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Govts have to work with private sector on roads, power generation

Saturday October 25 2014
TEAAbebe

IMF Africa Department deputy director Abebe Selassie. PHOTO | COURTESY

Given that domestic resources in the region remain meagre and insufficient, how can countries avoid accumulating high debt in the process of addressing infrastructure gaps?

An important approach is going to be looking for ways to bring in the private sector to participate and financing of these infrastructure projects, say, through public-private partnerships —where the government takes on some contingent liabilities and the private sector comes in to build infrastructure and provide services.

Another option is private investment in infrastructure. Look at the telecom revolution that took place in the region and globally over the past 10-15 years. Not long ago, telecom services were provided by public monopolies. Today there are very few countries where this is the case. It is the private sector that now provides these services.

It will not be as easy for sectors like electricity, where the capital investment requirements are very large. But even there it should be possible to entice some private investment—for example by allowing independent power producers to supply to the national grid.

For roads, much more use of toll roads needs to be made to help finance construction and maintenance. Using such options is probably the best avenue for countries to increase the fiscal space and avoid significant build up of debt.

The global growth projection for 2014 has been marked down by 0.3 per cent to 3.4 per cent and a less optimistic outlook for several emerging markets. What does this forecast mean for the developing world ,in particular low income countries in Africa?

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Overall, slower global growth is of course less than helpful for Sub-Saharan Africa. Still, it is important to note that what we are seeing is lower global growth than what was expected earlier in the year. But in relation to last year it is not a slowdown.
Hence, there should not be any extra drag for sub-Saharan Africa from this forecast. Nonetheless, a global environment which is not robust also means that growth in sub-Saharan Africa will not be much higher.

When you unbundle the aggregate number further for sub-Saharan Africa perhaps more important is the situation in large emerging markets like China, Brazil, and India — I think slower growth in these countries is probably the bigger source of concern for policy makers in the region.

We have seen considerable softness in commodity prices related to this, even as export volumes remain strong. All told, for the region as a whole, the outlook remains favourable.

Your recent economic outlook underscores the need for structural reforms to facilitate growth. What specific reforms are needed particularly for countries in the region?

Such reforms depend on country specific circumstances. What we see, for instance in East Africa, is generally strong economic growth, and growth that has lasted for many years at that.

The challenge for these countries—the likes of Kenya, Tanzania, Uganda, Rwanda and Ethiopia—is to sustain this economic growth further. This will require addressing potential bottlenecks to growth — like infrastructure — before they thwart it.

At the same time, you want to address these challenges with sustainable debt. Striking the right balance between addressing infrastructure bottlenecks while avoiding high debt is going to be one of the key challenges for countries that are already growing rapidly.

Challenges elsewhere include diversification of the economy – for instance, if you have an economy that is dominated by the oil sector or natural resources or other commodity exports — the challenge there is to foster greater economic diversification. This will require looking at the competitiveness of non-traditional sectors to boost competitiveness.

What effect could Fed tapering have on African countries that have issued bonds on international capital markets?

Borrowing costs for the region are likely to be higher than in recent years. This is something that I think is recognised by policy makers in the region.

But of more concern perhaps is how markets will behave in the transition phase. This is why an orderly exit from unconventional monetary policies being pursued by the Fed and other central banks will be important for the region and indeed all markets.

Reports often indicate that as developed economies recover, emerging markets will be the biggest victims. What can African countries that have tapped into the capital markets do to shield themselves from any negative fall-out of tapering?

The fear is unexpected behaviour by investors. This can be avoided if you have orderly market conditions in the wake of quantitative easing being rolled back.

But it is also important to remember that the reason why quantitative easing will be rolled back is because the US economy will be in better shape. For the global economy – this will be a good thing.

Looking at 2015, what are the prospects of the region? What are the risks?

We generally see the solid growth of recent years being sustained in the coming months. The risks to this outlook stem from adverse global conditions, such as disorderly financial markets as we discussed. Another risk is if emerging markets countries begin to experience much weaker growth than we currently expect, leading to lower commodity prices.

Finally, a more home-grown risk factor is the Ebola outbreak in Guinea, Liberia, and Sierra Leone. Should this spread beyond these three countries, it will have adverse economic consequences.

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