Download State Bailouts in an Era of Financial Crisis: Lessons from Africa

State Bailouts in an Era of
Financial Crisis: Lessons from
Africa
Philip Cobbinah and Dozie Okpalaobieri
GTA Analytical Paper No.5
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GLOB L
TR DE
LERT
GLOBAL TRADE ALERT
GTA-AP5
STATE BAILOUTS IN AN ERA OF
FINANCIAL CRISIS: LESSONS FROM
AFRICA
Philip Cobbinah
Dozie Okpalaobieri
The Global Trade Alert is funded by the World Bank, Contract Number 7155693
StateBailoutsinanEraofFinancialCrisis:Lessons
fromAfrica
PhilipCobbinah,BankofGhana
DozieOkpalaobieri,ACET
Abstract
This paper will document and examine the nature, pattern and types of bailout and fiscal stimulus employed during the recent global financial crisis by sub‐Saharan African (SSA) countries and most importantly identify the risks emanating from such interventions and suggest mode of disengagement at the end of the crisis. The specific research questions asked are: (i) What are the nature, trends, pattern and determinants of fiscal stimulus and bailouts in SSA vis‐
à‐vis those initiated and implemented in the United States and Europe? (ii) How do bailouts in SSA compare to those in other developing regions of the world? (iii) What are the effects of state fiscal stimulus and bailouts on sectoral and aggregate economic performance in SSA? (iv) Why are many SSA countries adopting the policy of inaction with respect to fiscal stimulus and bailout? (v) How can SSA countries further increase fiscal stimulus and bailouts to enhance better management of the risks induced by the crisis? (vi) What are strategies for avoiding re‐nationalisation and ensuring smooth state disengagement from the bailed out firms at the end of the crisis? Introduction
What began as a collapse of the US sub‐prime mortgage market quickly spread through the financial system, eroding the value of capital, undermining the creditworthiness of major global financial institutions, and triggering massive de‐leveraging. Efforts to restore capital adequacy and uncertainty about the underlying value of assets held in the form of sub‐prime mortgage backed securities resulted in capital hoarding, causing liquidity to dry up, and ultimately compromising the ability of borrowers to finance transactions in both the real and financial sectors. This in turn reduced demand and employment, undermining consumer and business confidence, and triggering a further contraction in demand. According to the IMF’s World Economic Outlook Update, output in advanced economies contracted by 2% in 2009, a sharp downward revision from expectations just a couple of months before. Forecasts by the World Bank and the OECD likely showed a further deterioration in the outlook.
Whereas it is true that the advanced economies were the hardest hit by the crisis, with growth rate projections declining from 2.7% in 2007 to about 1.0% in 2008, developing economies were not spared. As the global financial crisis continued to deepen, world output growth prospects, particularly for 2009 and 2010, had been downgraded at least a few times. Growth in developing economies, including emerging economies, was estimated at 6.3% for 2008, down from the realised growth rate of 8.3% in 2007. The recession that began in 2008 could turn out to be the worst slowdown since the Great Depression of the 1930s. For three‐quarters of a century, economists have been studying it diligently. And even now they cannot come to a definitive conclusion about the cause of that depression, the reasons for its severity and duration, or what cured it. In an introduction to a book of 2
essays on the Great Depression he compiled in 2000, Ben S Bernanke, then a Princeton professor and now chairman of the Federal Reserve Board, wrote, ‘Finding an explanation for the worldwide economic collapse of the 1930’s remains a fascinating intellectual challenge.’ Africa initially did not experienced the direct effect of the crisis but there is concrete evidence that African countries will not escape the second round effects of the global economic downturn (even though it is gradually easing), because of the relatively limited level of integration of most African financial markets with global financial markets. However, the continent witnessed some adverse effects, evidenced in a slowdown in the rate of growth from 6.2% in 2007 to 5% in 2008. Some of the channels of the second round effects of the crisis are: dwindling aid inflows; fall in commodity prices; reduction in global trade; precipitous drop in remittances; and stifled capital flows, especially foreign direct investment. These are sources of significant external shocks to African countries because variables behind recent strong growth experience in these countries over the last few years are being suppressed. Sustainability of growth in these countries is, therefore, further compounded and probability of meeting the MDGs become more uncertain than ever before. Dwindlingaidinflows
