Many developing countries are not benefiting from the booming digital trade ranging from software sales to streaming movies, which rose to $3.82 trillion globally last year, according to IMF.
The fund says countries like Kenya are struggling to fully participate in digital trade despite its huge potential.
“The countries risk falling behind on the back of gaps in connectivity, information and communication technology infrastructure and digital skills, as well as lack of a predictable and transparent regulatory environment,” the lender says.
Highlighting the sector's potential, IMF says digital trade has several unique benefits beyond traditional gains, saying software trade for instance, helps to digitalise the economy, increase efficiency and boost productivity.
It adds that trade in digital media, such as subscriptions to foreign journals, promotes inter-connectivity, communication and the transmission of knowledge and innovation.
“Finally, digital marketplaces, such as app stores or freelance programming websites, foster inclusion by reducing trade barriers for small firms and women-led businesses,” says IMF.
Subsequently, it says it is prudent for emerging economies to embrace policy reforms that promote inclusion, starting with the current tariff-free environment under the World Trade Organisation (WTO) agreements.
Although the agreements cover all types of trade, the only multilateral rule specific to digital trade is the moratorium on customs duties on electronic transmissions.
The moratorium, which has been periodically extended since its introduction in 1998, prohibits tariffs on digital imports, thereby contributing to a stable and predictable policy environment for digital trade.
“Whether to extend the moratorium will be a key issue at the WTO's 13th Ministerial Conference in February 2024. A much-debated point in discussions ahead of the gathering in Abu Dhabi revolves around the fiscal implications of the moratorium, as some countries fear that the current rules could hurt their revenue potential and constrain their policy space,” IMF says.
A study by the lender shows the moratorium has a relatively small impact on fiscal revenues, between 0.01 per cent and 0.33 per cent of overall government revenue on average.
The study further reveals that domestic consumption taxes are more efficient instruments for taxing digital trade and can generate higher government revenues.
“Imported digitised products within the scope of the moratorium are best taxed through existing domestic consumption taxes, such as value added tax (VAT), where collection methods can be adapted for digital transactions,” the report reads.
Kenya seems to be on track with sector-based reforms to boost digital trade with the recent launch on the national e-commerce strategy that aims to streamline the trade in coming years.
The strategy comprises of plans to develop digital skills between the workforce and entrepreneurs through improved Internet connectivity, and e-commerce-related infrastructure countrywide.
It also emphasises the establishment of regulatory frameworks and standards for e-commerce transactions aimed at building trust among consumers.