International Finance

Why Africans Seem Unconcerned About Illicit Financial Flows

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This article first appeared in my weekly column for the Business Daily on August 12, 2018

African governments are deeply concerned with the continued scale of illicit financial flows out of the continent. Experts say that Illicit Financial Flows (IFF) from Africa has doubled to USD 100 billion annually. The UN estimates that between USD 1.2 trillion and 1.4 trillion left Africa in illicit financial flows between 1980 and 2009 alone; this is roughly 63 percent of Africa’s Gross Domestic Product, and surpasses the money it received from outside over the same period. IFF far exceeds what the continent receives in aid and the fact that most are not aware of this seeds the impression that the world continues to be altruistic towards Africa when, it can be argued, Africa is financing the world.

Image result for illicit financial flows

(source: https://www.capitalfm.co.ke/eblog/2016/12/07/illicit-financial-flows-development-agenda-africa/)

Not only do African governments view the scale of IFF as morally abhorrent, their concern has a level of pragmatism during a time when many governments seek increased investments into their nations. In order to build infrastructure, stimulate private sector and economic growth, African governments consider these flows to be robbing them of funds that are rightfully theirs, pushing them to enter debt agreements that could have been financed if IFF were stemmed.

However, what is clear in this conversation is that the general African public does not seem to be as concerned about IFF as African governments are. This is due to several reasons the first of which is that some African-owned companies benefit from the loopholes that allow IFF to continue unabated. Through transfer pricing many African companies are able to retain more of their profits; and it’s doubtful they view this as immoral but practical business sense that keeps costs down. One is unlikely to see a strong African private sector push to address IFF.

Secondly, IFF features nowhere near the top of the list of priorities for Africans as most are concerned with basics such as access to clean water, health services, educational facilities and adequate nutrition. It will likely be a long time before African masses begin to picket fence about IFF.

Image result for illicit financial flows

(source: https://www.moroccoworldnews.com/2013/12/117665/illicit-financial-flows-from-africa-track-it-stop-it-get-it/)

Finally, one will likely not see any great pressure put on foreign governments by African populations concerning IFF because African populations generally do not view their own governments as responsible custodians of public wealth. Why should African populations put their weight behind their governments in insisting on an end to IFF when those governments are not financially accountable to them? Until African government stem fiscal indiscipline and mismanagement, IFF will be viewed as a difficulty African governments can grapple with on their own. Indeed, one can argue that the injustice of IFF in the minds of African governments, mirrors the injustice felt by African people when public funds are embezzled. As African governments starve their people of funds that are rightfully owed to the public, IFF can continue to starve African governments of funds they view as rightfully theirs.

In short, African governments ought to clean up their act and demonstrate that they can responsibly manage public funds if they ever hope to get the African public to amplify their push to end IFF.

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

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US-China Tariff Fallout Sets Stage for Shift in Africa’s International Trade

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This article first appeared in my weekly column with the Business Daily on July 22, 2018

Trade tensions between the two largest economies in the world have made global headlines as the trade war will have implications not only for China and the United States (US), but other countries well.

In terms of the background of the trade war, on June 15, Trump declared that the US would impose a 25 percent tariff on USD 50 billion of Chinese exports; USD 34 billion would start July 6, with a further USD 16 billion to begin at a later date. China imposed retaliatory tariffs for the same amount. A few days later, the US stated it would impose additional 10 percent tariffs on another USD 200 billion worth of Chinese imports if China retaliated against the U.S. tariffs. China retaliated almost immediately with its own tariffs on USD 50 billion of US goods. Keeping track of the back and forth of tariff imposition between the US and China is a task on its own, but what is more important is unpacking how these trade tensions will affect Africa. There are three implications of the USA-China trade war of which Africa should be cognisant.

Workers at the Export Processing Zone in Athi River.

(source: https://www.businessdailyafrica.com/analysis/ideas/US-China-tariff-fallout-Africa/4259414-4675670-pdvicjz/index.html)

Firstly, the imposition of tariffs between two lucrative markets in the world may well encourage both countries to diversify their export markets away from each other. Africa is one of the fastest growing markets in the world, and the potential loss of income from both new tariffs as well as ‘new’ non-tariff barriers that will likely appear, will provide impetus for both China and the USA to push deeper into African markets.

