Fiscal Policy and Development: Spending Priority in Niger1
Author:
International Monetary Fund. African Dept.
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Publication Date:
11 Mar 2015
eISBN:
9781498323789
Language:
English
Keywords:
ISCR; CR; Niger; food; reducing income inequality; investment; food crisis; banking financing; Brazil economy; A. economic growth; GDP ratio; Public investment spending; Natural resources; Agricultural commodities; Food security; West Africa; Sub-Saharan Africa; Global; North Africa; Africa; spending priority; spending inefficiency; revenue mobilization effort; expenditure share; windfall revenue; Education spending; Capital spending
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The discovery of new oil reserve will create significant fiscal revenues for Niger, but high pro-cyclicality of fiscal policy raises a concern on the efficiency of public spending on the medium-term development. High basic fiscal deficit calls for a fiscal adjustment to be in compliance with West African Economic Monetary Union (WAEMU) convergence criterion, but it requires the establishment of new fiscal framework to better manage natural resource revenues. This note provides a cross-country comparison of the level of public spending and highlights critical efficiency gap of Niger compared with other WAEMU countries due to the low quality of public spending. It shows that continued expansion of public spending, financed by larger resource revenues, will have only limited impact on growth unless the efficiency of spending can be improved. Finally, it proposes an improvement in institutional capacity is necessary for Niger to catch-up with income level in other WAEMU countries.

Abstract

The discovery of new oil reserve will create significant fiscal revenues for Niger, but high pro-cyclicality of fiscal policy raises a concern on the efficiency of public spending on the medium-term development. High basic fiscal deficit calls for a fiscal adjustment to be in compliance with West African Economic Monetary Union (WAEMU) convergence criterion, but it requires the establishment of new fiscal framework to better manage natural resource revenues. This note provides a cross-country comparison of the level of public spending and highlights critical efficiency gap of Niger compared with other WAEMU countries due to the low quality of public spending. It shows that continued expansion of public spending, financed by larger resource revenues, will have only limited impact on growth unless the efficiency of spending can be improved. Finally, it proposes an improvement in institutional capacity is necessary for Niger to catch-up with income level in other WAEMU countries.

The discovery of new oil reserve will create significant fiscal revenues for Niger, but high pro-cyclicality of fiscal policy raises a concern on the efficiency of public spending on the medium-term development. High basic fiscal deficit calls for a fiscal adjustment to be in compliance with West African Economic Monetary Union (WAEMU) convergence criterion, but it requires the establishment of new fiscal framework to better manage natural resource revenues. This note provides a cross-country comparison of the level of public spending and highlights critical efficiency gap of Niger compared with other WAEMU countries due to the low quality of public spending. It shows that continued expansion of public spending, financed by larger resource revenues, will have only limited impact on growth unless the efficiency of spending can be improved. Finally, it proposes an improvement in institutional capacity is necessary for Niger to catch-up with income level in other WAEMU countries.

A. Recent Fiscal Situation

1. Niger’s development projects in resource sector and basic infrastructure are expected to be the main drivers of growth and poverty reduction. However, there are a number of uncertainties in the timing of these projects and the petroleum sector, including the potential of oil reserves and the evolution of commodity prices. The historical fiscal data suggest that public expenditure has recently become more expansionary as the economy exhibited stronger growth (in the period of positive output gap) with increasing resource-related windfall revenues. The positive correlation of public spending with output gap (i.e., pro-cyclicality of fiscal policy), much higher than other WAEMU countries in similar per capita income level, created larger macroeconomic volatility and discretionary government spending, reducing the efficiency of public spending (Figure 1 and 2).2

Figure 1.
Figure 1.

Niger: Correlation of Resource Revenue, Expenditure, and Output Gap

Citation: IMF Staff Country Reports 2015, 064; 10.5089/9781498323789.002.A003

Source: IMF staff calculations.
Figure 2.
Figure 2.

Niger: Cross-Country Comparison of Pro-Cyclicality of Fiscal Policy in WAEMU1+ Countries (2008-14)

Citation: IMF Staff Country Reports 2015, 064; 10.5089/9781498323789.002.A003

Source: IMF staff calculations.1 The WAEMU+ countries contain 8 WARMU member countries and two natural resource rich countries (Nigeria and Chad).

