In its recently released report, the African Union estimates that the continent loses roughly $88 billion annually due to Illicit Financial Flows (IFFs). The report published in late August is the follow-up from the AU High-Level Panel on Illicit Financial Flows. Its initial report was issued three years after its establishment in 2012.
IFFs are illicit or illegal funds derived from criminal activities and illegal tax practices that are moved or transferred across countries. IFFs could include organized criminal operations, smuggling, government corruption, money laundering, tax evasion, or international trade manipulations.
Of these significant losses, the United Nations Economic Commission for Africa (UNECA) says Africa is losing an estimated $40 billion annually to illicit IFFs in the “extractive sector.”
Antonio Pedro is the executive director of the UNECA. He explained that such financial losses “not only hinder development but also exacerbate economic injustice, including denying underserved populations access to essential resources and “underscoring the connection between IFFs and the pursuit of reparatory justice.”
Pedro underscored his remarks in May at the UN’s “The African Dialogue Series.” He explained that critical challenges for African self-reliance include “attaining sustainable development.”
He said the adoption of strategic frameworks such as “African Mining Vision and the African Green Minerals strategy, which advocate for resource-driven industrialization and value addition.
The continent has the necessary instruments to guarantee that its abundant mineral resources promote economic emancipation, employment generation and benefit local communities.” The African Mining Vision and the African Green Minerals strategy was launched by the AU in 2009.
Of the IFFs, according to capitalethiopia.com, Ethiopia is among the top African countries significantly affected by them. “Ethiopia has taken steps toward improving financial transparency and governance, but still faces challenges related to capacity constraints and the complexities of global finance.
The nation’s vulnerability to IFFs is further exacerbated by inadequate data systems and limited access to comprehensive trade and financial information needed to track suspicious transactions accurately,” the website noted.
Unity among African nations is necessary to address the problems of IFFs. A recent headline in the Ethiopian-based The Reporter, titled “Unity Eludes Africa in Fight Against Illicit Financial Outflow: AU Report,” suggested that disunity is at the root of the continent’s inability to put a stop to IFFs.
The continent remains divided against itself. No substantial consensus seems to be forthcoming, despite much talk about somehow eradicating the “magnitude and depth” of IFFs, which have infected many African countries, including Ethiopia, home of the African Union headquarters.
According to the AU report, one of Africa’s main unmonitored culprits in the IFF problem is “globalization.” Cross-border flows have enabled the ability to thrive, while causing significant harm to African economies by taking away the preferable, much-needed domestic financing.
Senegalese economist Dr. Ndongo Samba Sylla is Africa Regional Director for Research and Policy at the International Development Economics Associates (IDEAs).
An option to nullify IFFs that is gaining traction is for African governments to gain fiscal and technical control over their export sector.
“As money is not scarce, anything that is technically and materially feasible at the national level can be financed in the national currency. Developing countries need not issue foreign-currency debt to finance projects that require locally available resources such as labor, land, raw materials, equipment, and technologies,” he wrote in a 2024 article on project-syndicate.org, titled “The Conceptual Roots of the Global South’s Debt Crisis.”
In the article, Dr. Sylla writes, “When required resources are not locally available and can be purchased only with foreign currencies, developing countries might be forced to take on the burden of dollar-denominated debt. One could imagine resource-poor or climate-vulnerable countries making such a choice.”
“But this ignores the fact that Global South countries often earn substantial income from exports. The issue is that a significant proportion of this income is remitted back to foreign investors – many of whom benefit from an inequitable global tax architecture—as profits or dividends. This is on top of the fraudulent practices that result in illicit financial flows.”
He explained that between 2000 and 2018, African countries suffered greater financial hardship from profit transfers by foreign investors, dividend repatriation by subsidiaries to their parent companies, and illicit financial flows than from servicing their external debt.
“They issued foreign-currency debt that paid high interest rates partly to plug the gap created by foreign nationals appropriating—both legally and illegally—vast dollar earnings,” Dr. Sylla continued.
Using Zambia as an example, Dr. Sylla said, the country is “a copper-producing country that lost around $10.6 billion in the form of illicit financial flows between 1970 and 1996 (355 percent of its GDP in 1996), $8.8 billion between 2001 and 2010, and $12.5 billion between 2013 and 2015. Zambia’s public and publicly guaranteed external debt was $1.2 billion in 2010, rising to $12.5 billion by 2021.”
“If the Zambian government had better fiscal and technical control over its export sector, it would have accumulated sufficient dollar reserves to enhance food and energy self-sufficiency and to finance investment in infrastructure and other public goods requiring the import of foreign productive capacity,” he wrote.
“There would have been no need to take on so much foreign-currency debt. The same could be said for other resource-rich African countries,” Dr. Sylla concluded.
Follow Jehron Muhammad @Africawatchfcn on X