This post will briefly touch on the ongoing saga surrounding investment in Africa and particularly recent concerns about the sustainability of rising debt levels. I first became interested specifically in South Africa after reading about the leadership of Cyril Ramaphosa and his attempts to attract FDI.
Zambian economist Dr Dambisa Moyo summarises why Africa’s economy causes so much grief with his claim “the world needs to engage and help solve Africa’s problems, which, sooner rather than later, will become global problems”.[1] Upon receiving investment, key issues outlined in Agenda 2063 will finally be addressed including the push to end wars on the continent, significant developments in infrastructure leading to heightened freedom of movement. While connecting African capitals through a high-speed rail network would, arguably, provide the boost required for Africa’s global trading position, resources are being increasingly used for paying foreign loans. Therefore, the grand plan remains fearfully distant. Another point of concern is poverty levels which the Bill & Melinda Gates Foundation proposes are rising in Africa despite falling globally.[2]
The factors contributing to these dangerous poverty levels are varied and complex. However, recent explanations have focussed on Africa’s notorious debt problems. A substantial proportion of Africa’s debt is incurred through ‘foreign currency dominated Eurobonds issued on international financial markets’ due to the underdeveloped and illiquid nature of African bond markets.[3] This year, the IMF has accused African countries of being on a Eurobond issuing spree and failing to efficiently evaluate exchange rate risks and realistic costs of repaying debts. This accusation was faced with a variety of responses and outrage. One particularly defensive perspective insists that African countries are paying far too much interest as opposed to over-borrowing. The article suggests that African countries are short-changing themselves by consistently accepting high yield curves closely linked to their poor credit ratings. The reasons for these mistakes are cited as ‘the excessive need to attract investors’ which is forcing African governments to borrow short-term in order to finance long-term projects.[4] As a solution, the critic proposes that African governments should ‘bargain for competitive interest rates and accept only favourable bids’. However, undoubtedly this suggestion is wishful thinking given Africa’s current lack of bargaining power.
The role of ratings in Africa’s mounting issues has been noted by several reporters with further Moody’s rating downgrades expected this year. As opposed to accepting illogical interest rates, Business Tech has attributed the problems in South Africa specifically to factors including the persistent failure to adjust personal income-tax brackets for inflation. A substantial amount of culpability has been landed on South African Finance Minister Tito Mboweni who has failed to convince investors that he has a sensible plan to relieve government debt.[5] His possibilities for improvement have been cited as adjusting ‘capital-gains tax, levies on fuel and luxury goods, excise duties and charges on sugar-sweetened beverages’ and urgently implementing structural reform to resolve GDP.[6] An additional factor mentioned recurrently in assessments of South Africa’s position is the bailouts of state-owned companies such as Eskom and South African Airways which have relentlessly contributed to government debt and generated further damaged to the low-growth economy.
Despite South Africa’s array of financial shortcomings, this did not prevent the government pointing the finger at Zimbabwe in the last month by telling ZANU PF leader Emmerson Mnangagwa the country is ‘lawless and unsafe for investments’.[7] The accusations stemmed from the suspected manipulation tactics of political leaders and repeated failure to respect investment & trade agreements. South African politician Baleka Mbete has been particularly vocal about this issue and has condemned Zimbabwe’s laws aiming to protect local industries from competition and enforcement of ‘punitive import tariffs and closing out some sectors to foreign competition’.[8] Mbete’s criticisms have been motivated by the potentially detrimental impact these issues will have on the direction of FDI summarised by the claim “we believe that in a highly competitive environment for FDI, these are but a few of the basic conditions that must be upheld at all times. In our view, failure to do so means that investment capital will always look past Zimbabwe to other safer havens”.[9]
In conclusion, the nature of debt and potential for FDI in Africa are topics that are persistently debated and feature regularly in global discussions. Understanding Africa’s economy is challenging due to its multifaceted, complex nature and lack of transparent information available. However, I am eager to learn more about this topic and will be particularly interested in the informal sector. The informal economy operates beyond the bounds of regulation, taxation and social protection making the value of production extremely difficult to decipher. The impact of the sector on the lives of women is particularly noteworthy as it has been described as a poverty trap, ‘concentrating women in low-skill, low-income activities with little prospect of advancement’, a proposition I hope to explore in future posts.[10]
[1] ‘How Africa hopes to gain from the ‘new scramble’, BBC News (February, 2020). https://www.bbc.com/news/world-africa-51092504
[2]‘How Africa hopes to gain from the ‘new scramble’, BBC News (February, 2020). https://www.bbc.com/news/world-africa-51092504
[3] ‘African countries aren’t borrowing too much, they’re paying too much for debt’, (February, 2020). https://www.ghanaweb.com/GhanaHomePage/africa/African-countries-aren-t-borrowing-too-much-they-re-paying-too-much-for-debt-876379
[4] ‘African countries aren’t borrowing too much, they’re paying too much for debt’, (February, 2020). https://www.ghanaweb.com/GhanaHomePage/africa/African-countries-aren-t-borrowing-too-much-they-re-paying-too-much-for-debt-876379
[5] ‘Mboweni’s budget unlikely to stop South Africa’s march to junk’, (February, 2020). https://businesstech.co.za/news/budget-speech/376277/mbowenis-budget-unlikely-to-stop-south-africas-march-to-junk/
[6] ‘Mboweni’s budget unlikely to stop South Africa’s march to junk’, (February, 2020). https://businesstech.co.za/news/budget-speech/376277/mbowenis-budget-unlikely-to-stop-south-africas-march-to-junk/
[7] ‘South Africa Tells Mnangagwa To His Face: Zimbabwe Is Both Lawless And UnSafe For Investments…’, (February, 2020). https://www.zimeye.net/2020/02/25/south-africa-tells-mnangagwa-to-his-face-zimbabwe-is-both-lawless-and-unsafe-for-investments/
[8] ‘South Africa Tells Mnangagwa To His Face: Zimbabwe Is Both Lawless And UnSafe For Investments…’, (February, 2020). https://www.zimeye.net/2020/02/25/south-africa-tells-mnangagwa-to-his-face-zimbabwe-is-both-lawless-and-unsafe-for-investments/
[9] ‘South Africa Tells Mnangagwa To His Face: Zimbabwe Is Both Lawless And UnSafe For Investments…’, (February, 2020). https://www.zimeye.net/2020/02/25/south-africa-tells-mnangagwa-to-his-face-zimbabwe-is-both-lawless-and-unsafe-for-investments/
[10] ‘How globalisation has informalized African Women’s’ Lives’, (February, 2020). https://www.opendemocracy.net/en/oureconomy/how-globalisation-has-informalized-african-womens-lives/
Financial Institutions 1850-2020 