As African governments attempt to battle the economic impacts of COVID-19, they must re-imagine development financing which will translate into efficiency in public expenditure and foresight in public investments that go hand in hand with inclusion, accountability and transparency as political norms and values.
Uyo, Nigeria—Ubong Abasi is a Keke driver in the capital of Akwa Ibom State, a state in Nigeria’s oil-rich Niger Delta region. As with many informal businesses that are characteristic of Uyo’s non-oil economy, Abasi’s livelihood has been severely affected by both the spread of COVID-19 in the city and efforts to contain it. Since the detection of Nigeria’s index case, in February 2020,both the federal government as well as several state governments have imposed several lockdowns, the most recent being during the last quarter of 2020. These lockdowns had devastating impacts on the business activities and livelihoods of Abasi and others that, like him, operate in the informal economy and therefore depend on daily income without having any savings buffer. The most recent unemployment data from the Bureau of Statistics (NBS) shows that unemployment rose from 27.1 per cent in second quarter of 2020 to 33.3 per cent in the fourth quarter of the same year. The government also expects that the pandemic could cost Nigeria more than 39 million jobs.
Beyond Nigeria, the COVID-19 ‘tale of hardship’ is common across much of Sub-Saharan Africa, where according to the IMF, the informal sector accounts for on average 34 percent of the overall economy. Sub-Saharan Africa has the highest share of informal economic activity in the world compared to 9 and 15 per cent in North America and the OECD respectively. In Nigeria, the Bank of Industry estimates the share of the informal economy to be as high as 65 percent. Moreover, according to the ILO, the informal sector absorbs more than 66 per cent of sub-Saharan Africa’s total employment, in urban areas. The pandemic and its economic ripple effects are expected to push an additional 87 million people into poverty in Sub-Saharan Africa, amounting to 520 million people compared to 433 million as of 2018.
THE ECONOMIC IMPACTS OF COVID-19
The 2020 IMF Policy tracker, which monitored global responses to the COVID-19 crisis, showed that African governments’ reactions to the pandemic were similar to protectionist OECD countries. In sub-Saharan Africa, South Africa showed the highest degree of financial capacity, comprehensiveness, and institutional delivery in the overall management of the impact of the pandemic. During the first and second phases of South Africa’s COVID-19 economic response, President Ramaphosa announced tax relief for the country’s retail sector, wage support through the Unemployment Insurance Fund, and a facility exceeding US$175 million for formal SME as well as informal businesses. Togo implemented similar measures to shield its informal economy via the NOVISSI solidarity income program, a cash transfer scheme that benefitted over 581,130 informal workers. Nigeria, in addition, responded with the deployment of the Survival Fund for small businesses, a plethora of ad-hoc social protection measures (food and cash transfers) from both the public and the private sector, and the enactment of a National Economic Sustainability Plan.
According to the IMF policy tracker, tax relief and interest rate reductions were equally popular COVID-19 mitigation measures among African governments. In Nigeria, many sub-national governments also provided economic protection. For example, in July 2020, Akwa Ibom State announced a tax holiday for its large informal businesses, the second most important contributor to the state’s IGR after royalties from crude oil. The tax holiday was beneficial as it provided temporary reprieve for Abasi and similar informal business operators who are adjusting to the new market realities, including low demand for their products and services post-lockdown.
THE MITIGATION DILEMMA
African governments’ social and economic COVID-19relief measures are both necessary and commendable. Especially as they provide a temporal buffer against the foreseeable high socio-economic cost of the pandemic. Yet, the question is: where is the money for such efforts coming from? Pre-COVID-19, sub-Saharan Africa already had a development financing gap of at least US$68 billion. Moreover, the region was heavily indebted with, according the IMF, some countries’ 2019 debt-to-GDP ratio exceeding 60 per cent. To make things worse, for resource-dependent economies, commodity revenues have been dwindling at an astronomical rate due to the crash in commodity prices triggered by low global demand resulting from the pandemic.
The answer to where the money comes from is a familiar one. Since the advent of COVID-19, sub-Saharan Africa has worsened its borrowing tendencies. In nine months of 2020 alone, Africa incurred an additional US$16.2 billion from IMF. Many African countries’ socio-economic recovery packages depend on loans, aids, and grants from the World Bank Group, African Development Bank, and other development partners. For instance, in July 2020, the IMF approved a US$3.4 billion loan—the institution’s largest single loan ever approved—to help South Africa finance its COVID-19 response and counter the country’s recession. Similarly, a large chunk of Mozambique’s COVID-19 intervention fund depends on a US$700 million loan from its development partners.
