The budgets of Southern African Development Community (SADC) Member States set out expected revenues and expenditures for the following fiscal year. In times of prosperity, with exports and grants increasing, the SADC region would run a budget surplus. However, with the global economic downturn beginning in 2008, Trade has decreased and, consequently, most economies in the region are running an annual budget deficit.
Large budget deficits can be detrimental to an economy if they are sustained over long periods. In order to mitigate the effects of prolonged austerity on the region that reducing these deficits would entail, SADC passed the Memorandum of Understanding on Macroeconomic Convergence in 2002, which is now annexed into the Protocol on Finance and Investment.
Budget Deficits and the Protocol on Finance and Investment
Annex 2 of the Protocol on Finance and Investment concerns Macroeconomic Convergence in the region. The aim of this Protocol is to promote economic integration of Member States in order to foster financial stability throughout the SADC region. As part of this stability-oriented approach, Article 2 of the Annex states that SADC Member States agree to maintain a prudent fiscal situation based on avoiding large deficits and not monetising those that already exist, while avoiding high or rising ratios of public and publicly guaranteed debt to GDP which would contribute to Inflation. Furthermore, Member States agree to monitor and measure their annual fiscal balances, as the ratio of budget deficit to gross domestic product is a vital indicator of economic health.
Budget Deficit Targets
Due to the developing nature of most economies within SADC, Member States, fiscal balances have fluctuated wildly over the past decade. Yet, following SADC policies toward macroeconomic stability, most Member States have greatly improved their fiscal positions from the 1990s onwards.
With the liberalisation of regional economies, Annex 2 of the Protocol on Finance and Investment set out deficit targets for SADC Member States. Member States were to achieve ratios of budget deficit to Gross Domestic Product (GDP) of less than 5% by 2008, decreasing to less than 3% by 2012 and maintaining that ratio through 2018.
However, the Protocol on Finance and Investment did not foresee the global economic downturn of 2008, which heavily impacted the SADC region.
Table: Overall Fiscal Balance (incl. grants) in SADC.
International Monetary Fund, 2011
Following 2008, nations that previously held budget surpluses either reduced their surplus margins or slid into deficit, a trend that continued through 2010. In particular, Botswana experienced the greatest budgetary issues, dropping 21 percentage points from 2006 to 2010. Only Angola, Democratic Republic of Congo, and Malawi ended the period with a budget surplus.
Yet, the region has fared well toward reducing budget deficits in general. As of 2010, only five Member States reported deficits greater than 5% of gross domestic product. Likewise, despite an overall decline in fiscal health, SADC approached its Macroeconomic Convergence target with a budget deficit of only 3.2%. These figures are also stronger than those of other regional economic communities in Africa, such as the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA), both of which have fared worse than SADC since 2008.