A UN economist highlights that African nations are increasingly directing a larger share of their revenues towards servicing debt interest payments.
Raymond Gilpin, who serves as the chief economist and leads the strategy, analysis, and research division at the United Nations Development Programme’s regional office for Africa, spoke with African Business during the African Economic Conference in Botswana. He noted that over the past twenty years, Africa’s debt profile has shifted notably from concessional to commercial lending. This change has led to a significant rise in the interest payments that countries face on their loans. He stresses that this focus on creditor interests undermines critical investments in essential sectors such as education and healthcare.
“This year, it’s projected that African nations will allocate around $163 billion to debt servicing, a steep increase from $61 billion in 2010. Moreover, more than half of the countries on the continent are spending more on servicing debt than on health and education—this is not sustainable,” he indicates.
Gilpin argues that overhauling the global financial system is vital to ensuring that Africa gains better access to concessional funding and that commercial debt pricing is fairer. He claims that Africa currently pays disproportionately high rates for the debt it assumes in international markets.
“The entities that determine risk pricing often lack a comprehensive understanding of the continent and neglect to identify the critical data points that accurately represent an economy’s ability to repay,” he adds.
Tax increases must replace external borrowing
Mavis Owusu-Gyamfi, the president and CEO of the African Centre for Economic Transformation, argues that in light of dwindling concessional finance and escalating debt costs, a focus on domestic resource mobilization is essential. Nevertheless, she stresses that governments should employ innovative methods to enhance tax revenues.
“When we aim to raise tax revenue, we frequently end up overburdening the same taxpayers repeatedly. It’s akin to incessantly cutting the same cake, which is not viable,” she cautions.
Governments often shy away from increasing the tax load on citizens due to fears of political backlash. In June, violent anti-government protests broke out in Kenya following President William Ruto’s administration proposing a finance bill that featured considerable tax hikes (as pictured above).
While engaging the informal sector is crucial, she warns against placing undue burdens on small businesses, which already contribute through taxes.
“We must acknowledge that the informal sector does indeed pay taxes. While we often claim they do not, they contribute through local government levies. This is a form of taxation. If they are paying these levies, it is essential for local governments to utilize these funds appropriately and to reduce dependence on central budgets,” she clarifies.
Anthony Simpasa, director of macroeconomic policy, forecasting, and research at the AfDB, posits that there is much to be done to improve the existing framework and raise Africa’s tax-to-GDP ratio from the current 15% to between 20% and 23%. For example, tax authorities should leverage technology to enhance compliance and close loopholes.
“Typically, Africa generates about $500 billion in tax revenue in a good year, but there are substantial leakages. We estimate approximately $90 billion in illicit financial outflows and over $200 billion associated with corruption-related activities,” he states.
He argues that to encourage voluntary tax compliance, governments must demonstrate unwavering accountability in managing public funds and ensure that reliable social services are available to their citizens.
“In numerous cases, we find ourselves digging our own boreholes due to water scarcity, constructing our own roads because national authorities have not addressed access in our neighborhoods, and even providing our own lighting,” he remarks.
“It is crucial to fortify the social contract between the government and taxpayers. This contract must mandate the government to deliver these social services to promote voluntary compliance,” he concludes.
