Download The legacy and challenge of fiscal policy in sub

Session 11
The legacy and challenge of fiscal policy in sub-Saharan Africa
Krige Siebrits and Estian Calitz1
Paper to be presented at the XIVth International Economic History Conference
(Helsinki, Finland, 21-25 August 2006)
During the past two to three decades, the ongoing process of globalisation has profoundly
changed the international economic order. This order now faces new challenges in the
wake of several recent financial crises and growing resistance from groups and countries
who perceive themselves to be excluded from the claimed benefits of globalisation. Over
the same period, views about the economic role of government have changed markedly, in
large part because of the renewed preference for market-based solutions to economic
problems. The debate about the economic role of fiscal policy is continuing, with questions
about the optimal extent and nature of government intervention in market economies
remaining contentious. Few participants in this debate, however, would deny that fiscal
policy has an important role in developing countries, both with regard to the promotion of
sustained economic growth and the reduction of poverty. Fiscal policy is likely to be of
particular importance in the African context, where the challenges of raising growth rates
and reducing poverty are acute.
This paper traces salient aspects of the evolution of fiscal policy in sub-Saharan Africa
since 1960 (mainly its contribution to the region’s economic problems and the fiscal
adjustment process during the 1980s and 1990s) and highlights the need for further
reforms to consolidate the fiscal gains of the recent past. We take a broad view of the
scope of fiscal policy that includes all national government decisions regarding the nature,
level and composition of government expenditure, taxation and borrowing. This view
encompasses the interdependent macroeconomic and microeconomic dimensions of fiscal
policy, where the latter includes efficiency and equity issues.
1
Senior Lecturer in Economics, University of South Africa, and Executive Director: Finance and Professor of
Economics, University of Stellenbosch, respectively. We are grateful to Christo Luus for permission to draw
on an article prepared for Absa Group Economic Research (Siebrits & Calitz, 2004b). Earlier versions of this
paper were presented at an Economic History Society of South Africa session of the Biannual Conference of
the Economic Society of South Africa in Durban on 17 September 2005, and at seminars at the Universities
of South Africa and Stellenbosch. We thank members of the audiences at these presentations for valuable
comments and discussions.
2
The nature and context of fiscal policy in sub-Saharan Africa
Proper understanding and assessment of recent developments in fiscal policy in subSaharan Africa require cognisance of at least three aspects of the regional and global
contexts, namely the economic performance of the region, changing views about the
economic role of government, and the fiscal implications of globalisation.
After growing briskly during the 1960s and the first half of the 1970s (the first decade or so
after colonial rule), the economy of sub-Saharan Africa performed poorly during the next
twenty-five years. Real GDP growth slowed from an annual average of 5.4% in the period
1960-1974 to 2.0% in the period 1975-1999; the corresponding average annual rates of
growth of per capita GDP were 2.6% and -0.9% (Fosu, 2002: 282).2 Both the level of these
growth rates and the nature of economic growth were wholly inadequate to overcome
poverty in the region. The World Bank (2005: 67), for example, estimates that the number
of people in sub-Saharan Africa who live on US$1 or less per day increased from
164 million (41.6% of the region's population) in 1981 to 313 million (46.4% of the
population) in 2001.
Commentators have long debated the relative contributions to sub-Saharan Africa's poor
growth performance of exogenous and policy-related factors (for a survey of this debate,
see Collier & Gunning, 1999a). According to some, economic growth in sub-Saharan
Africa was hampered mainly by factors beyond the control of policymakers, including the
small size of many countries, tropical climates, poor soils, erratic rainfall patterns, high
levels of ethno-linguistic diversity, long distances from industrial country markets and
heavy reliance on the exportation of a narrow range of commodities (many of which have
been characterised by falling demand and volatile prices). Others have emphasised the
growth-sapping effects of policies that contributed to macroeconomic instability3, the
excessive expansion of public sector activity and employment, poor service delivery, the
crowding out and stifling regulation of private economic activity, highly protectionist trade
2
All the major country groupings experienced slower growth during the 1980s than during the 1970s.
However, the slowdown was significantly more pronounced in sub-Saharan Africa and Latin America than in
Asia and the OECD countries. See, for example, Schmidt-Hebbel (1996: 11).
3
Composite indices show that sub-Saharan African and Latin American countries experienced considerably
more macroeconomic instability during the 1970s and 1980s than their counterparts in East and South Asia
(Collier & Gunning 1999b: 73; Schmidt-Hebbel, 1996: 18). Such indices measure the extent of instability in
the inflation rate, the exchange rate, the terms of trade, monetary growth, the current account of the balance
of payments and other relevant variables.
3
regimes, overvalued exchange rate regimes and the discouragement of production for
export.
A detailed discussion of these issues falls outside the scope of this paper; the important
point for our purposes is that the economic performance and prospects of sub-Saharan
Africa began to improve from the second half of the 1990s onwards (African Development
Bank, 2004: 1-8; Funke & Nsouli, 2003: 5-10). Data in the statistical appendix to the latest
issue of the World Economic Outlook (International Monetary Fund, 2006) confirm this
conclusion. Whereas average real output growth in sub-Saharan Africa lagged world
output growth by more than one percentage point per annum from 1988 to 1997, it is
expected to exceed world output growth by 0.1 percentage point per annum from 1998 to
2007.4 In every year from 2000 to 2005, at least 15 countries in sub-Saharan Africa
achieved real growth rates of 5% or more. The average annual change in consumer prices
decreased from 34.6% from 1988 to 1997 to a projected 12.4% from 1998 to 2007, having
dipped to 9.7% in 2004. Faster growth and accelerated debt relief reduced the external
debt burden of sub-Saharan African countries from 67.2% of GDP in 1998 to 37.8% in
2005; interest payments on external debt accordingly dropped from 6.8% of exports of
goods and services in 1998 to 3.0% in 2005.
The growth performance of African countries still exhibits considerable variation and many
countries remain vulnerable to external shocks because of their small size and heavy
reliance on foreign assistance and primary commodity exports. The growth prospects of
more and more Sub-Saharan African countries are nonetheless improving, fuelled by
factors such as greater political stability, increased awareness and understanding across
the continent of the international market criteria for good economic governance, greater
access to industrial country markets, debt relief, favourable revisions of multilateral grants
and debt repayment schedules, and stronger commitment by African leaders to assume
responsibility for their countries’ economic destinies.
At the global level, the comprehensive review of the role of government in the economy
that had begun in the 1970s continued into the new millennium, as did international
integration of economic activity in the form of regionalisation and globalisation.
Underpinning the global spread of market-friendly policies, the reconsideration of the role
4
From 1988 to 1997, average real output growth in sub-Saharan Africa and the world economy was 2.3%
per annum and 3.4% per annum respectively. The IMF expects the corresponding average annual growth
rates from 1998 to 2007 to be 4.2% and 4.1%.
