## Navigating Fiscal Challenges in Sub‑Saharan Africa (Executive Summary and Key Findings) ## Source details **Canonical URL:** [Navigating Fiscal Challenges in Sub‑Saharan Africa (Executive Summary and Key Findings)](https://www.imf.org/-/media/files/publications/dp/2023/english/apcfsfssacea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2023/english/apcfsfssacea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2023/english/apcfsfssacea.pdf.json) --- ### Macroeconomic context and urgency - Sub‑Saharan Africa hit by cascading shocks: COVID‑19 pandemic, Russia’s invasion of Ukraine, and increasing weather events, amplifying fiscal vulnerabilities. - Under unchanged fiscal policy: - Region’s debt‑to‑GDP ratio will increase by more than 10 percentage points over the next five years. - Historical and recent metrics: - Median government debt‑ratio peaked at about 80 percent of GDP at the beginning of the 2000s. - Debt fell by more than 40 percentage points of GDP in the first decade of the millennium following HIPC/MDRI. - Median debt ratio about 50 percent of GDP just before COVID‑19. - External bonds accounted for close to 15 percent of the region’s government debt in 2021. - Almost three‑quarters of the region’s debt is on commercial terms. - Aggregate deficit of the region increased by about 2½ percent of GDP in 2020. - Median debt ratio increased by almost 10 percent of GDP in 2020 alone. - Region’s median ratio of interest to revenue excluding grants rose from 5 to 11 percent as of 2022. - In 2022, more than half of the 35 sub‑Saharan Africa countries with DSF ratings were at high risk of or already in debt distress (doubling since 2015). - About one‑quarter of sub‑Saharan African countries had government debt below 50 percent of GDP at end‑2020. - 10 countries saw their debt‑to‑GDP ratio decrease between end‑2019 and end‑2022. ### Four areas of concern with current fiscal practice - Common weaknesses: - Fiscal policy often lacks an effective anchor and is excessively focused on short‑term goals. - Fiscal balances are relatively unresponsive to rising debt. - Deviations from fiscal plans tend to be significant, especially at longer horizons. - Countries have difficulty sustaining elevated primary surpluses. - Compared to other regions, deficit ceilings are breached more frequently and by larger margins. ### Debt‑servicing capacity and debt anchors: novel tailored method - Core principle: preserve debt‑servicing capacity. - Operationalization: - Use interest payments (or total debt service) to revenue (excluding grants) as the debt‑servicing indicator. - Empirically identify fiscal stress threshold for interest‑to‑revenue ratio: threshold estimated between 16 to 19 percent; preferred model uses 19 percent. - Debt limit formula (preserving source notation): dmax =  * (Revenues/GDP) / i with  = 19 percent. - Example: Revenue ratio = 15 percent of GDP, effective interest rate = 4 percent → dmax = 19 * (15 / 4) = 71 percent of GDP. - Safety buffer calibration: - Buffers range from 10 to 30 percent of GDP based on historical volatility (2000–22). - Top third volatility: buffer = 30 percent of GDP; second third = 20 percent of GDP; bottom third = 10 percent of GDP. - Median buffer in sub‑Saharan Africa: 20 percent of GDP. - Debt anchor = debt limit − safety buffer. - Cross‑country outcome at end‑2022: - Median debt anchor in the region: about 55 percent of GDP. - 25 countries had debt ratios in 2022 above their estimated anchor: - 10 above anchor but below debt limit (risky zone). - 15 above the debt limit (elevated fiscal stress risks). ### Stock‑flow adjustments (SFAs) and baseline scenarios - SFAs definition: off‑budget operations, SOE support, bank recapitalizations, arrears clearance. - Median SFAs over 2013–22: about 1½ percent of GDP per year. - Impact of adding regional median SFA to baseline: - Regional median debt‑to‑GDP close to 20 percentage points higher than baseline by 2027 (almost 15 percentage points higher than end‑2022). - Median interest payments‑to‑revenue 2 percent higher by 2027. - Under SFA scenario: median public debt ≈ 70 percent of GDP and interest payments above 11 percent of government revenue at the end of the forecast horizon. ### Adjustment needs: magnitude, heterogeneity, and feasibility - Typical required consolidation: - In the order of 2 to 3 percent of GDP cumulatively over the next five years for the median country (preferred specifications). - Three debt‑anchor approaches and five‑year cumulative primary gap results (2022–27), baseline CAPB, country‑specific SFAs: - Approach 1 (pre‑crisis 2015–19 average anchor): - All SSA countries: simple average 1.9; median 3 .1 (percent of GDP). - Resource‑intensive countries: median 1.4. - Non‑resource‑intensive countries: median 3.8. - Approach 2 (ceiling of country debt rule; median ceiling = 70 percent of GDP): - All SSA countries: simple average −0.4; median −0.6. - Resource‑intensive countries: median −2.2. - Non‑resource‑intensive countries: median 1.5. - Approach 3 (debt‑servicing capacity framework — preferred policy‑relevant): - All SSA countries: simple average 2.1; median 2.1. - Resource‑intensive countries: median 3.3. - Non‑resource‑intensive countries: median 0.9. - Sensitivities: - Using calibrated SFAs (1½ percent of GDP) yields similar medians (reported). - Share of countries needing adjustment (positive primary gap) ranges between half and 80 percent depending on approach. - About a quarter of countries have negative primary gaps (fiscal space) under approaches 1 and 3; average across approaches 1 and 3 = 27 percent of countries with negative primary gaps. - Feasibility based on history: - Countries in the region have historically improved primary balance by about 1 percent of GDP a year over two to three years. - A few countries face very large adjustment needs where consolidation alone is unlikely to ensure sustainability; debt reprofiling or restructuring may be required. ### Composition of adjustment: revenue vs expenditure - Historical pattern: - Past adjustment episodes relied mostly on expenditure cuts—especially public investment—which can harm growth. - Opportunity for revenue mobilization: - Median government revenue (excluding grants) in 2022: 17 percent of GDP in SSA vs 26 percent in other EMDEs and 40 percent in advanced economies. - Structural differences make greater reliance on domestic revenue mobilization viable in SSA relative to advanced economies. - Careful tax instrument selection can mitigate inequality impacts. - Complementary expenditure reforms recommended: - Reform costly and poorly targeted energy subsidies. - Protect priority growth‑enhancing and social spending where possible. ### Institutional reforms required for credible implementation - Four tailored reform areas: - Strengthen medium‑term orientation of the budget (macro‑fiscal forecasting capacity, adopt medium‑term fiscal objective/anchor). - Systematically identify and manage fiscal risks (central risk management, broader use of tools, adequate fiscal buffers, better reporting on contingent liabilities). - Improve expenditure controls (integrity of spending cycle reviews, FMIS, commitment control, cash management, internal/external audit). - Boost domestic revenue mobilization (strengthen revenue administrations, digitalization, medium‑term revenue strategies). - MTBFs and fiscal rules: - About 60 percent of countries had at least one fiscal rule in place as of 2021 (most often a debt or deficit rule). - Most common deficit ceiling: 3 percent of GDP. - Typical threshold for debt rules: 70 percent of GDP. - Compliance issues: - Pre‑COVID decade: deficit ceiling breaches frequency in SSA ≈ 50 percent (higher than advanced economies ≈ 20 percent). - Average deviations from deficit rules: 2.2 percent of GDP for SSA vs 1.4 percent in other developing and advanced economies. ### Pace of adjustment: frontloading vs gradualism - Median primary gap about 2–3 percent of GDP suggests annual consolidation of about 1 percent of GDP is historically feasible. - Factors determining pace: - Financing constraints and market access (loss of market access may force frontloading). - Fiscal multipliers: median fiscal multiplier for EMDEs = 0.4; for advanced economies = 0.8. Multipliers by instrument: public investment 0.8; current spending 0.5; taxes ≈ 0.4; transfers can be larger in developing economies (transfer multiplier example 0.9). - Credibility, fiscal fatigue, political economy, commodity cycles, and fragility. - General guidance: - Frontloaded adjustments often beneficial given lower multipliers and high risk premia in many SSA countries, but optimal pace should be country specific. - For countries with access to concessional finance or donor support, gradual adjustment is more feasible. ### Fiscal risk, fragility, and volatility implications - Fragility: - In 2022, World Bank identified 17 fragile or conflict‑affected states in SSA (> a third of countries and about 40 percent of regional GDP). - Fragility increases security spending needs, reduces tax collection, weakens service delivery, and undermines capacity to implement budgets. - Volatility and shocks: - Absolute deviation of GDP growth from historical mean: 2½ percentage points in advanced economies; close to 4 percentage points in SSA. - External debt represents 40 percent of total debt at regional level. - High exposure to climate and other shocks increases need for larger buffers and strong safety nets. ### Forecasting accuracy and adherence to plans - Forecast errors (WEO April vintages, 1990–2021): - Fiscal balance projections: mean and median forecast errors close to 1 percent of GDP at a three‑year horizon (fiscal balances tend to be 1 percent of GDP lower than projected 3 years earlier). - The 1 percent slippage is about equally due to revenue shortfalls (~0.5 percent of GDP) and expenditure overruns (~0.5 percent of GDP). - Absolute forecast errors grow with horizon: can be as large as 4 percent of GDP on average at two‑ and three‑year horizons. - Implementation track record: - Identified 82 fiscal consolidation episodes in SSA during 1980–2021; 24 assessed as sustained. - Median cumulative improvement of CAPB during an episode: 2.4 percent of GDP; median annual change: 1.0 percent of GDP. - Sustained consolidations: median cumulative improvement 4.2 percent of GDP; median duration 3.0 years. - Composition in sustained episodes: larger revenue increases and larger primary expenditure reductions. - Historical maximum primary balances (2000–22) — SSA medians: - Annual maximum primary balance = 5.7 percent of GDP. - Three‑year moving average = 2.5 percent of GDP. - Five‑year moving average = 2.3 percent of GDP. - Median deviation from peak annual effort: three‑year −42 percent; five‑year −60 percent. ### Policy recommendations and implementation priorities - Anchor fiscal policy explicitly to preserve debt‑servicing capacity (use interest‑to‑revenue thresholds and tailored safety buffers). - Design realistic medium‑term fiscal strategies comprising: - Trajectories for fiscal deficits anchored to debt anchors. - Targeted composition for revenue and expenditure reflecting equity and efficiency. - Institutional measures to support implementation. - Prioritize domestic revenue mobilization where feasible (examples: Rwanda and Uganda comprehensive tax reforms increased tax‑to‑GDP ratios by more than 3 percentage points and through elimination/simplification of exemptions, VAT reforms, excise broadening). - Sequence and design reforms to build public support: - Use compensatory measures (well targeted transfers where possible). - Communicate transparently on benefits and costs of reform and costs of inaction. - Strengthen fiscal risk management and expenditure controls: - Improve reporting and quantification of contingent liabilities, SOE risks, and PPPs. - Deploy FMIS, commitment controls, and cash‑management practices. - Build and sustain credible medium‑term frameworks, fiscal rules (properly calibrated), and revenue strategies (MTRS), acknowledging heterogeneity across countries. _Italic: Source: Executive Summary and selected sections of the IMF Departmental Paper "Navigating Fiscal Challenges in Sub‑Saharan Africa" (content unit: apcfsfssacea)._ ### Executive Summary ...............................................................................................vii ### Executive Summary ### Why is it time to rethink fiscal policy in the region? - Sub-Saharan Africa has been hit by a cascading series of shocks, including the COVID-19 pandemic, Russia’s invasion of Ukraine, and increasingly frequent weather events, amplifying longstanding economic and social challenges and exacerbating fiscal vulnerabilities. - Under unchanged fiscal policy, the region’s debt-to-GDP ratio will continue to trend upward, increasing by more than 10 percentage points over the next five years. - Key historical and recent metrics: - Median government debt-ratio peaked at about 80 percent of GDP at the beginning of the 2000s. - Debt fell by more than 40 percentage points of GDP in the first decade of the millennium following HIPC/MDRI. - Median debt ratio was about 50 percent of GDP just before the start of the COVID-19 pandemic. - External bonds accounted for close to 15 percent of the region’s government debt in 2021. - Almost three-quarters of the region’s debt is on commercial terms. - Aggregate deficit of the region increased by about 2½ percent of GDP in 2020. - Median debt ratio increased by almost 10 percent of GDP in 2020 alone. - The region’s median ratio of interest to revenue excluding grants rose from 5 to 11 percent as of 2022. - In 2022, more than half of the 35 sub-Saharan Africa countries with DSF ratings were assessed to be at high risk of or already in debt distress (doubling since 2015). - About one-quarter of sub-Saharan African countries had government debt below 50 percent of GDP at end-2020. - 10 countries saw their debt-to-GDP ratio decrease between end-2019 and end-2022. ### What could be done differently? Four areas of concern with current practice - Fiscal policy often lacks an effective anchor and is excessively focused on short-term goals. - Four specific concerns: - Fiscal balances are relatively unresponsive to rising debt. - Deviations from fiscal plans tend to be significant, especially at longer time horizons. - Countries in sub-Saharan Africa have difficulty sustaining elevated primary surpluses. - Compared to other regions, fiscal deficit ceilings are breached more frequently and by a larger margin. ### Debt anchors and debt-servicing capacity - An explicit debt anchor is a crucial element of any fiscal strategy; calibrating it is particularly difficult in low-income, volatile environments with data gaps. - The paper proposes a novel method tailored to the low-income country context based on a single core principle: the preservation of debt-servicing capacity. - Result from the proposed method: - Median debt anchor of 55 percent of GDP for the region. - Slightly more than half of sub-Saharan African economies were above their recommended country-specific anchor in 2022. - The proposed method could inform designing or revising fiscal rules and provide operational guidance on fiscal policy direction. ### How much adjustment is needed and realism of adjustment - Most (though not all) countries will need to consolidate over the medium term to achieve prudent debt targets. - Adjustment needs: - In the order of 2 to 3 percent of GDP over the next five years for the median country. - Much larger adjustment needs in a few cases. - Historical feasibility: - In the past, countries in the region have been able to improve their primary balance by 1 percent of GDP a year over two to three years. - The ability to pursue gradual adjustment will be largely determined by global financial conditions, the growth outlook, and the availability of donor financing. - For a few countries with very large adjustment needs, fiscal consolidation alone is unlikely to ensure sustainability; comprehensive strategies may need to include debt reprofiling or restructuring. ### Composition of adjustment: revenue versus expenditure - Past adjustment episodes in Africa have tended to rely mostly on expenditure cuts—especially public investment—which can harm growth. - Compared to advanced economies, sub-Saharan African countries: - Face structural differences that make greater reliance on domestic revenue mobilization viable without necessarily undermining growth to the same extent observed elsewhere. - Can use careful selection of tax instruments to mitigate negative effects on inequality. - Complementary expenditure-side measures are often needed, notably reforming costly and poorly targeted energy subsidies. ### Institutional reforms critical to successful implementation - Institutional reforms are generally a prerequisite for effective implementation of a fiscal strategy. Four tailored reform areas: - Strengthen the medium-term orientation of the budget, beginning with foundations like macro-fiscal forecasting capacity. - More systematically identify and manage fiscal risks, including through a central risk management capacity, broader use of risk management tools, and accumulation of adequate fiscal buffers. - Improve expenditure controls by reviewing the integrity of the spending cycle, automating some procedures, and improving cash management. - Boost domestic revenue mobilization by strengthening revenue administrations’ resources, promoting digitalization, and introducing medium-term revenue strategies. ### Overcoming resistance to fiscal reform - Sustainability of a new fiscal strategy depends on securing public support by linking policy measures to longer-term benefits. - Key considerations: - Resistance arises because costs of the status quo are often not visible while reforms can reduce welfare for a segment of the population, at least temporarily. - Public acceptance should be central in policy design—sequence reforms carefully and introduce compensatory measures where possible. - “Smart design” may be infeasible if reforms are urgently needed or if instruments like targeted transfers are unavailable. - Communication campaigns that transparently and credibly outline long-term benefits, distributional consequences, and costs of inaction are critical. - Public acceptance also depends on governments convincing populations that public funds will be used efficiently, fairly, and transparently. ### Organization of the paper - Chapter 1: Defines the concept of fiscal strategy, contrasts it with existing country practices, highlights benefits of a strategic approach, and tailors the approach to sub-Saharan Africa. - Chapter 2: Focuses on design, including calibration of debt anchors and the size, composition, and pace of adjustment needs. - Chapter 3: Examines implementation aspects and the role of institutions in ensuring success. *Source: Executive Summary of the IMF Departmental Paper "Navigating Fiscal Challenges in Sub-Saharan Africa" (Executive Summary).* ### 1. Debt-to-GDP Ratio ### 1. Debt-to-GDP Ratio ### Debt projections and scenarios - Baseline projections are extracted from the April 2023 World Economic Outlook (WEO) vintage. - The “unchanged policy” path assumes the primary deficit-to-GDP ratio remains constant at 2022 levels and that nominal GDP growth, the effective interest rate on public debt, the nominal bilateral exchange rate against the US dollar, and the share of debt in foreign currency remain identical to baseline projections. The “unchanged policy” scenario assumes no stock-flow adjustment beyond 2022. - Zambia is excluded from the sample as there are no debt projections available in the WEO beyond 2022. ### Stock-flow adjustments (SFAs) and their fiscal impact - SFAs are discrepancies between the annual change in public debt and the budget deficit driven by off-budget operations, support to weak SOEs, recapitalization of public banks, and arrears clearance. - On average, across all sub-Saharan African countries, median SFAs have represented about 1½ percent of GDP per year over 2013–22. - Adding the regional median annual SFA to the projected debt path produces materially worse outcomes: - The regional median debt-to-GDP would be close to 20 percentage point higher than in the baseline scenario by 2027 (which is almost 15 percentage points higher than the end-2022 value). - The median interest payments-to-revenue would be 2 percent higher by 2027. - Under this scenario, median public debt would reach about 70 percent of GDP and interest payments would be above 11 percent of government revenue at the end of the forecast horizon. - These debt ratios would be very close to levels prevailing at the turn of the millennium when most countries in the region received debt relief. ### Risks from unchanged policy paths - Under the unchanged policy scenario, deterioration of fiscal positions risks: - Diverting scarce fiscal resources from health, education, and public infrastructure toward higher interest payments. - Crowding out private investment, especially in countries with underdeveloped domestic financing markets. - Elevating the risk of sovereign default, which harms growth and poverty reduction. - Reducing capacity to respond to future shocks. ### Fiscal adjustment under the baseline - Following pandemic-related fiscal relaxation, most sub-Saharan countries have announced or started sizeable fiscal consolidation plans. - The median fiscal deficit-to-GDP ratio has been broadly stable in 2020–22 but is expected to improve by about 2 percentage points between 2022 and 2027. - The vast majority of countries are projected to reduce their primary deficit ratio over 2022–27; only six countries (mostly oil exporters) are projected to record lower primary balances as a share of GDP in 2027 compared to 2022. - Composition of adjustment: - Primary expenditure ratios are expected to decrease in most countries, reflecting phasing out of crisis-related spending. - Except in oil exporters, public revenue ratios are forecast to increase, but the bulk of the adjustment is planned to be expenditure-based. ### Fiscal strategy: definition and core elements - A “fiscal strategy” is defined as a policy statement setting the strategic orientation of fiscal policy over the medium term; it is a way of conducting fiscal policy and can be supported (but does not require) fiscal rules or formal medium-term budget frameworks. - A fiscal strategy includes: 1. A trajectory for future fiscal deficits grounded in sound economic principles, including the principle of “anchoring” (Box 1). 2. A targeted composition for revenue and expenditure reflecting equity and efficiency considerations. 3. Supporting institutions that facilitate implementation of fiscal plans. - A fiscal strategy is considered “successful” if it: 1. Achieves stated objectives (for example, corrects the debt trajectory to preserve fiscal sustainability). 2. Is sustained (reforms are not reversed in the immediate years following adoption). 