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World Bank expects Africa's recovery to continue, but debt crisis blurs outlook

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World Bank expects Africa's recovery to continue, but debt crisis blurs outlook

10th June 2010

By: Terence Creamer
Creamer Media Editor

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Economic growth in the sub-Saharan Africa region is expected to continue its gradual postcrisis recovery between 2010 and 2012, driven by rising commodity prices and stronger external demand, the World Bank's ‘Global Economic Prospects 2010' report, released on Thursday, states.


But the report also warns that Europe's debt crisis had made it difficult to forecast the medium-term growth outlook, and acknowledged that the latest projections were based on the assumption that European sovereign debt restructuring would ensure that defaults are avoided.

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It cautions, too, that even if such the restructuring were successful, developing countries with close trade and financial connections to highlyindebted high-income countries might still feel serious ripple effects.


"Medium-term prospects for both high-income and developing countries face serious headwinds," the report noted, while arguing that the most immediate challenge related to the unwinding of the crisis-related stimulus measures, which had raised fiscal deficits and debt to gross domestic product (GDP) ratios to "unsustainable levels".

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"The G7's debt is expected by the International monetary Fund (IMF) to reach more than 113% of the group's GDP in 2010, a level not seen since 1950," the report stated - the IMF estimates that high-income countries would need to cut government spending, or raise revenues, by 8,8% of GDP for a 20-year period in order to bring debt levels down to 60% of GDP by 2030.


The report also argued that developing countries would benefit more from a rapid unwinding of the fiscal challenges in rich countries than from protracted solutions. "A prolonged period of rising high-income country indebtedness would raise global borrowing costs for developing countries, reducing investment and growth and ultimately resulting in more poverty," the Bank warned.

Overall, sub-Saharan Africa was forecast to grow by 4,5% in 2010, 5,1% in 2011 and by 5,4% in 2010, a material rebound from estimated GDP growth of 1,6% in 2009.


The region's largest economy, South Africa, is expected to expand by 3,1% in 2010, 3,4% in 2011 and 3,9% in 2012. This, too, represents a relatively solid recovery from the estimated contraction of 1,8% in 2009. But it is still well below the levels required to ensure that the economy begins to deal with its chronically high rate of unemployment.


By contrast, the Bank expects global GDP to expand by 2,9% and 3,3% in 2010 and 2011, and to strengthen by between 3,2% and 3,5% in 2012. Developing economies are expected to grow between 5,7% and 6,2% each year from 2010 to 2012, while high-income countries are likely to expand at a far more modest pace of between 2,1% and 2,3% in 2010, followed by growth of between 1,9% and 2,4% in 2011.


The strong recovery that currently characterises monthly data for the global economy is expected to lose some steam in the coming months, but annual growth rates should continue to strengthen - especially among developing countries, the report avers.


"These countries are responsible for a growing share of global growth, a trend that is expected to continue in the years and decades to come. The outlook, nevertheless, remains fragile and significant challenges stand in the way of a smooth recovery," it asserts.


Further, continued relaxed monetary policy in high-income countries could also pose challenges for developing countries, especially as they move to tighten their own policy stances.


"Rising interest rate differentials could induce significant capital inflows that could serve to regenerate some of the asset bubbles that created the conditions of the crisis in the first place."

 

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