4
of government has focused on halting or reversing the expansion of the public sector that
had occurred in most industrial and developing countries from the end of World War II
onwards (see Tanzi & Schuknecht, 1997). It also has had major implications for what is
perceived internationally to be “best practice” in fiscal policy, with many countries adopting
the package of policies known as the Washington consensus. Although it is now generally
agreed that the Washington consensus is an inadequate overall framework for economic
development (which, incidentally, it probably never was intended to be), there is still widespread support for its main fiscal elements: low budget deficits, the restructuring of public
expenditure to increase the allocations for social spending and infrastructure, tax reform to
broaden the tax base and reduce marginal income tax rates, and the restructuring of
institutions and enterprises in the public sector (which may include privatisation)
(Williamson, 2000: 253).
Some of the potential advantages of globalisation – such as increased access to world
markets, suppliers, capital and new technologies – hold particular promise for subSaharan African countries if and when they materialise. But globalisation also brings fiscal
challenges (see Calitz, 2000; Tanzi, 2004). It has raised the importance of adopting
international best practices in fiscal policymaking (mostly resembling the fiscal guidelines
of the Washington consensus), both as a requirement for attracting foreign investment and
as partial protection against the contagion effects of financial crises. In this way,
globalisation is increasingly limiting the scope for independence in economic
policymaking.5 Aspects of globalisation, however, complicate compliance with the key
guideline of low budget deficits. Trade liberalisation usually reduces governments' income
from trade taxes, and the increased international mobility of tax bases puts downward
pressure on tax rates. On the expenditure side, globalisation creates pressure for
increased public spending on infrastructure and social safety nets (especially to assist
those who lose their jobs or capital because of increased exposure to foreign competition).
These issues are particularly worrying in the sub-Saharan African context, where tax
bases tend to be relatively small, social safety nets non-existent or rudimentary and
pressure for increased government spending on social services strong. Besides, despite
various preferential trade arrangements – including the European Union’s Lomé and
For more detailed discussions of the impact of globalisation on the autonomy of fiscal policymakers, see
Calitz (2000; 2003).
5
5
Cotonou Conventions and the US African Growth and Opportunity Act (AGOA) – African
economies generally have had less access to OECD markets than, for example, Chile and
Mexico (vis-à-vis the United States) and the East Asian “Tigers” (vis-à-vis Japan).
Fiscal policy in sub-Saharan Africa since 1960: a synopsis
Fiscal structures and pressures at independence
Great Britain and France managed their colonies as fiscally autonomous entities, and
granted aid and subsidies in exceptional circumstances only (Ehrlich, 1973: 662; SuretCanale, 1971: 342). Portugal treated Angola and Mozambique as provinces; as such, they
were constitutionally prohibited from running budget deficits (Samuels & Abshire, 1969:
235). Furthermore, the metropolitan powers exercised strict control over colonial
borrowing. These arrangements ensured that the public finances of the colonies were
sound, and the (admittedly scant) evidence indicates that African countries had low public
debt burdens at independence (cf. Fieldhouse, 1986: 51-53; United Nations Economic
Commission for Africa, 1968: 205-207). They also inherited basic revenue collection and
public expenditure management systems.6
On the whole, however, sub-Saharan African countries embarked upon independence with
extremely fragile systems of public finance.7 Their tax bases were narrow, and most
countries depended heavily on customs duties and, to a lesser extent, export taxes for
government revenue. Other indirect taxes, such as excise and sales taxes, also
contributed significant amounts to the public coffers of some countries. With the exception
of a few countries – notably South Africa – low per capita incomes, small corporate sectors
and limited revenue collection capacity had prevented the development of broad-based
personal and company income tax systems.
At the same time, pressures to increase public spending were strong and fuelled by rapid
population growth. Independence brought new responsibilities for African governments,
including the maintenance of defence forces and diplomatic missions abroad.
Furthermore, new rulers were expected to quickly upgrade their countries’ deficient
physical infrastructures and social services. The colonial states’ investment in physical
6
For a comparison of British- and French-based systems of public expenditure in sub-Saharan African
countries, see Lienert (2004).
7
The remainder of this section draws heavily on two early overviews of public finance systems in Africa by
the United Nations Economic Commission for Africa (1961; 1968).
6
infrastructure was heavily influenced by the needs of sectors involved in international
commodity trading: ports and rail networks were established and maintained, whereas
road networks and the supply of electricity were neglected (Fieldhouse, 1986: 35-36). At
independence the education and health systems of the vast majority of sub-Saharan
African countries were also severely underdeveloped. In 1960 the adult literacy rate on the
African continent was only 16%, and the average primary and secondary school enrolment
rates were 36% and 3% of the relevant age groups respectively (Fieldhouse, 1986: 34).
According to the World Bank (1981: 10) the entire region, excluding South Africa, at the
time produced some 8,000 secondary school graduates per annum and had less than
10,000 university students, with 40% of the former and some 65% of the latter group
coming from Ghana and Nigeria. The weak human resource base cemented African
countries’ heavy dependence on expatriate professional, managerial and technical skills,
including those required for policymaking and implementation. In many key sectors,
however, the required skills were not found abroad either. Thus, in 1960 sub-Saharan
Africa (excluding South Africa) had one physician for every 50,000 people, compared to
one for every 12,000 people in other low-income countries (World Bank, 1981: 10). Such
skills shortages were evident in the continent’s poor levels of social development. To name
but one example: in 1960 the mortality rate of children aged four or younger (39 per 1,000)
was more than 50% higher than the average for all developing countries (23 per 1,000)
(World Bank, 1981: 10).
The twin problems of a narrow tax base and heavy pressure for increased government
spending were obviously not unique to sub-Saharan African countries. To a greater or a
lesser extent, they were (and continue to be) germane to all developing countries.8 Be that
as it may, the fragility of the fiscal systems inherited by almost all the newly independent
countries of sub-Saharan Africa meant that the sustainable management of the public
finances required considerable wisdom, sustained economic growth and even some good
luck (in the form of an absence of severe exogenous shocks).
Fiscal crises and reform
The complexity of fiscal management in the sub-Saharan African context became
apparent as early as the 1950s, the decade in which the decolonisation process got off the
8
In fact, some aspects of the public finances were in better shape in sub-Saharan Africa than elsewhere in
the developing world. For example, a comparative study of tax effort in developing countries in the first half of
the 1960s (Lotz & Morss (1967), found that African countries generally exploited their tax bases more
effectively than their Latin American counterparts.
7
ground. In a review of fiscal developments from 1950 to 1958, the United Nations
Economic Commission for Africa (1961) showed that nearly all the African countries for
which data were available had experienced rapid growth in government expenditure.
Indeed, the growth in public spending outpaced that of government revenue to such an
extent that several countries severely depleted reserve funds accumulated to finance
future capital spending. According to the United Nations Economic Commission for Africa
(1961: 6-7), the major reasons for the rapid growth in government outlays in Africa during
the 1950s were the assumption of additional responsibilities by the governments of newly
independent countries, the expansion of social services (notably education, health care
and low-cost housing) and increases in recurrent spending related to earlier development
programmes.
The pattern of faster growth in outlays than in revenues continued during the 1960s and
1970s. At the ideological level it reflected one or more of several influences ranging from a
strong focus on post-independence nation-building to statist socialist ideas and the heavily
interventionist Western theories of economic development of the time (Wolgin, 1997: 54).