2. The main fiscal challenge therefore is how to use these increased revenues. The pro-cyclicality of fiscal policy has become particularly large since 2008 (the correlation coefficient is about 0.7). As Niger is expected to be oil exporter after 2017, it is particularly important to ensure an efficient, transparent, and sustainable use of the resource revenues to finance poverty reduction programs, while striking the right balance between spending now and conserving some assets for the future. This note assesses the priority of fiscal policies to meet the short-term and medium-term development needs.

B. Level and Efficiency of Spending—Cross-Country Comparison

3. An increase in windfall revenues has contributed to higher level of public spending, which resulted in Niger’s high capital intensity compared with peer countries. The level of public investment stood at 17.2 percent of GDP which is much higher than the WAEMU’s average level of 10.2 percent of GDP in 2014. In recent years, Niger has also recorded progress in increasing both education and health spending, comparable to the average level of other WAEMU countries. As the increase in public spending exceeded revenue mobilization efforts, the WAEMU’s fiscal convergence criterion (zero basic fiscal balance targets) has not been respected in recent years. By looking at the composition of budget allocated to each type of spending, it appears clear that larger fiscal windfall revenues have been absorbed by general public services and spending related to economic affairs (including agriculture, transport, and infrastructure), while social spending has also been gradually expanded (Figure 3).

Figure 3.
Figure 3.

Niger: Composition of Spending in Initial Budget Law

Citation: IMF Staff Country Reports 2015, 064; 10.5089/9781498323789.002.A003

Sources: Nigerien authorities; and IMF staff calculations.

4. Despite progress in increasing education and health spending, Niger fares the worst in social performance especially in education sector and still faces large spending needs to do with worsened security environment and to fill in infrastructure gap. In education, net enrollment rates in primary and secondary educations are 62.8 percent and 12.2 percent respectively, far below the level of other WAEMU countries. The level of education attainment is also the lowest in the region (Figure 4). While the quality of basic education service is poor, the school-age population is expected to keep rising over the next 20 years due to high fertility rate. By improving the efficiency in delivering education services, Niger is expected to have large gains in education outcome without increasing the level of spending (Grigoli, 2014).

Figure 4.
Figure 4.

Niger: Selected Social Indicators (Education)

Citation: IMF Staff Country Reports 2015, 064; 10.5089/9781498323789.002.A003

Sources: World Development Indicators (World Bank); and Barro and Lee Education Attainment database.

5. As for capital spending, a recent World Bank country report indicated that infrastructure spending has made only marginal contributions to the annual per capita GDP growth in Niger, which is among the lowest in West Africa (Dominguez-Torres and Foster, 2011). The poor condition of Niger’s infrastructure, in particular the bad quality of the road network, is a critical bottleneck to growth in Niger. A noticeable lack of infrastructure exists outside Niamey and financing needs to fill in infrastructure gap is large. In addition, as observed in other low income countries, high unit cost of capital spending, and delays in budget execution have been impeding access to basic infrastructure (road, electricity, and information and communication technology).

6. Although public spending has been significantly increased, it is found to accompany significant spending inefficiency which leads to large gap in productivity and smaller growth impact of human capital compared with other African countries. Growth accounting analysis (following production function approach used by Hall and Jones (1999)) highlights that output per worker in Niger is far below the level of frontier African countries (such as Cameroon, Ghana, and Kenya) as well as other WAEMU countries due to much lower contributions of productivity and human capital (Table 1).3 The level of education and capital spending is one of the highest among West Africa countries, while its income level locates far behind the GDP frontier level (Figure 5, left chart). An increase in the level of social spending (in education and health) as well as public investment contributed little to development in case of Niger due to the spending inefficiency. However, as demonstrated in other WAEMU countries, it should generate much higher growth impact should public spending are more efficiently managed and could lead to higher social and economic outcomes (Figure 5, right chart).

Figure 5.
Figure 5.

Niger: Growth Impacts of the Level of Expenditure and Educational Attainment

Citation: IMF Staff Country Reports 2015, 064; 10.5089/9781498323789.002.A003

Sources: World Development Indicators; Public Spending on Health and Education Database (IMF); and IMF staff calculations.(Note) In the left chart, X-axis measures ratios of education and capital spending in one country to spending values of frontier country (which spends the most in education and capital expenditure). In the right chart, X-axis measures ratios of net enrollment rate (in primary and secondary levels) in one country to the enrollment rate of frontier country (with highest net enrollment rate). In both charts, Y-axis measures ratios of real GDP per capita in one country to values of Ghana (with highest real GDP per capita).
Table 1.

