Illicit financial flows (IFFs) represent a major drain on capital and revenues in Africa, undermining productive capacity and Africa’s prospects for achieving the Sustainable Development Goals (SDGs). This is according to UN trade and development agency UNCTAD’s Economic Development in Africa Report 2020, launched last week.
For example, the report finds that in African countries with high IFFs, governments spend 25% less than countries with low IFFs on health, and 58% less on education. Since women and girls often have less access to health and education, they suffer most from the negative fiscal effects of IFFs.
Africa, the report says will not be able to bridge the large financing gap to achieve the SDGs, estimated at $200 billion per year, with existing government revenues and development assistance. The report finds that tackling capital flight and IFFs represents a large potential source of capital to finance much-needed investments in, for example, infrastructure, education, health, and productive capacity.
Sierra Leone for example, which has one of the highest under-five mortality rates on the continent, curbing capital flight and investing a constant share of revenues in public health could save an additional 2,322 of the 258,000 children born in the country annually.
In Africa, IFFs originate mainly from extractive industries and are therefore associated with poor environmental outcomes. The report shows that curbing illicit capital flight could generate enough capital by 2030 to finance almost 50% of the $2.4 trillion needed by sub-Saharan African countries for climate change adaptation and mitigation. The report’s analysis also demonstrates that IFFs in Africa are not endemic to specific countries, but rather to certain high-value, low-weight commodities.
Of the estimated $40 billion of IFFs derived from extractive commodities in 2015, 77% were concentrated in the gold supply chain, followed by diamonds (12%) and platinum (6%). The report aims to equip African governments with knowledge on how to identify and evaluate risks associated with IFFs, as well as solutions to curb IFFs and redirect the proceeds towards the achievement of national priorities and the SDGs.
It calls for global efforts to promote international cooperation to combat IFFs. It also advocates for strengthening good practices on the return of assets to foster sustainable development and the achievement of the 2030 Agenda for Sustainable Development. Tax revenues lost to IFFs are especially costly for Africa, where public investments and spending on the SDGs are most lacking. In 2014, Africa lost an estimated $9.6 billion to tax havens, equivalent to 2.5% of total tax revenue.
Tax evasion is at the core of the world’s shadow financial system, according to UNCTAD. Commercial IFFs are often linked to tax avoidance or evasion strategies, designed to shift profits to lower-tax jurisdictions.
Due to the lack of domestic transfer pricing rules in most African countries, local judicial authorities lack the tools to challenge tax evasion by multinationals. The report however proffered solutions to the problem in which it says must involve international tax cooperation and anti-corruption measures. The international community should devote more resources to tackle IFFs, including capacity-building for tax and customs authorities in developing countries. African countries need to strengthen engagement in international taxation reform, make tax competition consistent with protocols of the AfCFTA, and aim for more taxation rights, said the UN trade agency.
By Zainab Iyamide Joaque