Speaking at a seminar on Capital Flight and Tax Havens in Africa that opened in Addis Ababa, on Wednesday April 9th, Carlos Lopes, Executive Secretary of the Economic Commission for Africa has called on countries to tackle the issue with a sense of urgency. “Africa is not waiting for better times – we have to build the better times now,” stated Mr. Carlos Lopes.
Capital flight represents a direct loss of domestic capital and highlights the effects of the country’s policy distortions on investment and “the factors that fuel it, such as real exchange rate overvaluation have to be central in the discussion,” Lopes said, adding the need to scale up Africa-owned private equity funds and other financial services that can encourage capital to remain in Africa
“Compared to a decade ago, today, there is a thriving private equity industry in Africa, valued at approximately $30 billion,” he said; and added that there are up to 38 private equity funds which are invested in infrastructure in Africa including toll roads, dams, and airports. He told the meeting that for the past four years private equity funds have outperformed listed stocks and that in the boom years of 2006 to 2008, private equity in Africa amounted to approximately US$6.4billion.
“Nevertheless, while FDI through Private Equity has been rising in Africa, the continent still only attracts a small share of global equity funds,” he said.
e explained that these funds are relatively low and concentrated in a few countries, mainly South Africa at 53%, Egypt, Mauritius and Morocco at 8%, Nigeria at 5%, and a few sectors such as business services, information technology, industrial products and telecom, media and communications. “The trends demonstrate the persistent attractiveness of extractive industries, which account for nearly 46% of all cross-border mergers & acquisitions in Africa by private equity firms over the last 4 years,” he said.
He also highlighted the emergence of African bonds in the international bond market. “in Ethiopia, Kenya, Nigeria, South Africa, and Zambia, Infrastructure Bonds issues were recently oversubscribed by up to 15 times.” He said that these bonds could perform better with superior returns, low borrowing costs, appropriate fiscal incentives, and credit guarantee facilities to protect against default.
“As many of these are likely to be trans-boundary projects, African countries should coordinate efforts to deepen these bond markets and incentivize capital to stay in African countries,” he said and proposed an African Credit Guarantee Facility (ACGF) which would back African companies by guaranteeing the bonds they issue, and thereby build investor confidence to invest in the activities of these companies.
Mr. Lopes further called for the promotion of Regional Stock Exchanges to provide avenues for money generated in Africa to facilitate development financing on the continent. “Studies are increasingly showing that Africa provides superior returns to investment than in most regions,” he said. He proposed that new Public-Private Partnership financing models should be explored to entice private investors with investing their resources in viable high return projects and stressed the need for trans-boundary coordination at a continental and global level.
“The value chain of illicit flow of funds often involves money being spirited out of a country through third countries, usually tax havens and financial secrecy jurisdictions, before it gets to its final destinations,” he said adding: “Individual responses to capital flight are not adequate, not even for the most developed countries with full fledged security systems,” and that responses must focus on global drivers which can assist with the framework for developing regional and national security and enforcement strategies and mechanisms.
The Seminar is jointly organized by the Nairobi-headquartered, African Economic Research Consortium and the Economic Commission for Africa. Present at the Seminar were expert analysts and economists from around Africa and Prof. Lemma Senbet, Executive Director of the AERC.