Fitch: IMF Programmes in Africa and the Implications for Creditworthiness

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The increased involvement of the IMF in Africa over the last two years has alleviated short-term liquidity pressures and contributed to the design and implementation of adjustment policies to address macroeconomic imbalances. However, the long-term impact of IMF programmes on creditworthiness is less certain, as the sovereign ratings of countries under IMF arrangements have been upgraded in some instances in the past and downgraded in others, Fitch Ratings says.

The confluence of shocks that has hit African countries in recent years has led to a strong increase in the number of IMF arrangements in the region. The total agreed amount of the IMF’s outstanding arrangements with Sub-Saharan African (SSA) countries rose nearly five-fold between end-2014 and end-2017. In 2017, nine out of 21 Fitch-rated African sovereigns were under disbursing financial arrangements with the IMF, up from only three in 2014.

IMF involvement doubtlessly supports African sovereigns’ creditworthiness during programmes thanks to the Fund’s role as a lender of last resort. The IMF helps bridging financing gaps, reducing the risks of disorderly adjustment as many countries faced pressures on liquidity, often from a weak position, with growing debt ratios, low flexibility of exchange rate regimes and relatively weak governance indicators. The Fund’s financial assistance will only cover part of the fiscal financing needs over the lifespan of the arrangements, but its interventions often crowd in other creditors and also serve to avert capital outflows by domestic agents through the so-called “catalytic effect”.

In the longer term, the impact of the IMF programmes on creditworthiness is less clear-cut. The ability of IMF arrangements to support sovereign creditworthiness ultimately depends on each country’s characteristics, including macroeconomic fundamentals, the quality of institutions and governance, political set-up and, above all, the strength of commitment to the implementation of the required adjustment.

IMF intervention could lead to deterioration in the market’s perception of creditworthiness if the Fund assesses public debt to be unsustainable and requires restructuring as a condition for its intervention.

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