COVID-19: African countries risk losing US$500bn in tax revenue – An AU reports says

COVID-19: African countries risk losing US$500bn in tax revenue – An AU reports says

An African Union (AU) report has suggested African countries may be left in the mercy of international borrowers as the coronavirus is expected to result in some losses of about 30 per cent in fiscal revenue.

According to the report which sought to analyze the impact COVID-19 will have on the continent, African countries could lose huge amount close to US$500billion in revenue from taxes - a situation which can push many countries to look to the international market for support, thereby increasing debt levels in Africa.

As the continent heavily relies on high imports, its greatest source of tax revenues come from import duties on goods and services, which the AU report says accounted for 53.7 per cent of tax revenues in 2017.

However, with the pandemic catapulting restrictions on the movement of people across countries and shutting down businesses around the world with the closure of borders, imports have declined significantly.

Already, Africa’s average tax to GDP ratio is far too low at 17.2 per cent, compared to Latin American countries pegging at 22.8 per cent and Organisation for Economic Cooperation and Development (OECD) countries of 34.2 per cent hence, the already-declining low tax revenues will only force many countries on the continent to resort to borrowing to fill that gaps created – even though some countries are already debt-distressed or at high risk of being so.

“Governments will have no option other than to rely on international markets, which may increase countries debt levels. Debt should be used for productive investment or growth-enhancing investments rather than maintaining their spending plans.”

“There is a high probability that many countries could face an implosion in the stock of external debt and servicing costs due to the increase in fiscal deficits, as more emphasis will be put on fulfilling social needs – including health care systems, socioeconomic stimulus to householders, SMEs and enterprises.”

“Yet, one-third of African countries are already, or about to be, at high risk as a result of recent sharp increases in debt levels owing to the favourable international rise of bilateral donors and non-residents’ subscriptions to nationally issued bonds on the African market.”

“Debt in many African countries is on concessional terms, and multilateral institutions have no other choice than to help countries secure even easier terms. However, countries with commercial debt from emerging economies will need to refinance in the current economic crisis,” the AU report stated.

According to the report, it adds that public resources will also be deeply affected due to the scarcity of resources that the coronavirus pandemic will create resulting in the drop in infrastructural development by at least 25 per cent due to lower tax revenues and difficulty in mobilising external resources.

Also, public spending in Africa is dominated on health, education and defence and security.

These three areas, the AU says, represent more than 70 per cent of public spending.

Additionally, government spending on the health care system is expected to increase to contain the spread of COVID-19 and limit its impact on the economy.