As with the rest of the world, African countries have suffered a sudden slowdown of their economies due to the Covid-19 pandemic, further exposing Africa’s low level of Domestic Resources Mobilisation (DRM). According to The Organisation for Economic Co-operation and Development (OECD), the average tax revenue-to-GDP ratio in Africa has remained stable at an average of 17.2% of GDP over the last 3 years and it is half the rate of OECD countries. The majority of countries have had average tax revenue-to-GDP ratios below 15% with gross domestic resources accounting for 5.4% of GDP in Africa as compared to high-income countries and social security systems which account for 8.7% of government tax revenue sources. In addition to tax challenges such as shrinking tax base, reliance on few tax heads, lack of capacity, ineffective tax systems and outdated tax policies_ the Covid-19 pandemic itself and different measures implemented by countries to cope with it have further negatively implied on DRM in Africa. These challenges are potentially affecting DRM as tax systems continue being suffocated by measures being implemented by countries to limit the spread of the corona virus.
The pandemic has hit almost all African countries and it appears poised to worsen dramatically. The disruption of the world economy through global value chains, the abrupt fall in commodity prices and fiscal revenues including the enforcement of travel and social restrictions in many African countries are the main causes of the negative growth. Exports and imports of African countries are projected to drop by at least 35% from the level reached in 2019. Thus, the loss in value is estimated at around 270 billion US dollars..
The fight against the spread of the virus and acquiring medical treatment will lead to an increase of public spending in Africa estimated to be at least $130 billion. The implication of this may be an increased appetite for sovereign borrowing which will further expose countries to debt vulnerabilities, worsen their fiscal positions, lower their revenue generations and widen budget deficits. Before the Covid-19 health pandemic crisis, the Sub-Saharan African (SSA) region was already sliding into a new debt crisis, with 40% of the countries at high risk of debt distress. Debt-to-GDP ratio of many countries had reached unsustainable levels: Mozambique at 108.8%, Zambia at 91.6% and Angola at 95% (UNECA). A number of countries were already spending between 40% - 50% of their national budgets on debt servicing which was more than they spend on health and education combined. To date, 24 SSA countries including Democratic Republic of Congo (DRC), Malawi, and Mozambique have secured Assistance from the International Monetary Fund (IMF) to mitigate Covid-19’s negative impacts. These resources are concessional, no conditionality attached to them and they should be used to meet urgent balance of payment and fiscal needs stemming from the pandemic while mitigating its impact and preserving macroeconomic stability.
Recommendations to Curb IFFs include:
IFFs are developmental challenges that drain national resources. Resultantly, national budgets have been suffocated and budget deficits have become a perennial problem. This has in turn negatively implied on critical sectors including health thus curbing IFFs would have the potential to increase resources to fund these sectors. IFFs can be curtailed through a combination of actions such as: registering companies for tax purposes, establishing transfer pricing units, automatic exchange of information, beneficial ownership, reviewing of double taxation agreements and curbing corruption and establishing financial intelligence units to investigate and prosecute financial crimes.
There is need to demand for transparency and accountability in their usage. Likewise, the Africa Development Bank's (AfDB) Covid-19 response new schemes which is $3 billion social bond and a USD 10 billion loan scheme is dedicated to supporting member countries, their Covid-19 interventions and infrastructure. Irrefutably, these measures will increase the amount of resources needed to deal with the current crisis. However, despite being concessional, these loans will impose a heavy burden on tax payers, given the fact that African countries are already grappling to mobilise resources from sectors such as the mining sector due to tax evasions and tax avoidance. Countries will turn to their citizens to squeeze out their little hard-earned cash and these few tax collections will be diverted to loan repayments.