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3. To What Extent Has the Fiscal Policy Been Procyclical among Sub-Saharan African Countries?

Author(s):
Tetsuya Konuki, and Mauricio Villafuerte
Published Date:
August 2016
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The Business Cycle in Sub-Saharan Africa

First, this chapter illustrates the stylized facts of the business cycle dynamics among sub-Saharan African countries in recent years. While average economic growth rates increased over 2000–14 relative to past periods, four different subperiods can be identified on the basis of growth dynamics (Figure 1): 2000–04; 2005–08, with an acceleration in growth; 2009, with a sharp fall in growth rates following the global financial crisis; and 2010–14, with a recovery in economic growth rates even if not to the levels of 2005–08. These dynamics are more or less replicated in all country groups.

Figure 1.GDP Growth Rates by Country Groups, 2000–14

As shown in Figure 2, the upturn and downturn patterns from Figure 1 are replicated when looking at output gaps derived from the use of the H-P filter. Output gaps were on average positive for the periods 2005–08 and 2010–14 and on average negative during 2000–04 and 2009. Again, such a dynamic is replicated along all country groupings. Oil-exporting countries experienced more extreme trends, in terms of both average gaps and their relative dispersion, compared with mineral exporters and other countries whose output gaps centered near zero throughout the period.

Figure 2.Output Gaps by Country Groups, 2000–14

Note: The boxes represent the interquartile range between the 25th and the 75th percentiles. The horizontal lines represent the median. The vertical lines extend to the minimum and maximum values. The number of countries in each group is in parentheses.

The Fiscal Policy Stance

Before undertaking an analysis of the procyclicality (or not) of fiscal policy in sub-Saharan Africa over the period 2000–14, Table 1 provides a summary snapshot of the fiscal impulse across country groups and subperiods. To that effect, the fiscal impulse by period is computed by adding up the annual changes in the fiscal stance indicator (the cyclically adjusted [nonresource] primary balance in this case) over each subperiod. The data suggest the following:

  • Most of the oil-exporting countries in sub-Saharan Africa ran an expansionary fiscal policy between 2005 and 2008, once the recovery in oil prices of the early 2000s solidified.

  • All mineral-exporting countries had an expansionary fiscal stance immediately after the global financial crisis (2009).

  • There is no evidence of a clear bias or pattern across other country groups in any of the subperiods.

Table 1.Expansionary Fiscal Stance by Period and Country Group(Percent of total countries)
2000-042005-0820092010-14
Oil-exporting countries20835050
Mineral-exporting countries334010060
Other countries50506540
SSA countries45566946
Source: Authors' calculations.
Source: Authors' calculations.

While the focus of this paper’s analysis is on the overall fiscal stance, it is worth noting the important role played by public investment as a driver of the fiscal stance in sub-Saharan Africa, particularly for oil-exporting countries. Table 2 summarizes the median contribution of changes in public investment to the changes in the fiscal stance indicator. It shows that public investment in oil-exporting countries had a large and increasing role in determining the fiscal stance in those countries (and eventually its degree of procyclicality). By contrast, the dynamics of public investment had a relatively limited contribution to the fiscal stance in nonresource-rich countries in sub-Saharan Africa.

Table 2.Median Contribution of Public Investment to the Fiscal Stance(Percent of total changes in fiscal stance)
2000-042005-082010-14
Oil-exporting countries16.258.166.7
Mineral-exporting countries37.097.946.5
Other SSA countries43.241.60.5
Source: Authors' calculations.
Source: Authors' calculations.

Fiscal Policy Procyclicality

An assessment of the link between the fiscal policy stance and the economic cycle in sub-Saharan Africa based on the two methodologies described above finds some evidence of procyclicality. Two sets of panel ordinary least squares (OLS) regressions are run for each subperiod:

  • With cyclically adjusted (nonresource) primary balance in percent of (nonresource) GDP used as a dependent variable and (nonresource) output gap and constant as independent variables

  • With (nonresource) primary balance in percent of (nonresource) GDP used as a dependent variable and (nonresource) real GDP growth and constant as independent variables8

The estimated value of the coefficient on output gap (growth) represents the degree of fiscal procyclicality9: the lower (higher) this coefficient, the more (less) procyclical the fiscal policy is over the business cycle. A negative coefficient means that the fiscal stance is loosened/tightened during economic upturns/downturns (procyclical policy), while a positive coefficient means that the fiscal stance is tightened/loosened during economic upturns/downturns (countercyclical policy) (see, for example, IMF 2015b). Approach (a) above follows the methodology suggested by Villafuerte, Lopez-Murphy, and Ossowski (2010) while approach (b) follows the methodology used in IMF (2015b). Tables 3a and 3b report the results of the panel regressions (a) and (b), respectively. The coefficient on (nonresource) output gap is negative (except for the subperiod of 2005–08) but not statistically significant (Table 3a) in any period. In contrast, the coefficient on (nonresource) real GDP growth is significantly negative during the whole sample period and all of the subsample periods (Table 3b). The estimated negative value of the coefficient increases over time. This suggests that all sub-Saharan African countries ran procyclical fiscal policies during 2000–14 and that the degree of procyclicality increased over time, particularly after the global financial crisis.

