By Veronica Naa Okaikor Josiah-Aryeh
This article discusses the impact of illicit financial flows on economic growth in Africa and examines strategies to address and assuage these losses.
The United Nations Conference on Trade and Development (UNCTAD) in its 2020 Economic Development in Africa Report states that Africa loses $88.6 billion yearly to Illicit Financial Flows (IFFs). Consequently, Thabo Mbeki, chairman of the High-Level Panel on Illicit Financial Flows from Africa in the panel’s 2021 report states that the continent loses more than $50 billion to IFFs yearly. The African Development Bank (AfDB) reports in 2024 that Africa loses $1.6 billion daily to IFFs. Despite these alarming figures, the exact figure of the continent’s annual loss remains unknown, with only estimates available.
Governments, international organisations such as the United Nations, the Organisation for Economic Cooperation and Development (OECD), World Bank, AfDB, civil societies, and Non-Governmental Organisations (NGOs) have over the years championed laws, policies, and other initiatives in the fight to curb IFFs. However, it seems recent technological advancements and increased cross-border transactions between countries have rather enhanced IFFs. IFFs are the illegal transfer or movement of money or capital across borders due to tax evasion, corruption, and criminal activities. IFFs have over the years undermined Africa’s economic growth and deprived the continent of crucial resources necessary for development.
Economic impact IFFs have had a profound impact on Africa, resulting in significant revenue losses, stunted economic growth, increased dependence on external aid and debt, promotion of capital flight, and the facilitation of money laundering and cross-border tax evasion.
Revenue loss African countries rely on domestic and foreign revenue mobilisation to finance their development agenda. However, these nations face significant challenges, particularly from IFFs, which erode their tax bases and undermine fiscal capacity. IFFs result in colossal revenue losses for African governments which has led to poor infrastructure, inadequate social services, and limited investment in critical sectors such as healthcare and education. A leading cause of IFFs is tax evasion by multinational corporations and wealthy individuals, often facilitated through profit-shifting practices and offshore accounts in tax havens. Multinational corporations and businesses also take advantage of loopholes in the tax systems.
A working paper by the Tax Justice Network reports that in Nigeria, multinational corporations underreport and engage in profit-shifting on the transactional level to avoid taxes leading to Nigeria losing $3.09 billion in tax revenue. Relatedly, the mining sector in South Africa has been under scrutiny for transfer pricing practices regarding companies artificially lowering taxable income through intercompany transactions.
Stunted growth, increased external aid IFFs divert revenue and capital that could be used by African governments for domestic investment. This stunts economic growth as these financial resources which could be used to support growing industries and enhance innovation are unavailable. The Tax Justice Network Africa estimates that Ghana loses $1.4 billion yearly to IFFs. To put this into perspective, Ghana’s Foreign Direct Investment (FDI) for 2023 was $649.58 million which is just 46.47 per cent of the funds lost to IFFs.
This stark comparison accentuates the urgent need to address the economic impact of IFFs on the country. Ghana is not the only African country faced with this challenge. Kenya loses almost half of its domestic revenue to IFFs yearly. Can African countries achieve sustainable development when they lose more than they gain? As a result, African countries tend to depend more on foreign aid and loans which stifles long-term development and keeps them in stasis. This reliance on external assistance has increased debt accumulation and reduced the fiscal autonomy of African countries.
As of December 27, 2024, IMF has reported that countries like Egypt, Kenya, Angola, and Ghana each has a total IMF credit outstanding of $8,741,181,682, $3,022,009,900, $2,900,483,338, and $2,514,421,000 respectively. These debts inhibit the ability of their governments to implement independent and sustainable economic policies. This also hinders the quest for the UN Sustainable Development Goals on the continent. So long as IFFs thrive and African governments owe external debts sustainable development will be stifled.
