The debate on monetary sovereignty in emerging countries is resurfacing with, on the one hand, the plan of Argentinian President Javier Milei to dollarise his economy, and on the other, the temptation of several West African country leaders to abandon the CFA franc. The abandonment of the CFA franc with the aim of recovering the flexibility of an unpegged exchange rate regime and greater autonomy of monetary policy, is an argument that is either weak in theory or unconvincing in practice.
A breakthrough has recently been made in the process of restructuring the Ethiopian government's external debt. The peace agreement between the federal authorities and the Tigray rebel forces, signed in November 2022, ended two years of civil war and cleared the way for negotiations with international institutions to resume. Consequently, almost three years after requesting a debt restructuring under the G20 Common Framework, Ethiopia reached an agreement on an interim suspension of its bilateral debt service. However, this is only the first step on its journey, as the Ethiopian government must now reach agreements with all of its external creditors in order to fully restructure its debt
In 2024, 24 new countries will join the Guided Trade Initiative of the African Continental Free-Trade Area (AfCFTA). With the aim to boost intra-regional trade, the AfCFTA could increase Africa’s revenue and improve its resilience to external shocks. However, beyond tariff barriers, some structural challenges must first be addressed to see the full potential of the largest free-trade area in the world.
According to the World Bank’s report published last week, the external debt stock of all low- and middle-income countries (LMICs) contracted in 2022, for the first time since 2015. However, this observation does not apply to sub-Saharan Africa (consisting exclusively of LMICs with the exception of the Seychelles): the region’s external debt continued to rise in 2022, reaching USD 832.8 bn, a figure up 2.1% compared to 2021.
Nigeria’s economy is fragile. Despite the rise in oil prices in 2021 and 2022, macroeconomic stability has continued to deteriorate. This is due to the low level of oil production, an artificially overvalued exchange rate and the surge in energy subsidies. Without a change in economic policy, the situation was only going to get worse. The new President, Bola Tinubu, decided to act quickly and decisively. Shortly after taking office in May, he announced the flexibilization of the exchange rate system and the end of energy subsidies. Unsurprisingly, the first measure fuelled inflation, which is expected to come close to 30% by the end of the year. More problematic is the fact that we are once again seeing a gap between the official exchange rate and the parallel exchange rate
Since the beginning of 2023, Angola’s oil production has fallen short of the target set by the government and is declining compared to 2022, which is severely penalising economic growth. Combined with the fall in Brent prices, this underperformance is weakening the external accounts of the country, which is also dealing with particularly high external debt repayments. Dollar liquidity therefore fell in Q2 2023 and the Kwanza depreciated sharply. The government’s solvency also deteriorated. To counteract this, the authorities announced major budget cuts at the beginning of August. In the short term, the rise in Brent prices will stabilise foreign exchange reserves, which still stand at a satisfactory level
The Ghanaian economy is gradually recovering from the severe macroeconomic crisis of 2022. GDP growth is holding up better than expected and inflation has started to fall even though it remains too high. In terms of public finances, progress is also encouraging. In addition to satisfactory budget implementation during the first six months of the year, the authorities completed their domestic debt restructuration operation. However, the country remains in default on its external debt. Despite the support from the FMI, it also lacks a cushion to protect it from a possible new external shock.
In recent months, the African continent has been hit hard by inflationary pressures. In Eastern and Southern Africa, inflation peaked at 19.4% year-on-year in November 2022. It has since begun a slow and difficult deceleration: in July 2023, regional inflation fell to 15.5%, after peaking again at 20.6% in June. Nevertheless, this average masks major national disparities.
Last week, African heads of state and private sector representatives gathered in Nairobi, Kenya for the first-ever African climate summit. This meeting, organised ahead of COP 28, ended with the signing of the Nairobi Declaration, through which Africa has taken on continent-wide ambitions in the fight against climate change.
After years of financing through international markets and China, Kenya is facing a considerable increase in external debt servicing, which has led to strong pressure on external liquidity and on the shilling. Sustained economic growth in 2021-2022 was not enough to stabilise debt ratios. Renewed in late May 2023, support from multilateral creditors has helped to partially reconstitute official foreign exchange reserves and somewhat reassured investors. But the risk of social instability has increased significantly due to committed fiscal consolidation efforts and persistent high inflation.
The Ivorian economy seems to have weathered well the various external shocks since 2020. Growth has remained robust and inflation relatively under control. However, the measures put in place by the authorities to protect the population and the continuation of major public infrastructure projects have significantly widened the budget deficit, while financing conditions have deteriorated. In order to reduce pressure on public finances and external accounts, the authorities have called on the IMF. They have embarked on a fiscal consolidation programme that could prove difficult to complete.
Kenya's external solvency has been deteriorating for several months. After years of indebtedness to international markets and China, external public debt service rose significantly, accounting for 22% of export receipts in 2022. In addition, drought in the country has increased its dependence on imports, and the terms of trade have deteriorated significantly since the start of the war in Ukraine. On top of that are the dynamics of global monetary tightening.
The candidate of the outgoing majority, Bola Tinubu, won a close victory in the presidential elections of February 25. Coming challenges are significant: revive the first African economic power and consolidate macroeconomic stability, which has deteriorated dangerously despite high global oil prices.
After years of underinvestment in its power grid, South Africa is experiencing daily load shedding, the intensity of which has only increased in recent months. Economic activity is severely impacted. The restoration of electricity production capacities will be slow, which will have a significant impact on growth and the trade balance in 2023. Supply-side constraints will keep inflation high, while the unemployment rate is a concern. Under these conditions, the ruling party, the ANC, will be pushed to revise its budgetary consolidation trajectory downwards. Furthermore, the partial transfer of the debt of electricity company Eskom to the government will contribute to a sharp increase in public debt.
