Office of the Special Adviser on Africa - Sustainable Development

Stopping the haemorrhage: The case for a global framework to stem illicit financial flows from Africa

Rado Ratovonarivo — Mon, 30 Jan 2023 22:56:00 +0000

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Opening of Debate of 77 Session of General Assembly

UN Photo/Cia Pak

A wide view of the General Assembly Hall as Secretary-General António Guterres (at the podium and on screens) addresses the opening of the seventy-seventh session of the General Assembly Debate. © UN Photo/Cia Pak

By Rui Xu

As the COVID-19 pandemic highlighted structural inequalities in the global economy, it also exposed vulnerabilities on the African continent, including pervasive illicit financial flows (IFFs) depriving African countries of resources that could go toward financing their development. To end this financial haemorrhage, a global framework against IFFs must be established, as the UN General Assembly (GA) called for in its resolution A/RES/73/222 for renewed “international cooperation to combat illicit financial flows and strengthen good practices on assets return to foster sustainable development.”

IFFs shrink financial resources for Africa’s sustainable development

Curbing IFFs across Africa could close the financing gap for the Sustainable Development Goals (SDGs) by 33 per cent, according to the UN Conference on Trade and Development (UNCTAD). The continent is estimated to lose more than US $85 billion per year from IFFs, more than 3.5 per cent of its Gross Domestic Product (GDP). Capital flight, which serves as a proxy for IFFs, is also significant, reaching US $2 trillion per year between 1970 and 2018, not to mention the socioeconomic impact of COVID-19, which reduced real GDP growth by more than 2 per cent in 2020.

These losses far outstrip Africa’s inflows, including the US $48 billion the continent receives from Official Development Assistance (ODA) and the US $54 billion from Foreign Direct Investment (FDI) per year. Therefore, tackling IFFs is crucial for Africa’s sustainable development. It should be an integral part of the continent’s domestic resource mobilization, underpinning initiatives toward achieving the 2030 Sustainable Development Agenda and the Africa Union’s Agenda 2063.

Transforming regional initiatives into a global agenda

The African Union established a High-level Panel on Illicit Financial Flows from Africa, the Mbeki Panel, in 2015. This panel identified that commercial practices related to trade and tax abuse contributed to more than half of IFFs.

Then, a High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda, the FACTI Panel, was established by the UN in March 2020. In a report published in February 2021, the panel advocates for a “Global Pact for Financial Integrity for Sustainable Development,” underscoring the importance of tackling IFFs at the source, including financial institutions and professional services firms in developed countries.

Understanding this global nature of IFFs is key, as these illicit flows often originate from “enablers” in multiple sectors and countries. For example, Africa has been plagued by IFFs caused by multinational enterprises (MNEs) in other countries, as they are shifting profits away from the continent to affiliates in tax havens, exploiting loopholes in tax rules to reduce income tax liabilities.

A global initiative tailored to African realities

A new global framework for tackling IFFs in Africa should also look at the realities in developing and developed countries. While African countries are trying to enact policies to tackle IFFs, including those outlined in the 2022 policy brief of the UN Office of the Special Adviser on Africa (OSAA), we must recognize that many international instruments and regulations to stop, track, and trace IFFs were established based on economic and financial frameworks from the Global North that do not consider the African context and perspective.

For example, this is the case for a global tax deal achieved through an OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Although significant in establishing a minimum 15 per cent tax rate for MNEs, the agreement was implemented without considering reservations from the Global South. In several African countries, the average corporate tax rate is notably higher. The deal would do little to prevent MNEs from shifting profits away from African countries to low-tax havens.

A blueprint for building a coordinated international framework

The UN could support the implementation of an international framework for tackling IFFs, where UNCTAD, the UN Tax Committee and the Financing for Sustainable Development Office (FSDO) could play key roles given their expertise. The Organization could also ensure that the process of establishing this framework is transparent and inclusive, with adequate participation from developing countries, including those in Africa.

This global framework must lay out a blueprint for priority policy actions, establish a strong global governance system, facilitate the exchange of knowledge across jurisdictions, and provide capacity-building support to less advanced economies.

When it comes to IFFs, the FACTI Panel said it best: “Track it. Stop it. Get it. And use it to finance the SDGs.” The implementation of an effective global framework to tackle IFFs from Africa with support from the UN and a robust engagement of the international community is an important step toward achieving this goal.

