Chief Macroeconomist at the UN Economic Commission for Africa (UNECA), Adam Elhiraika, who is co-author of the 2019 Economic Report on Africa, advices African countries to abandon tax holidays for investors.
“Many countries in Africa have offered tax exemptions, tax holidays that never worked. Tax holidays do not really matter a lot. They are just a loss…The loss of tax incentives is more than the gain. It is not tax incentives that matter most for investors to do business in Africa,” said Adam Elhiraika.
“Instead of tax incentives, what matters for investors are infrastructure such as roads and electricity, which can help them to do their business properly. Then the investors need skilled labor to produce and access to market to export what they produce. They also need access to banks to finance additional investment when they need,” he says.
“African government need to focus on these to enhance capacity, to cooperate with each other to build value chains. I think with these and low labor cost Africa is very attractive destination for investors,” he said, speaking to NewBusinessEthiopia.com reporter in Marrakech at the sidelines of the 2019 African ministers of economy meeting.
Official government statistics also shows that tax incentives in Africa have been abused and didn’t brought intended positive result in many cases.
In Ethiopia for instance, the annual export earnings has declined to $2.857 billion in 2015/16 from $3.152 billion in 2011/12, while of the duty free incentives Ethiopian government has provided to investors has increased to $3.261 billion in 2015/16 from $1.116 billion in 2011/12, shows the data from Ethiopian Customs and Revenue Authority.
Most of these companies have secured the tax incentives promising to manufacture goods locally and generate hard currency to the country exporting their products.
Adam Elhiraika has also confirmed that the competition of African countries to attract more foreign direct investment through tax holidays over the past years was a waste of huge money. “Absolutely,” he says, confirming that the countries have wasted huge money on fruitless competition, which could have been used to improve the status of infrastructures immediately needed by the investors.
“…because in our analysis, if you decrease taxes by 1%, then your revenue from the investment you attract decreases by 10%,” Adam Elhiraika said.