Stratification of Africa requires appropriate policy choices

BY: Seth E. Terkper
 Seth E. Terkper-The writer
Seth E. Terkper-The writer

In November 2010, Ghana rebased its gross domestic product (GDP) and instantly, the economy expanded by about 60 per cent, mainly by applying higher indexes to services and construction.

The increase confirmed Ghana’s lower middle-income country (MIC) status, when its per capita income (i.e., GDP/population) exceeded the World Bank’s MIC criteria of US$1,005 or more.

The International Monetary Fund (IMF), African Development Bank (AfDB), and development partners (DPs) use this income classification to make decisions on tapering or stopping grants and concessional loans to low-income countries (LICs).

In November 2011, Ghana consolidated its MIC-status with exports of about 70,000 bpd of crude oil from its Jubilee Fields and using the gas to produce thermal power.

This later “gas-to-power” strategy involved the construction of offshore pipelines, a processing plant, and other infrastructure.

This ‘self-financing’ facility, under  the new debt management strategy, became controversial for geo-political and economic reasons—given China’s role in Africa and Ghana’s potentially unsustainable post-HIPC (Heavily-Indebted Poor Country) debt profile.

 The country  had to get a waiver for the loan under an IMF Program.

Transition blueprint

From 2012 to 2016, certain factors adversely affected Ghana’s per capita income and growth rates but its MIC status remained.

They include  the 2010 census increasing the population by 30.4 per cent (18.9 to 24.7 million);  Nigerian gas supply  disruption (2012 to 2015); fiscal slippages from subsidies and wages; and the continuing global crisis leading to slowdown in emerging market demand and sharp falls in prices for exports – gold, cocoa, and crude oil.

Ghana and other Sub-Saharan African (SSA) MIC states survived the downturn but a transition plan could help the ensuing economic recovery and assist  in managing future inevitable setbacks.

These MIC and resource-rich (RR) states need to improve and sustain economic performance, in Ghana’s case managing additional crude supplies from the TEN and Sankofa fields from 2017.

The projected growth of 6.5 to 8 per cent for three years  and second rebasing  in September 2018 that led to further 25 per cent growth implies more  tax revenue but less aid and concessional loans.

 The consolidated MIC-status will entrench the country’s exposure to the capital markets.
Ghana and other SSA states such as Kenya, Mozambique, Sierra Leone, Tanzania, and Uganda expect to get more incomes from new natural resource flows.

SSA ‘stratification’

The World Bank’s 2018 Atlas on Gross National Income (GNI) and per-capita income draws attention to Africa’s gradual stratification and need for ‘tailored’ plans to improve performance (www.worldbank.com).

 The groups are low-income economies with per capita income of US$1,005 or less; lower middle-income (LMI) with US$1,005 to $3,955; upper middle-income (UMI) with US$3,956 to US$12,235; and high-income economies above US$12,236.

We add an unofficial upper low-income group (US$600 to US$1,004) and note that Seychelles is the only high-income SSA state.

1. Upper Middle-Income Countries (U-MIC-Africa): Algeria, Botswana, Equatorial Guinea, Gabon, Libya, Mauritius, Namibia and South Africa.

2. Lower Middle-income countries (L-MIC-Africa): Angola, Cape Verde, Cameroon, Congo Republic, Cote d’Ivoire, Djibouti, Egypt, Ghana, Kenya, Lesotho, Mauritania, Morocco, Nigeria, Sudan and Zambia.

3. Upper low-income countries (ULIC-Africa): Ethiopia, Mozambique, Rwanda, Tanzania and Uganda have medium term MIC goals--based on natural resource finds and growth plans.

4. Low-income countries (LIC): The remaining states fall below US$1,005, with focus on poverty alleviation and managing fragilities from shocks (e.g., unstable commodity prices and disaster (e.g., wars, earthquakes and floods) that require rapid intervention.

MIC-Africa must avoid the ‘MIC trap’ that affects many Caribbean, Eastern European, and Latin American states with integrated transition plans  that facilitate appropriate policy choices.

Africa Rising

As Deputy and Minister for Finance from 2009 to 2016, I participated in Africa Rising or Renaissance events on SSA ‘Lions’ with high growth rates of five-to-seven per cent.

It was due to rising BRIC demand and high commodity prices, new natural resource finds, access to emerging market funds, and, some argue, gains from  decades of IMF-led structural reforms.