The author is an Associate Economic Affairs Officer in the policy analysis and coordination team of the Office of the Special Adviser on Africa at the United Nations.

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Fighting inefficiencies in public spending: Africa’s next battle?

Rado Ratovonarivo — Mon, 16 Jan 2023 18:00:00 +0000

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Newly installed solar panels at a health clinic in Sierra Leone

UNOPS

Aerial view of newly installed solar panels at a health clinic in Sierra Leone. © UN Office for Project Services (UNOPS)

By Liwaaddine Fliss

A number of African countries continue to face challenges while working toward the realization of the Sustainable Development Goals (SDGs). A lack of financial resources is contributing to their struggles, compounded by inadequate spending patterns depriving the continent of the resources it needs for its development. Now more than ever, African countries need to urgently rein in wasteful public spending and focus on boosting activities to tackle a tepid COVID-19 recovery and to put the SDGs back on track.

A powerful enemy carrying out a multi-pronged assault on the continent

In addition to illicit financial flows that deprive Africa of more than 3.7 per cent of Gross Domestic Product (GDP) per year and inefficient tax incentives that take away 2.5 per cent of GDP, Africa is registering an average loss of more than 2.5 per cent of its GDP per year to inefficiency in public spending. This inefficiency took hold because of multiple factors.

First is the government procurement system, which has been facing challenges ranging from lack of transparency and accountability to corruption. In the health sector alone, corruption is causing an annual loss of nearly US $9.5 billion in Africa, reducing people’s ability to access basic health services.

Rigidities in wages and entitlements in countries where these financial commitments make up a significant portion of government expenditures, as well as deficiencies in public institution processes, are also playing a role. According to the International Monetary Fund (IMF), the quality of public institutions significantly influences the efficiency of public spending and resource mobilization.

As a result, public spending inefficiency in Africa is high compared to other regions and is present across multiple sectors. In education and infrastructure, data between 2000 and 2017 show that this inefficiency contributed to a loss of more than US $40 billion per year. In health, an annual loss of US $28 billion was registered, which lowered life expectancy in Sub-Saharan Africa by more than ten years.

Combating inefficient spending is as important as generating revenues

Overall, regarding the efficiency of public spending, African countries have a lower average score [From 0 (least efficient) to 1 (most efficient). The methodology of calculating the score is detailed in the publication "In Search of Fiscal Space in Africa: The Role of the Quality of Government Spending"] of 0.585 compared to 0.825 for other developing countries. This suggests that if public spending is more efficient, African countries could achieve the same output with 41 to 48 per cent fewer resources and double their performance.

To turn the tide, African countries have been trying to boost domestic resources, focusing their efforts on revenue collection, including through tax increase measures. This approach has been leveraging initiatives to increase tax rates and widen the tax base, shifting to Value Added Tax (VAT) and strengthening the capacity of tax revenue authorities.

This domestic resource mobilization strategy is, so far, falling short, contributing only to a modest increase in tax revenues of a little over 16.5 per cent of the GDP in 2019. African countries must explore other alternatives, including improving public expenditure management.

Since it goes beyond the process of allocating funds, tackling inefficiencies in public spending requires a well-drawn-out battle plan that looks at the multi-dimensional aspect of the challenge.

Marshalling the impetus to fight and developing the strategies to win

African countries should look at strengthening governance across public institutions. With IMF research suggesting such initiatives could reduce inefficiency in public spending, African countries could mitigate losses, potentially recovering the equivalent of more than 50 per cent of their returns on investments for infrastructure.

Strengthening the governance of public expenditure management while aligning it with other frameworks and systems, such as those for debt management and investment promotion, is also vital. This is particularly important to avoid a vicious debt cycle when borrowed funds invested in infrastructure projects are not properly managed.

Africa should also leverage e-Procurement services to increase transparency and accountability, curb corruption, promote competition, lower costs and reduce transaction time for public procurement activities.

Addressing rigidities in wages and entitlements should be part of the solution as well. These initiatives could identify potential savings to be re-purposed for development activities, such as increasing social protection for vulnerable groups, while reducing budget-hungry spending, like cross-cutting energy subsidies.

Africa is at a crossroads where it needs to be decisive to stop a haemorrhage of resources from depleting its capacity. A sensible approach African countries could take is to adopt strategies that prioritize efficiency by trimming superfluous public expenditures. This will increase the countries’ budget portfolio, boosting their capacity to invest resources toward improving the quality of life of their people.

