Illicit Financial Flows

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STRICTLY EMBARGOED UNTIL TUESDAY NIGHT, 28 MAY 2013 AT 18:59 EDT / 23:59 BST / 23:59 WEST / 23:59 CET billion in the 1990s (or 1 percent of GDP). In the last decade (up to 2009), it is estimated that about US$30.4 billion per annum (or 3.2 percent of GDP) flowed out of Africa in net recorded transfers (as measured by NRecT Narrow). About 80 percent of these outflows, or US$25.2 billion, was out of North Africa. The sharp reversal of average annual net recorded inflows in the 1980s and 1990s to net annual recorded outflows over the last decade was mainly due to an increase in outflows associated with reserve accumulation (possibly in relation to African countries’ greater desire to self-insure against financial crisis), and, to a lesser extent, outflows associated with other investments. North Africa demonstrates a faster pace of reserve accumulation, mainly driven by oil exports, relative to the pace in Sub-Saharan Africa. Indeed, this last period coincided with the period of high oil prices, during which the oil-rich North African countries (such as Libya) benefited. In general, high oil prices translate to higher reserves. Given that an increase in reserves is entered into the balance of payments with a negative sign, which is consistent with the investment of those reserves abroad, the increase in financial outflows during the 2000s does not come as a surprise. In fact, our analysis on fuel exporters supports this, showing that fuel exporters collectively attracted net recorded transfers of US$4.2 billion per annum in the 1980s, registered small net outflows of US$0.6 billion per annum in the 1990s, and experienced net outflows of US$38.6 billion in the last decade. Based on NRecT Narrow, all regions within Sub-Saharan Africa (SSA), including Horn of Africa, Great Lakes, and Southern Africa, consistently attracted net recorded transfers, that is, experienced net recorded inflows, throughout the three decades. However, West and Central Africa registered net recorded outflows of US$9.7 billion per annum in the last decade. This loss offset recorded inflows into the three other regions (Horn of Africa, Great Lakes, and Southern Africa) resulting in net outflows from SSA in the last decade. Net recorded transfers from West and Central Africa were mainly driven by net outflows of other investments (involving repayments of loans and trade credits) rather than reserve accumulation. Considering individual African countries, the distribution of net recorded transfers was asymmetrical. Chart 1 shows that in descending order of magnitude, the top five gainers (measured by NRecT Narrow, deflated by the U.S. Producer Price Index (PPI) over the period 1980-2009 are South Africa, Sudan, Tunisia, Morocco, and Cote d’Ivoire, while the top five losers of NRecT Narrow were Algeria, Libya, Nigeria, Botswana, and Egypt which are all resource-rich countries. However, total net recorded transfers lost by the top five countries outstripped the resource gains of the top five by three to one, resulting in net outflows for Africa. Further work is needed to better understand the driving forces of these flows at country level. 16 African Development Bank and Global Financial Integrity
STRICTLY EMBARGOED UNTIL TUESDAY NIGHT, 28 MAY 2013 AT 18:59 EDT / 23:59 BST / 23:59 WEST / 23:59 CET Chart 1. Top Five Gainers and Losers of Real Net Recorded Transfers Narrow, Cumulative Chart 1. Top 1980-2009 Five Gainers and Losers of Real Net Recorded Transfers (in millions of 2005 U.S. Narrow, dollars) CumulaAve 1980-‐2009 deflated with CPI, base 2005 Millions of U.S. dollars -‐140,000 -‐120,000 -‐100,000 -‐80,000 -‐60,000 -‐40,000 -‐20,000 0 20,000 40,000 Algeria Libya Nigeria Botswana Egypt South Africa Sudan Tunisia Morocco Cote d'Ivoire Note: Deflated with PPI, base 2005 Source: GFI and AfDB Staff Estimates i. Broad Measure We now turn to the broad measure, which, in addition to the financial account balance, includes net current transfers (e.g., workers’ remittances) and net capital transfers (e.g., debt forgiveness and write-offs) and is therefore more representative of the African flows given the prominence of remittances and debt forgiveness in African economies. The long-run developments in net recorded transfers look markedly different if we use the broad measure. In the 1980s and 1990s, Africa attracted considerably higher inflows, averaging US$27 billion per annum or 4.3 percent of GDP. Over the last period (2000-2009), Africa continued to attract net recorded transfers from the world, albeit at the much slower pace of US$8.7 billion per annum. The broad measure does not show the swing from net debtor to net creditor in the 2000s because of substantial net positive current transfers such as remittances. In comparison, debt forgiveness played a comparatively minor role in keeping net recorded transfers in positive territory on account of their size in relation to remittances. But net recorded transfers broadly defined (NRecT Broad) behaved differently in the two main regions of Africa-in Sub-Saharan Africa, they remained strongly positive throughout the three decades, while in North Africa, net inward transfers declined progressively from 3.8 percent of GDP in the 1980s to 2.1 percent of GDP in the 1990s changing to 2.1 percent in net outward transfers per year from the region as a whole over the last decade. So, unlike Sub-Saharan Africa, in North Africa, both the Narrow and Broad measures of recorded transfers turned sharply negative over the last decade. This result needs to be investigated further, as it would suggest a comparatively limited role of remittances in the North African economies. Illicit Financial Flows and the Problem of Net Resource Transfers from Africa: 1980-2009 17
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Illicit Financial Flows

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