In practical terms, the sources of government spending growth in sub-Saharan Africa
ranged from the laudable to the downright wasteful. A major portion of the additional public
spending was much needed and contributed to notable improvements in the values of
several indicators of economic development in sub-Saharan Africa during the second half
of the 20th century. These indicators include life expectancy at birth, female enrolment in
primary and secondary education, and stocks of physical infrastructure (cf. Sender, 1999:
90-96). In many cases, factors such as increases in global interest rates, civil wars and
political conflict also stimulated rapid growth in government spending. The major problems,
however, were politically motivated expansion of public employment and excessive
intervention in economic activity aimed at accelerating the processes of development and
industrialisation. Many governments were guilty of heavily subsidising loss-making public
enterprises, of providing quasi-fiscal support to central banks involved in the allocation of
subsidised foreign exchange and credit, and of using windfall gains from commodity
booms to fund expenditure with minimal economic returns. The result was that many
African countries expanded the provision of regulatory, economic and social services
beyond their fiscal and administrative capacities, eventually making it impossible to
maintain – let alone expand – service provision (Williams 2004: 4). The small population
size of many countries in relation to the full spectrum of government services associated
with independent states arguably was a contributing factor.
8
Moreover, the resulting high budget deficits fuelled the accumulation of crippling external
debt burdens. During the 1970s, for example, the average public deficit of African
countries amounted to 6.4% of GDP – well above the corresponding figures for Latin
America and the Caribbean (4.6%), other developing countries (4.5%) and the OECD
countries (1.2%) (Schmidt-Hebbel, 1996: 11). According to Greene (1989: 840), the
external debt of sub-Saharan African countries increased from 14.6% of the region’s GDP
in 1970 to 28.7% in 1980.9 Debt service payments accordingly increased from 7.8% of the
region’s exports of goods and services to 13.7%. The region’s debt burden remained
manageable while it experienced rapid economic growth (which, in many cases, was
closely linked to buoyant commodity prices). Matters came to a head, however, with the
global slowdown in economic growth after the second oil price shock in 1979 and 1980.
The external debt burden of sub-Saharan Africa, which was still dominated by publicly
guaranteed liabilities, mushroomed from 28.7% of GDP (96.2% of exports of goods and
services) in 1980 to 53.0% of GDP (250.1% of exports of goods and services) in 1985
(Greene, 1989: 840). Over the same five-year period, actual debt service payments rose
from 13.7% of exports of goods and services to 33.9%.10
Progressively worsening macroeconomic conditions and dwindling access to private
foreign capital forced more and more African countries to borrow from the International
Monetary Fund (IMF) or the World Bank, thus subjecting them to the lending
conditionalities imposed by the Bretton Woods institutions and the uncertainty of official aid
flows. Figure 1 shows how the number of active IMF programmes in sub-Saharan Africa
increased from the mid-1980s onwards. In most years since 1988, at least 20 of the 48
sub-Saharan African countries had an IMF loan with policy conditionalities. The figure also
emphasises that the nature of IMF lending to African countries has changed entirely from
shorter-term facilities aimed at resolving balance of payments difficulties (Stand-By
Arrangements and Extended Fund facilities) to longer-term structural adjustment facilities
with wider-ranging policy conditionalities (Structural Adjustment Facilities, Enhanced
Structural Adjustment Facilities and Poverty Reduction and Growth Facilities). If the
combined impact of policy conditionalities and the policy surveillance and technical
assistance activities of the Fund and the World Bank are taken into account, it is probably
9
The publicly guaranteed portion of sub-Saharan Africa’s external amounted to 85% and 75% of the total
amounts in 1970s and 1980s respectively (Greene, 1989: 839).
10
Greene (1989: 841) estimates that scheduled debt service payments (the sum of actual payments and
arrears) approached 50% of exports of goods and services in 1986 and 1987.
9
fair to say that the evolution of budgetary policies in the region during the past twenty-five
or so years have been shaped heavily by the views of these institutions, the core fiscal
aspects of which have been the Washington consensus elements summarised earlier.
This conclusion should be qualified in two ways. The first point is that the fiscal-policy
views of the Bretton Woods institutions are not formed in a vacuum. As Peter Heller
(2000:3) put it:
While the IMF has certainly contributed to the literature on the economic and
financial impact of fiscal policy, it is not its own insights that principally
distinguish the IMF's perspective. The IMF is clearly a user of a body of
theoretical and empirical analysis that has been elaborated over the last halfcentury… and thus much of its views are likely to be seen as in the
mainstream of conventional wisdom on fiscal policy.
A second point that suggests that the actual influence of the IMF on fiscal policymaking in
sub-Saharan Africa (and elsewhere in the developing world) has been less powerful than
is commonly thought is the relatively poor implementation record of structural adjustment
programmes – an issue to which we return later in this section.
Figure 1
Active IMF programmes in sub-Saharan Africa (1976-2004)
33
30
27
24
21
18
15
12
9
6
3
0
1976
1980
1984
Total
1988
1992
SAF/ESAF/PRGF
1996
2000
SBA/EFF
Source: International Monetary Fund (various issues)
2004
10
Looking back at the past twenty-five or so years of fiscal reform in sub-Saharan Africa,
several events or developments stand out as having been of particular significance.
The first was the shift in emphasis in the IMF from an almost exclusive focus on the
macroeconomic aspects of fiscal policy (embodied in adjustment-programme ceilings for
the levels of budget balances and public spending) to a broader perspective that includes
microeconomic issues such as the details of tax reform and public spending priorities. The
Fund initially regarded involvement in such microeconomic issues as unnecessarily
resource-intensive activities and – more importantly – as interference in the domestic
affairs of borrowing countries. But in the 1980s it became clear that the so-called
macroeconomic and microeconomic dimensions of fiscal policy are too closely intertwined
to be viewed in isolation. Countries typically needed microeconomic (structural) reforms to
complement the growth-promoting effect of fiscal stabilisation, and the various tax and
expenditure options for reducing budget deficits can have very different effects on growth,
the efficiency of resource allocation, and the distribution of income (Tanzi, 1987). This shift
in emphasis paved the way, within and outside the IMF, for greater appreciation of the
need to shift the burden of expenditure cutbacks to less productive items (such as defence
spending and subsidies to public enterprises) while protecting social spending and public
investment. It also highlighted the common tendency among African and other developing
countries to maintain their often bloated public payrolls during adjustment while allowing
inflation to erode real pay levels – a tactic that contributed greatly to low productivity, poor
service delivery and corruption in the public sector, as well as losses of skills to the private
sector (Lindauer, Meesook & Suebsaeng, 1988).
A second event that has had important ramifications for the process of fiscal reform in subSaharan Africa is the increasing emphasis on governance. This has contributed to the
review of the role of government referred to earlier – in particular by highlighting that the
government should contribute not only to allocative efficiency (by ensuring that the public
sector does the right things), but also to technical or X-efficiency (by ensuring that these
“right things” are done as well as possible). Governance-enhancing efforts in the area of
civil service reform focus on the improvement of systems and operations and the creation
of incentives for attracting quality human resources to the public sector; accordingly, they
are known as second-generation reforms to distinguish them from the initial efforts to
reduce government employment and to reverse pay erosion (Ul Haque & Aziz, 1999: 76).
