Fiscal Forecast Errors in East Africa: Nature, Drivers, and Policy Implications

This paper explores the nature and underlying factors contributing to fiscal slippages in selected East African countries from 2000 to 2024. Slippages are proxied by the budget forecast errors as captured in WEO projections by IMF Staff. Our findings indicate that budget forecasts tend to be systematically optimistic with actual budget balances typically falling short of projected balances, primarily due to spending overruns and, to a lesser extent, revenue shortfalls. Unexpected revenue shortfalls largely arise from indirect taxes (VAT and customs), whereas spending slippages are predominantly influenced by public investment, goods and services and social protection expenditures. The optimism bias is more pronounced in situations where the budget is in deficit, during economic booms, among commodity-exporting countries, in the absence of an IMF program or fiscal rules, and when fiscal institutions are weak. These results are robust to excluding potential outliers, expanding the sample to other SSA countries, and controlling for country specific effects as well as potential endogeneity bias.