Africa’s growing illicit financial flows stalling economic growth

Africa is grappling with a significant economic challenge as illicit financial flows continue to drain the continent of much-needed resources. According to Francis Kairu, an International Tax Lawyer and policy officer at the Tax Justice Network, Africa is losing close to 3 per cent of its GDP to illicit financial flows, predominantly linked to tax avoidance and profit shifting by multinationals. This trend has been identified as a major factor stalling economic growth across the region. The problem has been exacerbated by the evolving nature of illicit financial flows, with new issues such as digital taxation playing a key role in siphoning off resources. Multinationals are increasingly adept at reducing their taxable income through complex structures and taking advantage of preferential tax treatments offered by certain jurisdictions. African countries, in a bid to attract foreign investment, have engaged in harmful tax competition by lowering tax rates, but this strategy has not yielded the desired results. Instead, it has only intensified the challenge of illicit financial flows and hindered economic development. Countries across the continent must innovate and cooperate to effectively combat this issue. Investing in human capacity, particularly in tax administrations, is crucial to enhancing the ability to tax multinationals and digital services effectively. Working together to design tax systems that benefit a majority of countries is essential to curbing illicit financial flows and generating much-needed revenue for public investments. Some countries, such as Nigeria and Kenya, have made strides in implementing digital service taxes, highlighting the importance of proactive measures in addressing this pressing issue. However, many African nations continue to struggle, with a significant portion of their budgets allocated to debt interest repayments rather than vital sectors like health and education. This dire situation poses a grave economic dilemma for the continent, particularly considering its youthful population in need of essential services and infrastructure. Finding sustainable solutions to combat illicit financial flows is paramount to securing a brighter economic future for Africa.