Working Paper 101 - The Global Financial Crisis and Domestic Resource Mobilization in Africa

As access to foreign resources has becomeincreasingly difficult, in the wake of the globalfinancial crisis, the use of domestic resourcesfor development purposes is becoming moreand more important. Ironically, however, thereare possibilities of the financial crisis also affectingthe mobilization of domestic resources. Theglobal financial crisis affected the capacity ofthe public sector to mobilize tax revenues. Theintroduction of such new taxes as VAT, the rationalizationof trade tariffs, the strengthening oftax offices, the reform of incentive structures,reduction and removal of subsidies have thepotential to improve domestic resource mobilization.Another significant challenge that African countriesface is how to strengthen their financialsystems in order to make them deliver thenecessary financial resources to be used forboosting investments and facilitate employmentcreation. Reforms in this area will enhance thepolicy environment for financial institutions andprovide incentives for them to become morecompetitive. Despite the effort, studies of financialsystems performance in most African countriesover the last two decades have often suggestedthat the reforms have generally had limitedsuccess in effectively mobilizing domesticresources and channeling these into productiveinvestments.While the African financial sector remains marginallyintegrated in global financial market, it isgenerally true that in knowing that they couldborrow from international markets to supplementwhatever resources were available to themfrom domestic markets encouraged Africanfinancial institutions to be a lot more out-goingin terms of the development of new instrumentsin recent years. But going back old ways wherethere was little interest in new instruments andnew clients, opting for safer government businessonly, will not be beneficial in the long-term.Reforms to enhance the continent’s integrationinto the global market are therefore important.This paper attempts to answer some importantquestions: Whether the mobilization of domesticresources is counter-cyclical and whether externalshocks will lead to improvements in domesticresource mobilization? The paper argues thatif there should be any interruptions in the flowof domestic resources, this may not be easilyattributable to the onset of the financial crisis,rather it is argued that the structural and institutionalconstraints that have hindered resourcemobilization for a long time will continue tomake it difficult for the financial systems torespond adequately to any interruptions inexternal resource flows. The paper highlights anumber of suggestions for countries to improvedomestic resources mobilization.