Domestic resource mobilisation refers to generating savings and taxes from domestic resources and allocating them to economically and socially productive activities rather than using external sources of financing, such as foreign direct investment, loans, grants, or remittances.
Strategies and initiatives for the mobilisation of domestic resources
Ghana collects less taxes (17.6% of its GDP) compared to other lesser developed countries in the region such as Burkina Faso (18.1%), Cabo Verde (19%) and Togo (22.2%).
With aid flows to Africa projected to keep declining, mobilising domestic resources would allow Ghana to reduce its dependency on foreign aid as espoused in “Ghana Beyond Aid” agenda.
Examples of successful cases in other low-income regions reveal that high domestic savings are necessary for high investment and growth.
Further, extensive literature documents the positive link between taxation and state building through creating a social contract between the state and citizens.
Applying internal resources can increase ‘ownership’ of the development process as compared to foreign aid that can be driven by the strategic considerations of donors and can be highly conditional rather than aligned with domestic development priorities.
In view of this, good practices that certain countries have put in place in successfully scaling-up broad-based domestic resource mobilisation, are worth emulating in the context of Ghana.
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Ghana has undertaken robust measures to improve domestic resource mobilisation through building or strengthening revenue collection capacity.
These reforms included the review of existing tax laws to bring them in line with international good practices. For instance, the Ghana Revenue Authority developed and implemented a revenue modernisation plan to drive efficiency and boost tax revenues.
The plan included measures such as deploying a geographic information system (GIS) to locate taxpayers, especially in the informal sector which makes up about 85% of total employment in Ghana.
The informal sector contributes about 38% to GDP for Sub-Saharan Africa. To further make it easier for small taxpayers, especially in the informal sector, to fulfil their obligations, a simplified system enhanced presumptive tax system has been introduced that allows an individual to make payments based on turnover or to keep records and submit returns using a modified cash basis of accounting.
Moreover, the government of Ghana created a Port Clearance Unit in the Custom Division to promote compliance in customs and tariff assessments and payments, and an integrated cargo clearance system for easy tracking of goods at the ports.
Ghana has also created an online tax application and registration platform. Revenue officials have been trained to use the new system.
In 2018, the government of Zimbabwe gazetted into law a 2% tax on electronic transactions under the Transitional Stabilisation Programme (TSP) that will run until 2020 which is aimed at widening government’s revenue collection base.
The new measures direct financial institutions, the Zimbabwe Revenue Authority (Zimra) and telecommunication companies to extend the collection to all electronic transactions.
The proposed tax is meant to expand the Government’s capacity for capital funding and retooling of the manufacturing sector.
With recurrent expenditure gobbling up more than 90% of government revenues, the country has not made meaningful investment in public infrastructure.
This reform came at a good time when electronic transactions are increasing in Zimbabwe, currently at 96% of monetary transactions, with mobile money leading.
Out of the more than 1 billion transactions in 2017, 754 million were conducted through mobile.
With a growing informal sector of more than 60% and shortage of cash in the country, the government has been able to tap into many transactions done for payments for casual work, domestic remittances, utility payments and the illegal trade of foreign currency. This reform has borne much fruit.
Zimbabwe’s economic problems in the past have been largely attributed to lack of capacity to finance its domestic debt due to budget deficit.
The US$332 million target for October 2018 was exceeded by 35% as US$ 449 million was collected.
In November, US$338 million was the target, but US$498 million was collected, representing a surplus of 47 %.
In the first 28 days of December 2018, US$ 632 million was collected exceeding the target of US$ 443 million by 43%.
The government has been collecting US$ 80 million every month from the 2% tax.
After the devastation caused by Cyclone Idai in March 2019, the Government set aside US$ 50 million from the 2% electronic transaction tax towards the cyclone Idai rescue efforts as well as rehabilitation of infrastructure.
Zimbabwe has also introduced other innovative targeted taxes such as the AIDS levy and the rural electrification levy.
It launched the Aids levy in 2000 to finance HIV/Aids interventions and to complement external funding, as well as to fund activities of the National Aids Council.
The levy is charged on individuals, companies, and trusts at 3% of income tax assessed and has led to an increase in tax revenue from US$ 5.7 million in 2009 to US$ 33.5 million in 2013.
The funds from the Aids levy are allocated to different program areas through an independent board appointed by the Health and Child Welfare minister.
Zimbabwe’s adult HIV prevalence declined from 27% in 1998 to 15% in 2012, despite a decline in donor funding. Similarly, the rural electrification programme (a levy of 3% on electricity consumers) has improved access to electricity in rural areas.
In addition, the adoption of prepaid meters has ensured a low default rate. These innovative tax measures may have been occasioned by Zimbabwe’s crises (high AIDS incidence and shortage of cash in banks).
In 2009, Rwanda joined the East African Community (EAC) Customs Union, which led to several new measures to harmonize Rwanda’s tax policies with those of EAC to facilitate intra-regional trade.
Between 2005 and 2006, Rwanda implemented laws to improve tax collection, created audit and appeals protocols and instituted penalties for tax evasion.
The compliance rate of large taxpayers who contribute around 75% of total domestic tax revenues has risen to 97% following these reforms.
Between 2000 and 2016, Rwanda’s tax revenue ratio increased from 10.2% to 16.6% (as a percentage of the GDP).
In Rwanda Revenue Authority (RRA)’s early days, tax compliance requirements were costly and time consuming for taxpayers.
Filing for any of the domestic taxes, or even obtaining a tax clearance certificate, required that a taxpayer physically walk into an RRA office to process paperwork, then go to a bank for payment, and finally return to the RRA.
This resulted in long queues at RRA offices and banks, especially around peak filing deadline times. The finalizing of a return, filing, and payment for VAT, income tax, or Pay as You Earn (PAYE) on average took over 23 days.
In conclusion, African countries have made commitment to increase domestic resource mobilisation to cushion itself from potential slumps in other external sources of revenue.
However, the challenge for domestic policy is how to bridge this gap.
This calls for more efforts towards domestic resource mobilisation which means undertaking reforms particularly the rationalisation of the key tax regimes, especially the value added tax, to improve on tax collection efficiency and effectiveness and more stringent reforms to curb illicit financial flow
- Ronald Zvendiya is an independent economic analyst. Contact details: rzvendiya@gmail.com,
- These weekly articles are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Private) Limited, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe. Email - kadenge.zes@gmail.com or mobile No.+263 772 382 852.
