On the 5th of August 2024, Mobius Motors, a renowned local manufacturing and assembly company in the automotive industry in Kenya closed its operations following mounting debts, tax liabilities and a concentrated market. The shutting down of companies like Mobius has become prevalent among businesses in Africa. The business environment is challenging for most businesses due to tight fiscal policies, costly borrowing, tax liabilities, and trade deficits. There is a need to prioritize policies and regulations that encourage investment and business growth in Africa. African governments should adopt low corporate income taxes, promote intra-African trade, and reduce inflation by restructuring their debts through sound fiscal policies.
The tax rate on income, profit and capital gains is higher in Africa compared to other countries with similar income levels. Trade taxes and customs taxes account for 14 percent of the tax revenue, compared to other regions such as East Asia where trade and customs taxes account for only 4 percent of tax revenue. The corporate income tax rate among African countries are also higher than the worldwide average. Similarly, inflation rates in certain countries on the continent are in the double digits, leading to costly borrowing. Curbing these barriers to business growth requires collaborative efforts by African governments and the private sector.
African governments need to reduce spending and restructure their debts to reduce inflation through sound fiscal policies.
African governments should reduce corporate income tax to encourage investment and business growth, especially in relation to local companies. Lower corporate income tax for indigenous businesses will aid in reducing tax avoidance and profit shifting among companies. Profit shifting is prevalent among countries with a high tax burden, where companies relocate their offices to countries with low tax rates or to tax havens to avoid tax liability. Multinational companies looking to penetrate African markets will be encouraged by lower taxes to set up shops on the continent, thus creating employment and contributing to the country’s gross domestic product. Ireland’s low corporation tax of 12.5 percent has seen multinational companies such as Google, Apple, and Facebook setting up their headquarters in the country.
Additionally, to encourage innovation and boost intra-Africa trade, African governments need to discourage over-reliance on imports. In 2023, intra-Africa trade accounted for 15 percent of the continent’s total trade. Though this is an improvement from 2022’s rate of 13.6 percent, the figure is relatively low in comparison to regions such as Asia. Intra-Africa trade must be promoted, as it encourages efficiency and lowers production costs by leveraging on the continent’s market size of close to 1.3 billion people. The promotion of trade among African countries relies on concerted efforts by African governments to harmonize laws and policies that reduce tariff and non-tariff barriers among member states.
Furthermore, African governments need to reduce spending and restructure their debts to reduce inflation through sound fiscal policies. Global geopolitical tensions and supply chain disruptions have driven up prices and inflation. In response, multinational financial institutions have raised interest rates, increasing debt servicing costs for developing countries. This has weakened local currencies, tightened fiscal policies, and made borrowing costly, reducing business investment. To counter the negative impact of costly debt servicing, African governments should restructure their debts by negotiating lower interest rates with multinational financial institutions. The low interest rates will help reduce inflation, enhancing access to finance for businesses. Restructuring debt will help lower inflation, strengthen the local currency, and make borrowing less expensive for businesses.
A favorable external business environment is instrumental for the growth of businesses in Africa. The high corporate tax imposed among African countries and the lack of intra-African trade negatively affect businesses in the long term. African governments must prioritize creating favorable business environments for economic growth.
Bernice Kimani is a writing fellow at African Liberty. She is on X (Twitter): @kimani_bernice
Article first published on Now Accra.
Photo by Erik Hathaway via Unsplash.