Stratification of Africa: …Requires appropriate policy choices

In November 2010, Ghana rebased its Gross Domestic Product (GDP) and, instantly, the economy expanded by about 60 percent, mainly by applying higher indexes to the services and construction sectors.

The increase also confirmed Ghana’s Lower Middle-Income Country (MIC) status, based on its per capita income (i.e., GDP/population) ratio exceeding the World Bank’s MIC criteria of US$ 1005 or more.

Institutions such as the International Monetary Fund (IMF), the African Development Bank (AfDB), and donors or development partners (DPs) use this World Bank income classification to make decisions, notably on the tapering or cessation of 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 harnessing the associated gas to produce thermal power. This later “gas-to-power” strategy involved the construction of offshore pipelines, a processing plant, and other infrastructure under a US$1 billion China Development Bank (CDB) loan.

This “self-financing” facility, under Ghana’s 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 also got a special waiver for the loan under an IMF Program.

Time for MIC-Transition Blueprint

From 2012 to 2016, certain factors adversely affected Ghana’s per capita income and GDP growth rates but did not reverse its MIC status. They include a 2010 census that increased the population by 30.4 percent (18.9 to 24.7 million); disruption in gas supply from Nigeria (2012 to 2015); fiscal slippages from mainly subsidies and wages; and continuing global crisis, notably a slowdown in emerging market demand and sharp fall in prices for Ghana’s three primary commodity exports, namely, 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 them to manage future inevitable setbacks.

The MIC and resource-rich (RR) states need the plan to improve and sustain economic performance, in Ghana’s case, including the additional crude oil supplies from the Tweneboa, Enyira and Tomme (TEN) and SANKOFA fields from 2017. The projected growth  rate of about 6.5 – to – 8 percent from petroleum for 3 years – as well as a second recent rebasing at end-September 2018 that expanded the economy by a further 25 percent — implies more domestic resources but less aid and concessional loans, as a consolidated MIC-status entrenches the country’s exposure to the capital markets.

Africa seems ready for transition plans, as Ghana and other SSA states such as Kenya, Mozambique, Sierra Leone, Tanzania, and Uganda expect to get more incomes from new natural resource flows.

An SSA “Stratification” is underway

The World Bank’s per-capita income grouping, based on Gross National Income (GNI), draws attention to Africa’s gradual stratification and the need for “tailored” plans and solutions that improve its performance. The Bank’s 2018 Atlas (www.worldbank.com) defines low-income economies as having per capita income of $1,005 or less; lower middle-income (LMI) of $1005 to $3,955; Upper Middle-Income (UMI) with $3,956 to $12,235; and high-income economies above $12,236. We add an unofficial Upper Low-income group (e.g., $600 to $1004) and note that Seychelles is the only high-income SSA state.

  1. Upper Middle-Income Countries (U-MIC-Africa): The U-MICs include Algeria, Botswana, Equatorial Guinea, Gabon, Libya, Mauritius, Namibia and South Africa.
  2. Lower Middle-income countries (L-MIC-Africa): These include 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): Countries such as Ethiopia, Mozambique, Rwanda, Tanzania and Uganda have medium-to-long term MIC-status goals–based on natural resource finds and growth plans–that require transition plans, drawn in collaboration with peer states and development agencies.
  4. Low-income countries (LIC): The per capita income of the remaining states, including ULIC states, falls below US$1,005. Their state plans focus on poverty alleviation and managing fragilities that often arise from shocks such as unstable commodity prices and disaster from wars, earthquakes and floods.
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These problems also challenge most MIC states that require rapid interventions to prevent economic and social deterioration. Further, MIC-Africa states must avoid the “MIC trap” that affects many Caribbean, Eastern European, and Latin American states. An integrated transition plan could prepare them to make appropriate policy choices and weather setbacks effectively.

Africa Rising – A Renaissance devoid of Blueprint

As Deputy and Minister for Finance from 2009 to 2016, I took part in many Africa Rising or Renaissance events on some SSA “Lions” with high growth rates of 5-to-7 percent. This was due to rising BRIC demand and high commodity prices; new natural resource finds; access to emerging market funds; and, as some argued, gains from many years of IMF-led structural adjustment programs. Ghana’s growth rate peaked at 14 percent in 2012 because of fast growth in the services and construction sectors, crude oil exports, and rebasing of the GDP.