The poorer countries do get foreign aid from richer nations, but it cannot be expected that current levels of aid (low as they actually are) can be maintained as donor nations themselves go through financial crisis. As such, the Millennium Development Goals to address many concerns such as halving poverty and hunger around the world will be affected. Almost an aside, the issue of tax havens is important for many poor countries. Tax havens result in capital moving out of poor countries into havens. An important source of revenue, domestic tax revenues account for just 13% of low income countries’ earnings, whereas it is 36% for the rich countries, however, due to the recession fears and the financial crisis, capital flight is estimated to cost poor countries from $350 billion to $500 billion in lost revenue, outweighing foreign aid by almost a factor of 5. This lost tax revenue is significant for poor countries. Table 1: Net official development assistance disbursements to key African recipients (percentage of gross national income) Source: OECD (for ODA) and World Bank, African Development Indicators (for GNI). 3
Figure 1: Financial inflows to sub‐Saharan Africa, 2000–2009 (US$ billions) Note: 2009 expected values. Source: International Monetary Fund (2009a).Regional Economic Outlook Sub‐Saharan Africa, (April) Washington, DC: IMF Fallingcommodityprices
The dramatic fall in commodity prices has affected different developing countries differently. Just as the increase in food and fuel prices between early 2007 and mid‐2008 created both winners and losers among developing countries, the sharp decline in commodity prices has done the same. Of the 68 developing countries with available data which experienced deteriorating terms of trade during the first three quarters of 2008, all but eight saw a partial reversal of the deterioration in the final quarter of the year. Of the 39 countries for which the terms of trade improved in the first three quarters, all but two saw a partial reversal in the final quarter. Nevertheless, for some low‐income commodity producers, the cumulative windfall was not large, particularly relative to their development needs. And for some commodity producers, the high prices from 2007 and into 2008 followed on the heels of a prolonged period during which their terms of trade declined. 4
Figure 2: Trends in price indices of major commodity groups Source: IMF online database. Reducingglobaltrade
Figure 3: Real import growth – OECD countries (3 month average – % change year ago) Source: World Bank data and staff estimates. Table 2: US imports from developing countries, October–November 2008, * % change from year ago. Source: US Commerce Department and World Bank staff calculations. Excludes small economies. Falling demand in advanced economies has had serious implications for global trade, with 2009 experiencing the first yearly decline in world trade volumes since 1982, the largest decline in 80 years. Advanced country imports projected by the IMF contracted by 3.1% in real terms compared to earlier expectations of no change in volumes, and further downward revision is likely. The counterpart to this is the expectation of a virtually unprecedented decline (of close to 1%) in exports 5
from emerging and developing economies. Although 70% of global trade is between advanced countries, developing economies are highly dependent on advanced country markets for their exports. South‐South trade only represents about 10% of global trade.
Droppingremittances
Remittance flows are estimated to have reached $305 billion in 2008, an increase of around 9% from 2007, but with a sharp deceleration in the second half of 2008. World Bank indicators suggest that remittances to developing countries fall in 2009 and continue to dwindle. The steepest decelerations in 2008 have been for SSA. In the past, remittances have been stable, or even counter‐cyclical, during an economic downturn in the recipient economy. This time, however, the crisis has affected remittance source as well as recipient countries. Since workers’ remittances traditionally help finance consumption and SME investment in recipient countries, the deceleration in growth and possible decline is of great concern. Figure 4: Remittance inflows to sub‐Saharan Africa (US$ billion) Source: Ratha and Zu (2007), Migration and remittances fact book (Washington: World Bank) and World Bank database. Stiflingcapitalflows
Nowhere is the impact of the financial crisis more evident than in the global capital markets on which emerging markets and many developing countries rely. According to the Institute for International Finance, net private capital flows to emerging markets was estimated to have declined to US$467 billion in 2008, half of their 2007 level. A further sharp decline to US$165 billion was forecasted for 2009, with just over three‐quarters of the decline due to deterioration in net flows from commercial banks. The World Bank estimated that in 2009, 104 of 129 developing countries had current account surpluses inadequate to cover private debt coming due. For these countries, total financing needs are expected to amount to more than $1.4 trillion during the year. While small in global terms, Africa has been relying increasingly on private capital inflows. But given the small size of domestic securities markets, even a small decline in these flows could have a sizeable impact on securities prices. In terms of market borrowing, there have been no international bond issues by African countries in 2008, compared with US$6.5 billion in 2007. The World Bank’s Public‐Private Infrastructure Advisory Facility (PPIAF) reports that the value of PPI projects that reached financial closure between August and November 2008 was down 40% compared to a year earlier.
