Wednesday, November 5, 2008

No time to reduce aid to Africa

By Antoinette Sayeh, Financial Times , October 31 2008

If Africa is to make sustained progress in meeting development goals, it must address energy poverty. To do so in the current environment will require deft macroeconomic management.

Africa’s growth boom since about the mid-1990s has intensified and underscored energy poverty. The continent’s diverse and often abundant energy sources are underdeveloped and poorly-utilised. Increasingly, energy bottlenecks are an obstacle for a continuation of the otherwise encouraging growth story. The scale of needed investments presents the continent with tremendous challenges, which have become even larger following the oil and food price shocks, and the financial market turmoil.

To illustrate, electricity output in sub-Saharan Africa (excluding South Africa) has been stagnant for years and, as a result, the entire region, with close to 700m people, generates only as much power as Argentina, with 40m. Only about a quarter of the sub-Saharan African population has access to electricity, power plants are not in good shape, and average charges are high.

The IMF’s focus is on the macroeconomic aspects of this issue and these have now been magnified by oil, food, and financial market turbulence. While the rise in energy prices until earlier this year has presented opportunities for oil exporters, for oil importers it represents an important challenge to foster growth and reduce poverty. According to estimates in our Regional Economic Outlook for sub-Saharan Africa, 17 countries have been hard hit by the fuel and oil price shock. However, the recent decline in oil prices, if sustained, could provide some relief.

There is a risk that slower global activity will reduce the appetite for African exports and the supply of financing, possibly accompanied by lower remittances and tourism inflows. Donor financing might also come under pressure. Not only will this hamper development, it will also make it harder to find private investors for badly needed energy projects, and diminish the public sector’s capacity to finance them.

Financing energy infrastructure is thus likely to be more difficult and costly. While all options need to be explored, investment decisions must be embedded in a sound macroeconomic and debt sustainability framework.

The scope of African countries for tapping and expanding domestic resources is limited relative to the needs. Without adequate aid, many have turned to foreign borrowing. Public-private partnerships have also contributed to the financing of vital energy and infrastructure investments. Even if substantial private flows were available, they would need to be managed prudently to avoid the piling up of too much debt on non-concessional, commercial terms.

The contribution of official development assistance has so far been limited, but concessional financing would help African countries to maintain sustainable debt levels and minimise the risk of future distress. Now is not the time to reduce aid. Quite the contrary, it is time for development partners to honour and even scale up commitments. At the same time, African policymakers must also do their part so that Africa can attack energy poverty and extend growth.

Incentives for private providers, domestic revenue mobilisation, and equity considerations all point to the need for appropriate energy pricing. Traditionally, the energy sector has benefited from large subsidies. This has been costly for public budgets and reduced the scope for other expenditures, that might be sorely needed to fight poverty and foster development. Reducing ineffective or non-priority spending could help enlarge the fiscal space for capital investment.

Often electricity tariffs do not cover operating costs and oil price developments have not been passed through to pumps. Cross-country analyses and country-specific findings suggest that, historically, large subsidies to the energy sector are poorly targeted. To protect the most vulnerable and reduce budgetary pressure, systems of transfers and subsidies need to be reviewed. Changes in international commodity prices should be passed on to domestic prices. Clearly, price changes may need to be implemented gradually as countries adopt more cost-effective targeted programmes to protect the poor. Mechanisms like cash transfer systems would be more effective.

Working with others, the IMF is ready to help member countries to manoeuvre in difficult times. To help countries address the impact of the oil and food price crisis, the IMF has augmented its financial support in 15 low-income countries and also modified another facility to be able to provide more rapid and streamlined help to those affected by exogenous shocks.

Antoinette M. Sayeh is director of the African Department of the International Monetary Fund