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New perspectives: Role of private sector in resource mobilisation

Obituaries
Africa realises that industrialisation is the way to go, as outlined in the two continental development plans, but resources to fund these programmes must inevitably be mobilised domestically.

BY RONALD ZVENDIYA Success in implementing Agenda 2063 and the Sustainable Development Goals depends largely on the availability and adequacy of resources.

Africa realises that industrialisation is the way to go, as outlined in the two continental development plans, but resources to fund these programmes must inevitably be mobilised domestically.

Domestic resource mobilisation (DRM) was recognised as one of the six leading sources of finance for the Millennium Development Goals (MDGs), but many African countries including Zimbabwe did not fully achieve the MDGs due to overreliance on donor funding.

One part of DRM is generating taxes and savings, which implies that governments and the private sector have key roles in this process.

Specifically, the private sector should mobilise private savings, expand its productive investments, conduct responsible business by not engaging in tax avoidance and illicit financial flows, and ensure corporate social responsibility.

However, the Covid-19 pandemic measures also affected domestic resource mobilisation in Zimbabwe.

Some of these measures include the closure of companies deemed not critical, social distancing, banning large gatherings, curfews and confinement (partial or total), border control and closure, market closures, suspension of non-essential activities, and travel bans.

Furthermore, with the coming of the pandemic, trade has been sluggish.

There has been a reduced demand for commodities due to the closure of the main markets.

This has had negative effects on the quality and amount of revenues accruing to the country.

The private sector is very important in collaborating and cooperating with governments and other key stakeholders to maximize tax revenues and promote savings and investment.

Hence, possible interventions for the private sector to enhance domestic resource mobilization is imperative.

However, the laying off of workers experienced in the tourism sector has affected revenue streams such as pay as you earn and Value Added Tax (VAT). The loss of jobs affects consumption.

Furthermore, VAT has been affected because of reduced demand for daily consumables and food staff for patrons.

The major capacity areas that require attention are stopping illicit financial flows, fighting corruption, ensuring efficient tax revenue collection, and strengthening revenue governance.

The capacity constraints hinder improving tax collection and broadening the tax base by increasing informal sector taxation, boosting savings through both formal and informal financial institutions, and reducing capital flight.

In light of these challenges, the private sector can support capacity-building initiatives through corporate social responsibility programs.

It can also support training for public officers inefficient tax administration and formalizing the informal sector to widen the tax base, which in the long run will reduce the tax burden on the private sector.

The private sector can improve Zimbabwe’s ability to curb resource leakages and maximize tax revenue collections from all possible sources by mobilizing domestic savings, ensuring financial inclusion, and maximizing development impact in strategic priority areas.

Beyond paying taxes and mobilising savings, the private sector can support domestic resource mobilisation efforts by contributing, through corporate social responsibility, to interventions that make governments accountable and transparent in the use of tax revenues.

Illicit financial flows are a developmental problem that leads to the draining of financial resources suffocating the national budget.

With the onslaught of the Covid-19 crisis, the scale and scope of illicit financial flows increased as authorities were diverting their focus and overwhelmed by the unprecedented economic fallout.

Such concerns are especially acute in developing countries, many of which are already characterised by poor governance, weak regulatory oversight, and corruption.

The private sector should invest in human, technical, legal, regulatory, and financial capacities to deal with illicit financial flows.

Investments in financial and human development can develop the capacities of government officials, universities, civil servants, and business schools to produce finance, procurement, and management graduates who can efficiently trace and recover illicit funds.

The private sector can share information with the government on fund movement, tax evasion, and tax avoidance and assist in plugging illegal fund transfers.

Multinational companies and even informal firms can volunteer to remit taxes due to the government, and assist in simplifying and rationalizing the tax system to tap hard-to-tax sectors.

Private savings for future productive investments should be increased to broaden the tax base.

The private sector should retain and plough back profits and find innovative ways to raise capital for investment in productive assets.

These can include private-public partnerships, private partnerships, local currency bond markets, and e-banking.

Diaspora bonds and infrastructure bonds can mobilise diaspora resources and channel remittances through formal channels to boost liquidity and supplement household income and savings.

Remittance flows are an integral part of development finance in the African context.

Despite proving to be relatively resilient during the 2008 financial crisis and the 2014 Ebola epidemic, remittances are currently under threat by the Covid-19 pandemic.

The decline in remittances from the African diaspora affects African economies.

This is because lockdown measures implemented in host countries have caused many African migrants to lose their jobs, consequently reducing remittance flows to developing countries including Zimbabwe.

Furthermore, some of the migrant workers are undocumented and thus hinders them from sending money to their families because of the stringent identification requirements demanded from migrant workers.

The private sector can take part in public-private partnerships to fund large capital infrastructure projects that cannot be fully accommodated under government budgets.

Private financial service firms can direct credit to attractive sectors of the economy and micro, small, and medium enterprises.

The financial sector should promote financial inclusion and integration (for example, through mobile money transfers and e-banking) and domestic savings, especially through the use of information and communication technology.

The Covid-19 pandemic led to growing reports on the economic losses faced by workers engaging in certain occupations due to reduced demand, lack of access to markets, and the loss of mobility of people and goods.

The losses have an impact on the spending patterns of the informal workers.

In this case, VAT was affected due to reduced consumption.

Furthermore, the operations of some of the companies that rely on inputs and raw materials from the informal sector are likely to be affected.

This may also affect the general functioning of the national economy as a whole.

The informal sector in sub-Saharan Africa remains one of the largest in the world and the pandemic constrains the mobilisation of domestic resources, as it is undermining the already weak economic performance of the country and presents a further downside risk to economic growth.

In conclusion, the private sector is arguably the most important stakeholder in Africa’s domestic resource mobilization strategy.

Growth in tax revenue and reductions in illicit financial flows will not happen without a responsible private sector.

The compliance and active participation of the private sector in tax laws and other revenue mobilisation strategies require equal attention.

Also important is unleashing the innovative capacity and creativity in the private sector to mobilize domestic savings and promote financial inclusion.

Zvendiya is a research and onnovation analyst at the Insurance and Pensions Commission, who writes in his individual capacity.  For feedback: rzvendiya@gmail.com. *These weekly articles are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge.zes@gmail.com or mobile: +263 772 382 852.

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