Economic Development in Africa Report 2020: Press Conference
28 September 2020
The Covid-19 crisis will weigh heavily on Africa – estimates show that recovery in Africa will cost some $154 billion – that’s on top of the pre-existing annual SDG finance gap in Africa of $200 billion.
That`s why we have focused this year’s Economic Development Report in Africa 2020 on tackling illicit financial flows - to help fill that growing gap. Our report finds that curbing illicit outflows from Africa can potentially generate some $88.6 billion per year, bridging about half of Africa’s SDG financing gap. This could help a long way towards filling the $2.4 trillion that sub-Saharan African countries will need by 2030 for climate change adaptation and mitigation.
Tackling the drain of capital from Africa requires action along 3 main channels.
First, trade misinvoicing costs Africa US$30-52 billion annually. Many IFFs in Africa are linked to the export of primary extractive resources, the mispricing of which has generated losses of up to US$ 278 billion from 2008 to 2018.
Secondly, corruption is an illicit flow that costs Africa US$148 billion per year. This is more than the $93 billion in Africa’s annual infrastructure investments needs.
The third channel is abusive tax practices. Abusive transfer pricing, profit shifting, tax arbitraging and tax treaty shopping are the main mechanisms for tax evasion, tax avoidance and money laundering in Africa. Many of the approximately 500 bilateral tax treaties in force in Africa are at high risk of tax avoidance. We estimate this costs Africa 20% to 26% of corporate income tax revenue from each treaty with an investment hub.
The effect of IFFs on Africa’s development are highly detrimental.
- Countries with high IFFs are one third as productive in agriculture, as countries with low IFFs.
- Countries with high IFFs invest 25% less on health and 58% less on education.
- And half of the countries in Sub-Saharan Africa lack domestic transfer pricing rules and therefore cannot challenge multinational enterprises (MNEs) through the local judiciary.
But African policy makers can do a lot to curb IFFs in Africa. They should pay closer attention to trade statistics, flagging wide and persistent trade gaps in a given commodity group for further investigation. Such investigations need to be supported by stronger capacities of port personnel, customs and tax authorities to better collect and analyse trade data.
African countries also need to cooperate with one another in the fight against corruption. Because of the international nature of the illicit activities, African countries would benefit from deeper international partnerships on tracking and arresting IFFs.
In addition, African countries should also share trade and tax data more closely and align regulations on sectors at high risk of IFFs, such as extractives, telecommunications and financial services.
Last but not least, joint transparency initiatives can help also such as open budget initiatives, the collaborative Africa budget reform initiative and extractive industries transparency initiative.
It goes without saying that the international community also have a key role to play. Stopping IFFs requires rekindling trust in multilateralism and engaging MNEs on their tax responsibilities. We look forward to working with our stakeholders and partners in using the report’s findings to help close IFF channels and to enhance domestic resource mobilisation in Africa.