There is an urgent need for African countries to put in place fiscal policies that can help them mitigate their debt dependency and debt overhang

Africa and the current challenges (1)

photo_camera africa-desafios

The sharp rise in food and fuel prices could increase the risk of unrest.

"Africa is particularly vulnerable to the impacts of the war in Ukraine through four main channels: higher food prices, higher fuel prices, lower tourism revenues, and potentially greater difficulty in accessing international capital markets," said IMF managing director Kristalina Georgieva1

Sub-Saharan Africa faces a shock on top of the pandemic. There are difficult choices to be made. The most vulnerable populations will need to be helped with the support of the international community, but, in the medium term, this region has enormous potential, if only in demographic terms. This is a great opportunity, but it needs to be managed well to make it grow. This requires diversification of the economy, promotion of the private sector and the need to move forward with reforms to combat climate change.

This crisis jeopardises the progress that was being made just as the continent was slowly recovering from the pandemic. Many countries in the region are particularly vulnerable to the effects of the war, precisely because of higher energy and food prices, declining tourism and potential difficulties in accessing international capital markets. The conflict has erupted at a time when most countries have minimal room to implement policies to counter the effects of the shock.

The effects of the crisis (COVID + currently the invasion of Ukraine by Russian forces) on human and physical capital have conditioned the continent's growth potential. The losses of enterprises and the weakening of investment caused by the crisis have effectively slowed down the accumulation of physical capital. In addition to poverty, other consequences have weakened human capital, such as worsening food insecurity (100 million in Africa), rising long-term unemployment (increasing by 8.5% in 2020), school closures, etc.

The accumulation of adverse factors will tend to intensify the socio-economic pressures, public debt vulnerabilities and long-lasting consequences of the pandemic already faced by millions of households and businesses. Exorbitant wheat prices are of particular concern for a region that imports about 85% of its supply, a third of which comes from Russia or Ukraine. It should be noted that rising food prices will affect all countries, whether they are oil importers or exporters. This has given rise to a number of potential risks: deterioration of the macroeconomic situation in some countries and an exacerbation of social vulnerabilities. There are also fears of a rise in the cost of living and an increase in the poverty rate. A number of new, multiple and covariant shocks are holding back the recovery of global economic growth. Sub-Saharan Africa's post-pandemic recovery  2has slowed in a context of high volatility and uncertainty. But let us not stop there; Africa, despite these last two pandemic years (2019 GDP growth: 3.13% and 2020 unprecedented recession: -1.3%) and with a still very uncertain horizon, has challenges and issues to overcome and therein lies its present and future as a continent. The economic blows received from the pandemic, as well as the Russian invasion of Ukraine  3, have done much damage and today's macroeconomic outlook is not the best. But this does not affect everyone equally  4, as in former times, some suffer more than others. The crisis, whose gum is still stretching since 2008 (14 years now) is global and trade and investment are interconnected, let's not forget, but some economies are better prepared than others to withstand it, and when it comes to Africa, the same is true. Some, such as Nigeria  5, Algeria, and Angola, whose exports are centred on oil and gas monoproducts, will benefit from the current energy situation because they have what they need most and their prices will rise in line with demand. There are other economies whose situation remains "beneficial" such as (in the short and medium term), the Democratic Republic of Congo and Zambia, which should benefit from higher metal prices and the transition to non-fossil fuels in the long term. The growth performance of Cameroon, whose economy is relatively diversified, shows a solid performance over time, with growth projections of 4.4% in 2024. Ghana's economy is expected to experience accelerated growth in 2022, reaching 5.5% before gradually decelerating to 5% in 2024, still below the pre-pandemic 7%    6 7.  Not to mention the traditionally more resilient and developed economies such as South Africa, and others with a better and more orthodox economic orientation such as Botswana.  Others do not have these advantages and will suffer from this dependence, and in Africa there are many.
 

grafico

We can therefore summarise by saying that Africa concentrates regions marked by a strong dependence on exports of extractive products, as well as others that are much more diversified. Central and southern Africa are dominated by the economic weight of being oil or mining countries, while East Africa and North Africa are more diversified regions. The regions of the Gulf of Guinea (excluding Nigeria) and the Sahel have gold as their main extractive export commodity, a safe haven whose value tends to rise in times of crisis. Finally, the countries of the Indian Ocean are characterised by their dependence on tourism  8

 reportaje-jordana

But there are other very fundamental aspects that need to be analysed. This first document analyses four aspects that will be dealt with in the following lines .... Infrastructure, debt, trade, governance and institutions.