On 22 February, the South African National Treasury set out its budget plan ahead of the new fiscal year, which will start on 1 April. After slightly revising its fiscal balance upwards since October 2022, the Treasury now expects a primary surplus starting from the current fiscal year. This performance should gradually improve over the next three years.
In 2020-2021, thanks to its diversified economy, Kenya was relatively more resilient to the shock of the pandemic than other sub-Saharan African economies. But in 2022-2023, the recovery will be constrained by the indirect effects of the war in Ukraine and subject to significant downside risks. The country faces a deterioration in its terms of trade. Accelerating inflation will weigh on domestic demand, with the risk of fuelling social instability. This could complicate fiscal consolidation efforts, which are necessary to maintain the support of multilateral creditors, particularly the IMF. The new president has ruled out the option of preventive debt restructuring. But the government’s external liquidity and solvency remain fragile.
Significant uncertainty remains following the general elections in Kenya. Against a sensitive socio-economic backdrop, the first challenge for William Ruto, the new president, is the continuation of fiscal consolidation and public debt reduction measures. Although he rules out a preventive debt restructuring, the high level of sovereign risk requires a slowdown in the deterioration of public finances. The budget deficit averaged -7.7% of GDP over the period 2015/21 and public debt reached almost 70% of GDP in 2021 (compared with 49% in 2015). Moreover, the interest charge on public debt now represents more than 20% of budgetary revenues and its total service absorbs 50% of revenues (compared with 38% in 2015). Kenya’s financing capacity is currently heavily constrained
Following five consecutive years of recession, Angola’s economic outlook is brightening: the country should return to growth, expected to be +3% in 2022, benefiting from a favourable economic situation marked by the upward trajectory of the oil price and a resumption of national production of hydrocarbons. The resulting increase in budget revenues and exports should support the kwanza. This dynamic is helping to ease the pressures on the country’s external financing needs and debt sustainability, which has improved thanks to the reprofiling agreement concluded with China in early 2021. Nevertheless, the Angolan economy remains prone to significant vulnerabilities
The Nigerian economy is experiencing mixed fortunes. Its low level of oil production does not allow it to benefit fully from the rise in oil prices. The current account balance is expected to return to a surplus this year, though the persistence of a rigid exchange rate regime continues to weigh on the economy’s attractiveness and the availability of liquidity in dollars. The commodity price shock is exacerbating already strong inflationary pressures, and the budget deficit will remain high due to the continuation of an energy subsidies policy that has become too expensive. For the time being, this is not jeopardising the strength of the economic recovery. However, the weakening macroeconomic stability leaves the economy vulnerable to further setbacks in the future.
After an unprecedented contraction in activity in 2020, the strong rebound in 2021 did not allow South Africa to return to its pre-crisis level of GDP contrary to most emerging economies. In 2022, activity should remain subdued and growth below 2% in the medium term. The economic outlook remains largely constrained by the need for fiscal consolidation in order to contain the high risk of debt distress, the tense socio-political climate, and structurally by strong infrastructure constraints, first of which the electricity supply. The shock induced by the conflict in Ukraine is also exerting significant pressures that could make fiscal consolidation efforts difficult
At year-end 2021, the South African economy had not returned to pre-Covid levels of activity. The upturn in the price of its main export products provides the country with a welcome boost in the short term. This is illustrated by the latest budget forecasts, which are more optimistic than those published in late 2021. Yet structural vulnerabilities persist and are exacerbated by the health crisis. Although South Africa has few direct trade ties with Ukraine and Russia, it faces, like other emerging economies, soaring inflation that will strain domestic demand. The swelling public-sector wage bill and financial support for state-owned companies continue to be strong headwinds for reducing the fiscal deficit
After a record contraction in the economy in 2020, South Africa’s GDP grew by 4.9% in 2021. This was the highest growth rate since 2007. The strong recovery in the first half of 2021 was held back by rioting over the summer and the return of health protection measures in the face of the Omicron variant in the fourth quarter of 2021. The pace of recovery is likely to continue to slow, with GDP forecast to grow by 1.3% in 2022, according to our estimates. Economic activity will remain structurally constrained by weak potential growth. Inflation keeps accelerating. By the end of 2021, inflation had hit 6% year-on-year (3
In Ghana, the warning signs are multiplying. Although economic growth has been fairly resilient, public finances have deteriorated sharply at a time of surging inflation. This is unsettling investors and threatening economic prospects. The central bank has already reacted by raising its key policy rate. But the authorities must reassure that they are capable of reducing the fiscal deficit. For the moment, they have failed to do so. Yet severe financial constraints and a dangerously high debt burden could force them to make adjustments.
In Ethiopia, the coronavirus pandemic triggered an economic crisis that has jeopardised the country’s development model of the past decade. Belated reforms, major logistics costs and a shortage of foreign currency have sharply slowed economic modernisation. Civil war in the Tigray region also threatens the country’s political stability and worsens the humanitarian crisis. With no resources, Ethiopia lacks the means to face up to the pandemic’s economic fallout, and is still highly dependent on international aid. The ratio of foreign currency debt to export receipts has become excessively high. The country has requested foreign debt treatment as part of the G20s’ common framework for debt restructuring
Following the 12 August presidential election in which opposition leader Hakainde Hichilema defeated incumbent President Edgar Lungo, Zambia’s macroeconomic situation has become clearer thanks to progress towards strengthening relations with the IMF with a long-awaited loan agreement on a financing programme in the coming months. External liquidity has increased with the new allocation of Special Drawing Rights (SDRs) on 23 August 2021. The allocation amounts to USD 1.3bn, the largest amount behind South Africa, Nigeria and DRC. FX reserves now account for 7% of GDP and cover around 4.7 months of imports, up from 2.5 months before the allocation
