Business
By Allan Mukungu and Zuzana Schwidrowski
RECENTLY, the UN Economic Commission for Africa, ECA, organized a conference jointly with the World Bank’s Governance Department on Public Financial Management (PFM) and a capacity-building training workshop on Public Expenditure and Financial Accountability Framework, PEFA. The framework is a tool aimed at supporting African countries to reach macroeconomic stability and sustainability.
The ECA has a long track record of impactful work in this critical area, which was mandated to the organization by the 2010 ECA Conference of African Ministers of Finance, Planning, and Economic Development. The main question posed during this conference was: How can Africa step up its development trajectory? A decade and half later, this question remains central to Africa’s development agenda.
Already in 2010, the Conference recognized that Africa’s investment needs—ranging from infrastructure to climate change adaptation—are immense. However, these needs are often undermined by significant leakages within the continent’s fiscal systems. These leakages drain vital resources that could otherwise finance essential development initiatives. Illicit financial flows, IFFs, among other issues, are one of the key drivers of these leakages.
In this context, African policymakers turned to the Economic Commission for Africa, ECA, and the African Union Commission, AUC, to investigate the prevalence of IFFs in Africa and propose actionable solutions. This has led to significant research and initiatives aimed at addressing the issue. Let us explore the critical aspects of this work and the steps needed to help Africa secure its financial resources for sustainable development.
The Pathbreaking 2015 Report: A Turning Point for African Finance
In 2012, the ECA and AUC established a high-level panel, led by former South African President Thabo Mbeki, to address illicit financial flows from Africa. After extensive consultations across the continent, the panel released a pathbreaking report in January 2015, endorsed by the Heads of State and Government at the African Union summit. The report highlighted that Africa was losing approximately $50 billion annually (in 2015 prices) through IFFs, a staggering amount that could have been directed toward achievement of Africa’s development goals.
The report identified several key drivers of illicit financial flows, including:
Weak public finance management systems within African countries.
Global financial governance architecture that enables tax avoidance, corruption, and financial misreporting.
An ecosystem of enablers, such as multinational corporations, banks, and other financial institutions, that facilitate IFFs from Africa.
The findings emphasized that addressing these issues would require a global solution. Collaboration between African countries and advanced economies was seen as vital for tackling the systemic issues that allow IFFs to persist.
Addressing the Problem from Within and Beyond Africa
The ECA has since been working to implement the recommendations outlined in the 2015 report. The approach is twofold: within Africa, by strengthening domestic public finance systems, and globally, by addressing the external factors that enable financial leakages.
One of the key areas of focus was to examine what African countries can do domestically to enhance domestic resource mobilization and safeguard their financial resources. In its premier Economic Governance Report in 2021, ECA examined the institutional architecture needed to address IFFs from Africa. It focusses on what African countries need to put in place to curb IFFs leakages before they leave Africa’s shores.
The report addresses the institutional architecture required to curb leakages through tax avoidance, tax evasion, trade mis-invoicing and illicit enrichment, including corruption. It takes a holistic approach to institutions, an approach that spans legal and regulatory frameworks, formal and informal practices, and organizational structures that act as enablers or curtailers at the national, regional and international levels in the IFFs value chain.
Another key area of focus has been examining the ways in which African countries lose financial resources through tax expenditures, a mechanism where governments offer tax incentives, for instance, to attract foreign direct investment (FDI). While FDI is crucial for economic growth, poorly managed tax incentives can lead to substantial revenue losses.
In the second edition of the ECA’s Economic Governance Report, published in 2023, a staggering statistic was uncovered: countries like Zambia were losing the equivalent of over 74% of their realized revenue through two tax types — Value Added Tax and Corporate Income Tax. These losses do not account for the economic growth and jobs that could have been generated had a more stable and predictable tax system been in place.
These findings underscored the need for greater oversight and better governance of tax expenditures in African countries. When these systems fail, they not only hinder domestic resource mobilization but also discourage long-term investment in strategic sectors.
