Rwanda on guard as capital flight hits Africa

Research by the African Development Bank (AfDB) shows that $1.4 trillion was lost by Africa in form of capital flight within three decades between 1980 and 2009.

Research by the African Development Bank (AfDB) shows that $1.4 trillion was lost by Africa in form of capital flight within three decades between 1980 and 2009.

Rwanda lost over $9b in capital flight between 1970 and 2010. Kenya was the least hit in the East African Community, losing $4.9b, while Tanzania was the biggest loser at $14b.

The other members to the bloc, Burundi and Uganda, lost $6.9b and $8.6b, respectively in the same period.

Capital flight, described as the money or assets lost from one country to another mainly through tax evasion, fraud and corruption, was highlighted as one of the main challenges to infrastructural growth in many countries on the continent.

According to the report by the University of Massachusetts Amherst in the US, Rwanda and the rest of the East Africa region are the least hit by capital flight, while southern and western Africa are the hardest-hit, with South Africa and Nigeria having lost over $183b and $252b, respectively since 1980.

The research further indicates that Nigeria, South Africa, Egypt, Algeria and Libya are the top five African countries with the highest unlawful financial outflows between 2000 and 2009.

Whereas the phenomenon isn’t of much concern to East Africa, Rwandan officials told The New Times that measures were in place to keep capital flight in check.

“We discourage such illicit money flows through clear tax policies; and we shall always be on the look out to punish whoever is involved in any form of money laundering activities that lead to capital flight,” Celestine Bumbakare, the Rwanda Revenue Authority (RRA) commissioner for domestic taxes, said.

According to the research, the common form of capital flight is through transfer-pricing and mispricing, whereby, for instance, a multinational company overcharges its subsidiary for services or goods, in order to cut down on the taxable profits.

Such illicit tricks, as depicted by AfDB, can only be played by countries with high levels of corruption, weak financial management systems, political and macroeconomic instability.

“We keenly monitor the progress of companies and make sure that they are accountable. Besides, parent companies pay 15 per cent for management fees, while their subsidiaries pay the normal 18 per cent VAT, and most of them comply with the standards we have set,” Bumbakare added.

The African Union previously blamed multinational companies for the surging capital flight from the continent. However, capital flight should not be confused with the right to repatriate profits by foreign companies, according to the Rwanda Development Board (RDB).

“Free repatriation of profits for foreign investors is a benefit a lot of our investors enjoy. But if business is good and profits are enjoyed, then any investor will opt to reinvest,” Vivian Kayitesi, the head of investment promotion at RBD, said in an interview.

“Our goal is having the right business climate to ensure profitable investments, which come with reinvestments.

“Therefore, in order to fight capital flight, it is important to ensure a ‘ripe’ and right investment climate.”

The issue of capital flight was one of the hot topics discussed in last year’s African Economic Conference that was hosted in Kigali. During the conference it was noted that rather than reinvesting, several investors opted for capital flight, a sign that they were starting to lose interest to invest in particular African countries.

In order to fight the vice, AfDB advises the undertaking of tax reform to widen the tax base. For the hard-hit countries, it advocates for the creation of national authorities to manage public procurements to ensure transparency and accountability in contracting processes.

It further advises African states to reform customs procedures to limit trade mispricing, as well as to strengthen anti-money-laundering initiatives.

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