News Archive 2014

Strong reforms offer countries path to high-income status

Sub-Saharan Africa’s small middle-income countries should implement strong reforms to boost growth and avoid the “middle-income trap,” seminar participants concluded in Mauritius.

At an event featuring peer-to-peer learning, 18 senior officials from seven small middle-income countries in Africa came together at the Africa Training Institute in Mauritius to discuss their common macroeconomic and structural challenges. They agreed that peer learning offers untapped potential to help move reforms forward in their countries.

Organized by the IMF African Department and the Africa Training Institute, the November 18-21 seminar built on initial discussions during two earlier high-level meetings on the sidelines of the 2013 and 2014 IMF-World Bank Spring Meetings and joint work with the authorities in the context of a new book titled “Africa on the Move: Unlocking the Potential of Small Middle Income Countries (SMICs).

The seminar involved multiple stakeholders and received broad sponsorship from the IMF’s African Technical Assistance Centers in Ghana and Mauritius, from the Africa Training Institute in Mauritius, from the Regional Multi-Disciplinary Center of Excellence in Mauritius, and from the European Union.

Avoid the trap

Building on past success, small middle-income countries in sub-Saharan Africa have now set themselves the challenge of reaching high-income status and avoiding the middle income trap. While still positive, growth has slowed, as previous growth drivers weaken and the rise in per capita income wanes.

The concept of a middle income trap grew from the observation that middle-income countries graduated to high-income status far less often than low-income countries became middle-income countries. From 1960-2012, fewer than 20 percent of middle-income countries – and none from sub-Saharan Africa – became high-income states, compared with more than half of low-income countries graduating to middle-income status.

The seven small middle-income countries facing this trap in sub-Saharan Africa are Botswana, Cabo Verde, Lesotho, Mauritius, Namibia, Seychelles, and Swaziland. The seminar examined common policy challenges these countries face, reviewed what individual countries have done to address them, and how IMF surveillance can build on successful approaches to help countries move forward.

Boosting growth

Opening the seminar, IMF African Department Deputy Director Anne-Marie Gulde-Wolf noted that while sub-Saharan Africa remains the second fastest-growing region in the world, the small middle-income countries are among the slowest growing in the region, and there are significant downside risks to this outlook.

Participants then explored policy responses to challenges to boosting growth in five key areas – macroeconomic vulnerability, employment and inclusiveness, productivity growth, financial inclusion, and the political economy of economic reform. To allow for peer learning – an approach which to date has been used relatively rarely by the IMF – small breakout sessions among country participants were a key feature of the program, with group discussions and presentations leading to review of country experiences and failure using specific policy initiatives.

Consensus emerged on the following points:

  • Like many small states, small middle-income countries are highly vulnerable to shocks, and there was broad agreement on the importance of building sufficient policy buffers to absorb external shocks – especially since official financing flows for these countries will fall over time. At the same time, there are significant opportunity costs of buffers such as holding large reserves, especially in view of important infrastructure gaps that restrain long-term growth in such countries.

  • To promote diversification there is a need for policies to reduce skills mismatch. If done right, these policies could help “crowd in” private sector employment, as supported by the analytic work in the book, while the state continues to foster smooth functioning of the labor market and provides safety nets. However, there is also a need to implement public employment and wage policies that will improve labor market outcomes, and to avoid the government becoming the “employer of last resort”.

  • Returning to an era of strong growth is necessary to achieve high-income status. This will require deeper reforms and innovative policies to boost productivity. In particular, the quality of public spending, especially for education and economic governance, was considered an important tool for supporting productivity growth.

  • Discussion on financial inclusion highlighted emerging evidence that financial inclusion is crucial for structural transformation and inclusive growth – while noting that small middle-income countries have some of the most uneven distributions of income in the world. Many country participants emphasized the need to go beyond relaxing financing constraints for small and medium-sized enterprises, such as loan subsidy programs, to address underlying market failures and structural weaknesses in the financial sector that keep intermediation costs high. At the same time, efforts by governments to promote financial inclusion need be pursued in a manner that preserves financial stability.

