The Cyclical Nature of Fiscal Policy in Sub-Saharan Africa

Abstract

Historically, fiscal policy in Sub-Saharan Africa (SSA) has been procyclical. Governments have raised taxes and cut spending in bad times and have expanded the size of the government in good times. Procyclical access to external borrowing and political economy distortions (e.g., common pool problems and asymmetric information) have been mentioned as culprit. The main goal of this article is to document the cyclical properties of fiscal policy in SSA and to test whether the cyclical stance can be influenced by structural and policy features of the economy, namely, institutional quality, policy space, resource abundance and state fragility among others. This article complements the existing literature on SSA by: (i) using an indicator of institutional quality that better captures economic institutions supporting policy frameworks and (ii) testing jointly the influence of structural and policy factors affecting the cyclicality of fiscal policy. Using annual information for 128 countries from 1970 to 2013, this article finds that stronger institutions and ample policy space do help to reduce the degree of procyclicality of fiscal policy for the majority of countries in the region. These findings call for African policymakers to: (i) deepen institutional reforms that will help them deliver sustainable and countercyclical responses and (ii) replenish liquidity and policy buffers in good times so as to be prepared for bad ones.