First of all, Africa is not a homogeneous reality, it is not a monolithic bloc

If we intend to analyse the African economy, we must point out that this continent, like other continents, is not a whole, but even today, despite having been pointed out on many occasions, there is still a tendency to confuse this with Africa. It is particularly important to start here, because Africa is a conglomerate of very different countries and realities, and it is on this basis that this region of the world must be analysed.

Returning to the title of this paper, what challenges does Africa face in the current circumstances? There are challenges that are already "recurrent" and that are still weighing down African economies and whose exit from the tunnel will still be a long time coming. Let us list some of them in the current environment of events....
 

1. Infrastructure

"It has not been our wealth that has built our roads, but our roads that have built our wealth", John F. Kennedy.

The infrastructure deficit in Africa leads to an increase in production and service costs, a decrease in business competitiveness, a negative impact on the flow of Foreign Direct Investment to the continent. All this influences the rate of economic growth and social development of the continent.

reportaje-jordana

There is a lack, therefore, not only of new infrastructure construction, but also of refurbishment and maintenance of existing infrastructure, and here the annual financing and disbursement needs are enormous. Collectively, Africa would need to invest between $130 billion and $170 billion annually to meet its infrastructure demands. The continent's infrastructure suffers from a lack of financing. The AfDB (African Development Bank) puts the needs at $170 billion a year until 2025, with an estimated shortfall of 108 billion a year. 

Africa still has massive infrastructure needs, yet invests only 4% of its gross domestic product (GDP) in infrastructure, compared to China, which invests 14%. Regional integration cannot be effective without adequate infrastructure. In our highly technological universe, the strength of economic ties in terms of trade, financial, social and productive development depends on well-designed and connected infrastructures. Intra-African trade suffers and will suffer without adequate infrastructure and it should not be forgotten that "there is no trade without infrastructure". The immediate implementation of strategies aimed at remedying the infrastructure deficit on the continent is imperative. 

jordana-reportaje

Percentage of citizens who have access to basic infrastructure services in Africa according to the AFRO barometre 2014/2015 for 35 countries. The quality of these is in many cases poor.

By countries, South Africa ranks first in terms of infrastructure integration on the continent. The next best-ranked countries are Egypt, Seychelles, and Morocco. South Africa has good air connections, with the best air connections on the continent, as its nationals and those from the rest of Africa can travel from one African country to another quite efficiently. Morocco and Tunisia to a lesser extent also have good air connections.

South Sudan, Eritrea, Somalia, Chad and Niger are the least integrated countries on the continent in terms of infrastructure: all have scores close to zero. Somalia, South Sudan, Niger and Chad also have the least developed infrastructure, as measured by the AfDB's Infrastructure Development Index. Eritrea's weakness lies in the inadequacy of its continental air links.
 

2.    Debt again

africa-actuales-desafios

Debt is getting heavier again

Many developing countries see external debt as an important source of revenue for increasing economic growth and development. However, most sub-Saharan African countries have failed to effectively use these external funds to improve their economies, with some even worsening and experiencing liquidity constraints.

As of 2021, total external public debt in Africa reached US$726.55 billion. https://www.youtube.com/watch?v=mNQ7cA3uU9M Source: World bank/IMF/ Global Power
They are unlikely to default this year, but will face problems by 2024. 
https://www.economist.com/middle-east-and-africa/2022/04/30/debt-repayment-costs-are-rising-fast-for-many-african-countries


Nigeria and Ghana (West Africa) recorded the highest debt levels in the region, with approximately USD 79.54 billion and USD 21.91 billion respectively.

