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BUSINESS & ECONOMY

We Can’t Breathe: How Africans Suffocate Themselves With Debt

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By Abimbola Agboluaje

Economic activities have taken a massive clobbering from the measures in place all over the world to curtail the spread of the new coronavirus. According to the International Monetary Fund’s World Economic Outlook Update, June 2020, global economic output will shrink by 4.9% in 2020, 1.9% lower than the IMF’s April 2020 forecast. For African economies as all others in the world, this means not only job losses but lost incomes from exports and reduced tax revenues. But while governments in other regions have rolled out billions of dollars in fiscal interventions to stimulate economic activities and /or support the jobless, African Governments have to look for $44 billion to service debts in 2020. Even before the economic ravage of the new coronavirus, many African countries spent more money servicing debt in 2019 than they spent on healthcare.

The IMF June 2020 Update forecasts a 3.2% decline in economic growth for Sub-Saharan Africa with output in the regional economic powerhouses, Nigeria and South Africa declining by 5.4% and 8.0% respectively. Without debt relief, Nigeria will use 96% of its income to service debt in 2020. Contrasting the plight of African countries with their western counterparts, Ken Ofori-Atta, the Minister of Finance of Ghana, exclaimed at a Centre of African Studies, University of Harvard webinar on June 3, 2020 “You really feel like shouting ‘I can’t breathe’ “. The G20 nations have agreed to let African debtors defer $20 billion debt payment until the end of 2020. But this applies mostly to debts owed to Western and other G20 governments.

Why Debt Relief Now Offers Very Little Comfort

The debts which burdened African economies in the 1980s and 1990s were predominantly contracted through Export Credit Agencies of Western Governments which guaranteed payments by African countries for goods and services their (private) companies exported to Africa. (The debts were not owed to the World Bank or IMF as is widely believed). In 1990, 83% of Africa’s debt stock i.e. $255 billion was owed to official creditors while only $28 billion was owed to private creditors. In the last ten years African Governments have expanded their search for credit and financing beyond western export credit and aid agencies and multilateral development agencies like the World Bank, IMF, and the African Development Bank which are significantly funded and controlled by western nations. They started to borrow from western investors by issuing bonds in London and New York just like western governments. According to 2020 data compiled by the World Bank, Africa owes $493.6 billion in long-term debt 33% of which consists of commercial debts, specifically bonds.

According to The Economist, 8 African countries issued 30-year bonds in 2018. This growing trend of commercial borrowing is problematic for two reasons. First, investors in the bonds are completely profit-oriented and are much less persuaded by arguments that not granting debt relief would hamstring economies and increase poverty. Also, unlike development agencies’ lending which is usually priced between 1% and 3% and is payment-free for the initial 3 or 5 years, commercial lending is very expensive and thus contributes to raising Africa’s debt burden. The interest on the 30-year Nigerian Euro bond is 9.248%, compared to the 0.031% interest rate on 30-year German bonds.   Nigerian Government officials used to celebrate the fact that Nigerian Eurobonds were oversubscribed i.e. there were more investors than bonds to sell. This is almost like leaving wads of dollars on the street and being surprised to see many people pocketing them. The higher price Nigeria pays to borrow is a reflection of the perceived risk of default; Germany has AAA credit rating with all the major 3 credit rating agencies.

Bonds are purchased by hundreds of investors; any decision on debt relief or restructuring or deferring interest payment has to be collectively agreed upon. It is notoriously difficult to agree on terms of debt restructuring amongst investors. Nigeria spent $771 million on interest on its Eurobonds in 2019, more than double the $329 million it paid to multilateral creditors. Like other African newcomers to commercial debt, Nigeria is wary of asking bondholders for debt restructuring. While it isn’t certain that the request would be granted, the mere act of asking would automatically result in a credit rating downgrade and complicate issuing Eurobonds in the future.