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Figure 5: Net private capital flows to developing‐country regions Source: Economic Commission for Africa. Generalresponsesfromglobalgovernmentstothecrisis
To minimise these negative effects, several actions have been taken by governments of both developed and developing countries. These include tariff changes, trade remedy measures, fiscal stimulus packages, subsidies, sector – and firm – specific bailouts aimed at protecting employment, encourage local production, lessen liquidity constraints and promote consumer confidence. One of the most acceptable and widely used remedial measures is the fiscal stimulus and sector‐ and firm‐
specific bailouts. Alas, the questions raised by proposed stimulus – whether to apply it, what sort it should be, how much it should cost, and when it should begin and end – are far trickier to answer than problems involving dead batteries. And, remarkably enough, history and economic research offer no conclusive answers. While there are headline support figures from developed countries and some emerging economies in Asia and Latin America, not very much has been done in sub‐Saharan African (SSA) countries, despite the biting effects of the crisis. South Africa and Nigeria are the only notable examples of SSA countries that have provided major support to specific sectors aimed at managing the risks induced by the crisis. For instance, South Africa has provided fiscal stimulus to sectors considered to be of high importance to the economy. In addition, bailouts in the form of subsidised loans worth R644 million have been extended to 11 firms, with another 49 applications being processed. In Nigeria, the banking sector has been bailed out with over $4 million. Researchquestionstobeaddressedinthispaper
One thing that remains unknown is the determinants of action and inaction on the part of governments of SSA countries relating to their interventionary role in mitigating with the effects of the crisis. Little is also known about the mode of intervention, risks emanating from such interventions and strategies for mitigation, and policy action for ensuring smooth disengagements without jeopardising the interests of private actors and tax payers’ money. This research is aimed at examining the nature, pattern and types of bailout and fiscal stimulus in SSA countries and most importantly at identifying the risks emanating from such interventions and suggesting mode of disengagement at the end of the crisis. The specific objectives of this paper are in line with the following research questions: (i) What are the nature, trends, pattern and determinants of fiscal stimulus and bailouts in SSA vis‐
à‐vis those initiated and implemented in the United States and Europe? (ii) How do bailouts in SSA compare to those in other developing regions of the world? (iii) What are the effects of state fiscal stimulus and bailouts on sectoral and aggregate economic performance in SSA? 7
(iv) Why are many SSA countries adopting the policy of inaction with respect to fiscal stimulus and bailout? (v) How can SSA countries further increase fiscal stimulus and bailouts to enhance better management of the risks induced by the crisis? (vi) What are strategies for avoiding re‐nationalization and ensuring smooth state disengagement from the bailed out firms at the end of the crisis? (vii) What immediate actions are required to enhance? Significanceofresearchquestions
This study aims at enhancing understanding on the strategies available to SSA countries for mitigating the effects of the global economic downturn – the major source of risk to sustainable growth and development in SSA. The main outcomes of this study include proposals for preventing re‐nationalisation of firms by the state due to their interventions as a result of the crisis. These outcomes are aimed at contributing to the policy debate on the role of the state in SSA. Specifically, the study outcomes would among others chart the course for smooth and non‐distortionary state disengagements at the end of the crisis. This is of high policy importance given that there are no existing policy prescriptions for SSA on this issue.