Again, Africa finds itself with high public and external indebtedness. The economic and health crises and now the Russian-Ukrainian conflict are forcing the continent to face high public indebtedness. Before the crisis, Africa was already heavily indebted, with public debt at 50.4% of GDP at the end of 2019 (IMF 2021 "Regional Economic Outlook"). Such indebtedness grew significantly in the last decade with an average of 33.5% of GDP between 2010-2017, which, according to World Bank statistics, the same external public indebtedness (the stock of external debt) of sub-Saharan Africa in 2019 had almost tripled to its lowest level in 2006 (thanks at the time to the Heavily Indebted Poor Countries initiative known as HIPC.) At the beginning of the pandemic in 2019, the G20 countries agreed on an initiative to suspend debt repayments. Forty countries were thus able to keep €10 billion in their coffers over two years, which they used to deal with the consequences of the health crisis. But this initiative ended on 31 December and debt repayments must now resume. Over-indebted countries are now invited to apply for a reorganisation of payments. Three countries have done so: Chad, Ethiopia and Zambia. But none of these negotiations came to fruition. This process is encountering considerable difficulties, because the nature of the debts has changed compared to 1996, when the last major debt relief programme was decided. Developing countries are now increasingly indebted to private creditors: investment funds, banks and even commodity giants (such as Glencore, which owns more than a quarter of Chad's debt). In addition, they are also increasingly indebted to new creditor countries such as Saudi Arabia and especially China.

Since the cancellations of the HIPC initiative, sub-Saharan African countries have taken on new debt and their debt composition has become more complex. The COVID-19 crisis has exacerbated these vulnerabilities and prompted the Paris Club and the G20 to implement multilateral initiatives. Beyond the debt service suspension initiative, the Paris Club and the G20 agreed on a common framework for the treatment of vulnerable countries' debt. The composition of creditors has evolved, with a growing role of private creditors (+14 percentage points between 2009 and 2019), reflecting an increase in the number of states issuing in international capital markets. 

"One third of African debt is held by public actors, one third by private actors and one third by public development banks," analyses Maé Kurkjian, advocacy officer at the NGO One. Private actors have taken an increasingly large share. However, they are the least interested in giving up part of their debt. They often cynically hope that part of the public debt will be cancelled, so that the budget margin thus freed up will allow them to be repaid. 

Moreover, China is now sub-Saharan Africa's (SSA) largest bilateral creditor, accounting for 62% of bilateral claims in 2019. According to the China Africa Research Initiative, China accounted for about 22% of the sovereign debt stock (2018) and 29% of debt service (2020) for some 22 low-income African countries. < Brautigam 2020: Risky business new data on Chinese loans and Africa debt problem>. 

China is currently the leading bilateral lender to 32 African countries and the largest lender to the continent as a whole. The list includes Angola ($21.5bn in 2017), Ethiopia ($13.7bn), Kenya ($9.8bn), Republic of Congo ($7.42bn), Zambia ($6.38bn) and Cameroon ($5.57bn).
 

grafico-ieee

grafico-ieee

grafico-ieee

(It is interesting to take a look at the CLA Chinese Loans to Africa Database (bu.edu). The Chinese Loans to Africa Database (CLA) is an interactive data project that tracks the loan commitments of Chinese political and commercial banks, government entities, corporations and other financiers to African governments and state-owned enterprises).

This rapid re-borrowing is a source of significant vulnerabilities due to the complexity of the new debt instruments. Thus, recourse to financial markets has created significant refinancing and exchange rate risks. Moreover, the lack of transparency of collateral-backed lending can increase the risk of over-indebtedness and complicate any debt treatment. The COVID-19 crisis has exacerbated pre-existing vulnerabilities. In the early 2020s, uncertainty and increased risk perceived by foreign investors deprived some sub-Saharan African countries of access to foreign capital markets, before normalising in the second half of 2020. On this occasion, multilateral institutions played their counter-cyclical role well by releasing very large emergency funds ($230 billion between April 2020 and mid-2021).

comercio-interregional

In addition, the Debt Service Suspension Initiative (DSI), established by the G20 and the Paris Club, has enabled low-income sub-Saharan African countries to release substantial liquidity to cope with the crisis. Looking beyond a temporary measure such as the DSI, G20 and Paris Club members have for the first time agreed on a common multilateral framework for the future treatment of these countries' debt.


In my view, there is an urgent need for African countries to put in place fiscal policies that can help them mitigate their debt dependency and debt overhang. This will require improving the efficiency of tax administration, rationalising tax expenditures, effectively combating tax evasion and illicit financial flows, and fighting corruption and fraud.
Intra-regional trade, price increases, African Free Trade Area (AfFTAf)


Roads carrying goods on the border between Ghana and Côte d'Ivoire. Sia Kambou/AFP/GettyImage


The global economic crisis triggered by the outbreak of the COVID pandemic in 2020 and Russia's invasion of Ukraine in February this year has intensified the risk of a decline in trade integration between countries. A process known as the de-globalisation of trade. The Russian invasion of Ukraine has exacerbated post-pandemic global supply shortages. It is also further fuelling expectations of a reduced reliance on global supply chains by companies.

