Fiscal Policy for Growth in Africa in the light of the Crisis

Fiscal Policy for Growth in Africa in the light of the

Crisis

by Kathie Krumm and Chandana Kularatne

World Bank

Motivation - Outline

 Motivation:

 What type of Fiscal Policy stance did Sub- Saharan 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

Context: Building on a base of improved fiscal performance

 Overall fiscal

stance since early 1990s

 Positive Primary fiscal balances in 72% of SSA by 2008 compared with a mere 28%

early 1990s

Source: Regional Economic Outlook, IMF

 Fiscal space for pro- growth expenditures since early 2000s

 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

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)

Context: Africa’s growth rate expected to

drop from 7% in 2007 and 5% in 2008 to

1% in 2009

Context: Larger growth premium for developing countries

Trend decoupling between advanced and developing economies?

Can Africa sustain growth

premium post-crisis?

Conceptual Framework: How has fiscal policy in Africa responded

 Shock in fiscal environment: primarily revenue shock

 Discretionary policy response: primarily expenditures

 Adjustment Or Accomodation/Financing? Or Stimulus?

 Quality of that adjustment for growth

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

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?

2008 includes 2008/09 fiscal year; 2009 includes 2009/10 fiscal year Source: Regional Economic Outlook, IMF (October 2009)

Impact of Crisis: How large

was the Revenue Channel?

LEGEND

Fiscal Tightening - ET, GH, RW Partial Adjustment – MZ, SD, UG No Adjustment – SN, BF

Stimulus – KE, NG, TZ, ZM

Based on

comparing 2009 fiscal stance

projected in July 2008 with

projection of July 2009

County Experiences: Fiscal Stance

…Revenue, Expenditure and Deficit (relative to earlier projections)

Fiscal

Stance County

Debt Distre ss Risk

Fiscal Projection Changes

Country Debt Distress Risk

Fiscal Projection Changes

Revenue^Expenditur_e (Ex. Grant)^Balance Balance

(In. Grant) Revenue ^Expenditur_e (Ex. Grant)^Balance Balance

(In. Grant)

Fiscal Tightening

Ethiopia Moderate Ghana Moderate

Rwanda Moderate

Partial

Adjustment Mozambi

-que Low Uganda Low

No

Adjustment Senegal Low Burkina

Faso High

Stimulus

Zambia Low Kenya Low

Tanzania Low

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

How are countries financing counter-

cyclical fiscal stances?

How has composition of spending responded?

Stimulus countries Fiscal tightening countries

Capital expenditure—mainly infrastructure—

protected when fiscal space was there to do so

Execution of public investment

budget

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