Opinion / Columnist
Impact of illicit financial flows on socio economic development
26 Jun 2018 at 07:04hrs | Views
While the "Zimbabwe is open for business" mantra is good in attracting foreign investors the government of Zimbabwe need to step up efforts to curtail illicit financial flows (IFFs) by enforcing anti avoidance provisions especially towards aggressive tax planning structures in line with the current transfer-pricing framework that was introduced into the Zimbabwe tax law, complement the Auditor General's efforts in combating corruption which is one of the drivers IFFs in order for the country to fully benefit from its natural resources local analysts have said.
An economist from a local financial institution speaking on condition of anonymity said, while the country is in serious need of foreign direct investment (FDI), the country must not be too open for it to be vulnerable and sound to desperate to sign deals that put the country at a disadvantage.
"True, the country needs FDI, but we need to guard against vulnerability and lose out. The country has lost a lot of money in the past through IFFs and we need to curb that," he said.
"These investors are coming in to make money and if we are too desperate we will end up signing too many "sweetheart deals," offering them ridiculous tax breaks and other incentives especially in the mining sector to the detriment of the country and we have many of these."
"Zimbabwe is open business does not literally translates to improved revenue contributions by the corporate world without a meaningful transformation of the tax regime, political will to fight corruption; Being open for business should never translate to being open for illicit financial extraction." According to a local think tank Zimbabwe Coalition of Debt and Development(ZIMCODD), the country has been losing an average loss of US$276 million annually through illicit financial flows with the mining sector contributing over 50% and this has had dire effects on the socio economic development of the country.
"The issue of Illicit Financial Flows (IFFs), especially by the corporate world, has robbed the nation of meaningful development as private companies are dodging taxes through various illicit means," said Mr. Tafadzwa Chikumbu an official from ZIMCODD.
"These lost revenues have far reaching consequences on the fulfillment of social and economic rights of the generality of Zimbabweans."
Some of those consequences include budget deficits, and subsequently the inability by government to adequately fund education, health, agriculture, infrastructure, water and sanitation. The government spend 90% of its revenue paying recurrent expenditure mainly salaries of civil servants. This is also as a result of the government failure to raise enough resources in the midst of IFFs. The issue of IFFs has affected public sector investment with more than 90% of the meager collections going to recurrent expenditures. The low public sector investment has impacted on government efforts to address high unemployment. The opportunity cost of IFFs is the essential social services forgone hence the strong link between illicit financial flows and the common person. Illicit financial flows rob the government from the much-needed funds to invest in critical sectors such as education, health and social service delivery. According to a report published by ZIMCODD, the country has a "budget deficit of US$1.7 billion which was financed through Treasury Bills, further drawing public debt to unsustainable levels. The trend is expected to increase owing to a projected budget deficit of US$672.3 million (3.5% of GDP) in 2018. Zimbabwe also finds itself in external debt trap which has a lot of conditionalities, despite the abundance of natural resources, hence the natural resource curse. If the country was able to collect all its revenue which it has lost through IFFs, this deficit would have been avoided. The US$1.4 billion externalized funds acknowledged by the government were sufficient to fund the budget deficit. Due to increased illicit financial flows, government is deprived of the much-needed revenue, resulting in limited fiscal space.
The issue of IFFs there has far reaching consequences to the development of the country. This hampers the efforts of the government to further develop the country and it is the common man on the street that suffers as a result. Illicit financial flows however have serious social, economic and political ramifications hence the reason why this subject cannot be divorced from the populace. Therefore it is incumbent upon the government as they say Zimbabwe is open for business to have political will to implement the robust legal frameworks already developed, to plug excessive leakages. The government also need to strengthen the public finance management system will go a long in plugging leakages in the extractive sector. The Auditor General Mrs Mildred Chiri has produced a number of reports and recommendations and the government needs to implement as a starting point.
