Backgrounder: Domestic resource mobilization

J. Governance: policy, legal and regulatory issues

22. Sound public financial management is integral to the process of improving domestic resource mobilization and ensuring that domestic resources are used to boost inclusive growth, create jobs and improve social welfare. Reforms in the areas of taxation, banking and capital markets, and efforts to access non-traditional sources of finance, need to be supported by a fair and robust public financial management framework to ensure that the most vulnerable and marginalized groups are not unnecessarily burdened by such reforms. It is therefore crucial that resource mobilization and spending processes are linked to core national development objectives and are underpinned by strong coordination and planning. There is also a need for mandatory impact assessments to determine to what extent such actions are achieving their stated objectives.

23. As taxation is the biggest source of domestic revenue for African countries, it is imperative that policymakers across the continent do more to address the constraints currently hampering the implementation of tax reforms and to maximize the contribution of taxes to domestic revenue. Reforms to tax policy and administration seem technical, but the real constraints are often political will and leadership. Indeed, African policymakers must convince their citizens that tax reforms are part and parcel of wider reforms to improve the business and investment environment of their countries. In simplifying the tax system, a comprehensive review of the tax exemption regime and investment codes could also help to broaden the tax base. Tax exemptions and holidays should only be granted where appropriate, and even then they should be granted sparingly and be time bound. Governments could also consider limiting such tax breaks to public-private partnership projects or entities that are willing to invest in infrastructure development and corporate social responsibility schemes.

K. Environmental sustainability and stewardship issues

24. Climate change and adaptation issues are at the forefront of sustainable development in Africa, and managing the impact on financing priorities will be a challenge for most countries as they strive to advance their industrialization agendas. Improving domestic resource mobilization will empower countries to raise and allocate funds for future climate-related endeavors, including providing incentives for private sector management of negative externalities and establishing endowment funds for adaptation purposes and reconstruction in the event of climate-related crises. Countries will need to find ways of tapping into streams of capital to better accommodate their sustainability agendas without compromising on the delivery of immediate to medium-term development objectives.

L. Knowledge base and human and institutional capabilities

25. Advances in public financial management, taxation, capital markets and other areas cannot occur in a vacuum of human and institutional capacity. Governments pursuing reforms with a view to improving domestic resource mobilization have generally had to invest in improving human capacity and/or acquiring such skills from outside their countries. Increasingly, and particularly since the introduction of the Busan Partnership for Effective Development Co-operation, there has been a call for technical assistance efforts to be strengthened to enhance the capacities of developing countries. Governments should use this opportunity to negotiate assistance that incorporates the provision of technical capacity and technology in areas where human and institutional capacity is lacking. This has huge potential for developing and retaining such skills domestically, thereby improving self-reliance and ownership of long-term national planning and reducing the risk of becoming dependent on foreign aid.

V. Cross-cutting issues

26. The high levels of informality in most African countries, especially in the agricultural sector and in rural areas, mean that a considerable proportion of resources cannot be mobilized and used to finance productive investments. Indeed, countries that depend heavily on agriculture tend to have lower savings rates as percentage of national GDP. Moreover, in Africa, many economic activities take place in the informal sector and many households hold their savings in a non-financial form, such as livestock, grain or stockpiles of goods for trading. In other words, the issue of how to mobilize informal savings and channel them towards productive investment applies across sectors.

27. As well as providing a degree of financial flexibility and independence, women who are economically empowered have been found to save more, take less risky investment decisions, and make spending decisions that positively impact the whole household by expanding economic opportunities and improving the welfare of children in the areas of health, nutrition and education. It can therefore be deduced that initiatives that improve women's access to financial services and infrastructure can have a positive multiplier effect on the economy, so it is extremely important that policies aimed at enhancing domestic resource mobilization also reflect the unique and important role of women.

VI. Conclusion

28. Improving domestic resource management in Africa is no easy feat. Governments need to commit to taking action on a broad range of areas, including a targeted overhaul of taxation frameworks and fiscal policy, and a strengthening and deepening of financial markets, to better respond to the needs of individuals and private enterprises. At the most basic level, low-income countries need to improve access to bank-based finance by increasing competition, and pay due attention to effective regulation that deters monopolistic practices, encourages innovation and provides incentives for banks to provide cheap credit to small and medium enterprises and wider, more appropriate financial services to women. Consideration could be given to tapping into more developed financial markets to access services that cannot be provided domestically. Middle-income countries could focus heavily on regulation and improving business environments, with a view to attracting foreign capital, boosting growth and promoting long-term stability. In addition, greater efforts need to be made to establish the necessary regulatory and enforcement frameworks to better exploit non-traditional forms of financing and to ensure discipline in public financial management, to ensure that any resource gains achieved are channeled into pacific national priorities that will advance inclusive and sustainable economic growth.