Debt servicing costs have risen sharply, with the median interest payment burden doubling to around 10% of income between 2011 and 2018. Photo: iStock
Reliance on informal economic activity makes it difficult for most African countries to generate revenue beyond consumption taxes, according to Ken Opalo.
African countries face two major challenges in public finance management.
First, many lack fiscal capacity due to structural weaknesses in their economy and weak tax administration. The predominant informality of wage employment and reliance on subsistence agriculture in most countries makes it difficult to raise revenue beyond consumption and border taxes. Therefore, on average, African countries collect just 16.6% gross domestic product (GDP) in taxes.
By comparison, countries in the Asia-Pacific region collect around 21% of GDP in taxes. Countries in Latin America and the Caribbean have an average of around 23%.
At the top, the average tax levy in high-income countries within the Organization for Economic Co-operation and Development (OECD) is around 34%.
Second, African countries’ fiscal capacity deficits are often compounded by the lack of prudent and responsible deployment of public resources. The existence of white elephants and abandoned unfinished projects in many countries reflect systemic failures in project planning and implementation.
Similarly, a number of countries routinely spend less than budgeted (net of corruption). The reason? Limited absorptive capacity in government ministries, departments and agencies.
For example, a 2018 World Health Organization study found that despite the urgent need for investment in public health, about 10% to 30% funds allocated to ministries of health in the region go unspent.
Finally, while corruption is not The main problem of public financial management in most African states, the waste and distortions of the associated budgetary processes limit the impact of public expenditure.
The joint effects of the two challenges keep many African countries in a sub-optimal balance. Fiscal morality is held back by inefficient spending patterns that do not meet the needs of taxpayers. This, in turn, reduces the overall tax burden and reinforces the government’s lack of fiscal capacity.
The absence of a strong revenue base means that African governments cannot undertake the large investments in public goods and services that are needed to achieve structural economic change in the region.
As shown below, African states continue to lag behind their counterparts in other regions when it comes to measuring government expenditure as a percentage of GDP. Contrary to popular opinion about allegedly bloated public sectors in the region, the problem in many African countries is that they are under-governed by states that can barely meet the huge demand for public goods and services.
This is why, in my view, African governments should align both revenue generation and public spending with public opinion.
The challenge is: how can countries proceed to democratize public finance management?
One way out of the fiscal pit that many African governments find themselves in is to increase public participation in the budget process. This can be done directly or through elected legislative representatives. Embedding a political culture of public participation and legislative input into the budget process would certainly not be a silver bullet. But it would increase alignment between budget appropriations and taxpayers’ priorities.
At the individual level, Studies show that spending money on taxpayers’ priority areas is likely to boost tax morale, thereby improving overall fiscal capacity.
The incentives to involve legislatures in the budget process are equally strong. Legislatures are an integral part of responsible democratic government. Therefore, instead of always deferring to Ministries of Finance, African legislatures should be at the heart of the ownership process.
The current monopoly of budget processes by ministries of finance poses two problems. First, without legislative input (ideally representing the constituency interests of individual legislators), many budgets in the region reflect the priorities of presidents and allied interest groups. Because ownership is not always tied to real needs on the ground, it’s no wonder governments waste money on white elephants or unfinished projects.
Second, since most legislatures’ involvement in the budget process tends to be limited to voting for or against executive proposals, individual legislators have little incentive to develop expertise in legislative appropriation and budget control. Getting good at these legislative roles takes time and effort. Simply put, not involving legislatures in the budget process weakens the important oversight function of legislatures.
A role for multilateral organizations
These domestic public financial management challenges are often compounded by donors and multilateral organizations. Almost all make rhetorical commitments to strong institutions and democracy. Yet when it comes to budget issues, many prefer to engage exclusively with presidents, ministries of finance and central banks at the expense of legislatures and civil society organizations.
This is often done under the guise of the supposedly “apolitical” and technical nature of public finance management.
But what could be more political than the process of (re)distributing public resources?
To engender the development of coherent public financial management processes in African states, multilateral organizations and donors should strive to include legislatures and civil society organizations in all matters relating to fiscal policy. It would be the right and democratic thing to do. It would also increase the likelihood of prudent use of resources by governments.
The consequences of the historical opacity surrounding these commitments are obvious to all. Studies show that elites in low-income countries have a history of embezzling aid, with disbursements associated with increased deposits in offshore financial centres.
Not a magic bullet. Just a good start
Finally, it should be remembered that the democratization of budgetary processes will not be a miracle solution to solve the public finance management problems of African states. In fact, it will be a mess. Injecting legislators and their constituents into the process is likely to complicate the politics of budget distribution in most countries. This can slow down the ownership process or lead to institutional paralysis. But this should be treated as a feature and not a bug. Given what is at stake, it makes sense that there are distributive conflicts around budgets. This is what we see in high-income democracies. We should expect no less from the democratization of African states.
A version of this article originally appeared in the International Monetary Fund’s Finance and Development magazine: It is time to democratize public financial management systems in African states..