The Pursuit of Inclusive Growth in Africa
Zhang Tao, IMF Deputy Managing Director
South Africa, July 24, 2018
III. Unleashing opportunity in Africa – the way forward
So how can the region capitalize on its demographic potential to attain the SDGs and achieve higher and more inclusive growth?
In my view, this will require upholding the multilateral spirit of cooperation by all parties involved. Countries in the region should do their part by getting their house in order; and development partners should help by ensuring “sustainable” sources of financing.
What does this mean in practice? For countries in the region, it means reducing macroeconomic vulnerabilities and raising growth potential. And here I see two important priorities. One for the short term; the other for the long term.
The first priority is to reduce vulnerabilities from debt. It is urgent. Public debt ratios have increased markedly over the past five years – from an average of 30 percent of GDP to over 50 percent currently.
In some countries, the increase in debt is driven by development and infrastructure needs. In other countries, it reflects the impact of the large decline in oil prices in 2014. And in others, it was the migration of off-balance sheet liabilities to the public sector.
If the growing debt trends in Africa continue, rising interest costs from higher debt would divert resources away from education, health and infrastructure.
The priority therefore is to reduce vulnerabilities from debt. The emphasis should be on domestic revenue mobilization and improved debt management. This will create space for investment in physical and human capital and social spending.
Many countries in the region have seen significant improvements in collections. Tax revenues are above the tipping point of 13 percent of GDP in two-thirds of the countries, compared to just one-third in 1995. Still, this leaves more than 16 countries with less than 13 percent of GDP in tax revenue.
At the same time, oil exporters have seen a sharp decline in their revenue intake, from 31 percent of GDP in 2012 to 18 percent in 2016. Clearly, the emphasis on domestic revenue mobilization needs to be sustained.
The second priority to raise long-run growth is to revive private investment.
For many years, low levels of private investment were offset by public expenditures. Yet, faced with growing public debt vulnerabilities, it is unclear how long this trend can continue. Some countries have pursued public-private partnerships, but these efforts have had varying success.
At the same time, initiatives such as China’s Belt and Road Initiative and the G20 Compact with Africa provide an opportunity to support private investment. This includes institutional reforms that can encourage foreign direct investment and support public-private partnerships.
But for these initiatives to be effective, sub-Saharan African countries should ensure a transition from public to private investment. This requires maintaining macroeconomic stability and improving regulatory and insolvency frameworks. It also means increasing intra-African trade and deepening access to credit.
Here, Africa can offer the world important lessons on financial inclusion. We have recently published a paper that pulls together lessons from 16 pilot countries in Africa on policies to expand access to credit. 
Facilitating this handover from public to private investment also requires alternative, non-debt creating ways of financing the region’s large infrastructure needs. By some estimates (AfDB), these needs amount to US$130-170 billion per year. Such financing should minimize risks to economies in the region.