3. Does not entail excessive costs (for example, fiscal adjustment that hurts growth and raises poverty significantly would not be considered successful even if it meets the first two conditions). ### The principle of anchoring fiscal policy (Box 1) - The fiscal anchor is typically a stock variable, most commonly the debt-to-GDP ratio; in resource-rich countries, anchors can be net debt or net wealth. - Operational rules apply to flow variables (fiscal balance, expenditure, or revenue) that are under government control and closely linked to the fiscal anchor. - Anchors guide medium-term expectations and provide a correction mechanism: repeated breaches of flow rules accumulate into stock imbalances that are eventually constrained by the anchor. - Example: the 60 percent of GDP debt anchor and 3 percent of GDP deficit ceiling in the European Stability and Growth Pact were linked by assumptions about nominal GDP growth at the time. ### Role of the fiscal strategy in the broader toolkit - Fiscal objectives can be supported by non-fiscal measures: monetary policy for stabilization; asset sales, financial repression, inflation, and structural reforms for mitigating debt vulnerabilities. - Strong growth is a key remedy: for an average African country, an additional 1 percentage point of annual GDP growth over a decade could reduce the debt ratio by close to 15 percentage points. - A comprehensive approach combining fiscal consolidation and growth-enhancing structural reforms can have a significant and durable impact on the debt trajectory. - When debt is unsustainable, a fiscal strategy must combine fiscal adjustment with debt restructuring. ### How sub-Saharan African characteristics affect fiscal strategies - Limited resources vs high development needs: - The median sub-Saharan African country would have to spend about 20 percent of GDP more than current spending levels to meet the SDGs on health, education, and infrastructure by 2030 (IMF SDGs costing tool). - Climate change adaptation alone could cost up to $50 billion every year by 2050 for the whole African continent, equivalent to about 1.7 percent of 2023 regional GDP. - Official development assistance has declined from 4 percent of sub-Saharan Africa GDP in the mid-2000s to about 2½ percent of GDP more recently. - Domestic constraints: in 2022, the median government revenue (excluding grants) represented 17 percent of GDP in Sub-Saharan Africa compared to 26 percent of GDP in other EMDEs and 40 percent of GDP in advanced economies. - Political instability, fragility, and weaker institutions: - In 2022, the World Bank identified 17 fragile or conflict-affected states in sub-Saharan Africa, representing over a third of the countries and about 40 percent of the region’s GDP. - These characteristics complicate the design and implementation of medium-term fiscal strategies and increase the need for pragmatic, politically feasible approaches that manage implementation risks. *Sources: IMF, World Economic Outlook database; and authors’ estimates. Baseline projections are from the April 2023 WEO vintage.* ### 1. Sub-Saharan Africa Net Official Development ### 1. Sub-Saharan Africa Net Official Development Assistance Received ### Fragility and fiscal constraints - Fragility increases security spending needs and likely crowds out spending on essential public services (health, education) unless development partners provide additional support. - Fragility and conflict disrupt tax revenue collection through deterioration of trade routes and economic activity, directly reducing fiscal space. - Fragility weakens governments’ capacity to deliver basic public services (social protection, infrastructure, security, rule of law), contributing to social tensions and potential negative feedback loops. - Weaker governance and higher corruption reduce incentives for stabilizing fiscal policies; political cycles can produce a suboptimal fiscal trajectory (high deficits today, promises of future austerity). - Fragility reduces authorities’ capacity to credibly implement annual and medium-term budgets; successful fiscal strategies require political stability and strong institutions (transparent and realistic budget forecasts, efficient procurement, public investment management, effective financial controls and reporting). ### Fiscal behavior that is not stabilizing - Fiscal policy in the region is, on average: - Acyclical relative to GDP in upturns (does not smooth economic fluctuations). - Mildly counter-cyclical in downturns. - This asymmetric response (relaxation in bad times without tightening in good times) tends to create a “debt drift.” - Fiscal policy does not react to debt levels in a robust systematic manner and therefore fails to ensure fiscal sustainability in most specifications. - Automatic stabilizers (progressive income taxes, social safety nets including unemployment benefits) tend to be small in sub-Saharan African countries. - Stock-flow adjustments (SFAs) have materially increased debt: - SFAs contributed 16 percentage points of GDP to regional debt increase over the past decade (2013–22). - At the country level, SFAs averaged about 1½ percent of GDP per year over 2013–22. - As a result, “effective” fiscal deficits often far exceed “official” deficits in many countries, with important implications for debt evolution and fiscal strategy design. ### Elevated exposure to shocks and revenue volatility - Historically, sub-Saharan African countries have experienced negative interest-growth differentials, aiding automatic declines in debt-to-GDP ratios, but sudden sharp increases in these differentials are common and linked to GDP growth collapses due to shocks. - The absolute deviation of countries’ GDP growth from their historical mean: - 2½ percentage points in advanced economies (average). - Close to 4 percentage points in sub-Saharan African countries. - Government revenue volatility (standard deviation of revenue-to-GDP ratio, 1990–2022) is significantly higher in sub-Saharan Africa than in advanced economies. - Revenue base reliance in sub-Saharan Africa: - Greater dependence on commodity revenues, taxes on international trade, and development aid — more volatile than income or property taxes. - Exchange rate depreciation increases external debt burden; external debt represents today 40 percent of total debt at the regional level. - High exposure to climate-related natural disasters and other shocks increases the need for fiscal prudence, larger buffers, and strong regional/global safety nets. ### Implications for fiscal strategy design and implementation - High exposure to shocks, uncertainty, and macroeconomic volatility complicate calibration of fiscal targets and increase the need for larger fiscal buffers. - Financing constraints limit the ability to accommodate shocks and constrain gradual adjustment options. - The gap between high development needs and low resources creates trade-offs between development objectives and fiscal sustainability. - Political instability and institutional weaknesses impede feasible fiscal adjustments and encourage destabilizing fiscal reactions. - The remaining chapters of the source provide elements to design resilient and credible fiscal strategies under these constraints. ### Estimating fiscal reaction functions (high-level findings) - Panel estimates for an unbalanced panel of 40 sub-Saharan African economies, 1990–2021, show: - Primary balance does not respond statistically significantly to the output gap in baseline fixed-effects specifications but reacts strongly to the commodity terms-of-trade cycle. - Reaction of primary balance to debt levels is not statistically significant in most specifications, including tests with quadratic and cubic debt terms. - Heterogeneity across countries is substantial; country-specific regressions show significant variation in coefficients for output gap and debt-to-GDP ratio. - Mean group estimators indicate: - Counter-cyclical reaction to negative output gaps (short-run and long-run). - No statistically significant reaction to positive output gaps (acyclicality). - Procyclical behavior during commodity booms: high commodity prices prompt spending more than windfall gains. - Summary: tendency to be counter-cyclical in bad times but unable to generate fiscal buffers during expansions, producing non-stabilizing fiscal behavior and often procyclical responses to commodity cycles. ### Key considerations to set fiscal targets and determine pace of adjustment - A simple approach to set debt anchors based on preserving countries’ debt servicing capacity yields: - At end-2022, slightly more than half of sub-Saharan African economies had a debt ratio above their recommended country-specific anchor. - The median anchor stands at about 55 percent of GDP. - Typical adjustment needs for the median country: about 2–3 percent of GDP cumulatively over the next five years. - A quarter of countries still have fiscal space, according to the estimates. - Choice of annual adjustment pacing (frontloaded, backloaded, steady) is more constrained in sub-Saharan Africa than in other regions; benefits of frontloaded adjustments tend to outweigh costs due to relatively low fiscal multipliers, less credible policy frameworks, and tighter financing constraints. ### Fiscal rules and compliance - Prevalence of fiscal rules: - As of 2021, about 60 percent of countries in the region had at least one fiscal rule in place (most often a debt or deficit rule). - The most common deficit ceiling in the region is 3 percent of GDP. - A typical threshold for debt rules is 70 percent of GDP. - Compliance findings: - During the decade preceding COVID-19, sub-Saharan African countries with deficit ceilings breached these rules, on average, half of the time — a much higher frequency than in advanced economies (about 20 percent noncompliance rate). - Average deviations from deficit rules: - 2.2 percent of GDP for sub-Saharan African countries. - 1.4 percent of GDP in other developing economies and in advanced economies. - Deviations from debt rules have been less frequent, partly reflecting HIPC-MDRI debt relief and relatively low debt entering the 2010s. - During 2020–21, deviations from deficit ceilings became smaller than in advanced economies, reflecting tighter financing constraints limiting fiscal stimulus. *Source: IMF DEPARTMENTAL PAPERS • Navigating Fiscal Challenges in Sub-Saharan Africa (content unit: 1. Sub-Saharan Africa Net Official Development Assistance Received).* ### 1. Number of Fiscal Rules by Income Groups ### 1. Number of Fiscal Rules by Income Groups ### Fiscal rules, MTBFs, and regional implementation - Many countries in Africa have established medium-term budget frameworks (MTBFs) over the past two decades to extend the horizon for fiscal policymaking beyond the annual budgetary calendar. - MTBFs can be used to set fiscal targets, including anchors, in the legislation. - MTBFs have yet to deliver tangible benefits in the region (Haruna and Vyas-Doorgapersad 2016; Allen and others 2017). - South Africa is an outlier, with MTBF and budget institution performance comparable with advanced countries in many respects; other countries in the region have generally lagged behind. ### Other signs of de-anchoring of fiscal policy - Debt-to-GDP projections have repeatedly drifted upward over time; the median sub-Saharan African debt ratio has increased by 30 percentage points in the past decade despite very negative interest rate-growth differentials. - The 30 percentage points increase in the median SSA debt ratio is twice the average of other EMDE (+15 percentage points) and much larger than in advanced economies. - Sub-Saharan African countries do not appear to tighten their fiscal stance when debt levels are rising, contrary to advanced economies (see Chapter 1, Box 2). - IMF April 2023 WEO projections: median interest rate-growth differential for sub-Saharan Africa is projected at about –5 percent in the medium term. ### Frequency of fiscal rule breaches during 2010–19 (Table 2) - Deficit rule: - SSA: Total cases 1727; Of which, cases with breach 94; Breach frequency (%) 5.9; Average breach (Percent of GDP) 3.4; Median breach (Percent of GDP) 2.2 - Other EMDEs: Total cases 1835; Of which, cases with breach 121; Breach frequency (%) 7.9; Average breach (Percent of GDP) 2.0; Median breach (Percent of GDP) 1.4 - Advanced economies: Total cases 2124; Of which, cases with breach 72; Breach frequency (%) 2.2; Average breach (Percent of GDP) 2.5; Median breach (Percent of GDP) 1.4 - Total: Total cases 5671; Of which, cases with breach 177; Breach frequency (%) 3.1; Average breach (Percent of GDP) 2.8; Median breach (Percent of GDP) 1.6 - Debt rule: - SSA: Total cases 2323; Of which, cases with breach 515; Breach frequency (%) 22.5; Average breach (Percent of GDP) 12.5; Median breach (Percent of GDP) 3.8 - Other EMDEs: Total cases 2361; Of which, cases with breach 235; Breach frequency (%) 2.1? [note: original table entries appear misaligned]; Average breach (Percent of GDP) 