  • In the discussion of political economy constraints on reform, country participants highlighted the importance of effective communication in building support. Appropriate sequencing could reduce the chances of reform fatigue in small middle-income countries. They also agreed on the usefulness of “reform champions” that are insulated from short-term political cycles. Ultimately, they recognized that strategies to advance reforms need to be driven by country-specific circumstances.

Benefits of peer learning

Looking ahead, country participants felt that peer learning could help move reforms forward in their countries. They also concurred on the value of the forthcoming book as a vehicle to further foster peer learning among this group and offered to contribute their own country experiences and perspectives – which will enrich the analysis and improve traction.

The peer group is also eager to pursue cost-effective tools for knowledge sharing, including online, which the IMF African Department and the Africa Training Institute will help explore. More broadly, seminar participants noted that capacity building and training institutions in the region could become vehicles for peer-to-peer learning and support. They envisaged that these countries could eventually set common policy goals among themselves, with those doing well helping those that are lagging behind.


Strong reforms offer countries path to high-income status

19 Dec 2014
Sub-Saharan Africa’s small middle-income countries should implement strong reforms to boost growth and avoid the “middle-income trap,” seminar participants concluded in Mauritius. At an event featuring peer-to-peer learning, 18...
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‘Record’ illicit money lost by developing countries triples in a decade

Developing countries are losing money through illicit channels at twice the rate at which their economies are growing, according to new estimates released Tuesday. Further, the total volume of these lost funds appears to be rapidly expanding.

Findings from Global Financial Integrity (GFI), a watchdog group based here, re-confirm previous estimates that developing countries are losing almost a trillion dollars a year through tax evasion, corruption and other financial crimes. Yet in a new report covering the decade through 2012, GFI’s researchers show that the rate at which these illicit outflows are taking place has risen significantly.

In 2003, for instance, cumulative illicit capital leaving developing countries was pegged at around 297 billion dollars. That’s significant, of course, but relatively little compared to the more than 991 billion now estimated for 2012 – a record figure, thus far.

In less than a decade, then, these illicit outflows more than tripled in size, totalling at least 6.6 billion dollars. GFI reports that this works out to an adjusted average growth of some 9.4 percent per year, or twice the average global growth in gross domestic product (GDP).

One of the most common mechanisms for moving this money has been the falsification of trade invoices.

“After turning down following the financial crisis, global trade is going up again and so it’s increasingly easy to engage in misinvoicing – a lot more people are coming to understand how to do this and are willing to indulge,” Raymond Baker, GFI’s president, told IPS.

“These rates are not only growing faster than global GDP but also faster than the rate of growth of global trade.”

Further, these estimates are likely conservative, and don’t cover a broad spectrum of data that is not officially reported – cash-based criminal activities, for instance, or unofficial “hawala” transactions.

Baker emphasises that these capital losses are a problem affecting the entire developing world. Yet given that illicit outflows run in tandem with a country’s broader interaction with global trade, these rates are particularly strong in the world’s emerging economies, led by China, Russia, Mexico and India.

There are also significant differentials between regions, both is size and the rate at which they’re increasing. In the Middle East and North Africa, for instance, illicit financial flows are growing far higher than the global average, at more than 24 percent per year.

Even in sub-Saharan Africa, home to some of the world’s poorest communities, these rates are growing at more than 13 percent per year. Such figures eclipse both foreign assistance and foreign investment – indeed, the 2012 figure was more than 11 times the total development assistance offered on a global basis.

“If we take [these] findings seriously, we can address extreme poverty in our lifetimes,” Eric LeCompte, an expert to U.N. groups that focus on these issues, said Monday. “Countries need resources and if we curb these illicit practices, we can get the money where it’s needed most.”

Lucrative misinvoicing

There is a broad spectrum of potential avenues for the illegal skimming from or shifting of profits in developing countries, carried out by criminal entities, corrupt officials and dishonest corporations. And for the first time, certain of these key issues are receiving new and concerted international attention.

Multiple nascent multinational actions are now unfolding aimed at cracking down particularly on tax evasion by transnational companies. New transparency mechanisms are in the process of being rolled by several multilateral groups, including the Group of 20 (G20) industrialized nations and the Organisation for Economic Cooperation and Development (OECD), a Paris-based grouping of rich countries.

