The International Monetary Fund (IMF) managing director Christine Lagarde tells Berna Namata about the EAC partner states' economic prospects this year and other cross-cutting issues affecting the region ahead of her visit to Kenya on January 6 . ------------------------------- For the past decade, Africa has seen strong growth; how can the continent make this growth sustainable and inclusive? The priority for most countries in sub-Saharan Africa must be to strengthen the foundations for sustained and inclusive growth. This will require more, and better, investment in physical infrastructure, especially in energy. But investment in the social sectors is also required. Without a healthy and well-educated younger generation, sub-Saharan Africa will not realise the potential that young people can bring to development. In recent years, a number of African governments have issued Eurobonds, diversifying their financing away from the traditional sources such as concessional debt and foreign direct investment. How do you view this development and what are the risks? This is a very positive development. Market-oriented reforms have succeeded in placing several African countries in a position to tap international financial markets by improving their public debt profiles and strengthening their reserves. Thus, I believe the possibility of issuing Eurobonds reflects both the abundant liquidity and improved economic stability in those countries. This is also good news, as it provides an opportunity to diversify finance sources. That said, it is crucial to ensure that the borrowed money goes to finance good investments that help countries to grow faster. But governments should pay close attention to market conditions before issuing foreign bonds and make every effort to provide markets with timely and detailed information on economic developments and policy plans. Kenya , for instance, is always borrowing from the IMF. What are the long-term solutions to foreign exchange support loans for African countries? Kenya's recently concluded IMF-supported programme was quite successful. The external and fiscal positions are now stronger, inflation has been tamed, and the economy is now less vulnerable to external and domestic shocks. On the reform front, Kenya has made significant progress with its expenditure and social protection systems, tax system, financial system and business regulation framework. In short, the country has laid the foundations to bring its economy to middle-income status within the next decade. Kenya does not have an immediate balance of payments need that would have to be filled by IMF financing. Nevertheless, the government has indicated that it will provide insurance against economic shocks by continuing its engagement with the Fund. This is what we call a "precautionary programme." We are working with the government to identify the best way to do that. I believe that the successful journey Kenya has embarked on will help to lift more of its people out of poverty and generate jobs for its rapidly growing population. But the country still faces international and domestic risks. The Fund will stand by Kenya to help manage these risks and provide support for the country to achieve its goals. ALSO READ: Economists sound the alarm over EA's rising public debt The EAC Monetary Union Protocol was signed recently. How do you rate the readiness of the region to enter into a monetary union, considering the different economic circumstances of the EAC countries? We welcome the signing of the Monetary Union Protocol because it will help foster regional economic integration. I cannot overstate how important that process will be for this region if it is going to keep building on its record of strong growth and job creation. Integration will boost trade, which will spur growth. Clearly, the agenda set out by the protocol is an ambitious one, and there is much work to be done. The IMF is ready to assist East Africa's governments as they move toward integration through continued technical assistance and policy dialogue. Specifically, what key lessons from the European Union should the EAC bear in mind as its implements the monetary union? The EU experience has highlighted the importance of addressing vulnerabilities in each country — particularly budget deficits — before the monetary union takes effect. If high public debt and fiscal deficits persist, the union may become hard to sustain. Thus, adhering to the fiscal convergence criteria is a must. There is also a need to develop cross-border banking supervision to reduce systemic risks and foster confidence in banks that work on a regional basis. The Fund has been providing technical assistance and policy advice in this area. With recent discoveries of oil in Kenya and Uganda and gas in Tanzania , governments are keen to bring more regulations to this nascent sector. What is your assessment? I believe that closing the large infrastructure gap is a necessary condition for growth and job prospects in the region. The discoveries of oil and other natural wealth provide unique opportunities that countries in the region should exploit. But they need to prioritise the use of their limited fiscal resources and ensure high quality infrastructure projects. For this reason, countries should develop a modern framework for taxing income from natural resources. This framework should ensure that a substantial portion of these revenues go to government treasuries and create a tax and regulatory environment that does not discourage foreign investment. What risks could arise from this sector? There are two risks. First, the benefits from the newfound wealth may not reach the region's population. The experience from many African countries has been disappointing. Only a small group benefits. The second risk is that the revenues from natural wealth may be used to finance low priority projects that do not help the region to grow faster and in a more inclusive manner. What sectors will drive growth in East Africa in 2014? Information technology is rapidly transforming the economic landscape by bridging the distance between East Africa and the global economy and providing financial services to millions who never had such access. Pent-up consumption from a growing middle class and rising investment have turned domestic demand into an engine of growth in many countries. At the same time, countries have diversified their economic relations. East Africans are trading more among themselves and more with non-traditional partners such as China , India and Brazil . This has enhanced the continent's resilience: East Africa is no longer as dependent as it used to be on Europe and the United States — its traditional export markets for raw materials. Prudent monetary policies have reduced inflation and built foreign reserve buffers. Fiscal restraint, helped by debt relief, has produced smaller budget deficits and lower levels of public debt. Governments have given a greater role to market forces; structural reforms have improved the business environment and increased investment in both human and physical capital; and stronger institutions have improved the quality of economic policies, leading to better governance. What is the economic outlook for East Africa ? The economic outlook for the region remains favourable. We expect growth to accelerate to above 6.5 per cent, from 6 per cent in 2013. READ: East Africa to rebound, grow by 6pc in 2014 Of course, there are risks, mainly from a further weakening of emerging market economies or advanced economies that would soften global growth prospects. Where possible, therefore, we recommend using the good times to build buffers to absorb the shocks to which low-income countries are exposed. So, East Africa's future is bright. The key now is to maintain the commitment to the reform process that has helped drive this progress, and to be fully aware that new risks can arise. I am confident that policymakers, business leaders, parliamentarians and civil society will continue the drive towards more progress and economic development.
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