Unlocking Africa’s Sustainable Development through Innovative Financing, Debt Reform

By Jason Braganza

Excerpts…

Question 1: What are the major industries affected, and how do illicit financial flows appear in different ways?

 

Answer: First and foremost, it can be seen in how multinational corporations structure themselves within our continent. For example, when our governments provide incentives for foreign direct investment or for multinational corporations to set up operations, many of these corporations have subsidiaries or special companies set up in low-tax jurisdictions.

These companies engage in tax planning, shifting profits to these low-tax jurisdictions and avoiding taxes in many African countries, as corporate tax rates tend to be quite high on the continent, averaging between 25% and 30%.

They establish themselves in low-tax jurisdictions, what we call tax havens offering near 0% taxes on profits, thereby moving their revenues to these jurisdictions where they aren’t taxable. This represents one form of illicit financial flows. The high-level panel report on illicit financial flows discusses this issue we call tax planning; in corporate or accounting jargon, it is called tax efficiency.

Another common way illicit financial flows occur is from the extractive and natural resources sector. To a large extent, the valuation of what exists in our natural resource sector is often underestimated. The manner in which companies operate in this sector tends to result in undervaluation when resources are discovered or extracted, and then overvaluation when they are priced and exported out of the continent.

A third dimension of how illicit financial flows are common is how companies trade and transact with each other through something known as transfer pricing, where two companies that are part of a larger corporation trade amongst themselves and assign different costs based on the company’s jurisdiction.

When you combine these practices, we are looking at approximately $80 to $90 billion leaving the continent annually. Given that Africa’s external debt is around 1.2 to 1.4 trillion U.S. dollars, it’s evident that we face significant challenges.

That said, there are opportunities and initiatives being taken to curb illicit financial flows, such as greater transparency and oversight, beneficial ownership to identify the true owners of companies, and requirements for publishing profit and loss accounts by mining companies.

 Question 2: Is there a difference between the IFF caused by tax evasion and corruption / crime?

Answer: Yes, there is a difference between the two. The term “illicit” is used because it incorporates deliberate immoral behavior by individuals or businesses looking to bend the law to its breaking point. Tax evasion, Corruption, illegal proceeds, drug smuggling, arms smuggling, and human trafficking are all forms of illicit financial flows since they are illegal and violate the law.

However, when considering illicit activities, it’s essential to recognise weaknesses in the legal framework, particularly regarding taxation, to minimise tax liability and the deliberate and wilful attempt by very wealthy individuals and or multinational corporations to avoid paying taxes. The literature has evolved, expanding the definition of illicit to include those who exploit weaknesses in the law.

 

Question 3: It has been noted that illicit financial flows in Ghana are predominantly driven by activities in the extractive sector. With the government intending to overhaul mining policy, what specific measures would you recommend to effectively combat IFFs and ensure greater transparency and accountability in the sector?

Answer: A couple of things to consider regarding the extractive sector: First and foremost, the government of Ghana has made significant strides in implementing initiatives like the Extractive Industries Transparency Initiative. While participation in this initiative is voluntary, many companies and the government have begun publishing contracts issued and revenues generated from the sector.

But there is much further to go. The first step is to domesticate the African Mining Vision—adopted by all African Union member states—to ensure that the extractive sector is managed correctly, with revenues and rents collected for the continent’s benefit.

The second step is to enhance parliamentary oversight, establishing specific committees or subcommittees within the parliamentary system to hold both the government and businesses accountable for their operations in the mining sector.

The third step is to introduce public beneficial ownership registers. Beneficial ownership means knowledge of the enterprise’s true owners, enabling tracking of investments, revenue generation, and tax contributions remaining in the country. Such registers are crucial for transparency.

The fourth recommendation involves creating robust tax policies and fiscal regimes surrounding the mining sector—ensuring that the taxation regimes, cost recovery regimes, and cost minimization regimes favor Ghana and its people, rather than the companies involved.

Lastly, understanding the corporate structures of mining actors in Ghana is vital. Where do these businesses have subsidiaries? Are they located in countries with double-tax agreements? Are they in low-tax jurisdictions? Addressing these questions can improve the government’s ability to maximise revenue collection and ensure higher accountability and transparency.

 

Q4: In the forum that started yesterday in Kampala, it was mentioned that no African country will be able to achieve its Sustainable Development Goals (SDGs) objectives within the given timeline of five years leading to 2030, especially if they work in isolation. Emphasizing the need to activate existing partnerships, I’d like to ask:Do you believe it’s possible to reinforce cooperation without implementing necessary reforms in the global architecture? What prerequisites should we establish to avoid continuing down the same path? Furthermore, considering that our leaders have been asked to increase taxes in a situation where the population is already suffering from the burden of reform, do you think there are alternative methods to generate financial resources to meet our goals before 2030?

