Out of Africa: Capital Flight

Out of Africa: Capital Flight

Africa is typically portrayed as a continent dependent on foreign aid and private investment, with money flowing from advanced economies into poor African economies. However, new research paints a very different picture. A June 2018 report by the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst examined capital flight from 30 African countries between 1970 and 2015 and documented losses of approximately $1.4 trillion over the 46-year period ($1.8 trillion if lost interest is taken into account). This amount far outweighs both the stock of debt owed by these countries as of 2015 ($496.9 billion), as well as the combined amount of foreign aid all of the countries received over this period ($991.8 billion). The direction of capital flows actually makes the group of African countries a “net creditor” to the rest of the world – a startling conclusion when contrasted against common perceptions about Africa.

“The traditional thinking has always been that the West is pouring money into Africa through foreign aid and other private-sector flows, without receiving much in return. Actually, that logic is upside down – Africa has been a net creditor to the rest of the world for decades.”

–Raymond Baker, Founding President, GFI

What is Capital Flight?

Capital flight occurs when the value of assets and capital is shifted from one country to another, often from a developing country with a relatively weak currency into a more advanced economy with a hard currency such as dollars, pounds, euros, Swiss francs or Japanese yen. This is because many developing countries are often subject to currency devaluations, exchange rate volatility, high rates of inflation, or political instability, all of which can erode the value of assets. In contrast, wealth stored in hard currencies rarely loses it value. Capital flight also occurs when people want to hide money they have gained illicitly, or to avoid paying taxes, resulting in attempts to shift wealth out of the country and into offshore centers and tax havens. Capital flight can occur both licitly, through foreign investors withdrawing profits, and illicitly, via illicit financial flows (IFFs).

From a global perspective, capital flight diverts money and tax revenue from poor countries to rich countries and deprives developing countries of domestic resources needed for achieving the United Nations Sustainable Development Goals in healthcare, poverty, infrastructure and other critical areas of public investment.

Capital Flight & Trade Misinvoicing

GFI estimates that trade misinvoicing is the most common strategy for shifting capital from developing countries to advanced economies. Trade misinvoicing occurs when companies move money illicitly in or out of countries via the commercial trade system by falsifying the prices of goods on import or export invoices. This process not only facilitates illicit flows of capital out of African economies, it also represents a huge loss in taxable revenues and undermines the ability of many countries to build domestic tax bases. A report produced jointly by GFI and the African Development Bank in May 2013 found that illicit financial outflows from Africa between 1980 and 2009 totaled between US$1.22-1.35 trillion.

The PERI report also recognized trade misinvoicing as an important mechanism for capital flight, using data from international debt statistics and the International Monetary Fund’s Direction of Trade Statistics database to estimate a loss of US$1.4 trillion in capital flight. Both the PERI and GFI reports reveal massive capital outflows from Africa resulting from trade misinvoicing- outflows which greatly outweighed what Africa received in the form of aid or foreign private investment over the same period.

Sustained capital flight slowly erodes the tax base of a country in multiple ways. First, shifting capital abroad switches the form from the domestic currency to a foreign one. This increases the supply of the domestic currency on currency markets, thus decreasing the value of that currency relative to others on global currency markets, hurting its exchange rate. It also contributes to the problem of low domestic savings rates, which in turn undermines the ability of governments to scale up public investment and to engage in deficit spending on needed public goods. Less public investment within an economy means less money is available for hiring new workers or increasing production (real GDP). Therefore, capital flight drains an economy through weakening the value of a country’s currency, hurting the domestic banking sector, undermining public investment and the ability of governments to increase real GDP. This has been the case with many African countries for the greater part of a century. As a region held back by high levels of capital flight, it is no wonder that most African nations missed their Millennium Development Goals during the 2000-2015 period.

A Growing Number of Efforts to Reduce Capital Flight

Addressing capital flight requires the cooperation of both developing and developed countries in closing down the international systems that absorb illicit financial flows from Africa. The PERI report noted: “The acceleration of capital flight over the past two decades suggests a need for deep investigation into the structural factors of this phenomenon not only at the origin in search of push factors, but also at the destination to identify potential pull factors.” This means there is a critical role for advanced economies and international institutions to play in addressing the problem of capital flight from Africa.

Specifically, since much of this money is sitting in bank accounts in developed countries and secrecy jurisdictions, developed countries must take concrete steps to reduce such clandestineness and improve transparency and accountability. Additionally, developed countries must cooperate at the international level to address and reduce tax evasion by multinational corporations.

