Africa Loses $275 Billion Annually to International Profit-Shifting, Says AfDB

The African Development Bank says African countries are losing about 7 percent of their total tax revenues—or 1 percent of Africa’s GDP (about $275 billion) due to international profit-shifting, which it describes as one of the most prevalent sources of leakages.

The Development Finance Bank says the figure which is the 2021 estimate is the same as total net international transfers to Africa in 2022.

The Vice President and Chief Economist (Economic Governance and Knowledge Management) of AfDB, Prof Kevin Chika Urama, raised the observation in Abuja during the launch of the Debt Management Forum for Africa (DeMFA) and

Inaugural Policy Dialogue on “Making Debt Work for Africa: Policies, Practices and Options.”

He also mentioned that some sources estimated that corruption costs Africa $148 billion every year, while about $90 billion leaves the continent annually in the form of illicit financial flows.

According to him, while the build-up in public debt in Africa has been associated with a surge in public investment, there is also evidence that low efficiency of public investment has weakened the growth benefits of such debt in Africa.

Urama said, “Africa has a public investment efficiency gap of 39 percent, higher than Europe (17 per cent) and Asia (29 per cent). Low efficiency implies that growth benefits of debt-financed public investment are not sufficient to generate revenue streams to liquidate the debt and finance new investments.

“In total, some estimates show that African countries loose above $1.6 billion daily in capital outflows due to the combined effects of the high-risk premiums, international profit shifting, illicit financial flows, corruption, etc. Measured annually, this could reach about $587 billion – more than three times the total external financial inflows to Africa each year.

“Estimates in 2021 show that international profit-shifting, one of the most prevalent sources of leakage, costs African countries about 7 percent of their total tax revenues—or 1 percent of Africa’s GDP (about $275 billion), which is the same as total net international transfers to Africa in 2022.

“According to some estimates, corruption costs Africa $148 billion every year and about $90 billion leaves the continent annually in the form of illicit financial flows. In total, some estimates show that African countries loose above $1.6 billion daily in capital outflows due to the combined effects of the high-risk premiums, international profit shifting, illicit financial flows, corruption, etc. Measured annually, this could reach about $587 billion – more than three times the total external financial inflows to Africa each year.”

“Plugging these leakages is therefore critical to addressing the challenge of domestic resource mobilisation and debt sustainability challenges in Africa.”

According to him, the establishment and the inaugural meeting of DeMFA is another key milestone in the African Development Bank’s efforts to build Africa’s capacities and provide institutional frameworks and instruments for the continent to address its persistent debt sustainability challenges.

The DeMFA, he said, provides the platform for high-level dialogue by African leaders, experts and practitioners on how to make debt work for Africa’s development.

At the event, Nigeria’s Minister of Finance, Wale EDUN, explained why the creation of DEMFA is a pivotal moment for African countries.

He said, “Firstly, is the challenge of growing debt and debt service which have increased resulting in constrained fiscal space for governments. Secondly, is the limited access to funding and the higher cost of borrowing in the domestic and international markets. These are against the backdrop of urgent need for pools of large capital to address the social and economic challenges of unemployment and infrastructure deficits amongst others while not forgetting the spending required for Climate Change and the Social Development Goals.

“These challenges have been well documented and accepted as real issues which need to be attended to in order for Africa to achieve growth and development. The DEMFA therefore, should be structured and positioned as a Forum, that will build on and provide more than similar institutions have done in the past, particularly with Africa as its focus.

“The key message to DEMFA is to evolve rather quickly, as a foremost Forum that will actively and visibly contribute to continuous and long term sustainability of public debt in Africa.”

Friday Olokor

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