Fiscal Forecast Failures in East Africa Reveal Deep Budget Credibility Challenges

The study by the International Monetary Fund (IMF), conducted by Youssouf Kiendrebeogo and Barima Kwame Gyesaw, examines fiscal forecast errors in East African economies using IMF World Economic Outlook data, offering a detailed look into how governments plan and execute their budgets . Covering the period from 2000 to 2024, the research analyzes differences between projected and actual outcomes in revenues, expenditures, and fiscal balances across countries in the East African Community and comparable low-income nations. It highlights the role of institutions, macroeconomic conditions, and structural weaknesses in shaping these deviations.

The Optimism Bias That Keeps Budgets Off Track

A central finding of the paper is the persistent optimism bias in fiscal forecasting. Governments consistently project stronger fiscal balances than they achieve, with actual outcomes falling short year after year. This gap is driven mainly by expenditure overruns rather than revenue shortfalls. Although revenues, especially from indirect taxes like value-added tax and customs, often underperform, it is excessive spending that plays the dominant role in widening fiscal deficits. These recurring discrepancies indicate that fiscal slippages are not occasional mistakes but embedded features of the region's budgeting process.

Spending Pressures and the Anatomy of Fiscal Slippages

The study shows that fiscal errors are deeply structural and more pronounced in East Africa than in other Sub-Saharan African and low-income countries. Weak public financial management systems, limited administrative capacity, and fragile revenue structures contribute to persistent inaccuracies. On the revenue side, VAT and customs duties are particularly volatile due to their dependence on imports, consumption, and compliance. On the expenditure side, deviations are concentrated in public investment, goods and services, and social protection, areas that are often adjusted in response to fiscal pressures. These dynamics reveal that overspending, rather than revenue failure alone, lies at the heart of fiscal imbalance.

Booms, Busts, and the Cycle of Fiscal Miscalculation

Macroeconomic conditions significantly shape forecast errors. During periods of economic growth, governments tend to overestimate revenues and underestimate spending, leading to procyclical fiscal behavior. Spending increases during booms, while corrections are made during downturns. These adjustments are asymmetric: when revenues fall short, governments cut expenditures, but these cuts disproportionately affect capital investment and social programs. Such patterns undermine long-term development by reducing spending on infrastructure and human capital, even as overspending during good times weakens fiscal discipline.

Institutions, Reforms, and the Road to Credible Budgets

External shocks and structural vulnerabilities further complicate fiscal planning. Commodity-exporting countries face higher volatility due to fluctuating global prices, while crises such as the COVID-19 pandemic amplify forecast errors through disrupted revenues and increased emergency spending. Fragile states experience the largest deviations, reflecting weak governance and high uncertainty. The study finds that stronger institutions play a critical role in improving forecast accuracy. Countries with fiscal rules, better governance, and participation in IMF-supported programs show smaller deviations and more credible budgets. Reforms such as strengthening tax administration, enforcing expenditure controls, adopting realistic forecasting methods, and enhancing institutional quality are essential to reducing optimism bias. The paper concludes that improving fiscal credibility is vital for ensuring sustainable growth, maintaining debt stability, and enabling effective use of public resources in East Africa.