Advertisement

Developing an Indicator of Fiscal Sustainability for Africa

  • Moses Obinyeluaku
Chapter

Abstract

The experience of extreme macroeconomic instability in Africa has its origin in the inability to control fiscal dynamics and the effect that this has had on the overall policy stance. African countries are heavily dependent on volatile revenues (from aid, oil, exports, a small tax base) to finance their relatively huge total expenditure, making their budget vulnerable to fiscal shocks. This poses a serious threat both to the sustainability of the continent’s budget and to its macroeconomic stability. Oil and commodity windfalls and aid surges induce government spending that is difficult to retrench when these sources of revenue experience negative shocks, distorting government budget allocation patterns, cohesion, and stability, and increase deficits and debt stock that has often created an unfavourable environment for monetary policy. In the presence of such a highly volatile environment, current figures for revenues, expenditures, and the fiscal balances will convey a rather misleading picture of the underlying fiscal situation. Developing fiscal indicators which may provide a more reliable picture of the underlying sustainability of current fiscal policy is of paramount important. In 2004, Nigeria introduced an oil-price-based rule to deal with the revenue volatility challenge. The aim of the rule is to smooth government expenditure. The oil-price rule is designed to benchmark overall fiscal performance and the sustainability of public finances. In this chapter, we analyse the case of Nigeria’s post-2004 data to guide the development of fiscal sustainability indicators in economies with highly uncertain fiscal revenues such as Africa. In particular, we look at whether the oil-price-based rule is able to adequately address the macroeconomic conditions that affect fiscal sustainability in Africa.

Keywords

Fiscal sustainability Fiscal indicators Resource-intensive countries 

References

  1. Aizemann, J., & Marion, N. P. (1993). Policy Uncertainty, Persistence, and Growth. Review of International Economics, 1(2), 145–163.CrossRefGoogle Scholar
  2. Akinlo, A. E. (2012). How Important Is Oil in Nigeria’s Economic Growth? Journal of Sustainable Development, 5(4), 165–179.CrossRefGoogle Scholar
  3. Auty, R. M., & Gelb, A. H. (2001). Political Economy of Resource-Abundant States. In R. M. Auty (Ed.), Resource Abundance and Economic Development. Study Prepared for the World Institute for Development Economics Research of the United Nations University (pp. 126–146). New York: Oxford University Press.Google Scholar
  4. Basci, E., Fatih Ekinci, M., & Yulek M. (2004). On Fixed and Variable Fiscal Surplus Rules (IMF Working Paper, WP04/117). Washington, DC: International Monetary Fund. Retrieved from https://www.imf.org/external/pubs/cat/longres.aspx?sk=17489.0
  5. Baunsgaard, T. (2003). Fiscal Policy in Nigeria: Any Role for Rules? (IMF Working Papers, WP/03/155). Washington, DC: International Monetary Fund. Retrieved from https://www.imf.org/external/pubs/cat/longres.aspx?sk=16728.0
  6. Bjerkholt, O. (2002). Fiscal Rule Suggestions for Economies with Non-Renewable Resources. Paper Prepared for the Conference “Rules-Based Fiscal Policy in Emerging Market Economies”, 14–16 February. Oaxaca.Google Scholar
  7. Calderon, C., Loayza, N., & Schmidt-Hebbel, K. (2005). Does Openness Imply Greater Exposure? (World Bank Policy Research Working Paper WP/3733). Washington, DC: World Bank.Google Scholar
  8. Cantor, R., & Packer, F. (1996). Determinants and Impact of Sovereign Credit Ratings. Federal Reserve Bank of New York Economic Policy Review, 2(2), 37–54.Google Scholar
  9. Fasano, U., & Wang, Q. (2002). Testing the Relationship Between Government Spending and Revenue: Evidence from GCC Countries (IMF Working Paper 02/201). Washington, DC: International Monetary Fund.Google Scholar
  10. Gavin, M. (1997). A Decade of Reform in Latin America: Has It Delivered Lower Volatility? (Inter-American Development Bank Working Paper Green Series, No. 349). Washington, DC: Inter-American Development Bank.Google Scholar
  11. Gelb, A., et al. (1988). Oil Windfalls: Blessing or Curse? New York: Oxford University Press for the World Bank.Google Scholar
  12. Hu, Y. T., Kiesel, R., & Perraudin, W. (2001). The Estimation of Transition Matrices for Sovereign Credit Ratings. Journal of Banking and Finance, 26(7), 1353–1406.Google Scholar
  13. Ibironke, A. (2013). How Effective Is the Nigerian Oil-Price-Based Fiscal Rule? (Research Paper). Newcastle: Newcastle University Business School. Retrieved from https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=CSAE2014&paper_id=888
  14. International Monetary Fund (IMF). (2013a). International Financial Statistics. Washington, DC: IMF. Retrieved from http://www.imf.org/en/Data
  15. International Monetary Fund (IMF). (2013b). World Economic Outlook. Washington, DC: IMF. Retrieved from www.imf.org
  16. International Monetary Fund (IMF). (2015, February). Staff Report for the 2014 Article IV Consultation-Debt Sustainability Analysis. Washington, DC: IMF.Google Scholar
  17. Kaminsky, G. L., Reinhart, C. M., & Végh, C. A. (2004). When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies (National Bureau of Economic Research, NBER, Working Paper No. 10780). Washington, DC: NBER. Retrieved from http://www.nber.org/papers/w10780
  18. Nigerian National Assembly. (2007, July 19). Fiscal Responsibility Act, 2007: Act No. 31. Abuja: Nigerian National Assembly.Google Scholar
  19. Obinyeluaku, M. (2008). Fiscal Policy Rules for Managing Oil Revenues in Nigeria. Paper Presented at the CSAE Conference on Economic Development in Africa, 16–18 March. Oxford: St Catherine’s College, Oxford University.Google Scholar
  20. Obinyeluaku, M. (2014). Monitoring Fiscal Sustainability in Africa. In A. B. Elhiraika (Ed.), Regional Integration and Policy Challenges in Africa (pp. 278–301). Basingstoke: Palgrave Macmillan.Google Scholar
  21. Odularu, G. O. (2008). Crude Oil and the Nigerian Economic Performance. Oil and Gas Business Journal, (1). Retrieved from http://ogbus.com/article/crude-oil-and-the-nigerian-economic-performance/
  22. Okonjo-Iweala, N. (2013). Ngozi Okonjo-Iweala Justifies Nigeria’s Budget Oil Price. African Spotlight. Retrieved from www.africanspotlight.com/2012/10/15/ngozi-okonjo-iweala-justifies-nigerias-2013-budgeted-oil-price/
  23. Perotti, R., Strauch, R., & Von Hagen, J. (1998). Sustainability of Public Finances (No. 1781). Centre for Economic Policy Research.Google Scholar
  24. Von Hagen, J., Hughes Hallet, A., & Strauch, R. R. (2002). Budgetary Consolidation in Europe: Quality Economic Conditions and Persistence. Journal of the Japanese and International Economies, 16(14), 512–535.CrossRefGoogle Scholar

Copyright information

© The Author(s) 2018

Authors and Affiliations

  • Moses Obinyeluaku
    • 1
  1. 1.International Trade Administration Commission of South AfricaPretoriaSouth Africa

Personalised recommendations