Public financial management reform can play a crucial role in building Africa Inc

Analysts are starting to warn investors off emerging markets, fuelled by forecasts from the likes of JP 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 sure up the growth path the continent has embarked upon.

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 were financed by global development partners and international aid. Satisfying the minimum standards of financial reporting in order to account for financial aid being provided to governments has thus been the motivation for financial public reform in Africa.

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 programmes of significant public financial management (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.

The PFM reform journey across Africa is at different stages, but all follow a similar process. This 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.

PFM reform is 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, this reform also positions 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 over-subscribed.

African governments are therefore seeing the value in embarking on PFM reform journey 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.

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. Public financial management reform can play a crucial role in helping African governments achieve these goals.

Joe Cosma