Fixing manufacturing and tax system key to development in Africa

January 17, 2014

African countries domestic consumption has been one of the key drivers of gross domestic product growth in the past decade as rising incomes have spurred Africans to spend more from Durban to Cairo and from Dakar to Dar es Salaam. According to 2013 figures, such spending continues to boost the retail sector and created hundreds of thousands of new jobs every year in sub Saharan Africa. The same has led to the establishment of new companies and the emergence of new ideas. Statistics show that the service sector especially tourism has been one of the stellar performers of the economies in Africa. However, the government’s of East Africa plan to raise tax on consumer goods ranging from mobile phones, airtime, mobile money transfer that has lifted millions out of poverty and created millions of direct and indirect jobs should be carefully considered and that is why I wasn’t amused to read their content in last years government budgets in the region. Already many businesses in the region have failed to compete with other African regions because of higher taxes that have caused a slowdown in consumption at a time when the other sectors of the economy are also experiencing myriad of challenges. African countries growing current account and trade deficits have been a cause of concern for a long time now. Given the state of affair, government’s move to raise tax on imported items some sense but the biggest challenge is that local manufacturers who face higher costs of production cannot satisfy demand nor meet the expectations of consumers in the region. Growing demand has driven up imports as the economies have continued to expand.

An IMF report last year revealed that exports in most African countries are suffering because of overdependence on commodities over the past few years and with commodity prices sharply down the value of exports has dropped with good example being Zambia a country that rely heavily with copper exports. The key to reducing the current account and trade deficits is to boost supply by empowering manufacturers to produce more goods. African governments will, in my opinion should lower taxes on imports that are used to manufacture goods for export as part of an incentive package to try and lower the deficit and this model seems to be working very well in Kenya and Tanzania. And I also think another urgent area to address is that most African countries industries are currently inefficient and uncompetitive. For example, high transportation costs and rising wages have turned many investors away from East African region where a CEO can command an allowance of $3m per annum while the workers of their firms can barely make $20,000 per annum. It would be a great idea to come up with policies that will address issues that makes domestic producers struggle to compete with importers from India, China and other Asian manufacturers. In the long term, African governments will need incentivizes to empower local entities. One problem I have experienced with East African market as an investor for example is the tangled licensing process that can take months and red tape. I also think countries in Africa need to build infrastructure reduce transportation costs and also upgrade the skills of the workforce in the continent.

Contador Harrison