Regional Launch of the Report on "Financing for Development in the Era of COVID-19: The Primacy of Domestic Resources Mobilization"

Key Highlights

Tapping into wasted resources
The flagship report by the Office of the Special Adviser on Africa highlights the importance of mobilizing domestic resources as the primary means to finance the Sustainable Development Goals and Agenda 2063. This does not mean that Official Development Assistance (ODA) has become obsolete overnight. Still, this report – “Financing for Development in the Era of COVID-19: The Primacy of Domestic Resource Mobilization” – suggests a paradigm shift by putting Africa at the driving seat of its development. The figures speak for themselves. When comparing various financing sources, domestic public revenues and private savings in 2018 were $911.4 billion, 20 times as much as inward Foreign Direct Investments (FDI) flows and 16.5 times as much as net ODA. This demonstrates that Africa’s development is primarily financed by domestic resources, contrary to the misperception that depicts the continent as dependent on foreign aid. However, there’s much room to unlock further the potential of Domestic Resources Mobilization for Africa’s sustainable development. 

Inefficient public spending: wasted domestic resources
Indeed, this report identifies the core issue of not finding new and additional resources – even if they are needed and welcomed – but, first and foremost, managing existing resources more efficiently. The waste associated with the mismanagement of resources has an enormous cost that could be redirected more productively.

Based on OSAA’s calculation, the inefficiency of public spending in Africa represents a combined loss of roughly $ billion per annum, almost twice as much as the annual ODA inflows. The losses breakdown is as follows: $12 billion for education, $30 billion for infrastructure, and $28 billion for health. The inefficiencies in health expenditures alone cost Sub-Saharan countries more than ten years of life expectancy.  Therefore, the starting point for any domestic resource mobilization strategy should be to optimize spending and savings, as these substantial losses could be harnessed towards sustainable development financing. 

Fiscal Incentives: costly and counterproductive
Another striking fact is the tax incentives that African countries provide to attract foreign investors, which amounted to $46 billion in 2019,  surpassing the total FDI inflows to Africa that year. Indeed, if these resources were directed to support African entrepreneurs, they would not only help develop the continent’s industrialization but also, the benefits of these investments would materialize on the continent instead of the profits benefiting shareholders abroad. The riches produced by Africans would benefit the African economies and develop the African middle class, which is critical for generating self-sustaining growth based on local consumption. 

What attracts FDI is a combination of favourable business climate and macroeconomics, political stability, transparency of national legal frameworks, affordable skilled labour, quality of life, and the existence of bilateral agreements and treaties. By contrast, fiscal incentives are the least effective in attracting FDI.  

Tax expenditures are costly and deprive governments of critical financial resources. Eliminating these tax expenditures would boost domestic resource mobilization considerably. Because of the patchy availability of data, the actual fiscal cost of tax expenditure may have been underestimated, together with the scope of potential loss for domestic resource mobilization. In that regard, the report recommends that African countries, supported by the international community, assess and review their tax incentives regimes by 2026 by adopting a comprehensive and balanced approach that rationalizes their usage and reconciles the country’s investment promotion objectives and resource mobilization strategies.

Sovereign wealth funds play an essential counter-cyclical role
The total assets under management in 2020 of the 13 African sovereign wealth funds was $24 billion. Despite their relatively small size, these funds can potentially play a crucial counter-cyclical role by generating the much-needed resources for financing the continent's development, stabilizing the national economies – with positive spillover effects for the entire subregion, especially during the implementation of the African Continental Free Trade Area. By supporting long-term investment in infrastructure projects and other strategic sectors, these funds would ultimately attract international capital to Africa and promote public-private partnerships by demystifying the risk perception of investment in Africa.

Remittances to Africa are also important – providing needed resources during economic downturns, pandemics, and natural disasters and could act as a stabilizing factor ensuring the continuous flow of funding. Still, like foreign investors, diaspora members require the necessary enabling environment and governance structures to invest their hard-earned savings in their home countries. Remittances to Africa rose from $67 billion in 2016 to an estimated $91 billion in 2021.  If informal funds and in-kind remittances were factored in, annual remittances could reach $200 billion annually, equivalent to four times the net Official Development Assistance. They also represent a vast potential for domestic resource mobilization.

