PFM reform’s role in building Africa Inc

Public financial management (PFM) reform can play a crucial role in helping African governments achieve their economic growth and development goals, thereby building Africa Inc.

Analysts are starting to warn investors off emerging markets, fueled by forecasts from the likes of J.P. Morgan and HSBC of slowing growth in emerging markets. At the same time, developed markets are showing signs of recovery making them more attractive. More than ever, African governments need to make the region attractive to investors to ensure the certainty of the growth path the continent has embarked upon.

Declaring Africa “open for business”

While Africa’s attractiveness as an investment destination has grown over the past decade, the role of governments has been shifting. Previously, a significant proportion of government budgets in many African countries was financed by global development partners and international aid. Satisfying the requirements of such funding bodies and seeking further funding was often a prerequisite for governments to get anything done.

As the Africa growth story begins to yield results, governments are increasingly positioning themselves to appeal to international investors in the open market in the race for capital inflows. Yet it is still a continent viewed by investors as high risk due to historically weak governance. Many African leaders recognize that, if they truly want to declare Africa as “open for business,” they need to adopt corporate principles of good governance and financial management.

The PFM reform journey

A new report published by EY, The rewards of reform,* argues that underpinning good governance is the need for governments to spend revenue in an effective and efficient way, free of corruption and wastage, and in an open and transparent manner. Governments across Africa are therefore embarking on programs of significant PFM reform to ensure that spending is adequately budgeted for, monitored and reported, and to enable transparency and accountability to investors, citizens and key institutions.

Different African countries are at different stages in the PFM reform journey, but all follow a similar process that may include: reviewing public financial legislation and regulations, designing a new chart of accounts for government, reviewing or reforming government budgeting and financial reporting processes, implementing integrated financial management information systems (IFMIS), developing and strengthening key institutions such as Auditors General and Accountants General, and putting in place processes to achieve clean audits. Throughout these processes, there is the continuous need for institutional capacity building and the use of IT to automate and integrate good financial management practices.

All of the different stages in PFM reform are aimed at improving accountability, efficiency and the integration of budgeting and expenditure processes across departments and tiers of government, moving countries closer to public sector international standards.

In turn, they also position governments to better collect revenue from citizens and businesses, while remaining accountable to those stakeholders for the way in which they spend public money. The principles are actually no different to what is required and expected by shareholders in the corporate world. This meets the need to use the balance sheet to access cheaper sources of finance from traditional and more innovative sources. For example, Zambia and Ghana have, in recent years, issued sovereign bonds that have been heavily oversubscribed.

The rewards of reform

African governments therefore see the value in embarking on PFM reform to ensure good governance and, in turn, attract much sought-after foreign investment. The better a country’s financial reporting and budgeting process, the lower the risk of lending to that government, thereby also making borrowing cheaper for those countries that successfully institute PFM reform.

This leads into a virtuous circle – the more governments can attract investors, the more they can start to fill the infrastructure gaps that still pose a challenge to doing business on the continent. As those infrastructure gaps are filled, Africa becomes an even more attractive place to do business. Citizens, in turn, benefit from improved infrastructure and service delivery, and the investment and economic growth that is likely to result.

Africa needs to move away from being a continent that has to appeal to the charity of developed nations. International aid budgets in the West have been slashed in any case. Thus, there is no doubt that successfully competing for investment in the global market is critical for Africa to sustain the economic growth and development path it has embarked upon. PFM reform can play a crucial role in helping African governments achieve these goals.

The article was written by:

  • Joe Cosma
    Government & Infrastructure Leader – Africa

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