Fiscal and external positions are affected by commodity prices

Developments in global commodity markets heavily influence the development of fiscal balances and current accounts in African countries. But the impact on individual countries is quite different across countries and depends on their natural resource wealth. In oil-exporting countries, both current accounts and fiscal balances generally improved in 2010, driven by higher oil prices and oil revenues. This is a reversal of the development in 2009, when declining oil prices caused a deterioration of both the current account and the fiscal balance. But fiscal and current account positions have generally not yet regained the levels prior to the global crisis. Both are projected to deteriorate slightly in 2011, but to improve again in 2012 (see Figure 1.15). The slight deterioration in 2011 is due to the disruption of oil production in Libya as without this event oil exporters´ fiscal and current account positions would have continued to improve.

In oil-importing countries, current accounts have on average sligtly improved in 2010 but are expected to deteriorate again in 2011 and 2012 (see Figure 1.16). Higher import bills for oil and food are taking their toll, and higher exports generally do not offset these. The external positions of these countries are sometimes also affected by fiscal policies. For example, where an increase in public spending is not accompanied by higher public revenue or by private net savings, both the fiscal and the external positions deteriorate, causing a twin-deficit. But high domestic cost and price pressures or large capital inflows, which lead to an uncompetitive real exchange rate, can also cause external imbalances. Where current account deficits are to a large extent financed through foreign direct investment (FDI) equity inflows, they are sustainable, as this kind of financing does not increase external debt. In contrast, financing deficits by short-term capital inflows increases foreign debt and makes countries vulnerable to swings in market perceptions. Thus, following prudent fiscal policies, sustaining competitive real exchange rates and improving conditions for domestic and foreign investors help to prevent unsustainable external positions.

The continent´s average fiscal deficit amounted to 5.2% of GDP in 2009. It declined to 3.3% in 2010 as revenues recovered, but it is expected to increase again to almost 4% in 2011. This increase is caused by the deterioration of fiscal balances in North Africa in the wake of political upheavals. In 2012 Africa´s average fiscal deficit is projected to decline again to slightly above 3% of GDP. However, fiscal consolidation will be uneven across the continent. While some countries (such as Angola and Republic of Congo) will record high surpluses, other countries (such as Cape Verde, Chad, Egypt, Guinea Lesotho and Swaziland) will continue to run relatively high fiscal deficits. Several countries (such as Burundi, Republic of Congo, Central African Republic, Nigeria and South Africa) have implemented or are planning additional fiscal reforms (notably, improving tax collection). These reforms aim at creating fiscal space for higher spending and/or reducing the dependence on donor support.

Budget projections as described in this report are subject to considerable uncertainty. Disbursements of Official Development Assistance (ODA) may fall short of expectations as donor countries are facing fiscal problems. Furthermore, African governments may introduce food and fuel subsidies to protect households from high import prices. Finally, the large number of national elections on the continent this year brings the risk that in many countries office holders will raise spending to get political support from voters, and such “pork-barrel politics” could undermine fiscal consolidation.