The International Monetary Fund’s (IMF) latest Regional Economic Outlook for SSA (112-page / 2.65 MB PDF) said unreliable electricity supply in particular “is hampering the transition to higher productivity activities”.
However, the major obstacle to addressing the infrastructure deficit in SSA “does not generally appear to be a lack of financing, but rather capacity constraints in developing and implementing projects”, the report said.
While many countries have managed to sustain infrastructure investment levels, financed by a mix of domestic resources and external financing, “outcomes have not always improved accordingly, suggesting limited investment efficiency”, the report said.
The IMF said countries in the region should adopt a mix of policies that allows them to “take advantage of increasing choices to secure finance, while controlling fiscal risks and maintaining debt sustainability”.
“All three broad modalities for infrastructure financing, public investment, public-private partnerships and purely private investment, come with advantages and pitfalls,” the report said. Overall, countries should seek to “upgrade their investment planning and execution capacity and overhaul regulatory agencies and policies”.
According to the report, since 2009 foreign investors “have been increasingly drawn to SSA” as a result of “abundant global liquidity and low global returns” and the region has been able to tap into additional external funding, “notably through substantial foreign direct investment”.
The report said “traditional partners such as France and the UK” and international institutions lending at concessional conditions, “remain prevalent in providing funding, but non-traditional partners, in particular China, have also increasingly been investing in the region”.
“This has allowed countries to finance public and private investment aimed at filling substantial infrastructure gaps,” the report said. “As such, the widening of current account deficits witnessed since 2007-08 is not necessarily of concern, as long as it is accompanied by a sustained investment effort, as has been the case particularly in low-income countries, and allows for a pick-up in productivity and exports.”
The report said bond and equity flows to SSA market access economies have “surged back... with stronger risk appetite and a return to search-for-yield behaviours at the global level”. Figures show that, in the five months since April 2014, bond and equity flows recovered around 40% of the ground lost since May 2013.
“Recent Eurobond sovereign issuances were largely oversubscribed including maiden issuances by Cote d’Ivoire and Kenya,” the report said. “Total issuance for the region, including South Africa, already nears $7 billion so far this year, above the record $6.5bn issued in 2013.”
The report said that while rising global economic and financial ties “have been a boon for the region, vulnerabilities to external shocks have also increased”.
Countries “should strengthen their public financial management capacity” by upgrading methods to plan, execute and monitor public investment, strengthen project appraisal procedures and adopt “a medium-term budgetary framework that includes adequate provisions for the cost of operation and maintenance”, the report said. “Public-private partnerships can be an effective tool to upgrade infrastructure, but need to be underpinned by an appropriate institutional and legal framework, and to be carefully monitored to minimise fiscal risks.”
However, the report said the “lion’s share” of the region’s economies continue to experience “solid growth, driven by the sustained infrastructure investment effort, buoyant services sectors, and strong agricultural production”.
The report said that in South Africa, “infrastructure constraints are expected to be lifted only gradually starting in 2016 as new power plants come on stream”. In Ghana, “high interest rates, the crowding out of private investment, and reduced real disposable income as the currency depreciation feeds into inflation will put the brakes on activity”, the report said. Conversely, growth is forecast to accelerate in Senegal, “supported by public investment, including in the energy sector”.
Nonetheless, the report said “a more protracted Ebola outbreak or a wider extension of the epidemic” in the region “could have severe consequences for the economy... as it would undermine trade, transport activities, and investment”.