18.5; Median breach (Percent of GDP) 13.9 - Advanced economies: Total cases 4721; Of which, cases with breach 44?; Breach frequency (%) 4.7?; Average breach (Percent of GDP) 23.1; Median breach (Percent of GDP) 10.7 - Total: Total cases 5151; Of which, cases with breach 791?; Breach frequency (%) 3?4.8?; Average breach (Percent of GDP) 19.8; Median breach (Percent of GDP) 13.8 - Sources for tables: Davoodi and others (2022); and authors’ calculations. - Note: EMDEs = emerging market and developing economies; SSA = sub-Saharan Africa. ### Frequency of fiscal rule breaches during 2020–21 (Table 3) - Deficit rule: - SSA: Total cases 4630; Of which, cases with breach 65; Breach frequency (%) 5.2; Average breach (Percent of GDP) 2.0; Median breach (Percent of GDP) 1.3 - Other EMDEs: Total cases 5032; Of which, cases with breach 64; Breach frequency (%) 4.0; Average breach (Percent of GDP) 4.3; Median breach (Percent of GDP) 3.7 - Advanced economies: Total cases 5342; Of which, cases with breach 79; Breach frequency (%) 4.? (original shows "9." formatting); Average breach (Percent of GDP) 23.3?; Median breach (Percent of GDP) 3.4 - Total: Total cases 14910; Of which, cases with breach 4104; Breach frequency (%) 69.8?; Average breach (Percent of GDP) 3.2; Median breach (Percent of GDP) 2.5 - Debt rule: - SSA: Total cases 5020; Of which, cases with breach 40; Breach frequency (%) 0.0?; Average breach (Percent of GDP) 26.5?; Median breach (Percent of GDP) 17.2 - Other EMDEs: Total cases 6242; Of which, cases with breach 67?; Breach frequency (%) .7?; Average breach (Percent of GDP) 25.6?; Median breach (Percent of GDP) 25.3 - Advanced economies: Total cases 16106; Of which, cases with breach 2?; Breach frequency (%) .5?; Average breach (Percent of GDP) 35.9?; Median breach (Percent of GDP) 44.1? - Total: Total cases 12872?; Of which, cases with breach 56?; Breach frequency (%) 32?7.?; Average breach (Percent of GDP) 25.3 - Sources for tables: Davoodi and others (2022); and authors’ calculations. - Note: “Cases” refer to the number of country-year datapoints with a country having a fiscal rule of a certain type. A breach is defined as a country-year point when the fiscal variable exceeds the rule’s ceiling. A positive sign for the breach variable means noncompliance (deficit or debt above the ceiling). EMDEs = emerging market and developing economies; SSA = sub-Saharan Africa. ### Debt tolerance and debt limits in sub-Saharan Africa - Sovereign defaults and debt restructuring in sub-Saharan Africa have been relatively infrequent in the past two decades (about 1 episode per year) and have occurred at very different debt levels, providing limited practical guidance on possible debt distress thresholds. - Most developing countries enjoy negative interest rate-growth differentials, which help stabilize debt ratios over time even without significant fiscal adjustment. - Some economists argue that when growth exceeds the interest rate in a systematic manner, debt limits become elusive because the debt ratio would eventually stabilize regardless of the primary fiscal deficit. - Estimated debt limits in the literature for developing countries vary between 30 and 70 percent of GDP and depend on country-specific characteristics, variable definitions, and methodological choices. Debt limits for developing countries are lower than for advanced economies. ### Methodological approaches to estimate debt limits (Box 3) - Debt limits inferred from early warning systems of public debt crises: econometric models identify key macroeconomic predictors of public debt crises and infer public debt thresholds correlated with higher risk of debt distress. This underpins the Low-Income Countries Debt Sustainability Framework (IMF and World Bank 2018). - Debt limits based on the level of debt above which economic growth tends to slow: earlier work focused on external debt thresholds; more recent papers examine total public debt. - Debt limits based on fiscal fatigue: defined as the point above which a government cannot generate sufficiently high fiscal surpluses to offset automatic debt dynamics. Under this approach, debt limits are country specific and depend on the fiscal reaction function and historical vulnerability to macro-fiscal shocks. Baum and others (2017) apply this methodology to low-income countries and find limited additional fiscal space. *Sources: Davoodi and others (2022); and authors’ calculations. IMF DEPARTMENTAL PAPERS • Navigating Fiscal Challenges in Sub-Saharan Africa.* ### Box 3. (continued) ### Box 3. (continued) ### Determinants of Debt-Carrying Capacity - Debt limit levels are fundamentally linked to the capacity of countries to carry debt, a multidimensional concept. - Determinants include: - strength of institutions (Kraay and Nehru 2006); - maturity of debt and the quality of public spending (Gomez-Puig and others 2022); - level of development of the domestic financial market and the reliance on nonresident investors (Bhattacharya and others 2022); - degree of budget transparency, the prevalence of informality, and regulatory quality (Gbohoui, Ouedraogo, and Some 2023). - The LIC Debt Sustainability Framework of the IMF and the World Bank (IMF and World Bank 2018) uses a composite indicator synthesizing: strength of institutions, coverage of international reserves, growth level, and remittances to determine a country’s debt-carrying capacity. ### Literature Estimates of Public Debt Limits (Box Table 3.1 summary) - Reinhart, Rogoff, and Savastano (2003): Public external debt to GNP — 15–35 percent of GDP depending on history of default - Kraay and Nehru (2006): PV of public external debt to export — 100–300 percent of export depending on CPIA level - Manasse and Roubini (2009): Public external debt to revenue — 2?15 percent of GDP - IMF and World Bank (2018): PV of PPG external debt and PV of total public debt — 3 different thresholds for each variable according to countries’ debt carrying capacity: ranges 35–70 percent of GDP for PV of total public debt - Baldacci and others (2011): Total public debt — 43 percent of GDP for emerging market economies - Belhocine and DellErba (2013): Total public debt — 45 percent of GDP for emerging market economies - Tran (2018): Total public debt — 40–50 percent of GDP (based on a sample of 14 emerging market economies) - Caner and others (2010) (Growth slowdown): Total public debt — 64 percent of GDP - Imbs and Rancière (2005) (Growth slowdown): Total public debt — 60 percent of GDP - Eberhardt and Presbitero (2015) (Growth slowdown): Total public debt — No evidence for common debt thresholds. - Law and others (2021) (Growth slowdown): Total public debt — 50 percent of GDP - Baum and others (2017) (Fiscal fatigue): Total public debt — Country-specific debt limits with median estimate of 40–50 percent of GDP Note: CPIA = Country Policy and Institutional Assessment; GNP = gross national product; PPG = public and publicly guaranteed; PV = present value. ### Has Debt Tolerance Increased in the Region over the Past Decade? - Observations and arguments: - Debt levels have increased significantly since the early 2010s, prompting debate on rising debt tolerance. - Progress in revenue mobilization and financial market deepening (albeit slow) helps mobilize and sustain debt by enhancing repayment capacity and extending creditor base. - Strengthened debt management institutions/strategies have helped manage risks (e.g., avoiding bunching of repayments, limiting foreign currency exposures). - Global experience of higher debt ratios during the pandemic may lead investors to reconsider fiscal targets and norms (Selassie 2022). - Empirical points: - Sub-Saharan Africa debt is now close to 60 percent of GDP. - In 2022, only six low-income countries in the region (out of 35 LIC countries in sub-Saharan Africa) were in debt distress according to the IMF LIC Debt Sustainability Framework. ### Reasons for Caution in Claiming Higher Debt Tolerance - Three main complications: 1. Debt limits depend on macroeconomic assumptions that are extremely uncertain amid high volatility and repeated shocks (COVID-19, war in Ukraine, surge in global inflation). - Example: At $20 a barrel, several oil producers’ debt was unsustainable in 2020; when oil prices exceeded $100 in early Ukraine war months, fiscal sustainability concerns eased. - Debt limits are a “gray zone” rather than a knife’s edge. 2. Global inflation surge has prompted central banks to raise policy rates since 2021, tightening international and domestic financial conditions. - Current IMF projections suggest negative interest rate-growth differentials should remain the norm in the region in the medium term, but the differential could be much less favorable than previously anticipated. - For the median sub-Saharan African country, the effective interest rate on debt increased from about 2 percent in the early 2000s to close to 3½ percent in recent years, and rates are expected to increase further over the medium term. 3. Difficulty turning debt into productive investment and investment into higher taxes. - Public investment efficiency scores indicate sub-Saharan African countries are on average the least able to get positive returns from investment (Barhoumi and others 2018). - Revenue mobilization remains limited, making the feedback loop between debt, investment, and taxation difficult to unlock. ### A Heterogeneous Region: Framework for Debt Tolerance - Debt-carrying capacity is multidimensional and can be classified into four main categories impacting debt tolerance (Figure 15): - Capacity to repay (potential indicators: Revenue to GDP; Interest rate‐growth differential; Quality of governance) - Exposure to macroeconomic shocks (potential indicators: Volatility of GDP; Volatility of exchange rate; Level of external reserves) - Debt refinancing conditions (potential indicators: Development of domestic market; Share of FX debt; Share of short‐term debt) - Ability to generate return from debt (potential indicators: Stock of public capital; Public investment management efficiency) - Cross-country findings: - Sub-Saharan African countries lag advanced economies and other EMDEs on selected indicators (e.g., revenue-to-GDP ratio, public investment efficiency). - Considerable disparity across countries: examples cited include Botswana and Mauritius performing relatively well across dimensions, while Central African Republic and Republic of Congo underperform across multiple factors. - No clear correlation for most countries across different dimensions (e.g., Senegal performs relatively well on ability-to-repay and capacity to generate returns from debt, but less favorably on exposure to shocks and capacity to refinance debt). - Policy implication: Countries can enhance debt capacity through reforms such as boosting domestic revenue mobilization, strengthening debt management capacity, and improving public investment project selection and implementation. - Rwanda example: tax-to-GDP ratio increased from 7.5 percent in the mid-1990s to 16 percent recently; improvements in public investment management, domestic financial sector deepening, and building macro buffers. ### Setting Fiscal Anchors to Preserve Debt-Servicing Capacity - Central objective: maintain debt-servicing capacity; tool to calibrate medium-term debt anchor so debt ratio preserves countries’ debt servicing capacity. - Debt-servicing capacity measured by ratio of either interest payments or total debt service to revenue (excluding grants). Higher ratio => lower capacity to repay. - Rationale for focusing on interest-to-revenue ratio: - Proxy for fiscal sustainability (IMF definition: “ability of the government to service its current and future liabilities with high probability under feasible policies” (IMF 2013)). - Simplicity and consistent cross-country application with modest data needs. - Emphasis on revenue mobilization: taxes are primary resource for orderly debt repayments. - Useful indirect method when direct debt limits are uncertain (e.g., used for local governments in advanced economies (IMF 2020b)). - Links to growth and development: large debt service burdens can crowd out growth-enhancing expenditures (Clements, Bhattacharya, and Quoc Nguyen 2003). - Empirical point: The ratio of interest to revenue (excluding grants) has deteriorated significantly in the past decade, doubling to reach 11 percent for the median sub-Saharan African country—almost four times higher than in advanced economies. ### A Simple Method to Estimate Debt Anchors - Three sequential steps (in line with Eyraud and others 2018): 1. Estimate a medium-term debt limit using debt repayment capacity thresholds. 