Niger: Decomposition of Output per Worker

article image
Sources: Penn World Table; and IMF staff calculations. (Note) Output per worker (in the first column) is the product of three contributing factors (capital-output ratio, education attainment, and productivity). Contributions are measured as ratios to the Ghana values using the most recent data available in the Penn World Table.

C. Development Needs and Strategy

7. Niger faces both short-term and long-term challenges which mainly relate to demographic and geographic constraints: (i) increasing share of school-age population (from 48 percent to 51 percent in next 20 years); and (ii) geographical proximity to conflict-affected fragile countries. In the short-term, the elevated Islamic terrorism threat and food insecurity have had negative effects on growth by interrupting uranium and agricultural productions and foreign investment. In the long-term, large social and economic gains are expected if the resources are allocated to improve the coverage of education service to increasing number of school-age population and promotes their human capital accumulation.

8. Given the emerging needs for spending, closely linking budget planning and execution with development plans would be useful in the planning of long-term and short-term development strategies. In this regard, Niger needs to stabilize credit allocation and authorization to prioritized spending. As Table 2 demonstrates, the inefficiency of spending partly comes from the uncertainty of budget allocation and execution. Actual budget executions in social sector have been much lower for delays in credit release and commitment to implement investment projects, especially for capital spending, which creates large uncertainties in establishing medium-term social development strategy. Along this strategy, Niger needs to strengthen public financial management and strategic budget planning for allocating consistent amount of resources to prioritized sectors in the medium-term expenditure framework. Finally, as the level of social spending has already reached the regional average level, it is critical to improve the efficiency of social spending by closely monitoring social outcomes based on specific indicators and by improving service delivery in education to maximize educational attainment.

Table 2.

Niger: Budget Allocation and Execution of Social Spending

(Percent of GDP)

article image

The sample includes Benin, Burkina Faso, Mali, Niger, Nigeria, Senegal, Chad, and Togo. The most recent available data is used to compute the regional average of social spending level. The data is from IMF’s Public Spending on Health and Education Database.

Sources: Nigerien authorities; and IMF staff calculations.

9. The medium-term fiscal strategy should also focus on improving the composition of public expenditure by shifting resources to social sector; this would have positive repercussions for growth and poverty reduction in Niger. In terms of the composition of public spending, the expenditure share of subsidy and transfers is currently 5.5 percent of GDP, which is the largest among other current expenditure items. Subsidy and transfers to public schools is also a large expenditure component for education spending (see Table 2). In the past, the government succeeded in creating room for education spending in the 2012 budget (19 percent increase in expenditure compared with the 2011 budget) by the temporary elimination of subsidy on fuel products.4 While international import fuel prices still remains at high level, domestic retail prices of main fuel products (gasoline, diesel, kerosene, and LPG) were kept lower than other WAEMU countries as the retail price of crude oil from CNPC to SORAZ remains fixed and below international prices to make fuel products affordable to population. The fuel subsidy has regressive distributional impact on the economy, while it also diverts fiscal resources away from priority public expenditures, which is detrimental for achieving growth and poverty reduction objectives. In this regard, the authorities are encouraged to create fiscal space by reducing subsidies for oil and energy sector and to reallocate the saving to meet urgent spending needs such as food security and security spending.

D. Policy Recommendations

10. The above analysis identified three fiscal policies as key reform agendas in the short- and the medium-term:

  • 1) Adoption of resource neutral fiscal rule: As Niger is expected to receive more revenues by producing crude oil, uranium, and other commodities (gold and coal), the adoption of non-resource primary balance needs to be considered as alternative fiscal policy benchmark, together with traditional fiscal policy anchor (basic fiscal balance) used in the WAEMU currency union, to avoid pro-cyclicality of expenditure and to ensure smoother budget allocation for productive public spending.5

  • 2) Mobilization of larger natural resource revenues: Important strides are recorded in fiscal reforms under the Extended Credit Facility-supported program; a further revenue mobilization effort would be welcome. The share of natural resource revenue is only 22 percent of total revenues in 2012. Raising this contribution has been essential to finance development needs and to create fiscal space to absorb future shocks.

  • 3) Expenditure rationalization: Fiscal adjustments that rely primarily on cuts in transfers and the wage bill tend to last longer and can be expansionary, while those that rely primarily on tax increases and cuts in public investment tend to be contractionary and unsustainable (Gupta, Clements et al, 2005). As the price-gap between domestic and international fuel prices has been recently gradually narrowing, the current government is encouraged to engage in the subsidy reform process again by reconsidering the pricing formula and by reducing tax exemptions on fuel products, accompanied by complementary safe-net provisions, for the transition to a new automatic fuel adjustment mechanism as recommended by the IMF’s technical assistance mission in 2010. The reduction of fuel subsidies can create fiscal space for more prioritized social and capital expenditure as was temporarily achieved in the 2012 budget.

