In the last few weeks, Ghana has seen escalating protests over the country’s rapidly deteriorating economy. The wave of popular discontent has been prompted by rising inflation, which reached 27.6% – an 18-year record high – in May, while growth has slowed down to a meagre 3.3%. As a result of mounting economic and political pressure, the government in Accra has therefore formally begun discussions with the International Monetary Fund (IMF) to secure a new support package, hoping for around $2 billion of support.
Recent economic developments in Ghana, one of Africa’s largest and most prosperous economies, are unfortunately reflective of the continent’s direction of travel. Across Africa, rising cost-push inflation and declining growth rates are increasingly limiting government’s ability to relieve poverty or invest to spur economic recovery. With fiscal space shrinking across the continent, it is as important as ever for governments across Africa to urgently recover precious tax revenue lost to the informal economy, excise tax evasion, and untargeted subsidies.
Rising inflation: a global challenge
All around the world, inflation is proving to be a major headache. Rising food and oil prices, which were already climbing prior to Russia’s invasion of Ukraine, are fuelling cost-push inflation that is sparing few, if any, national economies. Most central banks around the world, with the notable exception of Turkey, have therefore started tackling inflation by tightening monetary policy, raising interest rates to their highest levels in twenty years.
But the dark cloud currently hovering over the global economy appears to be particularly ominous in Africa. While recent projections still place the continent’s average inflation rate at 13.5%, rising commodity prices have started affecting several of Africa’s biggest economies – including Egypt, Rwanda, Ghana, and Nigeria – with rates reaching between 15 and 30 percent.
For Africa, however, inflation is only part of the problem. According to the African Development Bank (AfDB) – and recent analyses by the World Bank – growing prices are increasingly combining with slow growth rates to produce stagflation in several African countries, including Ghana. This phenomenon puts even greater pressure on governments, with the increased cost of borrowing making it increasingly difficult to invest in stimulating growth or financing measures to relieve economic distress.
Caught between the need to tighten fiscal policy and that of protecting citizens from growing levels of poverty, governments across Africa have so far started prioritising cutting excess spending. In an attempt to carve out greater fiscal space, Ethiopia – for instance – has recently cut its fuel subsidies. The result, however, has been a near 30% overnight increase in the price of petrol – which has contributed to growing worry and popular discontent.
Carving out more space
There is, however, a way for African governments to continue financing necessary spending without risking further spiralling inflation, which relies on recovering tax revenue that is lost to the informal sector, the trafficking of illicit goods, and the avoidance strategies of major corporations. According to the latest annual report by the Tax Justice Network, African countries lose out on over $17 billion in annual tax revenue due to tax evasion by multinational companies and individuals.
Among the most egregious offenders are major corporations involved in extractive industries. Indeed, research by the IMF found that, while many African countries nominally impose higher corporation tax and royalties on mining and other lucrative sectors, governments often significantly reduce these rates during negotiations with investors. In essence, this means that the effective amount of tax paid is far lower than that imposed by statutory rates. This naturally has a major impact on a country’s finances. In Zambia, for instance, companies that extracted $4.28 billion worth of copper in 2011 only paid a combined $310 million in taxes. It is estimated that its annual tax losses amount to $3 billion, equivalent to a tenth of its GDP.
It is not only big corporations, however, that avoid tax in Africa. Criminal networks that smuggle a variety of goods – from alcohol, to tobacco and medicines – cost the continent billions in lost excise tax. The problem is especially accentuated in Cameroon, with Cameroon’s Employers Association (GICAM) estimating in 2017 that the trade of counterfeit items costs the national economy around 150 billion francs (232 million USD) every year. Since the COVID pandemic, which saw a boom in illicit alcohol trading, annual losses in excise tax have likely increased.
Thankfully, it is a problem that can be easily solved by learning from other countries’ experiences. A report by the IMF, for instance, highlights how Albania was able to successfully use a system offered by Swiss security company SICPA to tackle the country’s illicit tobacco market. SICPA’s solution works by using highly secure digital tax stamps that enable authorities and customers to rapidly establish the product’s authenticity and whether the appropriate duty was paid. Because the technologically advanced digital tax stamps are particularly difficult for counterfeiters to forge, they make it far harder for them to pass off illicit products as legitimate items and enable governments to recoup substantial amounts in lost tax.
The challenge of the informal sector
But the biggest contribution to refilling the tax coffers of cash-strapped African economies would undoubtably come from regularising the informal sector. Unfortunately, however, making progress towards this end appears to be among the most difficult mountains to climb. According to the International Labour Organization, around 85% of all employed people in Africa work in the informal sector, depriving governments of income and employment tax revenues. Even in relatively robust economies such as Ghana’s, more than 80% of the workforce is employed through informal labour.
Although the African continent is a long way away from formalising informal labour, it is an ambition that should not be abandoned. In the meantime, however, governments across the continent should seek to quickly recover lost tax revenues by taking a tougher stance on counterfeiting and corporate tax. In this way, African countries will have the necessary fiscal space to weather the current economic headwinds.
