There is no question that the global financial and economic crisis is affecting Africa’s economic performance. The IMF’s World Economic Outlook forecasts a GDP growth rate for Africa of 3.5 percent, which is 1.6 percentage points lower than the previous forecast, and 1.9 percentage points below the 2008 growth rate. The growth forecast for primary commodity exporters is even lower; Angola, for instance, is projecting nominal GDP to be 17 percent lower in 2009 compared to 2008. A growth slowdown in Africa can have serious long-term consequences.
In light of these developments and evidence, and given that the United States, Western Europe and China are all considering a major fiscal expansion (of the order of trillions of dollars), a natural question to ask is: “Should African countries also introduce a fiscal stimulus?”
The answer is: “It depends.”
Since they lack access to international capital markets, low-income African countries would benefit from a fiscal stimulus only if it can be financed by external resources, such as foreign aid. Absent these resources, an increase in the fiscal deficit will either crowd out private spending or create inflation, neither of which is conducive to growth. Even if there are additional external resources, governments should be prudent about the type of countercyclical policies they pursue. Some countries such as Ghana already have a high fiscal deficit (of about 14 percent of GDP). The challenge facing Ghana is to bring down the deficit, possibly using external assistance to smooth the transition path, so that the economy’s debt situation is manageable and private investment resumes.
Other African countries have much lower fiscal deficits and debts. Assuming it can be financed from abroad, these countries should contemplate a modest fiscal stimulus as a way of shoring up the economy’s growth. But how the fiscal stimulus is spent will be just as important as the size of the stimulus. It is unlikely that tax reductions will yield great gains in growth, as many of the efficiency-reducing taxes have already been reduced (most recently in response to the food price crisis, when some countries eliminated or lowered import tariffs on cereals). So the major gains will come from expenditure increases. Here, governments should look for increasing expenditures that will create jobs in the short run, and leave the economy in a more efficient state in the longer run. One possibility is the often under-funded maintenance of infrastructure such as roads, water pipes and electricity grids, as the Democratic Republic of Congo is doing. Investment in agricultural infrastructure, long neglected in Africa, would also be productive and create off-farm employment. The provision of finance to small- and medium-enterprises, as well as for infrastructure projects would create employment and a more productive economy. Additionally, African governments could use the current situation to undertake some reforms that were elusive in the past, such as utility tariff reform, but are now badly needed, not just to cushion their economies during the crisis, but also to prepare their economies to benefit from the recovery when it comes. Spending to keep basic services to poor people from scaling back—for drinking water, primary education and primary health care, for instance—could be valuable, provided they are not captured by the same interests that kept these resources from getting to poor people in the first place. Finally, targeted safety net programs that will cushion the poor or near-poor from the growth slowdown should be part of the stimulus package—with one caveat: only programs that are known to be reasonably successful at targeting the poor, and whose leakage rates are relatively low—such as Ethiopia’s productive safety nets program--should be scaled up. The opportunity cost of public funds in these times is too high to be wasted on unproductive programs that leak to the non-poor.