How significant is Africa to the West, to the world? (10)

AGENDA 2030 of the Sustainable Development Goals (SDG) will be recording many milestones in the next eight years as the end date approaches. Many countries will be telling stories of success while others will reel out more than enough excuses for not making any substantial progress. It is important to begin to examine now, where Africa as a continent will be then. As a continent, development becomes a crucial issue as the world’s economy grows while the fortunes of some countries seem to dwindle or enter crisis mode. The United Nations’ SDG 9 focuses on building resilient infrastructure, promoting inclusive and sustainable industrialisation and fostering innovation. With the structural changes in the global economy over the past two decades, greater emphasis has been on manufacturing and service industries as major drivers of the new economy. Africa has clearly not been a major active player in this new economy. On manufacturing, the United Nations Industrial Development Organisation (UNIDO) observed not too long ago that Africa’s share in world Manufacturing value added (MVA) stood at around two percent, adding that the average world MVA per capita was almost nine times higher than Africa’s.

Africa is known to face major challenges in economic development as industrialisation continues to be exposed to the increasingly more connected and more sophisticated global economy in which so much can happen in a split second to turn around a country’s fortune. However, the fact that the international community takes note of the fundamental need for industrialisation on the African continent could be seen from the amount of funds coming into various countries within the continent. But the exposure of the local manufacturing sector to international competition is also obvious, as it slows down industrial development because of inherent local vulnerabilities. UNIDO’s definition of industrial competitiveness as the capacity of countries to increase their presence in international and domestic markets whilst developing industrial sectors and activities with higher value added and technological content exposes some aspects of such local vulnerabilities. Industrial development cannot therefore be without industrial competitiveness. It is of interest that only two per cent of world manufacturing value MVA is generated in Africa while the continent accounts for only three per cent of world GDP.

The contradictions within Africa are noteworthy. Much of the major drivers of the world economy emanate from Africa, albeit in raw and unprocessed forms of commodities. The continent reportedly possesses 12 per cent of the world’s oil reserves, 40 percent of its gold, between 80 percent and 90 percent of its chromium and over 70 percent of the world’s cobalt that is now an essential component of electric vehicles. In essence, Africa’s potential contribution to renewable energy and reduction of environmental pollution from automobiles is enormous. Yet most countries in Africa are in debt and are experiencing financial instability. The rise in financial instability in many transition economies in recent years necessitates some curiosity on why credit supply remains often insufficient in many countries of Africa and why many such countries sink deeper into debts even with more credit supply. The quantity and the quality of the credit supply have major implications for many countries that have been exposed to borrowing in what appear like purported attempts in many countries to boost their economies. Many countries are facing serious forebodings of defaults on debts. Although many of Africa’s financing needs are long-term, the continent seems to be sinking again into the pit of debts as no fewer than 22 countries are currently either in debt distress or at high risk of debt distress. This implies difficulties in paying back debts the governments incurred on behalf of their states. With a debt to GDP ratios of 119.02 percent and 102.65 percent respectively, Mozambique and Zimbabwe are already in debt distress while Malawi, Zambia and Comoros are at high risk.

The uneven development among the countries of Africa remains a huge setback to the entire continent. Bigger economies in Africa will continue to be dragged backwards just as smaller, indebted ones. Even the bigger ones are not immune to the problems of indebtedness as the ability of countries to manage their debt continues to be complicated by the increasing sizes, changing composition of the debts and the wider range of creditors to which they are exposed. Sub-Saharan Africa had a total external debt stock of $702.4 billion in 2020, compared to $380.9 billion in 2012. Within this period, the amount owed to official creditors, including multilateral lenders, governments and government agencies, increased from about $119 billion to $258 billion. While the debt profiles of countries continued rising, the confounding thing was happening as the volume of money stolen by corrupt political leaders from Africa and kept in foreign accounts continued to grow. For instance, the United Nations and the African Union disclosed that around $148 billion is stolen from the continent annually by corrupt political leaders, multinational corporations or some other entities. Yet, the spectre of sovereign defaults became real in the continent. The question about what African countries use the borrowed funds to finance becomes pertinent as it seems likely that some government officials embark on private round-tripping with officially borrowed money.

Of the many different ways of raising debt, the amount of bonds issued by African states on international markets has tripled in about a decade, held by an assortment of investors such as insurance companies, pension funds, hedge funds, investment banks and individuals. Some countries or private entities may have made good use of some borrowings while many have abused such windows. Many high profile companies in South Africa have benefited a great deal, cutting across telecommunications, hotels or hospitality and entertainments. One of the largest continental GSM service providers from South Africa owes much of its success to such windows of funding. The responses of the various lenders have also been diverse. While some that have been around are considering pulling out or halting their operations in Africa, some new ones are coming in. Their motives and modus operandi do not have to be similar, not least their expectations. Earlier on, official creditors of African countries were primarily the rich Western states and multilateral institutions like the World Bank and the International Monetary Fund. Now, the group has been expanded to include China, India, Turkey and multilateral institutions like the African Export-Import Bank and the New Development Bank. The role of Multilateral Development Banks (MDBs) in lending to African countries is legendary. The International Monetary Fund, World Bank, African Development Bank and some others have been around for a while. From 2000 to 2020, Chinese financiers have signed 1,188 loan commitments worth $160 billion with African governments and state-owned companies, according to Boston University’s research.