Departureofresearchfromexistingliterature
Most of the studies about the African experience of the financial crisis researched are highly preoccupied with the impact of the crisis and very few of the studies assess the nature of the fiscal stimulus and state bailouts in the region. This study is aimed at examining the determinants of the stimulus in the region, their effects on economic activities and policies for improving this intervention and examines the stance of inaction by some countries. It is also aimed at proposing strategies for state disengagements from sectors and firms in which they intervene when the crisis is over. It is thus the intent of this study, therefore, to contribute immensely to the existing knowledge if any, on these areas of urgent needs for SSA countries. Methodologyanddata
The study documents and reviews fiscal stimulus and bailout packages in SSA countries across sectors and countries for which there is available data, the determinants of these interventions and their effects are analysed qualitatively. Secondary and, where necessary, primary data and information will be collected from countries that have initiated and implemented major interventions across sectors as the basis for analyses. Similar information will be gathered from countries that have adopted the policy of inaction with a view to understanding the basis for their policy choice. Terms of contract and agreement between the state, on the one hand, and sector and firms of intervention, on the other, will be qualitatively analysed to ascertain the efficacy of the agreements, its benefits to the sector/firm and the economy at large. FISCALSTIMULUSANDSTATEBAILOUTSINSUB‐SAHARANAFRICA
Overview
An economic stimulus is an effort by the government to pump money into an ailing economy, whether through spending, tax cuts or interest rate reductions. By replacing money not being spent by businesses or consumers, a stimulus is meant to put a floor under a recession and pave the way for a return to growth. In most circumstances, economists consider interest rate cuts by the Federal Reserve to be the most effective form of stimulus. But when the economy continued to sink in late 2008 even after the Fed cut rates to practically zero, pressure grew for a fiscal intervention, that is, action by Congress. 8
On the confirmation of declining outputs for two/three consecutive quarters, signalling the onset of recession, the United States assembled a substantial stimulus package, running into billions of US dollars, in the form of fiscal bail‐outs of insolvent firms and expenditure hand‐outs to boost aggregate demand and reduce unemployment. In addition, the fiscal stimulus was complemented by tax adjustments to upturn dwindling economic fortunes. Even before taking office, President Obama began work on a stimulus package. On 11 February 2009, Congress gave final approval to a $787 billion bill, the American Recovery and Reinvestment Act. The bill had been bitterly resisted by Republicans – none voted for the measure in the House and only three did in the Senate. Conservative protestors regularly cited the bill's price tag as a sign that the Obama administration was running up unaffordable debt and was devoted to big government. By November 2009, a consensus had developed among analysts across a wide range of views that the stimulus package, as messy as it is, was working. But as unemployment rose above 10%, administration officials acknowledged that they had underestimated the depth of the recession, and pressure began to rise for a second round of stimulus – to be called a jobs bill, to avoid the stigma that Republicans had sought to attach to stimulus. The global financial crisis has had a major impact on development in SSA. The estimated output loss for SSA alone is around US$40–50 billion in 2008–2009. Developed countries announced fiscal packages worth close to US$2 trillion to address the effects of the global financial crisis – the effects of these packages help to smooth income losses in SSA in 2009–10, offsetting about a quarter of losses due to the financial crisis. The underlying considerations which informed the stimulus packages and the extent, depended on their vulnerability to external economic shocks (which depends, in turn, on the structural aspects of their economies and their integration into the world economy) as well as on their resilience (which can be nurtured, and depends on good economic management, good governance, ease of doing business and social cohesion as listed below). Nurtured determinants • • • • Macro‐economic management Good governance Ease of doing business Social cohesion Inherent (structural) determinants • Banking sector exposure • Export dependence • Export concentration.
Financialvulnerability
Table 3 partly confirms the view that the SSA’s financial institutions may have been less immediately affected by direct contagion from US and EU banks, due to their relatively limited global integration. 9
Table 3: Measures of economic vulnerability of SSA in comparison to other regions (most recent date, of 2007 or 2006) * The export concentration index is from UNCTAD’s export concentration index, which is a normalised Herfindahl‐