Table 3a.Sensitivity of Cyclically Adjusted (Nonresource) Primary Balance to (Nonresource) Output Gap
2000-142000-042005-082010-14
Output Gap−0.16−0.661.81−2.9
(1.01)(0.41)(1.88)(2.77)
Constant−19.62***−11.22***−18.34***−27.18***
(2.84)(1.45)(4.47)(6.89)
Observations604191160212
R-squared0.0010.0130.0060.005
*** p < 0.01, ** p < 0.05, * p < 0.1Source: Authors' estimations.
*** p < 0.01, ** p < 0.05, * p < 0.1Source: Authors' estimations.
Table 3b.Sensitivity of (Nonresource) Primary Balance to (Nonresource) Growth
2000-142000-042005-082010-14
Real GDP Growth−2.03***−0.84***−2.17***−3.84**
(0.56)(0.15)(0.8)(1.64)
Constant−9.33**−6.15***−4.48−8.10
(4.16)(1.23)(6.74)(10.61)
Observations604191160212
R-squared0.0220.1610.0420.025
*** p < 0.01, ** p < 0.05, * p < 0.1Source: Authors' estimations.
*** p < 0.01, ** p < 0.05, * p < 0.1Source: Authors' estimations.

To see whether there is a significant difference in the degree of procyclicality among resource-rich countries and others, interaction terms are included between output gap and dummies for oil- and mineral-exporting countries (Table 4a), and interaction terms between real GDP growth and dummies for oil- and mineral-exporting countries (Table 4b), respectively, as independent variables. In Table 4a, coefficients are not significant, except for the significantly (at the 1 percent level) negative value for the interaction term for oil exporters for the subperiod of 2010–14. In Table 4b, the interaction term for oil exporters is significantly negative in all periods and the estimated negative value of the coefficient increases over time. This may reflect some oil exporters’ expansionary fiscal stance during the oil price upturn after the global crisis and their fiscal tightening in response to the oil price decline that started in 2014 (see Chapter 5). Meanwhile, significantly positive coefficients on real GDP growth in the full sample period and during the subperiod of 2005–08 would indicate that the other sub-Saharan African countries ran countercyclical fiscal policies, particularly during the upturn before the global crisis. These results indicate that a procyclicality bias was particularly strong among oil exporters, especially after the global crisis.

Table 4a.Sensitivity of Cyclically Adjusted (Nonresource) Primary Balance to (Nonresource) Output Gap with Interaction Terms(Standard errors in parentheses)
2000-142000-042005-082010-14
Output Gap−0.16−0.200.320.10
(1.27)(0.51)(3.20)(2.87)
Output Gap * Oil Exporters Dummy−1.45−1.442.55−38.10***
(2.26)(0.92)(4.13)(10.15)
Output Gap * Mineral Exporters Dummy−0.13−0.800.46−0.31
(6.06)(3.00)(9.18)(15.10)
Constant−20.18***−11.31***−18.82***−27.24***
(2.97)(1.52)(4.81)(6.79)
Observations604191160212
R-squared0.0010.0260.0080.068
*** p < 0.01, ** p < 0.05, * p < 0.1Source: Authors' estimations.
*** p < 0.01, ** p < 0.05, * p < 0.1Source: Authors' estimations.
Table 4b.Sensitivity of (Nonresource) Primary Balance to (Nonresource) Growth with Interaction Terms(Standard errors in parentheses)
2000-142000-042005-082010-14
Real GDP Growth1.44*−0.082.67*0.35
(0.76)(0.21)(1.38)(1.60)
Real GDP Growth * Oil Exporters Dummy−5.86***−1.24***−5.63***−17.70***
(0.86)(0.25)(1.30)(2.30)
Real GDP Growth * Mineral Exporters Dummy−0.18−0.44−0.62−0.52
(1.58)(0.65)(2.31)(2.81)
Constant−19.04***−7.69***−24.08***−9.77
(4.34)(1.24)(7.94)(9.49)
Observations566153160212
R-squared0.1000.2810.1490.249
*** p < 0.01, ** p < 0.05, * p < 0.1Source: Authors' estimations.
*** p < 0.01, ** p < 0.05, * p < 0.1Source: Authors' estimations.

A less formal assessment based on mapping the linkages across the two dimensions would reinforce the evidence in terms of a predominance of a procyclical fiscal policy bias for oil-exporting countries. Figure 3 showed the change in the non-oil output gap and the fiscal impulse in each oil-exporting country during the periods of 2005–08, 2009, and 2010–14, and the associated regression lines. Table 5 summarizes the results for oil exporters, while Table 6 summarizes those for mineral-exporting countries.10

Figure 3a.Oil Exporters: Fiscal Impulses and Nonresource Output Gaps, 2005–08

Source: Authors' estimations.

Figure 3b.Oil Exporters: Fiscal Impulses and Nonresource Output Gaps, 2009

Source: Authors' estimations.

Figure 3c.Oil Exporters: Fiscal Impulses and Nonresource Output Gaps, 2010–14

Source: Authors' estimations.

Note: NROG stands for non-resource output gap.

Table 5.Cyclicality of Fiscal Policy for Oil Exporters in Sub-Saharan Africa
Oil Exporters2000–20042005–200820092010–2014
ProcyclicalAngola

Cameroon

Gabon

Nigeria

Equatorial Guinea
Angola

Congo, Republic of

Gabon
Angola

Cameroon

Congo, Republic of

Nigeria
Cameroon

Congo, Republic of

Gabon

Nigeria

Equatorial Guinea
CountercyclicalCongo, Republic ofCameroon

Chad

Nigeria

Equatorial Guinea
Chad

Gabon

Equatorial Guinea
Angola

Chad
Source: Authors' estimations.
Source: Authors' estimations.
Table 6.Cyclicality of Fiscal Policy for Mineral Exporters in Sub-Saharan Africa
Mineral Exporters2000–20042005–200820092010–2014
ProcyclicalBotswana

Mali
MaliZambia

Niger

Mali
CountercyclicalCongo, Democratic Republic ofCongo, Democratic Republic of

Guinea

Botswana
Mali

Guinea

Congo, Democratic

Republic of Botswana

Niger
Burkina Faso

Batswana
Source: Authors' estimations.
Source: Authors' estimations.

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