According to Mukasiri Sibanda an Economic Governance Officer at the Zimbabwe Environmental Law Association, the impacts of IFFs financial flows are broader than socio-economic and governance issues. The impact also extends to the environment especially for the extractive sector. By nature, the extractive sector is ominously destructive to the environment. Ostensibly, IFFs can incentivize mining companies to make illegal profits at the expense of the environment.
Although IFFs strip revenue through illegal activities such as tax evasion and not so illegal but nonetheless immoral aggressive tax avoidance strategy, essentially, resource rich countries like Zimbabwe are also stripping themselves of taxation rights through harmful tax incentives. The country therefore need to have a policy shift and review all harmful tax incentives, exemptions and subsidies, especially those provided to multinational corporations. As alluded to before in as much as the country needs foreign direct investment, it must be balanced by policies that curb IFFs and do away with "sweetheart deals" which also fuel corruption.
According to ZIMCODD, key drivers of illicit financial flows in Zimbabwe are weak governance and corruption, tax evasion and avoidance, and trade in contraband goods which are mainly smuggled in and out of the country. The government therefore also need tighten the porous border controls, impelement a raft of reforms in the tax regime, increase accountability and transparency by making all deals public as stipulated by the laws of the country. Also in the in the spirit of promoting transparency and accountability the government need to adopt national mandatory reporting of sales, profits, assets and taxation standards for all corporations, ensure public disclosure and access to financial, fiscal, beneficial ownership and human resources assessment data. The Global Financial Integrity (GFI) defines illicit financial flows as illegal movements of money or capital from one country to another. GFI classify movement of funds an illicit financial flow when the funds are illegally earned, transferred and/or utilised. Illicit financial flows are therefore the illegal flows of money into and out of a country. And this takes many forms including tax avoidance, tax evasion, money laundering, trade misinvoicing, and transfer pricing, related parties' transactions. Funds that are legally earned but transferred in violation of laws of the land such as exchange control regulations are also regarded as illicit. What is to note is the term "externalization" is loosely used in Zimbabwe to capture some of these IFFs which goes to show how the concept of IFFs is still generally elusive and a bit too technical for the public to understand and hence explains why system is weak in detecting some of these leaks and difficult to prosecute perpetrators.
This story was produced by Davison Kaiyo. It was written as part of Wealth of Nations, a pan-African media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org"
An economist from a local financial institution speaking on condition of anonymity said, while the country is in serious need of foreign direct investment (FDI), the country must not be too open for it to be vulnerable and sound to desperate to sign deals that put the country at a disadvantage.
"True, the country needs FDI, but we need to guard against vulnerability and lose out. The country has lost a lot of money in the past through IFFs and we need to curb that," he said.
"These investors are coming in to make money and if we are too desperate we will end up signing too many "sweetheart deals," offering them ridiculous tax breaks and other incentives especially in the mining sector to the detriment of the country and we have many of these."
"Zimbabwe is open business does not literally translates to improved revenue contributions by the corporate world without a meaningful transformation of the tax regime, political will to fight corruption; Being open for business should never translate to being open for illicit financial extraction." According to a local think tank Zimbabwe Coalition of Debt and Development(ZIMCODD), the country has been losing an average loss of US$276 million annually through illicit financial flows with the mining sector contributing over 50% and this has had dire effects on the socio economic development of the country.
"The issue of Illicit Financial Flows (IFFs), especially by the corporate world, has robbed the nation of meaningful development as private companies are dodging taxes through various illicit means," said Mr. Tafadzwa Chikumbu an official from ZIMCODD.
