Abstract: This paper traces salient aspects of the evolution of fiscal policy in sub‐Saharan Africa since

1960 and highlights the need for further reforms to consolidate the gains of the recent past. The fiscal
position of the sub‐Saharan African region as a whole has improved markedly during the past ten years,
but most countries still face formidable fiscal challenges. To consolidate the progress made during the
past decade and to tackle the remaining problems, sub‐Saharan African policymakers should remain
firmly committed to sound fiscal policies. Introduction The debate about the economic role of fiscal
policy is continuing, with questions about the optimal extent and nature of government intervention in
market economies remaining contentious. Few participants in this debate, however, would deny that
fiscal policy has an important role in developing countries, both concerning the promotion of sustained
economic growth and the reduction of poverty. This paper traces salient aspects of the evolution of
fiscal policy in sub-Saharan Africa since 1960 (mainly its contribution to the region’s economic problems
and the fiscal adjustment process during the 1980s and 1990s) and highlights the need for further
reforms to consolidate the financial gains of the recent past. We take a broad view of the scope of fiscal
policy that includes all national government decisions regarding the nature, level, and composition of
government expenditure, taxation, and borrowing. The nature and context of fiscal policy in sub-
Saharan Africa Proper understanding and assessment of recent developments in fiscal policy in sub--
Saharan Africa require cognizance of at least three aspects of the regional and global contexts, namely
the economic performance of the region, changing views about the economic role of government, and
the fiscal implications of globalization. the corresponding average annual rates of growth of per capita
GDP were 2.6% and -0.9% (Fosu, 2002: 282).2 Both the level of these growth rates and the nature of
economic growth were wholly inadequate to overcome poverty in the region. According to some,
economic growth in sub-Saharan Africa was hampered mainly by factors beyond the control of
policymakers, including the small size of many countries, tropical climates, poor soils, erratic rainfall
patterns, high levels of ethnolinguistic diversity, long distances from industrial country markets and
heavy reliance on the exportation of a narrow range of commodities (many of which have been
characterized by falling demand and volatile prices). Whereas average real output growth in sub-
Saharan Africa lagged world output growth by more than one percentage point per annum from 1988 to
1997, it is expected to exceed world output growth by 0.1 percentage point per annum from 1998 to
2007.4 In every year from 2000 to 2005, at least 15 countries in sub-Saharan Africa achieved real growth
rates of 5% or more. The growth prospects of more and more Sub-Saharan African countries are
nonetheless improving, fueled by factors such as greater political stability, increased awareness and
understanding across the continent of the international market criteria for good economic governance,
greater access to industrial country markets, debt relief, favorable revisions of multilateral grants and
debt repayment schedules, and stronger commitment by African leaders to assume responsibility for
their countries’ economic destinies. At the global level, the comprehensive review of the role of
government in the economy that had begun in the 1970s continued into the new millennium, as did
international integration of economic activity in the form of regionalization and globalization. Although
it is now generally agreed that the Washington consensus is an inadequate overall framework for
economic development (which, incidentally, it probably never was intended to be), there is still
widespread support for its main fiscal elements: low budget deficits, the restructuring of public
expenditure to increase the allocations for social spending and infrastructure, tax reform to broaden the
tax base and reduce marginal income tax rates, and the restructuring of institutions and enterprises in
the public sector (which may include privatization) (Williamson, 2000: 253). Trade liberalization usually
reduces governments' income from trade taxes, and the increased international mobility of tax bases
puts downward pressure on tax rates. On the expenditure side, globalization creates pressure for
increased public spending on infrastructure and social safety nets (especially to assist those who lose
their jobs or capital because of increased exposure to foreign competition). These issues are particularly
worrying in the sub-Saharan African context, where tax bases tend to be relatively small, social safety
nets non-existent or rudimentary, and pressure for increased government spending on social services
strong. Fiscal policy in sub-Saharan Africa since 1960: a synopsis Fiscal structures and pressures at
independence These arrangements ensured that the public finances of the colonies were sound, and the
(admittedly scant) evidence indicates that African countries had low public debt burdens at
independence ( cf. They also inherited basic revenue collection and public expenditure management
systems. On the whole, however, sub-Saharan African countries embarked upon independence with
