1. 1 Fiscal Policies in a Regional Context Sanjeev Gupta Deputy Director Fiscal Affairs Department, IMF Arusha, Tanzania February 27, 2012

2. Outline Overview of regional fiscal developments The EAC and the crisis EAMU convergence – the Issues Unresolved questions Concluding remarks 2

3. EAC Recent Fiscal Developments 3

4. EAC fiscal performance closer to MICs than LICs 4 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 200020022004200620082010 Overall Balance (in percent ofGDP) SSAMICs LICsEAC Map

5. Prudent fiscal policies, along with debt relief has reduced debt ratios in percent of GDP across the region 5 53 103 141 80 51 71 137 63 75 50 23 38 40 23 0 20 40 60 80 100 120 140 160 KenyaRwandaBurundiTanzaniaUganda 2000 2005 2010 SSA 2000 SSA 2010

6. Total revenues, excl. grants, as a percent of GDP increased in EAC countries 6 SSA 2000 SSA 2010 19.1 10.2 16.2 10.0 11.0 21.2 12.5 14.2 11.8 11.7 23.8 13.2 15.0 15.9 12.2 0 5 10 15 20 25 30 KenyaRwandaBurundiTanzaniaUganda 2000 2005 2010

7. Tax Revenue to GDP increased in EAC countries 7 16.1 9.7 15.5 9.1 9.9 17.8 11.3 13.1 10.8 11.4 20.1 12.7 14.1 14.6 11.7 0 5 10 15 20 25 KenyaRwandaBurundiTanzaniaUganda 2000 2005 2010 SSA 2000 SSA 2010

8. Number of countries Total tax revenue Non- resource tax revenue Trade tax revenue Indirect tax revenues Income tax revenue (% GDP) 1980-82 COMESA1416.715.75.83.94.8 EAC510.7 3.14.13.0 SADC1219.919.07.94.15.9 CEMAC617.612.36.72.02.9 WAEMU814.514.16.33.33.6 2003-05 COMESA1419.617.84.26.95.5 EAC514.0 2.07.14.2 SADC1223.521.86.16.97.4 CEMAC621.17.81.83.02.4 WAEMU813.6 3.95.93.2 Source: IMF staff compilation. EAC ‘s total tax revenue increased despite absence of resource revenue 8

9. 9 Number of countries Total tax revenue Trade tax revenue Indirect tax revenue Income tax revenue (% GDP) 2006-10 EAC514.01.57.54.9 Kenya18.81.68.88.4 Rwanda12.11.56.14.5 Burundi13.12.17.13.9 Tanzania13.81.28.54.1 Uganda11.91.27.03.7

10. But performance is uneven across countries 10 Source: IMF staff compilation. Change in tax revenue, 2000-10 (percentage points)

11. Total spending increased facilitated by higher revenues and grants 11 SSA 2000 SSA 2010 20.6 19.4 20.4 15.3 22.0 24.3 23.4 26.2 21.7 20.2 29.7 26.4 42.3 27.5 19.7 0 5 10 15 20 25 30 35 40 45 KenyaRwandaBurundiTanzaniaUganda 2000 2005 2010

12. Education as a percent of GDP increased… 12 SSA 2008

13. …so did healthcare 13 SSA 2008

14. EAC The Global Crisis 14

15. Africa experienced a significant external growth shock The recent financial crisis led to a decline in growth globally in 2009… …which also impacted EAC but less than MICs in SSA 15 Real GDP growth (%, y-o-y, weighted average) -2 0 2 4 6 8 10 20002002200420062008 Sub-Sahara AfricaWorldEmerging and developing -2 0 2 4 6 8 20002002200420062008 Sub-Sahara AfricaEACMICsLICs

16. Within the EAC, good policies and debt relief strengthened fiscal buffers and increased fiscal space 16

17. This allowed EAC countries to adopt countercyclical fiscal policies in 2009 Real spending increased in EAC by more than in other country groups 17 Real growth rate of expenditure (%, 2009, weighted average) EACLICsMICs

18. The expenditure composition shifted in favor of capital spending in all country groups 18 EACLICsMICs Expenditure composition (share of GDP, weighted average) 24.5 26.8 30.3 31.5 9.710.712.514.2 25.8 27.6 31.1 33.8

19. The fiscal policy response was strongest in countries with larger pre-crisis fiscal buffers 19

20. EAMU Convergence The issues 20

21. EAMU Fiscal Convergence Criteria Deficit objective TimelineObjective Stage 12007-10Overall deficit (excluding grants) less that 6 percent of GDP Overall deficit (including grants) less than 3 percent of GDP Stage 22011-14Overall deficit (excluding grants) less that 5 percent of GDP Overall deficit (including grants) less than 2 percent of GDP Stage 32015Introduction of a single EAC currency OngoingSustained pursuit of debt sustainability 21

22. Deficit convergence – still some way to go to meet stage one criteria 22 Overall Deficit, excluding grants, 2010, percent of GDP 6%

23. Deficit convergence – still some way to go to meet stage one criteria 23 Overall Deficit, including grants, 2010, percent of GDP 3%

24. EAC fiscal deficit criterion What is the best option for EAMU – a target with or without grants? The difference between the two is 3 percentage points of GDP The targets could limit external grants to 3 percent of GDP; external grants in EAC ranged between (1 percent in Kenya and 24 percent in Burundi in 2010) If grants are larger than 3 percent, a country would need to save them or lower the revenue effort—both outcomes could be problematicproblematic But deficit including grants is critical for gauging the broad fiscal stance, financing needs and debt sustainability Therefore, deficit target excluding grants should be monitored as part of surveillance but should not be part of EAMU convergence criteria 24

