Fiscal Policy Responses in African Countries to the Global Financial Crisis

Fiscal Policy Responses in African Countries to the Global Financial Crisis Sanjeev Gupta Deputy Director Fiscal Affairs Department International Monetary Fund

Outline Global economic outlook Growth prospects for SSA Fiscal impact of the crisis in SSA Fiscal transmission channels Considerations guiding fiscal policy responses in SSA Policy responses Conclusion References 2

Global Economic Outlook World economic activity is projected to fall by 1.3 percent in 2009 the first such decline since WW II A gradual recovery is projected for 2010 All countries have been affected, although the magnitude of the impact is different across regions 3

Global Economic Outlook 8 6 4 2 0-2 -4 WEO Growth Projections (in percent) -6 World Advanced Economies Emerging and Developing Economies 2008 2009 2010 4

Growth prospects for SSA Growth is projected to slow to 1.5 percent in 2009 a a decline of 5 percentage points from recent trend growth Per capita GDP will decline in 2009 by 0.6 percent for the first time in 15 years Aggregate projections, however, mask stark differences across countries Growth in Africa has slowed more gradually than in Latin America but slightly more than in developing Asia 5

Growth prospects for SSA Sub-Saharan Africa: Real GDP Growth (in percent) 8 7 6 5 4 3 2 1 0 All Countries Oil Exporters Oil Importers 2008 2009 2010 6

Growth prospects for SSA 10 Real GDP Growth Comparison 2008 to 2010 8 6 4 2 0-2 2 008 2009 201 0 Developing Asia Sub-Saharan Africa Latin America 7

Fiscal impact of the crisis in SSA SSA fiscal positions are being hit hard by the crisis Sub-Saharan Africa: Overall Balance (excluding grants) 10 8 6 4 2 0-2 -4-6 -8-10 Sub-Saharan Africa Oil-importing countries 2008 2009 Oil-exporting countries 8

Fiscal transmission channels A. Revenues will decline due to: Slower economic activity (lower trade taxes and reduced tourism) Decline in remittances Lower FDI flows Decline in commodity prices and external demand Tighter financing prospects (foreign aid and borrowing) 9

Fiscal transmission channels B. Spending pressures will increase: Need to expand safety nets and pro-poor poor spending Currency depreciation and rising interest rates Higher subsidies to domestic producers of exports Contingent liabilities Public-Private Private partnerships Support for SOEs Bail out depositors and financial institutions 10

Considerations guiding fiscal policy responses in SSA Two factors determine the nature of fiscal policy response to the crisis: A. Nature of the shock Mainly external in nature Fiscal policy can aim at limiting the spillover effects of lower external demand Temporary vs. permanent 11

Considerations guiding fiscal policy responses in SSA B. Country characteristics Exchange rate regimes Debt sustainability considerations Scope for monetary policy actions Capacity to implement social programs 12

Policy Responses Countries have scope for expansionary fiscal policy if they have: Output gaps Sustainable debt position Financing options 13

2 1 0-1 -2-3 -4-5 Policy Responses Sub-Saharan African Oil Importers: Output Gap, 2009 (in percent of potential real GDP) 14 Seychelles Namibia Lesotho Eritrea South Africa DRC Swaziland Sierra Leone Kenya Madagascar Comoros Guinea Sao Tome and Principe Senegal Togo Burkina Faso Guinea Bissau Tanzania Cape Verde Mali Zambia Gambia Mozambique CAR Niger Cote d'ivoire Burundi Ghana Mauritius Benin Liberia Ethiopia Uganda Rwanda Malawi

Policy Responses SSA: Debt vulnerability, 2009 (number of countries, 44 total) 20 15 7 out of 9 have not reached the HIPC Completion Point 10 5 0 Low Moderate High In distress 15

Policy Responses In these countries, fiscal expansion can be implemented through: Letting automatic stabilizers work Accommodating declines in commodity-related revenues, and Discretionary policy action, i.e. fiscal stimulus 16

Policy Responses Letting automatic stabilizers work Allow non-commodity revenues to decline with slow down in economic activity Letting expenditures adjust to economic slowdown As a result, fiscal balances (excluding commodity- revenues) will worsen However, automatic stabilizers are typically small in SSA countries 17

0.5 0-0.5-1 -1.5-2 -2.5-3 -3.5-4 Policy Responses Automatic Stabilizers by Country, 2009 1/ (in percent of GDP) 18 Seychelles Lesotho Namibia South Africa Cape Verde Madagascar Swaziland Niger Ethiopia Rwanda Congo, Dem. Rep. of Mozambique Ghana Mauritius Guinea-Bissau Zambia Gambia, The Kenya Tanzania Uganda Eritrea São Tomé & Príncipe Burkina Faso Sierra Leone Burundi Malawi Mali.Central African Rep Togo Comoros Senegal Benin Côte d'ivoire 1/ Exclude s cou ntries whe re comm odity reven ues exce ed 2 0 percent of to tal reven ues, in cluding o il exp orters.

Policy Responses Accommodate the cyclical decline in commodity revenues Countries with fiscal cushions can maintain spending (e.g., Angola, Republic of Congo, Nigeria) If there is a need to adjust, these countries can do so gradually However, if they are financially constrained, then countries will have to adjust (e.g. Chad) 19

Policy Responses Implementing fiscal stimulus: Should be timely, targeted and reversible Primary focus should be on the expenditure side as tax reductions will benefit primarily the rich and are difficult to reverse Infrastructure spending (projects already approved) Protecting social sector spending Scaling up existing social safety nets For example, Tanzania and Mozambique can implement fiscal stimulus Spending plans should ensure that fiscal sustainability is not jeopardized 20

Policy Responses Some countries will have to adjust The need for adjustment will be less if additional aid is forthcoming Policy measures include: Broadening the revenue base Rationalizing expenditure and increasing spending efficiency 21

Conclusion Fiscal effects of the crisis can be large Countries with output gaps, sustainable fiscal position and financing options (including commodity producers) have scope for fiscal expansion The focus will be on the expenditure side Other countries will need to adjust, but additional donor support can mitigate these pressures Priority should be given to expanding social safety nets Policy responses in 18 countries are consistent with this framework 22

References Berg, et. al., 2009, Fiscal Policy in Sub-Saharan Saharan Africa in Response to the Impact of the Global Crisis, IMF Staff Position Note 09/10. Available via the Internet at http://www.imf.org/external/pubs/ft/spn/2009/spn0910.pdf IMF,, 2009, The Implications of the Global Financial Crisis for Low-Income Countries. Available via the Internet at http://www.imf.org/external/pubs/ft/books/2009/globalfin/gl obalfin.pdf IMF, 2009, Regional Economic Outlook: Sub-Saharan Saharan Africa (April). Available via the Internet at http://www.imf.org/external/pubs/ft/reo/2009/afr/eng/sre o0409.pdf IMF, 2009, World Economic Outlook (April). Available via the Internet at http://www.imf.org/external/pubs/ft/weo/2009/01/ 23