Pension funds
Assets managed by pension funds could also represent another vital source of domestic financing. Pension funds amounted to over $1.1 trillion in 2020.  However, many countries invest a substantial portion of their pension funds abroad. The report estimates that if African pension funds allocated 2.8 % of their assets into infrastructure, like South African pension funds, this would generate an additional $20.9 billion per year, reducing the infrastructure financing gap by 30 %.

Better management of existing resources will trigger a virtuous circle by which African investors will feel confident to invest in their national economies and, by doing so, pave the road for foreign investors to follow suit. Better management also means better tax collection and tackling Illicit Financial Flows (IFFs), one of the most complex issues. Unlike the other untapped resources explained above, which can be considered low-hanging fruits, the IFFs will require global cooperation and long-term capacity development.  

Illicit Financial Flows
Despite those challenges, it is worth tackling Illicit Financial Flows as they represent a loss for the African economies of $88 billion per year, almost twice as much as the Official Development Assistance. More transparent governance structures and a more effective tax system and control could help recover most of these funds. The recovery of illicit financial flows is also a global moral issue as these lost assets move from Africa to developed countries, perpetuating global inequalities. The report argues that tackling IFFs is critical to ensuring fairer and more equitable globalization.

Strengthening partnerships for domestic resource mobilization 
The report argues that the much-needed transformative change to secure a better future for Africa can only be achieved through African-led initiatives from within the continent and supported by strengthened and novel national, regional and global partnerships. The report then takes a “deep dive” into the partnerships required to unlock Africa’s full potential in DRM and calls for a paradigm shift – a fundamental rethinking of these partnerships – to ensure alignment with Africa’s priorities and development aspirations. 

The report takes a critical look at the joint efforts of the international community to address the rapidly worsening debt situation in Africa. While acknowledging the success of the emergency measures to increase liquidity in the short run and provide temporary relief to debt-distressed countries, the chapter on partnerships calls for the enaction of comprehensive medium to long-run solutions for achieving debt sustainability through the combined political will at the national level and partnerships at the regional and global levels.   

The report also identifies key areas that must be urgently addressed to underpin Africa’s sustainable development. Among these are: 

• Energy to power Africa, 
• Finance to overcome dependence on external resources, 
• Digital connectivity to ensure social inclusion, and 
• People-centred policies, such as investments in social protection floors and decent jobs, as well as in food and nutrition security, education and health systems. 

The report also highlights the role of partnerships at the national, regional and global levels in harnessing Africa’s demographic dividend and human capital, its vast natural resource wealth and renewable energy potential, and leveraging the opportunities from intra-African trade through the African Continental Free Trade Area to move further upstream in the global value chains by investing in trade in higher value-added goods. 

Revisiting the challenges related to DRM analyzed in detail through the first four chapters of the report, the final chapter on partnerships concludes with a matrix presenting targeted and actionable recommendations and the types of partnerships required to unlock Africa’s potential to mobilize and efficiently invest its domestic resources in our shared quest to make the “Africa We Want” a reality.   

Recommendations
To address these issues, the report promotes bold and urgent recommendations. In their analysis, the cornerstone of effective public spending and revenue mobilization systems is adequate governance architecture and mechanisms that enable countries to fight corruption and reduce inefficiency. The efforts of African policymakers to achieve this objective could benefit significantly from channelling the ODA inflows to Africa into capacity building and institutional reforms, including by digitalization of revenue collection and expenditure systems to bring about more transparency and accountability. 

By 2024 – with the support of United Nations entities and relevant regional and international organizations, including IMF, the World Bank, AfDB, and the African Union Commission - African countries must digitize their revenue collection system to build domestic solid resource mobilization systems. 

By 2025, African countries should conduct a comprehensive audit/review of their government expenditure to identify wastages and potential savings for their budgets, along with potential expenditure reallocation gains within and across sectoral allocations. 

By 2026, African countries will have to embrace e-procurement services and e-government, ultimately increasing government accountability, transparency, and delivery. 

In addition to good governance and equally important, domestic resource mobilization must promote inclusiveness, social justice, and productive investments.