Consequences of Covid-19 on financing sustainable development

By Mary Ongore

The Sustainable Development Goals (SDGs) set in 2015 by the United Nations General Assembly create a blueprint for securing a sustainable future for all. They serve as a guide to the world’s development agenda until 2030.

The SDGs aim at, among others, reducing poverty, inequality (including gender inequality) and hunger, and ensuring access to education, clean water and decent work for all.

At the onset of the Covid-19 pandemic, the scope of investment needs of the SDGs had already exceeded available funding. Developing countries continued to face a shrinking fiscal space due to sub-par spending efficiency, low levels of domestic and external resources as well as high debt levels.

Tax revenue, for instance, was insufficient in Kenya with the tax-to-GDP ratio being approximately 16.7 percent in the 2018/19 financial year. A tax-to-GDP ratio represents the size of the tax revenue from the government, expressed as a percentage of GDP. It can be regarded as one measure of the degree to which the government controls the economy’s resources. The higher the tax-to-GDP ratio, the better the country’s financial position.

Kenya’s tax-to-GDP ratio is significantly below the Africa’s average between 2000 and 2018 of 24.5 percent. This has been coupled with unsustainable levels of debt. Kenya’s debt stood at more 61.1 percent of GDP in the 2018/19 financial year. The high levels of debt has continued to affect poverty directly by reducing the government’s resources for development. As a result, Kenya, like much of Africa, continues to face funding gaps for the SDGs.

The outbreak of Covid-19 has resulted in additional pressure on sources of development finance, which will cause Kenya to struggle to finance its public health, and social and economic responses to the pandemic.

Despite the recently announced revenue growth of 1.7 percent compared to the last financial year, the Covid-19 pandemic had an adverse effect on the fourth quarter performance, which slowed down the growth experienced from July 2019 to February 2020, according to data released by the KRA on its annual revenue performance.

Domestic revenues in the fourth financial quarter, for instance, were affected by reduced corporate income tax collections caused by reduced corporate profits; reduced consumption tax revenues due to a contraction in consumption; and reduced personal income tax revenues as a result of increased unemployment.

Additionally, fiscal measures implemented to cushion the economy such as reduced tax rates, payment deferrals and accelerated tax refunds also had an impact on domestic revenues in the economy.

Despite the contraction of the fiscal space, Kenya continues to face rising spending needs owing to increased and urgent public spending on health, social protection, and economic relief. This will likely widen the SDGs financing gap for years to come and could reverse the progress previously made to address global poverty. In this challenging context, how can we avoid a development finance collapse?

The development finance landscape had already shifted from one centred on official development assistance and external debt to one focused on domestic revenue mobilisation, following the adoption of the Addis Ababa Action Agenda in 2015. However, given the shrunken fiscal space, domestic revenue mobilisation will become even more important in the mid to long term. Kenya will need to identify ways to further increase tax revenue through both tax policy and tax administration measures.

Taxes will need to be fair, sustainable and legitimate to result in any meaningful increase in collections. This means that the government will need to increase transparency and accountability in revenue collection and budgeting to build citizens’ trust in the state.

Where revenue is collected, it will be imperative to show how it has been spent. This will be particularly important in ensuring taxpayer compliance in the collection of existing taxes whilst supporting attempts to widen the tax base and to more successfully tax the informal sector.

Tax administrations will also need to combat the current weak state capacity to collect taxes by adopting the use of technology. This means the country will need to evolve beyond traditional methods of collecting taxes, as services are now largely rendered through the digital space. 

Tax evasion will also need to be decisively addressed to ensure that taxes are fairly applied to everyone. Also, a close review of redundant, poorly structured and often wasteful incentives will need to be done to stop revenue leakage.

Finally, the Kenyan government will need to combat illicit financial flows (including international tax evasion, corruption and money laundering), as these are significant obstacles to securing sufficient financing for the SDGs. At present, these illicit flows deprive developing economies of significant volumes of capital, and exceed the Overseas Development Assistance received.   

Granted, the future of financing the development agenda and the eradication of poverty is not all bleak. While the impact of the Covid-19 pandemic will continue to be felt for some time, there is an opportunity for Kenya to exercise discipline in tax collection and administration and plug leakages. This will no longer be an option, but rather an absolute necessity to reduce poverty.

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The writer is a tutorial fellow at the University of Nairobi and a member of the Private Law Department.