Hirschmann index where 1 is maximum concentration. Source: Wim Naudé’s compilation from World Bank Development Indicators, IMF (2009a) and UNCTAD. Thus, the table indicates that, by 2006–7, the SSA’s liabilities to foreign banks were less than 1% of GDP – compared, for instance, to 9% in East Asia and the Pacific, and almost 5% in Latin America and the Caribbean.1 According to the IMF (2009a: 27), African countries have, so far, avoided banking crises as elsewhere due to: the still limited though increasing integration with global financial markets, minimal exposure to complex financial instruments, relatively high bank liquidity, limited reliance on foreign funding, and low leverage in financial institutions. But African financial institutions may not yet be out of the woods. The table also suggests that domestic credit to the private sector had significantly increased in the SSA in recent years, and now exceeds that of all developing regions except for East Asia and the Pacific. In addition, in about half the African countries, foreign ownership in the local banking sector is significant – with foreign banks owning more than 50% of local banking assets. To the extent that African banks may start to face adverse developments in their balance sheets due to exposure to, and linkages with, foreign banks, that the impact is more likely to come from the more substantial linkages with West European, rather than US banks – especially banks in the UK, Portugal and France. This could, however, also be a cloud with a silver lining, given that West European banks have been less affected than US banks. The table moreover indicates that, whereas the direct contagion impact on Africa’s banks may be less of an immediate danger than in other regions, its financial sector, more broadly, may be negatively impacted. Portfolio equity flows (short‐term financial inflows) in SSA stood at over 2% of GDP. Adverse movements in these flows will have a swift impact on stock markets, exchange rates and, indirectly, will affect banks’ balance sheets. Africa’s stock markets have seen quite rapid development since the early 1990s, and, as the table shows, by 2006, stocks traded on Africa’s 1
The countries of ‘emerging Europe’ were among the most significantly impacted upon by the financial meltdown affecting US and West European banks. Hungary, Iceland and Ukraine were among the countries needing emergence assistance from the IMF by the end of 2008. At the time of the outbreak of the crisis, these countries’ liabilities towards US and European banks exceeded 50% of GDP (IMF, 2009a). 10
markets reached over 60% of GDP – a higher proportion than in Latin America or MENA.2 The potential impact of a sudden reversal in portfolio equity flows as a ‘flight to safety’ response may, therefore, be particularly damaging as, indeed, subsequent events have shown. By the end of 2008, the South African stock market (the largest in Africa) had lost 25% of its value and, by the end of March 2009, the Nigerian stock market’s All Share Index had fallen by 37% in one quarter – the largest such decline in the world.3 Although the SSA’s relatively limited internationally integrated financial sector offers some protection against direct contagion effects, there is concern that the financial crisis will hurt African financial development over the longer term. As expressed by Maimbo (2008: 1): ‘the impact on the financial sector in Africa may actually be more significant and longer lasting than first assumed’. He discusses the impact of the crisis in weakening African stock markets, stifling innovation and less conservative lending practices, leading to significant losses in central banks’ reserve assets,4 in entrenching government ownership in the financial sector, and in weakening bank balance‐sheets to the point at which bank failures could occur. In addition, many foreign (western) banks may reduce operations in Africa as a result of the crisis, with negative implications for the availability of credit and the financial innovation on the continent. Table 3 furthermore shows that, as far as financial vulnerability is concerned, Africa is more dependent than any other region on aid (official development assistance) and the second most (after the MENA region) on remittances. Aid and remittances constituted more than 7% of Africa’s GDP by 2006 – in terms of 2007 values; this is an amount of around $60 billion. Africa’s share of global FDI has historically been small (less than 2%), but, in terms of Africa’s GDP, FDI had increased in importance in recent years, with especially resource‐rich and oil rich countries attracting the bulk of Africa’s FDI. By 2007, FDI amounted to about 3.5% of Africa’s GDP. The value of FDI is not only in its financial contribution, but also in bringing access to technology, know‐how and international markets. Taken together, FDI, aid, remittances and portfolio outflows, the amount of financial resources at risk to Africa may amount to around 12–15% of Africa’s GDP. Clearly, it is unlikely that any of these will be reduced to zero, but even if the extent of the reduction is only limited to a 30–40% drop, it may still amount to a $50–60 billion annual decline in financial resources. How likely is it, that declines of such magnitudes will be realised? This will depend on the depth and duration of the crisis in the advanced economies. However, a number of predictions have been made of the likely reductions in financial flows to African countries. COUNTRYSPECIFICFISCALSTIMULUSANDBAILOUTS
Nigerianeconomicstimuluspackage
Nigeria’s stimulus package was obviously not as pungent as those undertaken elsewhere, but like the other economies ravaged by the adverse impact of the global economic meltdown, the Federal Government initiated a fiscal stimulus to contain the obvious slowdown of the economic growth. Consequently, the following fiscal interventions were deployed: • Disbursement of ₦200.0 billion to deposit money bans under the Commercial Agricultural Credit Scheme; • Continuation of the lower tariffs regime under the ‘2008–2012 Nigeria Customs and Tarrif Book’ to encourage the importation of raw materials to stimulate domestic industrial production and manufacturing activities; 2