The growing focus on governance has also called attention to broader issues; in an
important report about fostering good governance in Africa, the African Development Bank
11
(2001) emphasised considerations such as the creation of an enabling environment for
private-sector growth (which includes institutional foundations such as the rule of law,
security of property rights, et cetera) and accountable and transparent economic
management.11
Thirdly, although various aspects of the World Bank/IMF Heavily Indebted Poor Country
(HIPC) debt-relief initiative remain controversial, its launching reflected the recognition by
the global community that the sustainable resolution of the fiscal (and broader economic)
predicaments of the world’s poorest countries requires more than internal policy reform.
Concrete steps should also be taken to improve the global economic environment within
which these countries – the majority of which are in sub-Saharan Africa – attempt to bring
and keep their houses in order. In the same vein, the IMF’s Annual Report for 2004
(International Monetary Fund, 2004b: 11) calls for more aid to poor countries, the
continuation of debt relief and greater access to the markets of industrial countries.
In another development that may prove to be particularly significant for the future of fiscal
reform in sub-Saharan Africa, recent IMF assessments of the effectiveness of structural
adjustment have emphasised the importance of country ownership of reforms. The notion
of country ownership essentially boils down to strong government commitment to the
implementation of reforms.12 Several IMF studies (eg Khan & Sharma, 2002) have probed
the possibility that the high failure rate of the traditional carrot and- stick approach of
lending conditionalities is related to inadequate country ownership.13 One of the outcomes
of this development has been that adjustment efforts supported by the Fund's Poverty
Reduction and Growth Facility (PRGF) are now guided by country-owned Poverty
Reduction Strategy Papers (PRSPs). Of course, commitment is as important in “home-
11
The current emphasis on property rights reminds one of an anecdote in a speech by former IMF Managing
Director Michel Camdessus. He told the story of two government leaders at opposite sides of the world who
both told him that the most important ministry in the process of economic development was that of justice.
12
The IMF (2001: 6) defines country ownership as “… the assumption of responsibility for an agreed
program of policies, by officials in a borrowing country who have the responsibility of carrying out these
policies, based on an understanding that the program is achievable and is in the country’s own interest”.
13
Ivanova, Mayer, Mourmouras and Anayiotos (2003) found that 70% of the 170 Fund-supported
programmes approved between 1992 and 1998 experienced interruptions, while 44% were not completed. A
major study by the IMF's Independent Evaluation Office (2003) reported that Fund-supported fiscal
adjustment programmes achieve only about one-half of the programmed change in fiscal balances, with
some 60% of such programmes underperforming with regard to their deficit targets. In fiscal adjustment
programmes, the probability of success is closely related to the state of the business cycle at the onset of
reform (Bulir & Moon, 2003). Of course, failure on the part of governments to accept ownership for economic
reform programmes can be indicative of the perception that the accompanying lending conditionalities are
politically or economically infeasible.
12
grown” reform efforts (such as that undertaken by South Africa in the 1990s and Nigeria's
ongoing National Economic Empowerment and Development Strategy) as in Fundsupported ones.
An assessment of the fiscal reforms
Attempts to assess the success of fiscal reforms in sub-Saharan Africa since the early
1980s are complicated by the diverse fiscal structures and experiences of the 48 countries
in the region. Several broad trends can nonetheless be discerned. In this section we
review the existing literature on these trends and summarise information from various IMF
and World Bank databases to accentuate salient points.
Reliable time-series data on public-debt levels in sub-Saharan African countries are too
scarce to enable assessment of debt sustainability. Despite the very real possibility that
reductions in budget deficits do not necessarily improve the net worth of the government
(cf. Easterly, 1999), we therefore first consider trends in budget balances. Figure 2 shows
that budget balances improved significantly in many countries, especially from the mid1990s onwards: the GDP-weighted central government balance for sub-Saharan Africa as
a whole changed from a deficit of 6.9% of GDP in 1981 (and a peak of 8.2% in 1993) to a
surplus of 0.2% in 2005 (International Monetary Fund, 2006: 203). The trend is not
affected when the two largest economies in sub-Saharan Africa (South Africa and Nigeria)
are excluded from the calculation. In 2004 fully 18 sub-Saharan African countries achieved
grants-inclusive budget surpluses or deficits that did not exceed 3% of GDP (International
Monetary Fund, 2005: 30).14 Further consolidation may well be needed in many countries
– Adam and Bevan (2005) recently found statistical evidence of a growth payoff to
reducing the budget deficit (including grants) to 1.5% of GDP – but it clearly is no longer
true that the majority of African countries suffer from large budget deficits.
A growing body of literature suggests that not only the extent but also the details of fiscal
consolidation matter for its sustainability and its impact on economic growth (cf. Gupta,
Clements, Baldacci & Mulas-Granados, 2004a; 2004b). Table 1 summarises changes in
key fiscal aggregates in sub-Saharan Africa from 1980 to 2003. For each aggregate, the
table provides the unweighted means of the averages for the periods 1980-1982 and
14
We use the cut-off value of 3% of GDP here simply to indicate that almost 40% of the countries of subSaharan Africa met the Stability and Growth Pact deficit rule of the European Economic and Monetary Union
in 2004. It has no independent normative value in the sub-Saharan African context.
13
2000-2003 for all countries for which data are available. The data are from various editions
of the World Bank’s African Development Indicators.
% of GDP
Figure 2
Mean GDP-weighted central government budget deficits
in sub-Saharan Africa (1981-2007)
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
-11
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
All countries
Excluding SA and Nigeria
Source: IMF World Economic Outlook database (April 2006)
Note: Values for 2006 and 2007 are projections
The unweighted mean revenue-to-GDP ratio (inclusive of grants) decreased from 23.9% in
the period 1980-1982 to 22.9% in the period 2001-2003, whereas the unweighted mean
government spending ratio dropped from 31.0% of GDP to 27.0%. The reality that the
interest payments increased significantly as a percentage of GDP in the vast majority of
African countries over the past two decades means that the decrease in the unweighted
mean primary-expenditure-to-GDP ratio was smaller than that in the overall expenditureto-GDP ratio. The revenue-to-GDP as well as the expenditure-to-GDP ratios decreased in
the majority of countries. It therefore appears as if the trend toward lower budget deficits in
sub-Saharan Africa mainly reflects expenditure cutbacks. The reality that so few countries
in sub-Saharan Africa succeeded in increasing their revenue-to-GDP ratios (and especially
the tax components thereof) is unfortunate in view of indications that deficit reductions
14
Table 1
Changes in selected fiscal aggregates in sub-Saharan Africa (1980-2003)
Unweighted means
2001-03
1980-82
% of GDP:
Revenue
Grants
Revenue and grants
Expenditure and net lending
Interest on public debt
Primary expenditure and net lending
% of total revenue:
Taxes on income and profits
Taxes on international trade
Non-tax revenue
% of total expenditure:
Salaries and wages
Other goods and services
Interest on public debt
Capital spending and net lending
Number of countries:
Total
Increases Decreases
21.1
2.8
23.9
31.0
1.5
28.2
19.8
3.1
22.9
27.0
3.7
24.4
13
17
12
9
22
6
19
13
21
24
3
19
33
33
33
33
25
25
25.3
33.1
13.8
26.9
28.8
20.5
23
13
23
11
17
11
34
30
34
26.1
19.2
6.0
28.2
25.4
21.7
12.8
24.7
15
16
27
10
16
11
1
22
31
27
28
32
Source: World Bank (various issues)
Note: Appendix Table A1 lists the countries included in each sample
based mainly on revenue increases tend to persist longer in developing countries than
those based mainly on expenditure cutbacks (cf. Gupta et al, 2004b).15
Tax reform is a complex undertaking in developing countries, especially when foreign aid
is a major component of current revenue. A considerable number of sub-Saharan African
countries reduced their dependence on taxes on international trade, partly in view of their
price-distorting effects and partly to comply with World Trade Organisation agreements.