Such initiatives are receiving keen attention from civil society groups, and would likely constrict these illicit flows. Yet in fact, GFI’s research suggests that the overwhelming method by which capital is illegally leaving developing countries is far more mundane and, potentially, complex to tackle.

This has to do with simple trade misinvoicing, in which companies purposefully use incorrect pricing of imports or exports to justify the transfer of funds out of or into a country, thus laundering ill-gotten finances or helping companies to hide profits. Over the past decade, the new GFI report estimates, more than three-quarters of illicit financial flows were facilitated by trade misinvoicing.

And this includes only misinvoicing for goods, not services. Likely the real figure is far higher.

Experts say that stopping misinvoicing completely will be impossible, but note that there are multiple ways to curtail the problem. First would be to ensure greater transparency in the global financial system, to eliminate tax havens and “shell corporations” and to require the automatic exchange of tax information across borders.

Efforts are currently underway to accomplish each of these, to varying degrees. Last month, leaders of the G20 countries agreed to begin automatically sharing tax information by the end of next year, and also committed to assist developing countries to engage in such sharing in the future.

GFI’s Baker says that developing countries need to bolster their customs systems, but notes that other tools are already readily available to push back against trade misinvoicing.

“There is a growing volume of online pricing data available that can be accessed in real time,” he says. “This gives developing countries the ability to look at transactions coming in and going out and to get an immediate idea as to whether the pricing accords with international norms. And if not, they can quickly question the transaction.”

Development goal

There is today broad recognition of the monumental impact that illicit financial flows have on poor countries’ ability to fund their own development. Given the centrality of trade misinvoicing in this problem, there are also increasing calls for multilateral action to take direct aim at the issue.

In particular, some development scholars and anti-poverty campaigners are urging that a related goal be included in the new Sustainable Development Goals (SDGs), currently under negotiation at the United Nations and planned to be unveiled in mid-2015.

Under this framework, GFI is calling for the international community to agree to halve trade-related illicit flows within a decade and a half. The OECD is hosting a two-day conference this week to discuss the issue.

“We’re not talking about an aspirational goal but rather a very measurable goal. That’s doable, but it will take political will,” Baker says.

“We think the SDGs should incorporate very specific, targetable goals that can have huge impact on development and helping developing countries keep their own money. In our view, that’s the most important objective.”

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OECD Development Assistance Committee: High Level Meeting Final Communiqué

The OECD Development Assistance Committee DAC convened its 2014 High Level Meeting from 15 to 16 December 2014 in Paris.

The principal objective of the meeting was the modernisation of the OECD DAC development finance measurement framework to ensure that it is credible and fit-for-purpose in today’s global context.

The decisions and actions taken in the meeting will enable the OECD and its members to make an important contribution to future monitoring of the financing framework underpinning the forthcoming Sustainable Development Goals.

This meeting was the culmination of an imperative fully endorsed by political leaders at the DAC High Level Meeting in December 2012. They called on the DAC to adapt its long-standing statistical concepts to the profound changes in the global financial and economic landscape.

Final Communiqué, 16 December 2014

  1. We, the members of the OECD Development Assistance Committee (DAC), convened at high level in Paris on 15-16 December 2014. We welcomed the five new members who have joined the Committee since our last High-Level Meeting in 2012: the Czech Republic, Iceland, Poland, the Slovak Republic and Slovenia. We also welcomed the United Arab Emirates as the first country beyond the OECD membership to become a Participant of our Committee. The International Monetary Fund, the World Bank, the United Nations Development Programme, the Inter-American Development Bank and non-DAC OECD members – Chile, Estonia, Hungary, Israel, Mexico and Turkey – participated in our deliberations.

  2. We have witnessed tremendous development progress over the past 15 years. Globally, extreme poverty has been halved, substantial progress has been made toward reaching gender parity in school enrolment at all levels and in all developing regions and child mortality has been halved as has the proportion of people without access to safe water. Yet the job of ending global poverty is unfinished, and we encounter continued instability and conflict, humanitarian crises and rising inequality. Addressing all these challenges in a sustainable way requires a renewed global partnership for development.