Answer: Reforming the architecture starts at the national level. We need a national agenda on what we want to transform and change. For example, Debt negotiation is a negotiation—between our government and lenders. Without a proper agenda regarding what we are borrowing for, how we manage it, and how we negotiate terms and conditions, we are likely to end up with unfavorable loan contracts.

Without proper legal and policy frameworks governing our borrowing and debt management, we can find ourselves in a challenging situation. Recent cases like Zambia, Ghana, and Ethiopia illustrate that they have not maintained robust and updated legal and policy frameworks to protect them from the commercial sector.

Reforming this unfair architecture starts with that domestic agenda. It then extends to regional economic communities like the East African Community (EAC), the Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA), the Economic Community of West African States (ECOWAS) and so on, as we strive for deeper political, economic, and social alignment, and having coordinated strategies and policies around financing. Cooperation and common understanding are essential for these initiatives.

At the continental level, we have Agenda 2063 and the Abuja Treaty, which discuss the establishment of African Union financial institutions and reforming the global financial architecture.

We do not operate in isolation, and these discussions are not taking place in silos. When attending international conferences, we must navigate various interests, particularly those of the West, while also addressing numerous political dynamics. It may appear that little action is taking place, but I assure you that meaningful conversations are happening.

For example, in a side event hosted by AFRODAD today, one of the candidates emphasised the critical role of domestic resource mobilization in advancing regional integration and adding value to locally produced goods before engaging in international markets. Domestic resource mobilization is essential not only for sustainable development but also for reducing reliance on exports. It can help strengthen our economies, transforming them into resilient and self-reliant systems.

 

Question 5: About my country, the Democratic Republic of the Congo, which is very rich in natural resources, yet we struggle to finance our own development without borrowing. Based on this, how can we develop a mechanism for the DRC to leverage its resources sustainably without falling into this vicious cycle of external debt?

Answer:

The DRC’s situation isn’t unique; many countries rich in natural resources face complicated economic challenges. Many of the reflections made regarding the Ghanaian government’s management also apply to the DRC.

These resources offer an opportunity for us to unite as a continent. Civil society organizations and media houses need to encourage leaders to adopt a coordinated approach, negotiating as one block rather than individually.

This solidarity can foster better negotiations, leading to more favorable terms and conditions with trading partners. For instance, with the current tariff wars that have emerged in the globe, in the Global North in particular, countries are coming together to offer counterproposals in the context of the tariffs that have been imposed on them.

As a continent, we must also collaborate effectively to manage mineral governance and revenue from these resources together.

 

 

Q6: Among African countries, is anyone doing something different—an example of a country trying to do the right thing in debt management?

Answer:

Absolutely! Numerous examples exist.

For instance, Kenya and Rwanda have made significant progress in debt legislation. While there is advancement, keep in mind that good policies can falter in implementation (policies are good, but implementation is is not so good).

Rwanda, for example, was on the brink of defaulting on euro bonds and managed to restructure and renegotiate early on before defaulting. In contrast, Guinea shows good debt legislation and transparency, providing detailed access to information, but implementation can still be lacking.

On the other side, the structure of our economies are not changing very much. Revenues they’re generating are not enough to match the development objective that we have, which is then forcing us to borrow.

Advocacy and encouragement from civil society, journalists, and politicians are vital to implement policies and frameworks effectively.

 

Question 7: What are your thoughts on enhancing local authorities’ ability to mobilise resources or  innovative financing to boost national development and reduce reliance on borrowing? Additionally, regarding debt legislation, do you believe that countries struggling with debt management and sustainability have failed to implement effective policies and laws? If they’ve developed such measures, what barriers prevent their successful enactment?

Answer:

It is indeed a combination of factors. The debt landscape for many African governments has shifted to predominantly commercial debt and non-traditional bilateral lenders, what we call ‘Paris Club lenders’. The domestic legislative frameworks have not adapted to this evolving landscape. you have a situation, for example, where you have bilateral lenders who also use commercial companies or private companies to lend.

For example, in Chinese lending, Turkey and other countries that lend, some of them use state corporations which are pseudo-private sector entities to provide loans under commercial terms while being classified sometimes as bilateral or state loans.

This complexity presents significant challenges that domestic legislation, policy, and international restructuring processes have been unable to address effectively or in a timely manner. As a result, the current international restructuring framework struggles to clearly differentiate between bilateral and commercial debt, particularly when it comes to corporate lending.

This highlights a clear gap where policy and legislation have not kept pace with the evolving trends and growing diversity of lending practices. On the second part, it’s also implementation in countries where you do have good legislation but the level of implementation being quite low and the lack of mechanisms to help and encourage implementation of the domestic legislation.