The average share of total government revenue of such taxes decreased from 33.1% in
the period 1980 to 1982 to 28.8% in the period 2001 to 2003, with decreasing shares
reported in 17 of the 30 countries for which data are available. From an efficiency
perspective this was a welcome development, but concern has been expressed over
especially poorer developing countries’ apparent inability to recoup the lost revenue (Keen
& Simone, 2004: 321-325). The vast majority of countries that have successfully recouped
the revenue lost as a result of reductions in trade taxes did so by introducing value-added
15
Keen and Simone (2004) point out that increases in tax ratios were comparatively rare throughout the
developing world in the 1990s.
15
tax – a high-yielding and relatively non-distorting tax that is now used widely in subSaharan Africa and elsewhere in the developing world (Keen & Simone, 2004: 315-321).16
Increased reliance on taxes on income and profits has also been common. The average
revenue share of such taxes increased from 25.3% in the period 1980 to 1982 to 26.9% in
the period 2001 to 2003, with increases in 23 of the 34 countries for which data are
available. This trend occurred despite widespread reduction in personal and corporate
income tax rates, which suggests some success with broadening the income tax base
and/or improving tax administration. Of the thirteen countries for which we could obtain
data for 1987 and 2002, eleven reduced their highest marginal income tax rates on
individuals and twelve their highest rate on corporations. Some of the most significant
reductions in the highest marginal rate on individuals occurred in Botswana (from 60% to
25%), Ghana (55% to 25%), Kenya (65% to 30%), Nigeria (70% to 25%), Tanzania (75%
to 30%), Uganda (60% to 30%) and Zambia (75% to 30%). The biggest reductions in
corporate tax rates occurred in Botswana (35% to 15%), Ghana (55% to 33%), Tanzania
(50% to 30%), Uganda (60% to 30%) and Zimbabwe (53% to 30%).
Weak tax administration has been a feature in many sub-Saharan African countries (see
Stotsky & WoldeMariam, 1997), but the relatively successful introduction of VAT and the
extent to which income tax yields have increased despite rate reductions suggest that
progress is being made. A growing number of sub-Saharan African countries have
established or are in the process of establishing semi-autonomous revenue authorities.
These countries include Ghana, Kenya, Malawi, Mauritius, Rwanda, South Africa,
Tanzania, Uganda and Zambia and several countries in West Africa (Fjeldstad & Rakner,
2003: 16). The effects of this step, however, have not been uniform across countries,
ranging from major efficiency dividends in South Africa to stagnation of revenue after initial
increases in Tanzania and Uganda.
Turning to the composition of government expenditure, it is notable that the average
expenditure shares of salaries and wages decreased from 1980-1982 to 2000-2002 in 16
of the 31 countries for which data are available. Few African countries made significant
progress towards reducing civil service payrolls in the 1980s, and salary erosion (in real
terms) remained the most widespread strategy for containing wage-bill growth (World
Bank, 1994: 121-125). There are indications that the latter problem became less
16
In a sense, VAT disguises the partial continuation of tax on internationally traded goods: the tax base
normally includes imported goods, while excluding exported goods.
16
widespread in the 1990s – in 19 of the 23 countries for which data are available in African
Development Indicators, the average real salaries and wages of government employees
were higher in the period 2001 to 2003 than in the period 1990 to 1992 – but cross-country
information on trends in government employment is incomplete. Widespread curtailment of
wage bill created some scope for increasing outlays on other goods and services, which
expanded in 16 of the 27 countries for which data are available. This category of
government spending includes outlays on the maintenance and operation of facilities and
other assets – items that were often “crowded out” when wage bills grew rapidly (Lindauer
et al, 1988: 21).
Interest payments on public debt increased sharply from 6.0% of government expenditure
during the period 1980 to 1982 to 12.8% in the period 2001 to 2003, with increases
occurring in 27 of the 28 countries for which data are available. This trend, however,
largely reflects the build-up of public debt during the first half of the 1980s: a similar
comparison of the periods 1985-1987 and 1999-2001 shows decreases in the interest-toexpenditure ratios of the majority of a group of 27 countries, as well as a drop of 2 percentage points in the average interest-to-expenditure ratio of the group as a whole
(Siebrits & Calitz, 2004b: 5). This confirms that faster economic growth, accelerated debt
relief and smaller fiscal deficits recently have reduced the debt burdens of a number of
sub-Saharan Africa countries. The releasing of budgetary resources for more productive
ends is already assisting spending reprioritisation in several countries, and more stand to
benefit if the recent proposal of the leaders of the Group of Eight (G8) countries to fully
cancel the debts owed by participants in the HIPC initiative to the IMF, World Bank and
African Development Bank is eventually implemented.17
Capital expenditure and net lending decreased from 28.2% of government expenditure in
the period 1980 to 1982 to 24.7% in the period 2001 to 2003. The ratio between capital
spending and total government outlays increased in only 109 of the 32 countries for which
data are available. A proper assessment of this development requires information about
the productivity of public investment in these countries, but it still appears to be the case
that such spending often is targeted disproportionately when government expenditure is
17
In October 2004, the IMF estimated that the savings on debt service in countries that have reached their
completion points in terms of the HIPC initiative had enabled pro-poor expenditure to rise by about 1.5% of
GDP. Tanzania, for example, is using the revenues freed up from debt relief granted in 2001 under the HIPC
initiative – about US$2 billion in net present value terms – to increase spending on education, health care
and agricultural development, and to keep its debt levels sustainable (International Monetary Fund 2004b:
40).
17
reduced in sub-Saharan Africa. In a recent study, Gupta et al (2005) found that failure to
protect capital spending during fiscal adjustment negatively affects economic growth in
low-income countries – a finding which suggests that widespread public investment
cutbacks probably represented one of the less desirable features of recent efforts to
reduce budget deficits in sub-Saharan Africa.
Considerations of space preclude a detailed discussion of trends in the functional
composition of government expenditure in sub-Saharan Africa, but a few brief comments
are in order. Sahn (1992) and Toye (2000: 27-33) reported that the governments of subSaharan African countries did not cut their spending on education and health nearly as
much during reform periods as is often claimed by critics of structural adjustment. Since
1990, most countries in sub-Saharan Africa experienced drops in the GDP shares of
military expenditure and public spending on education (the education cutbacks generally
were of a marginal nature) and increases in the GDP ratio of public spending on health
care (cf. United Nations Development Programme, 2004: 202-205). These developments
suggest that modest progress was made with shifting public resources from military to
social spending.
