NEW research from McKinsey & Company shows that improvements in revenue collection and public-spending efficiencies have the potential to deliver annual impact of between ( $85 billion and $125 billion) a year for Africa’s governance. And the good news is that the mechanisms to achieve this are already proven.
“African governments have more scope than is often assumed to mobilise domestic resources for their own development and improve efficiencies in public spending,” said Acha Leke, a senior partner in McKinsey’s Johannesburg office and co-author of the report.
The solutions to Africa’s public finance challenges already exist, he said. “If scaled up across the continent, such solutions could eliminate Africa’s entire budget deficit – or unlock sufficient funding to close the $100 billion infrastructure-spending gap – within a few years.”
But urgent action is needed, he said. Many African governments are currently battling serious fiscal challenges including declining revenues and rising deficits that are threatening to stall development gains made by the continent in recent years.
African countries collected $443 billion in government-revenue in 2018, representing 19 percent of the continent’s GDP – down from 23 per cent in 2016. By contrast, the ratio of public revenues to GDP in most non-African emerging economies stands at between 25 and 35 percent. In some developed economies the ratio is between 35 and 55 percent.
McKinsey’s analysis shows that compared with countries around the world, Africa’s overall low ratio of public revenues to GDP makes it a global outlier and that the continent is not “monetising” its economy as much as it could.
“Africa right now faces a perfect storm of a slowdown in growth, depressed commodity prices, stagnant tax revenues and rising public debt,” said Yaw Agyenim-Boateng, co-author of the report and a partner in McKinsey’s Lagos office. “Without appropriate action, many governments will face mounting fiscal pressure and find their ability to invest severely constrained.”
“A balanced focus on aggressive revenue growth and on cost control, with sustained pressure to maximise impact on both sides of the equation, will yield best results,” said Agyenim-Boateng. “With sufficient commitment to transformation, governments can create new headroom to pursue spending priorities without threatening fiscal sustainability.”
He added that several African countries have already delivered significant efficiencies by applying these levers. The authors highlight that strong leadership, political will and disciplined execution will be crucial factors in success. “The lessons learnt from successful public-finance transformations in Africa show that solutions are widely known, but that implementation can be difficult,” said Leke.