Secondly, the trade feud will deepen the resolve of the Chinese government to diversify away from export to consumption-driven growth. While the export-driven economic development model has reaped dividends for China, it has also left it vulnerable to this precise scenario. Thus, expect added commitment from the Chinese government to shift to primarily consumption-driven growth with greater urgency. This will affect Africa in that China will likely continue to offshore its manufacturing capacity to other countries, including those on the continent.

Image result for china us trade war

(source: https://www.newsmax.com/finance/economy/china-trade-war-confidence/2018/07/18/id/872331/)

Thus, the third implication of the US-China trade spat is that it may provide added impetus for increasing manufacturing investment and activity into Africa, particularly by the Chinese private sector which is already on this trajectory. A 2017 McKinsey report indicated that about 10,000 Chinese-owned firms operate in Africa, of which about 90 percent are privately owned. 31 percent of these firms are in manufacturing and already handle about 12 percent of industrial production in Africa with annual revenues of about USD 60 billion. Further, expect Chinese private sector to leverage AGOA and tariff hop into the US markets through Africa. In doing so, they will secure access to the US, access which would be much more difficult if were they domiciled in China.

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

The Financial System That Keeps The World Cup Going

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This article first appeared in my weekly column in the Business Daily on July 15, 2018

The last few weeks have been dominated by the FIFA World Cup with fans all over the world tuning in to support their teams and catch all the action. What many may not know is the size of the World Cup economy and the financial ecosystem that keeps it running.

The first element of cost of the World Cup is paid by the host nation. Russian media reports indicate that the total cost of hosting the event is over USD 10 billion. Interestingly, this is USD 5 billion less than the cost of the 2014 World Cup in Brazil. There are differing views as to whether investment in hosting the World Cup generates financial returns for the host economy. A study on FIFA World Cups indicated it has varied impacts on host country stock markets. In the case of South Africa, the tournament announcement date was linked to a largely positive trend on stock returns. However, in Japan there was a decline in daily stock returns a day after the announcement of the tournament.

Gianni Infantino

(source: https://www.businessdailyafrica.com/analysis/ideas/Financial-system-that-keeps-the-World-Cup-tournament-running/4259414-4664084-121ir1pz/index.html)

Further, some economists assert that no observable short-term economic growth linked to the World Cup exists within the tourism, retailing, accommodation, and employment sectors of host countries. Others insist that the World Cup can boost tourism, retailing, accommodation, and employment because of the novelty effect of new stadiums, the feel-good effect, and the Cup’s effect on the international perception of a host country. While not all factors affect every host nation to equal degrees, the World Cup as a whole, can turn out to be positive.

In the case of Russia in particular, Moody’s is of the view that the World Cup will have limited impact on rated Russian companies, including banks, regional governments, and the sovereign itself. They argue the economic benefit will be short-lived because much of the economic gain has already been attained through infrastructure spending, and even that impact is limited because World Cup-related investments in the 2013-17 period have accounted for only 1 percent of total investments in Russia. They argue that the games will last just one month and the associated economic stimulus will pale in comparison to the size of Russia’s USD 1.3 trillion economy.

Image result for russia world cup stadiums

(source: https://www.footyheadlines.com/2018/04/all-russia-2018-world-cup-stadiums.html)

The second component is the cost of a ticket to attend the games. Here records have been broken because for the first time at a FIFA World Cup, some tickets will cost more than USD 1,000. CNN reports that fans will have to pay at least USD 1,100 for the most expensive ticket at the final, an increase from the USD 990 charged at the last World Cup final held in Brazil. The cheapest tickets for non-Russian fans will cost USD 105, a USD 15 increase on the equivalent ticket in 2014.

The third element is payments made to participating teams. FIFA announced they have allocated USD 791 million for prize money, payments to clubs and player insurance fees as part of the World Cup. USD 400 million will be awarded to 32 national federations depending to how they finish in the tournament and the FIFA World Cup 2018 winners will pocket USD 38 million.

In short, either way you look at it, the World Cup speaks money, and this is likely to only amplify over time.

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

Manage Risks Raised by Oil Exports

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

Last week Kenya became the first country in East Africa to export oil. Media reports indicate that the crude oil was transported in the Early Oil Pilot Scheme and will be kept in Mombasa as the country looks for viable international markets. While Kenyans may be jubilant at the prospect of earning revenue from oil, and hope that those proceeds will lead to prosperity and an improvement in their quality of life, key risks have to managed.