A case study: fiscal adjustment in South Africa during the 1990s18
In the context of sub-Saharan Africa, South Africa has a particularly large and welldeveloped economy. One should therefore exercise caution when drawing lessons for
other African countries from experiences in South Africa. South Africa’s fiscal adjustment
during the 1990s, which has been hailed widely as particularly successful (cf. Tanzi, 2004:
539), nonetheless should be of considerable interest to the rest of Africa for at least two
reasons. The first is that it occurred in a context very similar to that now facing many
policymakers elsewhere in sub-Saharan Africa: fiscal discipline had to be restored while
simultaneously addressing strong demands for redistributive public spending in a fledgling
democracy characterised by a long period of relatively poor economic performance. The
second is that the South African reform effort was entirely “home-grown” as opposed to
driven by lending conditionalities imposed by multilateral institutions. It is therefore
interesting to compare the contents and political dynamics of the reform effort with those of
IMF/World Bank programmes. We discuss two aspects of fiscal policy in South Africa
18
This section draws heavily on Calitz and Siebrits (2003) and Siebrits and Calitz (2004a).
18
during the 1990s. First, what were the key fiscal policy priorities? Second, what were the
results and how were they achieved? We conclude with a few observations.
Priorities
The post-apartheid government faced the dilemma of having to reconcile the imperative of
fiscal discipline (necessitated by the macroeconomic situation and the prevailing views of
“best fiscal practice” in the era of economic globalisation) with the growing demand for
government expenditure resulting from political democratisation. The economic policy
proposals of the African National Congress (ANC) initially exhibited socialist leanings, but
the shifts that had occurred in the minds of economists, politicians, and business leaders
across the globe with regard to the role of government influenced the views of the
movement prior to its victory in the 1994 elections. The failure of macroeconomic populism
to deliver sustainable growth in various Latin American countries during the 1970s and
1980s was a clear warning. Consequently, the post-apartheid South African Government
adopted
a
non-populist
macroeconomic
strategy
on
growth,
employment,
and
redistribution í known by the acronym GEAR í in 1996. Broadly in line with the
Washington Consensus, the GEAR strategy acknowledged that macroeconomic stability is
a necessary condition for sustained economic growth and job creation, with the latter as a
necessary (though not sufficient) condition for sustainable poverty reduction and income
redistribution. GEAR stressed the redistributive role of fiscal policy, but emphasised that
the government intended to pursue it in a way that was compatible with macroeconomic
stability. This approach reflected the conviction that higher economic growth provides the
only option for financing the pent-up and growing demand for public services in South
Africa in a sustainable manner.
GEAR focused more on the medium and longer terms than on the short term and
emphasised fiscal discipline, which the government regarded as a prerequisite for
improving the longer-term growth potential of the South African economy. The fiscal goals
of the GEAR strategy included a gradual reduction in the budget deficit to three per cent of
GDP, maintenance of the total tax burden at 25% of GDP, the reduction of general
government consumption expenditure as a percentage of GDP, and the gradual
elimination of general government dissaving. The focus on fiscal discipline and other
structural aspects of fiscal policy continued throughout the 1990s, and came to be
associated closely with the stabilisation or even the reduction of the public sector’s claim
on resources (including the total pool of savings). The strong emphasis on the pursuit of
19
price stability, based on the view that lower inflation is a necessary condition for sustained
economic growth, further confirms the longer-term and structural focus of fiscal policy.
Statements in the annual budget speeches of successive Ministers of Finance suggest
that price stability was the most important macroeconomic objective of fiscal policy from
1994 until 1997, and the second most important in 1990, 1993, and 1998. During the
1990s, government budgets contained almost no measures aimed at deliberately
stimulating economic growth in the short term. When growth regained pride of place as an
objective of fiscal policy in 1999, the fiscal authorities emphasised its intention to promote
growth by microeconomic reforms to boost the supply side of the economy, instead of
deliberate demand stimulation. The government’s decision to adopt medium-term
expenditure planning in 1998 further cemented the movement away from expenditure finetuning. In the 2001/02 Budget a post-apartheid Minister of Finance deliberately took a
stimulatory macroeconomic policy stance for the first time. By 2005, the idea of a higher
budget deficit (in the range of 2–3% of GDP) was acceptable to the financial sector and to
international credit rating agencies. In 2005, South Africa’s international sovereign debt
credit rating was upgraded yet again í this time by Standard and Poor’s í thus continuing
the steady improvement in country risk ratings which had been experienced since the first
ratings in 1994 and the country’s first global bond issue in December 1994.
Distributional considerations became more important towards the end of the apartheid
years, and significant reprioritisation of expenditure aimed at reducing interracial benefit
gaps actually pre-dated the 1994 constitutional change. According to Van der Berg (2001:
257), per capita social expenditure on Africans increased from 12% of the white level in
1975 to 69% in 1993, with the major portion of the increase occurring between 1990 and
1993. The effort to increase the redistributive thrust of fiscal policy during the 1990s and
beyond therefore formed part of a longer-term process. There can nonetheless be no
doubt that the priorities of the South African Government have shifted further to
distributional and poverty issues after 1994, especially after Trevor Manuel became
Minister of Finance in 1996.
20
Results
Although higher economic growth (which stimulated tax receipts and exerted downward
pressure on ratios in which GDP is the denominator) and improved tax collection19 also
contributed, developments during the second half of the 1990s and beyond left no doubts
that the strategy of fiscal discipline paid dividends in the form of a significantly improved
fiscal position. From 1993/94 to 2003/04, national government revenue increased from
21.9% of GDP to 23.4%, while total expenditure dropped from 27.5% of GDP to 25.7%.
This latter trend appears to contradict the well-known Meltzer-Richard hypothesis on
government expenditure growth, on the basis of which one would have expected the
extension of the suffrage that accompanied the constitutional reform in 1994, to have
resulted in a major increase in the share of government expenditure in the economy.20 In
combination, the revenue and expenditure trends amounted to a fall in the budget deficit
from 7.3% of GDP (1992/93) to 2.3% (2003/04). National government debt accordingly
decreased from 50.4% of GDP at the end of 1996 to 37.0% at the end of 2004. In the
process privatisation income was used to a significant degree to reduce the public debt.
Since 1990, the South African Government’s efforts to promote economic growth by
means of fiscal policies assumed a longer-term perspective and increasingly emphasised
supply-side measures. Some aspects of fiscal policy boosted the longer-term growth
prospects of the South African economy, while others added to the list of factors
constraining economic growth. The positive aspects included steps that boosted investor
confidence in the growth prospects of the South African economy, including the adoption
of sound fiscal policies, accelerated depreciation allowances, and the opening-up of the
economy by means of tariff reduction and the gradual dismantling of exchange controls.
Government continued its attempts to build the country’s stock of human capital by
investing heavily in education and health care. On the debit side, persistent (albeit
decreasing) general government dissaving reduced the pool of savings that was available
for investment to expand the productive capacity of the economy. In addition, the general
government’s own contribution to gross capital formation, which had reached its highest
19
South Africa undertook a major overhaul and reform of its tax administration, which gained momentum
when the tax authority gained administrative autonomy as a public body outside of the public service on 1
October 1997. During most of the second half of the 1990s and beyond the buoyancy of government
revenue despite income tax rate reductions reflected much improved tax administration and tax compliance,
inter alia.
