AFRICA MONEY-Shining the tax light on the grey economy


“Widening the tax base,” is a refrain common to the lips of African policymakers, but taxing the legions of Africans conducting their day-to-day affairs in the informal sector is no easy matter.

During the last decade of strong growth, the reputed size of the continent’s “grey economy” has helped many governments borrow and spend more than they otherwise might because of the potential to shoe-horn more people into the tax system.

It is a option closed to most rich-country governments, whose economies are assumed to have gone through the process long ago and for whom the only way to screw more cash out of their citizenry is basically to raise taxes, Reuters reports.

However, close scrutiny of revenue data from leading African frontier and emerging economies suggests putting the “widening” rhetoric into practice is far from universal.

For instance, in Kenya, east Africa’s biggest economy, the amount of personal income tax collected went up by between 15 and 22 percent each year from 2005-2010.

Once inflation and underlying economic growth have been stripped out, Kenya’s revenue chiefs can still claim to be recovering on average 6.5 percent more income tax each year — a clear sign of appreciable tax base “widening”.

For Ghana, the equivalent calculation is even more impressive, at more than 11 percent and probably reflects the zeal with which Accra’s tax inspectors set to work after an acute fiscal crisis in late 2008.

However, the figures are much less impressive for Zambia and Uganda, two small but fast-growing economies whose high-yielding debt attracts the interest of international investors.

Discounting growth and inflation leaves Zambia with an average of just 1.7 percent expansion in income tax collection over the last five years, while Uganda has grown its revenues by just 2.0 percent.

Such figures are unlikely to go down well with domestic and international bond investors who may well be called upon to finance another round of expansive budgets if Europe’s fiscal crisis evolves into a full-blown global slowdown.
“There is going to be pressure on governments to cut spending, and the only way they can realistically avoid that is to look carefully at what avenues are open to boost revenue collection,” said Razia Khan, head of Africa research at Standard Chartered in London.
“It should be possible given the estimates on the size of the parallel economy in Africa. It’s just a question of tapping that without distorting the economic incentives too much.”


Of sub-Saharan Africa’s more prominent economies, Nigeria, Africa’s most populous nation and top oil producer, has one of the biggest grey economies, with estimates putting it near to 60 percent of official output.

Its revenue service did not respond to several Reuters requests for basic tax data, compounding a belief among Nigerians that Abuja is not serious about weaning itself off its addiction to oil revenues.

Similarly, Uganda’s heavy reliance on aid — until recently donors accounted for almost half of government revenue — may explain why its tax men collectors have not been so quick out of the blocks.

The converse may well be true of Kenya, where aid has historically been a small fraction of government receipts.

South Africa, far-and-away the region’s most sophisticated economy, is believed to have one of its smallest informal sectors, at 30 percent of GDP, but is still achieving a solid 3.2 percent annual expansion of its tax base, possibly due to its famously ruthless revenue service.

Harder to fathom is the poor performance of Zambia, Africa’s biggest copper producer.

While mineral sales account for three-quarters of export earnings, the sector yielded just 2 percent, or $47 million, of total tax and customs receipts in 2009 — hardly a state cash-cow.

New president Michael Sata, whose government delivers its first budget on Friday, has made it clear he wants this to change, most notably by making mining companies pay the right amount of tax.