Fortunately, the problem of capital flight is increasingly recognized by the international community and there are a growing number of possible solutions. Such initiatives include proposals to increase trade fraud penalties and to establish “beneficial ownership” legislation so the actual owners of companies are known to authorities. A growing number of countries are adopting the anti-money laundering recommendations of the Financial Action Task Force and signing onto the Addis Tax Initiative, which will all help to prevent capital flight from African nations.

For African governments, a comprehensive list of policy recommendations to reduce capital flight was published in 2018 by the United Nations Economic Commission for Africa (UNECA). In the report, UNECA proposes that governments require multinational corporations to provide comprehensive reporting on their operations, indicate disaggregated financial reporting on by-country or by-subsidiary bases; prepare cost-benefit analyses before allowing them to invest in a country; and that African countries should join voluntary initiatives, such as the Extractive Industries Transparency Initiative. It also proposes that African governments should provide training to empower investigators responsible for combating IFFs; establish greater inter-agency coordination between revenue authorities and ministries of finance in developing countries to build capacity in this area and strengthen transparent procurement procedures.

Capital Flight is both an African and an International Problem

Capital flight is a serious concern for all governments, both developed and developing, as it depletes revenue collections, undermines development initiatives and hinders effective governance. The data increasingly shows that the narrative of Africa as a poor recipient of capital obscures the reality that Africa in fact acts as a net creditor to the rest of the world, and that this is not just an African problem – but rather responsibility lies with both African and developed countries. GFI supports the recommendations listed in UNECA report, and urges governments in Africa, in the advanced economies, and international institutions to implement them. The injustice of the poorest countries in the world sending capital to the richest countries cannot be allowed to continue.

Source Global Financial Integrity by Ben Lorio
https://gfintegrity.org/out-of-africa-capital-flight/

Remittance Cost In Africa Is Reduced By 90% With Crypto Based Transfers

Remittance Cost In Africa Is Reduced By 90% With Crypto Based Transfers

The cost of sending money through banks and money transfer operators is high in Africa at an astronomical rate. On average, sending an equivalent of $200 costs 9.3 percent of the value transferred. This is the highest remittance rates anywhere in the world according to the world bank’s 2019 report. In contrast, the use of cryptocurrency based fintech firms such as Bitpesa cuts the cost by 90 percent.

Exorbitant Bank Charges On Remittance
The amount sent to Africa by Africans abroad is estimated to be about $46 million to support families in their countries. Most of the money sent is used to cater for education, food, clothes among others. Meanwhile, a lump sum of the payment is being taken by the financial institutions as transfer fees.

The world bank notes that the bank is the most expensive agent for sending money back to Africa at 10.2 percent, followed by most transfer operators at 7.7 percent and post office at 5.5 percent. This is very much costly in comparison to the sustainable Development Goals target of cutting financial transfer costs to within 3% of total transaction value by 2030.

Cryptocurrency-Based Remittance In Africa
While the financial institutions have been charging Africans exorbitant price for Remittance, crypto-based remittance has become a solace for Africans, because of its low fees, efficiency and speed. One of crypto-based Remittance platforms offering solace to Africans is Bitpesa.

Bitpesa was created in 2013 by an American political science graduate Elizabeth Rossiello. The firm initially focused on facilitating bitcoin-supported cash transfers between citizens of the U.K. and Kenya. However, Bitpesa now has operations in eight African countries: the Democratic Republic of the Congo, Ghana, Kenya, Morocco, Nigeria, Senegal, Tanzania, and Uganda.

According to Stephany Zoo, head of marketing at Nairobi-based Bitpesa, he stated that the firm enables people in Africa to send or receive money from around the world at a fraction of the cost charged by traditional agents.

Zoo explained that “We process our remittance payments with a blend of traditional and personal insurance such as pooling, as well as using cryptocurrency. Our fees are 1 to 3%, so it’s significantly lower than those mentioned in the World Bank report. A lot of our clients are money transfer operators that actually move the money, and we are the underlying technology or software behind what they do as well as being their foreign exchange provider.”

Other crypto-based Remittances or related platforms offering Africans solace include Uganda’s Coinpesa which is primarily a crypto exchange and does not directly engage in the remittance business, but process trades that originated as Remittance.

Also, there is Sure Remit in Nigeria; it charges between 0-2% for non-cash remittances. The company claims to host a network of hundreds of merchants throughout the world and uses an in-house token, RMT. In southern Africa, Wala utilizes its digital coin called Dala to help users send money, buy airtime and data, pay bills and school fees in several countries at no cost.

The world bank projects the African Remittance market to grow by 4.2% in 2019 and 5.6% in 2020. Bitpesa’s Zoo is optimistic crypto-based Remittance is going to claim a share of the market.

