Africa must improve fiscal management

Wednesday, November 9, 2011

Cape Town - With a slower then expected global recovery from the recession and the Eurozone crisis threatening to worsen, African countries should look to improving their management of public finances and collection of revenue in building a nest egg, the Deputy Minister of Finance Nhlanhla Nene said today.

Addressing the African Fiscal Forum, hosted by the IMF and the National Treasury in Cape Town on Wednesday, Nene said African countries could also generate additional revenues by implementing targeted programmes to assist investment when aid is granted and by obtaining more affordable finance offered by investors.

The improved management of revenue could assist African governments in spending more wisely, he said.

"The lessons from the current problems facing the Eurozone and the US provide Africa and the developing world with an opportunity to address the composition and efficiency of government expenditure," said Nene.

He said while Africa continued to access debt and grant funding - with the continent as a safe haven - the diminishing availability of financing in developed countries as well as the risk of over-heating in emerging markets could make it harder for African countries to borrow from outside funders to fulfil their budget requirements.

Added to this with over half of all Africa's exports going to EU members, Nene said any further revisions in the growth outlook of the Europe would likely affect the performance of Africa over the next two years.

"As uncertain economic conditions prevail in Europe and the US as well as in emerging markets, it's important for us to focus on medium to long-term considerations in order to sustain the continent's economic expansion," he said.

He added that African countries also face inflationary risk with rising fuel and food prices and the co-ordination of fiscal and monetary policy management could also assist in mitigating these risks.

The IMF expects budget deficits of African countries to remain high on the continent, despite a generally strong growth environment.

But Nene said for those African countries experiencing a decline in economic growth it may be necessary for their governments to temporarily widen their respective fiscal deficits further, to continue to support aggregate demand.

However, he stressed that this would be dependent on the availability of financing and country-specific sustainability initiatives.

Key to sustaining Africa's expansion, he said, was to remain focused on stability and growth, rather than on short-term gains.

"Governments across the continent should manage their public finances with a focus on maintaining planned strategic initiatives while automatic stabilisers operate on the revenue side," he said.

He said African governments needed to shift public finances from the expansionary stance taken during the 2008/2009 global financial crisis to a more neutral stance consistent with debt sustainability.

"Should the downside risks in the global economy emerge, the space for additional discretionary fiscal stimulus is limited," he said.

He said failure by African countries to lower their dependence on and financing growth-debt stock would ultimately lower the growth potential of these countries.

Sanjeev Gupta, the IMF's deputy director of fiscal affairs, said growth had recovered faster in emerging countries, but that an increasingly interconnected world meant high risks were still present and meant aid budget, remittances, capital inflows and trade could all be affected.

Gupta said governments were in a difficult position as they would have to use their scarce resources to carefully balance spending on development needs with the need to build fiscal buffers to mitigate future risks in the world economy.

The fiscal forum, hosted by the IMF, is the first regional one of its kind following a global fiscal forum held by the organisation in Washington last year.

Gupta said the Africa Fiscal Forum had come about after the National Treasury had requested that a regional forum be held so that more African delegates could be part of the discussions on sound public fiscal policies.

Nene thanked USAid for the funding it provided to the IMF and the National Treasury in order to host the forum.