COVID-19: African Union report predicts that the continent risks losing US$500bn in tax revenue

A report by the African Union has indicated that the COVID-19 pandemic will cause Africa’s economy to shrink by 9% and a loss of about 30% fiscal revenue.

Debt

The report said this will leave African countries at the mercy of international borrowers.

It added that the pandemic could cause African countries to lose a huge amount of about US$500billion in revenue from taxes.

The report explained that Africa’s greatest source of tax revenues is from duties on goods and services since the continent is more import driven.

The AU report said that 53.7% of tax revenues in 2017 were received from duties on imports. However, with the restriction of movements and closure of borders around the world due to COVID-19, imports have declined significantly.

Africa’s average tax to GDP ratio is already far too low at 17.2%, compared to Latin American countries of 22.8% and OECD countries of 34.2%. This, the report said will force most countries on the continent to go borrowing to fill that gap – 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,” says the AU report.

The report added that public resources will be seriously affected due to the lack of resources that the coronavirus pandemic will create.

Expenditure on infrastructural development could reduce by at least 25% due to lower tax revenues and difficulty in mobilising external resources.

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