External Financial Flows and Tax Revenues for Africa

This chapter analyses recent trends in external financial flows to Africa and domestic revenue collection. It explores how foreign direct investment, portfolio investment, remittances and official development assistance have evolved in 2015 and 2016, and their outlook for 2017. It highlights the growing importance of private flows in comparison to public ones. The chapter concludes with a description of domestic revenue performance in Africa from 2005 to 2015, as well as an analysis of the challenges to increasing domestic revenue mobilization.

Private external flows in the form of investment and remittances continue to drive growth in external finance to Africa. Despite prolonged weak commodity prices, foreign direct investment (FDI) inflows to Africa are estimated to have bounced back in 2016, reflecting increasing diversification of investment into services, manufacturing and infrastructure-related projects. FDI is expected to reach USD 57.5 billion in 2017, underpinned by large greenfield investment from economies from the Far East and Middle East. In 2016, Africa recorded its lowest total portfolio inflows since 2008 at USD 6.5 billion, and this downward trend is expected to continue, with a projected average of USD 5.2 billion in 2017. Remittances increased by more than 50% from 2005 to 2009 and are predicted to reach USD 66.2 billion in 2017, with Egypt and Nigeria receiving the bulk of flows. Official development assistance (ODA) to Africa declined in 2016, by 1.7% in real terms as some donors backtracked on a commitment to reverse past declines in flows to the poorest countries. The share of aid allocated to 17 of the 27 African low-income countries is expected to decline at least up to 2019, which gives rise for concern. In spite of progress, domestic revenue mobilization remains low. To meet Africa’s financing needs, the international community and African policy makers are exploring new ways of engaging with the private sector to mobilize finance and foster local financial markets and entrepreneurship.