Home » Business Monthly » UNCTAD XIV: Taxation, commodities and debt dominate discussion

UNCTAD XIV: Taxation, commodities and debt dominate discussion

The United Nations Conference on trade and Development’s 14th session (UNCtAD XIV) was  held  in  Nairobi  in    July.

two critical documents were adopt- ed. the two documents – Nairobi maafikio and Nairobi Azimio – are aimed at ensuring fair trade between developing countries and developed nations as well as ensure action is taken on previous agreements. but beyond these critical agreements, interesting discussions around Africa’s taxation policy, reliance on commodi- ties and rising debt levels dominated the forum—and with good reason.

Like any other global event of its magnitude, the headline that UNCtAD XIV’s organizers intended differed from the story that analysts and the media chose to go with. the adoption of the two critical docu- ments—essential an accomplishment as this was—seemed not to grab the attention of analysts in Kenya and the continent as much as the discussions around taxation, commodities and debt.

 

this is precisely because taxation,

commodities and debt are currently key issues in Africa. Consequently, the continent’s representatives at UNCtAD XIV were keen on pushing the envelope on these topics in order to get stronger commitment from key decision makers—and they did, from the top echelon of UNCtAD itself.

Dr. mukhisa Kituyi, the secretary General of UNCtAD, commented extensively on Africa’s over-reliance on commodities, penning an incisive article on UNCtAD’s website that echoed his thoughts on the topical issue.

Commodity dependence “UNCtAD    calculates    that,   in

2014, 88 of 134 developing countries relied on one or two unprocessed com- modities for 60 per cent or more of their total merchandise export earn- ings. For 66 of these countries, the rate of dependency was above 80 per cent,” Dr. Kituyi wrote. Countries such as Nigeria fall into this latter category, with the West African economic stal- wart depending on oil for 90 per cent of its total export revenue.

the challenge in Africa is that enthusiasm for economic diversifica- tion usually intensifies when commod- ity prices fall, but fritters away imme- diately prices recover. this was seen in the past decade, where governments across the continent increased salaries and other perks for public servants because of the windfall from the com- modity boom. they did not execute the highly touted economic diversifica- tion plan as they ought to have. Now times are lean and everyone is seeing the need to diversify.

“Indeed, the number of countries in this situation (overdependence on commodities) remains unchanged from the situation 30 years ago, and despite a decade-long commodities price super-cycle,” added Dr. Kituyi.

Kenya may not be big on com- modities at present, but this is set to change in a major way. the country has viable oil reserves in turkana  and production is expected to start    next year. this means that Kenya will need to start tweaking its broader economic policy framework to reflect the expect- ed huge dollar inflows from oil. Other countries in the region are already doing this.

Uganda has proceeded carefully in developing its oil reserves, observed Dr. Kituyi.“the government has scru- tinized agreements with producers to ensure the best long-term deal for the country and has passed legislation that requires oil revenues to be invest- ed in infrastructure or agriculture, rather than program spending,” he added.

similarly, mozambique and tanzania have ambitious visions for their offshore natural gas reserves, but have resisted the temptation to hurry their projects. Instead, they have devoted years to composing “master plans” that foresee practical details, necessary legislation and marketing agreements, all to realize the sustain- able development opportunity con- tained within these gas fields.

policies that cut over-reliance on commodities are therefore needed across Africa. even more pressing is the need for more robust activity in sectors such as manufacturing and agriculture. In the case of manufac- turing, a broad strategy is needed: one that not only enhances the ease of doing business, but also substan- tially improves the quality of human capital.

 

Debt

Conversations around debt also didn’t miss at the five day UNCtAD event. this is especially timely for Kenya, considering Kenya’s debt payments for the year to June were eight times more than what treasury used for roads, underlining the bur- den of increased government bor- rowing.

the treasury data shows that it paid sh421.8 billion for loans in the year  to  June,  making  it  the  single

largest  expenditure. the  debt  repay-

ment was bigger than Kenya’s com- bined development spend of sh333 billion in the period and eight times that of infrastructure like roads that stood at sh55 billion.

this year’s UNCtAD economic Development in Africa report 2016 finds that Africa’s external debt ratios appear manageable, but African governments must take action to prevent rapid debt growth from becoming a crisis, as experi- enced in the late 1980s and 1990s.

“borrowing can be an important part of improving the lives of African citizens,” UNCtAD’s Dr. Kituyi said. “but we must find a balance between the present and the future, because debt is dangerous when unsustain- able,” he further observed.

several African countries have also borrowed heavily on domestic markets, the report finds. It pro- vides specific examples and analyses of domestic debt in Ghana, Kenya, Nigeria, tanzania, and Zambia. In some countries, domestic debt

rose from an average 11 per- cent of GDp in 1995 to around 19 percent at the end of 2013, almost doubling in two decades.

the report argues that African countries should look for comple- mentary sources of revenue, includ- ing remittances, which have been growing rapidly, reaching $63.8 bil- lion to Africa in 2014. the report further discusses how remittances and diaspora savings can contribute to public and development finance.

remittances in Kenya are par- ticularly robust, having relegated tea and tourism as the key revenue earn- ers. the amount of money Kenyans in the diaspora sent back home in 2015 was sh154 billion, a 9.3 per- cent increase from sh141 billion in 2014, according to data from the CbK. the recommendations of the UNCtAD economic Development in Africa report to leverage on remit- tances to bolster public and develop- ment finance is therefore very timely for Kenya.