References

  • Dominguez-Torres, Carolina and Foster, Vivien, 2011 “Niger’s Infrastructure: A Continental Perspective”, Africa Infrastructure Country Diagnostic (AICD).

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  • Grigoli, Francesco, 2014 “A Hybrid Approach to estimating the Efficiency of Public Spending on Education in Emerging and Developing Economies”, IMF Working Paper WP/14/19.

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  • Gupta, Sanjeev; Clements, Benedict; Baldacci, Emanuele; and Mulas-Granados Carlos, 2005 “Fiscal Policy, Expenditure Composition, and Growth in Low-income Countries” Journal of International Money and Finance. vol. 24, pp. 441–463.

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  • Hall, Robert and Jones, Charles, 1999 “Why Do Some Countries Produce So Much More Output Per Worker Than Others?”, The Quarterly Journal of Economics, vol. 114, no. 1, pp. 83–116.

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  • International Monetary Fund, 2012 “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries”.

  • Shastry, Gauri Kartini and Weil, David 2003 “How Much of Cross-Country Income Variation is Explained by Health?”, Journal of the European Economic Association, vol. 1, pp. 387–396.

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1

This note is prepared by Manabu Nose (FAD).

2

Output gap is computed as the percentage GDP gap between actual GDP and potential GDP. Potential GDP is computed by applying the Hodrick-Prescott (HP) filter to annual series of nominal GDP for each country with the smoothing parameter of 100.

3

The decomposition analysis assumes a Cobb-Douglas aggregate production function which takes the stock of physical capital and human capital-augmented labor (unit of labor with different level of years of schooling) as inputs for production. Following Mankiw, Romer, and Weil (1992), Klenow and Rodriguez (1997), and Hall and Jones (1999), it decomposes differences in output per worker across countries into differences in capital-output ratio, educational attainment and productivity.

4

The initial reforms to gradually phase out fuel subsidies were implemented in late 2010-early 2011 by a transitional government, but the reform has lost momentum because it believed it had less legitimacy to embark on such a sensitive reform process.

5

In this regard, IMF’s fiscal affairs department provided a technical assistance which provides guidance on new fiscal frameworks (spending and saving options) and action plans to better manage natural resource revenues. For details on the new fiscal framework and policy recommendations, see IMF (2012).

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Cover IMF Staff Country Reports
Niger: Selected Issues
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2015: Issue 064
Publisher:
International Monetary Fund
ISBN:
9781498323789
ISSN:
1934-7685
Pages:
72
DOI:
https://doi.org/10.5089/9781498323789.002
  • <sup><xref rid="RA03fig01" ref-type="fig">Figure 1</xref></sup>.
    View in gallery
    Figure 1.

    Niger: Correlation of Resource Revenue, Expenditure, and Output Gap

  • <sup><xref rid="RA03fig02" ref-type="fig">Figure 2</xref></sup>.
    View in gallery
    Figure 2.

    Niger: Cross-Country Comparison of Pro-Cyclicality of Fiscal Policy in WAEMU1+ Countries (2008-14)

  • <sup><xref rid="RA03fig03" ref-type="fig">Figure 3</xref></sup>.
    View in gallery
    Figure 3.

    Niger: Composition of Spending in Initial Budget Law

  • <sup><xref rid="RA03fig04" ref-type="fig">Figure 4</xref></sup>.
    View in gallery
    Figure 4.

    Niger: Selected Social Indicators (Education)

  • <sup><xref rid="RA03fig05" ref-type="fig">Figure 5</xref></sup>.
    View in gallery
    Figure 5.

    Niger: Growth Impacts of the Level of Expenditure and Educational Attainment

Figure 1.

Niger: Correlation of Resource Revenue, Expenditure, and Output Gap
Figure 2.

Niger: Cross-Country Comparison of Pro-Cyclicality of Fiscal Policy in WAEMU1+ Countries (2008-14)
Figure 3.

Niger: Composition of Spending in Initial Budget Law
Figure 4.

Niger: Selected Social Indicators (Education)
Figure 5.

Niger: Growth Impacts of the Level of Expenditure and Educational Attainment