The fall in BRIC demand and global commodity price bubble from 2015 was worsened by domestic factors discussed earlier. Ghana’s growth rate fell gradually from a peak of 14 percent in 2011 to 3.7 percent in 2016 and the country barely avoided the recession that occurred in some major African states. Though tamed by the global downturn, about nine (9) SSA “Lions” kept their MIC status, despite the tough financial market conditions that increased borrowing costs and worsen economic performance.

At the peak of the “rising” debate, and shortly after becoming Minister in 2013, I got two (2) letters from the country directors of the World Bank and Africa Development Bank (AfDB). The polite message seemed synchronized: having attained MIC-status, Ghana must now borrow 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. For many, a tailored Policy Support Instrument (PSI) would have addressed Ghana’s transition needs better than an ECF Program designed for low-income economies.

Conclusion: Some PFM Policy Choices

The MIC- or RR-Africa states include some with good basic public financial management (PFM) institutions, systems, processes, and laws. We highlight some PFM reforms that must form part of national and technical assistance (TA) programs to improve economic performance. A key element is appropriate financing of budget deficits, notably, capital expenditures through rational domestic and foreign capital market strategies.

Revenue mobilization: The UN Sustainable Development Goals (SDGs) a frame work for MIC states to increase domestic resources to make up for shortfalls in dwindling aid and concessional loans. To stabilize and increase tax flows, SSA’s pioneer autonomous revenue authorities (RAs) in MIC states must;

  1. a) Enhance tax audit and compliance methods;
  2. b) Use electronic processing and data-gathering options; and
  3. c) Implement rational tax policies.

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

  1. a) Budget responsibility laws to curtail discretion and latitude that leads to budget overruns;
  2. b) Improved treasury and cash-flow methods on effective utilization of government revenues held in central and commercial bank accounts;
  3. c) Semi-accrual accounting options, involving a shift to IPSAS principles, from narrow definition of “arrears” (often in IMF Programs); and
  4. d) Public investment and contract databases—to curb unplanned deficits arising from “unfunded” expenditure mandates that breach budget guidelines and Estimates approved by Parliament in Appropriation laws.
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Stabilization funds: Every prospect for global economic recovery requires MIC/RR states to create budget “buffers” from high commodity price windfalls to better manage inevitable downturns. As with the structure of Ghana’s petroleum-backed Sovereign Wealth Fund (SWF), this will prevent excessive flows into consumption—at the expense of savings, investment, and debt management.

Borrowing and debt management: Setting up specialized Debt Management Offices (DMOs) to ensure that MIC-Africa;

  1. a) Controls unplanned borrowing through proper targeting of capital expenditure, in particular, as distinguished from liquidity requirements;
  2. b) Refinances short-term debt used in support of long-gestation projects in the capital budget, not covered by commercial or concessional borrowing;
  3. c) Separates short-term liquidity budget needs from long-term loans for capital expenditures as part of the development of domestic capital markets.

Secondary market tools: for countries that are endowed and are in capital markets, invest natural resource flows and windfalls in market tools such as sinking funds, buy-backs, and soft-amortization plans to alleviate the risk of debt distress or default from frequently “rolling over” interest-only “bullet” loans or bonds.

Self-financing commercial projects: As MIC/RR-African states lose concessional loans and grants, they must devise strategies that stop them from the fiscal burden of issuing so-called “sovereign guarantees” that crystalize automatically as pure public debt. This is often due to the absence of market-friendly options such as self-financing schemes that use revenues from commercial projects to repay these guaranteed-loans; and backed by “escrow”, normally as debt service (reserve) accounts; and infrastructure (investment) funds that can be used 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 in MIC-Africa states, from exposure to the markets, 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-pole 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 in structural reforms is a uniform view that appears to ignore the gradual “stratification” of SSA states and the need for differentiated economic policies to guide policy-makers. A special focus on Africa’s potential Lions in the next round of global recovery could move the continent in a more 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 author is the Former Finance Minister

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