29 September 2010, Technical Centre for Agricultural and Rural Cooperation ACP-EU URL: http://agritrade.cta.int/en/Key-topics/EPA-negotiations/general/News/Agriculture-and-the-fiscal-impact-of-EPAs
With a growing demand for public support to agriculture in ACP countries to meet the twin challenges of climate change and price volatility within a trend towards rising prices, the issue of the impact of the elimination of tariffs on imports from the EU on public finances in ACP countries is a matter of direct, if not yet immediate, concern to agricultural producers.
It is against this background that a special issue of Trade Negotiations Insights (TNI) on the fiscal implications of EPAs and domestic resource mobilisation is of particular interest. The articles focus on two related themes: the level of fiscal loss that EPAs will give rise to, and the compensatory remedial measures which ACP governments can adopt. The detailed articles in TNI look at: taxation issues in Africa; why it is important to enhance domestic revenue mobilisation; the severity of the fiscal challenge arising from full EPA implementation; the specific fiscal impact in West Africa; the scope for addressing the fiscal challenge of EPAs; a review of donor engagement in fiscal reform.
The overview article notes that while for some ACP countries the impact is minimal, for others it is ‘a major cause for concerns’, with a critical consideration being the willingness and ability of the governments concerned to initiate effective fiscal reforms. The research undertaken by the Groupe d’Économie Mondiale de Sciences-Po (GEM) on the severity of the fiscal effects of EPA implementation notes some illustrative examples:
revenue losses of between 8% (Rwanda) and 21% (Burundi) among EAC countries;
revenue losses of around 21% in Madagascar;
revenue losses of around 28% in Ghana.
The paper notes that the fiscal adjustment challenge is greatest where trade taxes are a major source of government revenue, and that looking solely at the effects on ‘customs duties revenue … tends to underestimate the actual fiscal shock, as it ignores the spillover of the customs tariff cuts on revenues from other taxes’, since ‘customs duties are usually part of the tax base for excise and value-added tax levied on imported goods. Therefore a tariff cut also reduces these revenues.’ Taking these wider effects into account can increase revenue losses by 40% compared to solely customs-duty-based estimates. Additional losses however also occur as a result of trade diversion (i.e., the diversion of import sourcing from third countries, on which import duties would still be levied towards the EU).
However, the GEM analysis notes that the worst effects of revenue losses will be delayed (with the exception of the SACU members of the SADC EPA configuration, where as a result of the EU-South Africa Trade, Development and Cooperation Agreement (TDCA), tariff elimination will be completed by 2012). There is therefore time to ‘implement policies and reforms that will help address the fiscal shock of the EPAs’, by shifting from ‘trade to domestic taxes’. However, it is acknowledged that past experience shows that such reforms are ‘unlikely to allow governments to fully recoup the revenue losses from tariff cuts under EPAs.’
In this context, the EU’s 2007 aid for trade strategy commitment to ‘contribute to the absorption of net fiscal impact resulting from tariff liberalisation in the context of EPAs in full complementarity with fiscal reforms’ is highlighted.
The TNI companion paper on addressing the fiscal challenges of EPAs reviews some of the strategies that have been proposed. These include:
linking liberalisation commitments to the functioning of some compensatory financial mechanism;
support for more general tax reform measures, ranging from capacity-building support to strengthening tax avoidance;
direct compensation, as in the fiscal compensation arrangements under discussion in West Africa.
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