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Domestic Resources Needed as Revenues Drop in Africa, OECD Says

Posted on Nov. 13, 2020

The COVID-19 crisis is expected to cause a dip in tax revenues for African countries where they have, on average, stayed flat over a five-year period, according to an OECD report.

In "Revenue Statistics in Africa 2020," released November 12, the OECD said that the average tax-to-GDP ratio for the 30 countries surveyed stayed relatively the same for the fifth consecutive year, and that additional domestic resource mobilization and diversification of revenue streams is needed. The COVID-19 crisis is expected to disrupt aid, tax revenues, international trade, and other forms of nontax revenue in African countries, the report says.

The 30 countries saw their tax revenues increase, on average, from 15.1 percent to 16.5 percent of GDP between 2010 and 2018, the report notes.

“The increase in the average tax-to-GDP ratio in the continent is of particular importance as tax revenues are a more sustainable source of public revenues over the long term in comparison to non-tax-revenues, which have been declining over the past years largely due to a fall in commodity prices driving down revenues from royalties and continuing decreases in grants,” the report says.

The pandemic threatens public revenues by reducing demand for commodities, the prices of which will drop sharply as a consequence, the report says. African countries whose economies depend on tourism will see losses in that sector caused by border closures and travel restrictions. Also, the report says, less international trade will reduce revenue from trade taxes, and overall lower levels of economic activity will reduce income tax revenue and social security contributions.

Before the pandemic, the African Development Bank had projected the continent would see GDP growth of 3.9 percent in 2020 and 4.1 percent in 2021. Those projected gains have been reversed by the pandemic. The IMF estimates that revenues in sub-Saharan Africa will decrease on average by 2.6 percent of GDP (compared with 2019), while government spending will increase by 0.9 percent of GDP.

African countries should deal with the effects of the pandemic before setting up structures that will facilitate domestic resource mobilization, the report says. One opportunity noted by the OECD is the implementation of the African Continental Free Trade Area, which has been delayed by the COVID-19 pandemic. The report says fast implementation could protect the continent against future economic shocks.

The free trade area could aid in the development of the African pharmaceutical industry and promote food security by decreasing the continent’s reliance on imported food, the report says. Trade tax revenue losses for countries that have high levels of trade taxes measuring over 4 percent of GDP should be monitored, it says, because these countries might have more revenue to lose from the elimination of taxes on intracontinental trade.

African countries could also expand the use of taxation to address environmental issues, but any plan must take into account several countries’ reliance on fossil fuel subsidies, the report says, noting that Cote d’Ivoire, Nigeria, and South Africa received more than $1 billion in fossil fuel subsidies in 2015. It recommends that countries reform energy subsidies and implement environmental taxation to mobilize more government revenue.

Logan Wort, executive secretary of the African Tax Administration Forum, said in an OECD webinar announcing the report that countries reliant on extractive industries like oil should look at diversifying revenue streams and broadening their tax base. While these countries’ tax-to-GDP ratio might appear high, he said, there is cause for concern because of the unstable nature of the tax base. According to the report, the forum has recommended that governments refrain from waiving or suspending environmental taxes during the COVID-19 crisis because long-term environmental goals take precedence over short-term tax relief.

Mario Pezzini, director of the OECD Development Centre, said during the webinar that African countries should focus on reducing their debt, either through restructuring or improving borrowing terms. Tax-to-GDP ratio in Africa is much lower than in Latin America and the Caribbean and OECD countries, he said, adding that without adequate tax revenue, “it’s very difficult to ensure the basic functioning of the state."

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