The COVID-19 pandemic has hit sub-Saharan African economies hard, exacerbating debt and debt servicing cost issues that a range of countries in the region – including Ghana and Nigeria – already faced. This report examines the fiscal context in sub-Saharan Africa and the issues and options for potential post-COVID-19 fiscal consolidation efforts.
Since Spring 2020, the COVID-19 pandemic has had significant impacts on the public finances of both developed and developing countries. Falls in revenues and increases in public expenditure have pushed up deficits and debts, posing a particular challenge for many countries in sub-Saharan Africa (SSA). After the debt relief of the 2000s, the 2010s saw public debt and debt-servicing costs grow substantially across the region, with the fiscal situation looking increasingly unsustainable in some countries even prior to the pandemic. This difficult context may be one reason why the scale of discretionary tax and spending policy measures undertaken in response to the pandemic has generally been much smaller than in high-income countries.
This report sets out the trends and forecasts for budget deficits, debts and debt-servicing costs in SSA, and provides an overview of the issues and options for potential post-COVID-19 fiscal consolidation efforts.
1. Between 2013 and 2019, gross public debt increased from an average of 30% to 47% of GDP for the 24 low-income countries in SSA tracked by the IMF’s April 2021 Fiscal Monitor report. An increased reliance on private non-concessional debt saw debt-servicing costs increase even more, from an average of 8.1% to 16.1% of government revenue
2. These increased debts and debt-servicing costs may have constrained the fiscal responses of countries in SSA to the COVID-19 pandemic. Discretionary tax cuts and spending increases have typically been modest, which helps explain a much smaller increase in budget deficits than in high-income countries: an estimated average of 5.7% of GDP in 2020, up from 4.3% of GDP in 2019. Across the region as a whole, therefore, while debt is forecast to have spiked at 53% of GDP in 2020, it is forecast to fall back to 49% of GDP by 2026 – although debt-servicing costs are forecast to increase further to 22.5% of revenues by the same date.
3. The picture differs significantly across countries though. For example, the debt-to-GDP ratio is forecast to increase in half and decrease in half of the 24 countries tracked by the IMF. Ghana and Nigeria stand out as facing particularly challenging circumstances. Ghana’s debt-to-GDP ratio is forecast to increase from 63% to 85% between 2019 and 2026, with debt-servicing costs amounting to over 50% of revenues every year. In Nigeria, while debt levels are relatively low and forecast to increase only modestly, low revenues mean debt interest costs are forecast to amount to 37% of revenues by 2026, up from 21% in 2019. Fiscal consolidation measures therefore seem worthy of serious consideration in these countries. The four other largest economies (Cote d’Ivoire, Ethiopia, Kenya, and Tanzania) are also forecast to have debt-servicing costs exceeding 10% of revenues in 2026, and these countries may also wish to consider fiscal consolidation measures.
4. A successful fiscal consolidation will improve the sustainability of public finances by lowering the trajectory for debt and debt-servicing costs while minimising any negative effects on the economy. Research suggests that achieving this can help address several issues that arise when debt and debt-servicing costs are high and/or rising. These include: the crowding out of investment by the private sector; increased vulnerability to a range of economic shocks (e.g. to interest rates, exchange rates and output); reduced ability to respond to economic and other shocks via discretionary fiscal policy measures; constraints on monetary policy, especially when debts are foreign-currency-denominated; the increased risk of default; and, ultimately, lower economic growth.
5. Key considerations for consolidation include the timing and composition of the measures. Both should take account of economic conditions. Where possible, consolidation should not take place while an economy is still weak – and particularly so if monetary policy is constrained – as the short-term demand and longer-term scarring effects are likely to be greater at these times. When more immediate action is required during a time of economic weakness, consideration should be given to measures that are less likely to depress demand. This includes increases in taxes on personal income – especially for those with high incomes – and corporate income, which could be made temporary to limit negative effects on investment. One-off wealth or windfall taxes could also be efficient, although, if there is a perception that such taxes will be repeated or made permanent, they will risk depressing and distorting investment.
6. It may take time to design, plan and implement measures that are more suitable for longer-term fiscal consolidation. Given that it is likely that most low-income countries in SSA will need to increase overall public expenditure to meet development goals, increases in tax revenues are likely to be key. Introduction and expansion of ‘green’ taxes and property taxes, and rationalisation of tax expenditures – including widespread exemptions and reduced rates of value-added tax – could both raise revenue and increase the efficiency of the tax system. Empirical research also suggests that a range of administrative reforms and enforcement activities can yield worthwhile revenues.