Wider tax nets, digitisation touted for post-Covid revival

Digitisation and expansion of tax bases could help countries in Africa weather the economic shocks of the Covid-19 pandemic, the African Development Bank (AfDB) has said.

Kevin Chika Urama, the bank’s acting chief economist and Vice President, Economic Governance and Knowledge Management Complex, said digitisation would boost revenue collection and encourage prudent management of the resources at hand.

“Digitisation can create new dynamics in governance and help improve the management of existing resources, curb illicit financial flows, and potentially free up capital for more productive uses,” he the three-day Africa Economic Conference which closed December 4 in Cape Verde.

“It could also facilitate coordination amongst the various government entities focused on resource mobilisation, such as tax agencies, investment promotion units, central banks, and the treasury. African countries must urgently leverage digital technology to improve efficiency in tax collection and revenues” Prof Urama added.

Estimates by AfDB show that government revenues have declined on average by 10 to 15 percent in 2020 across sub-Saharan Africa due to economic fallout from the Covid-19, with average revenue-to-GDP decreasing by two percentage points to 18 percent in 2020, from about 20 percent in 2019.

Projections last year had also showed that Covid-19 restrictions would contract African exports by 17 percent, resulting in a five percent drop in public revenue losses.

“For this reason, it is vital that African countries increase their tax base by addressing structural bottlenecks such as weak organisational structures, low capacity of tax officials and a lack of modern, computerised, risk-management techniques,” Prof Urama said.

AfDB estimates that African governments would need about $484 billion within the next three years to address the socio-economic impact of the pandemic and support economic recovery.

The new wave of the Covid-19 along with the extended government relief actions that accompany it is also expected to exert further pressure on the debt situations of many countries.

Streamline processes

“This is particularly worrying in African economies, where the debt-to-GDP ratio is estimated to increase by 10 to 15 percentage points by the end of 2021 relative to the previously stable debt-to-GDP ratio of around 60 percent,” the official said.

Prof Urama said digitalisation would also help streamline often-cumbersome processes in accessing African stock markets and reduce information asymmetries between investors and investees, especially in private equity or venture capital space.

“Development of stock markets, sovereign wealth funds, pension funds, and insurance sector would be crucial in financing development,” he said.

UN Economic Commission for Africa Executive Secretary, Vera Songwe said increased expenditures and declining revenues have worsened Africa’s fiscal deficits which deteriorated from -4.2 percent of GDP in 2019 to -7.6 percent of GDP in 2020.

“Of particular concern is that many developing countries are unable to meet the essential health and humanitarian needs of their people and to recover from the socio-economic crisis, owing to growing fiscal constraints and rising debt servicing obligations,” she said in a speech read on her behalf by her deputy, Antonio Pedro.

ECA said that as of June 2021, over 22 of the 54 African countries were either in or at high risk of debt distress, and many developing countries faced currency depreciation.

“In addition, inflationary pressures are on the rise threatening to erode the purchasing power of households already reeling from the pandemic. Policymakers are now faced with the daunting task of ensuring sustained socio-economic recovery while mobilising resources to finance rising fiscal deficits and debt obligations,” Ms Songwe said.