The World Bank has warned that Sub-Saharan economies that rely on capital inflows face stagnation, but advised commodity exporting countries like Botswana to invest their excess capital domestically to safeguard future growth.
The Bretton Woods’ institution’s latest Global Economic Prospects analysis showed that the region, which is home to some of the continent’s large economies, could see growth dampened by a prolonged slowdown in high-income countries and accompanying disruption to global capital flows.
The World Bank revealed that without external financing, investment in several countries relying on capital inflows would drop significantly, while slower external demand would reduce the volume of exports. High-income countries account for almost 90 percent of the FDI flows to Africa.
Therefore, the effect of a downturn in capital inflows would be tempered by the fact that the number of resource-rich Sub-Saharan African countries, which are net exporters of capital, is rising.
“If large resource-rich economies, such as Botswana, Nigeria, or Zambia, are able to absorb and invest their excess capital domestically (which would otherwise flow to the rest of the world), expanding output accordingly, GDP in net capital exporters would rise 13.4 percent above the baseline by 2025,” said the Washington based bank.
The Botswana GDP grew by 4.5 percent in 2014 and it is expected to grow by 4.6 percent this year then rise by 4.9 percent in 2016.
The World Bank revelead that diverging effects of net importers versus net exporters of capital would offset one another and as a result Sub-Saharan Africa’s overall GDP would only fall by 0.5 percent below the baseline in 2025.
The region’s growth improved, for the second consecutive year, to 4.5 percent in 2014. Despite headwinds, growth is projected to pick up to 5.1 percent by 2017, lifted by infrastructure investment, increased agriculture production, and buoyant services.
“The outlook is subject to downside risks arising from a renewed spread of the Ebola epidemic, violent insurgencies, lower commodity prices, and volatile global financial conditions,” said the bank.
The World Bank also advised governments in the region to pursue policies that preserve economic and financial stability.
“Yet large fiscal deficits and inefficient government spending are sources of vulnerability in much of the region. The basic need is to strengthen fiscal positions, and restore fiscal buffers to increase resilience against exogenous shocks”.
Equally, it added that on the monetary policy front, given the favorable inflation outlook, many countries appear to have the space to maintain an accommodative monetary policy stance.
“With terms of trade of commodity exporters deteriorating, some currency depreciation may be appropriate, but monetary policy has to be sufficiently tight to ward off any secondary rounds of wage and price increases that might follow the one-off impact on consumer prices of more expensive imports.”
It also argued that there is an urgent need across the region for structural reforms to increase potential output growth as an acute infrastructure deficit is evident, especially in energy and roads.
“It is critical that improvements in public investment management systems are accompanied by efforts to ensure that resources are allocated to the most productive ends. For most countries in the region, concerns about the quality of public investment, and the capacity to maintain and operate infrastructure once it is installed, highlight the need for financial management reforms.”