extremely fragile systems of public finance. Except for a few countries – notably South Africa – low per
capita incomes, small corporate sectors, and limited revenue collection capacity had prevented the
development of broad-based personal and company income tax systems. To name but one example: in
1960 the mortality rate of children aged four or younger (39 per 1,000) was more than 50% higher than
the average for all developing countries (23 per 1,000) (World Bank, 1981: 10). The twin problems of a
narrow tax base and heavy pressure for increased government spending were obviously not unique to
sub-Saharan African countries. To a greater or a lesser extent, they were (and continue to be) germane
to all developing countries.8 Be that as it may, the fragility of the fiscal systems inherited by almost all
the newly independent countries of sub-Saharan Africa meant that the sustainable management of the
public finances required considerable wisdom, sustained economic growth, and even some good luck (in
the form of an absence of severe exogenous shocks). Fiscal crises and reform In a review of fiscal
developments from 1950 to 1958, the United Nations Economic Commission for Africa (1961) showed
that nearly all the African countries for which data were available had experienced rapid growth in
government expenditure. According to the United Nations Economic Commission for Africa (1961: 6-7),
the major reasons for the rapid growth in government outlays in Africa during the 1950s were the
assumption of additional responsibilities by the governments of newly independent countries, the
expansion of social services (notably education, health care, and low-cost housing) and increases in
recurrent spending related to earlier development programs. The result was that many African countries
expanded the provision of regulatory, economic, and social services beyond their fiscal and
administrative capacities, eventually making it impossible to maintain – let alone expand – service
provision (Williams 2004: 4). During the 1970s, for example, the average public deficit of African
countries amounted to 6.4% of GDP – well above the corresponding figures for Latin America and the
Caribbean (4.6%), other developing countries (4.5%), and the OECD countries (1.2%) (Schmidt-Hebbel,
1996: 11). According to Greene (1989: 840), the external debt of sub-Saharan African countries
increased from 14.6% of the region’s GDP in 1970 to 28.7% in 1980.9 Debt service payments accordingly
increased from 7.8% of the region’s exports of goods and services to 13.7%. The external debt burden of
sub-Saharan Africa, which was still dominated by publicly guaranteed liabilities, mushroomed from
28.7% of GDP (96.2% of exports of goods and services) in 1980 to 53.0% of GDP (250.1% of exports of
goods and services) in 1985 (Greene, 1989: 840). Over the same five-year period, actual debt service
payments rose from 13.7% of exports of goods and services to 33.9%.10 Progressively worsening
macroeconomic conditions and dwindling access to private foreign capital forced more and more African
countries to borrow from the International Monetary Fund (IMF) or the World Bank, thus subjecting
them to the lending conditionalities imposed by the Bretton Woods institutions and the uncertainty of
official aid flows. The figure also emphasizes that the nature of IMF lending to African countries has
changed entirely from shorter-term facilities aimed at resolving balance of payments difficulties (Stand-
By Arrangements and Extended Fund facilities) to longer-term structural adjustment facilities with
wider-ranging policy conditionalities (Structural Adjustment Facilities, Enhanced Structural Adjustment
Facilities, and Poverty Reduction and Growth Facilities). The first was the shift in emphasis in the IMF
from an almost exclusive focus on the macroeconomic aspects of fiscal policy (embodied in adjustment-
program ceilings for the levels of budget balances and public spending) to a broader perspective that
includes microeconomic issues such as the details of tax reform and public spending priorities. in an
important report about fostering good governance in Africa, the African Development Bank(2001)
emphasized considerations such as the creation of an enabling environment for private-sector growth
(which includes institutional foundations such as the rule of law, security of property rights, et cetera)
and accountable and transparent economic management. Thirdly, although various aspects of the World
Bank/IMF Heavily Indebted Poor Country (HIPC) debt-relief initiative remain controversial, its launching
reflected the recognition by the global community that the sustainable resolution of the fiscal (and
broader economic) predicaments of the world’s poorest countries requires more than internal policy
reform. In another development that may prove to be particularly significant for the future of fiscal
reform in sub-Saharan Africa, recent IMF assessments of the effectiveness of structural adjustment have
emphasized the importance of country ownership of reforms. The notion of country ownership
essentially boils down to strong government commitment to the implementation of reforms.12 Several
IMF studies (eg Khan & Sharma, 2002) have probed the possibility that the high failure rate of the
traditional carrot and- stick approach of lending conditionalities is related to inadequate country
ownership.13 One of the outcomes of this development has been that adjustment efforts supported by