In Kenya, the IFC recently co-funded the country’s COVID-19 response for SMEs to the tune of US$50 million. Uganda’s social protection programmes and economic stimulus for businesses are majorly supported by a US$300 million World Bank loan as well as US$9.9 million from USAID. From the first to the second quarter of 2020, Nigeria’s external debt jumped from US$27.7 billion to US$31.5 billion. Such large-scale borrowing only compounds Africa’s existing debt burden and negatively impacts countries’ debt service plans and their ability to make full repayment. In fact, as reported by The Conversation, Africa’s repayment interest rate of 5-16 per cent on government bonds is way above what is charged in Europe and in the United States, thus making it harder to repay African loans. According to the African Union, the economic loss from the pandemic is expected to reach US$500 billion. Moreover, the IMF’s October 2020 Africa Regional Outlook report estimates that the pandemic has widened the region’s development financing gap by about US$290 billion.
FINANCIAL LEAKAGES — A STRUCTURAL PROBLEM
In the process of procuring loans to fund their COVID intervention measures, African governments have widened the region’s debt profile and financing gap. Domestic financial leakages make things even worse as shown in Malawi, Uganda, Kenya and Nigeria where there are alleged and confirmed leakages of these loans in the form of poor accountability and audit, and corrupt practices from public officials.
While COVID-19 has exposed the economic and development fragility of the continent, there is a structural issue that drives its finance woes: domestic financial leakages. The UK-based Tax Justice Network measures global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows or capital flight. The 2020 edition of the network’s bi-annual Financial Secrecy Index showed that not a single African country was among the top 10 destinations of illicit financial flows (IFFs). Instead, African countries tend to be sources of IFFs, which increase the continent’s economic vulnerability and undermines development financing. Especially during COVID-19, IFFs imply lower public savings to buffer citizens against harsh economic realities. The impact of IFFs on Africa’s development trajectory has been acknowledged by UN Secretary-General, Antonio Guterres, who recognized that IFFs leave public budgets barren to the benefit of the powerful few. As academic, Claudia Gastrow, has explained, ‘African corruption is only African as regards its victims, its perpetrators are institutions and individuals from across the globe who are willing to loot without conscience as they watch their offshore accounts grow’.
African countries suffer from various leakages including those from transfer pricing, non-transparency in both company reporting and corporate tax, banking secrecy, tax evasion and aggressive tax avoidance and money laundering. These leakages are mainly perpetrated by the region’s elite, in collaboration with OECD countries and their dependencies like the Cayman Islands, British Virgin Island, American Virgin Island, and Guernsey. The situation is exacerbated by the poor exchange of information between OECD and sub-Saharan African countries.
According to a 2018 report from the Political Economy Research Institute at the University of Massachusetts, between 1970 and 2015, 30 African countries lost at least US$1.4 trillion to leakages. Alongside Africa’s $496.9 billion debt as of 2015 and the continent’s financing gap of US$290 billion as of 2020, the report supports the notion of Africa as a net creditor to the global economy. Further evidence is provided via the Luanda and Mauritius Leaks where the International Consortium of Investigative Journalists showed that African elites such as Isabel Dos Santos are huge conduits of Africa’s financial leakages.
Even with COVID-19, financial leakages continue unabated across Africa and seem to be emboldened as a result of the influx of huge finance to government coffers. In 2020, Andres Schippani, Joseph Cotterill, and Neil Munshi reported that in Uganda, Kenya, South Africa and Nigeria, government officials and ministers have been accused and sometimes found guilty of making plans to siphon or eventually siphoning COVID-19 funds for personal gains. While some governments have taken punitive actions against such officials, in Kenya and Nigeria, governments deny such allegations, which has led to citizens’ protests and arrests.
RE-IMAGINING DEVELOPMENT FINANCING IN AFRICA
Re-imagining development financing across Africa requires increasing more financial and technical support to informal economy operators in order to boost their production capacity and raise their incomes. This will, in turn, translate to higher employment opportunities for citizens and higher GDP and revenue for government.
Re-imagining development financing also means stopping financial leakages, which now imply over US$60 billion in annual losses. It means implementing comprehensive tax reforms, strengthening the capacity of public agencies that manage domestic resource mobilization as well as adequately funding such agencies. It is about Africa improving its resource generation processes and reducing the cost of governance. This translates into efficiency in public expenditure and foresight in public investments, which go hand in hand with inclusion, accountability and transparency as political norms and values.
One strategy deployed at both global and continental levels to curb these financial leakages is a beneficial ownership register—a central repository, which clearly states the natural persons that the benefits of an entity or a transaction accrue to. The global extractive sector space, led by the Extractive Industries Transparency Initiative, has been successful at making the beneficial owners of the oil and solid mineral companies in its member countries known; with 24 African member countries making their information publicly accessible. However, implementing similar registers across other sectors in Africa has been marred by the lack of full commitment from African governments—despite such reform being part of the AU’s Agenda 2063.
While it is important for governments to implement relief measures in response to COVID-19, the resulting borrowing spree reiterates the need to address two key issues affecting the continent—financing gaps and financial leakages. Not prioritizing these challenges will always hinder the continent’s self-sufficiency and development efforts⎈
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