COVID-19: Ten Policy Priorities for Africa’s Recovery, Growth, and Transformation

On average, the tax-to-GDP ratio in sub-Saharan African has risen by only 2 to 3 percentage points of GDP in the past two decades, and at least ten countries’ tax to GDP ratios remain below 15 percent. With the collapse of industry in most countries and the extra burden of tax forgiveness related to COVID-19 response packages, revenue generation will become significantly more difficult.

Governments should move swiftly to identify tax loopholes and eliminate exemptions and concessions, particularly for global corporates and wealthy individuals. This would include taking steps to prevent tax-base erosion and profit shifting by companies from one jurisdiction to another. In this time of crisis, such actions will strengthen the social contract between citizens and government by addressing burdensome “tax expenditures”, which are often incurred without parliamentary oversight and a lack of public transparency. A 2019 McKinsey report suggests that programs to enhance tax and tariff performance, including closing tax loopholes, could have the potential to deliver revenues of between two and three percent of GDP, partially offsetting slower growth impacts on revenues.

Tax collection levels are highly uneven across the African continent. In 2018, South Africa’s tax-to-GDP ratio stood at 25 percent, compared to 16 percent for Kenya and only about 11 percent for Ghana and Ethiopia. Even in oil-exporting nations such as Nigeria, tax collection excluding resource rents still makes up less than 10 percent of GDP. In most African countries, there is significant room to increase tax revenues through various means, such as simplifying VAT policy, enforcing tax collection, and utilizing technology to create more efficient tax systems.

Governments can take steps to improve enforcement and collections through increased investment in revenue authorities and audit functions, and by preparing for significantly expanding property tax revenue.  Over the medium term, digitalization now provides opportunities to improve compliance through online registration, paperless tax transactions, and mobile payments. According to Doing Business 2020 the use of online systems for tax filing and payment resulted in efficiency gains in several Sub-Saharan countries.

For most governments, it will be difficult in the midst of the COVID-19 crisis to make swift organizational changes, but processes should be put in place now to implement significant government streamlining over the medium term. And some much-needed changes can be introduced as part of economic recovery plans. For example, governments with a multitude of job creation or agricultural support programs should move to consolidate initiatives for improved effectiveness and impact, resulting in significant savings. Along the same lines, there has been a trend in Africa to expand presidential cabinets and ministerial posts, leading to unwieldy management and overlapping mandates. (By contrast, Ethiopia has reduced cabinet posts by nearly one-third.) The recovery period is a sensible time to address bureaucratic bloat for a more focused and efficient use of people and resources.

Given the fiscal space challenges, governments should use the urgency of the crisis to ensure all public monies are used in the most efficient manner, such as spending on activities that either respond directly to the crisis or on activities that will promote growth and economic transformation. In fact, if managed well, a reduction in public sector spending can help crowd in the private sector. To this end, it is critical to improve budget management by line ministries, with special attention to waste and fraud. This would include vigorous vetting of government projects based on sound economic, technical and financial criteria. The capacity of the auditor general should be strengthened for rapid and robust audits and reviews. Where applicable, results-based budgeting should be introduced. In all countries, an enhanced effort should be launched to address longstanding corruption issues and pass legislation where needed to strengthen those anti-corruption efforts.

Most countries have national development strategies, often aligned with the Sustainable Development Goals, but in many cases they are not backed by financing plans—and thus are not implementable strategies. In the context of the budget measures discussed, these strategies should be revisited with a view to ensure they serve as roadmaps for the economic recovery. It will be especially important to develop mechanisms by which SMEs and the informal sector can access support quickly and easily, including addressing supply chain challenges and basic production. Some governments such as Ethiopia, Kenya, Ghana, and Uganda quickly adopted policies to keep agricultural value chains active, but more will need to be done in the aftermath of COVID-19. In particular, governments should institute progressive food import substitution policies that provide market-oriented incentives for national food production and processing, while using the same to support women and smallholder farmers.

African economies will only recover from this crisis with robust job growth if there is a thriving private sector. Extraordinary efforts should be taken now to pave the way for easy and rapid private sector activity, including the establishment of new firms, corporate expansion, and improved company registration and taxation policy. According to Doing Business 2020, Sub-Saharan African economies raised their average ease of doing business score by just 1 percentage point in the previous year. Even in areas where African countries have made strides, they are well behind others. For example, in high-income economies, 97 percent of companies use electronic filing or payments, whereas in Sub-Saharan Africa it is only 17 percent. The “beyond emergency” policy measures need to address the most pressing binding constraints to business in each country—which in many instances will be access to credit, contract enforcement, labor regulations, and reliable provision of utilities.

Closely related to improving the ease of doing business, governments should move quickly to foster investment after the immediate crisis, particularly in key sectors such as infrastructure and manufacturing. The investment pipeline should be re-assessed (in coordination with the private sector) to prioritize those projects that are in the greatest national interest, will lead to job creation, and will have the largest economic impact in the medium term. Investment promotion agencies should revise standard pitch documents, and governments should quickly make policy changes related to regulatory, financial and legal issues. While the global economy is being greatly impacted, there will remain a very large latent capital base looking for bankable projects—and Africa should take advantage.

In seeking investments, African governments should actively encourage venture capital funding to foster entrepreneurship and accelerate advances in technology and innovation. Even though some 150 digital startups mobilized a record $1.16 billion across Africa in 2018, that figure represents less than 1 percent of global incubator funds—all the more notable since some 80-90 percent of Africa’s venture capital funding originated outside the continent. By comparison, India attracted $7 billion in 2018; China’s total was a staggering $70 billion. By crowding in more venture capital, there is tremendous scope for countries to spur business and economic activity, especially in tech. For example, the Digital Transformation for Africa initiative, a coalition led by the African Union, involves increased funding commitments of $100 billion over the next decade to close Africa’s digital divide.

Technology and innovation hubs are proliferating across the continent—approximately 620 active tech hubs were identified in 2019. But these hubs are often disconnected from government policy and are not well integrated into the private sector. As a result, innovation often occurs in “silos” with limited overall economic impact. Countries should prioritize a more robust and inter-connected innovation ecosystem between entrepreneurs and tech hubs, funders and development partners, and policymakers and other government actors. Some steps are being taken; the Digital Transformation for African initiative entails a comprehensive new approach and tighter policy coordination. In addition, policymakers in particular have an important role to play in supporting an innovation ecosystem by ensuring ease of entry for entrepreneurs, maintaining robust public-private dialogue, and instituting clear regulations for innovation finance.

A few countries, including Kenya, Mauritius, Morocco, South Africa, and Tunisia, have comprehensive digital or innovation strategies in place—most focused on digital technology. The strategies should be aligned with national development priorities as discussed previously and highlight sectors that will support job creation. They must also directly address skills that will be needed for the next generation and the future of work in Africa. The Fourth Industrial Revolution is ushering in new technologies—artificial intelligence, the internet-of-things, and gene therapy, among other examples—that will reshape entire sectors of the economy. Likewise, the COVID-19 crisis is changing how people work, learn, and receive services such as health care. Countries that have not developed such strategies should start now, with a view to using the economic recovery as an opportunity for entrepreneurs to lead development of new markets.