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Various shocks have resulted in commodity price pressure and fiscal constraints globally, but sub-Saharan African countries, in particular, have been experiencing a "funding squeeze" as a result of these events, which necessitates a rethink about financing solutions and policy direction.
Speaking on the topic at the University of the Witwatersrand (Wits) on March 13, International Monetary Fund African development director Abebe Selassie said the funding shortfalls in the region have resulted in many countries, particularly South Africa, having high public debt levels.
He noted that, from the turn of the century until the onset of the Covid-19 pandemic, most African countries had periods of high economic growth and much development progress, which reflected successful domestic reforms, a favourable external environment with much resource demand and ample financing resulting from capital flows to the region.
However, since a commodity cycle downturn in 2015, growth started decelerating in many resource-rich countries, especially oil exporters. The period from 2020 to 2023 brought on a series of shocks, including the pandemic, the Ukraine war and other conflicts and financial markets tightening owing to aggressive policy.
These factors have exacerbated borrowing costs, reduced funding inflows and foreign direct investment, including in the emerging markets of sub-Saharan Africa.
However, after a difficult few years, a long-awaited rebound is on the horizon, with global economic conditions improving and inflation and rates easing, Selassie stated.
He cautioned, however, that these countries were not yet "out of the woods" as high debt levels remain.
Selassie elaborated that South Africa, Nigeria and Ghana are among the countries in the region that have returned to the international finance market, but given that sizeable uncertainties remain on China's internal restricting and prevailing challenges in sectors such as property, it remains to be seen what the knock-on impacts will be to emerging markets.
In South Africa's case, Selassie said, the country has historically been reliant on portfolio inflows from around the world, but this trend has reversed as of late, with more outflows occurring. He noted that domestic investment opportunities have not been attractive enough to keep capital flows in the country.
Additionally, both corporate and sovereign bond issuances have been declining, as foreign investor confidence has eroded.
It helps that South Africa has a large financial sector, since the government has had to increasingly rely on domestic borrowing. However, Selassie explained that South Africa's public debt situation was testament to the low economic growth in recent years.
"Prospects remain weak without resolute reforms to address growth impediments and fiscal sustainability concerns."
Selassie listed some of South Africa's strategic strengths as being the fact that a large chunk of its sovereign debt is in domestic currency, that it has a robust monetary policy framework and a flexible exchange rate.
Some of the weaknesses, on the other hand, include low economic growth, high and rising debt stock and the fact that current fiscal policy is not focused on debt stabilisation and fixing the primary balance.
Wits School of Economics and Finance associate Professor Ismail Fasanya agreed that sub-Saharan Africa's funding choices have deteriorated dramatically in the past year and that the acceleration of global monetary policy tightening has resulted in high interest rates worldwide and increased borrowing costs in sub-Saharan African countries.
He said tight financing conditions were likely to persist amid still high inflation and geopolitical fragmentation that were impacting on aid flows - for example, China is becoming more prudent with its lending.
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