New research from consulting firm McKinsey & Company indicates that improvements in revenue collection and public spending efficiencies have the potential to deliver a recurring yearly impact of between $85-billion and $125-billion for Africa’s governance.

McKinsey points out that the mechanisms to achieve this are already proven.

“African governments have more scope than is often assumed to mobilise domestic resources for their own development and improve efficiencies in public spending,” says McKinsey Johannesburg senior partner Acha Leke, who co-authored the report.

The solutions to Africa’s public finance challenges already exist, Leke says.

“If scaled up across the continent, such solutions could eliminate Africa’s entire budget deficit – or unlock sufficient funding to close the $100-billion infrastructure spending gap within a few years.”

However, he indicates that urgent action is needed. Many African governments are currently battling serious fiscal challenges, including declining revenues and rising deficits that are threatening to stall development gains made by the continent in recent years.

African countries collected $443-billion in government revenue in 2018, representing 19% of the continent’s gross domestic product (GDP) – down from 23% in 2016.

In contrast, the ratio of public revenues to GDP in most non-African emerging economies stands at between 25% and 35%. In some developed economies, the ratio is between 35% and 55%.

McKinsey’s analysis shows that, compared with countries around the world, Africa’s overall low ratio of public revenues to GDP makes it a global outlier and that the continent is not “monetising” its economy as much as it could.

“Africa right now faces a perfect storm of a slowdown in growth, depressed commodity prices, stagnant tax revenues and rising public debt,” says McKinsey Lagos partner and report co-author Yaw Agyenim-Boateng.

“Without appropriate action, many governments will face mounting fiscal pressure and find their ability to invest severely constrained.”

McKinsey’s analysis shows that governments that adopt an integrated, comprehensive public finance transformation programme that embraces the full tax and customs administration value chain, from registration through to debt collection, and focuses on all major expenditure levers, from capital expenditure to procurement, could generate substantial new revenues and reduce costs significantly within three years – without increasing tax rates or reducing the impact of government spending in critical areas such as education and health.

“A balanced focus on aggressive revenue growth and on cost control, with sustained pressure to maximise impact on both sides of the equation, will yield best results.

“With sufficient commitment to transformation, governments can create new headroom to pursue spending priorities without threatening fiscal sustainability,” says Agyenim-Boateng.

He adds that several African countries have already delivered significant efficiencies by applying these levers.

The authors highlight that strong leadership, political will and disciplined execution will be crucial factors in success. “The lessons learnt from successful public finance transformations in Africa show that solutions are widely known, but that implementation can be difficult,” says Leke.

“Implementation hurdles include vested interests, silos in organisations, a lack of focus and gaps in capabilities that need to be navigated and solved. Meaningful public finance transformations typically require action by multiple departments, agencies, ministries, and other stakeholders.

“These entities are often asked to move faster than they are accustomed to moving, collaborate in joint teams and initiatives and experiment with bold new approaches.”

The report also recommends the adoption of technology to enable better decision-making and increased transparency.

“The opportunities to reform public finance to fuel development are significant and real.

“Public sector leaders who take the lead here can design an effective delivery machine to translate this potential into tangible, sustainable gains,” concludes Leke.