20
For a possible explanation why this did not happen in South Africa, see Black, Siebrits and Van der Merwe
(2005: 97-98).
21
post-1960 level of 10.6% in 1976, decreased steadily and reached a low of 2.4% in 1992.
Subsequently, the fiscal authorities made considerable progress in eliminating government
dissaving: the excess of general government current expenditure over general government
current income dropped from 7.3% of GDP in 1992 to 0.8% in 2001 and 2002, the lowest
level since 1982. The reality that the low levels of government investment were
contributing to the deterioration of parts of the infrastructure (including the roads system,
rolling stock of the railways, and water-supply capacity) was a further disincentive to
private sector investment. There are also strong indications that inefficiency within
government limited the potential growth-promoting effects of some of the largest and most
important categories of government spending, including public order and safety, education,
and health.
During the 1990s, the fiscal authorities took a number of steps to increase allocative
efficiency. The thrust of tax reform was broadly in line with the international trend towards
broadening tax bases and reducing marginal rates (see Steenekamp & Döckel, 1993). The
authorities broadened the tax base by eliminating various special tax preference schemes
that benefited only particular industries or narrow sectoral interests, including the tax
subsidies for training, welfare, health, and the general export incentive scheme (GEIS), as
well as the interest rate subsidies for agriculture and housing. The overhaul of tax
collection and administration indirectly broadened the tax base by reducing tax avoidance
and evasion. The objective of reducing tax rates met with mixed success. The rate of
income tax on companies fell from 50% at the beginning of the 1990s to 29% in 2005, but
from 1993 onwards, distributed company profits became subject to a secondary tax on
companies (STC). The STC rate increased from its initial level of 15% to 25% in 1994 and
was then reduced to 12.5% in 1996. The top marginal rate of the personal income tax
decreased from 45% to 43% in 1991, but reverted to 45% in 1995. This showed that there
were times during the deficit-reduction process when efficiency considerations had to take
a back seat to revenue needs. In 2002/03, when the deficit was under control, the
authorities had room to lower the top marginal rate of the personal income tax to 40%.
Privatisation of state assets progressed slowly, largely due to strong opposition from
organised labour. Since March 1997, the Government fully sold various smaller assets
(including six radio stations and Sun Air), as well as significant stakes in large public
enterprises such as Telkom (30%), the Airports Company (25%) and South African
Airways (20%). The total proceeds from privatisation as at 31 January 2005 was
R33.7 billion. The fiscal authorities used almost three-quarters of the proceeds from
22
privatisation to finance government expenditure and the remainder to reduce the public
debt.
The authorities have attempted to pursue the objectives of redistribution and poverty
alleviation in a sustainable manner by combining fiscal discipline with major changes in the
distribution of public benefits and the incidence of financing costs, as well as far-reaching
regulatory measures to redistribute assets and opportunities (including land reform, labourmarket legislation and the Broad-Based Black Economic Empowerment programme).
The fiscal authorities changed the distribution of public benefits by changing the
composition of government expenditure and by directly or indirectly privatising the
provision of some public and merit goods. The most important development was the
marked increase in the share of social spending in total government outlays. The period
from 1990/91 to 2001/02 brought an increase in public outlays on social services from
38.6% of total general government spending (12.9% of GDP) to 45.6% (13.7% of GDP).
This was made possible largely by expenditure reprioritisation, notably reductions in
defence expenditure and outlays on economic services. Reprioritisation within functional
categories of government outlays, such as increasing the importance of the primary
education and primary health care components of social spending, further strengthened
the distributive impact of these shifts. Increased private financing and private supply of the
more sophisticated types of services (e.g. curative health care) accompanied these
redistributive changes.
A fiscal incidence study on the redistributive impact of more or less 60% of consolidated
government expenditure (education, health, social grants, water provision and housing)
during the period 1993 to 1997 affirmed the marked shift in social spending patterns from
the more affluent to the poorer members of South African society (see Department of
Finance, 2002: 145-46). The share of such spending benefiting the poorest 20% of
households increased from 27.4% to 30.7%, while that of the wealthiest 20% dropped from
12.7% to 8.7%. From 1993 to 1997, per capita social service expenditure on the poor may
have increased by as much as 34%. By contrast, outlays on the richest 20% of households
probably decreased by more than 20% in per capita terms. The study also confirmed that
the South African tax system is relatively progressive. It investigated the incidence of four
major taxes (the personal income tax, the value added tax, specific excise duties, and the
fuel levy), and found that the poorest 10% of income earners pay 11% of their incomes on
these four taxes, whereas the richest 10% pay approximately 30%.
23
South Africa’s economic performance is still no match for that of fast-growing economies
such as China and India, but nonetheless has improved significantly. The real average
annual rate of economic growth recovered from -0.7% from 1990 to 1993 to 2.7% from
1994 to 1999 and 3.4% from 2000 to 2004. Consumer price inflation fell to a 25-year low of
5.2% in 1999, and in 2004 the inflation rate was 1.4%. By the end of 2004 the economy
had been in an upward phase of the business cycle since September 1999 – a period of
64 months that represents the longest economic upswing since World War 2. The most
disappointing result has been that formal-sector employment did not grown fast enough to
reduce unemployment significantly. In 2006 the Government announced a shared and
accelerated growth initiative for South Africa (ASGISA), aimed at achieving 6% economic
growth per annum in 2010 and beyond. An analysis of this initiative falls outside the scope
of this paper.
Observations
The South African experience leads to some important observations.
ƒ
It is possible for the government of a newly democratised developing country to
consistently apply non-populist macroeconomic policies that meet with international
best practice without losing popular support. This is confirmed by the fact that the ANC
achieved overwhelming electoral support during the 1990s and increased it even
further to obtain a two-thirds majority in the 2004 elections. There is a caveat, however:
the current groundswell of popular discontent is a stark reminder of how important
tangible local-level progress with the delivery of services is for the continued legitimacy
of prudent economic policies.
ƒ
As we indicated earlier, the elements of South Africa’s fiscal reform effort had much in
common with those of the Washington consensus. Despite all the scorn that has been
heaped on the Washington consensus in recent years, the South African experience
suggests that its fiscal elements have considerable merit as the broad contours for
adjustment. By the same token, however, the South African case confirms that these
elements are significantly more useful for achieving first-stage reform (which mainly
consists of macroeconomic stabilisation) than for the considerably more complex
second stage of reform (which includes priorities such as improving social conditions
through enhanced service delivery and increasing international competitiveness by
means of regulatory reforms and the restructuring of economic sectors) (cf. Naim,
24
1994). For success with second-stage reforms, developing countries would have to
look beyond the Washington consensus for guidance.
ƒ
South Africa’s experience also underscores the importance of strong commitment to
fiscal prudence. In the final analysis, it is such commitment (rather than lending
conditionalities or elaborate rules) that makes or breaks fiscal adjustment. It should be
added, though, that the discipline of the market place in the era of economic
globalisation, from which no country can isolate itself, materially reduced the scope for
adventurous deviating policies (cf. Calitz, 2003).
