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Tax reform, digitization key to financing Africa’s development – ECA report

Tax reform, digitization key to financing Africa’s development – ECA report
Photo credit: UNECA

23 Mar 2019

11 minute read

A new report by the UN Economic Commission for Africa (ECA) says it is urgent for African countries to broaden and deepen their tax and revenue collection bases while leveraging digital technologies to boost collection and compliance, to achieve pressing development goals.

Launched today in Marrakech, Morocco, where ECA’s 52nd Session is taking place, the 2019 Economic Report on Africa (ERA 2019), regrets the continent’s weak state revenue-to-GDP ratio which stood at 21.4 per cent in 2018, noting that the continent must significantly augment that figure in a bid to adequately finance crucial development national programs as well as those set out in Agenda 2030 and Agenda 2063.

The Report, whose theme is “Fiscal Policy for Financing Sustainable Development in Africa,” argues that government revenue on the continent can be increased by 12-20 per cent of GDP through the rigorous pursuit of tax and non-tax income collection especially by aligning fiscal policy with the business cycle.

It makes a case for states to invest in strong institutions and advanced data collection methods that better monitor non-tax revenue streams while urging them to boldly venture into hard-to-tax areas such as agriculture, the informal sector and the digital economy.

Reforming tax administration systems through the use of digitization, refraining from issuing unproductive tax incentives and becoming highly debt-disciplined, are other propositions made for expanding the public purse to finance development in Africa.

The continent could increase tax revenue by as much as $99 billion or 4.6 per cent of gross domestic product (GDP) annually if it sets out quickly to implement these recommendation, the Report projects.

There is much to be achieved by leveraging digital systems for revenue harvesting. For instance, Rwanda increased revenue collection by 6 per cent of GDP by introducing e-taxation and South Africa used online tax payments to reduce compliance cost by a whopping 22.4 per cent while lessening the time to comply with the value-added tax by 21.8 per cent.

However, improved tax/revenue performance cannot be hinged on tax efficiency alone but also on the provision of essential public services to reduce inequality and encourage economic growth and compliance, the Report advises.

This should go with combating corruption and reinforcing accountability to reduce inefficiencies in tax collection.

The Report also notes the importance of multinational and state-owned corporations that are dominant in this sector of natural resource exploitation.

“However, multinational corporations also have the ability to undertake complex international tax avoidance strategies that shift profits from where the underlying economic activities take place to low- or no-tax jurisdictions, a behavior referred to as base erosion and profit sharing,” it says.

Closing loopholes in existing agreements with the multinationals could boost tax revenues accruing to concerned governments by about 2.7 percent of gross domestic product (GDP), funds that can be deployed for achieving the Sustainable Development Goals (SDGs), the Report adds.

Africa has a huge financing gap estimated at 11-13 percent of GDP per annum if it must achieve the targets of the UN sustainable Development Goals and Agenda 2063, but ERA 2019 shows how this gap can be quickly plugged.

“To achieve these two agendas, Africa needs to increase its domestic investment rate to 30-35 percent of annual GDP and triple its 3.2 percent growth rate to about 10 percent per annum,” said Mr. Adam Elhiraika, Head of ECA’s Macroeconomics and Governance Division which coordinated work on the Report.

“ERA 2019 is very timely for Africa as it explores comprehensive ways of financing development at a period when funding resources have been squeezed as fallouts of the global financial meltdown of 2008 and the nose-dive in commodity prices in 2014,” said ECA’s Executive Secretary – Ms. Vera Songwe following the Report-launch.

She was upbeat that “though these precedents have rendered the task of pursuing the implementation of the UN 2030 Agenda for Development and the AU’s Agenda 2063 for a prosperous, integrated and peaceful Africa, difficult, I have no doubt that the imperative of raising additional revenues for financing these development agendas will be much easier for African countries that heed the carefully crafted recommendations in this Report.”

“ECA has done such a good job with the 2019 Economic Report on Africa to the extent that we are asking the Commission to go further,” said Mr. Mambury Njie, Minister of Finance and Economic Affairs of the Gambia, who added that “we now know where the problem [with mobilizing internal resources for development] is.”

