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Africa’s debt sustainability: cause for concern?

MARCUS COURAGE

Many African countries were caught in a debt trap at the turn of the century. A number of initiatives, most notably the Highly Indebted Poor Countries Initiative (HIPC), resulted in constructive but challenging negotiations and the debts of African nations being written off by the Paris Club of lenders in 2007. With the slate rubbed clean, African governments were free to borrow again. Today, eight countries are once more at risk of falling into a debt trap. Their chances of negotiating debt relief are grim.

Demographics and democracy

In the face of low domestic savings rates, it’s understandable that governments would want to borrow to invest in critical infrastructure and economic diversification. But in most cases, loans have been used to plug fiscal deficits and finance short-term political objectives. Ghana for example, used the proceeds of a debt raise to double some civil servants’ salaries.

In general, borrowing has failed to generate the revenues needed to cover increased levels of debt service, leading to a vicious cycle of rollover financing.  In a small number of cases loans have been embezzled. The case of Mozambique and the $2.4bn ‘tuna bonds’ scandal is perhaps the most brazen. On 17th October 2019, a former Credit Suisse banker confessed to a jury in Brooklyn that he had pocketed $45mn from the deal.

Rapid population growth in Africa (26 nations expect their populations to double by 2050) places pressure on governments to raise finance to serve expanding populations, while the spread of democracy encourages short-termism and myopia that doesn’t look beyond the next election cycle.  After all, politicians don’t win elections with promises to raise taxes and reduce public service spending.

The rise of commercial lenders

In the aftermath of the global financial crisis and the Eurozone crisis in 2008,  commercial lenders such as hedge funds and banks, and even high net worth individuals, moved into emerging and frontier markets in search of higher yields (African interest rates were higher than other regions, while rates in the West were at historical lows). African debt became a hot commodity and African governments were inundated with offers from banks and brokers to borrow on the private market.

Suddenly African governments had access to easy credit again, albeit at rates of interest that caused debt servicing costs to increase rapidly.  According to the Brookings Institute,’’ interest costs as a share of government revenues doubled from 5% in 2012 to 10% in 2017, its highest level since the early 2000s.’’  Today interest costs account for 10% of government revenues in seventeen countries, compared with six countries in 2012. This increase has been particularly large in Angola, Nigeria, Ghana and Burundi. Rising by almost 20%.

African governments raised more than $25bn from Eurobonds in 2018 alone, the third consecutive annual record. The practice continues to this day. Last week the Kenyan government announced its intention to borrow $4.1bn from external lenders (a total of 44 loan agreements), having been granted parliamentary approval for an increase in the country’s debt ceiling to $85.7bn. Parliament’s approval has opened the door for another $38bn on top of existing debt of $56bn (in June) and takes the nation’s debt to unprecedented levels.
Average external debt payments on the continent doubled between 2015-2017, from 5.9% to 11.8%. Much of this is commercial borrowing, accounting for 32% of total debt, and 55% of interest payments.

Table 1: Eurobond yields
Issuer
Size
Maturity
Yield (mid)
Angola
USD 1.75 billion
2028
7.72%
Benin
EUR 500 million
2026
5.15%
Ethiopia
USD 1 billion
2024
5.69%
Gabon
USD 1.5 billion
2025
6.95%
Ghana
USD 1 billion
2029
7.72%
Cote d’Ivoire
USD 571.5 million
2028
5.9%
Kenya
USD 1 billion
2028
6.45%
Nigeria
USD 1.25 billion
2030
7.1%
Cameroon
USD 750 million
2025
7.55%
Namibia
USD 750 million
2025
5.09%
Rwanda
USD 400 million
2023
4.16%

New colonialism

A ‘new colonialism’ is a term that was coined at the start of the century to reflect China’s growing influence in Africa and the proliferation of loan agreements underwritten by Chinese state-owned banks to African governments. When presenting the United States’ ‘New Africa Strategy’ in December 2018, Ambassador John Bolton said: ‘’China uses bribes, opaque agreements, and the strategic use of debt to hold states in Africa captive to Beijing’s wishes and demands.’’ Readers of the Wall Street Journal or New York Times could be forgiven for thinking that Chinese lending to Africa was responsible for the current levels of debt in Africa. It is not.

It’s easy to overestimate Chinese lending to Africa. $140bn was loaned to African nations by Chinese banks between 2000 to 2017.  While the sum is large, it accounts for only 20% of all debts owed by African nations to foreign lenders today. Nor are the terms of China’s loans predatory. The China Export Import Bank (Exim Bank), which is responsible for about 70% of Chinese loans in Africa lends at a fixed average rate of 2%.  Moreover, of the eight African nations that are categorized as being under debt distress, the proportion attributable to Chinese debt is negligible. 

Debt Distress

African debt levels have risen steadily from 38% of GDP to 59% of GDP between 2012-2018 (Debt to GDP is a measure of what a country owes, relative to its ability to pay).  Seven African countries today have a ratio above 80% – Eritrea, Cabo Verde, Mozambique, Angola, Zambia, Egypt and the Gambia. That’s 188 million people served by a public sector that in many cases is ill-equipped to manage these funds efficiently and productively.

