Mechanisms for the Promotion of the Private Sector
7.2 Macroeconomic Policies
Fiscal and monetary policies are important in promoting a stable macroeconomic envi-ronment. Monetary policies are conducted by central banks, and on one hand, in practi-cally every country in the sub-region the central banks are managed by eminent profes-sionals on a sound professional basis. Fiscal policies on the other hand, are universally influenced by political considerations and objectives that sometimes are inconsistent with macroeconomic objectives and targets. The biggest challenge for full effectiveness of
mac-roeconomic policies is the harmonization of fiscal and monetary policies so that there is mutual reinforcement. For instance, while most central banks in the sub-region have tried to control inflation with tight monetary policies, uncontrollable deficits have tended to undermine the impact of such monetary policies on overall macroeconomic stability.
7.2.1 Fiscal policies
Both the revenue and expenditure sides of fiscal measures need to be responsive to the needs of the private sector. The tax burden should be such that the investor is able to meet their tax obligations, and shareholder profit expectations and retain adequate sur-plus to sustain the enterprise. Previously, tax collection was done by departments of the Ministries of Finance. Reforms in many countries have led to the creation of autonomous revenue agencies which operate on separate, conditions of service that are generally better than these of the civil service. In many countries in the sub-region, these agencies have improved revenue collection because they operate on semi-commercial principles.
The actual taxation policies are done by the Ministries of Finance, which attempt to be sensitive to private sector needs. Indeed, many countries are competing on the global market for FDI, and tax policies are part of their competitive packages. On the govern-ment expenditure side, the major areas of interest to the private sector are the shares going to infrastructure, human capital development, and to maintenance of political and social stability in the country. Countries in the sub-region have different experiences in infra-structure and human capital development. Most countries in the sub-region are taking major steps to improve political and administrative systems including the judicial systems.
These measures are getting fair budgetary provisions as they are critical to the maintenance of political and social stability, which is a very essential condition for private sector invest-ment whether local or foreign.
In some countries, there are government-underwritten programmes for World Bank, ADB and other donor-support services to the private sector. These programmes supplement donor support to governments, and should be further encouraged to enhance private sec-tor participation. It is a vibrant private secsec-tor that can, in the long run, reduce national dependence on foreign donors. Most countries in the sub-region are heavily dependent on donor support to balance their budgets. Such support may be inevitable in the short run. The challenge for government is to use this donor support to build capacity for self-sustained economic growth. With the heavy pressure on national treasuries from various angles of development, fiscal balance and discipline are a problem. Balance is particularly needed between short-term revenue objectives and long-term development objectives.
The revenue measures are prudently allowing for private sector incentives to invest in desired areas including human capital development.
Inadequate fiscal discipline, especially in the administration and implementation of ap-proved budgets, leads to serious distortions in planned expenditure and to undue stresses on available resources. This leads to unplanned recourse to the banking system, where the private sector is crowded out. This creates a series of chain reactions including poor per-formance, and reduced tax revenue that in turn undermine macroeconomic stability. To
improve fiscal discipline, any proposal to depart from the approved budget in Uganda has to be tabled and approved by the Cabinet. This procedure helps to induce fiscal discipline.
The Uganda practice could serve as a useful model for this sub-region.
7.2.2 Monetary policies
One of the biggest barriers to development in Africa is weak financial systems and capi-tal markets. Africa’s financial systems are characterized by inadequate and uncompetitive banking facilities and financial institutions and weak capital markets. The poor banking and financial services are particularly inadequate in rural areas. Even South Africa which has a world-class stock exchange cannot boast of optimal utilization for domestic capital mobilization because of the apartheid legacy that excluded many people from the main-stream commercial culture.
With the failure of several small, mainly indigenous banks on the continent in the 1990s, the banking system has further deteriorated into less competitive and unresponsive sys-tems, especially in countries that experienced these bank failures. The general picture in Africa is one of extremely poor access to institutional loans by local enterprises, especially SMEs. Even though access to institutional lending is said to have improved during the 1990s, the credit situation remains quite bad. Schulpen and Gibbon (2001) have noted:
“In Zimbabwe the percentage of SMEs that obtained loans from banks or NGOs in-creased during the 1990s from very little to 2.5%, while in Kenya 3.5% of SMEs had obtained institutional loans by 1995. Female-owned enterprises have less access to insti-tutional lending than male-owned ones, and depend for finance to a high degree on loans from husbands and other family members”.
This difficult credit situation is generally regarded as the binding constraint on the develop-ment of entrepreneurship in Africa. The special problem of women entrepreneurs is par-ticularly unfortunate since observable evidence in Lesotho, and the empirical observations of Kenya Industrial Estates and Zambia’s Small Industries Development Organization and national SME promotional agencies indicated that women-run SMEs tend to be better managed and to be more successful than those run by men. Thus, the bias against women entrepreneurs hampers a potentially more successful category of SME entrepreneurs.
In recognition of the binding constraints of poor credit access by SMEs, some countries have developed specialized institutions and schemes to facilitate credit to SMEs. This is a positive, development, but countries in the sub-region need to do a lot more to address the constraint of credit to the private sector. The East Asian credit policies and strategies in the 1980s offer very pertinent lessons for the sub-region.
In East Asian countries, the radical economic restructuring policies of the 1980s recog-nized the critical role of an efficient financial sector, and appropriate policies were de-veloped to deliberately encourage the vigorous growth of non-bank financial services to compete with commercial banks in the provision of financial services. The improved flow of credit ensured the growth of the private sector especially SMEs, and were critical to the resuscitation of economic growth in these countries.
The central banks in this sub-region generally rely on the classical monetary restraint to control inflation. This policy is sometimes undermined by deficits. Indeed, it could be argued that in some cases when the little liquidity available goes to government to increase consumption, and the private sector which is crowded out of credit market reduces its production, inflation pressure can increase rather than reduce because of this increased consumption by government and the reduced output in the private sector. If tight mon-etary policy is required, it should be targeted at controlling governments frequent exces-sive reliance on the banking system for funding budget deficits while allowing reasonable flows of credit to the private sector. Such “targeted tight monetary policies” are more likely to achieve macroeconomic stability than a generally tight monetary policy.