ABEBE: A simplified tax system will raise revenue

Saturday October 13 2018

Abebe Aemro Selassie

Abebe Aemro Selassie, the director of the African Department at the International Monetary Fund (IMF). PHOTO | COURTESY 

By ALLAN OLINGO
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The director of the African Department at the International Monetary Fund (IMF) Abebe Aemro Selassie spoke with The EastAfrican's Allan Olingo on taxation as the way out of rising debts.

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East African countries are turning to taxation to ramp up revenues as loan repayments and debt obligations continue to haunt them. Is this the best way to go?

Domestic revenue mobilisation is needed to ensure debt sustainability and create a stable funding source for much needed investment and development spending. Many countries in the region have seen significant improvements in collections, but further progress is needed.

Our estimates suggest that countries could raise tax revenues by three to five per cent of gross domestic product over the next five years.

I would emphasise that raising domestic revenue does not necessarily mean only raising tax rates. Countries that have succeeded in raising revenues paid special attention to measures to build the tax base, simplify the tax system and tackle exemptions and incentives.

Cuts in government spending, merging of agencies and putting a freeze on new projects have been adopted as one measure of checking expenditure. Will this affect development plans for the region’s positive economic outlook?

Countries need to strike a balance between investing in infrastructure and development and ensuring debt sustainability. For example, improving the efficiency of spending and raising domestic revenue would both help to create more space for development spending.

Improving the efficiency of public investment could be achieved by strengthening infrastructure governance institutions for the planning, allocation, and implementation of public investment.

Countries also need to continue enhancing public financial management to avoid incurring of arrears and misallocation of expenditure, including by reforming loss-making state-owned enterprises.

What can be done to reduce the region's financial sector vulnerabilities, which have seen slow credit growth and a rise in bad loans?

On the policy side, steps can be taken to strengthen bank supervision and advance financial market development. For example, this can include policies to enhance available debtor information (eg at credit bureaus), rebalance incentives currently discouraging credit to the private sector, such as tax deductibility and exemptions on government exposure, and removing other structural obstacles such as interest- rate ceilings.

In addition, improving access to bank finance, particularly for small- and medium-sized enterprises, would bolster private sector credit.

East African countries have eroded their reserves as they prop up their currencies against a rising import bill. What options do policymakers have to arrest this?

Pressure on currencies is due to the strengthening of the dollar as US monetary policy normalises.

In this context, it is appropriate to allow greater exchange rate movement and avoid excessive intervention. To rebuild reserves, polices should focus on strengthening macroeconomic fundamentals.

This in turn will require ensuring policies are sustainable and reducing the region’s dependence on commodity exports and improving flexibility by advancing structural transformation and labour and product markets reforms.

African countries are now dealing with debt concerns as a result of poor fiscal strategies. How can they dig themselves out of this?

The debt position across the continent is mixed. Both oil exporting countries and faster growing countries with more diversified economies need to improve debt management frameworks to could help better manage currency and interest rate risks.

This would require strengthening capacity to undertake cost-risk analysis of borrowing options and managing repayments on commercial borrowing.

Will the rise in crude prices affect economic growth outlook for the year?

This is a double-edged sword for the continent. On the one side, they help oil exporting countries, and on the other, they have the potential to hold back growth in oil importing countries.

Overall, we expect sub-Saharan Africa’s growth to improve to 3.1 per cent in 2018 and accelerate further to 3.8 per cent in 2019.