Why is domestic revenue mobilization so low in the Central African Republic and what can be done about it?

Conflict and instability have hampered the Central African Republic's economic growth, but there is hope. The Central African Republic, the second poorest country in the world (World Bank ranking of GDP per capita in 2017), is struggling to recover from a nearly 40% decline in its economy since 2013.  Worse still, since independence, the GDP per capita has dropped by almost half, from US$ 602 in 1960 to US$ 335 in 2017. Persistent conflict and instability have disrupted the production system, damaged public infrastructure, worsened the business climate and delayed government spending to priority areas such as education and health. Insecurity has resulted in a slowing of annual GDP growth from a peak of 4.8% in 2015 to 3.7% in 2018. Moreover, in such a fragile context, the Central African Republic is dependent on foreign assistance. In 2018, grants from the international community represented 45% of government revenue or 7.4% of GDP. With a new peace agreement in place since February 2019, there is hope for stability and recovery in the Central African Republic.

To meet the growing needs of its people, CAR needs to increase revenue from taxes. According to recent data, about 71% of people in the Central African Republic live in extreme poverty, with less than US$ 1.90 per day (International poverty line US$ 1.90 per day, 2011 PPP). The government has limited capacity to deliver basic services due to inadequate funding in social sectors. For example, the education sector budget is low and highly reliant on donor financing.  As of 2016, public spending in education represents only 1.3% of GDP, which is far below the recommended best practice levels of 4 to 6% of GDP by the Global Partnership for Education.

Although tax revenues have increased gradually since 2013—and are estimated to reach 8.1% of GDP in 2018—this is still not enough to meet the growing needs of the population and reduce poverty. Tax revenues are about 4% of GDP below the potential of the country and under their 2012 level due mainly to the low tax base, inefficient tax administrations, and a large and active informal sector that remains outside official tax channels.

 

FIGURE 1: CAR’S TAX COLLECTION RATES COULD BE HIGHER

CAR has some catching up to do. Compared with other countries in the region (Figure 1), the Central African Republic performs poorly in generating revenue from taxes.  This is understandable given the fragility of the economy and the high level of poverty and vulnerability in the social and economic fabric. There is, however, potential to increase tax revenues, especially now that a peace agreement has been signed. In the Second Economic Update for the Central African Republic, we identify five ways to boost tax revenues in the Central African Republic.

1. Broaden the tax base. Numerous and complex exemptions characterize the Central African Republic's tax system.  In 2016, tax exemptions on private firms resulted in a loss of more than CFAF 1 billion (US$ 1.74 million) of domestic revenues. Also, the report clearly shows that 70% of tax exemptions are on VAT, which is the primary source of tax revenues in the country. There is an urgent need to reduce derogatory tax exemptions and ensure that exemptions granted are in line with the law and the investment charter.  Business-friendly reforms, with a focus on the justice system, protecting minority investors, and facilitating construction permit acquisition, will help the country to attract private investors and firms in the informal sector and thereby broaden the tax base.
2. Tap on property taxes, which have the potential to generate a minimum of CFAF 12 billion ($ 22 million) per year – about 1.1 percent of GDP. Revenues collected from property taxes are at least 10 times below its potential due to (i) an outdated property tax legislation (from August 1926 and May 1960) which fails to account for recent economic developments, (ii) poor tax compliance, and (iii) limited human and financial resources of the property taxes administration. Moreover, property taxes have the advantage of being a secure and stable source of revenues for the local and central government and equitable by contributing to reduce inequality between owners of capital and the rest of the population.
3. Improve the tax system by ensuring the integration of parafiscal taxes in the Treasury Single Account and increasing the number of operational custom offices. Our analysis reveals that 3 out of 7 customs offices were not operational at the end of 2017 due mainly to insecurity. The new peace agreement represents an opportunity to leverage additional tax revenues. The report also highlights that the non-recovery of tax revenues in 2016 amounted to CFAF 14.9 billion (USD$ 25.3 million), especially in the telecommunication, forestry, and mining sectors.  Significant efforts are needed to improve the overall performance of the customs tax administrations, and especially efforts to recover tax revenues. Digitalization of tax collection procedures and gradual computerization of custom and fiscal administrations also represent real opportunities to boost tax revenues collection by reducing fraud and increasing the efficiency of the tax system.
4. Increase tax compliance efforts by building a new social contract between taxpayers and the state.   There is a need for an inclusive approach to leveraging domestic revenue in which streamlining government expenditure will build taxpayers’ trust in public institutions and reinforce the social contract between the state and the population. Also, strengthening fiscal and custom controls can provide room for additional tax revenue collection.  Breaking the cycle of instability and conflicts will be a critical step moving forward. The Central African Republic authorities would benefit from building on the newly signed peace agreement to improve fiscal transparency, fight corruption, and improve accountability.
5. Learn from peers.  Like CAR, Rwanda’s economy was negatively affected by a deep-rooted civil war. Rwanda managed to reduce its dependence on foreign aid by leveraging domestic resources through substantial policy reforms such as broadening the tax base, sequencing reforms to attract FDI, and strengthening tax compliance through trust. Strong leadership and sound managerial capacity coupled with steadfast commitment to implement tax and customs reforms were crucial for Rwanda’s success.