1.32 Fiscal Balance in Sub-Saharan Africa

unfavorable terms of trade as the rand price of exports of goods and services declined while import prices increased, supported by the surge in oil prices. South Africa is estimated to have registered a surplus of 3.7 percent of GDP in 2021 thanks to favorable terms of trade, and it is expected to narrow in 2022 (0.4 percent). The current account balance is expected to record a deficit of 1.5 percent of GDP in 2024. South Africa’s long history of weak competitiveness— attributed to labor and product market rigidities—constitutes a challenge over the medium term. Bold reforms are needed to boost export volumes and gain even more from favorable commodity prices while generating more and better jobs in the formal and informal sectors (annex A). Incoming data for Botswana show a current account deficit of 2.1 percent of GDP in 2021, brought down mainly by a marked decrease in diamond exports in 2021Q4, from small surpluses in the first three quarters. The economy could revert to its trade surplus pattern with favorable terms of trade associated with commodity prices. However, as rising oil prices place noticeable pressure on the import bill and China’s demand for diamonds softens, the current account balance could be under pressure in 2022. In Mauritius, travel bans on Southern African countries are expected to have slowed the recovery in services receipts in 2022Q1. Services receipts gained momentum following the full reopening of borders in October 2021. The current account deficit is expected to widen in Senegal to 10.8 percent of GDP in 2022 from 10.2 percent in 2021. However, this deficit is projected to narrow in 2024 to 5.8 percent of GDP from the oil price dynamics, which will also raise foreign exchange reserves and support the currency.

Fiscal Deficit

The median fiscal deficit is expected to remain unabated at -5.5 percent of GDP in 2021 and narrow to -4.9 percent of GDP in 2022 (figure 1.32). Deficits are set to decline more in metal and mineral exporters (-4.6 percent of GDP) given the gains from the terms of trade compared with non-resource-rich countries (-5.3 percent of GDP) in 2022. The fiscal account in oil-rich countries is projected to recover from a deficit in 2021 to a small surplus in 2022. The RussiaUkraine war is expected to exert more pressure on government spending in 1 non-resource-rich countries, especially those with fuel subsidies. However, given their elevated debt, SubSaharan African countries do not have enough fiscal space to provide the support needed to vulnerable households and firms without jeopardizing debt sustainability. Assistance from multilateral donors will still be required

FIGURE 1.32: Fiscal Balance in Sub-Saharan Africa (% of GDP)

3 2 0 Percent of GDP -3 -2 -1 -4 -5 -6 -7

2016 2017 2018 2019 2020e 2021e 2022f 2023f 2024f Sub-Saharan Africa, median Oil exporting countries in SSA Mineral and metal exporters in SSA Non-resource-rich countries in SSA Source: World Bank staff projections. Note: e = estimate; f = forecast; GDP = gross domestic product; SSA = Sub-Saharan Africa. The elevated price of oil will generate fiscal surplus in oilrich countries, while the fiscal deficit will decline steadily elsewhere.

for most countries in the region. Countries in or at risk of debt distress should seek to engage with creditors to reach a debt restructuring before they fail to meet their contractual obligations (World Bank 2022a).

In South Africa, the commitment to fiscal consolidation in the 2021/22 budget reflects the primary goal of the government to keep debt on a sustainable path. The deficit target for the fiscal year 2021/22 was set at 5.5 percent of GDP, down from 6.6 percent of GDP previously. The forecast to turn the current deficit into a surplus of 0.6 percent of GDP was shortened by one year to 2023/24. Yet, there is mounting pressure weighing on the government to keep providing fiscal support to vulnerable people, especially those who have been strongly affected by the different waves of COVID-19 and the social unrest in July 2021. In addition, with the election approaching within the ruling party, the government might find it difficult to resist the demand from trade unions for an upward revision of the wage bill. Rising unemployment (35.3 percent) is an additional obstacle to revenue mobilization.

Persistent fuel subsidies, increasing military spending for security purposes, and rising debt servicing costs weigh heavily on public finance to keep public debt at a sustainable level in Nigeria. The fiscal balance deteriorated considerably in several Sub-Saharan African countries as governments scaled up spending to mitigate the prolonged effects of the pandemic on firms and vulnerable households. In Cabo Verde, for example, the government provided emergency support to struggling SOEs, with Cabo Verde Airlines accounting for almost half of it. To return to its pre-pandemic consolidation trajectory, the Government of Ghana proposed reforms that promote fiscal and debt sustainability. After resistance from the opposition, the Parliament approved the E-levy tax of 1.5 percent on digital transactions. The proposed tax is expected to increase the tax base by generating US$1.1 billion in revenue in 2022. Nevertheless, these efforts are not enough to address the country’s debt sustainability problems. Revenue from the mining sector remains weak, while pressing needs for government support continue to weigh on public finance. However, there are prospects of increasing revenue from favorable prices of gold and oil. In Mauritius and the Seychelles, the governments deployed extensive state support programs in response to the COVID-19 pandemic to expedite the pace of reopening the borders to tourists.

Debt Levels and Debt Vulnerabilities

The austerity measures implemented by governments in the region to address rising concerns about debt sustainability coupled with fear of losing access to market have been insufficient to bring debt to the pre-crisis level. The median debt-to-GDP ratio remained elevated, with little change at 61 percent in 2021. Following the pandemic shock, public debt climbed to 60 percent of GDP in 2020, from 57 percent of GDP the previous year, as governments deployed fiscal support to vulnerable firms and households to shield them from the negative effects of the pandemic. Public debt was already climbing during the years prior to the pandemic (figure 1.33).

Debt dynamics in the region are somewhat tied to commodity price fluctuations and various debt relief initiatives. Debt started rising in 2011 at the peak of the commodity price supercycle when pressure mounted on revenue from the retreat in commodity prices. Before 2011, Sub-Saharan African countries managed to bring public debt down to 31 percent of GDP, from as high as 90 percent in 2000. The upward trend in debt resumed after bottoming in 2011 and