First is the Presource Curse. We are all familiar with the resource curse where natural resources such as oil lead to conflict, facilitate corruption and generate an immense income divide with most citizens failing to benefit from the process of natural wealth. The presource curse, as the IMF points out, indicates that on average after major oil discoveries, growth underperforms post-discovery forecasts. The presource curse is especially pronounced in countries with weaker political institutions. These countries not only fail to meet growth forecasts, their average growth rate is lower than before a discovery.

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(source: http://www.littlegatepublishing.com/2014/01/tullowoil/)

IMF points out that an oil discovery should increase output, and hence growth; oil discoveries are worth 0.52 percentage point a year in higher growth over the first five years. Kenya has only transported the oil to port, whether a buyer has been found is unclear and raises questions as to whether the country has the expertise to consistently find good quality buyers as well as ensure consistent supply. In the presource curse, countries are tripped up by the steps needed to turn discoveries into dollars. Time will tell whether Kenya will buck this trend.

The second risk is to manage profligate spending linked to an anticipation of oil-related revenue. Ghana is an example of a country that went on a borrowing spree based on overly optimistic revenue projections linked to generous oil barrel prices. When the commodity slump emerged, Ghana found itself unable to generate the revenue projected and service new debt obligations. Kenya has to manage this dynamic carefully because, as the IMF points out, if oil prices fall enough, Kenya may see projects cancelled and miss out on anticipated investment, taxes, and jobs. And even if prices go higher, Kenya may only get a share of the increased profits through taxes. Overly rosy expectations may lead to overly optimistic borrowing and risk over-exposure for both the lender and borrower. Thus, there is a need to manage exactly what oil can deliver in terms of revenue.

Tullow Crude Oil

(source: https://www.businessdailyafrica.com/analysis/ideas/Manage-risks-raised-by-oil-exports/4259414-4604952-pw40k2/index.html)

Finally, is the global tide away from fossil fuels; Kenya faces a conundrum. As the IMF points out, if there is no progress in combating climate change, poor countries are likely to be disproportionately harmed by the floods, droughts, and other weather-related problems. But if global actions to address climate change are successful, poorer countries that are rich in fossil fuels will likely face a steep fall in the value of their coal, gas, and oil deposits leading to a massive reduction in the value of their natural wealth.

In short, let Kenya be realistic that as a latecomer to the oil game, there are important risks to manage. And if we fail to manage these risks, the oil-related jubilance will fade very quickly.

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

 

 

 

 

Risks to manage in the African Free Trade Area

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This article first appeared in my weekly column with the Business Daily on May 27, 2018

The Africa Continental Free Trade Area (AfCTA) seeks to integrate African economies and pull together a market with a consumer spending power of USD 1.4 trillion by 2020 and increase intra-African trade by USD 35 billion by 2022. While some countries may have issues with the AfCTA, most African governments are behind it and momentum will continue to build to make it a reality. AfCTA is viewed as a game changer that will allow the free movement of goods and services across the continent, allowing African businesses to tap deeper into the sizeable and growing African markets. However, there are a few risks that ought to be managed going forward.

Delegates during the African Continental Free Trade Area Business Forum in Kigali, Rwanda, in March. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/analysis/columnists/Risks-manage-African-Free-Trade-Area-/4259356-4582538-46rg8n/index.html)

The first risk is to do with the financing of infrastructure that will interconnect the continent. Africa has an annual infrastructure financing deficit of about USD 93 billion. An obvious next step will be the business of raising funds to build the infrastructure Africa needs because without infrastructure, AfCTA will remain a good idea with no lived benefits on the ground. Given concerns with rising debt levels of African countries, coupled with queries on the management of public funds, there is a risk that AfCTA can facilitate a debt binge to finance infrastructure in a context of poor institutional controls and capacity to ensure infrastructure projects are efficiently financed and developed. African governments have to manage this by ensuring infrastructure plans are financed responsibly, that money reaches the infrastructure projects and the projects are completed in a timely manner. Without these controls, the sheer scale of financing that can be attracted to finance infrastructure in the context of AfCTA may trigger debt distress in many African countries.

The second risk is that given Africa’s underdeveloped manufacturing and propensity to export raw commodities; without coordinated policy change, AfCTA may entrench and enable this dynamic. A cynic will point out that given where Africa is now, AfCTA may do more harm than good. By opening up Africa’s borders and markets, AfCTA will make it easier than ever to extract even larger amounts of raw materials from even more of the continent. AfCTA can also open African markets even further to others and unintentionally facilitate the dumping of manufactured goods into Africa by other countries. Is Africa able to process all its oil, gold, coltan, titanium, copper, agricultural produce etc? If not, to whom is AfCTA really opening up Africa? And who will actually capture market share in Africa via AfCTA?