This trend risks adding additional stress to economies in Africa, on top of the current surge in food and fuel price inflation imposed by the war in Ukraine. A de-globalised world poses serious risks for Africa. This has been confirmed by the findings of a recent World Bank report8.

It shows that reversing globalisation through the relocation of value chains has the potential to push an additional 52 million people into extreme poverty.
The war between Russia and Ukraine will have serious implications for wheat supply and food stability in Africa. Despite government efforts to limit the pass-through of rising commodity prices to consumers, it will be almost impossible for many African countries to escape rising global food prices, given that food accounts for 30-50% of the CPI basket in most cases. Wheat shortages and rising wheat costs could facilitate a shift to other grains. Demand for wheat is expected to remain inelastic in North African countries (where wheat is a staple food), but consumers in the more price-sensitive sub-Saharan African (SSA) countries may switch to other grains

Establishing a trade development model in Africa, especially at this time, is no easy task. A model based on value chain integration could be a viable and perhaps simpler option than policies such as those adopted by Latin America (import substitution) or Asia (export-annexed policy).

The AfFTA: African Free Trade Area (1 January 2021)

How will this new continental economic community (the current ones are regional) facilitate intra-African trade by enabling better integration of regional and global value chains?

It is important to distinguish between intra-African trade and Africa's trade with the rest of the world. Intra-African exports are more diversified and have a more relevant technological content than exports to the rest of the world. The latter mainly comprise 65% of natural resources.9  40% of FDI (Foreign Direct Investment) refers to industries linked to these natural resources, mainly in the mining sector, with little added value, and with a significant capital endowment, which prevents the development of global value chains in the manufacturing sector. In contrast, intra-African trade relies mainly on manufactured and agricultural goods (50% and 20% respectively).

Before the AfFTA, Africa experienced trade liberalisation that was not accompanied by trade integration; thus intra-African trade accounts for only 15% of Africa's total trade, a far cry from that of other continents (60% in Asia, 68% in Europe, and 58% in America, according to statistics from https://unctad.org/es/node/27419 UNCTAD). 

Governance and institutions

Control regimes (which are a manifestation of a power structure and not a misguided economic policy prescription), an interventionist economic model, and and abusive, interventionist economic model, which was present for many years in Africa, expelled from the productive apparatus those who were not favoured (you were either with the regime that exercised that regime and cohabited with it, or you were simply excluded and your economic and production expectations had no future).

The countries that exercised these practices had little and almost negative growth for years. On the other hand, those that abandoned this type of policy at the end of the last century and improved their political and economic institutions, i.e. improvements in the quality of administration, in legal certainty, more effective implementation of rules regulating economic activity and control of corruption saw an acceleration in their growth beyond the increase in natural resource-based GDP that they have produced13.

The strategy to follow includes strengthening financial management, promoting transparency and accountability in the delivery of public services, increasing effectiveness of governments, creating business-friendly environments, fighting corruption and strengthening institutional frameworks needed to manage the efficiency of the economy at the national and local levels.
 

CPIA Index World Bank

A highlight....

Of the 39 sub-Saharan African countries eligible for International Development Association (IDA)12 assistance, Rwanda remains the one with the best qualities of public policies and national institutions. This is according to the 2021 edition of the Country Policy and Institutional Assessment (CPIA) report for Africa, published by the World Bank.

Rwanda had already been considered for several years as one of the best performers on the African continent in terms of development policies. According to the World Bank, "it has remained remarkable, underpinned by its significant progress in health service coverage, management and financing". The institution also notes that in the midst of the COVID-19 pandemic, Paul Kagame's country has continued and even adapted its public policies. This trend is particularly noticeable in the education sector.
 

