Policies for Enhancing Resilience and Transparency in Public and Private Financial Management in Post COVID-

19 Africa

Prof. Kevin Chika Urama, FAAS

Senior DirectorAfrican Development Institute (ADI)

“Strengthening individual, organizational, and institutional capacity for inclusive growth in Africa – without which the global sustainable development

goals and Africa’s Agenda 2063 will not be achieved”

Presentation Outline

• Introduction

• Africa before COVID-19

• COVID-19 – Health and Economic Impacts in Africa

• Implications for PPFM in Africa

• Emerging Policy Options from G-CoP Think Pieces

• Concluding Question

Africa Before COVID-19 Africa

“The Conundrum”

• Africa hosts 30 percent of the world’s mineral reserves.

• Africa accounts for more than 20 percent of global annual production of five key minerals namely:• 80 percent platinum, • 77 percent cobalt, • 51 percent manganese, • 46 percent of diamonds, • 39 percent chromium and • 22 percent of gold. • 60 percent of world’s arable land, • 13 percent of the global population and • About 60 percent of its population under the age of 25 – making it the most youthful population in the

World. • Africa is richly endowed with both renewable and non-renewable energy resources.• About 75% of Africa’s countries have access offering huge potentials for a blue revolution in Africa.• African coastal waters contain some of the world’s most prized fishery assets. The Gulf of Guinea and

coastal waters of East Africa include some of the world’s richest, tuna fishing grounds

• Yet, African economies remain among the least developed in the world with the size of economies amongst the smallest compared to other regions.

Gross Domestic Product by Regions, 1995 –2018 (Constant US$ 2010)

-

5.00

10.00

15.00

20.00

25.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Tri

llio

ns

Middle East & NorthAfrica

North America

Sub-Saharan Africa

East Asia & Pacific

European Union

Central Europe and theBaltics

Caribbean small states

Latin America &Caribbean

South Asia

Public and Private Financial Management in Africa before COVID-19

Institutional Capacity and Government Effectiveness in Africa Before COVID-19

2.80

2.90

3.00

3.10

3.20

3.30

3.40

3.50

3.60

3.70

3.80

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: AfDB CPIA Website

CPIA Components 2004 - 2018

Quality of Public AdministrationEconomic managememntQuality of Budgetary and Financial ManagementEfficiency of Revenue Mobilization

Fiscal Balance in Africa 1980 - 2021

-9

-7.9

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

Fiscal Balance - Pre-COVID-19 Fiscal Balance - COVID-19

Policies for Building Resilience in the Public Finance & Debt Sustainability Management

in Post COVID-19 Africa

• Domestic Revenue Mobilization: Tax and Non-Tax Revenues

• Prudential Budgeting and Public Expenditure Management

• Fiscal Policy Planning and Management

• Deepening Capital and Financial Markets

• Strengthening Supreme Audit Institutions – Data, Transparency and Curbing Leakages, Corruption and Illicit Financial Flows

• Public – Private Partnerships in Post COVID-19

COVID-19: Health and Economic Impacts in Africa

Impact Transmission Channels

• Shortfall in domestic revenue (tax and non-tax) due a reduction in economic activity and commodity price slump• Deterioration of the current account balance due reduction in exports,

tourism receipts and workers remittances; • Increased pressure on fiscal space due to expansionary fiscal spending to

mitigate the impacts on health and other sectors. • Currency depreciation in major African economies (15 – 25 percent in

come countries) since January 2020.• Risk ratings and debt sustainability management challenges could

increase the cost of capital.• Default on financial and loan obligations by individual and businesses as

a result of business closures caused by the lockdowns and social distancing.• Reduced capital inflows due to cancellation or postponement in foreign

investment

COVID-19: Health Impacts

1. Confirmed COVID-19 Cases in to 20 impacted countries as at 29 August 2020

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

5,96

1,09

4

3,84

6,15

3

3,5

42,7

33

982,

573

629,

961

622,

551

599,

884

591

,712

439

,286

408,

009

401,

293

371,

816

334

,916

313,

911

308

,925

304,

947

295,

372

267

,064

266

,853

242,

835

Confirmed Cases, 29 August 2020 Confirmed Cases, 28 August 2020 Confirmed Cases 22 Auhust 2020

COVID-19 Statistics - Africa

• Africa appear to have turned the corner on the health impacts of COVID-19

• Daily confirmed cases has peaked, Daily deaths has peaked, and death rates has peaked. All trending steadily downwards

Daily Deaths Death rates

COVID-19 Impacts in African Economies

• Africa could suffer GDP losses in 2020 between $145.5 billion and $189.7 billion from the pre-COVID–19 estimated GDP of $2.59 trillion for 2020.

• Some countries have seen a sudden uptick in inflation of up to 5%.

• Expansionary fiscal spending could double by the end of 2020.

