Month: October 2018

The Fallacy of China Debt Trap Diplomacy

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This article first appeared in my weekly column with the Business Daily on October 28, 2018

Last month, the South African Institute of International Affairs published my policy insight on the Chinese Debt Trap. In short, Africa’s growing public debt has sparked a renewed global debate about debt sustainability on the continent. This is largely due to the emergence of China as a major financier of African infrastructure, resulting in a narrative that China is using debt to gain geopolitical leverage by trapping poor countries in unsustainable loans. It essentially argues that African governments are being deliberately lured into debt by the Chinese government through debt trap diplomacy and that China has an ominous plan to mire the continent in debt in order to gain economic and geopolitical control of Africa.

See the source image

(source: http://www.leeabbamonte.com/asia/how-china-is-taking-over-the-world.html)

My counter-argument is simple: The debt trap narrative undermines the decision-making power and agency of African governments. Even worse, the debt trap narrative infantalises African governments, painting them as little more than overgrown children who have to be constantly supervised by other powers if there is any hope of them getting anything right.

More seriously, the debt trap narrative is deeply worrying because it is deeply dangerous. Arguing that African governments are being lured or tricked by China actually begins the process of preventing sovereign African governments from being held accountable for the financial commitments made on behalf of the African people. The narrative gives wiggle room for some governments to become intellectually dishonest and say that they did not know what they were getting into as they signed multi-billion dollar deals with China, rather than stand up and be counted. The narrative, in its determination to paint China as the ‘bad guy’, actually begins to absolve African governments of their fiscal responsibility and obligations. It creates space for some African governments to avoid hard questions from their publics about how debt is used, accounted for and whether the debt has led to economic gains and development.

(source: https://www.panafricanvisions.com/2018/op-ed-african-women-even-politics/)

Last week, the Financial Times (FT) took this argument further, pointing out that the heaviest cost for African countries comes from private lenders, not the Chinese. Nearly a third of African governments’ debt is owed to private creditors, but they account for 55 percent of interest payments. By contrast China, is owed about 20 percent of African nations’ external government debt, and receives just 17 percent of interest payments.

And to be honest even if that number were higher and Africa owed China far more, the responsibility for that rests squarely on the shoulders of the Ministries of Finance/ Treasuries of African governments, not China. African governments have demonstrated tremendous appetite for debt and have not only gone to China looking for it, they have floated sovereign bonds and continue to borrow from their traditional partners.

Frankly, the debt trap narrative seems motivated more by frantic Sinophobia than any genuine concern for the economic and fiscal health of African countries. Africans are worried about growing public debt, period. After all, it is the African people alone who will have to pay back all the debt in question. Thus, let the concerns of the African people about the fiscal accountability of their governments take centre stage in the conversation about public debt on the continent.

Anzetse Were is a development   economist, anzetsew@gmail.com

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Important role of MSMEs being recognised

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This article first appeared in my weekly column with the Business Daily on October 21, 2018

Last week the Inaugural Presidential Roundtable for Small and Medium Enterprises (SMEs) was held at Strathmore University with a focus on six sectors linked to the Big Four Agenda: Textiles, Livestock (dairy, beef and leather), Agro processing, Aquaculture, Construction and Trading. While the title of the roundtable headlined SMEs, the roundtable actually brought together micro enterprises as well thus making it a forum for MSMEs. Entrepreneurs discussed key issues and generated recommendations specific to their cluster with cluster representatives selected to share their content with the President.

See the source image

(source: https://www.smefinanceforum.org/post/financing-sme-growth-in-kenya-%E2%80%93-briefing-note)

The importance of this roundtable ought not be dismissed because it is the first time under the new constitution and devolution, that such high level attention has been accorded to the MSME sector. MSMEs are crucial as they constitute at least 80 percent of the private sector in Kenya and are central in generating employment, creating new jobs and contributing to GDP. Thus the focus on MSMEs is welcome, particularly at a time where many Kenyans feel economic growth does not translate to economic security and welfare. This is largely because MSMEs are locked out of financing and support structures that allow them to become more productive, profitable and scale. As a result, often the returns generated are not commensurate to the effort and time invested in business ventures by most MSMEs. For the most part, most low income Kenyans stay confined to subsistence, informal business activity, mainly as micro and small businesses.

The roundtable is important and signals that government has recognized the importance of MSMEs, and has an interest in learning about the sector to address their challenges. It also signals to financiers and business development providers that the MSME sector ought not be neglected if the country is to get on a credible path of economic transformation. One key issue is that, at the moment, MSMEs seem stuck in a vicious cycle where they are shunned by most financiers, and thus do not grow and strengthen financially, and thus remain vulnerable and ‘high risk’ and thus are shunned. Given the return on assets of banks in Kenya where the top 3 Kenyan banks are outperforming global peers in profitability and are among the top 20 in the world, there is room for banks to become more creative and relevant in financing MSMEs. For only then will a transition from micro to small and medium enterprise occur at a scale where a pool of larger businesses emerge that provide a wider and deeper deal pipeline for financiers.

