Fiscal decentralisation fails to address inequality in Africa

Fiscal decentralisation is correlated with higher growth in the presence of better institutions

FISCAL decentralisation is becoming a pressing issue in a number of countries in sub-Saharan Africa, reflecting demands for a greater local voice in spending decisions and efforts to strengthen social cohesion, the International Monetary Fund has said.
In a paper, titled: Lessons for Effective Fiscal Decentralisation in Sub-Saharan Africa, IMF observed that most sub-Saharan African countries retain a highly centralised model of territorial government and fiscal arrangements at the attainment of independence, but only a handful have embarked on meaningful fiscal decentralisation.
“Fiscal decentralisation is correlated with higher growth in the presence of better institutions, but it does not seem to affect income distribution. The combination of decentralisation with a better quality of institutions has a statistically significant correlation with GDP per capita. However, decentralisation does not appear to have had the expected impact on reducing income inequality in sub-Saharan Africa,” notes the report.
Among the few sub-Saharan African countries that have embarked on significant decentralisation, the report says macroeconomic risks have largely been contained, although in some cases political imperatives have caused the speed of decentralisation to be faster than warranted by capacity implementation at the subnational level.
“Against this background and in light of the generally weak public finance management (PFM) systems in sub-Saharan Africa, countries that decide to proceed with fiscal decentralisation should do so in phases. The big-bang approach to decentralisation has in some cases resulted in excessive accumulation of debt at the subnational level,” said the report.
According to the report, while the rapid pace of fiscal decentralisation in some sub-Saharan African countries has not been accompanied by excessive borrowing at the subnational level, it has nonetheless created challenges for controlling current spending and ensuring service delivery, as subnational governments lacked the capacity for budgeting or for monitoring and reporting fiscal developments.
“In light of the relatively weak quality of governance in some of the sub-Saharan African countries that are planning to embark on fiscal decentralisation reforms, a gradual approach would seem appropriate and consistent with the pace of strengthening the PFM systems at the subnational level,” the paper notes.