Commercial Debt: An Act of Financial Self-Suffocation

When poor countries’ governments experience fiscal crises, often as a result of the collapse of commodity prices, and debtors demand they hand over the limited funds they have to fund schools and hospitals, they resort to emotional blackmail such as complaining that they can’t breathe or that they are being encircled by financial vultures. Their citizens and supporters in the West seldom examine their own complicity in creating the lock hold.

The former IMF Managing Director, Christine Lagarde visited Nigeria in January 2016 to discuss how the institution could assist Nigeria to cope with the loss of $11 billion due to the fall in oil prices. She made it clear that the IMF could lend to Nigeria at 1%. Nigeria rejected the offer for 7 to 8% commercial debt (through issuing Eurobonds). IMF loans come with conditions.  Nigeria would have had to undertake policy reforms that enable it to use its own resources more productively, diversify its economy, and thus make its economy less susceptible to external shocks. IMF conditions would have included requesting that Nigeria spent more on healthcare and education or on roads rather than on fuel subsidy. The IMF would also have asked that Nigeria collapsed its multiple exchange rates, in effect a devaluation, which would have prevented the Central Bank of Nigeria from using more than $40 billion of its reserves to defend the naira over 3 years.

According to Franklin Cudjoe, President of the Accra-based Imani, one of Africa’s foremost economic policy think tanks, Ghana has issued Eurobonds mostly for infrastructure projects “that do not necessarily return value in the short to medium term”. In an interview with Arbiterz, Cudjoe expressed the opinion that investment in freight-carrying railway would have aided Ghana to reduce non-tariff barriers to regional trade; the passenger trains that Ghana has invested in cannot compete with road transport. Cudjoe also believes that Eurobond proceeds should not be invested in healthcare as the public sector is “just inefficient at maintenance and offering proper care”. He advises that Ghana and the rest of Africa use a mix of private sector investment and management of hospitals and private health insurance firms to “provide tiered but humane healthcare coverage.” Similarly Misheck Mutize of the Graduate School of Business (GSB), University of Cape Town noted that African countries use Eurobonds to finance loss-making projects like the Kenyan Standard Gauge Railway (SGR) which do not generate new economic activity and/or are not self-sustaining.

Investors in Eurobonds are interested in getting handsome returns rather than poverty alleviation or sustainable monetary policies, so their lending comes with no conditions on improving economic policies. Funds from commercial lending are “fungible” i.e.  African countries are often able to divert the funds to uses other than those stated for issuing Eurobonds. Commercial loans clearly have allowed many African countries to avoid critical reforms that would have boosted economic growth and contributed to reducing poverty, diversifying, and insulating their economies from external shocks. Now they have to hand over billions of dollars to service the loans.

The Director-General of Nigeria’s Debt Management Office, Patience Oniha, said at an investor conference on 23 June 2020 that Nigeria will until further notice borrow locally and seek international concessional lending rather than issue Eurobonds. This self-denial is very conveniently timed. There is simply no investor appetite for Nigerian Eurobonds in financial markets scarred by the new coronavirus pandemic; Nigeria had to scrap plans to issue yet another $3.3 billion Eurobond in March 2020. It is safe to conclude that Nigeria, for now, prefers the exorbitant privilege of commercial borrowing over reforms that would unleash genuine and sustainable economic growth. The country is likely to start issuing Eurobonds again once global economic conditions improve and financial markets regain their risk appetite.

Should Africa avoid the Vultures?

The poor quality of economic policy and institutions are the primary explanations for Africa’s underdevelopment and poverty rather than the lack of capital for public investment. But efficient mobilisation and investment of capital will significantly improve economic outcomes as well as the quality of economic policy.

Africa’s severe shortage of infrastructure is a barrier to investment and productivity and improving livelihoods. According to the World Bank, Africa needs to invest $90 billion every year in infrastructure but faces a $31-$40 billion shortfall. African countries should hence endeavour to access all available sources of capital to boost public investment, especially the very liquid western bond markets where western governments raise capital for their vastly greater public investment. In 2018, the value of outstanding bonds in the global bond market was $102.8 trillion, compared to $74.7 billion capitalization of the global equity market. In 2018, members of the Organisation of Economic Cooperation in Europe, a club for the world’s richest economies, issued bonds worth $10.7 trillion, far more money than Africa has ever received in development aid since independence.  African countries are determined to preserve access to this market precisely because they are aware it could easily finance their comparatively modest investment needs. The question is how to ensure that access to western bond markets assists in closing Africa’s infrastructure gaps rather than primarily to deliver supernormal profits to investors.

