African governments face many challenges, including pressure on public finances, a slowdown in foreign investment, and the need to provide housing, infrastructure, and services in fast-growing cities.
BY KUDZAI GOREMUSANDU
At the same time, the global economic slowdown, notably in China and related decline in key commodity prices are making life more difficult for African companies and reinforcing the imperative to develop an environment that enables the dynamism of the private sector.
The continent’s growing population offers a potential demographic growth dividend, precious in a broadly aging world, but African economies need to be able to create opportunities for an expanding workforce and ensure that their energy is mobilised to fuel economic activity.
To enable African economies to meet short-term challenges and make the most of strong long-term fundamentals, governments can prioritise action in key areas and address one overarching imperative — to improve the effectiveness of public-sector leadership and institutions.
Africa needs to take bold steps to mobilise more of its own funding to finance its development — an urgent imperative given weakening currencies, rising interest rate spreads on sovereign debt, and higher volatility in capital inflows to emerging markets.
Recent trends have been disappointing. Africa’s financial depth — its total financial assets as a percentage of GDP — declined from 108% in 2009 to 97% in 2015. During the same period, Latin America’s financial depth increased from 138% to 157%, and that of emerging Asia from 257% to 286%. Africa’s savings rate, as we have noted, dropped from 27% of GDP in 2005 to 16% in 2015.
At the same time, lower commodity prices have put the government revenue of resource exporters under pressure. For example, Nigeria’s oil revenue declined by an estimated 60% between 2011.
Africa’s generally low tax collection is a result of a number of factors. Government revenue authorities typically have limited data on the number of potential taxpayers, lack effective tracking tools, and have gaps in capabilities and resources.
In addition, tax collection processes are often complex and burdensome. The time required by firms to pay their tax is generally longer in Africa than in regions such as East Asia and OECD countries, although there are exceptions, including Kenya, Morocco, and South Africa.
Mckinsey Institute estimates that African governments could increase tax revenue by $120 billion to $300 billion if they were to eliminate non-compliance including fraud, neglect, error, and non-payment.
However, they need to overcome a number of structural challenges to achieve this extra revenue, including high levels of informality in business. It is estimated that governments could increase the amount of tax they collect (excluding growth in resource rents) by $50 billion to $100bn by 2025, simply by taking short-term measures to modernise tax systems and 2015.
Governments should consider strategies to expand high-potential sectors in close cooperation with business, based on a clear understanding of their countries’ comparative advantages. To be successful, any diversification strategy needs to be guided by a long term national vision that sets transparent objectives, sends a clear signal to investors in focus sectors, and guides resource allocation and trade-offs.
To support diversification, governments can also take steps to improve the enabling environment for business, including strengthening transportation and electric power infrastructure, increasing openness to foreign investment, and reviewing new-business registration, bankruptcy laws, and other key regulations.
As a starting point for accelerating diversification, governments need to take action to put in place a strong enabling environment for business. Africa’s business environment has improved over the past 20 years, but the continent is still not as attractive to businesses as in other regions.
In the World Bank’s 2016 Doing business report, 35 of the 50 lowest ranked nations were in Africa. Only seven African countries — Mauritius, Rwanda, Botswana, South Africa, Tunisia, Morocco, and Seychelles (in order of ranking) — were in the top half of the ranking.
Several factors contribute to the challenging business environment. Policies in some mining and exploration companies rank Africa’s policy environment poorly compared with other regions, and this is a significant break on investment in the sector. Electric power is another challenge.
Nearly half of companies in Nigeria and more than one-third in Angola and Egypt identify access to electricity as a major constraint. Firms in these countries reported that power outages cost them 5 to 10% of annual sales.
Logistics, despite recent improvement in some countries, remain another constraint. In Nigeria and Angola, costs and lead times for air and sea freight — for both exports and imports — can be double those in Brazil, China, and India. Taken together, such factors impose considerable extra costs on African businesses.
One World Bank study found that input costs in light manufacturing sectors such as apparel, agribusiness, leather, and wood and metal products in Ethiopia, Tanzania, and Zambia were at least 25% higher than in China. The reasons for this included regulations (including on imports and land access), poor trade logistics, and the high cost of electric power.
Another issue that governments can address is the prevalence of informal firms. Of firms surveyed by the World Bank in Africa, almost 40% — a higher share than in comparable emerging markets — ranked informal practices as a major constraint, while 65% of firms in sub-Saharan Africa stated that they had to compete against unregistered or informal firms.
Informal or unregistered businesses typically do not pay tax or comply with labour and other regulations, and that means unfair competition for companies in the formal sector.
Kudzai Goremusandu is a strategic and innovate business consultant. He offers consultancy services to local and international investors. He has authored a business book entitled Leadershipreneur. Feedback: firstname.lastname@example.org.