Fiscal Policy Letter No5: Improving Financial Inclusion To Broaden The Tax Base In Cameroon
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For several months, Cameroon has been facing the ravages of the pandemic caused by the coronavirus. To stop the spread of the virus, the Cameroonian authorities in April 2020 announced a series of fiscal easing measures to help companies and households in difficulty. Estimated at more than 114 billion CFA francs according to the Director-General of Taxation, the decisions taken have profoundly impacted public finances. Indeed, well before the pandemic, the country was already facing a high risk of external debt overhang (IMF, 2018) and immense security challenges in the North and the Anglophone regions. Despite this constraining socioeconomic and political context, the state must find the necessary and sufficient resources to ensure its proper functioning and territorial integrity.
This fiscal policy letter proposes through analyzes a way for the government of Cameroon to increase its tax revenues in the coming years without penalizing growth: improving financial inclusion. The goal is to eliminate all constraints that exclude the most disadvantaged from full participation in the financial sector.
The letter is structured around six key points. First, we provide an overview of Cameroon’s financial inclusion situation. Second, we analyze the factors that explain economic agents’ access to financial services, the transmission mechanisms between the financial and formal sectors, and the barriers to financial inclusion in Cameroon.
Our results show that a deepening of the financial system would likely positively affect tax mobilization in Cameroon. Estimates show that a 10% increase in financial assets would lead to a 1.87% increase in tax revenue, equivalent to CFAF 49.70 billion – based on the level of tax revenue projected in the 2021 budget law. Similarly, a 10% increase in the number of secure servers – better access to the internet – would lead to a 1.1% increase in tax revenue, equivalent to CFAF 30.62 billion.
This improvement in access to financial services for all economic agents – households, businesses – requires the public authorities to make the current regulations more flexible and increase the banking network’s density. This includes the development of payment systems, the construction of quality infrastructures, the definition of mechanisms to limit massive illicit capital flight, and the multiplication of consumer/investor protection guarantees.