves coverage ratio declined from more than 12 to less than 10 months of imports of goods and services.
In countries belonging to the Economic and Monetary Community of Central African States (CEMAC) it fell from over four to less than two months during 2016. In a few countries, eg Angola, Guinea, and Liberia, banks lost correspondent banking relations abroad, weakening trade financing (IMF (2017b).
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