More evidence that the IMF is going Keynesian on Africa, at least on paper

June 5, 2009

     By Duncan Green     

The IMF shows some encouraging signs of turning policy promises into practice in its new Staff Position Note on how governments in Africa should respond to the crisis. It still wins no prizes for sparkling prose, alas:

Overview: ‘Countries will need to weigh their options for fiscal policy responses. Countries with output gaps and sustainable debt and financing options have scope to implement expansionary policies, by letting automatic stabilizers work, accommodating declines in commodity-related revenues, and in some cases implementing discretionary fiscal stimulus. The main focus of fiscal stimulus should be on the expenditure side, particularly infrastructure and social spending given pressing needs, as reducing tax rates may be inequitable and the scope for doing so is limited given low revenue ratios. Other countries will have to adjust, in a way that will not affect critical spending. Additional donor support would reduce the need for adjustment. In all cases, countries should give priority to expanding social safety nets as needed to cushion the impact of the crisis on the poor.’

The Fund sees government revenue falling across the region as taxes, remittances, tourism and foreign investment all slump, commodity revenues fall in oil and mineral exporters, capital markets dry up and aid flows are threatened. At the same time spending pressures will increase as governments boost safety nets, come under pressure to support commodity producers and bail out domestic banks that get into difficulties. One unusual and worrying addition – the spate of private-public partnerships in recent years ‘may trigger calls on revenue guarantees’, since the PPPs include guarantees to private companies as part of their contracts.

The net result of increased spending and falling revenue is a huge shift from surpluses to fiscal deficits of 7.5% of GDP in oil exporters, and from -2.25% to –6% in non oil exporters.

The paper is particularly interesting on social protection (social safety nets):  ‘ In all cases, priority should be given to expanding targeted social safety net programs as needed. Protecting or increasing social programs helps cushion the impact of the crisis on the poor and buttresses domestic demand, given the high propensity of the poor to consume. Such support should be generally channeled by scaling up existing programs because the capacity of SSA countries to set up new programs is limited in the short run. Some countries have implemented public works programs for providing income support to the poor while building labor-intensive infrastructure projects. Setting the wage rate relatively low ensures that such schemes are self-targeted to the poor. Channeling additional resources to targeted food distribution or school meal programs can be an effective method of addressing potential losses in human capital during the crisis.

• More than a dozen SSA countries are either piloting or considering cash transfer programs. For example, the use of community institutions for implementing cash transfers is being piloted in Nigeria, Sierra Leone, Tanzania, and Uganda.

• Some SSA countries have begun to implement conditional cash transfer programs that link cash transfers or subsidies to the receipt of health care and/or education to protect human capital. These include Burkina Faso, Kenya, and Nigeria. The coverage of these programs is very limited.’

As the reference to keeping wages low in public works programmes shows, the IMF’s general dislike of wage rises lives on. While urging public spending increases, it warns ‘Some forms of spending increases would best be avoided. These include universal subsidies, which are not well targeted and benefit the rich more than the poor. Public wage increases would be poorly targeted and are difficult to reverse.’

Still, Dani Rodrik seems convinced. What we now need is to monitor what this translates into on the ground – does the Fund in practice go round telling governments that though spending more is preferable in theory, the circumstances don’t allow it in this particular country, or do they promote counter-cyclical spending with the kind of vigour shown in the rich countries?