See the source image

(source:https://www.smefinanceforum.org/post/financing-sme-growth-in-kenya-%E2%80%93-briefing-note)

Beyond financing and business development support, another key issue is market access, an area with which many MSMEs struggle, particularly in terms of the physical market spaces in which they operate. Most physical markets in which MSMEs conduct business are congested, dilapidated, have limited to no amenities in terms of electricity, water and sanitation, have poor security and are serviced by poor transport infrastructure. These factors alone discourage customers from visiting these markets, thereby locking MSMEs out of a lucrative consumer base.

Last year, the Central Bank of Kenya made the point that MSMEs were key in the resilience of Kenya’s economy and are crucial in economic recovery and performance. MSMEs have proven their worth. Let them be accorded the seriousness and focus they warrant for in doing so Kenya will more credibly achieve economic transformation and development.

Anzetse Were is a development economist; anzetsew@gmail.com

How Africa can leverage its youth in three ways

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This article first appeared in my weekly column with the Business Daily on October 14, 2018

Africa is young in three ways: young economy, young political system and a young population. These three variables present Africa with unique challenges and opportunities. Yet Africa lives in a world with many old countries with far more experience. How does Africa leverage her youth?

To be clear, there are key challenges linked to being young and Africa is young in terms of modern political economy structures. On average, African countries, as currently delineated, are about 50 years old or younger. Juxtapose that with at least 400 years of slavery and 200 years of ‘exploration’ and colonialism. It’s a marvel that Africa still functions. The point is that, under the current economic structure, Africa is young in three ways: young economy, young political system and young population. Each variable has its challenges and strengths.

Image result for africa

(source: https://www.business-humanrights.org/regions-countries/africa)

In terms of being a young economy, key challenges of being a young economy is economic immaturity, shallow financial markets, massive informality, cartels, and a poor economic data and knowledge base. These are real challenges that constrain the economic prosperity of the continent. There is often the perception that Africa is ‘inherently economically incompetent’. No. We are just young and the same struggle we are having is what other nations have done to get where they are. But there advantages to being a young economy: We have the opportunity to leapfrog, the opportunity to learn from older countries and leverage economic experience from others to Africa’s gain and we have the chance to create an economic path the world has never seen. Africa has that power.

In terms of being a young political system, there are key challenges: kleptocracy, corruption, and a concentration of political power. This feature is evident in the acrimonious relationship between African governments and their publics. But there are advantages to a young political system namely a young, engaged an invested populace; an opportunity to influence the country’s political path; and an opportunity to craft a political ideology that benefits Africa. So be aware that Africa is crafting its own political identity. And it will be done in a manner that is aware of all the geopolitical interests others have on the continent. It will be Africa front and centre.

Image result for kenya youth

(source: http://chwb.org/others/news/kenya-youth-peace-will-run-year-2015/)

And thirdly, Africa has a young population which is linked with the following challenges: unemployment, idleness and hopelessness, and civil instability. Africa has to leverage its population dividend or be swallowed by it. But a young population has its advantages such as: an energetic and deep labour pool; opportunity to skill up labour appropriately, and a massive young market. Not only is the African population growing in size, it’s growing in GDP per capita. Africa is a young, massive and lucrative market.

It is up to Africa to decide how to leverage our youth in three ways. And I am confident that we will.

Anzetse Were is a development economist; anzetsew@gmail.com

 

The New Face in Stemming Illicit Financial Flows in Africa

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This article first appeared in my weekly column in the Business Daily on October 10, 2018

Recent action in the banking sector in Kenya ought to be noted where the Central Bank of Kenya (CBK) announced that an unspecified number of banks are under investigation with regards to tracing the recipients of the allegedly irregularly acquired funds linked to the National Youth Service (NYS). Media reports indicate that bank accounts of companies and suspects with money believed to have been questionably acquired via the NYS have been frozen for six months. The CBK ought to be commended for taking this step, which is well within its ambit of authority, largely because it has drawn attention to the local articulation of illicit financial flow involvement. The CBK Governor indicated that regulatory guidelines on handling the proceeds of corruption are clear to all financial institutions making chief executive officers of those that ignored the rules personally liable.

The complexity and weight of what it trying to be done should not be underestimated so it would be prudent to start with definitions. Global Financial Integrity defines illicit financial flows (IFFs) as illegal movements of money or capital from one country to another. GFI classifies this movement as an illicit flow when the funds are illegally earned, transferred, and/or utilized. The first point to note is that this definition is insufficient in the African context.  At least three types of IFFs are present in countries like Kenya. The first is the well-known IFF particularly by private sector which transfer fund to tax havens abroad and use strategies such as transfer pricing to under-declare tax liabilities. The second is to do with the funds irregularly acquired from public coffers, through government-financed projects that are transferred from government accounts to local recipients. The third type of IFF is that linked to government-financed projects that are transferred from government accounts to recipients abroad. I have previously noted that African publics have been relatively disinterested in IFFs because they did not see how stemming IFFs would be of benefit to them.

