Africa’s Churlish China Debt Denial

After double digit declines on African stock markets last year in the face of dire official and private analyst warnings on sovereign debt accumulation, the African Development Bank (AfDB) in its 2019 outlook acknowledged rising loads but dismissed systemic crisis risk. Its more upbeat assessment contrasted with the International Monetary Fund’s recent designation of 15 countries “in distress” and the World Bank’s citation of widespread commercial borrowing above 30% of gross domestic product in its January Global Economic Prospects publication. A separate Washington think tank, the Center for Global Development continued to sound the alarm on Chinese loans in particular owed by poorer countries like Djibouti and the Maldives, which has asked Beijing for restructuring.

 The AfDB report noted the continent’s gross debt/GDP ratio topped the 50% danger zone as of 2017, worsened by commodity price decline affecting the denominator while the numerator increase could be justified by an annual infrastructure financing gap in the $75-100 billion range. It suggested that external debt service was manageable amid a Eurobond boom which brought the total outstanding to $70 billion in 2017, and that new Chinese yearly lines have stabilized below $15 billion. The Bank acknowledged serious average fiscal and current account deficits at 5% of GDP, but urged better foreign funding use for capital goods imports and other productive investment as opposed to reduction.

Economic growth this year is projected at 4%, below the early decade peak, although almost half the region will reach 5% offset by 2% population expansion. The pace will not cut unemployment and poverty, and assumes big oil exporters continue to enjoy price recovery at $70/barrel, despite subsidies in Nigeria and elsewhere exerting countervailing fiscal drag. East Africa is the highest growth area at 6% led by outperformers Ethiopia, Rwanda and Tanzania but also saddled with South Sudan’s unending civil war and refugee crisis. West Africa was hurt by Nigeria’s recession and modest rebound despite fast Francophone clips in Cote d’Ivoire and Senegal. Southern Africa likewise was constrained by giant South Africa’s meager 1% result as i credit ratings were lowered on debt concerns along with lagging public and private investment. The AfDB points out that the latter now equals consumption with each representing over 45% of regional output, with the rest net exports. Inflation is also steep at above 10% and could spike with further currency depreciation, and global trade disputes and rising interest rates, coupled with extreme weather and political unrest, could compromise these forecasts. Upcoming elections in South Africa and Nigeria, where China maintains close natural resources and financial services links, will be scrutinized for economic reform and adjustment signals.

Tax revenue is almost 10% below the 25% of GDP needed for development spending, and Angola will introduce a value-added levy this year, while Botswana, Kenya and Zambia emphasize easier on-line payment that can also elevate their ranking in the World Bank’s Doing Business reference. Remittances at $70 billion in 2017 are roughly double portfolio inflows and outpace as well foreign direct investment and overseas aid.  West Africa and Ghana especially is a popular FDI destination, and expatriate transfers are a large slice of national income in Senegal and Uganda, where the Indian community remains a powerful commercial force. Exports as a share of GDP declined everywhere except for Southern Africa since 2010, and are concentrated in raw materials with “low jobs content and volatile terms of trade.” Global value chain integration is sporadic, with lagging logistics and technology impeding good scores on the World Economic Forum’s Global Competitiveness Index, according to the Bank’s review.

With the launch of a pan-African free trade agreement and China’s Belt and Road Initiative push to forge continental commercial and transport hubs, the respective West and Central African economic and monetary unions are revisiting their purpose against a mixed record of policy and practical outcomes. The benefits of exchange rate calm and reduced transaction costs must be weighed against framework inflexibility that is reinforced with cross-border labor, goods and capital flow restrictions. Unhindered movement should be a “reality” rather than an objective, and central independent fiscal and banking authorities are a “tall order” yet to be achieved despite acceptance of short-term debt paths, the AfDB concludes.

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