Domestic revenue leads to improved development, which makes Domestic Resource Mobilization (DRM) a development tool for generating revenues that would support sustained and inclusive economic development. Mobilizing resources and allocating them to productive sectors that will support the growth and diversification of the economy and thus be the driver of sustainable inclusive development is fundamental.
Revenue mobilization, domestically and internationally, is crucial development priority for countries to finance investment in human capital and infrastructure and bring about economic growth and thereby alleviate poverty.
For Africa, according to the continent’s policy experts, mobilizing domestic resources, from both the public and private sectors, is central to its collective success in achieving the 2030 Sustainable Development Goals (SDGs) and the continent’s 50-year development plan, Agenda 2063. Furthermore, the ability to mobilize resources is not only a driver for sustainable inclusive development, but also crucial for the success of the plan of African countries. This holds true, of course, to Ethiopia as well.
Annual tax revenue in Ethiopia and its tax to GDP ratio is low, even by Sub-Saharan African standard, and is considered the threshold below which contemporary governments find it hard to finance their basic functioning and services.
To change this tide, the country has undergone through tax policy and administrative reforms over the last two decades. However, despite these efforts, the tax to GDP ratio is still low, and not at the needed level. As a result, the government is still planning reforms to improve tax revenue, and enhance domestic revenue.
According to Dr. Wondaferahu Mulugeta, Economics Associate Professor at Federal Meles Zenawi Leadership Academy, one way to go about to raising domestic resource mobilization is to develop the private sector.
“I do not believe that the private sector has been given the needed attention or priority. So, we have to create an even more business-friendly environment by improving the enablers so as to encourage and boost the private sector, and improve domestic capacity for tax and other revenue collection,” he added.
In fact one of the important strategies that were identified for developing countries to do at the Addis Ababa Action Agenda (AAAA) of the Third International Conference on Financing for Development (FFD) was to encourage the growth of private investment and Public-Private Partnerships. Thus, Ethiopia will need to tap into diverse funding sources for its development programs, including private investment to enhance domestic resource mobilization.
Also, the country should make sure that the money that is being mobilized and generated does not leave the country, Dr. Mulugeta opined. It is concerning that the capital flight of the country is high, and things should be done to prevent illicit financial flow.
Of course tackling illicit financial flows could help mobilize substantial additional revenues needed for the country’s development. While government has been exerting its efforts to control capital loss through illicit financial flows, there needs to be a meaningful commitment not only from the government but from all the relevant stakeholders and actors, including large and medium corporations to tackle the problem.
The other point Dr. Mulugeta raised with regards to strengthening domestic resource mobilization is focusing on sectors that could generate sustainable revenue. “By relaxing our grip on exhausted sectors like the agriculture, we should look other underutilized sectors like the mining sector, which could yield us key revenue.”
Like most African economies, Ethiopia’s economic base is narrow and externally-oriented, with primary production activities accounting for a good percentage of exports. And such measure will go a long in diversifying the economic base.
Furthermore, Dr. Mulugeta points out various saving mobilization mechanisms that the government could look to tap into in order to mobilize resources. “The Grand Renaissance Dam bond has been contributing significantly in mobilizing domestic resource through saving. The Community Based Health Insurance that was initiated was also good in this regard. Likewise, religious institutes have huge capital, which if they invest or buy bonds, the government can get huge saving. So, I think we better look into new saving mechanisms.”
All in all, Ethiopia has sought the financial sector to raise domestic resource and considerable progress has been made in developing the financial system over the last decade. The country has worked over the past few years to enhance the role of the banking sector, where the total resources mobilized by the banking system has increased, and close the investment saving gap. The country has also undertaken tax reforms in order to broaden its tax base and increase tax revenue, while currently the government is planning a transformative reform on tax.
And if the country is to continue to enhance its domestic resource mobilization and drive a sustainable and inclusive economic growth, its initiated efforts should continue with verve, and undertake reform where it needs some tweaking.
The Ethiopian Herald, June 12/2019
BY ROBEL YOHANNES
