Fiscal Social Contracts and Domestic Resource Mobilization in Sub-Saharan Africa

"We went through, just in the last 20 years, this big debt forgiveness for a lot of African countries…...now all of a sudden are we going to go through another cycle of that?" These were the remarks of U.S. Assistant Secretary of State for African Affairs Tibor Nagy at a press conference in Pretoria, South Africa in June 2019. He was, of course, referring to the Heavily Indebted Poor Countries (HIPC) Initiative that was rolled out by the World Bank and the International Monetary Fund (IMF) in 1996 with the noble mission of ensuring that "no poor country faces a debt burden it cannot manage." The initiative resulted in billions [i] of dollars in debt relief for the world's poorest countries — mostly in Sub-Saharan Africa.

Barely a decade and a half after this debt relief effort, the issue of public debt management in Sub-Saharan Africa (SSA) has resurfaced in fiscal dialogues about the region. Since the turn of the decade (2010) the average public debt as a share of GDP in SSA countries has grown from 29.6 percent to 53.1 percent (IMF, 2019). More than 40 percent of SSA countries are at debt distress levels, leading to frantic calls from the IMF and the World Bank for countries to be more cautious with their pace of debt accumulation. This time around, the main stakeholders in SSA's debt situation are not limited to the Paris Club — China also now has a major stake in these debts.

The situation is far from being addressed. SSA countries are simply not raising enough revenues to finance their own development needs and to transform their economies. The African Development Bank estimates that, while Africa's development financing needs for infrastructure alone amount to USD$130–$170 billion per year, available resources fall short by more than half the needed amount (USD$67.6–$107.5 billion). The 2015 Addis Ababa Action Agenda called on countries to scale up efforts to mobilize domestic resources to achieve the UN's Sustainable Development Goals (SDGs). But four years on, revenue as a percentage of GDP only averages 17.7 percent (up from 17.6 percent in 2015) for Sub-Saharan African countries. In the region, tax mobilization is largely driven by rising value-added tax (VAT), which constitutes more than a third of total tax mobilized. Non-tax revenue, however, remains untapped, constituting a very small share (about 1 to 2 percent) of total revenue collection in SSA — compared to 10 percent or more in Latin America. The IMF's Regional Economic Report (2019) estimates the overall revenue gap among SSA countries at 3 to 5 percent of GDP on average. In short, SSA countries are still well below their tax capability levels, with a lot of room to maximize non-tax revenues for growth.

It is crucial for any country to manage its debt sustainability level and control public expenditures. SSA countries, in particular, must also deal with their revenue mobilization problem. The second African Transformation Forum, held in 2018, convened ministers and senior revenue officials to discuss issues obstructing the region's quest to ramp up much-needed revenues for domestic development. The challenges identified included: the inability of the governments to effectively capture the informal sector into the tax net; the lack of political commitment to tackle tax incentives, exemptions and rationalizing subsidies; challenges in deploying technology for tax administration in a region with low internet penetration; the need to tackle the issues of tax evasion, illicit financial flows (IFFs) and corruption; political and technical challenges in taxing land and real estate; the need to ensure consistency in tax systems from the national to sub-national levels; and training and capacity issues in tax administration, especially at decentralized levels.

These challenges notwithstanding, one of the fundamental issues with revenue mobilization efforts in the region has been the rather flawed social contract by which taxpayers are expected to fulfill their tax obligations. Within the context of revenue mobilization and taxation, the social contract is simple: citizens are expected to pay their taxes, and in return, they expect to share in the benefits of governance. In essence, in paying taxes, citizens expect their governments will in return provide public services such as education, hospitals and healthcare, police protection, highway building and maintenance, and welfare programs. Compromising this social contract has far-reaching implications for compliance with revenue mobilization efforts. A myriad of studies have proven that the more value citizens see in the taxes they pay, the more likely it is for them to voluntarily comply. This is a key building block of tax administration; most advanced economies perform fairly successfully in generating tax revenue on the strength of this. Indeed, the reverse is also true, given that tax revenue helps governments provide services that lead to economic, social and environmental development.