the Fund's Poverty Reduction and Growth Facility (PRGF) are now guided by country-owned Poverty
Reduction Strategy Papers (PRSPs). An assessment of the fiscal reforms Attempts to assess the success
of fiscal reforms in sub-Saharan Africa since the early 1980s are complicated by the diverse fiscal
structures and experiences of the 48 countries in the region. Figure 2 shows that budget balances
improved significantly in many countries, especially from the mid--1990s onwards: the GDP-weighted
central government balance for sub-Saharan Africa as a whole changed from a deficit of 6.9% of GDP in
1981 (and a peak of 8.2% in 1993) to a surplus of 0.2% in 2005 (International Monetary Fund, 2006:
203). In 2004 fully 18 sub-Saharan African countries achieved grants-inclusive budget surpluses or
deficits that did not exceed 3% of GDP (International Monetary Fund, 2005: 30).14 Further consolidation
may well be needed in many countries ? Adam and Bevan (2005) recently found statistical evidence of a
growth payoff to reducing the budget deficit (including grants) to 1.5% of GDP – but it clearly is no
longer true that the majority of African countries suffer from large budget deficits. The unweighted
mean revenue-to-GDP ratio (inclusive of grants) decreased from 23.9% in the period 1980-1982 to
22.9% in the period 2001-2003, whereas the unweighted mean government spending ratio dropped
from 31.0% of GDP to 27.0%. The reality that the interest payments increased significantly as a
percentage of GDP in the vast majority of African countries over the past two decades means that the
decrease in the unweighted mean primary-expenditure-to-GDP ratio was smaller than that in the overall
expenditure- to-GDP ratio. based mainly on revenue increases tend to persist longer in developing
countries than those based mainly on expenditure cutbacks (cf. The average share of total government
revenue of such taxes decreased from 33.1% in the period 1980 to 1982 to 28.8% in the period 2001 to
2003, with decreasing shares reported in 17 of the 30 countries for which data are available. The vast
majority of countries that have successfully recouped the revenue lost as a result of reductions in trade
taxes did so by introducing value-added tax – a high-yielding and relatively non-distorting tax that is now
used widely in sub- Saharan Africa and elsewhere in the developing world (Keen & Simone, 2004: 315-
321).16 Increased reliance on taxes on income and profits has also been common. The average revenue
share of such taxes increased from 25.3% in the period 1980 to 1982 to 26.9% in the period 2001 to
2003, with increases in 23 of the 34 countries for which data are available. These countries include
Ghana, Kenya, Malawi, Mauritius, Rwanda, South Africa, Tanzania, Uganda and Zambia and several
countries in West Africa (Fjeldstad & Rakner, 2003. 16). There are indications that the latter problem
became less widespread in the 1990s – in 19 of the 23 countries for which data are available in African
Development Indicators, the average real salaries and wages of government employees were higher in
the period 2001 to 2003 than in the period 1990 to 1992 – but cross-country information on trends in
government employment is incomplete. Interest payments on the public debt increased sharply from
6.0% of government expenditure during the period 1980 to 1982 to 12.8% in the period 2001 to 2003,
with increases occurring in 27 of the 28 countries for which data are available. The releasing of
budgetary resources for more productive ends is already assisting spending reprioritization in several
countries, and more stand to benefit if the recent proposal of the leaders of the Group of Eight (G8)
countries to fully cancel the debts owed by participants in the HIPC initiative to the IMF, World Bank,
and African Development Bank is eventually implemented.17 Capital expenditure and net lending
decreased from 28.2% of government expenditure in the period 1980 to 1982 to 24.7% in the period
2001 to 2003. A case study: fiscal adjustment in South Africa during the 1990s18 Priorities The post-
apartheid government faced the dilemma of having to reconcile the imperative of fiscal discipline
(necessitated by the macroeconomic situation and the prevailing views of “best fiscal practice” in the
era of economic globalization) with the growing demand for government expenditure resulting from
political democratization. GEAR focused more on the medium and longer terms than on the short term
and emphasized fiscal discipline, which the government regarded as a prerequisite for improving the
longer-term growth potential of the South African economy. The financial goals of the GEAR strategy
included a gradual reduction in the budget deficit to three percent of GDP, maintenance of the total tax
burden at 25% of GDP, the reduction of general government consumption expenditure as a percentage
of GDP, and the gradual elimination of general government dissaving. When growth regained pride of
place as an objective of fiscal policy in 1999, the fiscal authorities emphasized its intention to promote
growth by microeconomic reforms to boost the supply side of the economy, instead of deliberate
demand stimulation. Results Although higher economic growth (which stimulated tax receipts and
exerted downward pressure on ratios in which GDP is the denominator) and improved tax collection19
also contributed, developments during the second half of the 1990s and beyond left no doubts that the