Asset Recovery: A Holistic Global Framework
In addition to addressing leakages within domestic tax systems, the ECA has also focused on the recovery of illicitly moved assets. In 2023, the ECA published a report on the resources lost from Africa, calling for a holistic, coordinated global legal framework on asset recovery. This framework would enable African countries to recover resources stolen or illicitly transferred out of their economies, beyond proceeds of corruption and money laundering. If adopted, it would provide a significant boost to Africa’s depleted fiscal space.
A crucial element in this process is international cooperation. Global financial institutions and governments must work together to track, freeze, and return of illicitly transferred assets. Given the scale of illicit financial flows, it is clear that global challenges require global solutions. The ECA’s push for such a framework is part of a broader call for a fairer global financial system that supports developing economies, including those in Africa, to maintain Africa’s financial security.
Tackling Profit Shifting and the Need for a Global Tax Cooperation Framework
Another major challenge in securing Africa’s financial resources is profit shifting. Multinational corporations, often through complex structures, shift profits from high-tax African countries to low- or zero-tax jurisdictions. This practice reduces the amount of tax revenue African governments can collect, further eroding their ability to fund vital public services.
In May 2022, the ECA Conference of African Ministers of Finance, Planning, and Economic Development called for the establishment of an inclusive and fair convention on international tax cooperation. The goal is to establish a global tax cooperation framework that enhances the fiscal space of developing countries by promoting more equitable international taxation systems.
This call is already gaining traction globally. In August 2024, the process for establishing the framework convention on international tax cooperation at the UN formally agreed its terms of reference, marking an important step toward reforming the global financial architecture. If successful, this framework convention will help ensure that multinational corporations contribute fairly to the economies in which they operate, enhancing the fiscal health of African countries.
Strengthening Capital Markets and Addressing Public Debt
Apart from tackling illicit financial flows and tax issues, the ECA has been working to strengthen Africa’s capital markets. Many African countries have relatively underdeveloped capital markets, which limits their access to both domestic and international resources. The ECA has been actively supporting member states in strengthening existing capital markets and developing new ones, providing African governments with the tools to tap into private sector financing for their development needs.
Another critical challenge facing many African countries is public debt, particularly the rising costs associated with servicing debt, increasingly that secured through Eurobonds. Africa’s sovereign debt crisis is partly a result of low credit ratings, which lead to high borrowing costs. To address this, the ECA has been collaborating with AUC to establish an African Credit Rating Agency. Such an agency would aim to improve Africa’s treatment by global credit rating agencies and, in turn, provide African nations with access to more affordable capital for development projects.
Aligning Development Plans with Africa’s Long-term Vision
A critical aspect of Africa’s development strategy is ensuring that national development plans (NDPs) are aligned with the broader African Union Agenda 2063 and the UN’s Agenda 2030 for Sustainable Development. The ECA has been working to ensure that African governments align their public expenditure to their NDPs and the global and continental goals.
One tool to achieve this is the Integrated National Financing Framework, INFF, which helps countries assess their development plans and identify the sources of affordable financing. The ECA supports African countries in implementing these frameworks, ensuring that financing is in place to meet development targets, objectives and goals. This approach also allows governments to better monitor progress and make timely adjustments as needed.
Looking forward: Securing Africa’s Financial Future
Africa’s development challenges are immense, but so are its opportunities. The continent needs up to $1.2 trillion annually to meet the SDGs and address climate change. Tackling the financial leakages that hinder economic growth is essential if Africa is to secure the resources needed for sustainable development.
The work being done by the ECA, in collaboration with the African Union, the global community, and other stakeholders, is a critical step toward addressing Africa’s fiscal challenges. However, the work does not stop here. African countries themselves must take bold steps to strengthen their public financial management systems, enhance accountability, and ensure that financial resources are effectively utilized for development.
As we move forward, it is vital that we continue these discussions, engage in training on public expenditure and financial accountability, and work together to build Africa’s capacity to secure its financial resources and future. Only by doing so can we create the Africa we want—an Africa that is prosperous, resilient, and capable of meeting the aspirations of its people.
Tags: ECA