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(source: http://www.decode.co.za/home/clients/)

This leads to the final point which is that the implementation of AfCTA must be correlated with focused and coordinated action across Africa to industrialise. Let African industries and manufacturers get the attention required to catalyse their development. The African Development Bank has just released a report on strategies, policies, institutions and financing required to industrialise Africa. Let governments draw from such documents as they develop and implement their industrialisation policies and strategies. In doing so, Africa will be in a much stronger position to leverage AfCTA and ensure African companies capture market share in a manner that propels wealth creation and development in Africa.

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

The China Debt Question

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This article first appeared in my weekly column with the Business Daily on May 20, 2018

There has been clear concern voiced over the sustainability of Kenya’s fiscal path over the past five years. Total debt has risen from KES 1.7 trillion in 2013 to about 4 trillion in 2017. The good news is that there seems to be indication that plans for fiscal consolidation are underway, although these will only be confirmed when the 2018/19 Budget is read.

Embedded in concerns with Kenya’s fiscal path, is a narrative that raises red flags on Chinese debt. If you look at the accrual of public debt owed to China, this stood at 63 billion in 2013 and rose to 479 billion in 2017; China owns about 66 percent of Kenya’s bilateral debt. This has led to alarm about Kenya’s ‘over-exposure’ to Chinese debt. Indeed, there is an emerging commentary that argues that China is saddling Africa with unsustainable debt and seeks to use indebtedness to further its geopolitical control over the continent.

 Kenya's President Uhuru Kenyatta (left) and Chinese President Xi Jinping  prepare to inspect Chinese honour guards during a welcoming ceremony outside the Great Hall of the People in Beijing on August 19, 2013. AFP PHOTO

(source: https://www.businessdailyafrica.com/analysis/columnists/4259356-4571188-tw2sm7/index.html)

While I agree that there should be concern with debt levels, I think the ‘danger’ of Chinese debt has dubious motives. In fact it is fair to ask if all the hue and cry over debt owed to China would be as pronounced if the debt belonged to another part of the world. The focus on Kenya’s and indeed Africa’s, rising debt needs to be approached in an intellectually honest manner that demonstrates, firstly, that the appetite for debt is coming from Kenya. China is not saddling Kenya with debt, the Kenyan government wants the debt. The Kenyan government has prioritised infrastructure and gone through expansionary fiscal policy to finance this priority. Thus, it is hard to conceive that given the financing demands of infrastructure development, the government would turn down credit lines that can finance this priority.

Secondly, if you look at the portfolio of China’s debt to Kenya, it is focused on infrastructure indicating that perhaps the Kenyan government feels it has found a partner that is willing to invest in its focus on building railways, roads, electricity transmission lines, dams etc. Bear in mind that China is still a developing country with a 2017 GDP per capita of USD8,643, and ranked 75th in the world. However, the Chinese view is that despite this, it will continue to provide sizable development loans to Kenya of which almost half are concessional loans or preferential credit lines with a 2 percent interest rate and 20-year maturity period.

Image result for China Africa

(source: https://www.diplomaticourier.com/2017/04/29/africa-chinas-human-rights-concerns-dont-apply/)

The point is that, once you find a partner that seems to understand where you are coming from and supports your vision, it is likely that the partnership will grow. Further, if other parts of the world are not offering similar debt packages in terms of scale and conditions, they really are not in a position to criticise. So why do some seem surprised by burgeoning credit lines from China?

Finally, beyond debt sustainability, the core problem with rising debt is less related to from whom Kenya is getting debt, but more about how that debt is spent. The first problem is the question of the management of public finances. If debt does not end up in projects that drive growth and rather is diverted to private pockets, then the country is in serious problems. Debt only makes sense when it is economically productive and thus mismanagement of public monies comprises the ability of debt to inform economic development. Second is the issues of absorption of funds. Government at both national and county level have clear problems with absorbing development financing, and debt sits in that docket. So securing all this debt and failing to ensure it is used correctly and that the funding is absorbed in intended projects is the real problem.

It is important that the country have a sober conversation about debt, because no matter where the debt comes from, if it is mismanaged, Kenya will be in hot water regardless.

