Pandemic and Balance Sheet Approach to Fiscal Analysis in African Countries

Background and Context

Fiscal authorities have undertaken innovative and considerable policy interventions to mitigate the economic and financial fallout associated with the Covid-19. For instance, during 2020-21, Nigeria implemented 2.4 percent of GDP in various forms of fiscal interventions to contain the economic impact of the virus, and South Africa spent about 6 percent of GDP. Equity, loans and guarantees were also used in the case of South Africa, amounting to about 4 percent of GDP. The below-the-line interventions are not adequately reflected in the usual traditional macroeconomic metrics such as the debt-to-GDP ratio. To be more precise, a loan guarantee put in place to support the economy, for example, would only impact debt-to-GDP if a loss is realized. It has been well recognized that this form of policy intervention could potentially have a significant effect on public finances if it materializes. During the period 1990-2014, 230 contingent liability realizations occurred with estimated average fiscal cost of about 6 percent of the affected country’s GDP (Bover et al, 2016). In this context, it is of utmost importance that country authorities adopt a balance-sheet approach to fiscal analysis and reporting to ensure comprehensive coverage and avoid build-up of fiscal risks. 

Public Sector Balance Sheet: Framework 

The adoption of a balance sheet approach entails replacing debt as the main indicator of the financial position of government with ‘net worth’, with attendant positive implications. Net worth captures the difference between the value of all assets and all liabilities. The balance sheet strength is not an end in itself, but a useful tool to facilitate the achievement of the objectives of public policy. In this regard, the net worth does not account for a country’s ability to tax in the future and / undertake needed expenditure adjustment. This is the reason why an intertemporal balance sheet analysis which integrates current wealth with future revenue and expenditure is important. 

The public sector balance sheet (PSBS) framework extends institutional coverage beyond general government to include state-owned enterprises and financial public corporations including the Central Bank, which are often excluded in fiscal analysis (Figure 1). While these enterprises could possibly represent a significant asset for the government, they can also generate significant claims on budgets—often governments accumulate fiscal risks in these entities that will need to be addressed in the future. 

Benefits of a Balance Sheet Approach

Public sector balance sheets (PSBSs) provide the most comprehensive picture of public wealth.  As a result, they account for the entirety of what the public sector owns and owes, providing a broader fiscal picture beyond debt and deficits (IMF, 2018). Due to its comprehensive nature, PSBSs equally bring about improved transparency and greater scrutiny of the government’s financial position. They also facilitate better balance sheet management, thereby reducing risks and the costs of borrowing. Countries with stronger balance sheets have been found to pay lower interest on their debt (Hadzi-Vaskov and Ricci 2016; and Henao-Arbelaez and Sobrinho 2017).

Balance Sheet Approach and African Countries

There are challenges in adopting the balance sheet approach to fiscal policymaking in African countries. In this regard, some work will be required on the data required to estimate the value of public assets and liabilities. The fiscal authorities will have to ensure that the data are of relatively good quality. In addition, a decision will have to be made on the appropriate methodology for estimating these public assets and liabilities. It is important to recognize that the balance-sheet approach is premised on accrual accounting. However, countries operating on a cash basis can apply the framework of balance-sheet management to their decision-making process. 

Public sector balance sheets have been compiled for six African countries (Table 1). These countries are: The Gambia, Kenya, Malawi, Tanzania, Tunisia, and South Africa. This demonstrates that with the buy-in of the fiscal, monetary and statistical authorities, there could be a broad-based adoption of a balance sheet approach to fiscal analysis in African countries. 

Conclusions and Next Steps: 

While it is clear that there are significant challenges in compiling reliable balance sheets, the benefits of basic balance sheet analysis are evident in many African countries. To strengthen public accounts and ensure effective design and implementation of fiscal policy, emphasis needs to be placed on promoting a medium-to-long-term balance-sheet oriented approach to policymaking. 

Moving the agenda forward to ensure increased adoption of the public sector balance approach in conducting fiscal policy would require the following:

• The buy-in of relevant authorities in adopting a more comprehensive fiscal framework underpinned by the balance sheet approach. The process of adoption could be accelerated via the involvement of civil society organizations and other fiscal watchdogs, demanding for more comprehensive public sector data and analysis. In addition, there exists scope for seeking for technical assistance from international financial institutions. These institutions have assisted many countries in compiling public sector balance sheets (Table 1). 

• Cross-country sharing of experiences: Public sector balance sheets have already been compiled for a few African countries (Table 1). The scope for engaging with these countries to ascertain their experiences in adopting public sector balance sheets could be explored. 

• Collaboration with African regional organizations: The AfDB (2021) recommends that policy discussion should not be circumscribed to debt management and debt sustainability analysis in gross terms and that a more holistic approach to address fiscal and debt risks and vulnerabilities should gradually move from public debt management to public balance sheet management. This shows that there is scope for Nigeria to work with AfDB in adopting a balance sheet approach to fiscal analysis. 

References:
Adedeji, O.S. 2021, “The Sustainability of Government Balance Sheet in the Context of Covid Uncertainties” Being a Presentation Delivered at the 62nd Annual Conference of the Nigerian Economic Society, October.
African Development Bank. 2021, “African Economic Outlook”, 2021.
Hadzi-Vaskov, M., and Luca A. Ricci. 2016. “Does Gross or Net Debt Matter More for Emerging Market Spreads?” IMF Working Paper 16/246, International Monetary Fund, Washington, DC
Henao-Arbelaez, C., and N. Sobrinho. 2017. “Government Financial Assets and Debt Sustainability.” IMF Working Paper 17/173, International Monetary Fund, Washington, DC.
International Monetary Fund, 2018, Fiscal Monitor: Managing Public Wealth. Washington, DC, October.