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Fiscal Policy for Growth in Africa in the light of the Crisis by Kathie Krumm and Chandana Kularatne World Bank African Economic Conference 2010, Tunisia Motivation - Outline Motivation: What type of Fiscal Policy stance did SubSaharan Africa take during the crisis? What are some of the factors behind the fiscal policy stance taken? Outline Introduction/Context Conceptual framework Country experiences Key messages/Conclusions Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 2 Context: Building on a base of improved fiscal performance Overall fiscal Fiscal space for stance since early pro-growth 1990s expenditures since early 2000s Positive Primary fiscal balances in 72% of SSA by 2008 compared with a mere 28% early 1990s Source: Regional Economic Outlook, IMF Infrastructure spending in Africa: $35b of $45b from public sector--$20b O&M, $15b capital Source: Africa’s Infrastructure: A Time for Transformation, World Bank Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 3 Context: Global crisis threatened to undermine gains in growth and poverty reduction Region already hit by – first -- food and fuel price crises A – second– global financial crisis affected Region less Last but not least --third -- global slowdown crisis hurting Africa through four main channels Reduced demand for exports combined with an initial decline incommodity prices; Reduced capital inflows, incl. threat of declining aid and costly trade finance; Decline in remittances (exacerbated by return migration and youth unemployment); Decline in fiscal revenues Some countries with pre-existing macroeconomic imbalances (Ethiopia, Ghana, South Africa) Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 4 Context: Africa’s growth rate expected to drop from 7% in 2007 and 5% in 2008 to 1% in 2009 GDP Growth in Sub-Saharan Africa 8 6.9 7 GDP Growth % 6 6.2 6.6 6.9 6.1 5.1 5.5 4.9 5 4.2 4 4.1 3.8 3 2.4 2 1 November 2008 Estimates March 2009 Estimates October 2009 Estimates 0.7 0 2003 2004 2005 2006 2007 2008 2009 2010 Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 5 Context: Larger growth premium for developing countries Trend decoupling between advanced and developing economies? Can Africa sustain growth premium post-crisis? World Output Growth (%) 1961 - 2011 10.0 8.0 6.0 Developing Country Growth Differential 1961-2011 Advanced 4.0 Developing Countries 6.0 Trend 4.0 2.0 2.0 0.0 -4.0 -6.0 Real GDP Growth. Source: World Bank World Development Indicators and staff estimates and forecasts. 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2009 2006 2003 2000 1997 1994 1991 1988 1985 1982 1979 1976 1973 1970 1967 1964 -2.0 1961 0.0 -2.0 Real GDP growth in developing countries minus advanced countries. Source: World Bank World Development Indicators and staff estimates and forecasts. Hodrick-Prescott trend. -4.0 Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 6 Conceptual Framework: How has fiscal policy in Africa responded Options 1 2 3 4 Fiscal Stance Stimulus No adjustment Partial adjustment Full adjustment Revenue shock (economic environment) -2 -2 -2 -2 Expenditure response (discretionary) +1 0 -1 -2 Deficit change -3 -2 -1 0 Shock in fiscal environment: primarily revenue shock Discretionary policy response: primarily expenditures Adjustment Or Accomodation/Financing? Or Stimulus? Quality of that adjustment for growth Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 7 Conceptual Framework: How has fiscal policy in Africa responded? Where did countries end up and why? Initial macro-fiscal-debt distress position What type of financing available – domestic versus foreign Stimulus versus accommodate versus full adjustment – Empirical evidence show limited impact of additional spending Composition of expenditures – which expenditures to increase? Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 8 Impact of Crisis: How large was the Revenue Channel? Government Revenue, Excluding Grants (% of GDP) 30.0 Government Revenue in Sub-Saharan Africa 28.0 Oil-exporting Countreis 26.0 Middle-Income Countries 24.0 22.0 20.0 Low-income Countries 18.0 Fragile Countries 16.0 14.0 2007 2008 2009 2010 2008 includes 2008/09 fiscal year; 2009 includes 2009/10 fiscal year Source: Regional Economic Outlook, IMF (October 2009) Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 9 County Experiences: Fiscal Stance LEGEND Fiscal Tightening - ET, GH, RW Based on comparing 2009 fiscal stance projected in July 2008 with projection of July 2009 Partial Adjustment – MZ, SD, UG No Adjustment – SN, BF Stimulus – KE, NG, TZ, ZM Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 10 …Revenue, Expenditure and Deficit (relative to earlier projections) Fiscal Stance County Debt Distre ss Risk Fiscal Projection Changes Balance 10 Ethiopia Moderate Balance Revenue Expenditure (Ex. Grant) (In. Grant) 2.0 Rwanda Balance Ghana 3.6 Balance Revenue Expenditure (Ex. Grant) (In. Grant) 1.3 1.1 0.3 Moderate -10 Fiscal Tightening Fiscal Projection Changes 2.3 -4.1 0 -0.5 Country Debt Distress Risk -0.8 -1.0 0.5 Moderate 1.9 2.0 -1.3 -3.0 2.0 Partial Adjustment Mozambi -que -0.5 Low -0.5 Uganda -0.1 Senegal Low -2.8 -3.1 0.2 0.0 -0.2 -2.0 -0.3 -0.5 No Adjustment Low -4.0 2.0 0.5 0.4 -1.5 -2 -1.9 Burkina Faso High 0.4 0.0 0.0 -2.0 -0.8 -1.0 -4.5 1.0 Zambia Low 0.8 -1.0 -1.7 -0.9 Kenya Low 5.0 0.1 1.8 -1.6 -1.6 0.0 -4.0 -5.0 Stimulus Tanzania -1.1 Low -0.2 -1.4 0.9 -1.5 Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 11 What factors explain the differences in fiscal stance? Low risk of debt distress Macroeconomic stability pre-crisis Fiscal space if one wants to utilize Resource rich that managed commodity boom relatively well Fiscal space despite sharp commodity price decline Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 12 How are countries financing countercyclical fiscal stances? 7 5 Fiscal Tightening Partial Adjustment No Adjustment Stumulus 16.6 3 1 -1 -3 Domestic Financing Foreign Financing -5 Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia Total 13 How has composition of spending responded? Capital expenditure—mainly infrastructure— protected when fiscal space was there to do so Stimulus countries Capital Expenditure Currunt Expenditure 30.0 25.0 Fiscal tightening countries 8.0 9.2 15.7 12.6 25.0 3.1 20.4 5.5 20.0 15.0 19.1 12.5 5.0 0.0 Currunt Expenditure 40.0 30.0 15.0 10.0 45.0 35.0 20.0 Capital Expenditure 11.2 10.0 25.4 5.0 2008/2009 2009/2010 Kenya 2008 2009 Nigeria 0.0 9.3 24.1 8.2 8.6 2008 2009 Ghana 8.6 2008 2009 Ethiopia Execution of public investment budget Capital Expenditures, 2009 Capital Expenditures, 2008 Planned capital expenditures Planned capital expenditures Observed capital expenditures Observed capital expenditures 11.3 9.0 10.4 9.2 9.0 7.4 9.5 8.3 8.1 7.9 10.8 10.5 9.8 9.5 7.9 7.3 7.1 5.6 4.6 Sub-Saharan Oil exporters Africa MICs 4.6 LICs Fragile states Sub-Saharan Oil exporters Africa Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia MICs LICs Fragile states 16 Key messages/Conclusions Responses reflected initial macro-fiscal conditions and ability to increase financing, which was mostly domestic; Most countries did not fully adjust to the revenue shock, though actual expenditures were on average lower than planned Ability to actively increase expenditures was limited partly due to absence of ‘ready to go’ projects or ‘scalable’ expenditure programs Points to the need to continue to strengthen PEM/PIP processes Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 17