Economic Burden for a Troubled Continent


The recently released UNCTAD Economic Development Africa report, which revealed that Africa requires $600 billion to attain the sustainable development goals, has sent shock waves to many countries on the continent, writes Ugo Aliogo

Recently, the United Nation Conference Trade and Development (UNCTAD) released the 2016 Economic Development Africa Report (EDAR), which revealed that Africa needs $600billion yearly to be able to achieve sustainable development goals in the continent. The report is coming at a very challenging time for the continent of Africa. Many countries are battling with domestic debt crisis, the falling commodity prices, rising inflation figures and other harsh economic realities of the time.

The report is not very a favourable one for Africa states as it was stated that the amount equates one third of the continent’s gross national incomes, which the official development aid and external debts are unlikely to cover those needs.

At the unveiling of the report in Lagos recently, the Director United Nation Information Centre (UNIC) Ronald Kayanja, stated that the 17 sustainable development goals offer a blueprint on how the global economy and the environment should look like in 2030, as well as the specific actions that would be required at global, regional and national levels.

He stated that in order to achieve the sustainable development goals, countries will need to invest a lot of money, stressing that the estimated figures showed that Africa needs between $600 billion- 1.2 trillion yearly to achieve these goals. He said that “most of these money will have to be mobilised locally within countries. Government and the private sector must align their practices.”

He added that the continent would require successful actions over the next 15 years especially in the areas of trade, investment, technology and finance, therefore, “it is required that we tap into the full potentials of all actors, promote innovation and correct sustainable trends.”
Kayanja said: “There are worrying signs that people in Africa are increasing unhappy with the state of affairs of their countries’ economies. There are high inequality, stagnant incomes, and fewer jobs for the youths. The global trade slowdown and a lack of productive investment have sharpened the deep divides between those who have benefitted from globalisation, and those who continue to feel left behind. Our message is that SDGs represents the change we need to restore people trust in our economies in Africa. The SDGs represent an enormous opportunity to make our economies work for dignity all.”

Rise in Domestic Debts

The report also noted that Africa is among the fastest growing regions in the world, with an average Gross Domestic Product (GDP) growth rates exceeding four percent per year since 2000. According to the report, since 2007, only Asia has surpassed Africa growth rates. It said, given the contraction in commodity prices, with global subdued demand, this growth may be difficult to maintain, as noted the World Bank and International Monetary Fund in 2015.

The report explained that economic growth in Africa has been accompanied by low and stable inflation, which is most countries have remained in single digits, noting that a growing number of countries have achieved middle-income status, with per capita annual incomes in excess of $ 1,000.
It was learnt from the report that some African countries have adopted policies aimed at developing their domestic debt markets, with the support of international financial institutions such as the African Development Bank (ADB), IMF, the Organisation for Economic Cooperation and Development (OECD) and the World Bank.

The World Bank and IMF have launched a joint initiative to assist countries in building a bond markets by developing effective medium-management strategies consistent with the goal of maintaining debt sustainability. The Africa Development Bank created an African domestic bond fund in 2010 with the objective of contributing to the development of sound domestic debt markets.
The fund is investable in local-currency-denominated sovereign and sovereign guaranteed sub-national bonds. In 2012, the international finance Corporation launched a bond issuance programme called the pan-Africa domestic medium term note programme. The programme was initially focused on Kenya, Botswana, Ghana, Kenya, Uganda and South Africa and Zambia. It was aimed at supporting and growing the nascent capital markets in the region and increasing the availability of local currency financing markets for private sector development.

The report added: “A developed and well-functional financial sector provides opportunities for mobilising savings and unlocks the potential of domestic debt market to bridge Africa large financing gap. Africa local currency debt markets are progressively opening up to non-residents investors. While South Africa has for some time been one of the most attractive portfolio investment destination in Africa, other markets may have managed to interest foreign investors, such as Ghana, Egypt, Morocco, Nigeria, and Zambia.

“In 2014, non-resident investors held about 20 percent of the total outstanding domestic debt, compared with less than 0.1, percent in 2004. Similarly, Ghana has also attracted a rising share of non-resident investors registering, in 2012, its highest net inflow, was about $2.6 billion (27 percent of total local-currency-denominated outstanding government securities). The increase in portfolio inflows in Ghana coincided with the opening of government securities markets to foreign investors in 2006 and in Zambia, with the introduction of longer maturities bonds.

“In Nigeria, portfolio flows followed large debt relief and restructuring of operations and renewed confidence in the country’s economic prospects. In Tanzania, as non-residents investors were not allowed to hold government securities, resources from foreign investors were invested in treasury bills and bonds indirectly, with commercial banks serving as intermediaries.

