While we do not yet know the full impact of the pandemic on poor African countries, we already know that the impacts on economies, health conditions and politics are significant – and will continue to be substantial. In this brief, we discuss the long-term implications and effects of the pandemic on Domestic Resource Mobilisation in sub-Saharan Africa. The brief builds on the report Implications of the COVID-19 pandemic for revenue generation in poor African countries.
Since late 2019, the COVID-19 pandemic has been spreading globally. The pandemic has affected all aspects of global society and has caused specific challenges for both the government and private sectors in most countries. While we do not yet know the full impact of the pandemic on poor African countries, we already know that the impacts on economies, health conditions and politics are significant – and will continue to be substantial. Some observers think that the impacts could be worse than the effects of the 2008 financial crisis (Lustig and Mariscal, 2020). Globally, GDP in 2021 is expected to be 3.2% below pre-pandemic projections (World Bank, 2021a). If this low growth is sustained, the average real GDP per capita in sub-Saharan Africa (SSA) will be back to its 2008 level. Thus, the COVID-19 pandemic may wipe out the economic and development gains that SSA has achieved over the past fifteen years. Government revenues in SSA in 2020 are expected to fall below pre-COVID-19 projections by about 2.3 percentage points of GDP (IMF, 2020). Sub-Saharan Africa’s recovery, while helped by spill-overs from the global recovery, is expected to remain fragile given the slow pace of vaccination and delays to major investments in infrastructure and the extractives sector.
Domestic Resource Mobilisation (DRM) has been recognised by the IMF as “one of the most pressing policy challenges facing” sub-Saharan African countries (IMF, 2018: 31). Similarly, DRM is reflected in the UN Sustainable Development Goals, under SDG 17.1: “Strengthen domestic resource mobilisation, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection.” This highlights the importance of DRM in development efforts, and specifically in targeting relevant policy-making.
According to a USAID definition, DRM is: “the process through which countries raise and spend their own funds to provide for their people” (IMF, 2018). As such, it is the long-term path to sustainable development finance. However, increasing revenues is not a silver bullet. Additional revenues will only lead to improved development outcomes if they are spent on improving peoples’ lives and enhancing the state’s institutional capacity to provide productive public services in an accountable and equitable manner.
As the economies of poor countries slow down due to the pandemic, poverty and inequality will increase, probably significantly. Consequently, the funds needed to counteract these trends through taxation, loans, aid and remittances will grow. In the short term, some 80–395 million people could fall into extreme poverty globally, depending on the extent of the economic shock from COVID-19. For SSA, the World Bank estimates that it could range from 33 to 37 million people. In Tanzania, the crisis could push an estimated additional 600 000 people below the poverty line (World Bank, 2021b).
The largest impact on growth so far has been in tourism-dependent economies, but oil-exporting countries and other commodity- intensive countries have also been hit hard. In East Africa, disruption to the tourism industry and lockdowns have caused substantial slowdowns in Ethiopia, Kenya and Tanzania. In West and Central Africa, the decline in growth is driven mainly by the reduction of oil exports. It is expected that fragile countries where the state has limited capacity to carry out vital governance functions, including security and provisions of basic services, will experience a strong decline in growth as the pandemic aggravates the drivers of fragility. Many poorer countries were already struggling to meet the targets set by the SDGs before the outbreak of COVID-19 (Andersen and Therkildsen, 2019), and this situation has only gotten worse since the beginning of the pandemic. Therefore, improved domestic resource mobilisation is as important as ever. Although with often considerable country variations, DRM is driven by a combination of economic, political, institutional and social factors. For instance, DRM is typically higher when the manufacturing and service sectors are larger, the country is more urbanized, the political situation is stable, there is political support for tax reforms, the tax administration is relatively effective, and citizens trust the government. The global economy and international conjunctures and donor influence also impact DRM.
Guest Editorial