• Remittances and foreign direct investment could plunge significantly.

• Between 28.2 and 49.2 million more Africans could be pushed into extreme poverty

• An estimated 25 - 30 million jobs could be lost by the end of 2020.

• The most affected economies will be those with poor healthcare systems, or rely heavily on tourism, international trade, and commodity exports, and those with high debt burdens and high dependence on volatile international financial flows

Implications for Public & Private Finance Management in Africa

Post COVID-19, Africa’s debt is expected to rise, though less than for developed countries

• Africa’s debt-to-GDP ratio at the end of 2019 was 61%.

• The pandemic could add to Africa’s debt burden by another 10 percentage points, at the backdrop of shrinking repayment base.

• But Africa is still in better shape than advanced economies, where debt is expected to rise by 17 percentage points to 122%.

• Africa needs to shift from the narrative of setting ad hoc debt thresholds and debt sustainability discourse to improving the quality of debt, efficient use of debt, and debt transparency.

3543 43 47 48

4250 53

62 65

46

60 6170 72

105 104 105

122 122

0

20

40

60

80

100

120

140

2011-2017 2018 2019 2020 2021

Per

cen

t of

GD

P

Debt-to-GDP ratio: Africa versus comparators

Low-Income Developing CountriesEmerging Market and Middle-Income EconomiesAfricaAdvanced Economies

Source: AfDB Statistics and IMF Fiscal Monitor, April 2020

2. Fiscal deficits could double from their pre-COVID-19 levels, notably in Southern Africa

• More than 50% of African countries recorded deficits above 3% in 2019.

• COVID-19 would heighten already large fiscal deficits in African economies.

• Southern African countries are particularly affected due to the relatively larger fiscal stimulus packages there.

• But these fiscal deficit are expected to narrow in 2021, though they would remain above 2017-19 levels

-0.4

-4.0

-2.7

-4.8

-6.8 -6.5-7.4

-10.9

-9.4

-4.3

-11.6

-10.3

-4.6

-7.2-6.2

-5.0

-9.0

-7.9

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2017-2019 2020 2021

Fiscal deficit within African regions (% GDP)

Central Africa East Africa North Africa

Southern Africa West Africa Africa

Source: AfDB Statistics, WEO data, April 2020

But Africa is not alone

• COVID-19 is worsening fiscal stance for all regions in the world

• Although the deepening of fiscal deficits in Africa are not expected to be as high as that of the G7 and China in 2020, the constrained fiscal capacity could worsen the impacts in Africa.

• South Korea appear to present a good case study.

-5.0

-9.0-7.9

-0.7

-7.5

-3.6-3.5

-12.0

-6.2

1.9

-1.8 -1.6

-5.0

-11.2

-9.6

-6.7-7.4 -7.3

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

2017-2019 2020 2021

Fiscal deficits: Africa versus Rest of the World (% of GDP)

Africa Euro area G7 Korea China India

3. Domestic revenue mobilization in Africa is low compared to other regions

• Government revenue as a percent of GDP is lowest in Africa at 18%.

• This is an area that Africa may need to exert more effort post COVID-19, both in terms of expanding the tax and non-tax revenue.

17.6 17.3 17.8

46.4 45.2 45.7

35.832.9

35.7

22.7 22.9 22.9

27.925.8 26.6

19.9 19.5 19.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2017-2019 2020 2021

Government Revenue (% of GDP)

Africa excl. Libya Euro area G7 Korea China India

4. African countries commit a lot on defence and military expenditures to fight terrorism and conflicts,

especially in fragile countries

• A major driver of high debt and deficits is the military burden in Africa’s fragile states.

• Debt contracted in fragile countries is mostly expended on the military rather than on more productive investments. This delivers a global public good but constrains the fiscal space of the fragile countries to address other competing development goals.

The security expenditures deepens the drag on fiscal conditions in fragile countries

40

45

50

55

Tot

al d

ebt

as %

of

GD

P

.01

85

.01

90

.19

50

.20

.20

5

Mil

itar

y ex

pédi

teur

as

perc

enta

ge

of

GD

P

5. Another source of challenge is illicit financial flows from Africa: estimated at about US$50 billion annually;

US$1.2 trillion since 1980

• Illicit financial flows out of Africa since 1980 are estimated at $1.2 trillion, far above FDI and ODA inflows to the continent.

• Blocking these leakages can provide the financing required to accelerate Africa recovery from the recession.

