new rules

IMF/Georgieva: After austerity, it’s ‘spend, spend, spend’ at the Fund

By Patrick Smith

Posted on April 8, 2021 07:05

As governments and international financial institutions throw off the constraints of austerity policies and economic orthodoxy, there are hard questions about how Africa could benefit from this change in strategy. Much will depend on how fast its economies can raise finance for post-Covid recovery efforts.

To date, even with the second wave of the pandemic, Africa’s coronavirus caseload is the lightest of any region: it has about 14% of the world’s population and about 3% of the reported cases. But Africa’s economic hit from the crisis is far heavier. With an IMF forecast of 3.4% growth for 2021, the continent is not making enough progress to fight poverty.

On the slide for five years, the theory that cutting deficits would help force down wages, prices and borrowing and then attract a wave of new investors into productive assets has finally been ditched in favour of a wave of manic spending. IMF managing director Kristalina Georgieva encouraged this shift: “In this crisis, we came very early with abandoning orthodoxy on fiscal policy. I would say spend, spend, spend […] but keep the receipts. Not the usual message from the fund!”

By the end of 2020, the US budget deficit had hit 14% of GDP, and Britain’s had ballooned to over 17%.

South Africa, one of the biggest spenders on the continent, ramped its up to 6.6%; Ghana, still more daringly, managed 11.6%. Both countries have to contend with a rising burden of debt-service costs. This will surge still further if the US Federal Reserve raises interest rates.

During the Covid-19 crisis, rich countries spent on average 7% of GDP on bolstering their economies; African economies averaged 3%. That boost in Africa was not enough to stop more than 30 million people falling into extreme poverty, according to the World Bank, as a result of pandemic-triggered recession.

More widely, the pandemic’s repercussions have halted social progress and reversed economic growth. Classrooms in Africa have been fully or partly shut for 23 weeks over the past year, which is higher than any other region on average.

Public debt as a percentage of GDP in African countries rose to an average of 70% last year and will increase further this year. Concessions agreed by the G20 group of countries for suspending payments will make no difference to that. Still more alarming is that African governments are now allocating on average 30% of revenue to debt service – that is a 10% rise on the pre-­pandemic levels.

This will directly cut into the budgets for healthcare and education, as well as much-needed security spending in countries such as Nigeria, many of the Sahelian states, DRC and Mozambique.

Such mounting fiscal pressures are an argument for a more systematic initiative on debt, the IMF’s Georgieva told The Africa Report: “It is important that both official bilateral and private-sector creditors step up. The evidence is clear – when unsustainable debt is addressed earlier it is good for the debtor and for the creditors as well, because it brings the economy forward and it provides a better debt service [capacity] in the future.”

Without sustained progress on restructuring debts across the region, the formal abandoning of austerity policies and economic orthodoxies across the globe will mean little in Africa. And any restructuring must not undermine the African countries’ capacity to fund a recovery that will drive growth and create jobs.

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