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The path to prosperity doesn’t lie amidst countries building even bigger international debt states Akinwumi Adesina, the head of the African Development Bank. He is quite clear when he urges the continent’s governments to try and boost tax revenue not grab yet more international loans. The statement comes whilst Africa, once again grapples with an economic slump.
Mr Adesina is reported with an interview in the Financial Times to be expecting yet another downturn in the economy of Africa largely being triggered by a slump in commodity prices. This issue greatly affects Africa as well as the slow down in Chinese economic growth. Yet as always Africa is one of the first to suffer from external economic slowdown, largely because of it’s relative financial weakness, in other words it’s large levels of debt.
The phrase ‘fiscal consolidation’ is often used to describe Africa’s position and potential solution. The reality is that decades of borrowing have had only limited success in delivering long term growth in the region. Sure when economic booms are happening in other places, Africa is dragged along through a demand for it’s commodities but the weakness is evident as soon as this demand drops. Nigeria has plunged into yet another recession simply due to the oil price fall, although to be fair this is the first for nearly twenty years.
The pattern will be repeated across sub-Saharan Africa, with GDP falling from it’s 3.5% level in 2015. Many nations are suffering from dwindling government revenues, and the wide budget deficits mean that governments have little monetary options available to them. The temptation of increasing debt is always there but this is precisely the reason why African economies are so vulnerable, billions of dollars of debt taken up in the ‘good years’ reduce the capacity of these governments to respond in a slump.
These debts have to be repaid and the costs of servicing them often rocket in poor economic conditions simply because of the weakness of most African currencies. The scarcity of foreign currencies also impacts African countries and businesses to invest.
Borrowing overseas with a weak domestic currency is a recipe for disaster, investment funds should ideally be sourced locally. For example there are huge African investment and pension funds which ideally could be used to support the African economy. Too often this money is invested in Western countries and businesses to the detriment of African businesses. It’s often depressing to sit in the presentations of these Pension and investment funds produced by some anonymous company who conducts most of their business through a residential VPN (see here) to be extolling the virtues of some international company with minimal links to the African continent when local companies are starved of investment and the potential for growth.