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Is Africa still a victim of capital flight?

May 25, 2011

Once shunned by international investors outside of some core commodities, Africa is now high on the radar screens of many funds seeking good returns across the asset classes.

But while money may be pouring in, how much is still pouring out? Capital flight has long been a scourge of the continent and one of the key reasons for its gut-wrenching poverty and lack of development. And there is plenty of evidence that it remains a significant problem, exacerbated by global tax havens and the opaque nature of extractive industries, oil in particular.

A girl selling apples by the roadside outside the Angolan city of Lubango. REUTERS/Finbarr O’Reilly

Take the case of oil and diamond-rich Angola, which rating agency Fitch on Tuesday upgraded to BB- from B+. We reported last month that $6 billion was spirited out of Angola in 2009, a staggering sum worth nearly a sixth of its entire annual budget.

The calculations, provided to Reuters by Washington-based anti-corruption advocacy group Global Financial Integrity (GFI), suggested that the bulk of the flow was channelled abroad by a mechanism known as “trade mispricing”.

In this case, the way it typically works is that Angolan importers pretend to pay foreigners more for imports than they actually spend. The difference provides cash that can be discreetly put into banks or other assets abroad.

Oil producers seem especially susceptible to this and other kinds of corruption and capital flight. Late last year, GFIestimated that in 2009 $27.5 billion flowed illicitly out of Nigeria, Africa’s largest oil producer and a country with eight times Angola’s 18.5 million population.

Lubricating such flows are a network of tax havens whose secretive workings have been brought into the light by author Nicholas Shaxson in his book “Treasure Islands: Tax Havens and the Men who Stole the World” (A subject I blogged on here last month). And global efforts to curtail them, a subject we have written on before, have been largely ineffective.

Still, there are promising signs on other fronts, including a U.S. drive to require oil and mining companies registered with the Securities and Exchange Comission to disclose their payments to foreign governments.

Those rules are still being finalised and could yet get watered down. And they might prove futile against things like trade mispricing. But they should still hopefully bring more transparency to the resource sector.

Another promising sign is the fact that Africa is no longer just about resources, which was key a theme at the Reuters Africa Investment Summit in March. The expanding middle class on the continent for one is in turn sparking growth in areas such as banking and retail — one reason why U.S. goliath Wal-Mart is so keen to enter the region via its $2.4 billion bid for a majority stake in South African chain Massmart. And a diversified economy is not only more sustainable but may also escape the “resource curse” and the corruption linked to sectors such as oil.

Still, these developments do not take away from the fact that there is strong evidence that some countries are losing billions of dollars a year. And things like capital formation and savings and investment will not get off the ground if the continent continues to lose large sums of money illicitly.

What do you think? Can Africa end capital flight?


No, I actually think the biggest issue for Africa is lack of talent. For example, South Africa has as many as 829,800 unfilled positions for highly skilled workers across a wide range of occupations. East Africa, which is growing very fast and especially Tanzania that is planning to spend in addition of US$ 27 billion, in the next 5 years, has serious deficiency in educated local and foreign talent. I highly doubt these countries can pull-off all these projects without the requisit talent. Hiring of foreign workers will increase cost tremendously, hence not viable. Which begs the question, what are plans for these countries on beefing up their talent pool? I have yet to hear efforts to bring back and or persuade African diaspora overseas to return, especially now with western countries in austerity measures. I am sold on all these new projects, because they actually needed, but we need answers on the talent issue.

Posted by Heriki | Report as abusive

The answer is both yes and no. With the current weak foreign direct investment laws and poor regulation of multi-national corporations in most African states, it is a challenge to stop capital flight. Corporate impunity thrives in Africa. Corporations in cahoots with political and administrative leaders stifle initiative to ensure greater benefits from investments for African States. Regulations that will limit capital flight have been flagrantly ignored or under hand deals execution to circumvent the law. Capital flight can be limited if African states became transparent and accountable for investments undertaken within their territories. Owing to the weak institutional structures in individual states, regional bodies and the African Union can step in to protect member states from corporate dictatorship. Unfortunately it is a challenge striking the balance between the need for foreign direct investment and protection against the negative effects of corporate operations.

Posted by Olez | Report as abusive

I guess capital flight can only be stopped if western countries plays their part. Most African countries are ruled by Dictators groomed , financed and kept in power by the West. All illicit transactions be it capital , arms etc the West turns a blind eye . This must stop for the African child to have a chance .

Posted by Sewava | Report as abusive

I guess that a strong African Union would be a bad thing for “Capital Flight”

Posted by somethingbrite | Report as abusive

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