Some of those consequences include budget deficits, and subsequently the inability by government to adequately fund education, health, agriculture, infrastructure, water and sanitation. The government spend 90% of its revenue paying recurrent expenditure mainly salaries of civil servants. This is also as a result of the government failure to raise enough resources in the midst of IFFs. The issue of IFFs has affected public sector investment with more than 90% of the meager collections going to recurrent expenditures. The low public sector investment has impacted on government efforts to address high unemployment. The opportunity cost of IFFs is the essential social services forgone hence the strong link between illicit financial flows and the common person. Illicit financial flows rob the government from the much-needed funds to invest in critical sectors such as education, health and social service delivery. According to a report published by ZIMCODD, the country has a "budget deficit of US$1.7 billion which was financed through Treasury Bills, further drawing public debt to unsustainable levels. The trend is expected to increase owing to a projected budget deficit of US$672.3 million (3.5% of GDP) in 2018. Zimbabwe also finds itself in external debt trap which has a lot of conditionalities, despite the abundance of natural resources, hence the natural resource curse. If the country was able to collect all its revenue which it has lost through IFFs, this deficit would have been avoided. The US$1.4 billion externalized funds acknowledged by the government were sufficient to fund the budget deficit. Due to increased illicit financial flows, government is deprived of the much-needed revenue, resulting in limited fiscal space.
The issue of IFFs there has far reaching consequences to the development of the country. This hampers the efforts of the government to further develop the country and it is the common man on the street that suffers as a result. Illicit financial flows however have serious social, economic and political ramifications hence the reason why this subject cannot be divorced from the populace. Therefore it is incumbent upon the government as they say Zimbabwe is open for business to have political will to implement the robust legal frameworks already developed, to plug excessive leakages. The government also need to strengthen the public finance management system will go a long in plugging leakages in the extractive sector. The Auditor General Mrs Mildred Chiri has produced a number of reports and recommendations and the government needs to implement as a starting point.
According to Mukasiri Sibanda an Economic Governance Officer at the Zimbabwe Environmental Law Association, the impacts of IFFs financial flows are broader than socio-economic and governance issues. The impact also extends to the environment especially for the extractive sector. By nature, the extractive sector is ominously destructive to the environment. Ostensibly, IFFs can incentivize mining companies to make illegal profits at the expense of the environment.
Although IFFs strip revenue through illegal activities such as tax evasion and not so illegal but nonetheless immoral aggressive tax avoidance strategy, essentially, resource rich countries like Zimbabwe are also stripping themselves of taxation rights through harmful tax incentives. The country therefore need to have a policy shift and review all harmful tax incentives, exemptions and subsidies, especially those provided to multinational corporations. As alluded to before in as much as the country needs foreign direct investment, it must be balanced by policies that curb IFFs and do away with "sweetheart deals" which also fuel corruption.
According to ZIMCODD, key drivers of illicit financial flows in Zimbabwe are weak governance and corruption, tax evasion and avoidance, and trade in contraband goods which are mainly smuggled in and out of the country. The government therefore also need tighten the porous border controls, impelement a raft of reforms in the tax regime, increase accountability and transparency by making all deals public as stipulated by the laws of the country. Also in the in the spirit of promoting transparency and accountability the government need to adopt national mandatory reporting of sales, profits, assets and taxation standards for all corporations, ensure public disclosure and access to financial, fiscal, beneficial ownership and human resources assessment data. The Global Financial Integrity (GFI) defines illicit financial flows as illegal movements of money or capital from one country to another. GFI classify movement of funds an illicit financial flow when the funds are illegally earned, transferred and/or utilised. Illicit financial flows are therefore the illegal flows of money into and out of a country. And this takes many forms including tax avoidance, tax evasion, money laundering, trade misinvoicing, and transfer pricing, related parties' transactions. Funds that are legally earned but transferred in violation of laws of the land such as exchange control regulations are also regarded as illicit. What is to note is the term "externalization" is loosely used in Zimbabwe to capture some of these IFFs which goes to show how the concept of IFFs is still generally elusive and a bit too technical for the public to understand and hence explains why system is weak in detecting some of these leaks and difficult to prosecute perpetrators.
This story was produced by Davison Kaiyo. It was written as part of Wealth of Nations, a pan-African media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org"
Source - Davison Kaiyo
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