Central African Republic Economic Update: A Call for Domestic Revenue Mobilization to Sustain Growth

BANGUI, The second edition of the Central African Republic (CAR) Economic Update, which was published today by the World Bank, examines evolving economic trends in the country and proposes options to boost domestic revenue by improving tax and customs policy and administration.

Titled Strengthening Domestic Revenue Mobilization to Sustain Growth in a Fragile State, the report notes that the improved security situation is leading to brighter economic prospects, with the real GDP growth rate estimated at 4.8% for 2019. The authors indicate that although the country's growth rate has outpaced that of countries in the Central African Economic and Monetary Community (CEMAC) and Sub-Saharan Africa, it continues to lag behind peer countries such as Burkina Faso, Malawi, Mali, Niger, and Uganda.

CAR has not experienced sustained growth since gaining independence in 1960. With the signing of the Political Agreement for Peace and Reconciliation in February 2019, the economic outlook is, however, positive, states Wilfried A. Kouame, World Bank economist and lead author of the report. The successful implementation of the peace agreement is critical for jumpstarting growth. By implementing this agreement in the run-up to the elections, we are expecting growth of around 5% in the medium term.

The report also reveals that while CAR is still at high risk for debt distress, its efforts to streamline public expenditure and clear domestic arrears are driving down the public debt level to below CEMAC and Sub-Saharan Africa averages and bringing it closer to the debt levels of its peers.

Han Fraeters, World Bank Country Manager for the Central African Republic, explains that this report aims to help the government and its development partners identify opportunities and address challenges in order to move forward on combating extreme poverty. Domestic resources will therefore have to be mobilized to boost public revenue and enhance delivery of basic public services, which are pivotal to guiding the country into a virtuous cycle of peace and security. The upcoming elections will require sound fiscal discipline and provide a unique opportunity to place the country on a path of sustained growth.

The report presents a number of options to address the growing needs of Central Africans:

Strengthen the social contract: The social contract between the State and its citizens, which is vital to mobilizing tax revenue, was undermined by the recent crisis. To strengthen the social contract, the State must undertake to improve the efficiency and quality of goods and social services, while restoring the trust of taxpayers to encourage them to move out of the informal sector and pay their taxes.

Broaden the tax base: CAR's tax revenue currently accounts for approximately 8% of GDP, which is below its potential and among the lowest in Sub-Saharan Africa. CAR could consider increasing the tax rates on alcohol and tobacco products in the short term, and reducing the number of tax brackets that hinder business creation and development in the long term.

Improve property tax collection: Legislation on property taxation has not been updated to reflect recent economic developments. Current revenue collection is inefficient and is based on a declarative system that narrows the tax base. New legislation could generate close to CFAF 12 billion (roughly $22 million).

Limit tax exemptions: In 2016, tax exemptions were a major source of lost tax revenue for the country (almost CFAF 2.4 billion or roughly $4 million). A significant share of these exemptions were granted to the private sector and related primarily to VAT. The adoption of the new investment charter in 2017 and the implementation of reforms aimed at curbing tax exemptions and improving the business environment to attract private investment require the firm commitment of the authorities and a formal legal system to institute legal proceedings in the event of abuse.

Modernize the tax system: Strengthening tax administration capacity is critical to improving the tax system. This requires heavy investment in the computerization of public administrations and the purchase of the equipment and software needed to improve revenue collection. Computerization will help curb abuse and corruption, trace transactions related to taxes and duties, facilitate the sharing of information between tax and customs authorities, and enhance the efficiency of financial boards.

Source: The World Bank

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