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Op-Ed

How African Governments Should Respond to the Impact of the U.S. Sequester

Brandon Routman and Julius Agbor

Based on the 2011 Budget Control Act, and due to the failure of the “supercommittee” to agree upon discretionary budget cuts in 2012, across-the-board cuts to all discretionary spending accounts in the U.S. federal budget (now known as the sequester) went into effect in March of this year. At the G-20 finance ministers and central bank governors meeting held in Moscow last February, Christine Lagarde, the managing director of the International Monetary Fund (IMF) insinuated that the sequester might not be the optimal path to medium-term fiscal consolidation in the U.S., and its impact could be wide-ranging on the global economy. The sequester would potentially affect African economies directly through reduced foreign aid and indirectly through lower export receipts, remittances and foreign investment should there be an accompanying significant slow down in the U.S. economy.

According to Secretary of State John Kerry, the effects of the sequester will be fairly dramatic. For instance, they will initiate some $1.7 billion worth of cuts in foreign assistance, which will negatively affect Africa in a number of key ways.

According to the State Department’s estimations, foreign aid to the health sector may be cut by about $400 million. The highly successful President’s Emergency Plan for AIDS Relief (PEPFAR) will loose some $280 million, which will mean that more than a quarter million fewer patients will receive HIV/AIDS medication. Other cuts in the sector will translate into 2.5 million women being denied family planning service, 3 million fewer treatments for malaria and 60,000 fewer treatments of tuberculosis. If these cuts only affected health outcomes, they would be tragic enough; however, they are compounded by budgetary slashes in other areas. There will be cuts of approximately $200 million in humanitarian assistance, cuts in international peacekeeping operations by almost $20 million and significant cuts to agricultural programs like Feed the Future. The Millennium Challenge Corporation (MCC)—another tremendously successful program and one which incentivizes good governance on a national scale throughout Africa—will also likely sustain a hit. As a consequence, cuts to this program could set back the agenda of governance reforms on the continent.

It also should be noted that the funding cuts induced by the sequester are really only a small part of the story; the larger part is the dwindling levels of funding for international assistance in the current cash-strapped climate.

It should be noted that the above figures are estimates from the State Department and the House Appropriations Committee. While we know for sure that the sequestration cuts will be in effect through 2013, the specifics of how and where these shortfalls occur will be ironed out via a budgetary process over the next few months. It also should be noted that the funding cuts induced by the sequester are really only a small part of the story; the larger part is the dwindling levels of funding for international assistance in the current cash-strapped climate. It should be noted that since 2010, there has been a systematic reduction of about 20 percent in U.S. international aid funding, which is occuring despite the fact that it is less than 1 percent of the total federal budget. Furthermore, in an era where most donors are dealing with fiscal problems of their own, finding alternative funding might be difficult. Thus, continuity of some of those programs that are jointly financed with African governments will critically depend on a greater budgetary participation by African governments themselves.

In formulating policy responses to these economic shocks, it is critical that Africa’s governments preserve the sound macroeconomic framework that has undergirded its remarkable economic growth during the last two decades. The optimal policy response of African governments to the sequester will depend on whether the sequester is percieved as temporary or permanent (the fate of these cuts is uncertain in 2014 and beyond) and on country-specific percularities. The country-specific percularities refer to the exchange regime in place (fixed or flexible) and to the availability of policy space – fiscal, monetary and external buffers. Fiscal buffers refer to the ability of governments to run larger fiscal deficits without creating unfavorable debt dynamics and undue pressures in domestic financial markets, while monetary buffers refer to the ability to ease monetary policy in support of economic activity without triggering significant inflation and exchange rate pressures. External buffers simply refers to the availability of a pile of foreign exchange reserves that can be run down in times of need. Generally, countries with flexible exchange regimes have a greater advantage over fixed exchange regime countries (notably, the African Financial Community, franc zone, member countries) in maneuvering support for affected programs as monetary and exchange rate policies can be fine tuned to support fiscal policy.

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If the sequester is perceived as temporary, the optimal response would be to scale up budgetary support for similar, African-groomed programs. Countries with enough buffers could temporarily decrease their stock of foreign exchange reserves and run large fiscal deficits supported, where available, by an expansionary monetary policy stance. For countries with limited buffers, budgetary support could come from borrowing from domestic financial markets (where available) or from the International Monetary Fund and other multilateral funding agencies.

The efforts to mitigate the impact of the sequester on African economies should also be complimented by the continents’ bilateral as well as multilateral development partners.

However, if the sequester is percieved as permanent a different set of policy responses, contingent on each countries’ percularities, can be envisaged: 

  • For countries with limited fiscal buffers (that is, those facing both high budget deficits and high debt-to-GDP ratios), the optimal response depends on the depth of countries’ domestic financial markets as well as on the extent of the pressure imposed by financial markets. Where fiscal buffers are limited, domestic financial markets are well developed but governments are under intense pressure from financial markets. For instance, in South Africa, the optimal response will be to allow a full blown impact of the sequester, which would entail a sharp increase in the price of anti-retroviral drugs in a country where 10 percent of the population is currently living with HIV/AIDS. It should be noted that under the Global Health Initiative, in fiscal year 2012, $469 million was allocated towards South Africa’s fight against HIV/AIDS, which currently tops the list of beneficiary nations. There are other African countries where limited fiscal buffers exist, domestic financial markets are developed, but the government is not under intense pressure from financial markets. For instance, in Botswana, the optimal response might be to borrow from domestic financial markets to partially offset the full blown impact of the sequester. Some sub-Saharan African countries have limited fiscal buffers, thin domestic financial markets, but do have some credibility in international markets, including Kenya, Ghana, Zambia, Angola and Mozambique. These countries could attempt to raise funds internationally through sovereign and diaspora bonds.

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  • Some natural resource-exporting countries in sub-Saharan Africa have accumulated savings in the form of a sovereign wealth fund or in foreign currency denominated assets (for instance, the franc zone countries). They could draw down on those resources to finance the additional cost of maintaining the affected programs.

The efforts to mitigate the impact of the sequester on African economies should also be complimented by the continents’ bilateral as well as multilateral development partners. On its part, the Obama administration and the black congressional caucus should strive to minimize the cuts on some of the highly successful programs like PEPFAR and MCC, and if African governments demonstrate greater commitment to good governance, economic freedom and citizen empowerment, they will be more motivated to do so. The responsibility for ensuring that African citizens continue to receive critical services delivered through U.S. foreign assistance ultimately rests with African governments themselves, notably, their willingness to step up budgetary support to similar African-groomed programs.

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