Liberia, a country on the path of transformation is faced with daunting challenges of overcoming anti-development vices. In 2012, African Ministers of Finance and Development Planning endorsed the establishment of the High Level Panel on Illicit Financial Flows from Africa. Chaired by former South African President Thabo Mbeki with the aim of conducting wide range of consultation among major stakeholders, the panel is expected to design practical recommendations in order to mitigate the alarming rate of illicit flows. This commentary therefore seeks to shed light on the current status of illicit financial flows from Africa and its negative impact on their economies.
Illicit flows differ from Capital Flight, which is associated with the movement of funds abroad in the drive for higher return. Amidst the fight to tackle money laundering, illicit financial flow from Africa still remains on the rising horizon. The United Nations Economic Commission on Africa (UNECA) shows that US$854 billion in illicit financial flows over the 39 year period (1970-2008) corresponding to a yearly average of about US$22 billion. This trend has been increasing in the last decade with an annual average illicit financial flow of US$50 billion between 2000 and 2008 against a yearly average of only US$9billion for the period 1970-1999. Mis-invoicing of trade, transfer pricing, investment related transactions, and bank transfers as well as corruption are the rudimentary drives of illicit financial flows, which are counter-productive to development in many African states including Liberia, where multidimensional poverty is endemic.
Impacts of illicit financial flows
The impact of these illicit financial flows is severely evident in resource-rich as well as commodity trading economies. This alarming rate of illicit flows out of Africa has not only constrained Africa’s investment outgrowth, but it has also been counterproductive to the continent’s efforts toward poverty alleviation programs and economic transformation. Evidently, some estimates show that if Africa were to repatriate illicit funds, the capital stock would expand by more than 66%. Additionally, if the illicit outflow of funds did not take place, GDP per capita would have been 16% higher than what it is in the current environment (Ndikumana and Boyce, 2008, 2011).
In Liberia, three pronged pieces of evidence about illicit flows include: foreign-led driven private sector, lack of control on foreign exchange market, and the dual currency regime. Until much concerted efforts are employed to develop a Liberian-driven private sector by removing constraints to growth such as access to finance, access to electricity as well as access to information, the illicit flows could be pervasive.
As an import-driven economy, the domestic currency is hugely pressured thereby facing depreciation while the balance of payment worsened. For decades, the dual currency has been in existence, and this reflects potential limitation in the execution of monetary policy. The optimal currency agenda is being promulgated by the West African Monetary Agency (WAMA), but progress has been slow thus far. The exit strategy on the dual currency issue requires a firm decision to promote single currency regime in Liberia. Many may concur that illicit flows from Liberia could likely be minimized with the adoption of single currency, Liberianization of the private sector as well as strengthening the real sector to minimize the import gap.
Despite the slow progress toward improving these socioeconomic vices, Liberia still treads a positive path of battling money laundering. The passage of the Anti Money Laundering Act (AML), which among other things called for the establishment of a Financial Intelligence Unit (FIU), demonstrates good signal provided it is genuinely translated into actuality. This unit is expected to zero-in on suspicious transactions ranging from its scale, magnitude of illicit movement of cash in and out of Liberia. But it achievability requires overall commitment and transparency. This implies that socioeconomic reforms are ongoing in the right direction, but concerted efforts need to be employed to sustainably deal with illicit flows.
Thus, stringent measures need to be instituted. A clear and achievable roadmap on tackling private sector development as well as dealing with dual currency and persistent drive of the Central Bank of Liberia (CBL) on its auction mechanism is imperative if the fight against illicit flows should be addressed. The policy decision by the CBL captured in its 2010 Policy Statement to promote a wider use of the Liberian dollar and action by the Government of Liberia to begin collecting some taxes in Liberia dollar that were originally paid in US dollar are all steps in the direction of dedollarization.
The Inter-Governmental Action Group against Money Laundering in West Africa (GIABA), an institution set up by ECOWAS to further address money laundering in the West African region has made a worth stride to this fight. GIABA has promulgated the creation of concrete legislations in many ECOWAS countries, which calls for institutional framework– technical and operational supports. As a commitment to its policy, Liberia passed the Anti Money Laundering Act (AML).
However, there exists daunting challenges: lack of requisite capacities to absorb and sustain technical assistance, competing priorities for meagre resources at the political, governance, economic and societal levels place Anti Money Laundering at a distant position (GIABA Annual Report 2012).
The inference is therefore suggested that illicit flows have negative implication by undermining financial viability and socioeconomic development. The alarming rate of hidden resource for Africa’s development signals a wakeup call for major stakeholders to holistically devised appropriate mechanisms through an effective governance structure to mitigate this problem. Though illicit flow is extremely difficult to quantify, strengthening regulatory and institutional frameworks could boost efforts to tackle the problem.
About the Author:
Gyude holds MBA in Finance from the University of Liberia and serve as Financial Analyst. He can be reached at [email protected].