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Supporting development financing in Africa

Supporting development financing in Africa

Africa keeps on working towards the achievement of the sustainable development goals (SDGs). However, with only 15% of targets currently on track, the continent risks not achieving the 2030 agenda. The main hurdle to progress is the lack of finance. Indeed, the continent has a sustainable financing gap of USD 1.6 trillion until 2030. To bridge this gap and with a view to supporting development financing in Africa, the continent’s governments need to optimize domestic revenue mobilization.

The paradigm shift to domestic revenue mobilization

Foreign aid has been playing an important part in stimulating Africa’s development. However, it is not meeting the continent’s needs. It is therefore crucial that African governments make a paradigm shift from official development assistance (ODA) recipients to optimizing domestic revenue mobilization (DRM). This was the recommendation Cristina Duarte, Special Adviser on Africa to the UN’s Secretary General, made in 2020, as Africa was experiencing its most severe economic recession in 25 years, partly due to the pandemic.

A few years later, DRM remains a priority for Africa’s development. Still, ODA and other sources of financing, such as foreign direct investment, remain relevant. Indeed, the cost of achieving the SDGs is estimated in the trillion of dollars. African countries therefore need to leverage their own resources. For African governments, optimizing DRM involves the creation of new revenue streams and formalizing the informal economy. Technology can provide them with valuable support in these endeavors. Capacity building and skills transfer for the institutions involved is another important component when it comes to effective development financing.

Creating new revenue streams

For African governments, creating new revenue streams may involve leveraging the revenue potential of some key economic sectors like the telecoms and digital financial services. To do so, governments need to promote transparency and compliance within these sectors by closely monitoring all revenue-generating events. This of course requires optimal visibility over the sectors involved.

New revenue streams can also be generated by stemming revenue leakage. Revenue leakage in Africa deprives the governments of revenue they could dedicate to development projects. It takes various forms, including illicit financial flows (IFFs), fraud, tax evasion, and cybercrime. IFFs, for example, are considered as one of Africa’s greatest challenges when it comes to stimulating development. They indeed cause the continent to lose approximately 88.6 billion USD annually, says a 2022 UNCTAD report. Incidentally, as Cristina Duarte points out, Africa would be able to access substantial funds for development were it not for IFFs. It is therefore crucial to promote the effective monitoring of financial transactions to stem revenue leakages that are hindering effective development financing in Africa.

Another way to improve revenue collection with the purpose of supporting development financing in Africa is to formalize the informal economy. The latter employs 85% of the population and, despite its size, does not contribute significantly to DRM. On the contrary, it makes effective taxation challenging and therefore negatively impacts tax revenue. African countries have become aware of the need to bring the information economy on board to broaden the tax base and boost revenue.

Supporting development financing in Africa through technology

To create new revenue streams and stem revenue leakage, and thus support development financing in Africa, governments and regulatory authorities need to be able to connect directly to the sectors they oversee. Technology, and more specifically regulatory technology (RegTech), helps build their regulatory capacity by streamlining and automating the collection and analysis of the vast volumes of data yielded by the different sectors. Technology therefore enables the authorities to collect the data they need for effective decision- and policy-making. As a result, it supports the fiscal policies required to prevent revenue leakages and encourage proper oversight mechanisms.

RegTech solutions have thus been successfully implemented in countries like Rwanda, Ghana, and Uganda, where it has led to an increase the revenue generated by the telecom, digital financial services, and gaming sectors. Indeed, these solutions have enabled the relevant authorities to get a firm grip on all revenue-generating events and financial transactions within these industries. As a result, compliance and transparency have increased, while fraud decreased. In Ghana, for example, the use of RegTech platforms in the telecom sector has resulted in a 36% increase in telecom revenue from 2021 to 2022, and an 18% increase from 2020 to 2021.

The increasing use of RegTech to promote compliance and transparency within the industry has created a need for digital skills and knowledge at institutional level. However, there is a shortage of skills in Africa, and especially of digital skills. Indeed, 87% of African business leaders see the development of digital skills as a priority. Moreover, the Digital Skills Gap Index shows that African countries currently score between 1.8 and 5, while the global average sits at 6. Training and skills transfer are therefore crucial to meet the need for skilled human capital.

Development financing in Africa, a technological and regulatory matter

Insufficient funding is a thorn in Africa’s side when it comes to achieving the SDGs. However, Africa’s domestic resources, including its thriving digital sector and informal economy, show significant revenue potential for development. Revenue leakage also plays a major part in creating the financing gap. Optimizing DRM and combatting revenue leakage are therefore key actions for governments and regulatory authorities to undertake to bridge the development financing gap.

To support these actions, some African governments have turned to RegTech solutions, including those GVG has developed. Our solutions enable the implementation of effective oversight mechanisms in key economic sectors like telecoms and digital financial services. Additionally, they provide the authorities with the data they need to create fiscal policies preventing revenue leakage. However, the effectiveness of the technology depends to some extent on the appropriate training of the users. GVG therefore offers its clients skills transfer programs to ensure autonomy post-implementation.

Would you like to read more about improving DRM through technology? Click here.