Domestic Financial Resource Mobilization in Africa

1. Domestic Financial Resource Mobilization in Africa Janvier D. Nkurunziza Geneva, 22 February 2010 Briefing session for students from University of Dar-es-Salaam

2. Outline • Information on UNCTAD’s Project on DFRM • Why DFRM? • What are those resources?

3. Context • Presentation based on work undertaken in context of UNCTAD’s Project on DFRM • Idea is to give basic motivation and some results in order to start off a discussion on the issue • Given nature of your MBA (Business and project management), cover two aspects: • Talk briefly about project (structure, administration) • Focus on the substantive part (content)

4. Nature & objective of project • Amount: US$ 560,000 • Funded by UN’s Development Account, fifth tranche. • Objective of project: Strengthen capacity to: • Identify non-debt creating domestic resources to be used to fund development • Use these resources efficiently • Covers several African countries

5. Timeline of project • Project activities: • Launched in Geneva in February 2007 in presence of country consultants to draft country studies • Discussion of country studies in July 2007 in Benin (regional seminar) • 2nd regional seminar: November 2007 in Mauritius with Ethiopia, Kenya & Zambia as additions • Kenya & Zambia later provided country studies • Presentation of draft Policy Handbook at Mauritius seminar • April 2008: discussion of revised draft handbook at stakeholder workshops in Burundi and Zambia • Stakeholder workshops on published Handbook in Rwanda (Sept 2009), Sierra Leone (Nov. 2009) & Ghana (Nov. 2009) • Three more workshops planned (2 in francophone countries)

6. Objective of the handbook • Handbook not analytical; distils lessons learned from discussions and case studies • Highlight importance of domestic resources and existing opportunities • Does not fully develop all policy proposals • Policies apply differently to different countries • Provides starting points and directions; if interested in specific policy: further research

7. Why interest in DFRM in Africa? • Africa has a large development resource gap to fill to reach development goals: • Investment rate needed to halve poverty by 2015 has been estimated at 34% of GDP • Investment rate average over last decade is 18% and growth rate estimates dropped to 1.2% in 2009 (from about 5% in period before) • Actual values vary country by country • Oil producing countries are a particular group

9. Why interest in DFRM in Africa? • Too focused on external flows to fill financing gap: • Official development assistance (ODI) • Foreign direct investment (FDI) • Debt and debt relief • Though helpful, these flows are not without problems • Official development assistance: • Unpredictable: up to 4 times more volatile than taxes • Tends to create dependency • Reduces policy space (donors’ priorities are not necessarily same as country’s) • On the whole, success rather muted (e.g. Moyo)

10. Why interest in DFRM in Africa? • Foreign direct investment: • Tends to go to specific sectors weakly linked to rest of economy • Highly volatile • Often capital-intensive with limited effect on local job creation (e.g. extractive industries) • Debt: • Debt crisis/debt overhang • Debt relief has been helpful to some extent, but • Additionality has often not been respected

11. Why interest in DFRM in Africa? • Current crisis amplified problem of over-reliance on external resources: • Decline in financial flows to Africa • Portfolio investments more than halved in 07-08 • Remittances dramatically declined • FDI & ODA? • So: cannot count solely on external resources to meet development needs • Africa’s industrialization will largely depend on domestic resources (e.g. Stiglitz at ADB)

12. Domestic financial resources • Advantages of domestic financial resources: • Reduce dependence on foreign resources • Less volatile than external resources • Increase policy space & control of development • Improve governance • Few African countries consider this as important for increasing development finance • Of course, DFRM not panacea: complement not replace external flows • Also, beware of country specificities

13. What domestic financial resources? • Boosting private savings in formal financial sector: • Adopt a “financial charter” • Strengthen credit information on borrowers • Build capacity of regulatory bodies • Strengthen pension funds and insurance sectors • Strengthen stock markets, microfinance & development banks • Use technology creatively (mobile banking)

15. What domestic financial resources? • Improving public revenue collection & use: • Facilitate entry of firms into formal sector • Fairness in taxation and efficient use of tax revenue • Review tax exemptions (50% in Burundi) • Invest resources in improving tax collection • Reinforce border controls

16. What domestic financial resources? • Increasing development potential of remittances: • African diasporas’ savings could reach $30 bn. • Improve financial sector’s services w.r.t. remittances • Offer investment instruments tailored to diasporas • Reduce transfer costs in source countries • Issue diaspora bonds

17. What domestic financial resources? • Capital flight: • Stock estimated at $607 billion; nearly 3 times stock of debt • Africa is net creditor to rest of world • What could be done: • Offer time-limited repatriation amnesty • Use legal channels to impound stolen assets • If all fails: envisage naming and shaming strategy

18. Thank you very much!