Source BTCNN by Babatunde Modupe
https://www.btcnn.com/remittance-cost-in-africa-is-reduced-by-90-with-crypto-based-transfers/

Five facts on fintech

Five facts on fintech

From artificial intelligence to mobile applications, technology helps to increase your access to secure and efficient financial products and services.

Since fintech offers the chance to boost economic growth and expand financial inclusion in all countries, the IMF and World Bank surveyed central banks, finance ministries, and other relevant agencies in 189 countries on a range of topics and received 96 responses.

A new paper details the results of the survey alongside findings from other regional studies, and also identifies areas for international cooperation—including roles for the IMF and World Bank—and in which further work is needed by governments, international organizations, and standard-setting bodies.

Foremost in all countries’ minds is cybersecurity.

Some interesting and startling trends emerged in the survey: foremost in all countries’ minds is cybersecurity.

1. Cybersecurity and data protection risks recognize no boundaries with spillovers across sectors and countries, and governments are working hard to get a handle on the issue. Awareness of cyber risks is high across countries and most jurisdictions have frameworks in place to protect financial systems. Most jurisdictions—79% of those with higher incomes according to the survey results—identified cyber risks in fintech as a problem for the financial sector.

But evidence from the survey suggests that only a third of jurisdictions have analyzed the technological interdependencies between networks, systems, or processes within the financial sector or looked at concentration risks among big technology providers that could threaten financial infrastructure. A high proportion—83 percent of high-income countries—report some monitoring of cyber risks related to third-party service providers, but only half of lower-income jurisdictions have specified minimum requirements.

2. Asia is ahead of other regions in many aspects of fintech. In China, the massive scale of its markets and a regulatory “light touch” in the early years supported fintech development, with China emerging as a global leader. In India, large-scale adoption of mobile payments and increase in money transfers have driven growth in the mobile payments.

But the region’s use of fintech exhibits large gaps between the rich and poor, men and women, and rural and urban areas.

3. Sub-Saharan Africa is a global leader in mobile money innovation, adoption, and usage. The region leads the world in mobile money accounts per capita (both registered and active accounts), mobile money outlets, and volume of mobile money transactions. Close to 10 percent of GDP in transactions are occurring through mobile money, compared with just 7 percent of GDP in Asia and less than 2 percent of GDP in other regions. Across Africa, the adoption and use of technology in the provision of financial services is changing the way in which financial service providers operate and deliver products and services to their customers.

4. Europe is not unified when it comes to fintech adoption. Given high mobile phone and internet access, the potential is high for fintech to improve access to, and usage of, payments and other financial services in Europe. The modernization of the EU’s data policy frameworks has helped to clarify rights and obligations in the data economy, which is an issue that many countries must address. However, there are important regional differences in the adoption of digital finance, the prevalence of cash-based payments, account ownership and usage, and savings and credit in the region. For example, a considerable gap also exists between the United Kingdom and the rest of Europe—that country being significantly ahead of the rest of Europe both in terms of fintech innovation and investment.

5. Digital currencies backed by central banks could become reality. The survey reveals wide-ranging views of countries on central bank digital currencies. About 20 percent of respondents said they are exploring the possibility of issuing such currencies. But even then, work is in early stages; only four pilots were reported. The main reasons cited in favor of issuing digital currencies are lowering costs, increasing efficiency of monetary policy implementation, countering competition from cryptocurrencies, ensuring contestability of the payment market, and offering a risk-free payment instrument to the public.

Source IMF Blog by Tobias Adrian and Ceyla Pazarbasioglu

https://blogs.imf.org/2019/06/27/five-facts-on-fintech/

Bitcoin’s Share of $350 Billion Crypto Market Highest Since 2017

Bitcoin’s Share of $350 Billion Crypto Market Highest Since 2017

Bitcoin has done it again, hitting a new 2019 high above $12,000 before retracing slightly. At 21:00 UTC on June 25, the world’s largest cryptocurrency by market capitalization broke from sideways trading after being held beneath $11,400 for over 11 hours.

However, perhaps most notable is the fact that bitcoin also crossed above 60 percent market dominance for the first time in over 17 months.

A metric maintained by data provider CoinMarketCap, the Bitcoin Dominance Index shows bitcoin continues to gain altitude at a time when broader confidence in the crypto market, now nearly $350 billion, has yet to return.

The move to fresh 2019 highs is further a welcome sight for the bulls who continue to enjoy the incredible 230 percent gains experienced from the beginning of this year.

Notably, the price rally was also accompanied by an uptick in the 24-hour trading volume as an increase of $13.8 billion was added overall, according to data from CoinMarketCap.

