Barriers and Opportunities for Enhancing Capital Flows
In the COMCEC Member Countries
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Low Income Group
Improving the rule of law, reducing political uncertainty and strengthening institutional
capacity are all well-documented challenges and are crucial to ensuring a move away from the
dependence on official development assistance (ODA) and remittances from diaspora abroad
that is characteristic of many of the countries within this group.
For those countries experiencing increasing capital inflows, attention needs to be paid to the
shift in the composition of flows that is being witnessed. Bond issuance has become popular as
a means of raising international capital, but countries will need to be aware of the volatility of
certain capital flows and manage the potentially negative impacts that could stem from a
decline in such capital flows in the event of an economic crisis.
In those countries which are natural-resource rich, managing illicit capital outflows remains a
significant issue. The per capita loss of illicit capital from fuel-exporting countries over the
period 1980-2009 (US$1,631) was slightly more than three times the outflow per capita from
non-fuel-exporters (US$441). Heavily indebted poor countries lost US$480 per person through
illicit financial flows. A number of measures could be taken to address this. First, authorities
could introduce policies to restrict the absorption of illicit financial flows, such as requiring
regular reporting to the Bank for International Settlements (BIS) of detailed cross-border
deposit data by sector, maturity and country of residence, entering into automatic tax
information exchange agreements, and improving the capacity and resources of tax
authorities. Second, policies to curtail illicit financial outflows from Africa could be developed
or implemented – such as resource-rich countries complying with the Extractive Industries
Transparency Initiative (EITI), which advocates verification and full publication of payments
made by companies and revenue received by governments from oil, gas and minerals. Other
countries less rich in natural resources can focus on strengthening legal institutions,
empowering regulatory agencies to oversee public procurement, imports and exports and
developing initiatives to combat money-laundering88.
Lower-Middle Income Group
Private investment and confidence in many of these countries is being held back by the on-
going political transition, the short planning horizons for governments in a number of
countries and upcoming constitutional changes. At the same time, those countries with
plentiful natural resources are demonstrating a continuing reliance on primary commodities
and will need to intensify efforts to diversify their economies to avoid the pitfalls of declining
global commodity prices. Furthermore, reducing state involvement and avoiding policies of
economic nationalism will help significantly to win investor confidence. For example,
reluctance to buy Uzbek assets in Uzbekistan has been attributed to an ‘illiberal’ business
climate and the tight control of capital flows by the state. As in other countries, there are
regulations and laws which set out the right of foreign investors to move funds freely in and
out of the country, but the degree to which this is actually allowed to take place in practice
without arbitrary restrictions remains an issue. Decisions to restrict currency conversion can
88 “Illicit Financial Flows and the Problem of Net Resource Transfers from Africa: 1980-2009”, African
Development Bank and Global Financial Integrity, 2013