One way of going further resides in the question: “How can we make fiscal policy support structural transformation in Africa?” quizzed Egypt’s Deputy Planning Minister Dr Ahmed Kamaly.

Debaters at the launch also requested that ECA deepens research on how tax incentives influence investments and revenue collection, though experts tended to agree on growing evidence that incentives did not make a great difference.

Others suggested that the Commission undertakes studies on how to mainstream the informal sector into the formal economy for more revenue wins and seeks to start accompanying member States in playing out the findings and recommendations of the Report.

A global message to retain from ERA 2109 “is that in Africa we have a challenge of financing the SDGs but this challenge is not insurmountable, it can be addressed with serious, focused efforts to mobilize more domestic revenue through fiscal policy,” Mr. Elhiraika summed up.

Extract from Chapter 7: Fiscal and public debt sustainability

Public external debt

Africa’s stock of public external debt averaged about $309bn over 2000-2006 and then rose further to $707bn in 2017 (figure 7.3), with a 15.5% increase from 2016 alone. Most of the rise reflects increased external borrowing by middle-income countries, with five of the six largest economies on the continent accounting for more than half of public external borrowing in 2017.

South Africa borrowed $176bn externally, followed by Egypt at $82bn, Morocco at $49bn, Nigeria at $40bn and Angola at $37bn. The total debt stock was lower in some of the frontier markets than in middle-income countries, but the increase over the past few years was nonetheless considerable. For instance, Ethiopia’s external debt stock rose more than 250%, from $7.3bn in 2010 to $26.5bn in 2017. Kenya’s pace of external debt accumulation was similar, with external debt stocks rising from $8.8bn in 2010 to $26.4bn in 2017 (nearly a 200% rise). Ghana’s public debt rise was close to 145% between 2010 and 2017 (from $9bn to $22bn).

The increase in external debt accumulation raises concerns about debt sustainability in many African countries, especially as external debt stocks have risen much faster than economic growth owing to rising interest rates in international capital markets. While the average ratio of external debt in Africa declined from 119% of GNI in 2003 to 32% in 2012 before rising in 2013 and stabilizing at 46% in 2017, debt ratios are still very high in some countries, mostly low-income economies. Debt ratios in 2017 were high in Djibouti (112%), Mauritius (156%), Mozambique (101%), Mauritania (89%), São Tomé and Príncipe (67%) and Zambia (65%). With the high share of external debt to GNI, debt servicing costs have increased. About a third of African countries had debt servicing costs of more than 10–15% of exports in 2017 (World Bank, 2018), including Côte d’Ivoire, with $2.2bn in external debt; Ghana, with $2.1bn; and Kenya and Zambia, both with $1.6bn; and Ethiopia, with $1.4bn.

The changing patterns of external borrowing help to explain Africa’s rising external debt. In recent years African countries began to diversity the source and composition of their external debt (figure 7.4). They have increased their share of external borrowing from non-traditional creditors (non-Paris Club official bilateral creditors, foreign and domestic commercial creditors and other financial institutions) and reduced the share of concessional borrowing. Countries have been relying more on non-concessional sources (both bilateral and commercial creditors) and are increasingly tapping international bond markets.

The expansion of non-concessional debt with longer maturity was due partly to enhanced IMF guidelines providing more flexibility in external debt sustainability limits and partly to progress by some countries in developing and deepening their financial sector, enabling them to issue dollar denominated sovereign bonds in international capital markets.

While most African countries still rely heavily on financing from official bilateral and multilateral creditors (which together account for about 60% of Africa’s long-term external debt stock), nontraditional partners are emerging. These include the BRICS countries as well as private creditors, commercial banks and other private entities. The increasing role of China among non-traditional bilateral lenders is especially noteworthy, particularly in external financing for large-scale infrastructure projects.

Table of contents

Chapter 1: Recent economic and social developments

Chapter 2: Fiscal policy and development finance

Chapter 3: Tax policy and performance in Africa

Chapter 4: Non-tax revenues for financing sustainable development

Chapter 5: Tax administration in Africa

Chapter 6: Multinational corporations, tax avoidance and evasion and natural resources management

Chapter 7: Fiscal and public debt sustainability

Chapter 8: Conclusions and policy recommendations