IMF cautions African governments to boost domestic revenue before entering the African Continental Free Trade Agreement

According to the IMF, the AfCFTA will be a game-changer on the continent as it will increase the GDPs of member countries due to an expected increase in inter-regional trade.

However, the IMF warned that some countries may lose up to 5 percent of their GDP to revenue losses from the scrapping of tariffs that will come with the implementation of the continental trade agreement.

This was contained in the Regional Economic Outlook, sub-Saharan Africa report which said that “On average, the revenue loss may amount to about 0.5 percent to 0.8 percent of GDP, depending on the assumed elasticities. However, in a few countries, revenue losses may be as large as 3 to 5 percent of GDP. For these countries, authorities should define clear domestic revenue mobilisation policies on entering the AfCFTA.”

The report shows that customs revenue is low in Africa and just a small portion of such revenue is coming from regional trade.

Between 2010 -2015, according to the IMF, the customs revenue of the continent averaged about 2.5 percent of GDP, which further represents 16 percent of total tax revenue.

Again, within the same period, most countries’ customs revenues averaged less than 2 percent of GDP, with the exception of a few countries that exceeded 5 percent of GDP. Ghana’s imports revenue, for the period under review, averaged about 3 percent; Liberia topping with more than 7 percent.

But with countries like Cote d’Ivoire, Malawi, Zambia, and Zimbabwe, imports from the region exceeded 35 percent of total imports, signalling risk of high revenue losses with the implementation of AfCFTA.

It is due to these reasons that the IMF is cautioning African governments to implement policies that will shoot their domestic revenues up before they enter the trade agreement.

“Deeper regional trade integration is also likely to adversely affect fiscal revenues in a few countries which will need to design domestic tax revenue-raising strategies while being mindful of possible growth and distribution effects,” it said.

The report encouraged agriculture-based and less diversified countries to combine trade policies with structural reforms that boost agricultural productivity to better leverage existing comparative advantage if they want to benefit from the regional trade agreement.

The report also urges for the development of a regional payment system, the introduction of swap arrangements across central banks, and the establishment of multicurrency clearing centres to facilitate and support trade integration.