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Government debt and borrowing costs for sub-Saharan African countries have been rising in recent years. In several countries, external debt servicing costs—the money needed to cover the interest and principal on debt—are now at their highest level since 2003. The rising debt servicing costs are already reducing funding for economic development; Kenya cut its development budget for the upcoming year and Zambia suspended development of projects below 80 percent completion. These cutbacks come at a time when the region is falling short of the needed investment rates of 30 percent of GDP or higher over a sustained period to achieve economic transformation. The rising debt levels and debt servicing cost against the backdrop of growing domestic financing needs is a reminder that the challenge of sustainable development financing across the region has not yet been addressed.
In a recent policy brief, Mobilization of tax revenues: state of play and policy options, we analyze tax revenue collection in sub-Saharan Africa, and explore its potential to bridge part of the continent’s financing shortfall. In what follows, we highlight some key takeaways from our research.
Tax revenues have been increasing but they remain low
As Figure 1 shows, the region has made progress in raising non-resource tax revenues over the past two decades, and social contributions from roughly 11 percent in the early 2000s to around 15 percent in 2015, excluding social contributions (averages based on an unbalanced panel dataset). Crucial to improving revenue collection were reforms such as the introduction of value-added taxes, programs to improve taxpayer services, and rollout of electronic tax filing systems. Despite these efforts, tax revenues remain low at 15 percent of GDP, significantly below the OECD average of 24 percent.
Figure 1: Regional non-resource taxes 2000-20015 as percent of GDP
Tax capacity and revenue collection efficiency have improved since 2000
To understand the recent improvements to the region’s revenue collection and the restraining factors …