This next battle is one that Africa should fight. It is a battle Africa can win.

The author is a Programme Management Officer in the policy analysis and coordination team of the Office of the Special Adviser on Africa at the United Nations.

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Africa primarily finances its development through domestic resources

Rado Ratovonarivo — Wed, 07 Dec 2022 21:45:00 +0000

New York, 29 November 2022 – The UN Office of the Special Adviser on Africa (OSAA) released its latest report, “Financing for Development in the Era of COVID-19: The Primacy of Domestic Resources Mobilization in Africa” at a special event chaired by Ambassador Pedro Comissário Afonso, Permanent Representative of the Republic of Mozambique to the UN and Chair of the African Group in New York.

The report shows that Africa’s development is financed through domestic resources, defying the notion that the continent relies heavily on external support. This funding, however, is inadequate to close a widening financing gap, which the sluggish recovery from COVID-19 and the impact of the war in Ukraine have exacerbated.

To bridge this gap, African countries need to boost domestic resource mobilization (DRM) by increasing revenue, improving public spending efficiency, leveraging large pension fund markets and sovereign wealth funds, curbing illicit financial flows out of the continent, and harnessing partnerships.

The publication also calls for putting the continent in the driver’s seat when it comes to its development, subsequently strengthening its resilience against future shocks. When it comes to external sources of financing, Official Development Assistance (ODA) and Foreign Direct Investments (FDI) play a key, albeit complementary, role in financing Africa’s development.

In a panel discussion that followed the launch event, senior UN and Member State officials joined subject matter experts to share knowledge about the role of domestic resource mobilization in Africa and propose solutions to the challenges it is facing.

Ambassador Claver Gatete, Permanent Representative of Rwanda to the UN, highlighted his country’s approach, which focused on streamlining tax administration and bringing the informal sector into the tax system, while Paul Akiwumi, Director of the Division for Africa, Least Developed Countries and Special Programmes at the UN Conference on Trade and Development (UNCTAD) said that to boost DRM, African countries should provide the same tax incentives to foreign and domestic companies.

For his part, Fodé Ndiaye, former UN Resident Coordinator in Rwanda, echoed the report’s messages that African countries need to invest pension funds domestically to boost revenues, while Irene Ovonji-Odida, member of the UN High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda, focused on tackling illicit financial flows (IFFs) enabled by international systems that are often unfair to Africa. The panelist raised the alarm that these IFFs are depriving the continent of key financing.

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Digitizing Africa, the key to stronger institutions

Rado Ratovonarivo — Fri, 02 Dec 2022 14:04:00 +0000

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Two women using a digital money transaction to buy and sell fresh produce

Adobe Stock Photo 309431523

By Kavazeua Katjomuise

I overheard a conversation between three young people at a café in an African city. It was a passionate discussion on the management of funds allocated to the COVID-19 response and the effectiveness of the mechanisms in place to manage these funds so they achieve the intended purposes.

The concerns of my three young brothers and sisters resonated with me, as I could not help but reflect on how COVID-19 exposed cracks in Africa’s fragile revenue institutions and contributed to widening the financing gap for the region’s development.

Weak institutions, especially revenue collection and customs authorities, are a challenge in Africa, which loses billions in potential tax revenue, including through tax avoidance and evasion, especially by multinational companies. UNCTAD (1) reports that Africa lost $88.6 billion through illicit financial flows in 2019.

This undermines efforts to mobilize domestic resources to finance the continent’s development as outlined in the United Nation’s 2030 Agenda and African Union Agenda 2063, which both recognize the primacy of strong and effective institutions in driving sustainable development.

African countries fare poorly on domestic resource mobilization compared to other developing countries. The share of revenue to gross domestic product (GDP) in 2020 averaged 16 per cent for Africa compared to 35 per cent for Asia-Pacific and 24 per cent for Latin American Countries. African Least Developed Countries fared even lower at 13.3 per cent.

Governance influences tax revenue collection considerably in Africa. Good governance and strong institutions, measured through regulatory quality, the enforcement of the rule of law, strong institutional capacity and lower corruption, enhance a country’s ability to mobilize domestic resources through revenue collection.

