Special series: Time to democratize public finance management systems in African states

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F&D special report: Africa at a crossroads: learning from the past and looking to the future

Governments that fail to overhaul taxes, spending and borrowing could face an election backlash

Weak public financial management systems are a significant obstacle to economic growth and development of African states. On the revenue side, many African countries perform less well in tax collection. In 2018, the average tax collection as a share of gross domestic production in Africa was 16.5%–ranging from 6.3% in Nigeria to 32.4% in Seychelles. On the expenditure side, low legislative control means that the allocation, implementation and control of the budget often reflect the priorities of the executive. As a result, only part of the revenue collected in African states actually reaches the public in the form of public goods and services. Much is wasted spending on poorly planned “white elephant” projects, corruption and general waste. With regard to borrowing, recent increases in public debt in a number of African countries have expressed concern about a lack of transparency and accountability.

Given Africa’s demographic and political trajectories, the challenges facing its public financial management systems will only worsen.

Solving these problems will require more than technical fixes to the operations of African treasuries. Indeed, public financial management systems essentially reflect the implicit fiscal pacts of societies. Thus, reforms should reflect the emergence of the electoral fiscal pact in African states. An important feature of this fiscal pact is the expectation that in order to stay legitimately in power or win elections, politicians must invest in visible and accountable public goods and services. In both African democracies and non-democracies (electoral autocracies), electoral competition (albeit imperfect) has created increased demand for roads, electricity, public schools, accessible health care, agricultural subsidies and extension services, social protection, and other public goods and services. The experiences of many African countries over the past two decades have reinforced this implicit fiscal pact. For example, the region’s successes in universal primary education as part of the millennium development goals have created a huge public demand for secondary and higher education.

power to the people

How will African countries sustainably finance the growing demands of their citizens? Ignoring the public is not an option, so Africa’s public financial management systems can no longer focus solely on macroeconomics or isolate public taxation and spending from popular politics. Instead, political negotiations – within the safeguards of the constitutional order – must guide public financial management systems. To improve public confidence, taxation must be linked to the provision of public goods and services. Along the same lines, to ensure that public spending reflects the priorities of taxpayers, legislators at the national and subnational levels must play a leading role in budget allocation and oversight. Finally, the policy-making process should be participatory and sensitive to country-specific political realities.

Exposing public financial management systems to full democratic expression will undoubtedly generate significant ‘inefficiencies’. However, these inefficiencies should be seen as features, not bugs, of democratic public financial management. It is only through practice that African legislatures and other institutions will establish the habits and institutional norms necessary to fully democratize tax administration, public expenditure and control. The corollary of this is that circumventing legislative input into budget processes will set back the institutional development of public financial management systems in the region – the long-term cost of which will be enormous, given emerging public demands for goods and services. Demographic and political trends in African states suggest that unresponsive governments will increasingly come under populist pressure and if they fail to respond, risk popular revolt and elimination through coups or uprisings. mass.

Multilateral institutions such as the IMF have an important role to play in promoting the democratization of public financial management systems in Africa. As a starting point, these institutions need to have a good appreciation of the pressures facing African politicians. Being in the business of gaining and retaining power through popular elections, politicians (in electoral democracies and autocracies) have a vested interest in supporting and funding easily visible projects, such as roads, schools and hospitals. To put it simply, inauguration is the main currency of electoral politics. Therefore, IMF technical assistance should strive to be compatible with the perspectives and incentives of key political figures. It is not enough to propose orthodox reforms born of ignorance of local contexts, to see them fail and to blame “a lack of political will”. Taking the inducements of politicians seriously must be at the heart of technical commitments.

Moreover, country engagements should not begin and end with the executive branch. In addition to interfacing with treasuries and central banks, multilateral institutions should meet regularly with legislatures and other relevant actors in African states. Many African countries have laws requiring legislative input in taxation, budget allocation, debt repayment, and other functions of the public financial management system. The IMF and other multilateral institutions should leverage these statutory requirements to build strong and meaningful relationships with legislators. During country visits, it is not enough to meet only the president of the legislature. Relationships need to be broader and deeper, including with committee members responsible for tax, credit, and core spending sectors such as agriculture, education, health, and infrastructure. Regular meetings with legislators will help heads of multilateral institutions better understand local political dynamics, increasing the likelihood that technical assistance programs and proposed reforms will be politically feasible.

Changing Perceptions

Perceptions and ideas also matter. Most citizens in African countries view the operations of the public financial management system as opaque, corrupt or both. For example, in Round 7 of the Afrobarometer Survey (2016-18) of thirty-four countries, only 36.1% of respondents approved of the government’s performance on corruption. In a similar survey, a clear majority of respondents agreed that the president should be controlled by the legislature (see chart). Addressing this will take more than general anti-corruption efforts. Instead, reforms should target public perceptions and understanding of key drivers of corruption – including low fiscal absorptive capacity, political cronyism, and key features of the electoral exchange between politicians and officials. voters. Rather than treating corruption as a moral or legal problem, reformers should recognize the relationship between certain types of corruption and distributive politics. This means understanding the relationships between public sector corruption and private sector lobbying, campaign finance, voter service, and intra-elite political payments that are critical to state stability. This would allow reformers to separate ‘transaction cost’ corruption that can be legitimized through legislation and regulation (as is the case in many consolidated democracies) from the commonplace theft of public resources.

Idea-driven engagement is absolutely necessary in policy analysis and development. Public spending in many African countries often faces popular pressure from disparate geographically concentrated ethnic/regional interests with varying (and often conflicting) ideas about what it means to invest in ‘development’. This requires investments in local policy think tanks, particularly on the most productive ways to spend scarce resources. The advantage of generating policy ideas locally is that these policies are more likely to be relevant to – and representative of – local demands. Multilateral institutions can then build relationships with these integrated think tanks to maximize their political influence.

Given Africa’s demographic and political trajectories, the challenges facing its public financial management systems will only worsen. Population growth, rapid urbanization and growing electoral competition will put enormous pressure on governments to increase spending on public goods and services. Recognizing the need to maintain macroeconomic stability, it will be tempting to insulate the region’s public financial management systems from political demands. Yet, for all the reasons stated above, this approach is likely to end in failure. Only by closely embracing political and institutional processes will African countries succeed in building strong democratic public financial management systems that meet the needs of their respective populations.


author

Ken Opalo is an assistant professor at the School of Foreign Service at Georgetown University.


Opinions expressed in articles and other materials are those of the authors; they do not necessarily represent the views of the IMF and its Executive Board, or IMF policy.

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