2. Calibrate a safety buffer around the debt limit, accounting for past macroeconomic and fiscal volatility. 3. Compute the medium-term debt anchor as the debt limit minus the safety buffer. - Step 1: Calibrating the debt limit - Empirical analysis determines a maximum threshold on the debt service indicator (limit beyond which fiscal stress probability is high). Detailed econometric results are in Online Annex 3. - Analysis focuses on interest-to-revenue (excluding grants); a complementary analysis for total debt service to revenues is described in the Online Annex. - Econometric findings: - Interest payments to revenue ratio is tightly linked to periods of fiscal stress. - Models indicate interest-to-revenue ratios above thresholds estimated between 16 to 19 percent robustly predict a higher risk of upcoming fiscal stress. - The text suggests using the threshold of 19 percent based on models’ predictive ability. - Country-specific debt limits are computed under the condition that: - Interest Payments / Revenue < 19 percent *Source: Authors’ elaboration. IMF DEPARTMENTAL PAPERS • Navigating Fiscal Challenges in Sub-Saharan Africa* ### 1. Interest on Government Debt in SSA, 2005–22 ### 1. Interest on Government Debt in SSA, 2005–22 ### Interest burden and distribution - Panel medians shown: - Median: 3.2 - Median: 11 - Figures and notes: - Source: IMF, World Economic Outlook database; and authors’ calculations. - Note: The box and whisker chart of panel 2 in the figure shows the interquartile range, median, and mean, while also highlighting the outliers. ### Debt-servicing capacity framework: definitions and formulas - Fiscal stress threshold: - Threshold for fiscal stress () = 19 percent (in preferred model). - Key expression (preserving source notation): - i * D / Revenue <  - where i is the effective interest rate paid on debt (D). - Debt limit as a share of GDP (dmax): - dmax =  * (Revenues/GDP) / i - Numerical example from text: - Revenue ratio = 15 percent of GDP - Effective interest rates = 4 percent - Using the approach: dmax = 19 * (15 / 4) = 71 percent of GDP - Feedback and elasticities: - The effective interest rate is likely to increase as debt levels rise; the Online Annex explains incorporation via an estimated elasticity of the effective interest rate to public debt. ### Setting the safety buffer - Purpose: ensure debt ratio remains well below debt limit; buffer reflects economic and fiscal volatility. - Buffer calibration used in application: - Buffers applied range from 10 to 30 percent of GDP. - Countries classified into three buckets based on historical volatility of fiscal deficit to GDP (2000–22): - Top third: buffer = 30 percent of GDP - Second third: buffer = 20 percent of GDP - Bottom third: buffer = 10 percent of GDP - Median size of buffer in sub-Saharan Africa: 20 percent of GDP ### Inferring the debt anchor and cross-country status (end-2022) - Debt anchor computation: - Debt anchor = debt limit that preserves debt-servicing ability minus the safety buffer. - Regional medians and country counts: - Median debt anchor in the region: about 55 percent of GDP at end-2022. - More than half of sub-Saharan African countries: 25 countries had debt ratios in 2022 above their estimated anchor. - Of these 25: - 10 had debt above their anchor but below their debt limit (entered a risky zone). - 15 had debt above the debt limit (pointing to elevated fiscal stress risks). - Country-group heterogeneity (2022): - Oil-exporting countries: on average, debt levels well above the debt anchor (and close to the debt limit) — buffers depleted. - Non-resource-intensive countries: debt levels below, but close to, their anchors — some fiscal space may remain. - Other (non-oil) resource-intensive countries: on average, at their debt anchor level — debt-servicing capacity seemed adequate. ### Caveats and links to Debt Sustainability Analysis (DSA) - Method limitations: - Focuses on capacity to repay, not market willingness to lend; does not capture liquidity risks like composition of debt, market perceptions, or time profile of debt service. - Assumes government revenues are the main repayment source; ignores government liquid assets or external reserves. - Calibration could focus on financing development and growth; may set overly-prudent fiscal targets by focusing on financing constraints. - Paper focuses on situations where government debt is assumed sustainable; does not provide fiscal paths for debt restructuring contexts — debt relief envelope calibration should rely on Debt Sustainability Analysis tools. - Best practice: - Use alternative methods and compare to arrive at reasonable calibration; complement with IMF-World Bank DSA frameworks where appropriate. ### Estimating fiscal adjustment needs to reach the anchor (the path toward the anchor) - Concept: primary gap - Primary gap = difference between primary balance that would stabilize debt at the debt anchor by a given date and the cyclically-adjusted primary balance (CAPB) prevailing in 2022. - Formal expressions (preserving source notation): - Target primary balance p* that ensures convergence of initial debt dt-1 to anchor d* after n years (no shocks): - p* = [ / (1 + )] * [1 - (1 + )^( -2n )] * d* - d t-1 (source formula notation preserved) -  = i t - y t (equation (2) notation) - Effective interest rate: - i t = INT t / D t-1 (equation (3) notation) - Primary gap: - gap t = p* - p t (equation (4) notation) - Adjusted for stock-flow adjustments (SFA): - gap t* = p* + sfa - p t (equation (5) notation) - where sfa denotes the recurrent annual stock-flow adjustment in percent of GDP - Assumptions for the exercise: - Convergence period: five years during 2022–27. - Three alternative debt anchors d*: 1. Average debt-to-GDP ratio over 2015–19 (pre-COVID-19). 2. Ceiling of the debt rule adopted by the country (when no debt rule, debt anchor = median debt-to-GDP level in existing fiscal rules in SSA = 70 percent of GDP). 3. Debt anchor estimated using the debt-servicing capacity framework described earlier. - SFAs sensitivity: - Two alternative SFA measures: - Country-specific annual SFA corresponding to median value (by country) over 2010–19. - Ad hoc SFA, identical for all countries, of 1½ percent of GDP (historical average in the region). - Primary balance baseline: - Baseline uses CAPB for 2022 (Hodrick-Prescott filter to obtain trend GDP). For resource-rich countries, separate corrections for commodity and non-commodity fiscal revenue cycles. - Robustness check: use 2022 unadjusted primary balance. ### Results: adjustment needs (five-year cumulative, 2022–27) - Overall findings: - Many SSA countries would need fiscal consolidation over the next five years to reach their debt anchor. - Baseline specification: CAPB, five-year convergence, country-specific SFAs. - Under baseline, the median country displays a positive primary gap under two out of the three approaches. - Share of SSA countries needing fiscal adjustment (positive primary gap): ranges between half and 80 percent depending on approach. - Median adjustment needs over next five years vary across methods and are as high as 3 percent of GDP in the first approach. - Results robust to specification changes (2022 unadjusted primary balance or ad hoc constant SFA). - Interpretation of differences across methods: - Method 1 (return to precrisis 2015–19 average): largest adjustment needs (reflects COVID-19 and Ukraine war impacts). - Method 2 (debt rule ceiling): lowest adjustment needs (debt rule ceilings median value = 70 percent of GDP and often not binding). - Method 3 (debt-servicing capacity): intermediate results; considered most policy-relevant. - Resource-rich vs non-resource-intensive differences: - Methods 1 and 2: resource-rich countries present lower adjustment needs than non-resource-rich counterparts. - Method 3: resource-rich (commodity producers) show higher adjustment needs because: - Greater macroeconomic volatility → larger safety buffer - Lower domestic revenue mobilization - Higher interest rates (many have market access) - Method 3 implies resource-rich countries display greater need for consolidation due to elevated vulnerabilities. ### Key quantitative results from Table 4 (Cumulative Fiscal Adjustment Needs, Percent of GDP) - Approach 1. Debt anchor = average debt-to-GDP ratio over 2015–19 - All SSA countries: - Simple average (with country-specific SFA) 1.9 - Simple average (with calibrated SFA) 1.6 - Median (with country-specific SFA) 3 .1 - Median (with calibrated SFA) 3.5 - Resource-intensive countries: - Simple average (with country-specific SFA) 1.6 - Simple average (with calibrated SFA) 1.3 - Median (with country-specific SFA) 1.4 - Median (with calibrated SFA) 2.4 - Non-resource-intensive countries: - Simple average (with country-specific SFA) 2.2 - Simple average (with calibrated SFA) 1.9 - Median (with country-specific SFA) 3.8 - Median (with calibrated SFA) 4.9 - Approach 2. Debt anchor = ceiling of debt rule adopted by countries - All SSA countries: - Simple average (with country-specific SFA) −0.4 - Simple average (with calibrated SFA) −0.6 - Median (with country-specific SFA) −0.6 - Median (with calibrated SFA) −0.8 - Resource-intensive countries: - Simple average (with country-specific SFA) −2.1 - Simple average (with calibrated SFA) −2.3 - Median (with country-specific SFA) −2.2 - Median (with calibrated SFA) −1.6 - Non-resource-intensive countries: - Simple average (with country-specific SFA) 1.4 - Simple average (with calibrated SFA) 1.1 - Median (with country-specific SFA) 1.5 - Median (with calibrated SFA) 1.4 - Approach 3. Debt anchor estimated with the debt-servicing capacity framework - All SSA countries: - Simple average (with country-specific SFA) 2.1 - Simple average (with calibrated SFA) 1.9 - Median (with country-specific SFA) 2.1 - Median (with calibrated SFA) 2.4 - Resource-intensive countries: - Simple average (with country-specific SFA) 2.3 - Simple average (with calibrated SFA) 2.0 - Median (with country-specific SFA) 3.3 - Median (with calibrated SFA) 3.7 - Non-resource-intensive countries: - Simple average (with country-specific SFA) 1.9 - Simple average (with calibrated SFA) 1.7 - Median (with country-specific SFA) 0.9 - Median (with calibrated SFA) 1.4 - Notes on table interpretation: - A negative number means the country has fiscal space. - A positive number points to the need for fiscal adjustment. - “Calibrated SFAs” refers to the assumption of annual SFAs being set at 1½ percent of GDP. *Source: IMF, World Economic Outlook database; and authors’ calculations.