International Finance

Toxic public debt a chance for African firms to raise capital

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This article first appeared in my weekly column with the Business Daily on November 25, 2018

Kenya’s public debt stands at over KES 5 trillion. Both last year and this year, international finance institutions and development banks such as the World Bank, African Development and the IMF cautioned Kenya over the pace, composition and terms of public debt accrual. But the appetite for debt continues unabated. And Kenya is not alone. The Brookings Institution makes the point that since 2008, public debt in Africa countries has been rising at an increasingly rapid pace and by 2016, the continent’s gross public debt to GDP ratio had doubled. Countries such as Chad, Sudan, South Sudan, Zimbabwe, Cameroon, Ghana, Eritrea, Ethiopia, Djibouti, Zambia, Zimbabwe, Mozambique and of course Kenya have been warned that their fiscal path and debt pile up is unsustainable.

Image result for Africa public debt

(source: http://www.geeskaafrika.com/22006/africas-public-debt-rising-alarming-levels/)

The composition of debt is of particular concern. Kenya for example has a domestic to foreign public debt split of about 50-50. With the strengthening dollar, the cost of servicing foreign debt will be increasingly onerous. This is in a context of chronic subpar revenue generation with revenue targets routinely revised downwards year on year. Thus, not only is government unable to raise planned levels of revenue, it will have to figure out how to raise even more local currency to service foreign debt as the dollar strengthens.

Another favourite of African governments has been sovereign bonds, and these too are becoming more expensive. Last week Bloomberg reported that spreads on Africa’s sovereign bonds had widened to 506 basis points (bp) above U.S. Treasuries, the most in two years. Te Velde, an analyst, makes the point that at the current rate at which African countries issue sovereign bonds (USD 14bn in the past year), a 2 percent (500bp-300bp) increase in cost of financing, means an increase in future cost of servicing newly issued bonds at more than USD 250 million a year. Let that simmer for a while.

Image result for Africa eurobonds

(source: https://web.northeastern.edu/econsociety/eurobonds-an-opportunity-or-a-curse-for-african-economies/)

Now this would perhaps be fine if there were assurance that African governments were using the debt effectively and in an economically productive manner. But even that is not clear. What is clear is that the rapid accumulation of debt by African governments, partnered with serious questions about fiscal accountability will translate to a massive drop in the popularity African governments have been enjoying in local and international debt markets. And this is good news for the African private sector.

Africa’s private sector continues to be under-capitalised and the past decade or so of considerable appetite for public debt from Africa has left most of the African private sector in the shadows. However, creditors are beginning to understand that debt owed by African governments can be toxic. And this presents the perfect opportunity for private sector in Africa to better position itself to domestic and international players for financing. Let the African private sector grab this opportunity and show the world that much of Africa still has its head on right.

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

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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.

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(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

TV Interview: 8% VAT on Fuel in Kenya

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On September 18, I was part of a panel that discussed the 8% VAT on fuel that has since been effected.

Podcast: A frank discussion on Sino-Kenya Relations

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In my new paper for the South African Institute of International Affairs, I suggest that Kenya’s leaders, not China, should be the ones held accountable for borrowing too much money without a detailed, transparent plan on how to repay the loans.

I join Eric & Cobus on the China-Africa Project podcast to discuss the growing anti-Chinese backlash in Kenya and the country’s’ burgeoning economic crisis.

 

Image result for china africa relations

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

Three Takeaways from FOCAC for Africa

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This article first appeared in my weekly column with the Business Daily on September 9, 2018

 

Last week African leaders attended the Forum on China Africa Cooperation (FOCAC), an event that has become the symbol of strengthening ties between China and Africa. In his speech, Xi Jinping stated that China will extend USD 60 billion of financing to Africa, a combination of grants, interest-free loans and concessional loans, credit lines, development financing, and a fund for financing imports from Africa. There are three key takeaways I think are important for African governments and Africa’s fiscal engagement with China.

Firstly, Xi Jinping indicated an intention to ensure Sino-African cooperation delivers real benefits to both China and Africa perhaps indicating and awareness of the concern as to the economic viability of some of the projects financed by China on the continent. Some analysts are of the view that there will be an increase in China monitoring deals agreed to with African governments. The signalling of China perhaps having a keener eye to ensure real benefits accrue through Sino-African engagement is likely to be welcomed by African citizens, not so much African governments. I am of the view African governments enjoy the fiscal opacity that has defined deals made between them and China. If Sino-African deals undergo more scrutiny going forward, this would be welcome and perhaps push African governments to better demonstrate the intended and actual use of Chinese debt and financing.

Forum on China Africa Cooperation

(source: https://www.businessdailyafrica.com/analysis/ideas/Three-takeaways-from-Beijing–Africa-summit/4259414-4751212-1l8iee/index.html)

Secondly, Xi Jinping announced plans for debt relief with a focus on Africa’s least developed countries, heavily indebted and poor countries, landlocked developing countries and small island developing countries that have diplomatic relations with China. He stated that the debt incurred in the form of interest-free Chinese government loans due to mature by the end of 2018 will be exempted. This was a smart diplomatic move on the part of China given the fearmongering in some media circles that argued China was using debt to trap and control African governments and unilaterally seize China-financed assets.

Finally, alongside FOCAC was a clear push of the debt trap diplomacy narrative, particularly by European and US media. The debt trap diplomacy narrative is part of a long history of Sinophobic narratives by EuroAmerica, focused on Sino-African relations. The narrative argues China is luring African governments into debt in order to control African governments and assets. The reality is starkly different. Debt appetite is coming from African governments, debt is not being pushed onto Africa by China; Kenya owes more to the World Bank than it does to China for example. Further, the West’s Sinophobic narrative on Chinese debt in Africa seems more rooted in a dislike, fear and paranoia about China rather than a genuine concern for Africa. The priority for most African citizens is a focus on African governments to ensure the debt deals make sense for the country, and that they’re sustainable and used properly, no matter the source of debt. Thus FOCAC in my view, signalled a divergence between EuroAmerica’s paranoid obsession with China, and the real concerns Africans have with regards to growing public debt.

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

 

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