By Tanu Jalloh
I kept a late night, last night reading. Two huge current happenings around the economy, one of them was almost going to inform my piece for this edition of Business & Economy. Not any anymore.
I was almost done with my pre-writing planning earlier in the day on the Sierra Leone Extractives Industry Transparency Initiative, SLEITI and the Global Competitiveness Reports on the country, all new in one week; this week. But those have been flagged on air and at forums.
Against that backdrop, I am looking at a third one, completely different and far removed away from the sentiments that have beclouded economic arguments in recent days. It nonetheless still is very timely.
It was the Oxford professor Paul Collier who observed, and set out to prove same, that: “…if governance quality is above some level then natural resources can lead to further improvement, while below the threshold further deterioration may take place.” That quote speaks to the
hope and aspiration of the pending polls.
Those arguments were built around the relationships between natural resources, governance, and economic performance. The relationships
run in both directions, with resources potentially altering the quality of governance, and governance being particularly important
for resource poor countries, (Collier P., A J. Venables, Oxford, 2009).
I have therefore taken my cue from his use of key phrases and words like ‘natural resources’ and ‘deterioration’. My thrust is however confined, for this discourse, to the seeming illusions around natural resource use and management. In the words of Collier again ‘illusory
revenues’ that come in the form of [high] import tariffs in resource-rich countries [like Sierra Leone] could be counterproductive. “…tariffs have the usual effect of damaging countries’ attempts to diversify away from dependence on aid or resources.”
But President Ernest Bai Koroma was confident when he faced parliament on October 8, 2011 to announce that, “his government has been very successful in mobilizing internally generated funds to gradually reduce our reliance on donor funds.”
Invariably, therefore, the country’s revenue generating body, NRA bears the burden of exceed targets in the first two quarters of 2012 if
activities unbudgeted for were to be successfully incorporated in the grand agenda of the government. Like in 2011, this year the government still depends on the tax collector to do wonders. The target for 2011 was Le 1.174 trillion, far above the targets for the previous two years, to cushion roads infrastructure spending.
In 2010, out of a target of Le 930.494 billion, a total of 945.842 billion was collected. In 2009, the revenue collected was Le 700,328 billion away
from the target of Le 668,343 billion. In 2008, a total of Le 615,645 billion was collected for government. This year the trend must change
drastically to accommodate for extra commitments to elections and fuel subsidies. It means the tariffs on import and export will increase, if not already there.
But some tax experts and importers are calculating the implications this might have on how the authority’s biggest reform initiative is implemented. Already, fears abound that the Goods and Services Tax (GST), introduced in 2009, will remain a burden to be borne by the
business community (high tariffs) and end users. For instance, vehicles are subject to high import taxes and duties. Amount to be paid depends on value, model, year, cubic centimeters and accessories. Tax range varies depending on these factors of 5% - 110%.
“Natural resources are said to have been of profound importance to many developing countries. Restricting attention just to non-renewable
resources (as we will throughout this paper) more than 250 million Africans live in countries where natural resources account for more than 80% of exports and, in some cases, more than 50% of government revenues. These countries have heterogeneous economic and political performances – ranging from the best (Botswana) to among the worst (Sierra Leone, Democratic Republic of Congo).
“Resource wealth is part of the story for both the successful countries and the failures. To understand why, we have to look at two broad
relationships. The first is how resource wealth affects the various dimensions of governance, and the second is how resource wealth and
governance interact to affect a country’s economic performance and more general development progress. These relationships are dynamic and non-monotonic, so that above some initial levels progress becomes self-reinforcing, while below these levels a vicious circle can cut
in, increasing the fragility of the state.
“Import tariffs raise the price of imports but, since they cannot change their relative price, they also increase domestic prices proportionately. So while the import tariff raises revenue it also reduces the domestic purchasing power of the resource or aid revenues, effects that, in the simplest case, exactly net out.
“For example, if the private sector purchases some of the natural resource then the import tariff may reduce real government revenue. We therefore suggest that trade policy formulation in aid or resource-rich economies needs to recognise the likelihood that import tariffs do
not necessarily raise revenue for government.”
Government raises hundreds of billions through NRA, and of late putting the bar as high as trillions of leones, from tariffs (taxes and other import dues or duties). What we don’t realise is that government is the biggest buyer in the country. In fact over seventy per cent of its annual
budget goes into procurement, according to the procurement authority. Therefore the direct adverse impacts of import tariffs on local purchase by the government and ordinary citizens are proportionate increase in domestic prices and a reduction in the domestic purchasing power.
Supporting Arguments
Read some formidable academic arguments in favour of my postulations. Paul Collier and Anthony J. Venables, “Illusory Revenues: Import tariffs in Resource-Rich and Aid-Rich Economies”, (Oxford, 2009) have argued as follows:
“We have shown that in resource-rich and aid-rich economies it is likely that import tariffs do not generate net revenue. The revenues shown in government budgets are illusory because they are offset by reductions in real revenues from resource or aid rents, these losses not appearing in the budget as a line item. The central case is that in which the impact on net revenues is strictly zero, and we have shown that in
more general economies net revenues can either decrease or increase, supporting the presumption that for resource-exporting economies
tariff revenues are likely to be illusory. Since aid is a form of foreign exchange rent accruing to the government, the same analysis applies. Hence the relevant measure to determine whether our analysis is pertinent in a particular context is the sum of resource rents and aid relative to the value of imports. For many low-income economies this combination of resource exports and aid is the predominant source of finance for imports.
“As in other contexts, tariffs (when they have a real effect) reduce aggregate welfare and may also frustrate export diversification. There is thus a strong case that countries in which tariff revenue is illusory should have lower tariff rates than those in which they generate genuine revenue, yet there is no evidence of such a tendency. This suggests that tariffs are excessive either because of political advantages accruing to a shift of revenue between budget headings or – perhaps more likely – the illusory nature of revenue is not yet appreciated.”