Image result for Illicit financial flows

(source: https://www.one.org/africa/blog/launch-of-the-high-level-panel-report-on-illicit-financial-flows-in-africa/)

The action taken by the CBK has changed this because it is the first time, at least in living memory, a regulator has put the banking sector on the spot with regards to how they facilitate and profit from IFFs. Thus, the action from the CBK ought to be positively noted as Kenya is in a region surrounded by countries in conflict which often use Kenya as a centre for illegal financial transactions.

An example of local participation in IFFs involves South Sudan. An investigative documentary, The Profiteers, unpacks how leaders of states in conflict profit from war using the financial systems of neighboring countries. The only way elites can profit from the war is if key regional financial hubs such as Kenya continue to allow apparently illegally acquired wealth move through their financial systems to their profit. The facilitation of such IFFs expose the Kenyan financial system to the risk of financing of war and civil instability. Because despite the presence of anti-money laundering money legislation, if the banking sector is lax with regard to any type of IFF, it exposes the entire financial system to the transfer of illegally acquired funds. IFFs are a national and regional security issue.

In 2020, Kenya will be subject to a review by the Financial Action Task Force which will scrutinise the country’s financial sector. Any abuse of Kenya’s financial system will put the integrity of the country’s financial system in question and undermine Kenya’s international reputation and attractiveness to investors.

Anzetse Were is a development economist; anzetsew@gmail.com

 

Africa should seize renewed global interest for prosperity

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This article first appeared in my weekly column with the Business Daily on September 30, 2018

Over the past few months, it has become clear that the world is multipolar and that Africa is seen as a key partner for all the different centres of global power. There has been a notable shift in attention from perceiving Africa as a continent of poverty and aid, to one for trade and investment.

The most talked about power is, of course, China which unveiled a USD 60 billion plan for economic engagement with Africa during FOCAC. Right along China is the USA which is creating the International Development Finance Corporation, an agency that can invest up to USD 60 billion in the developing world. According to the Financial Times, the new agency will spearhead private sector investment through both debt and equity deals, and make profits for the USA. The European Union (EU) is also on the money; reports indicate that the EU is proposing a new Africa-Europe Alliance for Sustainable Investment and Jobs involving a 25 percent hike in the EU Africa budget for 2021-27 to about € 40 billion. Japan will not be left behind. In 2016, Japan’s prime minister, announced that between 2016 and 2018, Japan would invest USD 30 billion in public-private partnerships in Africa. Other countries such as India, Turkey, the UAE, Russia and Brazil also have an eye on the continent with their own Africa-focused economic initiatives.

Chinese President Xi Jinping

(source: https://www.businessdailyafrica.com/analysis/ideas/4259414-4784518-7t12dl/index.html)

So the question is why the mad dash for Africa? Why now? There are several factors informing this renewed attention, the first of which is China. Africa would arguably, not be getting such determined attention particularly from Europe and North America, if China had not made such significant economic inroads into the continent. Old powers fear losing Africa to China, and have been forced to reassess their attitude towards Africa and make themselves relevant again.

A second factor is the fracturing of the Western alliance between Europe and North America; an alliance that has been the core of international power and influence since the Cold War. The UK is breaking away from the EU via Brexit, and the USA is contemplating putting sanctions on the EU and Canada, and moving away from NATO. Going forward it seems that a relationship that was once defined by cooperation and coordination will be increasingly defined by competition. Theresa May hinted at this shift when she stated that she wanted the UK to overtake the USA and become the G7’s biggest investor in Africa by 2022.

Image result for Africa business

(source: https://www.africanexponent.com/post/there-are-numerous-business-opportunities-in-africa-1610)

Thirdly, Africa has a new generation of individuals who are more educated than ever before, want prosperity at home, and have an entrepreneurial ambition and ability the continent has never seen. Africans are approaching investors, making business deals with players all over the world and proving not only that no one knows Africa like Africans, but that there is money to be made here.

Lastly, the world seems to finally understand that it is better for everyone when Africa is doing well. Whether this new focus is informed by an attempt to stem the flow of immigrants into Europe, or in response to sentiments of economic nationalism where publics have grown tired of sending billions to Africa and getting ‘nothing in return’, the impetus to focus on Africa’s economic potential is real.

The question now is: How does Africa leverage this renewed interest in the continent? How does Africa use the multiple offers to its advantage? We do not know when the world will next be so keen on Africa, we have to seize the opportunity at hand.

Anzetse Were is a development economist; anzetsew@gmail.com