526.1

1,234.8

2,865.8

3,934.6

9,278.9

0 2000 4000 6000 8000 10000

North America

Africa

Latin America & Caribbean

Europe

Asia

IFFs in million

Illicit Financial flows

Source: GFI report 2019

6. COVID-19 could increase the challenge of corruption

Corruption Perception Index, 2019

Corruption Perception Index, 2019

0

10

20

30

40

50

60

70

80

90

Den

mar

kN

ew Z

eala

ndF

inla

ndS

inga

por

eS

wed

enS

wit

zerl

and

Nor

way

Net

her

land

sG

erm

any

Lux

embo

urg

Icel

and

Aus

tral

iaA

ustr

iaC

anad

aU

nite

d K

ingd

omH

ong

Ko

ngB

elgi

umE

ston

iaIr

elan

dJa

pan

Nic

arag

uaC

ambo

dia

Cha

dIr

aqB

urun

diC

ongo

Tur

kmen

ista

nD

emoc

rati

c R

epub

lic

of…

Gui

nea

Bis

sau

Hai

tiL

ibya

Ko

rea,

No

rth

Afg

hani

stan

Equ

ator

ial

Gui

nea

Sud

anV

enez

uela

Yem

enS

yria

Sou

th S

udan

Som

alia

(1) Corruption, (2) Double dipping, (3) Mis-invoicing,(4) Unjustified high remunerations for

Public Officials, (5) Illicit financial flows, (6) Domestic resource mobilization, and(7) Inefficient resource utilization;(8) Lack of consequence management

CPI & GDP Per capita – Overlaid

GDP Per Capita 2019 (261-114704)CPI, 2019 (Range: 9 - 87)

CPI & GDP Per capita

7. Expansionary Fiscal Spending - COVID-19 fiscal stimulus packages: What are the trade-offs?

3.74

5.68

17.4

0 2 4 6 8 10 12 14 16 18 20

Africa

Emerging MarketEconomies

AdvancedEconomies

Percent of GDP

Size of COVID-19 stimulus package in ROW

Source: AfDB staff calculation based on IMF data

Africa: Fiscal stimulus-Covid-19 as % of GDP

0.020.04

0.180.300.300.300.300.370.40.440.50

0.600.850.900.971.00

1.101.10

1.21.38

1.501.601.641.701.751.801.801.881.90

2.002.002.00

2.22.30

2.42.60

3.003.40

3.903.90

4.254.30

7.007.40

10.00

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5

Fiscal Stimulus % GDP

8. Currency depreciation is on the rise

10: Savings culture is an issue?

Global and African Assets Under Management (AUM) is expected to almost double in size by 2025, from US$84.9 trillion in 2016 to US$145.4 trillion by 2025.[1] Within Africa, the AUM of domestic institutional investors are expected to reach US$ 1.1 trillion by 2020 from US$ 634 billion in 2014[2].

The Inconvenient Truths

Known Knowns• Africa’s tax/GDP ratio; Savings/GDP ratio; and investment/GDP ratios are among the lowest in the World.

• Comprehensive tax administration reforms costs money. The level of informality in Africa’s economy makes tax administration difficult.

• Dependence on external revenue sources for financing development is not a sustainable policy.

• COVID-19’s unprecedented impacts has led to unprecedented - probably, “unguarded” fiscal and monetary easing in the developed economies. This may have significant inflationary implications in future.

• COVID-19 presents a rationale for unprecedented borrowing and deficit-financing to level that would otherwise be considered abnormal. Because this is an emergency response policy, proper expenditure planning and prioritization is a challenge. This could leave room for heightened inefficiencies and corruption.

• Transparency, accountability and trust are key pre-conditions for efficient resource mobilization and utilization. With the high perception of corruption on the continent, governments may continue to struggle with tax administration.

The COVID-19 Quagmire• Expansionary fiscal spending is required to help countries deal with the unprecedented impacts

of COVID-19 in the short, medium and long-term impacts on economies;

• Sources of Revenue (domestic and external) have contracted significantly due to lock down of economic activities;

• Worsening risk ratings and perceived credit worthiness limit the capacity of lower income countries and states experiencing fragilities to access commercial loans due to and associated higher cost of capital;

• Middle income countries cannot access concessional loans and grants due to classifications and hence are constrained to borrow from commercial markets at high cost, heightening debt sustainability challenges.

• Africa’s development financing gap is huge and widening, but the space for overseas development assistance is narrowing in many countries. Countries have an unprecedented need for external aid to respond to the crisis. But the sources of aid is narrowing. There is need for countries to re-prioritized balanced budgeting and semi-accruals accounting systems.

• Africa needs private sector financing now more than ever. But lack of transparency and accountability systems impair risk ratings of countries and limit financial inflows.

• Governments need to think outside the box – innovative public private partnerships is key.

The Policy Options

(G-CoP Think Pieces)

Short Term Policy Options:Domestic Revenue Mobilization

• Address the large informal sectors in the economy

• Adopting Integrated Tax Administration Systems (ITAS) and Single Revenue Accounts (SRA) and popularizing their usage amongst tax-payers.