In SSA, the social contract around the payment of taxes is flawed for two reasons. Firstly, the taxes mobilized do not sufficiently translate into improvements in the delivery of public services, and the benefits from governance seem to benefit only a few. Findings from Pew Research (2015) indicated that although an average of 78 percent of respondents from SSA countries sampled were very or somewhat confident their government would help tackle major problems facing their country (i.e., healthcare and education), 59 percent were of the view that government was run for the benefit of the few, rather than the benefit of all.  Secondly, in SSA improvements in public services tend to be overshadowed by high levels of corruption, opaque public expenditures, embezzlement, and procurement scandals. Vertical accountability has been a major challenge of governance in many SSA countries. The region has consistently ranked the lowest globally in the Corruption Perceptions Index (CPI), giving a bleak picture of inaction against corruption. The region's average score was a lowly 32 (out of 100) in the 2019 edition of the CPI. Corruption is a major barrier to economic growth and basic freedoms in SSA.  More importantly, it distorts the views of citizens about governance and fairness in the tax system. The latest round of the Afrobarometer (2019) revealed that corruption is on the rise on the continent, as expressed by 55 percent of citizens interviewed across 35 sampled countries on the continent. The report further revealed that African governments are not doing enough to tackle corruption, so much that more than 28 percent of respondents (across countries) who accessed public services, such as health care and education, had to pay bribes to get the service.

It is no surprise that citizens in SSA are skeptical about their social duty to contribute to a revenue system.  They wonder who actually benefits from taxes paid, and whether all citizens are giving their fair share of contributions to the "national cake." In the face of poor public service delivery, massive corruption, misappropriation of funds, and unfair enforcement of tax laws, the masses are unclear about the benefits of paying taxes. Some studies assert that massive tax noncompliance in Sub-Saharan African countries may be better characterized as a "tax boycott" arising from taxpayers' frustration with the fiscal social contract of governance.

Moreover, the work of revenue authorities in SSA becomes more challenging when they are expected to mobilize revenues despite having limited information on how those collected in the past have been utilized. Specifically, it is a challenge to communicate with taxpayers about their tax obligations without being able to show visible evidence of the benefits they derive from their taxes (infrastructure, services, etc.)

The Way Forward

Preserving peace and stability, and building the foundations for economic transformation, require resources that have to be mobilized primarily from internal sources. But without repairing the rather scarred fiscal social contract in most SSA countries, compliance on tax revenue efforts will forever remain elusive. While compliance could be improved by introducing and enforcing sanctions for non-payment of taxes, simplifying tax processes to minimize administrative burden, and adopting digital technologies in tax collection, the impact of all these well-intended recommendations from experts could be amplified if the social contract issue were addressed at the national level. There is no better way to boost the social contract between taxpayers and government than by providing visible evidence of public services rendered thanks to revenues mobilized. Addressing this challenge will require concerted efforts by Sub-Saharan African countries to strengthen policies and institutions that monitor, evaluate, and disseminate information about the impact of government spending. Additionally, governments have to crack the whip on corruption by introducing stricter punishment, particularly for members of the ruling class who are implicated in such activities. This will build the confidence of citizens in the government and public administration system. A recent IMF study concluded that countries with the lowest levels of corruption collect four percent of GDP more in tax revenues than countries with the highest levels of corruption at similar income levels.

IMF Managing Director Kristalina Georgieva notes that it is increasingly becoming obvious that Sub-Saharan African countries will not be able to simply "borrow their way" to the SDGs — unlike for the Millennium Development Goals.  It is therefore imperative that SSA countries strengthen their fiscal contract with their citizens by building effective, transparent, and accountable domestic revenue mobilization systems, while improving their public service delivery systems to the benefit of all citizens.

Photo credit: Aerial Views of the Ivory Coast's economic capital of Abidjan at sunset by Ayotography/Shutterstock.com

Richmond Commodore is a current Southern Voices Network for Peacebuilding (SVNP) scholar with the Wilson Center Africa Program during the spring 2020 term. He is a Research Analyst at the African Center for Economic Transformation (ACET) in Ghana, a member organization of the SVNP.

[i] The total cost of debt relief to creditors under the HIPC Initiative is estimated at USD$76.2 billion in the end of 2017's present value.