Long the global laggard, Africa's growth rate has improved in recent years. During the economic slowdown of 2001 and 2002, sub-Saharan Africa's growth rate exceeded the global average. Global recovery may have changed this, but with commodity prices supportive, Africa has benefited. Its growth rate continues to rise, and by 2005, the IMF expects that African growth will outperform global growth once again. This is telling.
A number of factors support Africa's improved growth performance. Perhaps the most important of these has been the steady move away from the state-led economic model that was dominant in the region for many years. Africa's over-extended state sectors have been steadily rolled back. Attempts have been made to bring large fiscal deficits in order, with the attendant benefits of reduced borrowing in domestic markets, lower interest rates and lower inflation. Average inflation in sub-Saharan Africa has been in single digits for some time now, although one or two glaring exceptions persist. Privatization has created opportunities for increased levels of FDI. Conditions more conducive to private-sector-led growth are gradually emerging and Africa's growth rates are seeing the benefit.
But the global environment is not without some risk for Africa. Although in overall terms sub-Saharan Africa is a net oil exporter, with the exceptions of Nigeria and Angola most of its large economies are oil importers. The overall impact of oil price strength on Africa's economies is difficult to gauge. By some accounts, African economies have yet to recover from the oil price shocks of the 1970s. But there have been relatively few perceptible signs of fallout as a result of recent oil price strength. Part of this is due to a weak US dollar environment, one in which most commodity prices, not just oil, are broadly supported. For many of Africa's oil importers, this means that the overall deterioration in the terms of trade has been limited. Another potentially more worrying reason is the temptation to re-introduce domestic fuel subsidies, in the belief that oil price strength will be only temporary.
While a better fiscal situation overall should allow some governments to buffer their economies from the adverse impact of oil price strength, if oil price highs are sustained for some time, recent fiscal reform may be put at risk. Sizeable amounts of borrowing in domestic debt markets may resume, putting upward pressure on interest rates. In some cases, the extension of domestic yield curves (with the issuance of longer term debt), rather than economic fundamentals, have been responsible for falling interest rates. Here, overly-liquid conditions may raise the risk of greater inflation when domestic fuel prices inevitably correct. Africa must be vigilant to avoid giving up its hard-won macroeconomic stability.