 NOTES AND REFERENCES


1 Perspectivas económicas regionales: África subsahariana, abril de 2022 (imf.org)

2 https://www.afdb.org/sites/default/files/building_back_better_in_post_covid-19_africa-kcu-_31-08-20-final-1sept.pdf

3 Africa Pulse world bank April 2022

4 la reacción de Kenia ante el Consejo de Seguridad de la ONU es esclarecedora al respecto: el representante de Kenia recordó con tranquilidad que el continente africano había sido colonizado por las grandes potencias europeas y que las poblaciones habían sido separadas por las fronteras trazadas, pero que no había guerras incesantes. porque los estados africanos habían aprendido a vivir con esta división. Esta es una buena lección dirigida a Rusia.

5 las perspectivas de crecimiento ya iniciadas en 2021 (+3,6%) pueden verse afectadas por este último acontecimiento.

6 "El aumento de los precios del petróleo ha elevado las perspectivas de crecimiento de los exportadores de petróleo de la región, como Nigeria". Su previsión de crecimiento del PIB de Nigeria para 2022 es del 3,4%, lo que supone un aumento de 0,7 puntos porcentuales respecto a la ronda de octubre, y para 2023 es del 3,1%, lo que supone un aumento de 0,5 puntos porcentuales (World economic Outlook 2022).

7 Africa Pulse abril 2022 Banco Mundial

8 los países exportadores de petróleo son aquellos en los que las exportaciones netas de petróleo representan al menos un 30% de sus exportaciones totales; los otros países ricos en recursos naturales (RN) son aquellos en los que los RN no renovables representan al menos un 25% de las exportaciones totales; los países tributarios del turismo son aquellos en los que el turismo representa más de un 5% del PIB y 30% de sus exportaciones. El resto de los países son considerados como más diversificados.

9. https://www.worldbank.org/en/region/afr/publication/industrialization-in-subsaharan-africa-seizing-opportunities-in-global-value-chains

10.https://wits.worldbank.org/default.aspx?lang=es

11. Este indicador compara el perfil de exportación de un país al de un país de una comunidad económica regional (CER)

 12. Recordemos que la clasificación solo tiene en cuenta los países del África subsahariana elegibles para recibir asistencia del IDA . Excluye, por ejemplo, Sudáfrica, Esuatini, Seychelles, Mauricio, Angola, Botswana, Gabón, Guinea Ecuatorial y Namibia. “World Bank. 2021. CPIA Afrique, Novembre 2021 : Évaluation des Politiques et des Institutions en Afrique. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/36885 License: CC BY 3.0 IGO.” La Asociación Internacional de Fomento IDA es la institución del Banco Mundial que ayuda a los países más pobres del mundo. Fundada en 1960, IDA tiene como objetivo reducir la pobreza mediante la concesión de préstamos (conocidos como "créditos") y donaciones para programas que estimulan el crecimiento económico, reducen la desigualdad y mejoran las condiciones de vida.

13. (Carlos Sebastian: Subdesarrollo y
esperanza en África/ tablas fuentes: Collier y O’Conell 2008 y Globla development finance
indicadores del banco mundial

 Bibliography, forums, and some recommended readings

•    https://www.youtube.com/watch?v=UDlmc_WWCtI
•    Agence française de développent L’économie africaine 2021 et 2022
•    Jean-François Rével “El conocimiento inútil” ed. Página indómita
•    Béchir Ben Yahmed “J´assume” editions du ROCHER
•    Banco Africano de desarrollo world african Outlook 2022
•    Banco Mundial estadísticas 2022
•    Jeune Afrique lectura newsletters
•    Carlos Sebastian: Subdesarrollo y esperanza en África
•    Debt repayment costs are rising fast for many African countries. The economist. Middle East & Africa
Apr 30th, 2022, edition. “They are unlikely to default this year, but face trouble by 2024”
•    Banque Mondiale 2020 The African Continental Free Trade Area. Economic and distribution effect, Washibgton,DC
•    Ferry M.,Jonveaux B. et Terrieux M. (2021) « La soutenabilité de dettes en Afrique : état des lieux et enjeux futurs ».


 

More in Reports
PORTADA 

Una combinación de imágenes creadas el 9 de febrero de 2024 muestra a ucranianos fotografiados entre edificios y casas destruidos durante los dos años de la invasión rusa de Ucrania - PHOTO/AFP
In a post-pandemic scenario, Russian President Vladimir Putin launched a major offensive against Ukraine, bringing the first full-scale war since World War II to Europe

Mapping a failed invasion