Is Somalia’s Al Shaabab better at tax collection than most low-income states?

Most low-income states rely on trade taxes (at borders) rather than on income taxes. A common explanation for this phenomenon is that these states lack capacity to collect income taxes among largely rural populations that rely on subsistence agriculture.

The idea here is that it is easier to collect taxes in economies with large firms that act as fiscal intermediaries. But as it turns out, the case of Al Shabaab — the Somalia-based terror group — shows that it is possible to raise non-trivial amounts of revenue from rural populations.

This is from the Hiraal Institute:

Zakawaat is collected by troops mobilised from different AS departments, assisted by clan elders; they are put into action during the collection season, which is traditionally the month of Ramadan. The starting rate is one camel out of every 25 camels owned and one goat out of every 40 goats. Collection is done uniformly across all the regions in south and central Somalia, including in the districts that AS does not control. Collectors issue receipts to pastoralists; those who lose their receipts are made to pay the taxes again in the next year. This ensures that pastoralists who were away from AS territory during the preceding year do not escape payment of Zakah.

Amounts collected vary by district. For instance, in Bardale in 2017, AS managed to collect 2200 goats and 171 camels. In the area around Mogadishu in the same period, 100 camels and 1500 goats were collected as Zakah. This is a relatively small amount of livestock because the area is mainly inhabited by non-nomadic farmers as it is close to Mogadishu and surrounded by urban areas. Likewise, Zakah collection in Barawe in 2017 was 600 camels and 8000 goats; in Wanlaweyn it was 700 camels and several thousand goats. The livestock is auctioned to ASlinked businessmen at an amount that is generally just below the market rate, at $400-$600 per camel according to the animals’ age and $30 per goat. The districts named above are not controlled by AS, yet the group managed to collect more than $1mn in Zakawaat in those regions in 2017. This would translate, at a conservative estimate, to about $8mn annually from livestock Zakawaat throughout South and Central Somalia.

Revenue leakages are rare:

The financial system is tight, with only one known case of a collector who defected with $2800. The auditors in the districts, who receive the monies from the checkpoints, are rigorously vetted before being employed. They declare all their assets, including land, cars, and cash in the bank. They declare their wealth again after being relieved of their duties; any unaccountable wealth is repossessed.

Auditors, some of whom receive up to $50,000 a month, are unable to defect with the money for a number of reasons. First, they are on 24-hour watch by the Amniyaat: in their offices, there are four known members of the Amniyaat. Additionally, other hidden Amniyaat operatives keep watch of their movements. Moreover, they are relieved of their duties every few months and sent on leave.

Finally, Al Shabaab regularly balances its budget:

The AS tax revenues are estimated in this paper at $27mn while its expenditures are at around $25.6mn. While our estimates are conservative, the group breaks even on its balance sheet every year. This is shown by the fact that the emergency tax collection is not done on a regular basis, and not in every region. On the other hand, the fact that emergency collection is sometimes needed shows that AS profits are not significant and its income is just enough to cover its expenses.

Read the whole thing here.

H/T N. Lidow.

The Elusive Quest to Fix (Political) Governance Problems Using Technology

File this under “the perils of treating political problems as technical problems”:

The government’s main financial management system is marred by technology loopholes, making it prone to abuse and possible loss of public funds, an official audit has revealed. An inquiry report by the Auditor- General reveals that the Integrated Financial Management Information System (Ifmis) has numerous control weaknesses that badly expose it to fraud and misuse, with unidentified users capable of logging in remotely while others have multiple identities in the government’s main financial nerve centre.

So exposed is the system that one can create more than one User ID. This can lead to misuse of such additional User ID freely in committing fraud. The audit reveals that almost 50 users had more than one User ID leaving little accountability on the users. The system also lacks a trackable approval process in the creation of new User IDs, meaning it is possible to create ghost IDs and carry out transactions including remotely without being noticed.

In fact, a list of authorised personnel provided with remote access was not available for audit review meaning their identities remained anonymous. There was no practice of approving the remote login requests; which means even those not authorised would log in remotely. Remote transactions were largely blamed for the theft at the Ministry of Devolution which saw the loss of more than Sh1.6 billion in the infamous National Youth Service (NYS) scandal.

Vendors were also duplicated in the system with a review of the supplier master data showing the existence of almost 50 cases of duplication of the same vendor, meaning the vendor may as well have been paid 50 times.

Mozambique: Is there such a thing as predatory sovereign lending?

The Wall Street Journal has a great story on Mozambique’s hidden debt scandal:

Screen Shot 2016-06-30 at 8.03.37 PM.pngThe government picked Mr. Safa’s company, Privinvest, to supply ships, including patrol and surveillance vessels, and asked its help getting financing. The company disputes the characterization of the ships as military, saying they weren’t outfitted with weapons. Privinvest approached Credit Suisse about a loan for Mozambique, and a committee of senior executives, including then-CEO Gaël de Boissard, approved the deal.