  3. We met as the world prepares the ground for the post-2015 agenda, an ambitious global framework for achieving inclusive, sustainable development for all. Three decisive events taking place next year will sharpen the vision and clarify the means of implementation underpinning this agenda: the Third International Conference on Financing for Development, the United Nations Summit for the Adoption of the Post-2015 Development Agenda, and the 21st Conference of the Parties on the United Nations Framework Convention on Climate Change.

  4. As we shape the new sustainable development goals for the post-2015 era, we want to ensure our contributions make the difference that is needed. We invite the OECD to fully use its interdisciplinary expertise to support members and partners as they design and implement the range of policies needed to achieve these goals in all countries. This new set of goals will require both financial and non-financial means and efforts. As regards the financing challenge, a wide array of domestic and international resources – both concessional and commercial in nature – needs to be mobilised from public and private sources and from all providers. These different resources must also be used effectively, drawing on their respective comparative advantages. In this context, we welcome relevant efforts from across the OECD on development finance, including in the areas of taxation and investment. We consider that improving global access to reliable statistics regarding all these resources will be essential for all stakeholders, including developing and provider countries, to optimally plan, allocate, use and account for development resources. Reliable statistics will also facilitate national, regional and global transparency and accountability.

  5. OECD DAC statistics on development finance are a global public good that informs policy choices, promotes transparency and fosters accountability. Following a mandate that we adopted at the 2012 High Level Meeting, we began work to modernise our statistical system, measures and standards to ensure the integrity and comparability of data on development finance and create the right incentive mechanisms for effective resource mobilisation. We have today taken stock of progress achieved in this regard, and have taken decisions in a number of areas.

  6. Official Development Assistance (ODA) will remain a crucial part of international development co-operation in implementing the post-2015 agenda, particularly for countries most in need. We also acknowledge the important role of international private flows. Domestic resources, however, will continue to be the main pillar of development finance for the broad majority of developing countries.

  7. We note that despite challenging fiscal circumstances in many OECD countries, we have maintained high levels of ODA – which reached an all-time high of USD 134.8 billion in 2013. We reaffirm our respective ODA commitments, including those of us who have endorsed the UN target of 0.7 per cent of Gross National Income (GNI) as ODA to developing countries, and agree to continue to make all efforts to achieve them.

  8. We also agree to allocate more of total ODA to countries most in need, such as least developed countries (LDCs), low-income countries, small island developing states, land-locked developing countries and fragile and conflict-affected states. We have agreed today to commit to reversing the declining trend of ODA to LDCs. Those members who have committed to the specific UN target of 0.15-0.20 per cent of GNI as ODA towards these countries reconfirm their commitment. We underscore the importance of collective action and individual steps to better target ODA towards countries most in need (See Annex 1). We will monitor progress in line with each member’s commitments through the OECD peer review process, and additionally on an aggregate DAC level at our senior level meetings.

  9. In line with the 2012 High Level Meeting mandate, we have carefully examined how the ODA measure could be strengthened to reflect the nature of today’s development co-operation and to better address current and future development challenges, while maintaining its core character. We remain committed to maintaining the integrity of the ODA definition and further strengthening transparency regarding its measurement and use, including through defining clearly concessionality and updating the reporting guidance on peace and security expenditures. We also recognise that ODA can help bring in private investment to support development, and that it is essential to capture the breadth of official support provided to developing countries.

  10. While most ODA is provided in the form of grants, concessional loans form an important part of the measure. However, differences have developed in the way members interpret the unclear “concessional in character” criterion of the ODA definition. We therefore agree to modernise the reporting of concessional loans to make it easier to compare the effort involved with that in providing grants, by introducing a grant equivalent system for the purpose of calculating ODA figures. This means that under the new reporting system, ODA credit counted and reported will be higher for a grant than for a loan. Furthermore, among loans which pass the tests for ODA scoring, more concessional loans will earn greater ODA credit than less concessional loans. Alongside reporting on a grant equivalent basis, ODA figures will continue to be calculated, reported and published on the previous cash-flow system. This means that data on actual disbursements and repayments of loans will continue to be collected and published in a fully transparent manner.

