TANZANIA'S extractive sector, often heralded as a cornerstone of economic growth, masks a troubling reality; the epidemic of illicit financial flows (IFFs). These clandestine transfers of illegally earned capital not only siphon off critical resources but also undermine the nation's development and the welfare of its citizens.

While the extractive industry promises prosperity, it simultaneously facilitates a cycle that perpetuates poverty and stunts economic progress.

Illicit financial flows encompass a variety of illegal financial transfers, primarily arising from corruption, tax evasion and smuggling. The International Monetary Fund (IMF) underscores that these flows drain resources from African nations, exacerbating poverty and stifling economic advancement. 

The High-Level Panel on Illicit Financial Flows from Africa defines IFFs as money that is illegally earned, transferred, or utilized, typically through commercial tax evasion or trade mis-invoicing.

In Tanzania, the mechanisms driving these illicit flows are complex and entrenched. Mis-invoicing stands out as a prevalent method, where companies manipulate the reported value of exported goods or inflate the costs of imports. 

This tactic is particularly rampant in mining and oil sectors, where the inherent value of commodities makes them susceptible to manipulation.  The use of intricate corporate structures and shell companies obscures the origins of wealth, enabling both local and multinational firms to evade taxes by shifting profits to jurisdictions with lower tax rates.

The government has identified transfer pricing as another significant contributor to IFFs. In this practice, parent companies charge their subsidiaries inflated prices for goods and services, effectively draining revenue from the Tanzanian economy. Such strategies erode the tax base, limiting the government's capacity to invest in essential development initiatives.

The ramifications of IFFs extend beyond Tanzania's borders. Neighbouring countries, such as the Democratic Republic of the Congo, (DRC) are similarly afflicted, losing billions annually through illicit outflows in their mining sectors. 

Kenya grapples with substantial losses, estimated at $1.8 billion per year due to trade mis-invoicing. The collective impact of these practices stifles economic development and deprives local communities of the rightful benefits of their natural resources.

In Tanzania, the consequences of IFFs are dire. At community level, the loss of revenue deprives regions of vital resources needed for infrastructure, healthcare, and education, perpetuating a cycle of poverty. 

Environmental degradation caused by extractive activities further exacerbates the plight of local communities, who often lack the means or leverage to hold corporations accountable for the harm inflicted upon their land.

Allocation of revenues from Tanzania's extractive sector is pivotal for addressing critical needs in infrastructure, healthcare and education, essential for breaking the cycle of poverty. 

Allocating 40 percent of revenues from extractive sector to infrastructure development is vital for enhancing transportation networks and energy supply, thus facilitate economic growth and improve access to essential services, especially in rural areas where such infrastructure is often inadequate.

Similarly, a 35 percent allocation for healthcare is necessary to strengthen primary services, improve facilities and train healthcare workers. This investment is crucial for enhancing health outcomes and ensuring accessibility for vulnerable populations, ultimately reducing the financial burden on families seeking medical care.

Moreover, setting aside 25 percent of the budget to education imperative for constructing schools, provide learning materials, and training teachers. 

A well-educated populace is essential for sustainable development, equipping individuals with skills for economic participation. Therefore, strategic revenue allocation can significantly reduce poverty and foster lasting community impacts (Tanzania Extractive Industries Transparency Initiative, 2021; World Bank, 2022).

On a national scale, the erosion of Tanzania's tax base due to IFFs severely constrains government investment in critical sectors, including healthcare and education. This limitation stifles progress toward development goals, leaving citizens vulnerable and marginalized. 

Over the past decade, key economic indicators reveal the significant impact of IFFs on Tanzania’s economy. The Gross Domestic Product (GDP) growth rate, which peaked at 7.0 percent in 2013, has since declined to a low of 4.8 percent in 2020. This volatility underscores the destabilizing influence of IFFs, hindering the country’s ability to maintain consistent, robust growth.

Moreover, Tanzania's tax revenue as a percentage of GDP remains stagnant, hovering around 12-14 percent. This low ratio is a direct outcome of the erosion of the tax base, which limits the government's capacity to fund essential public services and developmental initiatives. 

Persistent current account deficits, reaching -3.6 percent of GDP in 2020, further indicate the damaging effects of capital outflows through IFFs.

Addressing the issue of IFFs necessitates comprehensive policy reforms. First and foremost, Tanzania must enhance its tax administration and enforcement capabilities by strengthening the Tanzania Revenue Authority. 

Implementing robust regulations around transfer pricing is crucial to prevent profit shifting and tax avoidance. Moreover, prioritizing transparency in the extractive industries – mandating comprehensive public disclosure of payments made by companies to the government – can help restore some accountability.

Equally vital is the strengthening of the financial sector regulatory framework. Improving oversight of banks and financial institutions is essential to prevent their complicity in facilitating IFFs. 

Implementing enhanced know-your-customer (KYC) and anti-money laundering (AML) measures are also critical to curbing illicit activities.

Promoting transparency and accountability cannot be overstated. Establishing beneficial ownership registries can illuminate the true owners of companies and assets, complicating efforts to conceal illicit proceeds. Increasing public access to information regarding government contracts and budget allocations will further enhance accountability.

Investing in capacity building within government agencies is essential for effectively combating IFFs. Providing training and technical assistance to institutions like the Financial Intelligence Unit will bolster their ability to detect and prosecute IFF-related crimes. Collaboration with international organizations can facilitate access to best practices and resources necessary for tackling these flows.

Promoting inclusive and sustainable development is imperative. Ensuring that the benefits of economic growth are equitably distributed and reinvested in local communities is vital. Policies must aim to diversify the economy and reduce reliance on extractive industries, which are particularly vulnerable to IFFs.

The issue of illicit financial flows in Tanzania's extractive sector poses a grave threat to the nation’s development. By confronting the mechanisms of IFFs and enhancing transparency, Tanzania can reclaim its wealth and ensure that its natural resources benefit its people. 

A concerted effort by the government, civil society, and the international community is essential to confront this pressing challenge and unlock the true potential of Tanzania’s economy for the benefit of its citizens.

Evans Rubara is an experienced natural resources management specialist with a deep focus on extractive geopolitics, environmental politics and sustainability. He can be reached at [email protected]

By Evans Rubara