Heightening Domestic Resource Mobilization in Africa During COVID-19

When the Sustainable Development Goals (SDGs) were established in 2015, there was broad recognition that most developing countries would have to step up their efforts to raise domestic resources to finance needed domestic investment. Support from development partners and private sector investors would not be enough. For low-income countries, the IMF subsequently estimated that on average domestic taxes would have to increase by about 5 percentage points if they were to meet the SDGs in five key areas (education, health, roads, electricity, and water). The financing needed in sub-Saharan Africa would be larger given their development level.

Some progress has been made in increasing tax revenues. Between 2000 and 2018, average tax-to-GDP ratios in sub-Saharan Africa increased from 12 to 15 percent of GDP, peaking in 2015 at 16 percent of GDP. But this is not enough, and a concerted effort is needed by partners and developing countries to increase domestic resource mobilization (DRM). A financing strategy was laid out at the Addis Ababa Financing for Sustainable Development Conference. The strategy included the Addis Tax Initiative to accelerate progress on increasing DRM.

The pandemic-induced economic disruptions in Africa provide a significant challenge to the continent’s efforts to increase DRM. DRM has effectively stalled since 2015, and with the continent entering its first recession in 25 years, the expansive use of fiscal tools to blunt the effect of the recession further hamper states’ efforts to increase domestic revenue.

On January 25, the African Center for Economic Transformation (ACET) and CGD convened a panel of seven experts, including from government, the private sector, and financing partners, to discuss the potential for increasing DRM in the aftermath of the COVID-19 health and economic crises. All panelists agreed that this challenge and the ensuing disruptions wrought by COVID-19 present an opportunity to reassess tax regimes, including tax holidays and other incentives. The crisis offers an opportunity for substantive action to improve the composition of public finance. A striking outcome of the event was the almost-unanimous convergence of views and recommendations from panelists around DRM. Below are some of the recommendations emanating from the event, and we encourage you to watch the event for yourself:

1. Putting the politics back in political economy. Panelists agreed that, to a large extent, the technical solutions to the low revenue collection problem are known. While these solutions cannot be cut and pasted, and need to be adjusted for context, the contours of the technical response are well established. Going forward, reform ought to focus on both the politics of DRM and the technical solutions.
2. Identifying and responding to entrenched interest groups that form powerful constituencies for existing tax regimes and incentives. The intricate balance between politicians, their business partners, and their campaign contributors hampers the reform effort, and dealing with this nexus of economic and political power needs to constitute a significant part of the DRM improvement program.
3. Learning from jurisdictions that share similar characteristics and yet made significant progress. The Russian Federation was presented as one such example. It is a low-trust jurisdiction, with entrenched interests and opaque dealings. In its case, the use of technology has significantly increased the quality of DRM and the Russian experience provides a learning opportunity for African economies.
4. Deploying technology to play a crucial role by increasing the ease of tax payment, but also improving the means of tax collection. One panelist noted that the tax management software has not kept pace with the technological progress.
5. Adjusting DRM to the shifting composition of firms in the economy from large agricultural, trading, and extractive firms to e-commerce, and discussed the difficulty of taxing e-commerce. This problem is not exclusive to Africa since e-commerce firms might be incorporated in one jurisdiction but conduct significant businesses in others.
6. Enhancing partnership with the private sector. Panelists agreed that the private sector ought to be partners rather than adversaries in DRM and they should be consulted extensively in the reform process.
7. Realizing the quality of expenditure is a key ingredient of getting compliance and buy-in. Both corporate and individual taxpayers need to see the benefits of revenue collection, especially to finance infrastructure and social services.
8. Recognizing the important role for external actors. Panelists saw a role to further enhance multilateral and bilateral assistance with domestic tax authorities. Agreed interventions ranged from training, to software, facilitating exchanges with similar jurisdictions, or assistance in running pilots to introduce new technology.
9. Leveraging the African Continental Free Trade Agreement (AfCFTA), which will present a short-term challenge for DRM management as countries will, in due course, eliminate any duties on intra-African trade and adopt common tariffs for intercontinental trade. However, in the medium to long term, the taxes on increased economic activity on the continent will more than make up for any lost trade taxes. The more African countries cooperate on this transition, the faster it will come about.