However, corruption erodes tax compliance. Citizens in countries with high corruption are reluctant to pay taxes because of the perception that resources will be misused. Empirical evidence shows that countries with a low Corruption Perception Index (CPI) score collected 4.3 per cent more in tax revenue to GDP than those with a high CPI score (2).

Addressing governance issues and improving transparency in the use of public resources is vital to building trust and generating increased domestic resources. Efforts should be geared at supporting African countries to strengthen governance and tackle corruption.

Technological improvements and digitization could be leveraged to improve scale and efficiency and prevent corruption through increased transparency.

The pace toward digitization has quickened in recent years, particularly in the wake of COVID-19. Before the pandemic, Africa recorded progress toward digitization, albeit driven by the private sector mainly through incubators, start-ups, technological hubs and data centers (3).

Digitization is already transforming African economies in several ways, such as revolutionizing retail payment systems, thus allowing consumers and businesses to save billions in transaction costs, facilitating financial inclusion, and enhancing the efficiency of fiscal and revenue administration.

For example, the launch of M-Shwari in Kenya increased access to financial services for millions who may otherwise have been excluded from the financial sector. Taking advantage of this trend, the Kenyan Revenue Authority (KRA) introduced electronic banking in 2016 to expedite the payment of taxes through secure electronic payment. This, coupled with the launch of iTax, has enabled a single view of taxpayer information, allowing for real-time monitoring of revenue collection, thus improving the efficiency of payment to government suppliers and social protection grants.

Digitization has enabled developed countries to build effective and robust DRM systems, which is critical to ensuring Africa’s recovery from COVID-19. However, despite the widespread adoption of digital technologies across the world, the digital divide excludes many African countries from the benefits of digital technology.

However, digitizing tax administration in Africa has been relatively slow. An International Monetary Fund (IMF) (4) analysis shows that, relative to other developing regions, African countries scored below the world average on almost all indices related to tax administration performance, especially on the degree of digitization. The average score for the degree of digitization was 29 per cent for Africa compared to 49 per cent and 46 per cent for Latin America and the Caribbean as well as East Asia Pacific, respectively.

The COVID-19 pandemic contributed to an erosion of tax collection in Africa due to a lack of digitization, as countries could not fully work remotely. This underscores the urgency of investing in the digitalization of tax collection processes, paired with other digitization initiatives such as digital identification, digital finance, and electronic payment systems.

Evidence shows that enhanced tax collection has followed the introduction of ICTs, including the computerization of tax and customs administration to support tax payments. Countries that have modernized and digitized tax revenue administration have benefited from increased revenue due to improved efficiency, reduced corruption through enhanced transparency, and increased tax compliance. For example, the introduction of electronic cash registers by the Ethiopia Revenue and Customs Authority increased Value Added Tax (VAT) collections by 32 per cent.

COVID-19 provides an opportunity for African governments to embrace digitization by leveraging information and communications technology (ICT) as well as mobile technology.

Increased mobile penetration is an opportunity for African countries to digitize their fiscal and revenue administration. Development partners can support African countries in bolstering DRM systems by channeling substantial Official Development Assistance (ODA) towards strengthening capacities and institutions, including tax authorities, to improve tax collection. This would help enhance African countries’ ability to address tax evasion and avoidance, tackle money laundering and tax havens, and curtail base erosion and profit sharing (BEPS).

Development partners and international organizations can increase support to Africa to strengthen its capacity for tax assessment, including through training, mentorship and coaching. Complimentary measures are also necessary to enhance African countries’ capacity to enact and implement policies and legislation to tackle BEPS and transfer pricing, starting with a comprehensive review of all tax treaties, tax incentives, and trade and investment agreements to eliminate all loopholes for BEPS and other IFFs. This is central to de-risking Africa’s fiscal space for long-term sustainable development in the post-pandemic era.

In conclusion, building strong institutions through digitizing key institutions, especially revenue authorities, is critical to boosting domestic resource mobilization systems. By digitizing fiscal and revenue collection institutions and modernizing customs systems, African countries can build robust DRM systems and overcome the challenge of weak institutions.

References:
(1) UNCTAD’s Economic Development Report, 2020
(2) Odusola
(3) Cristina Duarte, 2020, “Africa goes digital”, Finance and Development, March
(4) IMF, ISORA, 2018. Understanding Revenue Administration

The author is a Senior Economic Affairs Officer and the leader of the policy analysis and soordination team in the Office of the Special Adviser on Africa at the United Nations.

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