Capital flight Furthermore, IFFs breed capital flight which is a constraint on economic growth in Africa. Capital flight occurs when huge funds and assets are transferred from a country. Continuous capital flight drains foreign exchange reserves and causes exchange rate volatility. Foreign exchange reserves are crucial to controlling a country’s currency and promoting international trade and investments, including exports and imports. When a country’s exchange rate becomes volatile, its national currency becomes weak leading to economic struggles, constraints on international trade and investment, and exports and imports.
Money laundering, Tax evasion IFFs encourage money laundering and cross-border tax evasion which weakens the financial systems of African countries. Financial systems rely on transparency, accountability, and stability to function effectively. However, IFFs introduce vulnerabilities that erode financial systems, promote corruption, reduce the availability of funds for productive investment, and increase the risk of financial crises. A weak financial system discourages both domestic and foreign investors.
Remedies: The impact of IFFs on economic growth in Africa cannot be overlooked. It is therefore a matter of necessity for African governments to unite on various fronts to tackle the scourge.
Regulation and enforcement To curb IFFs, African countries must implement and enforce vigorous and sound regulatory policies and laws. These policies and laws need to address the loopholes multinational corporations and businesses exploit, such as trade mispricing or transfer mispricing. Trade mispricing or transfer mispricing occurs when corporations deliberately misstate the prices of goods or services in cross-border transactions between related entities within the same corporation.
A typical example is when a subsidiary in a high-tax jurisdiction sells products at an artificially low price to another subsidiary in a low-tax jurisdiction, to reduce taxable profits in the high-tax country and shift profits to the low-tax location. This practice enables tax evasion and distorts trade values making it harder for African governments to accurately assess and collect taxes. Addressing these loopholes requires robust regulations, transparent pricing mechanisms, and international cooperation to ensure fair taxation and accountability.
Collaboration and recovery There is a need for more regional collaborations to track and recoup funds and assets lost to IFFs. African countries should work together to improve cross-border regulatory frameworks to collapse alliances that facilitate IFFs. More collaborations like that of the AU’s High-Level Panel on IFFs, chaired by Mbeki, must be created. The panel promotes collaboration among African countries to tackle capital flight and recover stolen assets.
Boost tax administration African countries must individually ensure that their tax administrations are equipped to fight IFFs and boost domestic revenue mobilisation. Tax administrations must have the technical expertise and the needed resources to achieve this quest. African countries including Tanzania, Uganda, and Côte d’Ivoire have in place electronic fiscal devices and digital tax systems by their revenue authorities to enhance tax compliance and reduce tax evasion in the informal sector. OECD and the African Tax Administration Forum (ATAF) must be commended for their numerous initiatives aimed at strengthening tax administrations in Africa. Notably, the implementation of Beneficial Ownership Information, used to identify, register, and disclose the beneficial owners of companies.
Cooperation for transparency Transparency in cross-border financial transactions is essential for combating IFFs. African countries must actively participate in international collaborations and agreements to promote transparent cross-border transactions. OECD has supported African nations through initiatives such as the Global Forum on Transparency and Exchange of Information for Tax Purposes, and the Africa Initiative, which currently includes 39 African member-countries. Similarly, the Financial Action Task Force (FATF) has assisted countries like South Africa to enhance anti-money laundering measures and address vulnerabilities in the country’s financial systems.
Conclusion IFFs are a major threat to Africa’s economic growth and sustainable development. IFFs cause revenue loss, stunt economic growth and dependence on external aid, promote capital flight and facilitate money laundering and cross-border tax evasion. To address these challenges, African countries must adopt a multi-faceted approach that includes strengthening regulatory frameworks as well as their implementation mechanisms.
Besides, focus should be on enhancing tax administration and promoting financial transparency through regional and international cooperation. These reforms will help African countries reduce their dependence on external aid, thus decreasing the debts owed, mobilising revenue, and improving sustainable development on the continent.
Josiah-Aryeh, a lawyer and international tax expert, holds an LLM from Columbia University, New York. She can be reached via email varyeh.veronica@gmail.com
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