However, its “Real 10” volume – a metric that takes into account trading volume from exchanges reporting honest volume figures as identified in a report by Bitwise Asset Management, is delivering more sober results, currently standing up $4.09 billion, according to Messari.io.

Dominance Rate

Still, bitcoin’s dominance may be the broader story.

At press time, bitcoin’s market capitalization now records $202.8 billion, which is about $67.1 million more than the market capitalization of every other cryptocurrency combined – which currently stands at $135.7 billion.

Meanwhile, other highly ranked cryptocurrencies like NEO, Ether (ETH) and Ontology (ONT) have gained between 2 to 10 percent value on a 24-hour basis, according to CoinMarketCap.

Eyes are now firmly set on bitcoin’s new target along the $12,0000 psychological price tag, last seen 17 months ago on Jan 28, 2018, signaling a very strong upward toward its all-time high near $20,000.

 

Source Coindesk by Sebastian Sinclair

https://www.coindesk.com/bitcoins-share-of-350-billion-crypto-market-highest-since-2017

Study Predicts Bitcoin Could Become Leading Payment System Within Decade

Study Predicts Bitcoin Could Become Leading Payment System Within Decade

A new report by the software firm DataLight predicted that Bitcoin could become the world’s top payment system within the next decade if it maintains its current growth rate.

“In just 10 years, Bitcoin has managed to compete with the leaders of the payment system industry,” the report found.  “Bitcoin’s development is occurring exponentially. If it maintains this pace, in another 10 years, it will surpass all competition.”

For so long, global payments have been championed by platforms like Visa, Mastercard and PayPal, who offer seamless, if flawed, payment options for individuals and companies.

In its report, DataLight wrote that while Bitcoin still has fewer users than established payment networks like Visa and Mastercard, these two, in particular, were established over half a century ago.

Currently, there are about 25 million Bitcoin wallets in the world, per DataLight, while the total number of debit and credit cards in circulation amounts to over 5 billion.

However, according to DataLight, the next few years will bring about advancements in the Bitcoin network that will make the world’s most popular digital asset more useful to mainstream consumers.

DataLight also pointed out that Bitcoin offers significantly lower fees on individual transactions conducted. And, the firm pointed out, while Bitcoin has about 10,000 active nodes, the numbers of data centers being managed by Mastercard and Visa are 89 and 119 respectively.

The researchers didn’t shy away from the shortcomings of the cryptocurrency, particularly around its rate of transactions processed per second. Currently, Bitcoin can only process seven transactions per second, compared with Visa’s 65,000 transactions per second. Scaling solutions like the Lightning Network could be instrumental in Bitcoin’s rise.

“Technical improvement of Bitcoin’s network is almost certain to make it the world’s main payment system,” DataLight wrote.  “This is why the bear trend of 2018 will be another dip before the exponential growth and new all time highs.”

Source Bitcoin Magazine by Jimmy Aki

https://bitcoinmagazine.com/articles/study-predicts-bitcoin-could-become-leading-payment-system-within-decade

Image by Aleksi Räisä on Unsplash

Africans continue to lead the way on mobile money

Africans continue to lead the way on mobile money

Africa is leading the way with mobile money accounts, and its sub-Saharan countries are the only region in the world where more than 10 percent of adults have such access. In some places, including Tanzania and Côte d’Ivoire, that’s more people than have a traditional bank account.

That’s according to the new G4S World Cash Report, presented Tuesday during the Africa and Middle East Cash Cycle Seminar (ICCOS), being held in Accra, Ghana.

“Going forward it is expected that the mobile phone will continue to play an important role in the future of payments in Africa,” said Paul van der Knaap, Global Director of Strategy and Business Development for G4S Cash Solutions.

“It has the potential to bring the worlds of cash and electronic payments together, and through a variety of new creative payment solutions could prove to be instrumental in creating a more inclusive financial system.”

Africa’s adoption of mobile money vastly exceeds the two percent rate across the rest of the world, at the same time that millions of Africans struggle to achieve inclusion and rely on cash payments. Cash is expected to remain a primary transactional method for the foreseeable future, with its use – as measured by ATM withdrawals – growing in all of the African countries studied except for Mozambique.

“Although the African continent is still largely cash dependent, many African countries have seen significant improvements in terms of payment infrastructure over the last decades,” said Van der Knaap.

“Governments, regulators, financial institutions and fintechs in Africa have a great opportunity to look at both the successes and challenges faced in other parts of the world, learn from them and leapfrog the legacy issues to develop innovative, modern and efficient payment systems that work for everyone.”

 

Source Africa Times
https://africatimes.com/2019/02/12/africans-continue-to-lead-the-way-on-mobile-money/