strategy of fiscal discipline paid dividends in the form of a significantly improved fiscal position. This
latter trend appears to contradict the well-known Meltzer-Richard hypothesis on government
expenditure growth, based on which one would have expected the extension of the suffrage that
accompanied the constitutional reform in 1994, to have resulted in a major increase in the share of
government expenditure in the economy.20 In combination, the revenue and expenditure trends
amounted to a fall in the budget deficit from 7.3% of GDP (1992/93) to 2.3% (2003/04). In the process,
privatization income was used to a significant degree to reduce the public debt. Since 1990, the South
African Government’s efforts to promote economic growth utilizing fiscal policies assumed a longer-
term perspective and increasingly emphasized supply-side measures. Some aspects of fiscal policy
boosted the longer-term growth prospects of the South African economy, while others added to the list
of factors constraining economic growth. Subsequently, the fiscal authorities made considerable
progress in eliminating government dissaving: the excess of general government current expenditure
over general government current income dropped from 7.3% of GDP in 1992 to 0.8% in 2001 and 2002,
the lowest level since 1982. There are also strong indications that inefficiency within government limited
the potential growth-promoting effects of some of the largest and most important categories of
government spending, including public order and safety, education, and health. The authorities
broadened the tax base by eliminating various special tax preference schemes that benefited only
particular industries or narrow sectoral interests, including the tax subsidies for training, welfare, health,
and the general export incentive scheme (GEIS), as well as the interest rate subsidies for agriculture and
housing. The fiscal authorities used almost three-quarters of the proceeds from privatization to finance
government expenditure and the remainder to reduce the public debt. The authorities have attempted
to pursue the objectives of redistribution and poverty alleviation sustainably by combining fiscal
discipline with major changes in the distribution of public benefits and the incidence of financing costs,
as well as far-reaching regulatory measures to redistribute assets and opportunities (including land
reform, labor- market legislation, and the Broad-Based Black Economic Empowerment program). The
fiscal authorities changed the distribution of public benefits by changing the composition of government
expenditure and by directly or indirectly privatizing the provision of some public and merit goods.
curative health care) accompanied these redistributive changes. A fiscal incidence study on the
redistributive impact of more or less 60% of consolidated government expenditure (education, health,
social grants, water provision, and housing) during the period 1993 to 1997 affirmed the marked shift in
social spending patterns from the more affluent to the poorer members of South African society (see
Department of Finance, 2002: 145-46). It investigated the incidence of four major taxes (the personal
income tax, the value-added tax, specific excise duties, and the fuel levy), and found that the poorest
10% of income earners pay 11% of their incomes on these four taxes, whereas the richest 10% pay
approximately 30%. In 2006 the Government announced a shared and accelerated growth initiative for
South Africa (ASGISA), aimed at achieving 6% economic growth per annum in 2010 and beyond.
Observations The South African experience leads to some important observations. Despite all the scorn
that has been heaped on the Washington consensus in recent years, the South African experience
suggests that its fiscal elements have considerable merit as the broad contours for adjustment. It also
conveyed commitment to policy consistency, thereby adding to the credibility of self-imposed fiscal
targets. Future challenges and prospects In closing, we comment on the key challenge now facing fiscal
policymakers in sub--Saharan Africa: the need to consolidate and build on the positive developments of
the last ten years. By reducing excessive budget deficits and affecting changes to the structures of their
tax and expenditure systems, many subs--Saharan African countries have extended their “fiscal space”
and regained control over fiscal policymaking from the IMF and other external institutions. To
consolidate the gains of the last decade and to tackle the remaining problems, it is imperative that sub-
Saharan African policymakers commit themselves – and remain firmly committed – to sound fiscal
policies. A question that arises in this respect is whether voluntary accession to an evaluation of
policymaking and -implementation practices in terms of the African Peer Review Mechanism (APRM) of
the New Partnership for Africa’s Development (Nepad) would help to cement such commitments to
fiscal prudence and to build policy credibility. It is, therefore, our view that participation in the APRM
(or, for that matter, the adoption of formal numerical rules such as those of the Stability and Growth
Pact in the European Union) cannot substitute for sustained governmental commitment to fiscal
prudence. References Helsinki, F. (2006, August). The legacy and challenge of fiscal policy in sub-Saharan
Africa. (6th, Ed.) SAJE, 21-25.