By Veronica Naa Okaikor Josiah-Aryeh
The United Nations Conference on Trade and Development (UNCTAD) in its 2020 Economic Development in Africa Report stated that Africa loses $88.6 billion annually due to Illicit Financial Flows (IFFs). Consequently, the High Level Panel (HLP) on Illicit Financial Flows from Africa (chaired by former South African president Thabo Mbeki) in its 2021 report stated that the continent loses more than $50 billion to IFFs annually. In 2024, the African Development Bank (AfDB) reported that Africa loses $1.6 billion daily to IFFs. Despite these alarming figures, the exact amount lost annually to Africa remains unknown, with only estimates available. Governments, international organisations such as the United Nations, the Organization for Economic Cooperation and Development (OECD), World Bank, AfDB, civil societies, and Non-Governmental Organisations (NGOs) have over the years championed laws and 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 is the illegal transfer or movement of money or capital across borders as a result of 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. This article discusses the impact of IFFs on economic growth in Africa and examines strategies to address and assuage these losses.
Economic Impact of IFFs
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.
Significant Revenue Loss
African countries rely on domestic and foreign revenue mobilisation to finance their development agendas. 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 the use of offshore accounts in tax havens. Multinational corporations (MNCs) and businesses also take advantage of loopholes in the tax systems. A working paper by the Tax Justice Network reports that in Nigeria, MNCs operating in the country underreported and engaged in profit-shifting on the transactional level to avoid taxes which led to the country losing $3.09 billion in tax revenue. Relatedly, the mining sector in South Africa for several years has been under scrutiny for transfer pricing practices regarding companies artificially lowering taxable income through intercompany transactions.
Stunted Economic Growth and Increased dependence on 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. Recently, the Tax Justice Network Africa estimated that Ghana loses $1.4 billion annually to IFFs. To put this into perspective, Ghana’s Foreign Direct Investment (FDI) for 2023 was $649.58 million which just 46.47% 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 is reported to lose almost half of its domestic revenue to IFFs. How can these countries achieve sustainable development when they lose more than they gain? As a result of this, African countries tend to depend more on foreign aid and loans which stifles long-term development which keeps them in stasis. This reliance on external assistance has increased debt accumulation and reduced fiscal autonomy of African countries. As of December 27, 2024, the International Monetary Fund (IMF) reported that countries like Egypt, Kenya, Angola, and Ghana each have 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 African governments to implement independent and sustainable economic policies. This also hinders the quest to achieve the UN Sustainable Development Goals on the continent. As long as there are IFFs and African governments owe external debts, eradicating poverty, and reducing inequality will progress slowly.
Promotion of Capital Flight
Furthermore, IFFs breed capital flight which is a constraint on economic growth in Africa. Capital flight occurs when large funds and assets are transferred out of 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, the country’s currency becomes weak which leads to economic struggles, constraint on international trade and investment and exports and imports.
Facilitation of Money Laundering and Cross-Border 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 weaken these systems by fostering corruption, reducing the availability of funds for productive investment, and increasing the risk of financial crises. A weak financial system discourages both domestic and foreign investors.
Strategies to Combat IFFs
Given the detrimental impact of IFFs on the economic growth of African countries, it is crucial for African governments to collaborate in tackling these flows. African countries can adopt several strategies to tackle IFFs.
Bolstering Regulatory Frameworks and Enforcement Mechanisms
To curb IFFs, African countries must implement and enforce vigorous and sound regulatory policies and laws. These policies and laws must specifically address the various loopholes that multinational corporations and businesses exploit, such as the manipulation of product pricing, often referred to as trade mispricing or transfer mispricing. This occurs when companies deliberately misstate the prices of goods or services in cross-border transactions between related entities within the same corporation. For instance, a subsidiary in a high-tax jurisdiction may sell products at an artificially low price to another subsidiary in a low-tax jurisdiction, thereby reducing taxable profits in the high-tax country and shifting profits to the low-tax location. This practice not only enables tax evasion but also distorts trade values, making it harder for African governments to accurately assess and collect taxes. Closing these loopholes requires robust regulations, transparent pricing mechanisms, and international cooperation to ensure fair taxation and accountability. Also, while enacting robust regulatory policies and laws is crucial, strict implementation is as important in ensuring a curb on IFFs.
More Regional Collaborations to Track and Recoup Lost Assets
There is a need for more regional collaborations to track and recoup the billions of 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 African Union’s High Level Panel on IFFs, chaired by Thabo Mbeki, must be created. The High Level Panel promotes collaboration among African countries to tackle capital flight and recover stolen assets.
Boosting Tax Administration
African countries must individually ensure that their tax administrations are equipped to fight IFFs and boost domestic revenue mobilization. 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.
Encouraging International Cooperation to Enhance 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. The 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 is a major threat to Africa’s economic growth and sustainable development. IFFs cause revenue loss, stunts economic growth and dependence on external aid, promotes capital flight, and facilitates 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, efforts should focus 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, mobilize revenue, and improve sustainable development on the continent.
A lawyer, tax expert, and holder of an LLM from Columbia University, Ms Josiah-Aryeh writes from New York. She can be reached via email varyeh.veronica@gmail.com