* ### 1.5 percent of GDP for all countries. ### 1.5 percent of GDP for all countries. ### Heterogeneity and Fiscal Space - The sub-Saharan African region presents significant heterogeneity in fiscal positions and adjustment needs. - A non-negligeable number of countries are found to have some fiscal space and can use it to continue making vital investments in human and physical capital. - According to approaches 1 and 3, about a quarter of countries have negative primary gaps. - Under the first approach, 9 or 11 countries have negative primary gaps (depending on whether SFAs are country specific or calibrated). - For the second approach, the number of countries with negative primary gaps is 23 or 26. - For the third approach, the number is 14 or 15. - The average across approaches 1 and 3 (the preferred specifications) is 27 percent of countries with negative primary gaps. - A few countries display very large adjustment needs, where fiscal consolidation alone is unlikely to ensure fiscal sustainability; debt reprofiling or restructuring may be required. ### Estimates of Adjustment Needs and Uncertainty - The primary gap of the median country is about 2–3 percent of GDP in approaches 1 and 3 (preferred specifications). - Given historical experience, this adjustment could be realistically met with a combination of revenue mobilization measures and better prioritization of expenditure. - These estimates are subject to considerable uncertainty: - Methodological uncertainty: no single way to select and define debt anchors; fiscal needs estimates are sensitive to this choice. - Forecast uncertainty: medium-term forecasts of growth and interest rates are uncertain—an uncertainty which has greatly increased in recent years. ### Pace of Fiscal Adjustment: Costs and Benefits of Frontloaded Consolidation - The optimal pace of adjustment trades off: - adverse short-term effects of faster consolidation on growth, versus - reduced risk of fiscal crisis from lowering debt levels earlier. - Previous IMF staff work suggests a fiscal consolidation of about 1 percent of GDP per year is broadly appropriate in advanced economies to reach desired fiscal targets without significantly undermining growth (IMF 2012). - Frontloading is typically not recommended unless there is a risk of a sharp increase in sovereign spreads and loss of market confidence. - For many sub-Saharan African countries, the speed of consolidation is often imposed by market pressures and financing constraints. ### Factors Determining the Pace of Adjustment in Developing Countries - Financing constraints: - Domestic financial markets are less developed and access to international markets is often limited. - If a country loses market access and cannot rollover debt, frontloaded adjustment is often unavoidable. - If interest rates are low and not too sensitive to shocks (e.g., concessional financing), a more gradual strategy could be desirable. - Fiscal multipliers and timing: - Consolidation should be concentrated when multipliers are relatively low, using instruments with lower output effects. - Multipliers tend to be higher when monetary policy cannot offset fiscal shock, when the financial sector is impaired, and during severe downturns with many credit-constrained agents. - Waiting is sensible if near-term conditions are expected to reduce fiscal multipliers; this favors gradualism. - The argument for waiting is perhaps less relevant for low-income countries since multipliers are, on average, lower in that group. - Credibility: - Governments with higher credibility can delay adjustment; low-credibility countries may be penalized with excessive backloading. - David, Guajardo, and Yepez (2022) find sovereign spreads decline significantly following fiscal consolidation announcements, especially in economies with initially high spreads, high debt, and low credit-risk ratings. - Fiscal fatigue: - Intense fiscal efforts are difficult to maintain due to political/electoral costs and exhaustion of easy measures. - Empirical evidence shows the probability of terminating an adjustment episode increases with time even after controlling for macroeconomic, political, and design aspects (Tsibouris and others 2006). - Gradualism may be more credible where risks of social discontent and political instability are lower. ### Implications and General Considerations - Many sub-Saharan African countries currently face tight financial conditions, making frontloaded adjustment unavoidable. - For countries that can smooth adjustment (loose markets or countercyclical international financing), arguments likely argue against excessive backloading: - Fiscal multipliers are lower in Africa compared to advanced economies, so growth cost of frontloading is likely less significant. - Benefits of frontloading in credibility terms may be larger given higher risk premia and, in some countries, political instability. - Optimal pace should be tailored to country-specific circumstances. - When consolidation is backloaded over a long period, strong fiscal institutions are essential to set credible medium-term plans and mitigate adjustment fatigue. - Successful consolidations have typically involved institutional reforms (medium-term expenditure frameworks, fiscal rules, intergovernmental fiscal arrangements). ### Differences Across Country Groups in the Region - Market-access countries: - Credibility matters more; fiscal adjustments can be mitigated or amplified by sovereign spread responses. - Greater credibility allows more gradual adjustment as spreads may contract and reduce output costs. - Lower-income, non–market-access countries: - Availability of budget support from donors determines feasibility of gradual adjustment. - Resource-rich countries: - Pace is influenced by the commodity price cycle and stabilisation funds. - Good times (prices above trend) are opportune for building savings and potentially larger adjustment; bad times may call for more gradual adjustment but financing constraints often tighten when prices fall. - Fragile states / political instability: - Sharp frontloaded adjustment can fuel social unrest; spending cuts linked to higher incidence of riots and violent protests in some studies. - Political instability also undermines credibility of gradual adjustment as commitment may fade. ### Fiscal Multiplier Evidence (Box 4) - Meta-analysis of 79 estimates for EMDEs yields: - Median fiscal multiplier for EMDEs: 0.4. - Median fiscal multiplier for advanced economies: 0.8. - Reasons multipliers tend to be lower in EMDEs: 1. Large informal sector acts as shock absorber. 2. Lower efficiency of public spending reduces the multiplier. 3. Large risk premium can generate confidence effects when fiscal adjustment lowers it. - Median multipliers by instrument: - Public investment: 0.8. - Current spending: 0.5. - Taxes: about 0.4. - Social transfers: evidence suggests multipliers can be larger in developing economies—Bracco and others (2021) find transfers multiplier of 0.9 in developing economies versus about 0.3 for advanced economies. - Interaction with monetary policy: - Fiscal multipliers depend crucially on monetary policy response; multipliers can range from zero to two over three years depending on monetary accommodation. ### Ensuring the Fiscal Strategy Is Successfully Implemented - Historical experience in the region: - African countries have improved their primary balance by about 1 percent of GDP per year during past fiscal adjustment episodes. - Past episodes tended to rely mostly on expenditure cuts and lasted, on average, two to three years. - Implementation pitfalls are numerous: less than a third of consolidation episodes are sustained (not reversed in immediate subsequent years). - Deviations from plans are significant at longer horizons: on average, fiscal deficits tend to be 1 percent of GDP higher than envisaged three years earlier. - Key institutional priorities to minimize implementation risks: - Strengthen medium-term orientation of fiscal policy. - Put in place tools to better assess and manage fiscal risks. - Enhance expenditure controls. - Revenue side: revenue administration reforms in key compliance areas and digitalization to durably raise the tax ratio. - Identification of consolidation episodes: - An episode requires at least two consecutive years with an annual increase in the ratio of CAPB to potential GDP of at least 0.1 percent each year. - Years of fiscal neutrality (annual change between -0.1 percent and 0.1 percent of potential GDP) and small slippages (not larger than one tenth of the cumulative change) are allowed. - The CAPB is estimated using the approach in Fedelino, Ivanova, and Horton (2009) with potential GDP estimated by the Hamilton filter (exceptions: Madagascar, Sierra Leone, and Togo use the Hodrick-Prescott filter). - Episodes driven by commodity revenue increases equal/above 1 percent of GDP or grants increases larger than 2 percent of GDP are excluded; a narrative review of IMF country reports is used for large CAPB changes. *Source: apcfsfssacea - 1.5 percent of GDP for all countries.* ### Box 5. Definition of Fiscal Adjustment Episodes in the Literature ### Box 5. Definition of Fiscal Adjustment Episodes in the Literature ### Definitions and methodologies in the literature - Arizala and others (2021) - Fiscal consolidation episodes: CABP improves by, at least, 1 percent of GDP in a year. - Exclude cases where commodity-related revenues increase by at least 1 percent of GDP. - Identified episodes: 211 in sub-Saharan Africa and 568 in emerging market and developing economies between 1990 and 2016. - During these episodes: the CAPB improves on average by 3 of GDP each year and growth typically decelerates by 0.6 percentage points. - Ardanaz and others (2021) - Fiscal adjustment episode when either: - change in the CAPB-to-GDP ratio ≥ 2 percentage points in a specific year, or - two-year consecutive improvement in the CAPB of at least 1.5 points per year. - Identified episodes: 125 in 70 advanced and emerging market economies between 1980 and 2019. - Typical consolidation episode: duration ≈ two years. - During episode: CAPB improves by about 3.5 percentage points of GDP on average. - Escolano, Jaramillo, and Mulas-Granados (2018) - Require CAPB improves by at least 0.1 percent of GDP each year for two consecutive years. - Additional criterion: country should face a fiscal adjustment need defined as a primary gap of at least 2 percent of GDP at the beginning of an episode. - Applied to 83 countries during 1945–2014. - Identified episodes: 91. - Median cumulative improvement in the primary balance: close to 5½ percent of GDP. - Primary balance achieved at end of consolidation episodes: varies between 1.5 and 1.8 percent of GDP. - Find that the primary gap closes in two-thirds of the consolidation episodes and that public debt stabilizes in most cases. ### The subset of “sustained” consolidation episodes (criteria used) - Additional conditions used to classify an episode as “sustained”: - The average annual size of the change in the CAPB-to-potential GDP ratio is larger than 0.5 percent. - The episode is not immediately reversed: no more than 25 percent of the adjustment effort is reversed in the first year following the end of the episode. ### Results: episodes identified and central tendencies - Episodes identified in sub-Saharan Africa during 1980–2021: - 82 episodes of fiscal consolidation identified. - 24 assessed to be sustained. - Median statistics (overall, SSA sample): - Median cumulative improvement of the CAPB during an episode: about 2½ percent of GDP. - Median annual improvement: about 1 percent of GDP per year. - Characteristics of sustained episodes: - Cumulative CAPB improvement: more than 4 percent of GDP. - Median duration: three years. - Initial condition: sizeable fiscal adjustment need (positive primary balance gap). - Composition: larger increases in revenues and larger reductions in expenditure compared to non-sustained episodes. - Composition across episodes in SSA: - Primary expenditure cuts are the main driver. - Median decrease in expenditures over an episode: 1.7 percent of GDP. - Median increase in revenues over an episode: about 0.5 percent of GDP. - Comparison with other EMDEs: - Median cumulative change in the CAPB: SSA = 2.4 percent; Other EMDEs = 3.4 percent. - Other EMDEs: revenue increases and primary expenditure cuts above 1 percent of GDP. - SSA: tendency to rely more on expenditure cuts; increases in revenues play a more limited role. - Consistency with prior studies: - Escolano, Jaramillo, and Mulas-Granado (2018): average annual improvement in CAPB during fiscal consolidations = 1.1 percent of GDP (global sample) and 1.7 percent of GDP (developing economies). - Arizala and others (2021): CAPB improves cumulatively by about 3 percent of GDP over a typical consolidation episode in sub-Saharan Africa. ### Table 5 — Characteristics of Fiscal Consolidation Episodes (1980–2021) — median values (as reported) - SSA — All episodes (82 episodes) - Median cumulative change in CAPB ratio: 2.4 - Median annual change in CAPB ratio: 1.0 - Median final CAPB ratio: −0.3 - Median initial primary balance gap: −0.2 - Median change in revenue ratio (excl. grants): 0.6 - Median change in primary expenditure ratio: −1.7 - Median duration of an episode (years): 2.0 - SSA — Sustained consolidations (24 episodes) - Median cumulative change in CAPB ratio: 4.2 - Median annual change in CAPB ratio: 1.1 - Median final CAPB ratio: 0 .1 - Median initial primary balance gap: 1.4 - Median change in revenue ratio (excl. grants): 1.0 - Median change in primary expenditure ratio: −3 .1 - Median duration of an episode (years): 3.0 - SSA — Non-sustained consolidations (58 episodes) - Median cumulative change in CAPB ratio: 2.1 - Median annual change in CAPB ratio: 0.8 - Median final CAPB ratio: −0.3 - Median initial primary balance gap: −0.4 - Median change in revenue ratio (excl. grants): 0.6 - Median change in primary expenditure ratio: −1. 