Front Matter Page
INTERNATIONAL MONETARY FUND
African Department
Lessons for Effective Fiscal Decentralization in Sub-Saharan Africa
Niko Hobdori, Vino Nguyen, Solvotore Dell’Erba, and Edgordo Ruggiero
No. 18/10
Front Matter Page
African Department
Lessons for Effective Fiscal Decentralization in Sub-Saharan Africa
Niko Hobdari, Vina Nguyen, Salvatore Dell’Erba, and Edgardo Ruggiero
INTERNATIONAL MONETARY FUND
Front Matter Page
Copyright ©2018 International Monetary Fund
Cataloging-in-Publication Data
Joint Bank-Fund Library
Names: Hobdari, Niko. | Nguyen, Vina. | Dell’Erba, Salvatore. | Ruggiero, Edgardo. | International Monetary Fund. | International Monetary Fund. African Department.
Title: Lessons for effective fiscal decentralization in Sub-Saharan Africa / Niko Hobdari, Vina Nguyen, Salvatore Dell’Erba, and Edgardo Ruggiero.
Other titles: International Monetary Fund. African Department (Series)
Description: Washington, DC : International Monetary Fund, 2018. | Departmental paper series | At head of title: African Department. | Includes bibliographical references.
Identifiers: ISBN 9781484358269 (paper)
Subjects: LCSH: Sub-Saharan Africa—Economic integration. | Decentralization in government—Sub-Saharan Africa. | Fiscal policy—Sub-Saharan Africa. | Economic development—Sub-Saharan Africa.
Classification: LCC HC800.L475 2018
The Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Publication orders may be placed online, by fax, or through the mail:
International Monetary Fund, Publication Services
P.O. Box 92780, Washington, DC 20090, U.S.A.
Tel. (202) 623–7430 Fax: (202) 623–7201
E-mail: publications@imf.org
Contents
Acknowledgments
Executive Summary
1. Context
2. Pros and Cons of Fiscal Decentralization
3. Design Elements for Effective Fiscal Decentralization
4. Fiscal Decentralization in Sub-Saharan Africa
5. Conclusion
Annex 1. Case Study: Kenya
Annex 2. Case Study: Nigeria
Annex 3. Case Study: South Africa
Annex 4. Case Study: Uganda
References
Figures
1. Subnational Government Spending
2. Subnational Government Spending
3. Own Revenue of Subnational Governments
4. Spending vs. Revenue Decentralization
5. Government Effectiveness Index
Annex Figure 1.1. Kenya: County Expenditure by Economic Classification, 2015/16
Annex Figure 1.2. Kenya: Composition of Spending by Counties, 2015/16
Annex Figure 1.3. Kenya: County Size and Capacity to Collect Own Revenue
Tables
1. Fiscal Decentralization TradeOffs
2. Options to Control Subnational Borrowing
3. Does Decentralization Improve Income Distribution or Increase Growth?
4. Main Aspects of Fiscal Decentralization in the Four Case Studies
Box Table 2.1 Logit Analysis on the Determinants of Decentralization in
Annex Table 1.1. Kenya: Formula for Transfers to Counties
Annex Table 2.1. Nigeria: Federal-State Shares of Oil Proceeds from Distributable Pools
Annex Table 2.2. Nigeria: Formula for Federal Account Allocation to State and Local Government
Acknowledgments
The authors would like to thank Roger Nord, Deputy Director of the African Department, for his guidance and comments. Tanks are also due to Benedict Clements, Lesley Fisher, Benoit Taiclet, and Ha Vu for providing inputs and comments at various stages of drafting the paper.
This paper has also benefited from discussion with country officials from sub-Saharan Africa during the Fourth African Fiscal Forum held in Kampala, Uganda, January 21–22, 2016.
We are grateful to Albert Nyikuli and Fernando Morán for assistance with formatting and document preparation, and to Mary Bruzzese and Houda Berrada for editorial guidance and production support.
Executive Summary
Fiscal decentralization is becoming a pressing issue in a number of countries in sub-Saharan Africa, reflecting demands for a greater local voice in spending decisions and efforts to strengthen social cohesion. Against this backdrop, this paper seeks to distill the lessons for an effective fiscal decentralization reform, focusing on the macroeconomic aspects. The main findings for sub-Saharan African countries that have decentralized, based on an empirical analysis and four case studies (Kenya, Nigeria, South Africa, Uganda), are as follows:
Determinants and effectiveness: Empirical results suggest that (1) the major driving forces behind fiscal decentralization in sub-Saharan Africa include efforts to defuse ethnic conflicts, the initial level of income, and the urbanization rate, whereas strength of democracy is not an important determinant for decentralization; and (2) decentralization in sub-Saharan Africa is associated with higher growth in the presence of stronger institutions.
Spending assignments: The allocation of spending across levels of government in the four case studies is broadly consistent with best practice. However, in Uganda, unlike in the other three case studies, subnational governments have little flexibility to make spending decisions as a result of a deconcentrated rather than a devolved system of government.
Own revenue: The assignment of taxing powers is broadly in line with best practice in the four case studies, with the bulk of subnational revenue coming from property taxes and from fees for local services. However, own revenues are a very small fraction of subnational spending, reflecting weak cadaster systems and a high level of informality in the economy.
Transfers: In some cases (for example, Kenya and Nigeria) most transfers are unconditional, with subnational governments having broad spending autonomy. But in most sub-Saharan African countries transfers are largely earmarked by the central government for the provision of specific services.
Hard budget constraints: The authorities in the four sub-Saharan Africa case studies have generally succeeded in keeping borrowing by subnational governments under control using strict fiscal rules, including ceilings on subnational governments’ debt stock (Kenya, Nigeria, Uganda) or tough sanctions for subnational governments if they ignore good fiscal practices instituted by the central government, complemented by a transparent mechanism for subnational bankruptcies (South Africa).
Speed of transition: The fast speed of fiscal decentralization in Kenya and South Africa has not been commensurate with the capacity of subnational governments to effectively carry out the spending assigned to them. This created problems initially with service delivery at the subnational level, which were addressed gradually over time. This suggests a gradual decentralization through a process that goes hand in hand with strengthening the public finance management systems.