  11. We have further decided to assess concessionality based on differentiated discount rates, consisting of a base factor, which will be the IMF discount rate (currently 5%), and an adjustment factor of 1% for UMICs, 2% for LMICs and 4% for LDCs and other LICs. This system, combined with a grant equivalent method, is expected to incentivise lending on highly concessional terms to LDCs and other LICs. To ensure that loans to LDCs and other LICs are provided at highly concessional terms, only loans with a grant element of at least 45% will be reportable as ODA. Loans to LMICs need to have a grant element of at least 15%, and those to UMICs of at least 10%, in order to be reportable as ODA.

  12. Consistent with our commitment to pay particular attention to debt sustainability when extending loans to developing countries, we agree that loans whose terms are not consistent with the IMF Debt Limits Policy and/or the World Bank’s Non-Concessional Borrowing Policy will not be reportable as ODA. We request the WP-STAT to prepare the revised Reporting Directives, in accordance with our agreement further detailed in Annex 2, for endorsement by the DAC by the end of 2015.

  13. We recognise the importance of strengthening private sector engagement in development and we want to encourage the use of ODA to mobilise additional private sector resources for development. We recognise that the present statistical reporting system does not fully reflect the changing way in which members are engaging with the private sector, nor does it incentivise innovation. We take note of progress already made in developing a modern taxonomy of financial instruments, and methodologies to measure private sector resources mobilised, for example through guarantees. We agree to urgently undertake further work to reflect in ODA the effort of the official sector in catalysing private sector investment in effective development. In doing so, we will explore further the institutional and instrument-specific approaches that have been developed by members, and potentially other approaches, with the aim of concluding at our next meeting. We will continue to collaborate with agencies with special expertise in this field, such as donors’ Development Finance Institutions and other bilateral institutions that use private-sector instruments, and similar multilateral institutions.

  14. The development agenda is becoming broader. It is therefore important to recognise and further incentivise the efforts that are being made above and beyond ODA. Accordingly, we agree to continue to develop the new statistical measure, with the working title of Total Official support for Sustainable Development (TOSD). This measure will complement, not replace, the ODA measure. It will potentially cover the totality of resource flows extended to developing countries and multilateral institutions in support of sustainable development and originating from official sources and interventions, regardless of the types of instruments used and associated terms. The components of this measure have been discussed and will be refined, working with all relevant stakeholders, in the lead-up to the Third International Conference on Financing for Development in Addis Ababa. Its ultimate parameters will be clarified once the post-2015 agenda has been agreed. We will also collect data on resources mobilised by official interventions from the private sector using leveraging instruments such as guarantees. We support continued work to establish an international standard for measuring the volume of private finance mobilised by official interventions and want to explore whether and how this could be reflected in a new measure.

  15. Supporting developing countries to optimally use the increased diversity of funding sources that they can access today will be important. The transparency of resource flows reaching developing countries plays a role in enhancing the effectiveness of development co-operation. We will therefore strengthen our dialogue with developing countries to ensure that our statistical system contributes to meeting their information and planning needs. Further, we will continue to develop our systems for measuring resource inflows to developing countries, building on our longstanding work with country programmable aid.

  16. Recognising that building peaceful and inclusive societies will be an increasingly important part of the development agenda, we will generate greater political momentum in support of peacebuilding and statebuilding efforts. We agree to further explore how support in this area could be better reflected in our statistical system through a possible broader recognition in TOSD, and through updating ODA reporting instructions. In doing so, we will ensure that the main objective of ODA remains the promotion of the economic development and welfare of developing countries. We aim to complete this work in time for our next meeting.

  17. We have come some distance in our efforts to upgrade and modernise our statistical systems and tools in order for them to contribute to monitoring the financing framework underpinning the post-2015 agenda. By implementing these changes, we reaffirm our commitment to remain the centre of excellence of high-quality statistics on official development finance. We will explore ways of engaging more systematically with other stakeholders (e.g. partner countries, other providers of development finance, foundations, civil society, private sector, the United Nations and other international organisations) in the further development and use of our statistical system, measures and standards. We welcome the reporting of development co-operation data from an increasing number of sovereign states beyond DAC members (such as European Union Member States, Israel, Kuwait, Liechtenstein, the Russian Federation, Saudi Arabia, Thailand, Turkey, and the United Arab Emirates) as well as other development actors (including the Bill and Melinda Gates Foundation and more than 30 multilateral institutions), and encourage other providers to follow their example.

