Africa’s fiscal indiscipline may derail gains

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History is coming round to haunt sub-Saharan Africa once more.

In the decades of 1980s and 1990s, African economies could not repay their sovereign debts, which were largely blamed on falling commodity prices and fiscal indiscipline (we are simply not able to attain an ideal balance between government revenues and expenditure).

In 2005, wealthy lenders decided to “forgive” at least 30 deeply indebted African countries.

It was assumed that the continent had leant its lesson. Indeed, some countries came up with sound policies that changed the African narrative from one of doom to “Africa rising.”

After 2005, the continent seemed to be managing its debts well given the fact that most countries’ debt levers hovered below 30 percent of GDP. Not anymore. Today, we are soaking in debt.

From 2015, something seems to have gone terribly wrong so much that the average debt to GDP ratio began to exceeds 50 percent for most countries just about where it was when they could not sustain it in the 1990s.

By early 2019, at least half of African countries had exceeded the IMF’s 55 percent debt-to-GDP threshold, putting these countries in a vulnerable position to economic changes.

Treasury mandarins often attempt to allay fears by arguing that the debt levels compare favourably with other countries across the world. What they fail to explain is the fact that high tax rates in most African countries undermine the potential to collect enough taxes that can meet the country’s obligations.

In some countries, high tax rates have pushed manufacturing activities into other countries.

We have not been doing our own studies on the impact of some fiscal policies to bring out our unique situation. Instead, we keep on making reference to OECD and yet we know our environment is different.

Some policies cause more harm than the benefits. In general, selective taxation and high tax rates have never achieved largest revenue gains even with tax reforms.

Studies by the International Monetary Fund (IMF) show that success largely depends on simplification of the tax system, reduced rates, and eliminating several other local taxes that generate little revenue.

Indeed, one of the IMF studies noted that the revenue lost from lower tax rates was made up through a broader tax base, better compliance, and stricter enforcement.

Perhaps the best-case scenario was that of Georgia that was by 2003 experiencing “rampant corruption involving tax evasion, illegal tax credits, and theft of government tax revenue that left public finances in shambles. The government was no longer able to honour its obligations to public servants and pensioners, even though salaries and pensions were very low.” The citizens had had enough of the leadership that they decided to revolt.

The revolution gave the new Georgian leadership an opportunity to introduce sweeping tax reforms and new measures that included zero tolerance on corruption. As a result, the culture and the laws changed, putting the country on the right path.

Today, Georgia is the shining example of simplified tax reforms that have increased revenue to the country.

We must develop a culture of impact research in order to make better recommendations and stop relying on data that addresses the problems of other nations that are well diversified while Africa relies mostly on commodity prices with a very high volatility.

In Kenya where debt to GDP is hovering around 60 percent, for example, the country is losing its manufacturing competitiveness. The sector’s contribution to GDP has plummeted from a high of 15 percent to 7 percent in 2018.

High tax rates killed some manufacturing facilities and moved others out of the country.

Agricultural production is thinning. Recent Tea earnings have forced farmers to rethink. Some are uprooting the crop as they did with coffee. In both cases corruption is to blame. In spite of the fact that media highlighted the plight of farmers, no one seems to take any responsibility.

Tourism sector is also fragile, with poor investment. It cannot be relied upon in the long run. We therefore cannot borrow beyond 50 percent only because other countries are borrowing more.

Recently, I had a farmer speak to graduate students at the University of Nairobi and hearing what he goes through on a daily basis, you will think he is doing a favour to governments along his trade routes.

When he transports his produce to Nairobi passing through three counties, he has to deal with goons at each county boundary to pay discretionary taxes. When he imports machinery, the customs too have multiple discretionary taxes.

There are also multiple regulatory agencies whose threats to shut the business are more pronounced than what is in the law.

There is clearly a disconnect between those who have the responsibility to encourage entrepreneurship for prosperity and the harassed entrepreneurs. It won’t take much for the Minister for Trade and the Kenya Revenue Authority Commissioner General to drive a truck from Nyandarua to Nairobi simply to learn how many taxes entrepreneurs pay along the road to Nairobi.

It is an experiment I will want to participate in as a driver while they take notes along the way. They will understand why entrepreneurs will want to be non-compliant in an unfair tax system. Without routing out discretionary taxes we may never achieve sufficient targets to cover our debts.

The insatiable need for tax revenue by governments puts pressure on tax administration and encourages policies that undermine economic prosperity. This is tantamount to destroying the goose that lays the eggs.

We must reflect on these practices, build local enterprises by removing production tax, encourage emerging technology in resource mobilisation such as securitising abundant African assets to build infrastructure, effectively dealing with tax revenue leakages just as Georgia did and instilling fiscal discipline to ensure sustained economic growth.

The writer is a professor of entrepreneurship at University of Nairobi’s School of Business. @bantigito

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