“The participation of non-residents in Africa debt market widens the investors’ base. However, countries need to closely monitor the level of such participation as it may increase their vulnerability to external development such as financial crises. Issues of previous concern that made mainstream international investors hesitate to invest in local-currency-denominated domestic debt, such as a lack of familiarity with local credits, standards and documentation are been addressed by supranational borrowers such as the ADB and the World Bank through the International finance Corporation.”

Dynamics of Domestic Debt

The UNCTAD revealed that the ratio of domestic debt to Gross Domestic Product (GDP) has been rising since the early 80, driven by the need to finance large fiscal deficits, adding that in the face of decreasing foreign aid, including loans and grants, the government has largely relied on domestic market to fund its borrowing requirements for development finance.

The report stressed that the portion of deficit in the portion of annual budgets funded domestically grew from $209 million in 2005 to $5.4 billion in 2014. From the graphical illustrations presented in the report, it was discovered that the budget deficit has been mainly financed by domestic borrowing since 2004, “the growth in the budget deficit was triggered by a decline in the price of oil.”

Furthermore, the report stated that in addition to funding for appropriated budget deficits, proceeds from domestic borrowing were utilised to fund special government stimulus spending initiatives between 2008-2014, adding that this, in line with the need to fund infrastructure deficit, contributed to the growth of domestic debt.

“From 1981 to 2003, domestic debt was heavily concentrated in maturities of less than one year, most of which were 91-days treasury bills. Treasury bonds and development stocks have been issued for specific funding purposes in the past, although they were marketable, they were largely held by the bank. This exposed government to high rollover and interest rate risks. These fiscal risks were further accentuated by a shallow financial system, reflected in the ratio of low and quasi money (M2) to the GDP (26 percent at the end of 2003) and a narrow investor base.

“The shallow financial market unfavourably influenced interest rates and risked crowding out private sector credit in the face of government large borrowing requirements. It also complicated the banks’ conduct of the monetary policy, as more force use of liquidity management to pursue price stability could have adversely been affected the government’s debt service costs.

“The structural changes to Nigeria’s domestic debt began in 2003, following the adoption by the government of public debt management reforms. Apart from addressing the institutional weaknesses in the management of public debt, the reform sought to improve domestic debt management. As part of these reforms, the government brought back a sovereign bond issuance programme that was discontinued in 1986. This resulted in the issuance of long dated instruments of 3,5,7 and 10 years, structured as both fixed-rate instrument (3-year and 5-year bond) and floating rate notes (7 and 10 years). This was a reflection of debt management strategy aimed at restructuring the country’s debt portfolio to achieve the 75:25 ratio of long to short term domestic debt”, the report stressed.

The Way Forward for Nigeria

An expert from the West African for Financial and Economic Management (WAIFEM) Prof. Akpan Ekpo, said the government should look at mobilising more of domestic resources and less debt which in turn will widen the task net, when the task is broaden, it will include the rich and the informal sector, “government should also consider remittances, sovereign wealth fund, and Diaspora bonds.”
He stated that the bailout funds for states is necessary because there should be availability of funds amongst the public, in order for them to buy goods and services, affirming that the bailout is necessary in the short term, but in the long term it is not sustainable, since the economy is in recession, the bailout funds are necessary.

Ekpo urged states still struggling with the bailout funds to increase their Internally Generated Revenue (IGR), diversify their economy and reduce the over dependence on the federal government, adding that there is no state in Nigeria without a natural resource which they can explore to generate revenue for their states.

He said: “When states reduce their over dependence on the federal government it will be helpful for them. The federal government depends on oil revenue and the oil revenue is not sustainable because of the price fluctuations. What the federal government needs in this period of recession is fiscal stimulus. The only way to do it since we don’t have money is to borrow. Then in the long term we will be able to pay it up and it is sustainable in the long term. It is sustainable because our GDP is not bad.

“If you look at our debt GDP ratio, we still have a space to borrow. Nigeria should take a cue from Botswana, because they have done very well in the management of their diamond and they have a sovereign wealth fund which is bringing them money in during the period of crisis. Also, Rwanda, and Ethiopia, these countries are making good governance as their utmost priority. Therefore as a nation we need to imbibe the culture of good governance, otherwise nothing will work.

“The issue of economic diversification should be taken serious, because petroleum will not last forever. We should not just export raw agricultural materials, but also process them. Even the oil and gas sector is not diversified in a manner that it will be linked to other sectors such as chemical and pharmaceutical industries. We have to industrialise, if we aim to achieve full diversification. It is sad to state here that we have an unproductive economy, if we have a productive economy, we will produce not only for local consumption, but also for export. Therefore government should create the enabling environment for industrialisation.”