Growth in sub-Saharan Africa is projected to fall to 3 per cent this year. The director of the African Department at IMF, Antoinette Monsio Sayeh spoke to Berna Namata about the outlook for the region.

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Our latest outlook highlights a drop in growth in the region. What is the reason for this and what policy measures do you recommend?

Sub-Saharan Africa’s economy has entered a rough patch after many years of strong growth. A substantial policy reset is therefore required across the region to address the situation. The pace of economic expansion declined to 3.4 per cent in 2015, the lowest level in 15 years. We project growth to decelerate further this year to 3 per cent.

The sharp decline in commodity prices, tighter global financing conditions and the effects of China rebalancing have put many of the largest sub Saharan African economies under strain.

The oil exporters’ overall growth is forecast to slow to 2.25 per cent this year from as much as 6 per cent in 2014, while some of the region’s non-energy commodity exporters, such as Ghana, South Africa and Zambia, are also facing difficult economic conditions. Meanwhile, several South and East African countries, such as Ethiopia, Malawi, and Zimbabwe, are suffering severe drought.

However, let me stress that this regional slowdown masks differences across countries. However, many oil importers continue to grow robustly. Take for example Côte d’Ivoire, Kenya, Senegal, Tanzania, and Uganda — they are still growing at more than 5 per cent.

More importantly, though, we think that medium-term prospects are favourable.

The underlying drivers of growth, particularly the much improved business environment, remain in place, and going forward favourable demographics should also support growth. However, to realise this potential, a substantial policy reset is critical in many cases.

Commodity exporters, especially, urgently need to contain fiscal deficits and build a sustainable tax base from the rest of the economy.

Where possible, exchange-rate flexibility—as part of a wider macroeconomic policy package — should also be the first line of defence. Finally, given the tighter external financing environment, countries with access to global financial markets also need to adjust their fiscal policies to mitigate vulnerabilities, especially fiscal and current account deficits that have been elevated over the past few years.

Some countries are faced with spiralling public debt, which could hurt growth and make it more expensive to borrow from the international market. What is your assessment of this and what other options do they have?

I will not say that debt is spiralling, although there has been a notable increase in many countries. While fiscal adjustment has started among oil exporters, spending cuts have not been at par with the dramatic decline in revenues, so debts have increased rapidly.

For example, in Angola, Cameroon, Gabon and the Democratic Republic of Congo, debt ratios since the end of 2013 increased by about 15 to 30 percentage points.

Debt has also increased quickly in a few other countries that are making a push to upgrade infrastructure. However, outside the resource-intensive countries, increases in debt levels have generally been modest.

That said, since the external environment, in particular commodity prices, is forecast to remain unfavourable for an extended period, prompt action is required to prevent debt sustainability risks from escalating. While still prioritising growth-enhancing investment, countries need to better utilise available resources while also mobilising domestic revenues.

To elaborate, our recent work suggests that on average, sub Saharan Africa countries could have the potential to increase revenue by between 3 and 6.5 per cent of GDP — a substantial amount indeed. In addition, savings could also be achieved by streamlining recurrent spending to preserve growth-friendly capital investments, by strengthening public financial management, and by streamlining expensive and poorly targeted subsidies.

Faced with lower export revenues, an increasing number of sub-Saharan countries are borrowing from the IMF. Won’t this increase their public debt?

When countries face financing difficulties, access to markets also disappears. This is when the IMF steps in to provide financing so that countries can implement the needed reforms.

As I said, many countries in the region must now adjust to the shocks they are experiencing. We can also provide technical assistance and policy advice on strategies to stabilise the economy and boost domestic revenues.

We can also identify the most urgent reforms that can set the stage for recovery. And if needed, the IMF can provide financial support. For the majority of African countries, this assistance is typically provided on concessional terms.

On that front, as recently as July 2015, the IMF adopted a number of new initiatives to support its member countries, including a 50 per cent increase in low-income countries’ access to the Fund’s concessional resources, and zero per cent interest rates for IMF lending under the rapid credit facility, targeted at low income countries hit by natural disasters.

As always, we stand ready to provide financial support to help countries overcome balance of payment pressures. For example, this is currently the case with requests for new programmes from countries such as Angola and Rwanda.

While the reduction in crude prices is a net positive for the world, the strong dollar negates that effect for many oil importers with weak currencies. What does this mean for policy makers in those countries, including those with recent discoveries of oil?

Most oil importers in the region continue to do well and are benefiting from lower oil prices as is evident here in East Africa. Still, as you point out, such benefits have been partly offset by the depreciation of currencies in the region against the US dollar, which has limited the decline of oil prices in domestic currency.

In addition, in some countries, administered energy prices have not been adjusted to pass on the full decline of lower prices to final consumers. Nonetheless, the overall impact remains positive.

So what should policymakers do? While the answer will depend on an individual country’s circumstances, there are some important general points: First, to the extent that recent pressures on the region’s currencies are related to the dollar’s strength globally, policymakers should not resist the depreciation pressures. More generally, fiscal policies may also need to be tightened to avoid overburdening monetary policy levers.

What is your assessment of the region’s financial sector and how crucial is it to stable economic growth?

Sub-Saharan African countries have made substantial progress in financial development over the past decade, including in financial services based on mobile telephony, such as M-Pesa in Kenya, and through home-grown pan-African banks.

Indicators of financial inclusion have also generally improved, especially here in East Africa; many more households have access to a bank. But there is still considerable scope for further financial development, especially compared with other regions.

Our recent analysis suggests filling that gap could yield as much as 1.5 percentage points of additional annual growth for countries in the region. Let me also highlight that, since the early 2000s, banking crises in the region have become significantly rarer — a trend that has evolved in parallel with favourable macroeconomic conditions and improvements in supervisory frameworks.

This has undoubtedly contributed to financial development. But with a rapidly evolving financial landscape there are new opportunities and challenges. One particular challenge is to keep up with the enhancement of the supervisory and regulatory frameworks.

Where prudential standards remain weak, providing supervisors with more enforcement power and strengthening the capacity of supervisory agencies should be at the top of the agenda. Where pan-African banks have expanded, cross-border oversight and supervision on a consolidated basis should be enhanced.

Finally, risks to the financial sector from commodity price declines, especially in oil-exporting countries, and from exchange rate depreciation, require careful monitoring.