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Africa must drive domestic revenue mobilization for sustainable development

12 December, 2023
Africa must drive domestic revenue mobilization for sustainable development

Addis Ababa, 12 December 2023 (ECA) - African countries need to effectively manage their resources to drive domestic revenue mobilization for sustainable development, a regional meeting on tax expenditure governance in Africa, heard.

Opening a one-day workshop on issues of tax expenditure governance in Africa, Economic Commission for Africa (ECA) Director for the Macroeconomics and Governance Division, Adam Elhiraika, noted that Africa faced a huge financing deficit which has constrained its ability to achieve the Sustainable Development Goals (SDGs) and Agenda 2063. Besides, the continent was battling high debt levels, some estimated at 64 percent of the GDP. Therefore, it is imperative for African countries to raise domestic funding if they are to meet the SDGs and achieve Agenda 2063.

“Effective governance of all resources including tax incentives that are provided in different forms by governments with the objective to attract investment is needed,” Mr. Elhiraika said, raising concern that “often these tax expenditures are not well targeted, not well measured and not well covered and they end up abused in many cases, fueling rent seeking, corruption and massive losses to governments.”

Lamenting that many tax expenditures end up being losses without helping countries achieve development objectives, Mr. Elhiraika said governments need to be advised on reforming governance of tax incentives and building capacity of their tax institutions to better govern their tax expenditures. He said there is lack of adequate data on tax expenditure losses but estimates were that expenditure costs could go up to 15 percent of GDP in Africa.

The workshop organized by the ECA, discussed the issues of institutional governance of tax expenditure in Africa and examined the magnitude of tax expenditure. It identified prevailing gaps in governance, coordination, transparency, and oversight of tax expenditure provisions in Africa.

ECA highlights that domestic sources play a critical role in attaining the sustainable medium-to long-term transformation needs of African economies, given their relevance to national priorities, level of stability compared with external resources and huge untapped potential.

Accordingly, ECA focuses on improving economic governance and domestic resource mobilization in member States. This includes strengthening the rule of law, trust in governance institutions, reducing corruption, and enhancing public sector management systems through a fair, transparent, and effective tax system.

During the workshop, The ECA/ African Tax Administration Forum (ATAF)report, Economic Governance Report II: A Framework for Assessing and Reporting Tax Expenditures (EGRII), was launched. The report proposed concrete reforms and policy recommendations for fair, transparent, effective, and efficient governance of tax expenditures to improve DRM in Africa.

Ezera Madzivanyika, ATAF Research Manager, African Tax Administration Forum (ATAF) said ATAF has collaborated with the ECA in developing the Economic Governance Report (EGRII) which provides innovative ideas to deal with unhealthy tax expenditures.

“It is high time that Africa protects its revenue base through innovative, proactive and sound tax administration initiatives, Mr. Madzivanyika said, adding that, “Addressing the issue of unhealthy tax expenditures is one area that has the potential to boost the tax base of African jurisdictions.”

In presenting the report, Farzana Sharmin, Economic Affairs Officer at ECA, said African governments were operating in a narrowed fiscal space where they had pressure to ensure economic growth while raising enough revenue to finance national priorities. At the same time, governments faced a tension of growing domestic revenues while attracting investment.

“Tax incentives cost governments money in terms of lost revenues, referred to as tax expenditures,” Ms. Sharmin said, noting that the cost of tax expenditures was much higher than is reported.

“Tax expenditures are provided under arbitrary and discretionary practices outside the country’s tax laws and central administration system, as such it is susceptible to corruption,” said Ms. Sharmin.

The EGR II which focused on ten country case studies, found that the lack of centralisation in the governance of tax expenditures results in ineffective analyses, reporting and oversight and scrutiny of the total tax expenditures.  Besides, tax expenditures were not subjected to the same budgetary control procedures as direct budgetary spending.

The report recommended among other actions, that the regular tax expenditure analysis and reporting be strengthened and that African countries should revisit policies on tax incentives including careful assessment of the cost of different tax incentives provisions. In addition it was recommended that the governance structure for tax expenditures should entail the Ministry of Finance as overseer of the overall governance of tax expenditures.

Tax officials present in the workshop highlighted the need to provide a framework for a cost benefit analysis of tax expenditures. This framework is crucial to effectively inform public policies in relation to tax incentives.

Issued by:
Communications Section
Economic Commission for Africa
PO Box 3001
Addis Ababa
Tel: +251 11 551 5826