According to the IMF (2009b: 16), Africa’s stock market capitalisation stood at US$1,182 billion in 2006, which was 107% of Africa’s GDP – a percentage exceeding that of Latin America (63%), the Middle East (82%) and emerging Europe (73%). 3
See ‘Nigeria Becomes World’s Worst Market on Bank Losses’ at http://www.bloomberg.com/apps/news. 4
As discussed by Maimbo (2008) in recent years the foreign currency reserves of many African central banks had grown. Sizeable shares of these were managed by external fund managers and may have been invested securitised assets originating in the US. 11
• Earmarking of ₦361.2 billion for investment in critical infrastructure; and • Injection of about ₦100.0 billion multilateral loan in critical sectors of the economy. The fiscal stimulus countered the effects of the global crisis and curtailed the deceleration of Nigeria’s economic growth. Nigeria’s economic stimulus package was declared but was primarily being provided in form of economic assistance and foreign direct investments to ailing sectors of Nigerian economy. In recent times Nigeria has received an economic stimulus package, which is worth $1.87 billion from World Bank FDIs. A significant amount of economic stimulus package to Nigeria, amounting to $5.2 billion, is being spent mostly in finance and energy sectors. Fossil fuel or oil is Nigeria’s main export revenue earner. Out of total revenue earned from oil exports by Nigeria, 80% is earned by Nigerian government, 16% is spent on operational costs, and 4% goes to investors. Beyond oil, the economy of Nigeria is inefficient and requires adequate attention. An economic stimulus package in Nigeria is also being provided by way of National Economic Empowerment Development Strategy (NEEDS). Liberalisation, deregulation, privatisation and stability are primary concerns of the Nigerian economic stimulus package. NEEDS focuses on developing infrastructural facilities like the setting up of adequate power supply facilities, supply of drinking water, and provision of irrigation facilities. NEEDS also aims at diversification of the Nigerian economy, creating 7 million jobs, maximising utilisation of industrial capacity, encouraging exports of non‐energy commodities, and removing corruption and obstacles to formation of new enterprises. A corresponding State Economic Empowerment Development Strategy (SEEDS) has been framed for developmental programmes at state level. To strengthen this economic stimulus package for Nigeria until 2015, a National Millennium Goals programme has been sponsored by the United Nations. Under this programme Nigeria is committed to eradication of poverty, to ensuring universal primary level education for all, combating diseases like malaria and HIV/AIDS, reducing child and maternal mortality, and protecting the environment. In view of the current global meltdown the Nigerian budget has been drawn up to boost the agricultural sector, unlock rural assets, and mobilise rural assets for increasing agricultural productivity. Provisions for the steady flow of foreign direct investments have been incorporated for strengthening the Nigerian economy. SouthAfricaneconomicstimuluspackage
The South African government is planning to implement a South Africa economic surplus package, which would be employed in the form of an infrastructural expenditure plan. It is supposed to be worth $69 billion. Kgalema Motlanthe, president of South Africa, expects that this would help the South African economy to achieve a growth rate of 4%. A South African economic stimulus package had been announced in February 2008. The main purpose of this economic surplus package was to make business establishments spend more by way of introducing attractive incentives. The economic stimulus package in South Africa was more of legislation to provided business entities in South Africa with rewards that are necessary to increase spending of financial resources. As per that economic stimulus package to South Africa companies were awarded if they bought assets. However, there was a catch. In order to be eligible to receive this benefit companies needed to buy an asset that would have helped them improve various aspects of their business such as software. It was expected that as a result of this economic stimulus package business establishments would be taking the right steps to ensure that they made full use of that particular benefit. This economic stimulus package would also help these business establishments to save various costs, incurred in their regular business procedures, such as expenses for properties by way of using them after having bought them. As per latest reports, the government of South Africa is likely to pursue an economic stimulus package in the face of heightening global financial crisis. Various financial institutions within South Africa are also providing business establishments with South Africa economic stimulus packages. In January 2009 the Development Bank of Southern Africa provided Airports Company South Africa with financial assistance worth 1.5 billion rands. This money would 12
be used by Airports Company South Africa for an infrastructural programme that would be executed at ten airports across the country. This project would run for five years and is worth 22 billion rands. Ghana