  18. We strongly support the work of the Global Partnership for Effective Development Co-operation (GPEDC), agreed in Busan, as a leading international policy platform and a hub to “share, support and spread development success”, including through the contribution of voluntary initiatives and building blocks. We believe the GPEDC’s flexible, multi-stakeholder, action-focussed approach means that it can play a useful role in helping to implement the post-2015 agenda. We stand ready – with other international fora such as the Development Cooperation Forum – to drive efforts at the international level to anchor the quality of co-operation and the development effectiveness principles in the post-2015 agenda, and at country level to foster learning and exchange of experience in achieving sustainable development results. We reaffirm our existing aid and development effectiveness commitments and resolve to further engage with other providers. We note that a strengthened GPEDC monitoring framework can be a useful tool to measure and report on progress in support of future efforts to implement the post-2015 agenda at developing country level.

  19. We look forward to actively contributing to the UN-led process to shape the ambitious post-2015 agenda, and the renewed global partnership to support its implementation, including the future accountability and monitoring system. We will engage with international, regional and local initiatives and actions for a successful outcome of the decisive meetings in 2015.

  20. We will reconvene end-2015/early-2016 to take stock of progress in implementing the decisions we have taken today, and in carrying out additional analytical work to bring to closure our effort to modernise the DAC statistical system for the post-2015 era.

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AFC completes $300m fund raising scheme for trade facilitation, others

Africa Finance Corporation (AFC), a leading investment grade rated multilateral development finance institution, on 17 December 2014 announced the close of a $300 million dual tranche (two-year and three-year) club facility arranged  by six initial mandated lead arrangers (IMLAs) and bookrunners.

The financial institutions involved are Bank of Tokyo-Mitsubishi UFJ, Ltd; Citibank N.A; Deutsche Bank AG; FirstRand Bank Limited; Standard Bank of South Africa Limited; and Standard Chartered Bank. 

Each of the IMLAs and bookrunners committed $50 million funding to the facility.

Subsequent to the initial funding, a secondary market syndication of the facility was arranged, which witnessed a strong demand for the credit, with new commitments of $336.5 million obtained from 16 lenders across various geographies, such as Asia, Europe and the Middle East.

The lenders include Industrial and Commercial Bank of China Limited, Commercial Bank of Kuwait K.P.S.C, Korea Development Bank, KDB Bank Europe Limited, Burgan Bank S.A.K, Tunis International Bank, First Gulf Bank PJSC, Bank of China Limited, State Bank Of India, Banque des Mascareignes Ltée, Commercial Bank of Qatar Q.S.C, The Export-Import Bank of the Republic of China, Korea Exchange Bank, Al Ahli Bank of Kuwait K.S.C.P, First Commercial Bank Limited, Mega International Commercial Bank Co and United Taiwan Bank S.A.

Altogether, the facility was more than two times oversubscribed during the primary and secondary market processes, with AFC receiving total commitment of $636.5 million from 22 lenders.  

The proceeds of the facility will be used by AFC for general corporate purposes including the facilitation of trade.

AFC, a multilateral finance institution, was established in 2007 with a capital base of $1 billion, to be the catalyst for private sector infrastructure investment across Africa.  

The Senior Vice President and Treasurer of the development finance institution, Banji Fehintola, explained that “AFC’s long term vision is to help address Africa’s infrastructure deficit and ensure sustainable economic growth for the continent.” 

He added: We are encouraged  by the  confidence  that  our lenders have  placed  in  us. We  believe  that  the  well  documented need  for  bridging the infrastructure  investment  divide across  Africa will provide  the opportunity  to  apply  AFCs  differentiated  model  of  providing long-term infrastructure financing and value added infrastructure  asset  project development expertise,  to  generate  real value  for  our  investors  and  stakeholders”.

AFC’s  investment  approach  combines  specialist  industry  expertise with a  focus on  financial and technical advisory, project structuring, project development and risk capital to address Africa’s infrastructure development needs and drive sustainable economic growth.

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