Government operations and the development of nations require heavy capital investment. For this reason, countries with insufficient resources to meet their development goals seek assistance from other countries and international organizations. Inter-governmental assistance can be in the form of grants, loans, among others. For mutual benefits, many governments, especially in African countries, are given loans by foreign governments. The loans are obtained to finance development projects whose capital investments might be too high for the concerned government. Currently, the Chinese government is the leading bilateral lender with loans to over 32 African countries. Out of these, the leading countries are Angola, Ethiopia, and Kenya.
Common challenges associated with Debts in African countries
Easy access to foreign loans by African countries poses a number of challenges to both lenders and borrowing countries. Most African governments have been enticed by lenient loan conditions into borrowing beyond their repayment capacity. The inability to repay loans places such governments at the mercy of lenders. This results in a colonization-like relationship between the lender and the loaned country.
Most African countries are riddled with cases of corruption of mismanagement of public resources. When funds are debited into government accounts, there is a high likelihood that they will be diverted to functions other than the intended. This leads to incomplete or a total lack of implementation of development projects which would, in turn, generate revenue to repay the loans.
The absence of debt management policies in many African countries is among the key reasons for excessive borrowing. Governments need policies that dictate the maximum amount of money that can be borrowed within a given time. Such policies ensure adequate plans are laid on how the loans are repaid to avoid additional interests due to late repayment. Despite evidence of the inability of African countries to repay loans, some foreign governments still give loans with the aim of benefiting in other ways. These include less stringent trade regulations between the lender and the countries receiving the loans.
Implications on taxation in African countries
According to IMF, the debt to GDP ratio of African countries is expected to rise as governments engage in more public spending than revenue generation. While continued uncontrolled borrowing poses a threat to inter-governmental relationships, it has a greater impact on the livelihoods of citizens in borrowing countries.
As stated earlier, most of the borrowed money is diverted to purposes other than the intended. A significant portion of the funds is also lost through corruption and mismanagement of public resources. The lack of revenue-generating activities and projects makes taxation the only viable option to raise funds for loan repayment.
Political instability in some countries is one of the key factors hindering local and foreign investments. As a result, cash flow in such countries is limited, resulting in insufficient revenue collection by relevant authorities. Increased tax rates to raise capital for loan repayment adversely affects the livelihood of citizens. For instance, increased Value Added Tax (VAT) causes a subsequent rise in product prices as manufacturers strive to make profits and meet their production costs. As taxes rise, the cost of products and services provision becomes unbearable. A situation where a country’s population can’t afford products and services leads to business failure and exit of international firms. The result of such is increased unemployment; governments lose Pay As You Earn (PAYE) taxes.
Potential remedies for excessive borrowing
Despite the implications foreign debts have on taxation, African countries have a hope of making good use of the debts. One of the important remedies of unfair taxation resulting from improper borrowing is the establishment and enforcement of proper borrowing policies. Such policies should put a cap on the amount of funds a government is allowed to borrow. Additionally, the policies should outline how the government, in collaboration with the public, intends to use and repay the borrowed funds.
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