ƒ
It is also possible to affect significant budgetary redistribution while maintaining prudent
and sustainable fiscal policies. However, reconciling these potentially conflicting
priorities requires longer-term planning and consistent policy implementation. In 1997,
the South African Government introduced medium-term fiscal planning, which added to
transparency and facilitated orderly reprioritisation of budgetary resources. It also
conveyed commitment to policy consistency, thereby adding to the credibility of selfimposed fiscal targets.
Future challenges and prospects
In closing, we comment on the key challenge now facing fiscal policymakers in subSaharan Africa: the need to consolidate and build on the positive developments of the last
ten years.
As we indicated earlier, the fiscal position of the sub-Saharan African region as a whole
has improved markedly during the past ten years. By reducing excessive budget deficits
and affecting changes to the structures of their tax and expenditure systems, many subSaharan African countries have extended their “fiscal space” and regained control over
fiscal policymaking from the IMF and other external institutions. Most countries in the
region nonetheless still face formidable fiscal challenges. Narrow tax bases and underdeveloped financial markets still leave many African countries highly dependent on grants
and foreign borrowing as sources to finance government expenditure, while spending
pressures and susceptibility to external shocks remain high. The gains of the recent past
are therefore fragile. Moreover, the governance and service delivery deficiencies
highlighted in the African Development Bank's African Development Report 2001 remain
acute, as was affirmed by the findings of a survey commissioned by the United Nations
Economic Commission for Africa (2004).
25
To consolidate the gains of the last decade and to tackle the remaining problems, it is
imperative that sub-Saharan African policymakers commit themselves – and remain firmly
committed – to sound fiscal policies. A question that arises in this respect is whether
voluntary accession to evaluation of policymaking and -implementation practices in terms
of the African Peer Review Mechanism (APRM) of the New Partnership for Africa’s
Development (Nepad) would help to cement such commitments to fiscal prudence and to
build policy credibility. The APRM is an authentically African institution and, as such,
powerfully signals African leaders’ seriousness about good political and economic
governance. The potential credibility benefits to accession to the Mechanism should
therefore not be underestimated. The APRM, however, has at least three drawbacks as an
instrument for further strengthening fiscal policymaking in sub-Saharan Africa: the reality
that participation is voluntary, the vagueness of its assessment criteria21, and the lack of a
credible enforcement agency. It is therefore our view that participation in the APRM (or, for
that matter, the adoption of formal numerical rules such as those of the Stability and
Growth Pact in the European Union) cannot substitute for sustained governmental
commitment to fiscal prudence.
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Appendix:
Lists of countries included in the samples in Table 1
Variable(s)
Countries
Revenue, Grants, Revenue and grants,
Expenditure and net lending
Benin, Botswana, Burkina Faso, Burundi, Cameroon, The
Comoros, Cote d’Ivoire, Democratic Republic of the Congo,
Ethiopia, Gabon, The Gambia, Ghana, Guinea, GuineaBissau, Kenya, Lesotho, Madagascar, Malawi, Mali,
Mauritius, Niger, Nigeria, Republic of the Congo, Senegal,
Seychelles, Sierra Leone, Sudan, Swaziland, Tanzania,
Togo, Uganda, Zambia and Zimbabwe
Interest on public debt, Primary expenditure
and net lending
Benin, Burkina Faso, Cameroon, Democratic Republic of the
Congo, Ethiopia, Gabon, The Gambia, Ghana, GuineaBissau, Kenya, Lesotho, Madagascar, Malawi, Mauritius,
Niger, Nigeria, Republic of the Congo, Senegal, Seychelles,
Sierra Leone, Swaziland, Tanzania, Uganda, Zambia and
Zimbabwe
Taxes on income and profits
Benin, Botswana, Burkina Faso, Burundi, Cameroon, The
Comoros, Cote d’Ivoire, Democratic Republic of the Congo,
Ethiopia, Gabon, The Gambia, Ghana, Guinea, GuineaBissau, Kenya, Lesotho, Madagascar, Malawi, Mali,
Mauritius, Niger, Nigeria, Republic of the Congo, Rwanda,
Senegal, Seychelles, Sierra Leone, Sudan, Swaziland,
Tanzania, Togo, Uganda, Zambia and Zimbabwe
Taxes on international trade
Benin, Burkina Faso, Burundi, Cameroon, Cote d’Ivoire,
Democratic Republic of the Congo, Ethiopia, Gabon, The
Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho,
Madagascar, Malawi, Mali, Mauritius, Niger, Nigeria,
Republic of the Congo, Rwanda, Senegal, Seychelles, Sierra
Leone, Tanzania, Togo, Uganda, Zambia and Zimbabwe
Non-tax revenue
Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cote
d’Ivoire, Democratic Republic of the Congo, Ethiopia, Gabon,
The Gambia, Ghana, Guinea, Guinea-Bissau, Kenya,
Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritius, Niger,
Nigeria, Republic of the Congo, Rwanda, Senegal,
Seychelles, Sierra Leone, Sudan, Swaziland, Tanzania,
Togo, Uganda, Zambia and Zimbabwe
Salaries and wages
Botswana, Burkina Faso, Cameroon, Cote d’Ivoire,
Democratic Republic of the Congo, Djibouti, Ethiopia, Gabon,
The Gambia, Ghana, Guinea-Bissau, Kenya, Lesotho,
Madagascar, Malawi, Mali, Mauritius, Niger, Nigeria,
Republic of the Congo, Rwanda, Senegal, Seychelles, Sierra
Leone, Sudan, Swaziland, Tanzania, Togo, Uganda, Zambia
and Zimbabwe
Other goods and services
Burkina Faso, Cameroon, Democratic Republic of the Congo,
Cote d’Ivoire, Djibouti, Ethiopia, Gabon, The Gambia, Ghana,
Guinea-Bissau, Kenya, Lesotho, Madagascar, Malawi, Mali,
Mauritius, Niger, Nigeria, Rwanda, Senegal, Seychelles,
Sierra Leone, Sudan, Swaziland, Togo, Zambia and
Zimbabwe
Interest on public debt
Burkina Faso, Cameroon, Cote d’Ivoire, Democratic Republic
of the Congo, Ethiopia, Gabon, The Gambia, Ghana, GuineaBissau, Kenya, Lesotho, Madagascar, Malawi, Mali,
Mauritius, Niger, Nigeria, Republic of the Congo, Rwanda,
30
Senegal, Seychelles, Sierra Leone, Swaziland, Tanzania,
Togo, Uganda, Zambia and Zimbabwe
Capital spending and net lending
Botswana, Burkina Faso, Cameroon, The Comoros, Cote
d’Ivoire, Democratic Republic of the Congo, Djibouti,
Ethiopia, Gabon, The Gambia, Ghana, Guinea-Bissau,
Kenya, Lesotho, Madagascar, Malawi, Mali, Mauritius, Niger,
Nigeria, Republic of the Congo, Rwanda, Senegal,
Seychelles, Sierra Leone, Sudan, Swaziland, Tanzania,
Togo, Uganda, Zambia and Zimbabwe