Different IMF takes on fiscal policy, Nigeria’s funding gap - Capital Economics
Africa Economics

Different IMF takes on fiscal policy, Nigeria’s funding gap

Africa Economics Weekly
Written by Virag Forizs
The IMF’s campaign encouraging governments to broaden fiscal support to prop up recoveries does not seem to extend far and wide. While the Fund appears to be backing a pause in Kenya’s fiscal consolidation plans this year, the IMF has not offered similar endorsements to South Africa. To the contrary, its government was urged to rein in debt – a key reason why we think the economic recovery will be weak. Meanwhile in Nigeria, there is probably more, not less, deficit monetisation on the horizon.

Kenya: more room for fiscal manoeuvre?

Policymakers in Kenya appear to be exploring options to open up fiscal space to boost the recovery, seemingly with the IMF’s blessing.

It is not entirely clear what central bank governor Patrick Njoroge was referring to when commenting this week that the government is seeking to “reconfigure its portfolio of external debts”. The remarks came against the backdrop of Kenya’s recently approved request for debt service suspension by Paris Club creditors and China (amounting to $300mn and $245mn, respectively). And negotiations with the IMF about a possible funding programme are ongoing. For approval, Kenya has to maintain a sustainable debt burden.

As things stand, Kenyan officials have not signalled their intention to go beyond the G20’s Debt Service Suspension Initiative (DSSI), for example by requesting debt restructuring under the “Common Framework”. And we think that concerns expressed by the authorities in the past about the implications of participating in terms of market access have not gone away. Kenya is less likely to follow the example of Chad which became the first country to request debt relief under the Common Framework this week just as its government struck an IMF deal. (We noted before the debt problems in Zambia and Ethiopia, which seem to be the next potential candidates.)

Rather than focusing on tightening the belt to address Kenya’s debt problem, the IMF appeared to endorse a pause in the government’s fiscal adjustment plans in a recent statement – in line with broader recommendations by the Fund for continued fiscal support across the globe. With the IMF’s blessing, the authorities in Kenya seems to be preparing the ground to continue propping up economic activity.

South Africa: slipping fiscal consolidation

One country where the IMF seems to be pushing hard for fiscal consolidation is South Africa. But recent moves by the government are increasing the chances of austerity plans being watered down.

A damning IMF statement this week urged the authorities to employ “fiscally responsible measures” to support the recovery while stressing the critical importance of reining in debt and avoiding “ill-targeted subsidies and transfers to inefficient state-owned enterprises (SOEs)”. The government’s recent decision to provide no further debt guarantees to state-owned lender Land Bank suggested a turn away from providing additional bailouts to SOEs.

But reports this week provided signs to the contrary. South African Airways, the state-owned airline, is set to receive ZAR1.3bn from the government. And the troubled public electricity provider Eskom may be propped up too due to its systemic role in the economy. Large outlays to support SOEs would, all else equal, require the government’s harsh austerity plans to be stepped up. And that will be even harder to push through, further raising the possibility of the plans being watered down.

One direction: Nigeria and (more) monetisation

Nigeria’s central bank governor Godwin Emefiele seemed to dismiss concerns about funding provided to the government this week, suggesting that the direction of travel is towards more, not less, deficit monetisation. Afterall, the government’s financing needs are projected to be higher this year with a wider budget deficit included in the 2021 budget. Meanwhile, negotiations over a $1.5bn World Bank loan have stalled. And the decline in dollar bond yields may not be sufficient for a Eurobond issuance. Policymakers will probably have to fall back on central bank financing to plug the budget deficit. This may not cause inflation to spike sharply, but it is likely to keep price pressures elevated.

The week ahead

Monetary policymakers meeting next week in Ghana will probably keep interest rates unchanged.

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

1st Feb

Gha

Interest Rate Announcement

14.5%

14.5%

SA

Absa Manufacturing PMI (Jan.)

(09.00)

50.3

50.0

3rd Feb

Ken

Markit/Stanbic Bank PMI (Jan.)

(07.30)

51.4

4th Feb

SA

Electricity Production (Dec.)

(11.00)

(-2.4%)

5th Feb

Mau

CPI (Jan.)

(+2.7%)

(+1.6%)

Also expected during this period:

1st – 12th

Mau

Interest Rate Announcement

1.85%

1.85%

Selected future data releases and events

8th Feb

Tan

CPI (Jan.)

(+3.2%)

10th Feb

Gha

CPI (Jan.)

(+10.4%)

SA

SACCI Business Confidence (Jan.)

(09.30)

11th Feb

SA

Mining Production (Dec.)

(09.30)

-5.7%(-11.6%)

SA

Manufacturing Production (Dec.)

(11.00)

-1.3%(-3.5%)

SA

State of the Nation Address

(17.00)

15th Feb

Nam

CPI (Jan.)

(+2.4%)

Bot

CPI (Jan.)

