The Policymaker’s Trilemma

IMF Blog, May 12, 2021

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Region: sub-Saharan Africa.
Pandemic context: second wave eased earlier in the year, risk of further waves as winter approaches.
Global backdrop: global recovery well underway; key economies rebounding sharply; global trade improved; commodity prices higher; investment flows resumed.
Near-term outlook for sub-Saharan Africa: growth prospects described as somewhat more subdued while widespread vaccination remains out of reach.

Immediate challenges facing finance ministers:
- Meet increased spending needs.
- Contain a pronounced increase in public debt.
- Mobilize more tax revenues.
Tradeoffs: addressing one element typically comes at the expense of one or both of the others (e.g., higher spending requires more debt or higher taxes; boosting tax revenue can support spending or help contain debt).

Pre-existing development needs were already daunting in the context of rapid population growth.
The crisis setback: the region’s development path has been set back by almost a decade.
Labor market and poverty impacts in 2020:
- Regionwide employment fell by about 8½ percent in 2020 due to COVID-19.
- More than 32 million people were thrown into poverty.
- Disruptions to education have jeopardized the prospects of an entire generation of schoolchildren.
Distributional impact: a large proportion of the region’s most marginalized workers were concentrated in some of its hardest-hit sectors, adding to inequality.
Demographic pressure: by 2030 nearly one in two new entrants into the global labor force will come from sub‑Saharan Africa.

Public debt increased to almost 58 percent of GDP in 2020 — the highest level in almost 20 years and a jump of more than 6 percentage points in just one year.
Interest burden:
- Interest payments reached a worrying 20 percent of tax revenue for the region as a whole in 2020.
- Interest payments exceeded one-third of revenue in a number of cases, diverting resources from social and development needs.

Tax revenue mobilization remains the main policy lever to bridge spending pressures and sustainable public debt, but progress has typically been slow.
Country-specific needs for mobilization:
- Streamlining exemptions for some countries.
- Increasing efficiency of existing tax systems for others.
Political and social constraints: raising taxes is politically difficult, especially given businesses and households have fewer resources post-crisis.
Temporary relief measures: in some countries, many relied on tax forbearance or delayed tax payments to get through the year.

Immediate international support priorities:
- Ensure swift and affordable access to vaccines.
- Provide resources through grants and concessional financing.
- Extend the G20 Debt Service Suspension Initiative.
- In some cases, provide debt treatment under the Common Framework.
Domestic policy priorities (bold and transformative reforms):
- Strengthen transparency and governance reforms to lift the efficiency of public spending and target resources to those who need it most.
- Improve tax administration, including through the use of new digital technologies, to broaden the tax base.
- Raise more revenue in ways that protect the vulnerable and support growth.
- Adopt medium-term fiscal frameworks to balance short-term supportive fiscal stance with medium-term consolidation to contain borrowing costs and sustain confidence, especially where debt is high and financing tight.
- Accelerate reforms to promote private sector activity and economic diversification to lift potential growth, resilience, and job creation.
IMF role: provide program engagement, emergency financing, technical assistance, and policy advice; stands ready to help.

Source: The Policymaker’s Trilemma — Abebe Aemro Selassie, Andrew Tiffin, May 12, 2021.