Credit Suisse’s top brass signed off in part because the bank had pioneered a way to lend in developing countries without taking on much risk.

The bank found it could purchase sovereign-debt insurance through the Lloyd’s of London insurance market to hedge as much as 90% of the loans against default. Credit Suisse charged higher interest rates on the debt than its insurance premiums, pocketing the difference mostly risk free.

The insurance policies Credit Suisse used only covered governments. So when Mozambique wanted to borrow the money through state-owned companies instead, the bank came up with a twist: Mozambique would cosign.

FT notes that:

The debt was originally borrowed via a special purpose vehicle for Ematum [tuna fishing company], an arrangement that does not require the same level of disclosure as a sovereign bond issue.

Basically Credit Suisse, the Russian VTB Capital, and their Mozambican accomplices knew exactly what they were doing.

When the money got to Mozambique it mostly went into private pockets. The proposed tuna business the loans were intended to finance went bust (realizing a paltry 2.5% of projected sales). And the security purchases (ostensibly to secure Mozambique’s vast yet-to-be-developed gas fields) proved useless.

Meanwhile…

…….conditions in Mozambique are worsening. Its foreign-currency reserves fell to $1.8 billion in May from $2 billion in January, and it is seeking $180 million in food aid. Intensified fighting has sent more than 10,000 refugees to neighboring Malawi, according to the U.N. High Commission for Refugees.

Credit Suisse is a Swiss financial services company. According to the WSJ Privinvest’s struggling subsidiary Constructions Mécaniques de Normandie built the ships sold to Mozambique. The latter is, of course, based in France. Corruption knows no borders.

Incentivizing Workshops as Substitutes for Actual Governing: The Case of Nigeria

This is from the FT:

According to figures released by the ministry, travel was the single biggest government line item from 2012 to 2014, at N248bn ($1.25bn) for the three years combined (the ministry did not provide annual figures). This is equivalent to an extraordinary 18 per cent of total government spending [Emphasis added].

……. A 2012 investigation by Nigerian newspaper Punch found that wealthy Nigerians spent $6.5bn on private planes between 2007 and 2012, making the country the biggest market for them in Africa.

Not all of them were bought with private funds. Under former president Goodluck Jonathan, Nigeria’s Presidential Air Fleet (PAF) acquired several new private jets, bringing its total to 11.

And you know a non-trivial proportion of these “study tours,” conferences, and meetings were either expensive shopping trips on the government’s tab or ploys to earn inflated per diems.

This is an instance where I’d endorse a move to “leapfrog” meetings, workshops, and conferences.

Africans Covered 98% of the Cost of Administering Colonial French West Africa (AOF)

Elise Huillery writes in the Journal of Economic History:

What share of French expenditure was allocated to West Africa? What share of West Africa’s revenue was provided by France? These two questions are crucial since scholars and politicians who claim colonization had a “positive role” make essentially the two arguments that the colonies benefited from imperial public investments and that mainland taxpayers sacrificed local investments for investments in the colonies.

I find that the costs of AOF’s colonization for the metropolis were low. From 1844 to 1957 France devoted on average 0.29 percent of its public expenditures to AOF’s colonization. Colonization of French West Africa was profitable for France to the extent that the impact on cumulative domestic production exceeded 3.2 billion 1914 francs. The military cost of conquest and pacification accounts for the vast majority (80 percent) of the average annual cost. The cost of central administration in Paris accounts for another 4 percent. So subsidies to AOF account for only 16 percent of the average annual cost, meaning that less than 0.05 percent of annual total metropolis public expenditures were devoted to AOF’s development.

For French West African taxpayers, French contribution was not as beneficial as has been argued. From 1907 to 19578 the metropolis provided about 2 percent of French West Africa’s public revenue. Local taxes thus accounted for nearly all of French West Africa’s revenue. These resources supported the cost of French civil servants whose salaries were disproportionally high compared to the limited financial capacity of the local population. Administrators, teachers, doctors, engineers, lawyers, and so on, were paid French salaries and got an additional allowance for being abroad. Thus, in the colonial public finance system, most revenues were collected on an African basis while being spent on a French basis. To illustrate this point, I show that colonial executives (eight governors and their cabinets) and district administrators (about 120 French civil servants) together accounted for more than 13 percent of local public expenditures.

The rest of this very fascinating paper is here.

Besides the headline finding, also interesting in the paper are: (i) the extent to which Paris subsidized private firms involved in the colonial enterprise; and (ii) the structure of the public finance system that allowed the AOF administration to borrow directly from French banks with the full backing of Paris (which allowed for lower rates). This might explain the persistence of the monetary relationship between former AOF territories and Paris in the form of the CFA and a common central bank (BCEAO).Screen Shot 2015-07-05 at 12.05.23 AM

As I keep saying, Economic History is hot again. And sooner rather than later it’s going to become more apparent to more people that African political and economic history did not begin in 1960, or for that matter in 1884-5. And neither was it just about the unimaginably catastrophic Atlantic experience.