External Finance and the African Economy: A Macro Approach

In the previous chapter, some determinants of the supply of external finance were discussed. Such flows have a number of macroeconomic implications that require careful management. Specifically, three such implications may be outlined. The first of these relates to the recipients’ fiscal response in the face of such flows. Section 5.2 will discuss this issue in the context of the wider literature on recipients’ fiscal response. The second and related impact of such flows relates to the upward pressure, which they place on the level of domestic prices, and the resulting appreciation of the real exchange rate. As discussed in Chapter 2, this falls within the ‘Dutch disease’ literature. Section 5.3 will examine this issue in relation to Africa. In section 5.4 the positive impacts of external finance will be examined. In most African economies this relates to the possibility that external finance offers to finance imports. The latter, in turn, will have a positive effect on investment and growth, by relieving the import compression situation discussed in Chapter 3. An econometric analysis focusing on this issue is given in section 5.4. Finally, section 5.5 brings the chapter to a close by highlighting a number of conclusions, arising out of the preceding discussion.