Reforms could unlock African development, reports McKinsey

Public finance reforms in Africa could mobilise as much as $100bn a year for the continent’s development, according to a report by management consultancy firm McKinsey & Co. 

Reforms in revenue collection and public spending could eliminate Africa’s entire budget deficit or unlock sufficient funding to close the $100bn infrastructure-spending gap within three years. Infrastructure spending doubled to around $80bn a year in the past decade, while multiple reforms have improved African countries’ ease-of-doing-business ratings.

Africa’s combined GDP has tripled since the turn of the century. Investments in health systems have delivered significant gains, including a 50% reduction in infant mortality rates since 1990 and the average time African children spend in school has nearly doubled since 1990, contributing to raising the continent’s youth literacy rate to 70%.

But the question of whether this progress will continue in many ways boils down to finance, McKinsey argues. Real annual GDP growth in Africa slowed from an average of 5.2% in 2000-2010 to an average of 3.3% in 2010-2015. The recovery from that slowdown is still underway.

Programmes such as tax code improvements and reforming tax administration could increase government revenues by $45-65bn or 2-3% of GDP in three years, without increasing tax rates or trade tariffs. Africa’s cumulative public debt increased from 40% of GDP in 2013 to 58% to GDP in 2018, a historic high. However, Africa’s cumulative debt as a percentage of GDP is still low when compared to advanced economies, such as France, where public debt is 99% of GDP.

Combined budget deficits across Africa have doubled since 2010, exceeding $100bn in 2018, almost 5% of GDP. Africa’s debt-servicing was 22% of public expenditure on average in 2017, higher than that of Brazil, India and Vietnam, despite having less total debt as a percentage of GDP.

African government revenues declined from 23% in 2010 to 19% of the continent’s GDP in 2018, partially due to the fall in oil prices in 2013-2014, as oil sales represent a large proportion of African government revenues. In contrast, government revenue in most advanced economies is between 35-55%, suggesting that African governments were not “monetising” their economies as much as possible.

“Africa right now faces a perfect storm of a slowdown in growth, depressed commodity prices, stagnant tax revenues and rising public debt,” said report co-author Yaw Agyenim-Boateng.

Public investment reforms also could also allow African governments to decrease public debt without increasing tax rates. The simplification of capital expenditure practices, reforms in procurement procedures, and the removal of non-existent workers from the state payroll could free up $40-60bn, or 8-12% of total public expenditure in Africa.

One example of this is the Nigerian federal government implementing the Integrated Payroll and Personnel Information System in 2016. This system eliminated 80,000 non-existent officers from the Nigeria Police Force, considerably reducing waste of public finances caused by corruption.

Transparency International found in 2012 that approximately 7% of Africa’s GDP was lost through corruption, and this significantly reduced public spending across the continent.