How Africa can curb illicit financial flows to strengthen economies post Covid-19

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The Covid-19 pandemic crisis has worsened the vulnerabilities caused by the excessive reliance of African economies on world markets. 

Africa’s main trade partners include the European Union, China, the United States and United Kingdom. Together they represent more than 50% of the continent’s trade flows. 

Africa’s dependence on external markets for medicinal and pharmaceutical products is particularly acute — Africa imports more than 95% of these products from outside the continent. 

As the continent’s main trade partners have been severely hit by the Covid-19 pandemic, Africa has suffered significant business disruptions and output contraction, including in export sectors. 

Africa’s gross domestic product could contract by 1.4% in 2020, and the continent’s total merchandise exports could decline by 17%. McKinsey estimates that Africa’s manufacturing sector output will shrink by 10% in 2020 — equivalent to a loss of more than $50-billion.


Deeper integration 

Deepening regional integration on the continent through the African Continental Free Trade Area (AfCFTA) can build resilient economies post-Covid-19. 

The AfCFTA, if quickly and effectively implemented, can address challenges emanating from Africa’s reliance on world markets, and create more value in local economies. This will, in turn, help to reduce vulnerability to future pandemics. 

By 2025, the AfCFTA could boost Africa’s total exports by 29%, intracontinental trade by more than 81% and African exports to the rest of the world by 19%, with most of the gains accrued to the manufacturing sector.

However, the implementation of AfCFTA requires significant financial resources because of the need to address infrastructure bottlenecks, invest in productive capacities and expand access to operational cash flows by businesses. 

The continent’s infrastructure financing gap ranges from $68-billion to $108-billion, and its trade finance gap is estimated at $91-billion a year. 

Other priority actions include setting up and operationalising institutional frameworks to co-ordinate the implementation and monitoring of the agreement, as well as sensitising and developing the capacity of a wide range of actors to realise its objectives.

Africa, therefore, needs to mobilise more domestic capital, an effort that is often frustrated by illicit financial outflows, among other impediments. 

Curbing illicit flows 

Illicit financial flows drain billions of dollars out of Africa every year. Curbing these flows will contribute to increasing some of the much-needed resources required to realise the AfCFTA. In turn, the latter can provide a framework for co-operation and institutional capacity to combat illicit financial flows.

In 2015, illicit financial flows from the continent were estimated at $50-billion a year. The United Nations Conference on Trade and Development (UNCTAD) in 2020 reckons that Africa loses about $88.6-billion a year in illicit capital flight.

Illicit financial flows appear most prominent in the extractive sector, estimated at more than $40-billion in 2015. The cumulative amount of such flows in the sector is  $278-billion from 2008 to 2018. In addition, Africa’s financial challenges are currently exacerbated by the effects of Covid-19 and scale of recovery responses.

The AfCFTA process, including preparatory interventions and actual implementation (likely to begin in early 2021), coincides with the global spread of Covid-19 the economic recovery from the pandemic. 

This creates a dilemma, given the competing priorities of AfCFTA and Covid-19 recovery requirements for budget allocation including funds derived from additional resources recovered from illicit financial flows. Nonetheless, building stronger post-Covid-19 African economies is linked with potential AfCFTA outcomes. 

For example, curbing illicit financial flows could possibly increase the capital available for businesses, boosting their capacity to produce and trade through AfCFTA markets, especially at a time when the pandemic has severely hit their cash flow. 

Reducing illicit financial flows may also provide governments with the necessary additional fiscal space to provisionally support a private-sector recovery from the effects of Covid-19 and fund institutional capacity arrangements and other actions needed to ensure the operationalisation of the AfCFTA.

Policy collaboration

Therefore, policy sequencing and synergies should be sought by countries when they are devising and implementing both AfCFTA and Covid-19 recovery strategies.

Considering the development challenges posed by illicit financial flows and their links to trade and other cross-border activities, co-operation among African customs authorities, financial institutions and regulatory bodies provided under the AfCFTA offers an opportunity to track and combat these flows. 

The AfCFTA could establish the foundations for better integrated actions including: the harmonisation of investment laws and practices; improvement of data collection and information-sharing to better track illicit financial flows; building up institutional capacity; and the promotion of transparency and accountability at both the state and private sector levels, which is essential to combating many forms of illicit financial flows. 

The UNCTAD Economic Development in Africa Report 2020 addresses some of these issues and provides the concrete steps that African countries should take towards building greater co-operation, including under the AfCFTA, to curb illicit financial flows.

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