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

The Changing Face of China-Africa Relations

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This article first appeared in the China Daily on May 11, 2018

The relationship between China and Africa is one that generates immense interest and debate in both countries and around the world. The combination of strengthening economic growth in both China and Africa, particularly in the context of an increasingly insular USA and Europe means that the relationship between the two parties will play a progressively important role in their development and global dynamics. There are three factors to consider as we unpack Sino-African relations.

Image result for china and africa

(source: http://africanleadership.co.uk/china-open-to-president-weahs-view-on-china-liberia-relations/)

First is the leadership of China where Xi Jinping is redefining China’s presence on the global stage. In the context of the trade spat between the USA and China, Xi Jinping continues to emphasise China’s commitment to globalisation and free trade perhaps best demonstrated in his massive Belt and Road Initiative. In early April, Jinping restated his commitment to continue to open the nation’s economy affirming that China will open its doors wider to foreign investment. While some may argue that China does not walk the talk and that the country’s economy remains very protected in some ways, what is clear is that Xi Jinping is positioning himself as a global leader and one who encourages global cooperation both economically and diplomatically. Whereas in the past it seemed China was happy being a leading economy but not necessarily a leading voice in global interactions, Jinping is redefining how China positions itself globally. As Europe and the USA turn inward, he emphasises that China continues to look outwards and seeks to lead global conversations.

The implications for Africa in this regard is that Africa can expect initiatives under Jinping to deliberately foster deeper collaboration and cooperation. These will not only be from an economic standpoint but politically and militarily as well. Geopolitical dynamics in Africa will be informed by a leadership in China that seeks to strengthen its global presence and reputation and Africa will be an important party in how this plays out globally.

Secondly and linked to the point above, Jinping is actively rebranding China. Brand China has both positive and negative elements. The key negative elements particularly with regards to Brand China in Africa, is that China is corrupt and environmentally destructive. It seems China is aware of these negative elements of its brand because the Two Sessions addressed both these issues. A key focus of Two Sessions was to ratify a law to set up a new powerful anti-corruption agency. Africa’s struggle with corruption is a well-known fact, and Brand China has been seen to tolerate or even facilitate this corruption. Thus, the announcement of steps that will be taken to stem corruption in the Chinese government may have an impact on Africa in the form of new rules and requirements linked to Chinese funding. The two Sessions also revealed the growing importance of environmental concerns as a government priority in China.  This seems to stem not only from an understanding in the Chinese government that environmental degradation must be addressed as a strategic concern for the country and economy, but also as a response to growing demands from the Chinese public for responsible environmental behaviour and action as part of the country’s development model going forward. Again, it will be interesting to see if this shift will be reflected in how the Chinese government interacts with Africa going forward. The point is that Jinping’s administration is taking clear and bold steps to address the negative aspects of the country’s brand as he seeks to position China as a powerful and responsible global leader.

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(source: https://www.irishtimes.com/business/economy/chinese-trade-unexpectedly-speeds-up-but-is-expected-to-drop-1.3112037)

Finally, as China continues to strengthen economically, and as Jinping strengthens China’s global influence, we will likely see a heightening of Sinophobic narratives on China’s presence in Africa by Europe and North America in particular. One key feature of EuroAmerican analysis of China in Africa has been notable Sinophobia; and we have seen an evolution in this Sinophobic commentary. The narrative started with Europe and North America warning Africa that China is the new colonial power and that China will subjugate Africa with colonial-like behaviour that undermines Africa’s sovereignty. This then shifted to the Africa being warned that China only wants to exploit the continent’s natural resources in a rapacious relationship that will suck Africa dry. This was coupled with accusations that China facilitates and participates in corruption in Africa and that Chinese investment has poor social and environmental standards and indeed kills the continent’s environment in the form of unregulated pollution and destruction of wildlife. Now, the narrative is that China is saddling Africa with unsustainable debt and seeks to use indebtedness to further its geopolitical control over the continent. China should expect more aggressive Sinophobic commentaries coming out of Europe and North America as an ideological battle is waged on African hearts and minds.

However, despite the fact that the Sinophobic narrative will continue to be generated by Europe and North America, the reality is that China is not good at communications. China does not do a good job at sharing its contributions to Africa’s development in a strategic and sustained manner both inside and outside Africa. Whereas Europe and North America have sophisticated communications strategies both as government and private sector, the same cannot be said of China. Both the Chinese government and private sector ought to be cognisant of these dynamics and generate positive counter-narratives on China’s presence in Africa. Africans ought to also be aware of the ideological battle on the continent and generate informed narratives that analyse China-Africa relations from an African perspective.

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