Unlock Africa’s public finance potential

The 5th Annual Tax Summit in Kenya was held last week at the Kenyatta International Convention Centre.

The theme this year was Tax Simplification and Inclusivity to Facilitate Trade and Economic Transformation, but the discussions focused on the impact of technology in the face of emerging new business models and tax reforms.

Unknown to the conference participants was the fact that McKinsey in its recent study, Unlocking Africa’s $100 billion public-finance opportunity, argue that although “African governments’ combined budget deficits exceeded $100 billion in 2018,…with public-finance reforms, if scaled up across the continent, could close the entire fiscal deficit.”

In spite of Africa being the poorest continent, the report argues, it is making progress in key areas that would boost economic growth.

The study highlights some of the reforms that have a significant impact. These include: Doubling spending on infrastructure to about $80 billion every year; improved ease of doing business, investments in health systems have led to significant gains including a 50 percent reduction in infant mortality rates since 1990; and an increase in the time African children spend in school, which has nearly doubled since 1990, contributing to raising the continent’s youth literacy rate to 70 percent.

African governments will therefore not sustain the current progress in addition to closing the $100 billion infrastructure deficit without taking appropriate measures. According to the study, many governments will face rising fiscal pressure and find their ability to invest severely constrained. With depressed commodity prices, stagnant tax revenues and rising public debt, African States have no option but to rejig their finances.

The study argues that there is more scope than is often assumed to mobilise domestic resources for development and improve efficiencies in public spending.

Already, some governments have improved revenue collection through tax reforms, while others have made savings from public procurement and capital expenditure.

Many governments, however, need to overcome issues that undermine efficiency in tax collection. These include failure to leverage data, lack of effective tracking tools and gaps in capabilities and resources.

Some governments, notably South Africa, Kenya and Morocco, have made progress in closing revenue resource mobilization gaps but are still inefficient in public spending.

Kenya’s Comprehensive Public Expenditure Review of 2018 admits that the country’s wage bill is considerably high, potentially crowding out other important socio-economic and developmental expenditure.

In the last five years, the wage bill to revenue ratio has consistently exceeded 50 per cent, which is higher than the 35 per cent threshold required by the Public Finance Management Act of 2012.

The McKinsey study says that Africa’s tax revenue acceleration opportunity lies in leveraging digital technologies to create transparency on how subsidies are applied, and thus eliminate leakage and reduce overheads, centralization and harmonization of procurement processes for common categories of goods or services procured by government entities, and defining a price index allowing for the selection and enforcement of a reference price by type of goods.

Other recommendations include: reduction of workforce costs without resorting to reducing headcount by bringing transparency to the government payroll, enhancing planning and prioritization processes of capital expenditures by monitoring and auditing of contractors and systematic implementation of legal contractual safeguards such as the enforcement of performance contracts. Many of these issues were raised at the Tax Summit, including the expansion of the tax base by reducing informality.

There is need to consult widely in especially how to deal with the informal sector. Governments should help them to be more productive before any form of taxation is applied.

There is an opportunity to unlock Africa’s public finance opportunity as the study has noted but we must act quickly to design and deliver a transformative fiscal environment that can propel the continent out of perennial indebtedness.