NAIROBI Investment in infrastructure and natural resources will continue to underpin economic activity in sub-Saharan Africa, although capital outflows sparked by tighter global financial conditions pose a risk to growth, the IMF said on Thursday.
Inflation looks set to remain contained in most countries, it said.
"The main downside risk to this generally positive baseline scenario is the risk that growth in emerging markets might slow much more abruptly than currently envisaged," the International Monetary Fund said in its latest Regional Economic Outlook.
"As advanced economies tighten their monetary policies, frontier market economies will also face higher funding costs and a heightened risk of reversal of capital flows," it said.
The IMF forecasts economic growth of 5.5 percent for sub-Saharan Africa this year, up from 4.9 percent last year.
That is slightly more optimistic than the World Bank, which projects sub-Saharan Africa's output will grow 5.2 percent this year, partly driven by rising household spending.
Antoinette Sayeh, director of the IMF's Africa department, said growing fiscal and current account deficits could curb growth prospects in some of the region's economies. Measures such as widening tax bases would reduce those vulnerabilities, she said.
The median fiscal deficit in the region has risen to above 3 percent of gross domestic product last year, from below 2 percent in 2006, the IMF report showed.
Ghana drove up its fiscal deficit last year after raising public wages and capital investments. Zambia was also left with a bigger budget hole after it increased spending on subsidies and wages.
The higher deficits resulted in lower credit ratings for both countries and may have significant adverse implications for their debt sustainability, the IMF said.
"It doesn't necessarily mean increasing the tax rate but actually expanding your tax base by not exempting so many things from existing taxes," she said.
Weeding out so-called "ghost workers" from the payroll would also keep spending down, she said, referring to scams whereby fake workers or a deceased or retired worker receives wages which are directed to the account of the fraudster behind the scheme.
Africa, the world's poorest continent, needed to ensure growth was more inclusive, the IMF said, citing Mozambique where although the economy has expanded at the same pace as Vietnam, poverty has declined far more slowly.
The fund said it expected growth in Nigeria - now the region's biggest economy after a rebasing - to quicken as oil production picked up after recent supply disruptions.
It said South Africa, now ranked second largest and which suffered anemic private sector investments in 2013 and mining strikes which persist, will post modest growth this year as demand picks up in its main advanced economy trading partners.
Inflation in the region will accelerate to an estimated 6.2 percent in 2014 from 5.9 percent last year, before easing slightly in 2015, though currency depreciations may lead to renewed upward price pressures, the IMF said.
Conflicts might also curb economic growth prospects beyond the countries where fighting is taking place, the fund said, citing the violence in South Sudan, whose neighbors fear a spillover of the unrest in a volatile region.
"There are home-grown risks in a number of countries dealing with conflict, South Sudan and the Central African Republic, that are potentially also negative for neighboring countries as well," Sayeh said.
(Reporting by Drazen Jorgic and Duncan Miriri; Editing by Richard Lough and Susan Fenton)