The International Monetary Fund (IMF) says countries in Sub-Saharan Africa need to rely more on domestic resources when mobilizing revenue.
The international organization notes that due to high external borrowing costs, authorities will ultimately have to come up with stronger internal efforts to ensure they increase revenue.
This is contained in the IMF’s Regional Economic Outlook Report (REO) for Sub-Saharan Africa, published in October 2023.
The IMF poses the following question to the region. How can countries in the region manage high debt obligations while still creating space for development spending?
Worth clarifying is that the IMF was not specific to only Eswatini, but all countries in Sub-Saharan Africa.
“Debt levels are high and the funding squeeze is far from over. Moreover, with countries relying increasingly on market financing, interest payments have ballooned, crowding out space for development spending—the median ratio of interest to revenue is around 10½ percent in sub-Saharan Africa, over three times that of advanced economies. With rising needs and fewer options, fiscal policy must centre around ways to adapt in the face of a tighter funding envelope,” notes the IMF.
Due to these ballooning interest payments, the IMF suggests that countries in the region should consider expanding their tax base through reduced (distortive) tax expenditures and improved tax design.
“The region has often relied on value-added taxes (VAT), but as activity shifts to the formal sector, consideration should also be given to more progressive sources, such as income and property taxes in addition to VAT. More broadly, a critical precondition for tax policy reform is effective tax administration, an area where the increased use of digitalization promises to significantly improve efficiency in collection,” the report discloses.
The outgoing Minister of Finance Neal Rijkenberg has previously stated that increasing taxes was not on the country’s radar in the previous financial year as households were struggling.
Furthermore, the IMF advises that with limited revenues and large development needs, countries need to make the most of the resources they have. Investment projects should be selected carefully to ensure high economic and social returns, while the efficiency of spending needs to be improved.
The international organization further cautions that when investment projects are being carefully selected, it is important to protect growth-enhancing expenditures (such as on education, health, and critical infrastructure) as well as social assistance to the vulnerable.