Domestic resources matter tremendously in financing Africa’s transformation and development agenda. This is an area where Africa has made commendable progress over the past decade, with total tax revenues increasing four-fold from US$138 billion in 2000 to US$527 billion in 2012. To put this number in perspective, domestic tax revenues mobilized by Africa in 2012 were 10 times larger than net official development assistance, which was US$51.8 billion.

That Africa’s financial landscape is changing is also demonstrated by the fact that both foreign direct investment and remittances of Africans working outside the continent, now exceed the aid that Africa receives annually.

Although the overall domestic tax revenue numbers are encouraging, considerable variability exists among different countries. While the tax effort of upper middle income African countries was about 34% of GDP – close to the OECD average of 35% – low-income African countries mobilized slightly less than 17% of their GDP in tax revenues. In fact, the five largest tax collectors on the continent – Algeria, Angola, Libya, Nigeria and South Africa – accounted for about 68% of the continent’s total tax effort.

Notwithstanding the recent improvements that have taken place, increasing Africa’s tax effort is hampered by its narrow tax base, especially in sub-Saharan Africa. The informal sector plays an important role in most African economies, with activities that are hard to tax, especially small enterprises and farms.

Furthermore, in a bid to attract investment, some countries have chosen to offer generous tax incentives to investors. While these might be able to attract a few potential investors, the price paid by the economy can be significant as it deprives the country of much needed revenues, constraining its ability to invest for example in much needed infrastructure. The resulting infrastructure gap, in turn, can act as a constraint to investment. Therefore, focusing instead on improving the overall investment climate and creating a supportive policy and regulatory environment might actually be a better and more sustainable way by which to catalyze private investment. Encouraging Governments to publish all tax exemptions that are granted to corporations and making public the cost of each tax exemption can also help generate domestic debate about which policy option to adopt.

Weak tax administration, characterized by poorly trained and inadequately paid staff, is another constraint to increased domestic resource mobilization. The skills gap allows corporate entities to take advantage of the situation, exploit tax loopholes, underreport profits, and engage in activities such as transfer pricing by shifting taxable profits from high tax to low tax jurisdictions. According to the African Tax Administration Forum, investment in strengthening tax administration and building institutional capacity can have a “tenfold multiplier effect on states’ resources”. An innovative approach to helping build taxation capacity in developing economies is the Tax Inspectors Without Borders initiative, through which experts work directly with tax officials on audits and by helping find solutions to current audit issues transfer knowledge and learning.

Mobilizing domestic resources through improved natural resource management presents a significant opportunity for many African economies. According to the Africa Progress Panel’s 2014 ‘Grain, Fish Money’ report, illegal and unregulated activities related to the fisheries sector in West Africa alone costs the region US$ 1.3 billion annually in lost revenues, while illegal logging costs the continent US$ 17 billion every year.

Putting in place a transparent system for awarding mining rights and permits for sectors such as logging; making concession contracts public; involving local communities and deepening collaboration with Government; putting in place policies that encourage local value addition; and promoting initiatives like the Extractive Industries Transparency Initiative can all help to better harness the tremendous natural wealth that the continent has.

The African Development Bank has adopted a multi-pronged program for helping countries in the continent augment domestic revenues. It’s Value for Money, Accountability and Sustainability program, in partnership with other donors, provides capacity building support to government officials as well as civil society organizations and parliamentarians and encourages the analysis of fiscal space. Its support for the African Tax Administration Forum aims to strengthen networks and further build tax administration capacity through peer learning, an objective also supported through the Africa Budget Reform Initiative.

The Bank’s Good Financial Governance program supports reform initiatives that link the technical dimensions of public financial management with political economy issues such as the political will to change the structure of incentives and institutional culture.

Its Africa Legal Support Facility provides assistance to African governments to strengthen legal expertise and negotiating capacity in the extractive industries and natural resource management space through support for negotiating, contracting, drafting investment agreements and related commercial and business transactions. Since its establishment in 2010, the facility has approved over 45 projects with a value in excess of US$ 14 billion, and supported more than 30 countries in this area.

Given Africa’s large financing needs, investments in increasing domestic resource mobilization can pay rich dividends and the African Development Bank intends to remain a committed partner, providing policy guidance, technical assistance and financial resources to help client countries attain this objective.

Kapil Kapoor has been Director of Strategy and Policy for the African Development Bank Group since 2012. Latterly the World Bank’s representative for Uganda and Zambia, he was a development economist and governance specialist with the WB Group for over twenty years.