Digitizing Africa, the key to stronger institutions

Rado Ratovonarivo — Fri, 02 Dec 2022 14:04:00 +0000

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Two women using a digital money transaction to buy and sell fresh produce

Adobe Stock Photo 309431523

By Kavazeua Katjomuise

I overheard a conversation between three young people at a café in an African city. It was a passionate discussion on the management of funds allocated to the COVID-19 response and the effectiveness of the mechanisms in place to manage these funds so they achieve the intended purposes.

The concerns of my three young brothers and sisters resonated with me, as I could not help but reflect on how COVID-19 exposed cracks in Africa’s fragile revenue institutions and contributed to widening the financing gap for the region’s development.

Weak institutions, especially revenue collection and customs authorities, are a challenge in Africa, which loses billions in potential tax revenue, including through tax avoidance and evasion, especially by multinational companies. UNCTAD (1) reports that Africa lost $88.6 billion through illicit financial flows in 2019.

This undermines efforts to mobilize domestic resources to finance the continent’s development as outlined in the United Nation’s 2030 Agenda and African Union Agenda 2063, which both recognize the primacy of strong and effective institutions in driving sustainable development.

African countries fare poorly on domestic resource mobilization compared to other developing countries. The share of revenue to gross domestic product (GDP) in 2020 averaged 16 per cent for Africa compared to 35 per cent for Asia-Pacific and 24 per cent for Latin American Countries. African Least Developed Countries fared even lower at 13.3 per cent.

Governance influences tax revenue collection considerably in Africa. Good governance and strong institutions, measured through regulatory quality, the enforcement of the rule of law, strong institutional capacity and lower corruption, enhance a country’s ability to mobilize domestic resources through revenue collection.

However, corruption erodes tax compliance. Citizens in countries with high corruption are reluctant to pay taxes because of the perception that resources will be misused. Empirical evidence shows that countries with a low Corruption Perception Index (CPI) score collected 4.3 per cent more in tax revenue to GDP than those with a high CPI score (2).

Addressing governance issues and improving transparency in the use of public resources is vital to building trust and generating increased domestic resources. Efforts should be geared at supporting African countries to strengthen governance and tackle corruption.

Technological improvements and digitization could be leveraged to improve scale and efficiency and prevent corruption through increased transparency.

The pace toward digitization has quickened in recent years, particularly in the wake of COVID-19. Before the pandemic, Africa recorded progress toward digitization, albeit driven by the private sector mainly through incubators, start-ups, technological hubs and data centers (3).

Digitization is already transforming African economies in several ways, such as revolutionizing retail payment systems, thus allowing consumers and businesses to save billions in transaction costs, facilitating financial inclusion, and enhancing the efficiency of fiscal and revenue administration.

For example, the launch of M-Shwari in Kenya increased access to financial services for millions who may otherwise have been excluded from the financial sector. Taking advantage of this trend, the Kenyan Revenue Authority (KRA) introduced electronic banking in 2016 to expedite the payment of taxes through secure electronic payment. This, coupled with the launch of iTax, has enabled a single view of taxpayer information, allowing for real-time monitoring of revenue collection, thus improving the efficiency of payment to government suppliers and social protection grants.

Digitization has enabled developed countries to build effective and robust DRM systems, which is critical to ensuring Africa’s recovery from COVID-19. However, despite the widespread adoption of digital technologies across the world, the digital divide excludes many African countries from the benefits of digital technology.

However, digitizing tax administration in Africa has been relatively slow. An International Monetary Fund (IMF) (4) analysis shows that, relative to other developing regions, African countries scored below the world average on almost all indices related to tax administration performance, especially on the degree of digitization. The average score for the degree of digitization was 29 per cent for Africa compared to 49 per cent and 46 per cent for Latin America and the Caribbean as well as East Asia Pacific, respectively.

The COVID-19 pandemic contributed to an erosion of tax collection in Africa due to a lack of digitization, as countries could not fully work remotely. This underscores the urgency of investing in the digitalization of tax collection processes, paired with other digitization initiatives such as digital identification, digital finance, and electronic payment systems.

Evidence shows that enhanced tax collection has followed the introduction of ICTs, including the computerization of tax and customs administration to support tax payments. Countries that have modernized and digitized tax revenue administration have benefited from increased revenue due to improved efficiency, reduced corruption through enhanced transparency, and increased tax compliance. For example, the introduction of electronic cash registers by the Ethiopia Revenue and Customs Authority increased Value Added Tax (VAT) collections by 32 per cent.

COVID-19 provides an opportunity for African governments to embrace digitization by leveraging information and communications technology (ICT) as well as mobile technology.

Increased mobile penetration is an opportunity for African countries to digitize their fiscal and revenue administration. Development partners can support African countries in bolstering DRM systems by channeling substantial Official Development Assistance (ODA) towards strengthening capacities and institutions, including tax authorities, to improve tax collection. This would help enhance African countries’ ability to address tax evasion and avoidance, tackle money laundering and tax havens, and curtail base erosion and profit sharing (BEPS).

Development partners and international organizations can increase support to Africa to strengthen its capacity for tax assessment, including through training, mentorship and coaching. Complimentary measures are also necessary to enhance African countries’ capacity to enact and implement policies and legislation to tackle BEPS and transfer pricing, starting with a comprehensive review of all tax treaties, tax incentives, and trade and investment agreements to eliminate all loopholes for BEPS and other IFFs. This is central to de-risking Africa’s fiscal space for long-term sustainable development in the post-pandemic era.

In conclusion, building strong institutions through digitizing key institutions, especially revenue authorities, is critical to boosting domestic resource mobilization systems. By digitizing fiscal and revenue collection institutions and modernizing customs systems, African countries can build robust DRM systems and overcome the challenge of weak institutions.

References:
(1) UNCTAD’s Economic Development Report, 2020
(2) Odusola
(3) Cristina Duarte, 2020, “Africa goes digital”, Finance and Development, March
(4) IMF, ISORA, 2018. Understanding Revenue Administration

The author is a Senior Economic Affairs Officer and the leader of the policy analysis and soordination team in the Office of the Special Adviser on Africa at the United Nations.

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Office of the Special Adviser on Africa - Transparency

Digitizing Africa, the key to stronger institutions

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By Kavazeua Katjomuise