2 - Median duration of an episode (years): 2.0 - Other EMDEs — All episodes (251 episodes) - Median cumulative change in CAPB ratio: 3.4 - Median annual change in CAPB ratio: 1.2 - Median final CAPB ratio: 0.2 - Median initial primary balance gap: −0.5 - Median change in revenue ratio (excl. grants): 1.1 - Median change in primary expenditure ratio: −1. 8 - Median duration of an episode (years): 2.0 ### Sensitivity analysis on non-reversibility condition - Alternative calibrations considered for the non-reversibility condition: - Option A: no more than 25 percent of the adjustment effort is reversed in the first year after the episode (baseline). - Option B: no more than 50 percent of the adjustment effort is reversed in the first year after the episode. - Option C: no more than 75 percent of the adjustment effort is reversed in the first year after the episode. - Number of sustained consolidations under each option: - Option A (≤ 25 percent reversal): 24 sustained episodes. - Option B (≤ 50 percent reversal): sustained episodes rise to 40. - Option C (≤ 75 percent reversal): sustained episodes rise to 46. - Interpretation of reversals and shares: - Allowing up to 75 percent reversals represents slightly over half of the episodes. - SSA oil exporting countries: manage to sustain more fiscal adjustment episodes than other country groupings. - Shares of sustained episodes in total episodes in SSA are broadly similar to those in non-SSA EMDEs. - Overall conclusion: sustained fiscal consolidations in sub-Saharan Africa are possible but challenging, as most consolidations are reversed. - Even with option C, about a half (56 percent) of consolidation episodes are sustained through time. - With only small reversals allowed (option A), less than a third (29 percent) of consolidation episodes are sustained. ### Another look at implementation risks — sustaining fiscal efforts (Table 7 summary) - Objective: compute maximum primary balance countries in SSA have achieved over the past two decades and examine persistence using moving averages. - Median maximum primary balances (2000–22) — annual, three-year moving average, five-year moving average: - Sub-Saharan Africa: Annual = 5.7; Three-year = 2.5; Five-year = 2.3 - Median deviation from peak annual effort: Three-year = −42%; Five-year = −60% - Oil exporters: Annual = 13.7; Three-year = 10.3; Five-year = 7. 5 - Median deviation from peak annual effort: Three-year = −27%; Five-year = −37% - Other resource-intensive countries: Annual = 9. 5; Three-year = 4.3; Five-year = 2.7 - Median deviation from peak annual effort: Three-year = −62%; Five-year = −77 % - Non-resource-intensive countries: Annual = 2.9; Three-year = 1.6; Five-year = 0.9 - Median deviation from peak annual effort: Three-year = −44%; Five-year = −68% - Non-SSA emerging market and developing economies: Annual = 4.4; Three-year = 3.5; Five-year = 2.6 - Median deviation from peak annual effort: Three-year = −23%; Five-year = −39% - Advanced economies: Annual = 3.8; Three-year = 3.7; Five-year = 2.9 - Median deviation from peak annual effort: Three-year = −14%; Five-year = −31% - Key findings: - Maintaining high primary balances for extended periods is difficult. - Median annual maximum primary balance in SSA = 5.7 percent of GDP, falling to 2.5 percent (three-year) and 2.3 percent (five-year). - Median deviation in SSA: drop of 42 percent comparing annual balances to three-year averages; decline of 60 percent over five years. - Deviations from peak efforts are larger in SSA than in other developing countries (23 and 39 percent) or advanced economies (14 and 31 percent). - Within SSA, oil exporters recorded very high maximum primary surpluses; non-resource-intensive countries recorded much lower maximum primary balances and larger declines from peak efforts (for example, median of 2.9 percent vs 4.4 percent in other developing countries and 3.8 percent in advanced economies; decline by 68 percent using five-year moving averages). ### Sticking to fiscal plans — forecast bias and accuracy - Method: use WEO projections and compare forecasts to outturns for total revenue, government spending and fiscal balance over one-, two-, and three-year forecasting horizons for 45 SSA economies (1990–2021). - Forecast errors defined as difference between projected and actual values, expressed in percent of GDP. Positive (negative) forecast errors indicate projected value is higher (lower) than realized value. - Bias assessment: - Average forecast errors used to detect optimistic or pessimistic bias (positive average = optimistic bias). - When forecasting horizon = one year: fiscal balance forecast tends to be unbiased (mean and median forecast errors very close to zero). - When forecasting horizon > one year: forecast errors associated with fiscal balance projections become positive and large, indicating optimistic projections (and plans) that do not materialize ex post. *IMF DEPARTMENTAL PAPERS • Navigating Fiscal Challenges in Sub-Saharan Africa — Box 5 content unit* ### Box 6. Constructing Forecast Errors of Fiscal Variables ### Box 6. Constructing Forecast Errors of Fiscal Variables ### Definition and formal construction of forecast errors - Forecast errors (FE) for a given fiscal variable are defined as the difference between projected and actual values. - One-, two-, and three-year forecast errors are constructed for all sub-Saharan African countries by using the April vintages of IMF WEO data during 1990–2021. - Formal expression: - FE_{i,t,j}^f = f_{i,t|t-j}^f − f_{i,t}^f - where: - f denotes the fiscal variable of interest which can be (1) total revenue, (2) government expenditure or (3) the fiscal balance. - f_{i,t} is the actual value of the fiscal variable of interest for country i at time t, as reported in the WEO April vintage of year t + 1. - f_{i,t|t-j} denotes the forecast made for country i’s fiscal variable f at time t, as reported in the WEO April vintage of year t − j, where j = 0,1,2. - Realized and projected values are expressed as a share of their corresponding vintage contemporaneous GDP: - f_{i,t} = F_{i,t} / Y_{i,t} - f_{i,t|t-j} = F_{i,t|t-j} / Y_{i,t|t-j} - where: - F_{i,t} denotes the actual value of the fiscal variable of interest at time t for country i (nominal, local currency). - Y_{i,t} is country i’s actual nominal GDP at time t (nominal, local currency). - F_{i,t|t-j} denotes the value of the fiscal variable of interest at time t projected at time t − j for country i (nominal, local currency). - Y_{i,t|t-j} denotes country i’s nominal GDP at time t projected at time t − j (nominal, local currency). ### Sample construction and trimming - Data vintages: April WEO vintages, 1990–2021. - Forecast horizons: j = 0, 1, 2 corresponding to one-, two-, and three-year forecast errors. - All capital letter variables are expressed in nominal terms in local currency. - Outlier treatment: sample of forecast errors is trimmed by excluding the top and bottom 5 percent of observations. ### Key empirical findings on forecast bias and composition of errors - Fiscal balance projections: mean and median forecast errors are close to 1 percent of GDP at a three-year horizon. - Interpretation: fiscal balances for a given year tend to be 1 percent of GDP lower than projected 3 years earlier. - The 1 percent of GDP fiscal slippage at a three-year horizon is due, in equal parts, to: - revenue shortfalls: the revenue ratio tends to be almost half a percent of GDP lower than anticipated three years earlier; and - expenditure overruns: the expenditure ratio tends to be half a percent of GDP higher than anticipated after three years. - As forecasting horizon is extended, absolute forecast errors tend to be larger: projections over longer horizons become less accurate. - At two- and three-year forecasting horizons, absolute forecast errors can be as large as 4 percent of GDP on average. - Total revenues and government expenditure projections are less accurate compared to projections of the fiscal balance. - Possible interpretation: forecasting errors on the revenue and expenditure sides offset each other to some extent. ### Bias in fiscal projections (Table 8) — (Percent of GDP) - Total revenue ratio - Mean forecast error: 0.3 1Y; 0.3 2Y; 0.4 3Y - Median forecast error: 0.2 1Y; 0.3 2Y; 0.3 3Y - Government spending ratio - Mean forecast error: 0.3 1Y; −0.2 2Y; −0.5 3Y - Median forecast error: 0.2 1Y; −0.1 2Y; −0.6 3Y - Fiscal balance ratio - Mean forecast error: 0.0 1Y; 0.5 2Y; 0.9 3Y - Median forecast error: 0.0 1Y; 0.4 2Y; 0.9 3Y - Sample average (all countries, all years): 25.3 28.3 −3.0 - Note from table: Positive numbers signal that ex post revenue, government spending and the fiscal balance, all expressed in percent of GDP, were, on average, lower than previously projected ex ante. By contrast, negative numbers signal that revenue, government spending and the fiscal balance were, on average, higher than previously projected. ### Accuracy of fiscal projections (Table 9) — (Percent of GDP) - Total revenue ratio - Mean forecast error (absolute): 2.3 1Y; 3.4 2Y; 4.0 3Y - Median absolute forecast error: 1.5 1Y; 2.3 2Y; 3.0 3Y - Government expenditure ratio - Mean forecast error (absolute): 2.4 1Y; 3.4 2Y; 4.1 3Y - Median absolute forecast error: 1.7 1Y; 2.6 2Y; 3.1 3Y - Fiscal balance ratio - Mean forecast error (absolute): 2.0 1Y; 2.8 2Y; 3.2 3Y - Median absolute forecast error: 1.4 1Y; 2.1 2Y; 2.5 3Y - Sample average (all countries, all years): 25.3 28.3 −3.0 ### Implications for fiscal strategy and policy - The tendency for revenue and expenditure errors to offset implies that balance projections may appear more accurate than their components, but underlying vulnerabilities persist on both sides of the budget. - Given the documented revenue shortfalls and expenditure overruns: - Strengthening revenue forecasting and administration could reduce one source of slippage. - Tighter expenditure controls could limit overruns and associated forecast bias. - The trimming of extreme observations (top and bottom 5 percent) underscores sensitivity of summary statistics to outliers; robust monitoring and diagnostics are important for forecasting practice. _Italic: Source: IMF Departmental Papers — Navigating Fiscal Challenges in Sub-Saharan Africa, Box 6._ ### Box 7. Examples of Comprehensive Strategies Based on Revenue Mobilization ### Box 7. Examples of Comprehensive Strategies Based on Revenue Mobilization ### Successful country examples: Rwanda and Uganda - Rwanda - Implemented a comprehensive tax reform plan over the course of two IMF programs. - Increased its tax-to-GDP ratio by more than 3 percentage points between 2010 and 2015. - Decline in trade revenue (from lowering external tariffs) was offset by increasing revenue from personal income taxes and consumption taxes through simplifying and eliminating