The think tank ECDPM has published analysis in November 2012 of estimates of the fiscal impact of EPAs in Africa, and has concluded that EPA implementation could have ‘significant, and in some countries very serious, consequences for government revenues’, with potential knock-on effects on public expenditure. ECDPM’s discussion paper cites the concern expressed by the European Parliament that such a reduction in revenue ‘may lead to immediate cuts in government spending’. This is counter to the conclusion that many of the earlier estimates of the fiscal impact of EPAs were overstated.
Problems, according to the paper, arise from the fact that like many developing countries, ACP states tend to rely upon trade taxes for a significant share of total revenue, not least because they are easier to collect than many other taxes. The loss will depend upon how much revenue is currently collected, by how much tariffs will be cut, and the effect of these cuts on the volume of imports (with the possibility that during the EPA implementation period some revenue could go up because the tariff cuts are more than offset by an increase in the flow of imports).
The earlier studies, completed before the details of tariff cuts had been agreed, had to make guesses about the scale of liberalisation. In some cases, they also based their estimates on the statutory tariff level at the time, rather than the effective rate actually applied after taking account of exemptions and under-collection.
Despite this, the ECDPM study finds that eight African countries face ‘very high’ fiscal impacts (with losses ranging from 6% to as much as 43% of total tax revenue), while 15 countries face ‘high’ potential impacts (with losses ranging from just under 3% to just under 16% of total tax revenue). The eight most severely affected states are all in West Africa, while the next 15 are in Central and West Africa. The states of Eastern and Southern Africa that have been studied face ‘modest’ to ‘low’ impacts.
The analysis notes the severe methodological problems faced in forecasting the revenue effects of trade liberalisation. ECDPM has, however, undertaken a ‘control’ calculation to construct what they term an ‘economic rule of thumb’ for the impact. This ‘reveals very few major discrepancies with the results from the detailed studies’.
The analysis points out that revenue losses need to be seen in the context of the reduced global aid and financial flows during the global crisis. A review of the African domestic resource mobilisation agenda, published in an ECDPM article earlier in the year, notes that ‘the total requirement to address Africa’s infrastructure needs in Sub-Saharan Africa has been estimated at about $93bn a year’. The article cites research showing that ‘catching up on infrastructure could boost per capita economic growth in Africa by an average of 3 percentage points.’ However, it is added, ‘innovative sources of funding’ are becoming unavailable, with significant challenges faced in order to ‘transform these opportunities into concrete deliverables’.
The fiscal impact of EPAs has the potential to affect public expenditure in all sectors, including agriculture. As such, it may have an effect on production and consumption of non-tradeable agricultural goods, such as subsistence farming. In this way the effects of an EPA may be transmitted to the furthest corners of a country. This needs to be seen against the background of the wider efforts in the Comprehensive Africa Agriculture Development Programme (CAADP) framework to boost government spending on the agricultural sector.
Already, as these studies make clear, the status quo for funding to Africa is not adequate, and revenue losses could further compound problems of infrastructure development in Africa, which are so essential for growth, including in the agricultural sector.
The extent to which it will be possible to adjust to these losses of trade tax revenues will depend partly on the speed of implementation of tariff elimination commitments and also possible domestic fiscal reform.
Because the precise pattern of liberalisation, the implementation period and the elasticities of supply and demand vary, the next phase of research and preparation must be done at a country level. If this were undertaken in a substantive manner in the context of the wider fiscal challenges now facing many smaller vulnerable ACP economies, then this could go some way to reassuring those ACP governments which in the course of 2012 called for the deferment of implementation of agreed tariff reduction commitments on fiscal grounds (see Agritrade article ‘ Madagascar and St Kitts & Nevis seeking deferment of EPA implementat...’, 15 October 2012). Detailed country-specific analysis could then identify options for insulating agricultural development expenditures from the worst effects of fiscal adjustment processes.