Other African countries also have to rethink their approach to pub- lic and development finance. this could mean either of two options

increase taxes or broadening the tax base. the latter is easier, but only on paper. In practice, widening the tax base is never easy. the only harder thing is increasing taxes, but government strangely succeed in it more than they do in widening the tax base.

this has been evidenced in Kenya by the ongoing debate on whether or not to tax the informal sector. tentatively, the informal sec- tor is not keen to comply because  of the bureaucracy and costs that usually come with compliance and formalization, such as book keeping and audits. these costs only serve to undermine the ease of doing busi- ness, which is not too great to begin with for informal businesses.

the conversation about debt levels  in  Kenya  is  therefore broad,

and the talking points many. this notwithstanding, a critical point that will guide deliberations on this topic going forward is the fact that gov- ernment spending across Africa is unlikely to decline due to the vast infrastructure gap in the continent.

striking the right balance between scaling-up infrastructure spending and maintaining sustain- able debt is therefore critical.

A few brilliant ideas have already been floated to mitigate this   catch-

22 situation. For instance, a new school of thought proposing using local currency rather than dollars for infrastructure spending has emerged. Using local currency for infra- structure projects helps reduce for- eign debt and also enables a coun- try to recycle local savings. this is especially timely for Kenya as it will boost demand for savings  products

 

and increase the overall savings rate at a time when savings are unaccept- ably low. At 12 per cent, Kenya’s savings rate as a share of GDp is several percentage points below its regional peers such as tanzania and Uganda, the World  bank says.

 

Taxation

A report by UNCtAD revealed that commodity-dependent developing countries are losing as much  as 67 per cent of their exports worth billions of dollars due to trade mis- invoicing. trade misinvoicing is a method for moving money illicit- ly across borders which involves deliberately misreporting the value of a commercial transaction  on an invoice submitted to customs. misinvoicing has led to the loss of export earnings that could otherwise be spent on development.

experts believe that the majority of misinvoicing is illegal activity designed to evade tax and foreign exchange payments. the opacity of data disclosure in commodities trad- ing centers such as switzerland and the Netherlands greatly exacerbates the problem, they add.

UNCtAD has  done  exception- al conceptual work on taxation in recent years, including developing principles for a fairer taxation sys- tem. but it lacks the mandate and resources to put these tools to work in countries that need them.

the countries that need these guidelines—mostly developing— lack the capacity, and are in some instances not keen to improve this capacity due to vested interests. most lobby groups argue that gov- ernments across Africa have opened up a loophole that allows super rich individuals and multinational com- panies to avoid taxes. this allegation could have some merit.

there is no shortage of reports by lobbyists and development agen- cies detailing collusion between rogue businessmen and officials   in

African governments to cheat the system. Corruption is the problem, and it’s not just in administration of taxes, but increasingly in how devel- opment money is used.

the major problem with rich nations and development agencies providing foreign aid to developing countries is the lack of transpar- ency, accountability and  the  level  of embezzlement and corruption involved in these international finan- cial transactions. Once the monies are transferred, they are  prompt- ly skimmed off into swiss bank accounts and other offshore hold- ings.

Africa has been and remains the basket case for these hugely corrupt embezzlements and the sooner the developed world acts to stop these illegal movements of capital, pros- ecute the embezzlers and reclaim the said finances the better. this is a point that was stressed at UNCtAD by many delegates representing Africa’s interests.

the discussions around taxation not only focused on misinvoicing, but also how revenue from trade can be  used  to  drive  development. this

was in line with UNCtAD’s overar- ching agenda, which aims at creating a closer linkages between trade and development.

trade needs to support devel- opment. this means that it should be encouraged by low taxation. this sounds counter-intuitive—from a revenue collection perspective—until you closely examine the example of countries such as singapore, Hong Kong, Chile, south Korea or taiwan. Low taxes, low corruption and high spending on education helped these countries ascend to their present enviable levels.

Africa also needs to do the same, especially with regard to cutting back on taxes. High  taxes  have been shown to not only reduce trade volumes, but also a country’s com- petitiveness with regards to the ease

 

of doing business. In a recent paper, tim besley of the London school of economics found that the average rank of countries with a value-added tax in 2006 in the World bank’s annual ease of Doing business survey was 23 places lower than that of countries without businesses generally thrive when tax rates are lower.

As an example, one of the main reasons why mombasa port is the preferred gateway to  east  Africa  as opposed to Dar es salaam in tanzania is because official port fees are 74 per cent higher in Dar than in mombasa, according to the World bank.this shows just how important low fees and taxation are in making a port attractive. An attractive port translates into more trade and ulti- mately more development.

 

UNCtAD XIV therefore present- ed a timely opportunity to reflect on issues of great importance to Kenya and the broader African con- tinent. It also acted as a symbol of Kenya’s growing relevance in the global arena, coming on the heels of WtO’s 10th ministerial Conference in December 2015 and the Global entrepreneurship summit (Ges) in July 2015.

Likewise, UNCtAD XIV also acted as a reminder of Kenya’s Foreign Affairs and International trade Cabinet secretary Amina mohamed’s rising star. the Cs has been instrumental in burnishing Kenya’s profile on a global level, and is increasingly winning interna- tional approval from all the quarters that matter, including the United Nations.