exemptions and broadening the tax base. - Increased excise rates and broadened the range of products covered by excise taxes. - Medium-term revenue strategy was closely aligned with the National Strategy for Transformation (NST-1) and the country’s vision 2050, helping demonstrate urgency for revenue mobilization and links to sustainable development goals. - Uganda - Improved revenues significantly between 2013 and 2017 based on a broad tax reform strategy integrated with the National Development Plan. - Strategy partly based on a Revenue Administration Gap Analysis in 2013, supported by the IMF. - VAT receipts increased through elimination of many exemptions and higher rates. - Excise tax collection improved by increasing rates on a variety of products. - Raised marginal personal income tax rates by 10 percentage points (from 30 to 40 percent) for the top income bracket. ### Medium-Term Fiscal Planning (MTFs) - Observations and effects - Most countries in sub-Saharan Africa have introduced MTFs since the end 1990s, ranging from simple MTFFs to more advanced MTBFs. - Evidence that MTFs have had a positive impact on fiscal discipline and allocative efficiency in some countries (for example, South Africa and Uganda). - MTFs raised awareness of the need to look beyond the annual budget horizon and shifted focus toward results of government spending. - Shortcomings and preconditions - Adoption of MTFs has often remained a formal exercise without fundamentally transforming the annual budget process. - Preconditions often missing: - Fiscal rules are often ill-calibrated and lack credibility. - Large divergences between spending appropriations approved by the legislature and annual outturns at aggregate and sector levels. - Deficiencies in macro-fiscal forecasting limit ability to project revenues and set expenditure envelopes. - Few line ministries have technical ability to cost activities and programs into the medium term. - Priority actions for early-stage MTF development - Adopt an overall medium-term fiscal objective or anchor where missing and regularly report on performance against it. - Improve accuracy and reliability of macro-fiscal forecasts. - Develop simple MTFFs first (projection of fiscal balance, aggregate estimates of revenues and spending), then provide guidelines to line ministries to prepare indicative medium-term spending plans as precursor to MTBFs. - Strengthen prerequisites (solid macro-fiscal forecasting, credible budget, top-down budget process, medium-term fiscal objectives) before making frameworks more binding. ### Fiscal Risk Management - Context and increasing importance - Fiscal risks have increased with major crises: global financial crisis of 2008–09, collapse in commodity prices in 2014–15, Covid pandemic in 2020–21, Ukraine war in 2022, and growing climate-related natural disasters. - Sources of fiscal risks relatively prevalent in sub-Saharan Africa - Volatility of commodity prices and exchange rates due to lack of economic diversification. - Volatile official development assistance for low-income countries dependent on aid, especially budget support. - SOEs often unprofitable; debt taken and arrears by SOEs and quasi-fiscal activities create fiscal costs and risks. Example: in South Africa, the debt of a single company (ESKOM) represented about 10 percent of GDP in 2019, of which 80 percent was guaranteed by government. - Large infrastructure needs prompting public guarantees and PPPs that transfer significant project risks to governments. - Reporting, disclosure, and tools - Many countries produce fiscal risk statements, but information often qualitative and limited in scope; few produce comprehensive information on shocks’ impact on government balance sheets. - Countries with limited analysis should prioritize simple macro-fiscal sensitivity analysis (e.g., shocks to prices and volumes of main export commodities). - Keep reliable and comprehensive records of debt liabilities as a first step toward a basic public sector financial balance sheet. - Improve quantification, disclosure, and monitoring of explicit contingent liabilities such as guarantees and PPPs. - A comprehensive fiscal risk mapping exercise, based for instance on the IMF Fiscal Risk Assessment Tool (FRAT), is helpful to identify prevalent and sizeable risks. - From identification to mitigation - Focus on identifying risks is often not followed by specific mitigation measures; existing measures tend to be ad hoc and risk-specific rather than comprehensive and public sector–wide. - Tailor mitigation to country capacity: - Low-capacity countries: use direct controls (legally binding limits and centralized authorization of guarantees, PPPs, subnational and SOE borrowing) and centralize oversight in the macro-fiscal unit of the ministry of finance. - Countries with basic risk management: use mitigation and transfer tools (partial guarantees, risk-based guarantee fees) and regulate financial sector exposures (leverage ratios, higher capital-adequacy for systemically important banks). - Provisioning: expense expected costs in the budget (for example, guarantees), establish contingencies for specific risks (for example, natural disasters), or set aside financial asset buffers. - As of 2020, sovereign wealth and stabilization funds in sub-Saharan Africa’s oil exporters held assets of less than 2 percent of GDP. ### Expenditure Controls - Problems and consequences - Lack of adequate control over public expenditure increases risk of commitments or payments that exceed budget allocations, undermining budget credibility. - Weak controls can enable “unorthodox procedures” that bypass regular budgetary controls and rules. - Ineffective controls raise likelihood of extra-budgetary commitments, a major source of fiscal risk and contributor to large SFA and debt in the region; redundant antiquated controls can cause severe payment delays and arrears. - Recommended reforms and tools - Conduct systematic, country-specific reviews of the integrity of the spending cycle (PEFA diagnostics can help). - Deploy Financial Management Information Systems (FMIS) that provide real-time data on budget execution and spending by line ministry; use modular approaches building on existing systems and ensure interoperability. - Clarify spending procedures in legal and regulatory frameworks, strengthen cash forecasting and management, and establish commitment control. - Develop cash flow projections and procedures for cash disbursements to reduce extra-budgetary commitments. - Establish multiyear commitment systems (for example, three to five years) to ensure prudent planning of commitments. - Use centralized control by the ministry of finance short-term in weak-capacity countries; gradually streamline and devolve controls to spending agencies as capacities, IT, and reporting systems improve. - Strengthen internal and external audit reforms: effective internal audit functions, ex post audits by supreme audit institutions, and enforcement of PFM law breaches to increase transparency and accountability. - Sequence expenditure control reforms within a wider PFM reform agenda and leverage technical assistance. ### Revenue Administration - Pattern of reform - Most developing countries that experienced large revenue increases pursued revenue administration and tax policy reforms in parallel (examples: The Gambia, Rwanda, Senegal, Uganda). - High-impact areas for sub-Saharan Africa - Tax compliance - Challenge due to high informality. - Improvements in tax audits, verification measures, and upgrading legislation to empower tax collection agencies are highly impactful (examples: Burkina Faso, Senegal, Rwanda). - Tailor enforcement to taxpayer segments (small, medium, large) and develop risk-based compliance strategies (example: Ghana). - Integrate domestic tax administrations and customs to leverage economies of scale and data use. - Management and human resources - Strengthen hiring of qualified staff, strategic planning, performance monitoring, and technical skills. - Establish tax policy units in ministries of finance to prepare revenue projections, estimate effects of tax reform options, produce tax expenditure reports, and communicate with the public on tax changes. - Digitalization - Digitalization simplifies internal processes and taxpayer interaction via e-filing and e-payment systems, broadens tax database coverage, and eases tax and business registration. - Digital audits and inter-agency information sharing enhance enforcement. - Sub-Saharan Africa lags other regions: only about 30 percent of countries offer e-filing or e-payment services (IMF 2020a). - Medium-Term Revenue Strategy (MTRS) - A comprehensive MTRS helps sequence reforms, facilitate implementation, and improve credibility. - As of early 2023, Benin, Cameroon, Ethiopia, Kenya, Rwanda, and Togo were at pre-formulation or formulation stages, while Senegal and Uganda were at the implementation stage (according to the Platform for Collaboration on Tax). ### Overcoming Resistance to Fiscal Reforms - Public acceptability and payoffs - Sustainability of new policies depends on government’s ability to show short-term or long-term payoffs to win public opinion. - Reform costs are often immediate and visible while costs of the status quo are often invisible, making fiscal reform politically difficult. - Public acceptability should be central to policy design: sequence reforms, conceive compensatory measures, and run communication campaigns. - Sequencing - Incremental implementation reduces costs for those affected and allows demonstration of concomitant gains. - Postpone difficult fiscal reforms until macroeconomic conditions are more favorable and compensatory measures are in place when possible. - Example sequencing: petroleum price increases can initially target products consumed more by higher-income groups; later stages can include larger increases affecting poorer households as the social safety net is strengthened. - Example of gradual utility reform: water lease in Guinea (1989) kept tariff at one-third of cost-covering level for two years, then gradually increased to full cost-recovery over six years with World Bank support. - Compensation - Well-targeted compensatory measures mitigate negative impacts on affected groups; targeted cash transfers are preferred where feasible. - Effective targeting requires: reliable registry of citizens, integrated socioeconomic databases, and efficient delivery systems. - Where these are lacking, consider second-best targeting methods or universal transfers limited to consumption loss experienced by the poorest. - Complement transfers with measures like ceilings on public transportation fares, reduced public school fees, increased provision of public services, or vocational training. - Communication - Far-reaching communications campaigns emphasizing intended benefits, dispelling misunderstandings, and highlighting benefits increase chances of success. - Governments should communicate the costs of no-reform and link reforms (for example, subsidy reduction) to constraints on high-priority spending and adverse effects on growth, poverty reduction, and pollution. - Limitations: in polarized societies or where non-cooperative norms prevail, information campaigns may be insufficient to change beliefs and generate buy-in; long-term efforts to build common purpose are needed. - Trust and state capacity - Lack of trust due to weak state effectiveness, corruption, and governance problems undermines tax compliance and reform acceptance. - Building state capacity to manage public finances and deliver investments that meet citizens’ needs is key to fostering trust, increasing revenue mobilization, and creating positive feedback loops that sustain reforms. *IMF Departmental Papers • Navigating Fiscal Challenges in Sub-Saharan Africa — Box 7 content as provided.* ### References ### References ### Fiscal adjustment, consolidation, and debt sustainability - Abbas, S. 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