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 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 2Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

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 3Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

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) 4Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

Context: Africa’s growth rate expected to drop from 7% in 2007 and 5% in 2008 to 1% in Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

Context: Larger growth premium for developing countries Trend decoupling between advanced and developing economies? Can Africa sustain growth premium post-crisis? 6Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

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 7Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia Options 1234 Fiscal StanceStimulusNo adjustment Partial adjustment Full adjustment Revenue shock (economic environment) - 2 Expenditure response (discretionary) Deficit change -3-20

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? 8Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

2008 includes 2008/09 fiscal year; 2009 includes 2009/10 fiscal year Source: Regional Economic Outlook, IMF (October 2009) 9Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia 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 10Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

…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 Expenditure Balance (Ex. Grant) Balance (In. Grant) Revenue Expenditure Balance (Ex. Grant) Balance (In. Grant) Fiscal Tightening EthiopiaModerateGhanaModerate RwandaModerate Partial Adjustment Mozambi -que LowUganda Low No Adjustment Senegal Low Burkina Faso High Stimulus Zambia Low Kenya Low Tanzania Low 11Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

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 12Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

How are countries financing counter-cyclical fiscal stances? 13Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

How has composition of spending responded? Stimulus countries Fiscal tightening countries Capital expenditure—mainly infrastructure— protected when fiscal space was there to do so

How has composition of spending responded?  Spending pressures to protect the vulnerable Scaling up existing programs where they have proven cost-effective Support for workers and farmers adversely impacted by the crisis are more difficult to target  Protection of human capital investment (education, health, water)? 15Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia

Execution of public investment budget Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia16

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 17Fiscal policy for growth in Africa in light of the crisis, AEC, 2010, Tunisia