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Guest post by: United Nations Economic Commission for Africa Become an Author

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Overall, Africa has continued to maintain a positive fiscal position, with the average
budget balance (excluding grants) of 0.1 per cent of GDP in 2006 compared to 0.4
per cent in 2005. For the 40 countries for which comparable data were available,
there was a slight decrease in the number of countries having budget deficits in
2006 relative to 2005 (from 33 to 30) despite higher government expenditures in
oil-importing countries due to higher oil prices (table 2.2). Significant increases in
public sector investment resulted in sizeable budget deficits in some oil-exporting
countries – Angola (-5.0 per cent), Chad (-4.4 per cent) and Egypt (-7.9 per cent).

Oil as a key factor in fiscal balance improvement

Seven of the ten countries that had budget surpluses in 2006 were oil exporters (Algeria,
Cameroon, Republic of Congo, Equatorial Guinea, Gabon, Libya and Sudan).
Therefore, oil continues to be the key factor behind the positive fiscal position for
Africa as a whole, which raises concern over the sustainability of fiscal balance over
the medium term. Official development assistance (ODA) is a major source of budget
support for many non-oil economies. The dependence of government budgets on oil
revenue and external aid constitutes a source of vulnerability for fiscal balance and
GDP growth. For oil producers, fiscal sustainability will require effective strategies
for prudent management of oil revenues and strategies to utilize these revenues for
enhancing economic diversification. Non-oil countries need to design mechanisms
for increased mobilization of revenue from domestic sources.

Pressure from oil prices threatens price stability

For the second year, average consumer price inflation increased in Africa (from 8.5
per cent in 2005 to 9.9 per cent in 2006). Inflationary pressure results mainly from
higher oil prices, and subsequent increase in production costs and lower output.
In most countries, food prices rose significantly due to higher transportation costs.
While inflation remained contained and low in most of the 52 African countries
with available data, the risk of higher inflation remains a concern should higher
prices persist in the near future.

Despite the increase in the average rate of inflation, the situation has improved. In
2006, 25 countries recorded inflation rates of less than 5 per cent, compared to 21
countries in 2005 (table 2.3). The number of countries with a two-digit inflation
rate dropped from 17 in 2005 to 12 in 2006. The number of countries experiencing
increased inflation fell from 33 in 2005 to 24 in 2006. However, a few countries
experienced drastic increases in inflation. In Zimbabwe, inflation increased to 1216
per cent in 2006 compared to 237.8 per cent in 2005, owing to inflationary financing
of the budget deficit and shortage of food, especially maize. In Guinea, the
country with the second highest inflation rate in Africa, inflation remained high (27
per cent in 2006 compared to 31.4 per cent in 2005), due to the effects of high oil
prices and imported inflation arising from high imports of consumer goods.

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