25. The volatility of grants: an example 25

26. The volatility of grants: an example 26 Back

27. Other fiscal indicators For countries where the importance of resource revenues is growing, deficit excluding natural resource income would need to be monitored for fiscal management As noted earlier, there is no explicit ceiling on public debt; A limit of 50 percent of GDP would seem prudent—it could be refined as part of the debt sustainability frameworkframework 27

28. Gross versus net debt Fiscal sustainability commonly assessed by reference to gross debt as it captures all liabilities, except those from equity, financial derivatives etc Net debt adjusts for financial assets held by governments (e.g., acquired from natural resource revenues) Changes in gross and net debt have differed during the economic crisiscrisis

29. Gross vs. net debt Sources: IMF staff estimates and projections. Note: Weighted averages by GDP at purchasing power parity. Change In General Government Debt (Percent of GDP)

30. Conventional numerical debt benchmarks 30 Back

31. Potential growth rate matters. Slower growth even under prudent fiscal policies can push the debt ratio up 31

32. Other things equal, strong growth potential reduces the debt-to-GDP ratio 32

33. Coverage and reporting of fiscal accounts In EAC, 3 of 5 (Burundi, Kenya and Tanzania) only report central government and 1 general government (Uganda) 2 of 5 members (Rwanda and Uganda) report on a quarterly basis, not adequate for fiscal surveillance (others monthly) Stock/flow discrepancies between deficit and debt are large (above 5 percent of GDP), except Kenya Important to prevent the use of accounting stratagems which typically increase reported revenue or decrease reported spending in the short term, but decrease revenue and increase spending over the long term (PPPs, treating privatization receipts as revenues, securitization or sale of future revenues) 33

34. Supporting institutional reform Harmonization in customs Strengthen legal and regulatory framework in public financial management 34

35. Customs framework in place… Adopted a single Customs Act Adopted a Common External Tariff (CET) Adopted same rules of origin Developed Non-Tariff Barrier (NTB) mechanisms in each partner state Harmonized standards and agreed on mutual recognition of certificates Customs reforms and modernization initiatives in partner states underway (development of One Stop Border Posts (OSBPs) at a number of border posts: – Kagitumba (Rwanda-Uganda): circa Jul 2011, (2 yrs to completion) – Rusumo (Rwanda-Tanzania): circa Aug 2011 (just started) – Nemba (Rwanda-Burundi): circa Dec 2011 (just started)

36. Still much to do… Harmonize laws related to trade/taxes – Public/private dialogue (Nov 2011) on Harmonization of Domestic Taxes in the EAC Harmonize customs and non-customs procedures Consolidate trade facilitation measures Operationalize dispute resolution mechanisms Develop mechanisms for transparent accounting of customs union revenue Develop mechanisms to share information

37. Public financial management Changes will be required to PFM systems and procedures – Setting up mechanisms for establishing and monitoring fiscal rules linked to monetary union – Ensuring that budgets are systematically planned and adopted within a credible medium-term framework – Aligning government cash management and banking arrangements with the regional Central Bank – Aligning accounting, auditing and reporting systems and procedures to satisfy the surveillance regime 37

38. Next steps in public financial management A reassessment of each country’s legal and regulatory framework with the view of – adopting an integrated approach, providing a common set of rules and responsibilities for all aspects of PFM across all levels of government – Introducing in law the new concepts of fiscal principles and transparency – better aligning planning and budgeting procedures and cycles; and – adopting international standards for accounting, reporting, and auditing Kenya and Uganda well advanced with new drafts of PFM laws The technical workshop immediately following this conference will examine in detail the fiscal and PFM convergence issues 38

39. Unresolved issues Fiscal risk sharing mechanism Overlapping membership of regional economic organizations 39

40. 40 Risk sharing mechanisms

41. Overlapping arrangements 41 South Sudan Namibia Eritrea Madagascar Mozambique Zambia Zimbabwe Malawi Mauritius Seychelles Democratic Republic of Congo Angola Swaziland Lesotho South Africa Botswana Tanzania Rwanda Burundi Uganda Kenya Sudan Comoros Ethiopia Djibouti Libya Egypt SADC SACU EAC COMESA

42. Primary and secondary convergence criteria in COMESA: Stage 1 (2005-2010) 42

43. Primary and secondary convergence criteria in COMESA: Stage 2 (2011-2015) 43

44. Primary and secondary convergence criteria in COMESA: Stage 3 (2016-2018) 44

45. Conclusion Strong past fiscal performance laid the basis for a robust response to the global crisis EAMU – still much to be done: – Further fiscal convergence needed – Review of deficit excluding grants and debt ceiling criteria – Strengthening of supporting fiscal institutions is essential – Unresolved issues (fiscal risks sharing mechanism and overlapping multilateral arrangements) 45

46. Thank you! 46

47. Deficit target including grants could potentially create disincentive for revenue mobilization 47

48. Deficit target including grants could potentially lead to large cuts in spending when grants decline 48

49. Deficit target including grants could potentially create disincentive for revenue mobilization 49

50. Country groupings used in the presentation 50 Oil exporters (7) MICs (11) LICs (26) Back MICs Botswana Cape Verde Ghana Lesotho Mauritius Namibia Senegal Seychelles South Africa Swaziland Zambia

51. PIMI: EAC countries

52. PIMI Sub-indices: SSA Countries

53. Detailed Scores in 4 Stages