Many notable private multinational Banks (MNBs) have had their eyes on Africa at one time or the other for a variety of reasons. Among them, Raymond James, Julius Baer, Goldman Sachs, BNP Paribas, Citigroup, JPMorgan Chase, Credit Suisse, Bank of America, Morgan Stanley and UBS have played several roles to varying degrees in many African countries. Banque Nationale de Paris (BNP Paribas), a French international banking group, founded in 2000 from the merger between Banque Nationale de Paris (BNP, “National Bank of Paris”) and Paribas, formerly known as the Banque de Paris et des Pays-Bas, has been operating in the Middle East and Africa for over four decades even before the merger, although the Sub-Saharan Africa seems no longer its priority as the French bank now looks more towards Europe and Asia, while still maintaining some establishments in Africa, especially in Senegal where it is the sixth largest bank. Late in 2021, UBS Group AG, a Swiss bank, began retreating from its South African investment-banking operations after laying off most of its dealmakers in that country. Earlier this year, Credit Suisse – another Swiss bank – announced that it was pulling out of nine African countries. However, earlier in the year, British International Investment and U.S. bank Citigroup Inc. signed a $100 million risk-sharing facility aimed at boosting lending to small businesses across Africa. JP Morgan, an American multinational investment bank and financial services holding company headquartered in New York City, has launched a $20 million fund for black-owned businesses in South Africa, while Goldman Sachs is positioning to provide the full suite of investment banking and loans to South African corporates and institutions. The Hongkong and Shanghai Banking Corporation (HSBC) Limited, essentially a British multinational investment bank, operating in the Sub-Saharan Africa since 1981, approved $30 million in green financing last September to a South African company specialising in waste management.

While the foregoing provided some insights into sources of finance, it also highlights missed opportunities and imminent threats as debt distress remains one of Africa’s biggest problems. History may happen again as concern is increasing about the prospect of a new sovereign debt crisis in countries across sub-Saharan Africa. Just while some Asian countries were making an impressive presence on the global economic stage in the 1990s, Africa was grappling with a debt crisis. Subsequently, officials from major creditor countries – referred to as the Paris Club – and multilaterals, came up with the ambitious Multilateral Debt Relief Initiative (MDRI) for outright forgiveness of debt owed by a group of 36 low-income poor countries of which 29 were African. Beneficiaries of the massive debt relief were expected to embark on sound economic management and poverty reduction strategies. MDRI was to help the Heavily Indebted Poor Countries (HIPC) to address debt overhang in the poorest countries of the world, and African countries had been borrowing before the 1980s, with an increasing accumulation of debt that became unsustainable. For about a decade after the MDRI debuted, the median public debt level – as a percent of GDP – for sub-Saharan Africa declined to about 31 percent in 2012, far below the levels leading up to the HIPC initiative. Brookings, however, expressed concerns associated with the debt relief programme, notably the issue of moral hazard, worried that, in the future, this blanket debt forgiveness would distort incentives for weak governments to over-borrow and then over-invest, detracting from economic performance. “These concerns are consistent with the belief that poor governance and fiscal indiscipline contributed to the debt overhang and that, unless there are genuine systemic reforms, history will repeat itself,” Brookings pointed out.

Another cycle seems to be playing out now as Africa once again faces massive debt, beginning since 2013 when the region’s debt began to rise. In 2017, the median debt ratio as percent of GDP was 53 percent, up from 31 percent in 2012 both in domestic and external debt. Based on the rapid increase in debt burden over recent years, Brookings pointed out, “about one-third of the countries in sub-Saharan Africa are either in or at high risk of debt distress, including the majority of countries that benefited from debt relief in the 1990s. Total debt and external debt for these countries is estimated at $160 billion and $90 billion, respectively.” It has been reported that a proliferation of new creditors emerged as African countries began entering capital markets after the cancellation of debts of developing countries in the early 2000s. Eight African countries accounted for over 80 percent of private creditors’ debt in 2019, whereas three countries accounted for 50 percent of China’s debt. It has been observed that the majority of infrastructure investments delivered through the use of Public-Private-Partnerships (PPPs) pose serious economic and social risks. More problematic is the absence of a successful sovereign debt resolution system involving all creditors, in which case the resolutions fail to support recovery for heavily indebted African countries. As of April 2020, just about the onset of the COVID-19 pandemic, the IMF categorised seven African countries as being in debt distress and identified 12 more as being at high risk of becoming so.

After the HIPC and MDRI cancelled most of the debts owed to traditional creditors in 2006, African countries reportedly began issuing bonds in international credit markets and procuring new debts, increasing by nearly 140 percent to $841 billion between 2009 and 2019. Research from Standard & Poor’s (S&P) indicates that sovereigns have historically defaulted twice as often on foreign currency obligations as on local currency debt. A study on Kenya has shown that, with respect to financial stability, banking practices that helped to increase financial fragility continued to thrive in the presence of MNBs in that country. The same study also notes that the MNBs may also have had an indirect destabilising effect on South Africa, as domestic banks, missing strong domestic investment opportunities turned to speculative overseas investments instead. Breaking the shackles of debt is a first essential step to the economic development of Africa. How that can be done when more debts are accumulating is a big task ahead of African political leaders, policy makers and intellectuals. While some of the debts might have been incurred on infrastructure projects, such investments only make sense when the returns on the investment far outweigh the debt. To be free from the leash and tethers of debt, a new thinking is required and urgency is needed. Unsustainable debt should be done away with and new ways of financing must be explored. A time has come for Africa to be free to make progress. The time is now.