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TAX NEWS - may 2010

tax revenues collected in Africa compare well with those of countries at similar stages of development

ABIDJAN/BERLIN (IDN) - Africa is taking a growing role in the world, its population is increasing fast and so too is its need for finance to build for the future.

To achieve the United Nations' Millennium Development Goals and close the gap between its infrastructure and the rest of the world's, the continent requires an annual investment of $93 billion over the next decade, says a landmark new study.

However, as several African nations celebrate 50 years of independence in 2010, the study titled 'African Economic Outlook (AEO) 2010' points out, it is time for a continent that still relies too much on often volatile and unpredictable external flows to take a new look at taxes - a potential untapped source of billions of dollars,

It is time also for donor countries to consider the benefits they can get from giving more help to set up stable, broad-based tax systems in African nations, it adds.

The AEO is published each year, jointly by the African Development Bank (AfDB), the Organisation for Economic Cooperation and Development (OECD) and the UN Economic Commission for Africa (ECA), with the financial support of the European Commission and the Committee of the ACP (African, Caribbean and Pacific) group.

The study notes that African tax administrators, under serious capacity constraints, face a daily battle against informality, evasion, corruption and fraud, pressure to grant exemptions, etc. Yet there is a more optimistic side to the story.

One of the pleasant surprises the AEO springs is that "following a decade of reforms, levels of tax revenues collected in Africa compare well with those of countries at similar stages of development". African politicians are looking for ways to improve collection further, it adds

On the other hand, the study says: "Tax revenues should not be seen as an alternative to foreign aid, but as a component of government revenues that grows as the country develops."

One of the development dividends of effective tax systems, it argues, is greater ownership of the development process, whereby the government shapes an environment that is more conducive to foreign and domestic private investment, sustainable use of debt and effective foreign aid.

"The challenge is therefore for African countries and their partners to reverse the vicious circle of aid dependence shifting government accountability away from citizens towards donors, and trigger a virtuous circle of aid becoming redundant by supporting public resource mobilisation," states the AEO.

In the short run, it adds, "strategies towards more effective, efficient, and fair taxation in Africa typically lie with deepening the tax base in administratively feasible ways".

Policy options include removing tax preferences, dealing with abuses of transfer pricing techniques by multinational enterprises and taxing extractive industries more fairly and more transparently. In the long run, the capacity constraints of African tax administrations must be released to open up policy options.

A few notable messages from the African Economic Outlook are:

- 80 percent of the African countries covered in the AEO (47 of the 53 countries) registered positive growth in 2009 as compared to only 10 percent of rich OECD countries.

- Africa is one of the most undiversified regions in the world: approximately 80 percent of its exports are based in oil, minerals and agricultural goods.

- Resource-related taxes have increased from 5 to 15 percent of GDP (gross domestic product) over the last 15 years. In Equatorial Guinea alone, over 95 percent of taxes collected come from natural resources.

- Low Income Countries in Africa still collect less than 15 percent of GDP in taxes while Upper Middle Income countries collect 35 percent, almost on par with OECD countries.


THE OTHER SIDE

But the AEO also points out that Africa has been hit particularly hard by the global financial crisis and this has put to an abrupt end a period of relatively high economic growth on the continent. But average growth is expected to rebound to 4.5 percent in 2010 and 5.2 percent in 2011.

It finds that Africa's GDP growth was slashed from an average of about 6 percent in 2006-2008 to 2.5 percent in 2009.

The GDP or GNI (gross national income) is a measure of a country's overall economic output. It is the market value of all final goods and services made within the borders of a country in a year.

It is often positively correlated with the standard of living, though its use as a stand-in for measuring the standard of living has come under increasing criticism and many countries are actively exploring alternative measures to GDP for that purpose.

"Given the pace of population growth this means that growth of per capita GDP came to a near standstill. Average growth is expected to rebound to 4.5 percent in 2010 and 5.2 percent in 2011, although the recession will leave its mark," says the document tabled on May 24, 2022 at the annual meetings of he Boards of Governors of the African Development Bank Group in Abidjan, the economic and former official capital of Côte d'Ivoire.

Henri-Bernard Solignac-Lecomte, Head of the Europe, Africa and Middle East Desk at the OECD Development Centre has both good and bad news.

"The good news is that the continent has proved resilient to the crisis. The bad news is that, despite rebounding growth next year, the downturn could make it more difficult for some African countries to meet the Millennium Development Goal of halving the number of people living in poverty by 2015," he said.

The report points to an uneven recovery on the continent. It expects Southern Africa, which was worst affected in 2009, to recover more slowly than other regions with an average growth of almost 4 percent in 2010/2011.

East Africa, which best weathered the global crisis, is projected to again achieve the highest growth with more than 6 percent on average in 2010/2011. North and West Africa are both expected to grow at around 5 percent and Central Africa at 4 percent during the same period.

The Outlook also predicts an uneven recovery across sectors.

In 2009, Africa's export volumes declined by 2.5 percent and import volumes by about 8 percent. Sectors such as mining and manufacturing were particularly exposed to the fall of commodity prices and global trade in goods and services.

Other sectors, notably non-tourism services and agriculture, were more resilient and mitigated the effects of the downturn. In fact, in most African countries the agricultural sector benefited from good harvests due to favourable weather, although in some countries, bad harvests exacerbated the effect of the global crisis.

Analyzing the policies that cushioned the impact of the crisis, the AEO says: "Africa proved to be more resilient to the global crisis than some observers had feared thanks to prudent macro policies prior to the downturn that resulted in improved economic fundamentals in many African countries."

This, together with sustained official aid flows, earlier debt relief and loans by the International Monetary Fund, the World Bank and the African Development Bank provided space for adopting counter-cyclical policies, which cushioned the impact of the crisis. Nonetheless, policy challenges remain.

"The prospect of only a moderate recovery in a number of African countries makes it even more pressing to address the structural problems which existed even before the global crisis, and which reduced growth potential and led to high poverty levels," said Léonce Ndikumana, Director of Development Research Department of the African Development Bank.

The 2010 AEO includes a special study on Public Resource Mobilisation - an acronym for taxation - on means for African governments, as it says, "to become less dependent on aid in the long run, to the benefit of recipients and donors". It comes to the conclusion that there are very large differences in the tax raising performance of individual countries.

Annual taxes per capita ranged in 2008 from between $20 to $40 in Burundi, Guinea-Bissau, DR Congo., Sierra Leone and Ethiopia, to $4,866 in Equatorial Guinea, and $11,725 in Libya.

In fact, tax effort estimates confirm that some countries collect as little as half of what would be expected, given their living standards and economic structures, while others collect two to three times what is expected. In particular, resource-rich countries have made little effort to broaden their tax base.

By contrast Kenya, Morocco, Ghana and Cape Verde have shown that it is possible to collect taxes effectively from diversified sources.

The AEO authors are of the view that strategies towards more effective, efficient, and fair taxation in Africa typically lie with broadening the existing tax base. Policy options include cracking down on fraud and evasion, removing tax preferences, particularly for large corporations and traders, dealing with abuses of transfer pricing techniques by multinationals and taxing extractive industries more fairly and more transparently.

The 2010 AEO findings will be debated by African ministers and CEOs of companies investing in the region at the 10th annual International Economic Forum on Africa on June 11, 2021 at the French Ministry of Economy, Industry and Employment.
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