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African countries are dedicating increasingly large sums of their revenues to servicing interest payments on debt, according to a UN economist.
Raymond Gilpin, chief economist and head of the strategy, analysis, and research team at the United Nations Development Programme’s regional bureau for Africa, tells African Business at the African Economic Conference in Botswana that the shift in Africa’s debt composition over the past two decades from concessional to commercial lending has led to a spike in the interest that countries pay on their loans. This shift to repaying creditors, he notes, comes at the expense of critical investment in sectors such as education and health.
“This year the estimate is that African countries will pay about $163bn in debt service compared with $61bn in 2010. Moreover, over half of the countries on the continent are spending more on debt service payments than they are spending on health and education and that is not sustainable,” he notes.
Gilpin says that the solution lies in reforming the global financial architecture to ensure that Africa accesses more concessional finance, and that commercial debt is priced more fairly. Africa currently overpays for debt that it contracts in international markets, he asserts.
“The institutions that price the risk don’t really understand the continent in terms of which data points really tell you about an economy’s ability to repay.”
Raising taxes must replace external lending
Mavis Owusu-Gyamfi, president and CEO of the African Centre for Economic Transformation, argues that prioritising domestic resource mobilisation is essential in light of shrinking concessional finance and increasingly expensive debt. However, governments have to be innovative in their approach to increasing tax revenues.
“What tends to happen when we want additional taxes is that we squeeze the same taxpayers. The cake that has been cut over and over and gets cut again. It’s not sustainable,” she highlights.
Governments are often wary of increasing the tax burden on citizens, fearing a political backlash. In June, Kenya was racked by a wave of deadly anti-government protests (pictured above) after the administration of President William Ruto put forward a finance bill which included significant tax hikes.
Bringing in the informal sector is key, but she warns that small businesses should not be overly burdened since they already pay taxes.
“We’ve got to remember that the informal sector does in fact pay taxes. We always say they don’t, but they pay local government levies. That is a form of tax. If they pay local government levies the onus is on their local governments to use the levies properly and reduce the amount of centralised budgets they receive.”
Anthony Simpasa, director of macroeconomics policy, forecasting and research at the AfDB, says that more can be done to fix the current system and ensure that Africa’s tax-to-GDP ratio improves from the current 15% to between 20% and 23%. For example, tax administrators must leverage technology to enhance compliance and seal leakages.
“On average Africa raises about $500bn in tax revenues in a good year, but there are leakages. We have around $90bn in illicit financial flows and another $200bn plus in corruption related activities.”
He argues that to encourage voluntary tax compliance, governments must demonstrate unwavering accountability in their use of public funds and ensure the provision of reliable social services to their citizens.
“In many countries we sink our own boreholes because there is no water, provide our own roads because national authorities have not been able to provide access roads to our neighbourhoods, and in some cases we even provide lighting.”
“Strengthening the social contract between the government and taxpayers is key. The social contract must bind the government to provide these social services in order to create voluntary compliance,” he concludes.
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