 The fall in demand and price bubble from 2015 got worse with domestic factors. Ghana’s growth rate fell gradually from a peak of 14 per cent in 2011 to 3.7 per cent in 2016 but  it barely avoided the recession that occurred in some major African states.

Although tamed by the global downturn, about nine SSA ‘Lions’ kept their MIC status, despite the tough financial market conditions that worsened borrowing costs and economic performance.

At the height of the ‘rising’ debate, and  as Minister from 2013 to 2016, I got two letters from the World Bank and Africa Development Bank (AfDB). The polite message seemed synchronised:  with MIC-status comes borrowing on ‘harder’ concessional loan terms.

However, there was no MIC transition blueprint to serve as input for the Home-Grown Policy that was used to negotiate the IMF ECF Program in 2014. As transition, a tailored Policy Support Instrument (PSI)  was rejected though better than a low-income ECF Program.

Policy choices

Some MIC-Africa states  have good basic public financial management (PFM) structures  for a transition plan that stabilizes and improves economic performance.

 A key element is appropriate financing of budget deficits, notably, capital expenditures and domestic and foreign capital market strategies.

Revenue mobilisation: The UN Sustainable Development Goals (SDGs) requires MIC states to increase domestic resources to make up for shortfalls in dwindling aid and concessional loans.

 SSA’s pioneer autonomous revenue authorities (RAs) in MIC states must (a) enhance tax audit and compliance methods; (b) use electronic processing and data-gathering options; and (c) implement rational tax policies.

Budget spending and deficits: The World Bank’s Integrated Financial Management Information Systems (IFMIS) reforms must have;

a) budget responsibility laws to curtail  the latitude that leads to budget overruns;

b) improved treasury and cash-flow methods  for revenues held in central and commercial bank accounts;

c)  semi-accrual accounting processes under IPSAS principles to shift from the narrow definition of ‘arrears’; and

d) public investment or contract databases—to curb unplanned deficits from ‘unfunded’ expenditure mandates that breach budget guidelines and Estimates.

Stabilisation funds:  MIC/RR states to create budget “buffers” from high commodity price windfalls to manage inevitable downturns—such as Ghana’s petroleum-backed Sovereign Wealth Funds (SWFs) and prevent excess flows going into consumption—at the expense of savings, investment, and debt management.

Borrowing and debt management: Setting up specialized Debt Management Offices (DMOs) to;

a) control unplanned borrowing through proper targeting of capital expenditure, as distinguished from liquidity;

b) Refinance short-term debt used in support  capital projects not covered by commercial or concessional borrowing;

c) Separate liquidity budget needs from long-term loans as part of the development of domestic capital markets.

Secondary market tools: invest natural resource flows in market tools such as sinking funds, buy-backs, and soft-amortization to alleviate the risk of debt distress or default from frequent "roll over" interest-only "bullet” loans or bonds.

Self-financing commercial projects: As MIC-Africa loses concessional loans and grants, it must  find alternatives to “sovereign guarantees” that crystalize automatically into pure public debt—through market-friendly options such as self-financing schemes that use commercial projects revenues in dedicated debt service accounts to repay loans; and infrastructure (investment) funds to leverage borrowing from capital markets.
These examples are not exhaustive but highlight an integrated approach to managing budgets to achieve better fiscal outcomes. The solution to the risk of debt distress, must include sustainable debt management strategies and tools used in advanced and emerging states.

They must form part of the SDG’s Finance for Development (FfD) agenda, as linked to sound public sector budget and financial accounting measures.

Further, MIC transition plans must include real sector growth strategies, such as Ghana’s “gas-to-power” plan for improving power supply for industry and services. Despite the agricultural and natural resource view of the country, it is the Services sector that has grown rapidly and constitutes, on average, 49-to-51 percent of GDP.

The main drawback to the absence of MIC transition strategies is a uniform view that appears to ignore the gradual “stratification” of SSA states and need for differentiated economic policies to guide policy-makers.

A focus on potential Lions in the  ensuing global recovery could move the continent in a positive and stable direction.

 Africa needs to take the initiative, to formulate and implement “tailored” plans, with the assistance of multilateral and other development agencies. An example is the AfDB assistance to Ghana in preparing its original Home-Grown Policy in 2014.

Saying that the graduation to MIC status is a meaningless statistic is not enough: it has real fiscal, financing and development impact in countries across different region and, in particular, MIC-Africa must take it seriously.

The writer is a former Finance Minister and founder, Tax Policy Africa, a public finance accounting firm based in Accra
email:This email address is being protected from spambots. You need JavaScript enabled to view it.