Africa will not transform the legacy of poor governance overnight. But it is quite possible to improve significantly policy and governance around an oasis of infrastructure projects which African Governments aim to finance with Eurobonds. The prospectuses of African countries are often vague about the intended specific uses of proceeds of Eurobonds.  Simple things like initiating policies that ensure that proceeds from Eurobonds could only be invested in the infrastructure projects for which the bond was issued would not only enable African countries negotiate lower interest rates but would also enhance economic growth and thus the capacity to repay debt. African governments should aim to finance infrastructure for which there is a clear economic need and for which economic user fees could be charged with their new Eurobonds whenever it becomes possible again to approach the market.

Selective Regional Integration and External Agencies of Restraint

All politicians would prefer short-term fiscal choices that enable them deliver free or subsidised healthcare, education and infrastructure services and avoid hard choices about sustainability while storing up economic crises and failure. In developed economies, think-tanks, the media, opposition political parties, legislatures, etc. act as, according to the Oxford economist Paul Collier, “agencies of restraint” on governments’ fiscal choices. In most African countries, “epistemic communities” i.e. academics, policy experts, and journalists that research, generate and diffuse knowledge about the consequences of fiscal or economic policy choices are very poorly resourced and have little influence.  And political institutions, including legislatures, tend to serve as “agencies of distribution” in African politics rather than of restraint because the political argument over fiscal policies in ethnically divided African politics is more about the identity of beneficiaries and less about economic impact or sustainability.

The Cameroonian economist and Head of the United Nations Economic Commission for Africa, Vera Songwe, has suggested the creation of a new institution that could issue bonds for African countries at much lower interest rates by guarantying repayment. This is a very good idea worth exploring. But only western governments or the development finance institutions they control could offer investors the required level of comfort required to sufficiently de-risk African debt. African integration initiatives tend to converge around the lowest common denominator rather than set high standards for “upwards” policy convergence. Unlike the European Union, for instance, economic integration processes in Africa do not act as an external restraint on domestic policy choices.

African governments who have been happy to use access to very expensively priced bonds in order to avoid fiscal and economic reforms are very unlikely to act together to create a credible structure that would enable them borrow at lower interest rates. (Leaving aside having the funds or creditworthiness to guarantee repayment of debt if countries issuing bonds default). External actors like the European Union which through the European Development Fund has had a multilateral instrument for conducting development policy negotiations with African countries (alongside Caribbean and Pacific nations) for decades is well-positioned to create an institution for helping Africa tap bond markets at much lower interest rates (ideally not higher than 2.5%). The new structure has to work on the principle of “selective integration” i.e. open to only countries who want to use Eurobonds to finance economically viable projects even if European funders have to invest in selling it to African governments and citizens.  Europe would be doing for Africa what America did for it after the Second World War through the Marshall Plan when the Yankees’ European Cooperation Administration (ECA) produced a large publicity campaign comprising pamphlets, posters, radio broadcasts, traveling puppet shows, and over 250 films between 1949-1953 to convince Europeans of the wisdom to adopt American methods of managerial and economic organisation. The technical arguments about how to lower the interest African pay to issue debt on western bond markets are unassailable, the problem is selling them to African citizens and their governments.

Courtesy: Arbiterz


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BUSINESS & ECONOMY

Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria

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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website: https://focus.afrief.org/trending/a-salutary-tribute-to-general-ibrahim-badamasi-babangida-architect-of-islamic-finance-in-nigeria/

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.

Sincerely,

 

Abba Musa Mamman Lagos

Kaduna


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10 Megatrends Shaping the World in 2024

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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.


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BUSINESS & ECONOMY

Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know

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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford


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