(+2.2%)

16th Feb

Zam

Interest Rate Announcement

8.0%

17th Feb

Nam

Interest Rate Announcement

3.75%

SA

CPI (Jan.)

(08.00)

+0.2%(+3.1%)

SA

Retail Sales (Dec.)

(11.00)

+1.8%(-4.0%)

25th Feb

Zam

CPI (Feb.)

26th Feb

Uga

CPI (Feb.)

Ken

CPI (Feb.)

SA

Trade Balance (Jan., SAAR)

(12.00)

SA

Budget (Jan., SAAR)

(12.00)

Also expected during this period:

8th – 15th

SA

Unemployment Rate (Q4)

30.8%

11th – 18th

Nga

CPI (Jan.)

(+15.8%)

14th – 21st

Uga

Interest Rate Announcement

7.0%

14th – 25th

Ang

CPI (Jan.)

(+25.2%)

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

World 1

2009-18

Ave.

GDP

Inflation

2019

2020e

2021f

2022f

2019

2020e

2021f

2022f

Nigeria

0.80

4.4

2.2

-2.0

3.5

3.0

11.4

13.2

15.0

13.0

South Africa

0.57

1.5

0.2

-7.3

4.3

4.0

4.1

3.3

3.8

3.3

Ethiopia2

0.20

9.7

9.0

6.1

3.0

9.0

15.7

20.4

14.5

12.5

Kenya

0.18

5.6

5.4

-0.5

6.0

6.5

5.2

5.3

5.5

5.0

Angola

0.17

2.4

-0.9

-5.0

3.5

2.5

17.1

22.2

21.0

16.0

Ghana

0.13

7.0

6.5

0.5

5.5

6.5

8.7

10.0

9.0

8.5

Tanzania

0.12

6.5

5.8

1.5

6.5

6.5

3.4

3.3

3.0

4.5

Côte d’Ivoire

0.10

6.1

6.5

2.5

7.5

7.5

0.8

2.5

0.5

1.0

Uganda

0.08

5.3

6.7

-1.5

7.0

6.0

2.9

3.8

4.0

5.5

Zambia

0.05

5.6

1.4

-2.5

3.0

4.0

9.1

15.7

16.5

10.0

Botswana

0.03

3.7

3.0

-10.5

8.5

5.5

2.8

2.0

3.5

3.0

Mozambique

0.03

3.7

2.3

-0.5

4.0

4.5

2.8

3.0

3.0

3.5

Rwanda

0.02

7.2

9.4

-3.5

11.5

11.0

2.4

7.8

3.0

4.5

Mauritius

0.02

3.7

3.0

-15.0

12.5

6.5

0.4

2.5

3.0

3.0

Namibia

0.02

3.4

-1.0

-7.5

6.0

5.0

3.7

2.5

3.5

3.5

Sub-Saharan Africa

2.5

4.2

3.1

-2.4

4.6

4.8

8.3

9.7

9.8

8.5

Sources: Refinitiv, National Sources, Capital Economics. 1) % of GDP, 2019, PPP terms (IMF estimates); 2) Fiscal Years.

Table 2: Central Bank Policy Rates

Policy Rate

Latest

(29th Jan.)

Last Change

Next Change

Forecasts

End
2021

End

2022

Nigeria

MPR

11.50

Down 100bp (Sep. ’20)

Down 100bp (Q2 ’21)

10.00

10.00

South Africa

Repo Rate

3.50

Down 25bp (Jul. ’20)

None on horizon

3.50

3.50

Angola

BNA Rate

15.50

Down 25bp (May ’19)

Down 100bp (Q4 ’21)

14.50

13.00

Kenya

Central Bank Rate

7.00

Down 25bp (Apr. ’20)

None on horizon

7.00

7.00

Ghana

Policy Rate

14.50

Down 150bp (Mar. ‘20)

Down 100bp (Q2 ’21)

13.50

13.50

Uganda

Central Bank Rate

7.00

Down 100bp (Jun. ’20)

None on horizon

7.00

7.00

Sources: National Sources, Capital Economics

Table 3: Key Market Forecasts

Forecasts

Forecasts

Currency

Latest
(29th Jan.)

End

2021

End

2022

Stock Market

Latest

(29th Jan.)

End
2021

End

2022

Nigeria

NGN (Official)

381

400

400

NGSE

42,413

49,000

55,000

NGN (Nafex)

394

425

425

South Africa

ZAR

15.0

14.5

15.0

JALSH

62,563

75,650

91,550

Angola

AOA

647

700

750

Kenya

KES

110

115

120

NSE 20

1,882

2,250

2,650

Ghana

GHS

5.82

5.90

6.00

GSECI

2,027

2,400

2,800

Uganda

UGX

3,680

3,850

3,950

UGSE

1,300

1,500

1,700

Sources: Refinitiv, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com