In the past, the burden of fiscal instability dominated the conduct of fiscal policies in Ghana. The main challenges were the persistent high level of fiscal deficits, low mobilisation of domestic resources, unpredictability of the flow of foreign resources, unsustainable debt levels and poor prioritisation of spending. Excessive or unsustainable fiscal deficits have impacts on aggregate demand and on financial markets. Deficits indicate that the public sector is absorbing resources in excess of current revenue levels, and could end up contributing to the problem of balance of payments. In financial markets, excessive fiscal deficits result in high borrowing, drive interest rates upward, crowd out private sector borrowers and eventually slow the country’s economic activity. Government fiscal deficits could significantly influence the current account balance level. Indeed, provisional fiscal data for 2008 indicate that fiscal policy during the year was expansionary. While revenue outcome was robust, in line with the strong momentum in economic activity during the year, expenditures exceeded budget estimates during the year by wide margins, resulting in a worsened fiscal balance (excluding divestiture), equivalent to 14.9% of GDP, up from 8.4% in 2007 and compared with a budget estimate of 5.7% of GDP. However, provisional data for 2008 indicate that the public debt situation began to deteriorate again during the year; the stock of total public debt stood at US$7918.1 million (55.9% of GDP), up from $7411.7 million in 2007. With the exchange rate depreciation and reported sudden withdrawal of foreign capital from the economy, this may not augur well for Ghana as a result of the substantial foreign currency‐denominated debts. In an attempt to soften the impact of the global food and fuel crisis on the purchasing power of the average Ghanaian, the Government of Ghana had to introduce mitigation measures (ie the government was to spend about GH¢150 million to cushion tax payers) in May 2008. In this plan, the government called for the removal of import duties on rice, wheat, yellow maize and crude vegetables for soap and food manufacture. Other items covered by the waiver were fertilisers and agricultural inputs. This measure called for the amendment of the Customs Excise and Preventive Service (CEPS) Duty and Other Taxes Act. The government further decided to grant subsidies on fertiliser and to ensure effective distribution to farmers to assure a good harvest, so as to reduce the impact of the rising food prices. With respect to government directives, the Petroleum Taxes and Related Levies Amendment Act 2008 (Act 756) came into effect on 23 May 2008. Under the new Act, excise duty on gas oil has been reduced from 9.1000 pesewas per litre to 6.2000 pesewas; kerosene from 6.4875 pesewas per litre to 4.5375; marine gas oil from 6.4945 pesewas per litre to 3.9945 pesewas; and premix fuel from 5.1456 pesewas per litre to zero. The Debt Recovery Levy on petroleum products was also reviewed, with gas oil and marine gas oil attracting 2.50 pesewas per litre, down from 5.00 pesewas, while with kerosene and premix fuel all levies have been removed. The Livelihood and Empowerment Against Poverty (LEAP) programme introduced by the past government is a component of the National Social Protection Strategy. LEAP targets orphans and vulnerable children through their caregivers, the aged (above 65 years and without subsistence or support) and persons with severe disabilities without productive capacities. By the end of 2008, LEAP had reached out to over 8,000 households across 54 districts on regular LEAP, and an additional 15,000 households were supported under the emergency programme. The new government has pledged to maintain and actually expand the programme to 35,000 households in 2009, from about 23,000 households in 2008. Efforts were also being made by the new government to maintain or even improve levels of social protection and poverty reduction expenditures in Ghana. Measures include cash transfers, provision of free education (capitation grant and school feeding programme) and healthcare. 13
The government has earmarked an amount out of the 2009 budget for education and health expenditure to provide free textbooks and uniforms for school children. Specifically, as part of measures to enable Ghana to deal with the crisis, the government promised in the 2009 budget to: • Provide about 1.6 million pupils in public basic schools in deprived communities with school uniforms; • Increase the capitation grant by 50% from GH¢3.00 to ¢4.50 and provide free exercise books to every pupil in all public basic schools; • Rationalise government expenditure by cutting down on wasteful expenditures, including those on official foreign travel, workshops and conferences; • Enforce the Foreign Exchange Act in terms of monitoring and reporting. Ghana adopted the International Financial Reporting Standards (IFRS) to replace the Ghana National Accounting Standards (GNAS) in January 2007. The adoption of the IFRS was expected to make Ghana compliant with global standards of financial reporting in order to promote investor confidence in Ghana. The new standards are applicable to companies whose securities are held by the public, banks and insurance companies. Private businesses and state‐owned enterprises were also expected to apply IFRS to enhance public confidence in their financial reporting. However, small and medium‐sized enterprises, as well as ministries, departments and agencies in the public sector, were expected to continue to use the GNAS until 1 January 2009, when the IFRS and the International Public Sector Accounting Standards (IPSAS) become mandatory; • Review mining, oil and forestry firms’ agreements to curb excessive repatriation. This is probably aimed at stabilising the local currency; • Consolidate the existing 27 ministries into 24 in order to rationalise government expenditure; and • Review petroleum taxes, with the aim of reducing domestic petroleum prices. To be able to keep its expansionary fiscal policies, the government also intended to increase total revenue from GH¢4.80 billion in 2008 to ¢5.94 billion in 2009, 24% above the 2008 outturn. Tax revenue was also projected to increase by 19.0% in 2009, despite expected shocks to export revenue. The level of tax revenue, however, depended not only on tax policy and the revenue administration system, but also on overall economic activity. Conclusion It results from the above information that African countries were severely hit by the financial crisis. The impacts included: for resource rich‐countries; i)
