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1. Introduction

Author(s):
Tetsuya Konuki, and Mauricio Villafuerte
Published Date:
August 2016
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The cyclical behavior of fiscal policy affects sub-Saharan African countries because many of them depend on commodity exports or have been gaining access to international capital markets in recent years, and those markets tend to be highly volatile. If sub-Saharan African countries were to follow highly procyclical fiscal policy patterns—spending too much in good times and then forced to cut back at other times—they would amplify booms and exacerbate busts in line with global commodity prices and capital flows. By contrast, lower procyclicality of fiscal policies could boost medium-term growth prospects (IMF 2015b).

Existing studies find that while advanced economies have tended to pursue countercyclical or acyclical fiscal policy, the majority of emerging market economies have pursued procyclical fiscal policies, thus exacerbating the underlying business cycle. For instance, Gavin and Perotti (1997); Villafuerte, Lopez-Murphy, and Ossowski (2010); and Frankel (2011) point out that procyclical fiscal policy has especially plagued Latin American commodity exporters. Meanwhile, Kaminsky, Reinhart, and Vegh (2004) find that periods of capital inflows are associated with expansionary macroeconomic policies, and periods of capital outflows with contractionary macroeconomic policies in emerging markets. Going further, Frankel, Vegh, and Vuletin (2013) provide a systematic empirical analysis on the difference in cyclical behavior of fiscal policy among countries. They find that the quality of institutions is a key determinant of a country’s ability to reduce the procyclicality of fiscal policy; even after controlling for the endogeneity and other likely determinants of fiscal procyclicality, there is a causal link running from stronger institutions to less procyclical fiscal policy. However, the majority of sub-Saharan African countries are not included in the sample of existing studies.

This paper contributes to the literature on the cyclical behavior of fiscal policy by focusing on a specific but large set of countries that has not been systematically examined before. While it is likely that sub-Saharan African countries in general have run procyclical fiscal policy in line with the findings of existing studies, this paper seeks further validation of the procyclical bias in particular for resource-rich countries and the role of institutional quality.1 In this context, it attempts to answer three sets of questions:

  • How expansionary or contractionary was fiscal policy in sub-Saharan African countries in recent years, and to what extent was the policy of these countries procyclical or countercyclical?
  • What factors explain the different degrees of fiscal procyclicality among sub-Saharan African countries?
  • What policy lessons can be applied to sub-Saharan African countries to run less procyclical fiscal policy?

To address the first question, this paper follows Villafuerte, Lopez-Murphy, and Ossowski (2010) in using an approach to measure the degree of fiscal procyclicality that is simpler and more reliable than other approaches used in many existing studies. This paper finds that, while sub-Saharan African countries have run procyclical fiscal policies in general, oil exporters’ policies tended to be more procyclical than those of other countries. To tackle the second question, regressions were conducted similar to those presented by Frankel, Vegh, and Vuletin (2013). They find that financial depth and international reserves buffers appear to play a significant role in reducing the fiscal policy procyclicality among sub-Saharan African countries, even after controlling for endogeneity and other explanatory variables. Designing and implementing fiscal rules and institutions with the goal of saving revenue windfalls during booms so that they are available in bad times would facilitate progress in deepening financial markets and build up reserves buffers in sub-Saharan African countries. This would go a long way to alleviate the curse of procyclical fiscal policy. While some resource-rich sub-Saharan African countries recently adopted fiscal rules or resource funds—referred to as special fiscal institutions (SFIs) in the literature—in an attempt to limit the procyclical bias in spending, existing studies point out that SFIs can help achieve such policy objectives only if they are supported by strong institutions (such as enhanced transparency and accountability) and political commitment. To address the third question, the paper summarizes the experience of three countries in establishing fiscal frameworks aimed at saving for rainy days: Botswana, Chile, and Nigeria.

The rest of the paper is organized as follows. Chapter 2 explains the methodology for measuring the degree of fiscal policy procyclicality in this paper. Chapter 3 examines to what extent the fiscal policy has been procyclical in recent years among sub-Saharan African countries, splitting the sample countries into oil- and mineral-exporting ones and others, and sample periods into commodity upturns and downturns. Chapter 4 runs regressions to analyze the factors behind the degree of fiscal policy cyclicality among sub-Saharan African countries, controlling for various explanatory factors and addressing endogeneity concerns. It discusses policy implications of the empirical findings. Chapter 5 reviews the country case studies mentioned above. Chapter 6 presents concluding remarks.

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