 

Question 8: What is the percentage limit for African countries to borrow from institutions like the World Bank and the International Monetary Fund (IMF)?

Answer:

The limits are specific to each country; there isn’t a standard percentage. The lending amount is usually determined by a country’s quota share or voting share within the International Monetary Fund (IMF), which dictates how much they can borrow or access from IMF programs (by way of their extended credit facility or any of the other balance of payment support instruments that they have).

Domestic legislation typically governs borrowing limits. Many countries have debt-to-GDP ratios (a percentage considered to be a sustainable amount a country can borrow). It varies from country to country; in Africa it ranges from 35% to about 70% debt to GDP ratio, which is considered to be sustainable. In contrast, advanced economies may exceed 100%, reflecting their economy’s size and their debt carrying capacity is higher (ability to support higher debt levels).

In Africa, caution is necessary regarding these ratios because even the definition and what encompasses the composition of GDP varies, given that the structure of our economies tend to be largely still informal in nature. Even the calculation of GDP excludes quite a bit of what is considered to be contributing to the economy. There are issues also with debt to GDP ratios because one finds it very easy to pass legislation to bypass or extend the debt ceiling.

A potential solution and our recommendation to journalists is advocating for a debt-to-tax revenue ratio. This means that there should be a specific amount of money that is allocated to just debt servicing as a proportion of the tax revenue. The reason for proposing this is to avoid governments from entering the trap of allocating significant amounts of their tax revenues to debt servicing, as we are currently seeing across the continent, because that means then they are diverting tax revenues away from development and public services in order to service debt; thereby undermining development and achieving Agenda 2063.

 

Question 9: How can African countries benefit from the Continental Free Trade Area when some countries do not have products to export? Additionally, how can African women benefit from the Continental Free Trade Area?

Answer:

I will start with how women will benefit from the African Continental Free Trade Area.

Even if a country does not have particular products to export, it will still be involved in a chain of contributions—be it through production, manufacturing, or value addition. All countries will play a role within the framework of the trade area. Ultimately, service-related contributions will be equally significant to product-based benefits.

 

Q10: We often discuss external debt, which can feel like neo-colonization. Yet, managing internal debt is equally problematic. Internal debt is essential for local economies and enterprises, contributing to national development. What is Africa’s stance on internal debt, considering the challenges with repayments?

Answer:

Many of our governments, because of the higher risk or potential of defaulting on the external debt have opted to start borrowing domestically and borrowing at a higher cost. The cost of domestic borrowing can sometimes exceed that of external borrowing (almost double in some cases). We need to pay very close attention to this because what is likely to happen is that the financial system is at risk here if the government doesn’t pay the domestic debt (leading to complications in the domestic financial sector).

The domestic carrying capacity of private banks and commercial banks domestically to buy or hold government paper is very problematic because it crowds out the ability of private sector to access these financial resources and these credit lines in order to invest and build industry, build manufacturing and so on and so forth. (High domestic debt burdens can limit credit availability for private sectors, hindering job creation and development).

I agree that we do need to look at domestic debt from two perspectives; first the dynamics between commercial banks and the government, and why is the government offering such incentives of high returns for holding the government securities? Secondly, encouraging commercial banks to reduce their holdings of government securities would also ensure that the domestic private sector is not crowded out from accessing these lines of credit, which they can use to develop their own businesses, develop jobs, create jobs, develop and invest in domestic manufacturing and industrial sectors in their countries and on the continent.

Thirdly, bring down the cost of borrowing and the need to go and borrow from outside or attract foreign direct investment. So we do need to track the domestic debt situation from this perspective and ensure that it acts as a stimulus for economic development and industrialisation rather than a lazy way of commercial banks trying to get quick money from holding government securities that are highly overpriced, but also increasing, potentially increasing the vulnerability of the domestic financial markets.

 

Question 11: The World Bank has just released the Lesotho Economic Update on Monday. The report states that external debt accounts for about 80 percent of total debt. While mainly concessional,  External debt is still vulnerable to exchange-rate risk.  With the USA’s imposed reciprocal tariff of 50 percent to Lesotho, how is the total debt likely to increase and/or or the country to default?

Answer:

We would need to study what tariffs have been imposed on Lesotho in terms of the exports. So understanding the economic composition of the products affected by those tariffs will be relevant. for local currency lending, to mitigate fluctuations linked to the U.S. dollar.

If you borrow from the World Bank or a bilateral partner or a commercial partner, it is prudent to get the debt in local currency so that it avoids fluctuations of the US dollar. This is a new strand of discourse in the debt space.

Braganza is The Executive Director of the African Forum and Network on Debt and Development (AFRODAD)