falling exports of minerals and other natural resources due shrinking global demand, leading to loss of export revenues and foreign exchange; ii)
loss of jobs due to retrenchment in the extractive resource sector; iii)
widening fiscal deficit; iv)
declining investment putting at risk socio‐economic infrastructural projects in these countries. for resource‐poor countries; i) an amplification of the food crisis; ii) declining tourism earnings; iii) declining FDI; iv) declining remittances; and v) declining foreign exchange reserves. All these measures, whether of the stimulus type or of budget revision type were aimed at designing ways to enable government mobilize additional financial resources to compensate for the losses caused by the financial crisis. In most cases governments succeeded to some extent to mitigate the effects of the financial crisis on their economies. The impact of the crisis on public finances in 14
emerging and developing economies has been more muted, except for economies in central and Eastern Europe. Developing countries also confronted the crisis with sharply reduced deficit and debt levels than they had at the start of the decade. Stronger fiscal positions and lower debt created room for an active response to the crisis, which helped lessen the impact and duration of the downturn compared with past crises. As global growth is restored and countercyclical fiscal support is withdrawn, budget deficits should decline gradually with debt stabilizing and then trending down. However, improvements in fiscal balances brought about by the restoration of growth will not be sufficient to stabilize public debt levels and further adjustment. Nevertheless, most African governments have little capacity to fund policy interventions to address the crisis. Effective economic governance continues to be lacking in many countries, and responses are projected to be restrained by the relative unavailability of foreign reserves, insufficient budgetary margins for enacting fiscal stimulus packages, and restrictions on incurring further external debt in countries that have benefited from international debt relief. African countries used measures spanning from stimulus package to specific targeted measures and budget revision. Although, it is quite early to assess the effectiveness of the measures taken, it could be argued that these measures provided some kind of cushion to the countries that adopted them. It resulted from the analysis that African countries need to be pro‐active to prevent their economies to suffer a full blow of external shocks. It should also be ensured that bailout strategies included exit strategies that are time bound and satisfy certain pre‐conditions that must be fulfilled Moreover African countries need to put the existing RECs to play in dealing with these external shocks rather than engaging in solitary actions. 15
Table 4: Sample of SSA countries References
IMF (2009a), Regional Economic Outlook Sub‐Saharan Africa (April), Washington, DC: IMF IMF (2009b), Impact of the Global Financial Crisis on Sub‐Saharan Africa, Washington, DC: IMF. Maimbo (2008), ‘The Impact of the Financial Crisis on African Financial Systems’, Paper prepared
for the AFPD field staff retreat 24-25 October (see
http://siteresources.worldbank.org/EXTAFROFFCHIECO/Resources/sammaimbo_note.pdf accessed
21 April 2009).
Ratha and Zu (2007), Migration and remittances fact book (Washington: World Bank) Websites: http://www.globaltradealert.org/sites/default/files/GTA5_Nzue.pdf http://www.globalissues.org/article/768/global‐financial‐crisis ‐ Global Issues http://www.rba.gov.au/publications/fsr/2007/ mar/html/box‐c.html. http://www.bog.gov.gh – Central Bank of Ghana http://www.cbn.gov.ng – Central Bank of Nigeria http://www. Africa‐union.org – African Union (AU) http://siteresources.worldbank.org/NEWS/Resources 16
This paper will document and examine the nature, pattern and types of
bailout and fiscal stimulus employed during the recent global financial crisis
by sub-Saharan African (SSA) countries and most importantly identify the risks
emanating from such interventions and suggest mode of disengagement at the
end of the crisis. The specific research questions asked are:
1. What are the nature, trends, pattern and determinants of fiscal stimulus and
bailouts in SSA vis-à-vis those initiated and implemented in the United States
and Europe?
2. How do bailouts in SSA compare to those in other developing regions of the
world?
3. What are the effects of state fiscal stimulus and bailouts on sectoral and
aggregate economic performance in SSA?
4. Why are many SSA countries adopting the policy of inaction with respect to
fiscal stimulus and bailout?
5. How can SSA countries further increase fiscal stimulus and bailouts to
enhance better management of the risks induced by the crisis?
6. What are strategies for avoiding re-nationalisation and ensuring smooth
state disengagement from the bailed out firms at the end of the crisis?
Centre for Economic Policy Research
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