Implications of the COVID-19 pandemic for revenue generation in poor African countries

Abstract

In the aftermath of the COVID-19 pandemic the need in poor countries in Africa for more revenues is obvious and growing - also because aid agencies are quite stingy in helping them in this crisis. The pandemic’s negative impact on revenues is especially pronounced in countries that are most dependent on international trade, tourism and petroleum exports.

The good news is that sub-Saharan African tax collectors have performed almost as well as their peers in the much wealthier Latin America and substantially better than in South Asian countries.

Increased domestic revenue mobilization (DRM) is possible depending on a country’s specific situation and political economy - and it will not be easy:

The IMF’s position is that increasing the tax-to-GDP ratio by five percentage points by 2030 is a reasonable aspiration for poor countries. That was unrealistic before COVID-19: it is even more so now. No silver bullet (“tax the rich”!) will generate substantial additional revenues on its own. Better utilization of a range of revenues sources are needed. A stop for Illicit Financial Flows will clearly help but is not the golden egg that many believe. Inequality may increase due to COVID-19. However, major redistribution through domestic taxation (as in the Danish welfare state model) is unrealistic in countries with low revenue-to-GDP ratios. Nor is there strong organised political support for such redistribution in poor African countries. Donor support to DRM in poor countries can provide manifold returns on investments if targeted strategically. Support to relevant local and international civil society organisations is also important to help to foster public engagement in tax reforms and improved fiscal accountability. The Sustainable Development Goals in poor countries are strongly under-financed. The progress and sustainability of the SDGs will increasingly depend on poor countries’ own revenues. Hence the centrality of strategically relevant donor support to DRM.