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African nations are facing their toughest economic challenges this century as desperately needed funding evaporates, the International Monetary Fund said.
Rising interest rates have increased borrowing costs for sub-Saharan African nations. Not a single country in the region has been able to raise financing through a dollar bond sale over the past year, the Washington-based lender said in its Regional Economic Outlook report The Big Funding Squeeze on Friday.
Even before the coronavirus pandemic struck, many African countries were burdened by budget deficits and high levels of debt, and didn’t have as much fiscal firepower to provide relief measures or stimulate their economies as developed markets.
Funding shortages
Now, the sharpest tightening in monetary policy in major economies in a generation is hitting African nation’s currencies and shutting them out of debt markets at a time when donor financing has also dwindled. Public debt and inflation are at decades high, hitting the poorest the hardest, the report said.
“Any one of these shocks individually would’ve been considered a once-a-multi-decade shock,” IMF Africa Department Director Abebe Selassie said in an interview. “Definitely, in terms of macroeconomic challenges, this is by far the most difficult period I think from the turn of the century.”
Financing from capital markets, donors, and countries like China, which had in recent years poured in tens of billions of dollars in infrastructure funding, have pulled back at a “most unfortunate time,” the report said. Budget shortfalls could force countries to cut spending on critical sectors like health and education, hitting their growth potential down the line.
The fund forecasts economic growth in the region to decelerate for a second straight year to 3.6% in 2023, from 3.9% in 2022. Growth will rebound to 4.2% next year, according to its estimates.
Already African nations including Zambia, Ethiopia, Chad and Ghana have applied for debt relief using the Group of 20’s Common Framework mechanism.
“The longer-term sources of funding the region was relying on, which were increasingly market rate funding from eurobond markets, domestically, from banks, from the new lenders — creditors such as China — have all kind of dried up,” Selassie said. “The fact that official development assistance — concessional financing — which was in the past such an important source of financing has also been declining so aggressively is unhelpful.”
‘Severely sonstrained’
It’s at times like this where significant countercyclical funding from the World Bank and institutions like the IMF is really needed, Selassie said, highlighting that the lender has provided more than $50 billion in financing to the region in the last couple of years. “But our ability to continue to do this kind of financing is now severely constrained.”
IMF Managing Director Kristalina Georgieva warned last month that the lender’s Poverty Reduction and Growth Trust, which supports the poorest nations in the world, is in urgent need of replenishing.
The list of African governments asking the fund for help is growing. By March, the IMF had lending arrangements with 21 nations in the region and many program requests, according to the report. For some nations, the funding squeeze risks turning a “ liquidity problem into a solvency problem,” Selassie said.
