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How African countries can break the cycle of debt dependency

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How African countries can break the cycle of debt dependency

Shutterstock

Key to the implementation of the ambitious 17-point Sustainable Development Goals (SDGs) is the question of how the estimated cost of between U$614 billion and $638 billion that will be required annually will be financed.

The United Nations Conference on Trade and Development has produced a report assessing the relationship between Africa’s capacity to finance the 15-year SDGs and maintaining debt sustainability. The report ignores critical deficiencies in the approach to the continent’s development agenda.

The report highlights the fact that official development aid alone will be inadequate to sustain the development needs of the continent. Instead, it recommends a three-pronged approach:

  • up-scale the use of domestic debt that is market oriented to supplement external debt and development aid;

  • use complementary financing such as private-public partnerships and diaspora remittances; and

  • curtail illicit financial flows.

The approach is far from ideal in that the continent’s debt position – external and domestic – is bordering on unsustainable. Stemming illicit financial flows, which are sometimes overstated, requires institutional capacity-building to enforce. Private-public partnerships is one approach that could bring sustainable development in the area of infrastructure development. But it requires a different model to contribute to other sectors.

Africa’s debt crisis

The continent’s sovereign external debt position has been rising faster than gross domestic product (GDP) in the past four years. With the dawn of the cyclical boom-bust of the commodity market, a key trigger factor for the 1980s African debt crisis, it is evident the continent is facing a renewed debt crisis.

Ghana is currently under International Monetary Fund (IMF) intensive care supervision, while Mozambique’s IMF support programme is under suspension. Kenya has applied for a standby credit facility, while Zambia is expected to negotiate an IMF bailout package after its general and presidential elections on August 11 2016. A dozen other countries dependent on single commodities for revenue will be looking for international relief to avoid defaulting on both concessional and commercial loans. This will become more critical as they approach the repayment period between 2020 and 2025, when most capital market eurobond loans mature.

A critical factor that underscores the debt crisis is that the debt has become unsustainable even though debt ratios are below 50% of GDP. The debt crisis is already well under way. The only question is how deep it will cut into the development agenda of the continent.

The challenge with domestic debt is that it limits the resources available to the private sector to borrow for productive activity, which directly contributes to the country’s GDP. The private sector, which consists of at least 83% small and medium-sized companies, depends on this financing for expansion. These have limited access to finance but hold the key to job creation and increased tax revenue generation. They are also directly linked to the populace that is living in extreme poverty.

Illicit financial flows

The extent to which curtailing illicit financial flows can contribute to creating an alternative source of development finance has been overemphasised. Between 1970 and 2008 it is estimated that the continent lost $850 billion. About 60% of this was through trade mis-invoicing and the use of tax havens. And 35% was attributed to the proceeds of crime, with the balance of 5% apportioned to corruption.

The corporate and commercial outflows (tax havens) are legal modalities of tax avoidance and thus difficult to curtail. Mis-invoicing is a vice that cuts across borders and will require a concerted effort among trading countries.

And if national governments had the resources and capacity to eliminate crime and corruption, the proceeds from these activities would not add to government revenues.

On top of this Africa as a whole has very poor resource management capacity. This means that putting more money into government coffers won’t necessarily lead to the eradication or alleviation of poverty.

Take Nigeria. Oil revenues per capita have increased tenfold in 35 years. But Nigeria’s income per capita does not reflect this growth. The Global Finance report lists the country as the 62nd poorest country in the world.

Foreign direct investment cancer

Concessional policies associated with foreign direct investment are the single largest drain on revenue for African countries. This partly occurs when investors are allowed duty-free imports on capital equipment. The immediate effect is that it denies governments much needed tax revenue and continually bleeds the country of foreign exchange earnings.

Between 2004 and 2014 Zambia received just over $12 billion in foreign direct investment. These inflows mostly came into the country in the form of capital equipment. The general effect was the immediate loss of tax revenue in import taxes, which represents a minimum net loss of $5.4 billion. In addition, the externalisation of the investment amount and untaxed profits over the long term undermines the country’s capacity to have a solid foreign exchange reserve base. This represents an additional net loss of $4.2 billion.

This $9.6 billion loss comes alongside the depletion of the country’s natural resources. The net effect is that Zambia has not made a tangible reduction in poverty, as pointed out by the European Union in its analysis of the implementation of the 11th European Development Fund.

Africa’s strengths

The African continent holds a unique position on the global market. It produces more than 20% of the world’s gold, 50% of diamonds, 12% of oil and 6% of natural gas. It also has an array of other minerals, including uranium, copper and nickel.

Yet 75% of the world’s ten poorest countries are in sub-Saharan Africa.

Bilateral and multilateral donors have failed the continent by piling massive public debt on governments in the full knowledge of the history to the 1980s debt crisis. This is despite the fact that they lack fiduciary accountability to their people while causing depletion of natural resources. They have also turned a blind eye to these multinationals parking huge amounts of earnings in tax havens.

Development goals

To come anywhere near achieving the target of eliminating poverty, as per the United Nations’ latest development goals, the continent would need to attain a GDP growth rate of least 16%. The reality is that the continent is averaging growth of 5%.

The solution lies in African countries taking control of their destiny by replacing foreign direct investment with local direct investment. The continent must direct resources towards production in agriculture and manufacturing, improve its capacity for global competitiveness and import only advanced technologies and expertise.