Making aid and domestic public finance work for Africa and its people

The development finance landscape in Africa is shifting. Public domestic resources are playing an increasingly important role in Africa’s development and economic growth prospects. Africa’s much celebrated growth over the last two decades has benefited in large part from public revenues derived from the sale of natural resources. While the tax base remains narrow, and tax compliance levels low on the continent, revenues from tax collection continue to increase, rising from USD 259.3 billion in 2005 to USD 527.3 billion in 2012. [1] A 2013 study by NEPAD and UNECA [2] shows that the fundamentals and resource potential exist for the continent to raise more financial resources domestically to implement its development programmes and finance its own institutions.

At the same time, the role of emerging donors and South-South Cooperation in Africa is increasing, with more public finances being channelled from emerging economies to Africa via various bilateral and multi-lateral arrangements.

In contrast, there is clear evidence that Official Development Assistance (ODA) from traditional donors is dwindling – falling from 38% as a proportion of all external financial flows to Africa in 2000 to 27% in 2014. [3] Despite a global upward trend in ODA, figures for 2014 show that aid to Sub-Saharan Africa fell for the second consecutive year - back to levels they were a decade ago. In addition, machinations by the OECD’s Development Assistance Committee (DAC) – the body which oversees the OECD’s aid policy and spending – are likely to result in further erosion of aid budgets.[4]

The key to sustainable, adequate and predictable financing of Africa’s development therefore no longer lies in the delivery of aid from traditional donors but largely in unlocking the domestic resource potential, so that the continent can harness more of its own revenue for development.

That said, aid continues to be a critical source of public development finance in Africa particularly when it is targeted and administered well, helping more people to access healthcare, education and other essential services where governments lack the capacity to extend public services to all. Adequate, predictable and sustainable ODA flows will therefore remain vital for development in most African countries in the short- to medium-term. This is especially so in fragile/post-conflict contexts and low income countries where it currently constitutes the bulk of external financial flows, and makes up most of the resources for public spending. Half of African countries, which comprise mostly post-conflict countries, resource poor, small economies, landlocked or those with a combination of these characteristics, rely on aid as the largest external source of finance for their development needs. [5]

In addition, better value for aid investments will arise where ODA is used in ways that complement domestic financing and other alternative sources, and critically, when it is deployed in ways that enhance the capacity for African countries to sustainably generate sufficient domestic revenues and better manage these domestic resources for their people’s development. Aid therefore remains a necessary, though insufficient, condition for growth and development on the continent.

In addition to ensuring that domestic revenue mobilisation (DRM) is bolstered and development partners adhere to aid commitments, there is an urgent realisation that African countries must plug loopholes that have traditionally resulted in net revenue losses for the continent. Africa has been a long-term net creditor to the rest of the world, suffering losses of between $597 billion and $1.4 trillion in illicit financial outflows between 1980 and 2009. [6] Illicit financial flows, along with aggressive tax dodging by multinational corporations especially in the extractives sector, have combined to prejudice Africa of vast amounts of domestic public revenues that could otherwise be directed to meeting the needs of the continent's people, and ensuring reduction in poverty and inequality.

Further, Africa’s reliance on aid and the sale of natural resources, as opposed to broad-based tax collection, for example, has distorted accountability over public expenditure, with governments incentivised to meet the needs of the extractive and commodity private sector corporations and the priorities of donors, as opposed to those of their citizens.[7] Spending is therefore often at variance with citizens’ priorities, with variable outcomes on the imperative to end poverty, reduce inequality and ensure inclusive transformation across the continent.

To work for Africa and its citizens, development aid and domestic resources, must meet the primary criteria of adequacy, predictability and sustainability.

In addition, the utility of domestic resources will also depend on how appropriate they will be in responding to the continent’s broader developmental needs. Firstly, strengthened capacities for domestic resource mobilisation mean that governments rely less on aid, they can exercise more power on the direction of public expenditure, and take ownership of the national development process.

Secondly, the power of domestic resources – primarily tax – to contribute to building and strengthening a new social contract between the state and its citizens reinforces its importance to sustainable development on the continent. When citizens pay a fair and just tax it allows them to take an active role in demanding accountability on government expenditure, ensuring thereby, that resources are spent on agreed priorities. Drawing a link between DRM, governance and active citizenship therefore ensures that development finance discourse goes further than articulating the mechanisms for revenue generation and collection, but also focuses on the policies, institutions and processes required to ensure that resources are spent efficiently, effectively and equitably, to meet the genuine needs of all citizens, and particularly those of marginalised and vulnerable groups in society. [8]

An accelerated and comprehensive delivery of outstanding commitments by development partners under the frameworks of the Paris Declaration, Accra Agenda for Action, and the Busan Partnership for Effective Development Co‐operation is important. This is not only because of ODA’s critical role in low-income countries, but also to ensure that commitments around the use of country systems, elimination of conditionality, promotion of transparency, aid predictability, mutual accountability and alignment to country and regional priorities are fully implemented for all future aid to the continent. In addition, the purposes to which aid is deployed must be determined with the full involvement of citizens, whilst also ensuring that downward accountability from governments to citizens on the use of aid money accompanies upwards accountability to donors.

While aid continues to enable many countries in Africa to provide access to many basic services, pay the civil service and meet several development needs its ultimate value and long-term vision, which is to help people escape poverty on a sustainable basis, will be realised not when it is used as a substitute for domestic financing of countries’ developmental programmes and meeting governments’ obligations to their citizens, but when it helps build African capacities to finance and sustain its own development and move beyond aid dependency.

In the current context, therefore, aid will achieve its best outcomes when it is used in ways that complement and bolster domestic financing, support other financing mechanisms and help African countries to better manage revenues for their citizens’ development.

Aid must advance the rights of citizens, including the marginalised, to influence decision-making and demand accountability on public spending. Investing ODA in building progressive national tax systems, strengthening the ability for countries to curtail illicit financial flows, strengthening transparency and accountability mechanisms at local to national levels or towards enhanced contract negotiating capacities to maximise national revenue retention from extractives, are a few ways that will yield impressive returns. 

* Dr Tigere Chagutah is Policy and Influencing Manager for Oxfam in Southern Africa. The views and opinions expressed in this article are his own and do not necessarily reflect the views of Oxfam. He can be contacted at [email protected] .

Endnotes

[1] Africa Economic Outlook 2014, http://www.africaneconomicoutlook.org/sites/default/files/content-pdf/A…

[2] Mobilizing Domestic Financial Resources for Implementing NEPAD National and Regional Programmes & Projects - Africa looks within, 2013

[3] Africa Economic Outlook 2014

[4] https://blogs.oxfam.org/es/node/39883

[5] Africa Economic Outlook 2014

[6] AfDB/GFI. 2013. Illicit Financial Flows and the Problem of Net Resource Transfers  from Africa: 1980-2009

[7] http://www.developmentprogress.org/blog/2014/06/19/domestic-resources-a…

[8] Ibid