• Diversify economies away from dependence on revenues from commodity exports

• Strengthening the social contract between state and citizens - improve transparency, accountability, monitoring of public service delivery, compliance and consequence management.

• Improve the business environment to grow the tax base through private sector participation.

On DRM (Ctd)

• Tax policy (re-)adjustments to maintain liquidity in low income household and small business and protect employment across board.

• Improve compliance with payments of existing taxes such as the Voluntary Asset and Income Declaration Scheme (VAIDS)

• Progressive taxation on high net worth individuals, luxury and ostentatious goods could help.

• Securitize remittances – This is worth over US$80 billion annually.

• Innovative financing approaches: pension funds, sovereign wealth funds, blended fiancé, impact investing, fin-tech based financing 7 crowdfunding, impact investing, etc.

On Prudential Budget & Expenditure Management

• Adoption of Medium-Term Revenue Strategy (MTRS) as a whole-of-government overarching strategic domestic revenue improvement framework

• Establish Digital Financial Management Information Systems

• Budget Prudence: - focus on transparent and efficient balanced budget planning and execution

• Re-prioritize (Re-allocate) expenditure – Move away from elephant projects and focus on building the real sector with a special focus on smart health infrastructure, food systems and education.

• Address leakages, corruption and illicit financial flows through use of smart technologies.

On Fiscal Policy Management

• Fiscal infrastructure: Establish strong and efficient fiscal infrastructure, including good governance architecture

• Fiscal prudence: - Deploy fiscal prudential tools, set realistic targets/thresholds, and establish counter-cyclical fiscal buffers during good times.

• Fiscal discipline: consolidation and coordination – focus on building the real sector and technologies to enhance productivity in the economy.

• Fiscal accountability: - Focus on national development effectiveness of policies and implement development impact assessments. Hold Ministers and Public Officials accountable for development impacts.

Fiscal Policy Management (Ctd.)

• Fiscal capacity building & incentive systems: Build capacity for an appropriately skilled and effective public sector and create incentives to keep them focused on the job.

• Fiscal Transparency: Build systems that the citizens can see, feel and relate with. Create a system of public oversight on public service delivery.

• Fiscal consolidation – Use smart technologies and shared services to create efficiency gains.

• Negotiate Tax relief with the G7 and G-20 countries

• Countries to develop Emergency Risk Financing Fund to prepare to deal with future exogenous shocks

On Deepening Capital & Financial Markets• Inward looking policy required

• Implement AfCTA- interregional trade

• Prioritize savings – Sovereign and Private Wealth Management

• Stimulus packages and debt service suspension to ailing firms particularly small and medium scale enterprises to enable them remain in operation

• Provide incentives for Global Public & Private Investors

• Scale-up general liquidity interventions and provide monetary policy accommodation

• Reduce interest rates to ensure extension of the direly needed credit to private sector businesses

• Central Banks to assure bank forbearance on domestic private loans by providing liquidity to commercial banks and critical businesses that are constrained by liquidity

• Reduce collateral requirements for loans needed to finance businesses

• Use a combination of equity, debt and credit guarantees to shore up the finances of affected businesses.

• Central Bank to increase financial sector supervision to forestall emergence of weak financial stability and possible contagion

• DFIs to increase guarantees and liquidity facilities to banks with which they have lines of credit

On Strengthening Supreme Audit Institutions

• Enduring legal infrastructure and institutional & regulatory fframeworks

• Accelerate capacity building for SAIs.

• Promote independence of the SAIs to insulate it from being a subject of political interference.

• Enforce compliance and effective consequence management systems

• Governments to institute legal and framework for establishing supreme audit institutions where they are inexistent

• Establish and/or strengthen anti-corruption agencies and ensure its independence

• Transparency to enhance public accountability for implementation of audit recommendations

Closing Words

• As aptly noted by His excellency President Emmanuel Macron, “This period will have taught us a lot. Many certainties and convictions will be swept away. Many things that we thought were impossible are happening. The day after when we have won, it will not be a return to the day before, we will be stronger morally. We will draw the consequences, all the consequences”.

• “We are all embarking on the unthinkable…. We all face the profound need to invent something new, because that is all we can do… But it will change the nature of globalisation, with which we have lived for the past 40 years…”.

• The UN Secretary-General António Guterres noted that: “Everything we do during and after this crisis must be with a strong focus on building more equal, inclusive and sustainable economies and societies that are more resilient in the face of pandemics, climate change, and the many other global challenges we face - recovery from the COVID-19 crisis must lead to a different economy.”

The New Normal

Thank You

African Development Institute

“Strengthening capacity for inclusive growth in Africa – without which the global sustainable development goals and Africa’s Agenda 2063 will

not be achieved”

Contact: e-mails: Africandevelopmentinstitute@afdb.org

k.urama@afdb.org

© African Development Institute, 2020