Unlocking Africa’s $100 Billion Public-Finance Opportunity

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African governments have made impressive progress in fostering development and improving people’s lives. The continent’s spending on infrastructure has doubled to around $80 billion a year in the past decade, investments in health systems have helped to halve infant mortality rates since 1990, and the average time African children spend in school has nearly doubled over the same period.

Will this progress be sustained or stalled in the decade ahead? In large part, the answer boils down to finance. Africa today faces a perfect storm of a slowdown in growth, depressed commodity prices, stagnant tax revenues, and rising public debt. African governments’ combined budget deficits amounted to $112 billion in 2018, equivalent to almost 5 percent of GDP—and double the level in 2010. Closing Africa’s remaining infrastructure gap will cost another $100 billion per year. Without appropriate action, many governments will face mounting fiscal pressure and find their ability to invest severely constrained.

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Yet, as this paper shows, African governments have more scope than is often assumed to mobilize domestic resources for their own development and improve efficiencies in public spending. Several pioneering governments have already achieved big gains in revenue collection through tax-system reform, while others have delivered significant budgetary savings in areas such as public procurement and capital expenditure. Each of these countries has delivered annual revenue improvements of between $1 billion and $5 billion, or budgetary savings of at least 5 percent of total budget, or both.

McKinsey’s analysis shows that programs to enhance tax and tariff-collection performance have the potential to deliver between $45 billion and $65 billion in additional annual tax and customs collection across Africa within three years (see Exhibit). That translates into additional revenues of between 2 percent and 3 percent of GDP—without changes to tax rates or trade tariffs. In addition, programs to improve public-spending efficiency have the potential to deliver between $40 billion and $60 billion a year from expense efficiencies, such as implementing leaner capital expenditure practices, revamping procurement procedures, and eliminating “ghost” workers. Those savings represent between 8 percent and 12 percent of the aggregate budgets of African governments.

If African governments are to unlock this $100 billion opportunity, many will need to undertake far-reaching transformations of public finances. That will require them to put the right leaders in place, actively engage key stakeholders, communicate a compelling change story through the public service, focus on both revenue growth and cost control, and harness technology to radically improve transparency and decision making.

Africa’s fiscal challenges, while serious, can be resolved through levers that are available to most countries. By embarking on a true transformation of public finances, African governments can navigate today’s headwinds and steer the continent towards continued rapid growth and social development.

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Source: McKinsey

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