External Financial Flows & Tax receipts to Africa
External and tax revenue resources available for development in Africa have trebled over the past decade and have never been so high. In 2011, external finances recovered to pre-crisis levels with foreign investment, official development assistance and remittances estimated at USD 152.2 billion. As a share of Africa’s gross domestic product, external flows doubled from 6.8% in 2000 to 12.3% in 2006, but were still down at an estimated 8.2% in 2011.
Foreign direct investment (FDI) and official development assistance (ODA) remain the key sources of finance. But African governments and their partners must increasingly look at remittances and tax revenues and this chapter takes a closer look than previous years at these forms of finance.
The appetite of emerging economies for natural resources and a boom in international commodity prices underpinned an increase in resource investment in Africa. Sustained growth of over 5% and improved macroeconomic indicators --lower inflation, sustainable debt levels-- attracted international and, increasingly, national investors.
Foreign investment remains the largest external financial flow to Africa and has great potential for stimulating long-term growth and employment. Yet, the increase in investment in recent decades did not produce more inclusive growth or sufficient jobs as most of the finance went on the hunt for resources. Africa needs to attract more productive FDI to diversify its economy and benefit from technology transfers and spill over effects.
Official development assistance increased in 2011, but at a slower pace than previous years. The sovereign debt crisis and austerity measures in OECD countries dampened prospects for a significant increase in future assistance. This particularly threatens the functioning of the state for nearly half of African countries where ODA is still the largest external finance.
Remittances to Africa peaked in 2011 and are projected to continue to increase strongly in 2012. The importance of remittances varies across countries and regions. They play a significant role in smoothing consumption and hence contribute to poverty reduction and improving social conditions. Additionally, they can provide capital to small and microenterprises, aiding job creation.
Collected taxes in Africa increased from an unweighted average of 18.1% of gross domestic product (GDP) in 2000 to 19.9% in 2009. However, this increase was mainly driven by resource-related taxes in oil-exporting countries as oil prices surged after 2007. African countries need to improve the quality of their tax systems by deepening their tax bases. Tax revenues complement external financial flows by helping states to provide quality public services and pursue economic policies that are conducive to raising growth and attracting finances from abroad.
Table 1: Summary of external financial flows and tax receipts in Africa (2000-12)
|Flows (real USD Billions)||2000||2001||2002||2003||2004||2005||2006||2007||2008||2009||2010||2011||2012|
|1. ODA, net total, all donors||15,5||16,8||21,4||27,4||30||35,8||44,6||39,6||45,2||47,8||47,9||48,4||48,9|
|2. Portfolio investments||1,9||-3,3||-0,1||-0,4||6,8||5,8||22,2||12,8||-27||-2,1||12,2||7,7||16,2|
|3. FDI inward||10,9||20,9||16,1||20,4||21,7||38,2||46,3||63,1||73,4||60,2||55||54,4||53,1|
|5. Tax revenues||140,8||131,9||124,6||159,7||205,2||262,8||312,3||358,5||457,3||341,3||416,3||..||..|
|Total External flows (1+2+3+4)||39,7||47,1||50,6||63,3||78,3||102,5||139,8||152,5||133,1||143,5||154,4||152,2||163,2|
Source: OECD/DAC, World Bank, IMF and African Economic Outlook Data. Author’s estimations for 2011 ODA data, by using the forecasted rate of increase for Country Programmable Aid in the 2011 OECD Aid Predictability Report. Forecasts for 2012: FDI and portfolio: IMF, Remittances: World Bank, ODA: OECD/DAC (author’s calculations). (This table excludes loans from commercial banks, official loans and trade credits).
The strong increase in Africa’s financial resources over the past decade hides significant realities. Resource-rich countries captured most of the commodity-driven increase in external and especially domestic resources, largely through rising tax income from the exploitation of resources (Figure 1.a). In GDP terms, external flows are more important to non-resource rich countries (Figure 1.b.). Low-income countries, often poor in natural resources, attracted a higher share of FDI to GDP in 2010 and 2011. Greenfield investment to low-income countries showed more resilience to the economic crisis than the more cyclical resource-seeking FDI going to resource-rich middle-income countries
Figure 2.01. Domestic and external financial resources
Total external flows to Africa in 2011 decreased slightly from USD 154.4 billion in 2010 to USD 152.2 billion. The gradual recovery of investment from the global economic crisis was halted by the revolutions in Tunisia, Egypt and Libya. In contrast to the modest recovery in other developing countries, FDI flows to Africa decreased slightly in 2011 to an estimated USD 54.4 billion, compared to USD 55 billion in 2010 (UNCTAD, 2011). In comparison, total tax revenue decreased by 26% to USD 339 billion in 2009. Total tax revenues in African countries were more than double the total external financial flows to the continent in 2010.
Africa’s share of FDI to developing countries decreased from 9.4% in 2010 to 8.2% in 2011 as more money went to emerging economies outside the continent, particularly China. Africa received 3.6% of global FDI in 2011, down from 4.2% in 2010. This remains four times higher than the 0.8% in 2000, but significantly lower than its peak of 5.2% in 2009, indicating Africa’s potential for attracting investment has not fully recovered.
FDI overtook official assistance as the largest external source for Africa in 2005 (Figure 2). However, for 20 out of 28 low income countries which account for 52% of Africa’s population, ODA remained the main external resource in 2010. The number of countries where investment exceeds other flows -- all resource-rich countries -- increased from nine in 2000 to 16 in 2010. Six lower middle-income countries (Cameroon, Cape Verde, Côte d’Ivoire, Djibouti, Sao Tomé and Principe, Sudan) had ODA as the largest external inflow in 2010. In all upper middle-income countries FDI represented over 50% of total external flows, with the exception of South Africa where portfolio inflows in 2010 represented 80% of total external flows. Some countries, such as Nigeria, Tunisia, Morocco, Senegal, Kenya, Swaziland and Lesotho, however, rely on remittances as the largest external inflow.
Figure 2.02. FDI overtook ODA in 2005, but is below its 2008 peak
To get back to the trend of increasing external financial resources, Africa needs foreign investment to recover to pre-crisis levels, particularly in Northern Africa, and remittances to continue progressing. The UN Conference on Trade and Development (UNCTAD) estimates that FDI to Africa should recover by 2014 to its average prior to the global crisis. The share of the emerging powers in foreign investment should continue, in line with their needs for natural resources. Portfolio flows remain relatively marginal to Africa, but with the growing financial sector in countries like Morocco, South Africa or Egypt, a relative increase may be expected in the near term. In the current fiscal austerity and growing budgetary pressures in donor countries, official assistance will, at best, remain at its current nominal value in years to come.
Risks are mainly related to global economic growth prospects and the evolution of commodity prices. A deeper crisis in Europe and a pronounced weakening of the global economy would hit financial flows to Africa (see chapter 1). The outlook for North Africa, in particular, depends on a return to normalcy in Libya, Tunisia and Egypt. Libya, one of the continent’s largest foreign investment recipients, saw FDI drop from USD 6.3 billion in 2010 to an estimated USD 2.35 billion in 2011.