Figure of the week: Opportunities for public finance in Africa

In October, McKinsey & Company published Unlocking Africa’s $100 billion public-finance opportunity, which analyzes Africa’s current challenges to raising tax revenues and limiting public debt, as well as opportunities to reform tax systems and improve spending efficiency. The report states that, while Africa faces serious challenges from slowing growth, low commodity prices, stagnant tax revenues, and rising public debt, there remains significant scope to mobilize domestic resources and improve budgetary savings in order to reduce the impact of these challenges.

As Figure 1 shows, the average fiscal deficit—the difference between government revenue and public expenditure—in Africa has increased significantly since 2010-2012, reaching a high of 7.2 percent in 2016 and remaining high at 4.8 percent in 2018. In 2018, Africa’s public spending was $555 billion but government revenues were only $443 billion, resulting in a deficit of $112 billion. The report states that Africa’s 2018 government revenue-to-GDP ratio was only 19 percent, while most non-African emerging countries raise revenues totaling between 25-35 percent of GDP. Furthermore, governments have been pressured to increase public spending, particularly for debt servicing and to pay public-sector salaries.

Figure 1: Africa’s fiscal deficit

^{Source: Yaw Agyenim-Boateng, Acha Leke, Francisco Mendes, and Aurelien Vincent. 2019. “Unlocking Africa’s $100 billion public-finance opportunity.” McKinsey & Company.}

Figure 2, however, shows that there are significant opportunities to reduce fiscal deficits through both improved revenue collection and optimized public spending. The report states that these opportunities have the potential to improve Africa’s fiscal situation by between $85 billion and $125 billion per year–$45 billion to $65 billion from improved revenue collection, and $40 billion to $60 billion from more efficient public spending.

Figure 2: Annual public revenue increase and expense savings potential (2017, billions of USD)

^{Note: Calculated before accounting for annual GDP growth. Resource rents are excluded from tax analysis.}Source: Yaw Agyenim-Boateng, Acha Leke, Francisco Mendes, and Aurelien Vincent. 2019. “Unlocking Africa’s $100 billion public-finance opportunity.” McKinsey & Company.

In the area of revenue collection, the report notes that tax collection levels vary widely across African countries, from a 25 percent tax-to-GDP ratio in South Africa to a ratio of only 11 percent in Ghana and Ethiopia, and even less in oil-exporting countries such as Nigeria. This variance suggests that there is significant opportunity to increase revenues in many African countries. The report finds that the largest gains would come from eliminating tax non-compliance, increasing taxpayer registration, and strengthening the administration of tax systems. For public spending, the report finds large opportunities to improve efficiency by improving systems of transfers and subsidies, harmonizing procurement processes, reducing workforce costs by making government payrolls more transparent, and enhancing the planning and prioritization of capital expenditure. Overall, the report argues that reducing fiscal deficits will require strong political will; targeted, country-specific approaches; and coordination across multiple ministries, agencies, and departments within a country.

For more on this issue, see Brahima Coulibaly and Dhruv Gandhi’s report 2018 policy brief, Mobilization of tax revenues in Africa: State of play and policy options, as well the recent T20 brief, Fiscal and Debt Sustainability in Africa.