Reversing illicit Financial Losses for Climate Adaptation in Africa

Unaddressed, climate change threatens to reverse productivity in these key economic sectors and stifle the region’s growth. Consequently, effective adaptation to deal with consequences of past emissions is an urgent imperative for the continent.

Astronomical Adaptation Costs a Major Barrier

However, while the need to adapt is well established, financing climate change adaptation on the continent requires colossal investments. Some estimates suggest adaptation costs could soar up to US$ 50 – 100 billion by 2050. But despite the hefty amounts involved, Africa can no longer rely on external public financing like it has in the past.

As of 2015, funding from a variety of international sources stood at a lowly US$ 1 – 2 billion per annum. It is projected that to meet the adaptation costs by the 2020s, funds disbursed annually to Africa need to grow at an average rate of 10 – 20% annually from 2011 levels. So far this has not been achieved. It is clear that relying on external aid alone to raise these amounts is a risky strategy and Africa needs to start looking within for alternative sources.

Stymieing illicit financial flows for Africa’s climate Change Adaptation

One viable way Africa could finance climate change adaptation is by curbing illicit financial flows (IFFs) from the continent. Each year, the continent loses an estimated US$ 50 – 60 billion through IFFs. A recent continental initiative – the joint AU/UNECA high level panel on IFFs – looked at how the continent could stop hemorrhaging billions of dollars through these illicit outflows. The report makes recommendations on how IFFs can be stemmed by taking targeted actions on the main contributors: the commercial sector (the largest contributor at 60% through profit shifts and tax evasion by corporates), organized crime (about 33%), and public sector activities, with corruption playing a key role in facilitating these outflows.

While relevant partnerships should be forged at country, continental, and global level to ensure unreserved implementation of the report’s recommendations, the following actions targeting the commercial and public sectors would be relatively easy for most countries to implement.

Photo: The Green market oracle.

Targeted areas to curb financial losses

Tax code reforms: Upgrading Africa’s tax code to reflect the continent’s growth will aid in sealing revenue losses because of lax taxation. Projected average real GDP growth vis-a-vis potential tax revenues paints an increasingly optimistic picture for the continent’s resilient growth progress. From a baseline of 8% average growth and 12% tax share of GDP, it is projected that for average GDP growth of 8 – 9% and a linear increase in the tax share of GDP of between 12 – 17% between 2019 – 2030, low income countries in Africa can afford to dedicate a maximum of between US$ 248 million annually for resilience building initiatives.

A similar scenario will generate about US$ 233 million annually for recent middle income countries and up to US$ 961 million per annum for upper middle income countries. Juxtaposed against adaptation needs of US$ 50 billion by 2050, tax reform to increase SSA tax-to-GDP ratio by 1% could generate 50% of the required amount.

Partnerships to improve tax administration: It is documented that an investment of US$ 1 in capacity building in policies and strengthening tax administration institutions can return as much as US$ 1,650 in recouped taxes. Key areas of focus to seal IFF loopholes should be improving regulatory oversight in tax administration and enhancing negotiating capacities with multi-national companies.

Fiscal reforms: Scraping unnecessary tax expenditures, such as incentives given to investors who are attracted by natural resources or a growing consumer base. These expenditures constitute a significant loss of revenue for the region ranging from 1.7 – 4% of GDP in individual countries, and create loopholes for fraud. Oil subsidies where 65% of subsidies in Africa benefit the richest 40% of households hence defeat the intended social impact, but potentially feed into corrupt cartels represent another target area for reform. Scrapping them could recoup as much as US$ 8 billion.

Optimize diaspora financing: Remittances from Africans in the diaspora are rising. In 2013 remittances were valued at US$ 32 billion, or around 2% of GDP, and are projected to rise to over US$ 41 billion in 2016. However, the amount of money hemorrhaging through transfer charges is colossal. Charges on remittances to Africa are at 12%, well above global average of 7.8%. This translates to approximately US$ 1.4 billion annually that Africa loses. By reforming financial governance and increasing efficient access to financial services in Africa, and improving competition by eliminating oligarchs, and increasing transparency in transfer fees among service providers through appropriate global policy, private sector action and information management (as simple as an AU run website posting transfer costs for different service providers), will drive down prices and Africa can recoup the US$ 1.4 billion annually.

Photo: Shutterstock

How to re-invest recouped funds into resilience building

Credit guarantee schemes to optimize agro-value chains: Agriculture employs up to 64% labor with women producing 80% food. It is also the source of livelihood for 70% of the continent’s poor. An optimized agro-value chain has great potential to directly and indirectly enhance climate adaptation in Africa.

Direct adaptation: Using low risk Ecosystems Based Adaptation approaches (EBA) for on-farm production could potentially increase yields by 116 – 128%, but at lower environmental and financial cost (less fertilizer and chemicals used). This ensures climate adaptation by enhancing capacity of ecosystems which is the most effective adaptation approach.

Indirect Adaptation: With EBA approaches, farmers are guaranteed higher yields at lower costs. This means higher profits hence more household level incomes to enable farmer communities better adapt to climate change. Forward and backward linkages of on-farm EBA approaches to supply and demand side value chains will unlock additional entrepreneurial and income opportunities along the post-farm gate value chain. This means more incomes to communities for climate adaptation. Cumulatively, an optimized agro-value chain across Africa can potentially create as many as 17 million jobs and realize an agro-sector worth US$ 1 trillion by 2030. This means expanded household incomes for climate adaptation. It also means expanded economy wide incomes e.g. through a broader tax base hence more incomes to government to fund resilience building.

Ethiopia’s Adama wind farm. Photo: Photo: Wikimedia Commons

Despite this significant potential, most commercial banks consider agriculture a high risk sector, and are therefore averse to it, pegging very high interest rates. This greatly hampers productivity through limiting private sector engagement. By leveraging recouped IFFs, governments can, through working with the private sector and the development partners, develop appropriate de-risking tools to reverse this scenario. As an example, funds could be invested in developing integrated credit guarantees to commercial banks tied to capacity building and farmers using low-risk EBA approaches to enhance chances of successful yields.

Conclusions

Faced with daunting financing needs, it is Africa’s moral and economic responsibility to take active steps to stymie and recoup IFFs. This is vital in creating a more sustainable financing model for Africa’s adaptation and development. As Africa continues to lobby for international support, it should not be forgotten that in the long-term, a sustainable financing model will not be achieved through reliance on international funds only. Africa urgently requires funding for climate resilient development and plugging IFFs and other leakages is a good starting point.