Table 2: Public debt above 80% of GDP

Countries with Debt-to-GDP level above 80%
Debt as % of GDP in 2019 (IMF)
Eritrea
165.1
Cabo Verde
123.5
Mozambique
108.8
Angola
95
Zambia
91.6
Egypt
84.9
Gambia, The
80.9

In the past, when debt crises occurred and nations were facing default, they could negotiate with sovereign creditors. Today, nations must negotiate with a more diffuse creditor base comprising commercial lenders and vulture funds who buy debt on secondary markets, often at deep discounts with the intent of suing the debtor for full recovery. Vulture funds have averaged recovery rates of about 3 to 20 times their investment, equivalent to returns of (net legal fees) 300%-2000%.

Their practice is simple: purchase distressed debt at deep discounts, refuse to participate in restructuring, and pursue full value of the debt often at face value plus interest. The African Development Bank (AfDB) cites one recent case against Zambia, where a vulture fund, having bought a debt for US$3 million, sued Zambia for US$55 million and was awarded US$ 15.5 million.

Table 3: Debt as a proportion of GDP

Debt as % of GDP in 2019 (IMF)
Eritrea
165.1
Cabo Verde
123.5
Mozambique
108.8
Angola
95
Zambia
91.6
Egypt
84.9
Gambia, The
80.9
Republic of Congo
78.5
Mauritania
78.5
Sao Tome and Principe
77.2
Tunisia
74.4
Togo
72.6
Guinea-Bissau
69.2
Mauritius
68.7
Morocco
65.3
Malawi
65.1
Sierra Leone
64.5
Ghana
63.8
Burundi
63.5
Senegal
63.3
Kenya
61.6
South Africa
59.9
Ethiopia
59.1
Sudan
59.1
Gabon
56.4
Niger
55.8
Seychelles
53.8
Côte d'Ivoire
52.7

Risk of contagion

The backdrop of dimming economic prospects off the continent provides aggravated cause for concern on the African continent. In its half yearly update published in October 2019 the IMF said that almost 40% of the corporate debt in eight leading industrialised countries – the US, China, Japan, Germany, Britain, France, Italy and Spain – would be impossible to service if there was a downturn half as serious as that of a decade ago. 


The World Bank’s Chief Economist for Africa points to the real fragility of those African nations who have seen an increase in debt by more than 20% points over six years, in the event of a global downturn. Commodity price slumps, a natural disaster or conflict would have similar devastating impacts. Renaissance Capital, an investment bank focused on emerging and frontier markets, worries that a large spike of $12 billion in repayments is due by African governments in 2024—mostly from smaller oil-importing countries. This would be hard to roll over if the global economy in 2024 is in bad shape.

Public debt dynamics

The US has a 77% public debt to GDP ratio, while France had a ratio of 98.4% at the end of 2018.  In cases where governments have the capacity to bear high levels of debt, there's little reason for concern. But research conducted by the Brookings Institute concludes that ‘’public debt dynamics in many countries in sub-Saharan Africa are now working against their stability and growth.’’ They found that ‘the quality of policies and institutions has deteriorated or not improved in most African countries,’ with the biggest deterioration occurring in countries that have witnessed the highest increases in public debt. This should concern us.

What next?

The IMF is working to address the risk of default in nations facing debt distress. Under its IDA programme it has established a Sustainable Development Finance Policy (SDFP). Under this initiative they will engage with the non-Paris Club — the so-called emerging donors – to help restructure African nations’ debts where possible, and to ensure they remain eligible beneficiaries of IDA funding.

While you will never hear them speak of conditionalities, the IMF intends to use the next two years to push for measurable progress in the policy actions needed for debt sustainability. In instances where there is no measurable progress, they will reduce the allocation for the third year. Constructive engagement between the IMF and the governments of Ghana and Gabon have resulted in measures to successfully reduce their debt burdens in recent years, while the merry dance that has played out between the Government of Zambia and the IMF has failed to achieve the same results. Zambia’s external debt stock today stands at more than $19billion (a debt to GDP of 74%). It stood at just $3bn in 2008. 

Structural and governance constraints

The fact that nations face the prospect of another debt crisis less than two decades after HIPC debt relief was granted, is a reminder that structural and governance issues still pose a challenge on the continent. Domestic resource mobilization, through efficient tax revenue collection and domestic financial markets, forms an important part of the solution. 

Combating illicit financial flows and strengthening natural resource governance, is important too. And finally, accountability. We have to address the fact that governments can borrow billions of dollars on the Eurobond market with little or no accountability regarding the use of the proceeds, as Andrew Roche points out in his article published on 17th October 2019 in the FT.

So, what needs to happen next?

Firstly, African governments must stop denying that a problem exists.  Secondly, when issuing bonds, they should present full prospectuses, identifying clearly how the funds will be spent. The ‘don’t ask, don’t tell’ approach cited by Roche which characterises most bond issuances is irresponsible, and in the case of the Mozambican example I cited above, damn right criminal.  All revenue raises should be subjected to parliamentary scrutiny and to ESG performance principles, to ensure that the proceeds are invested in areas that generate improved performance at low risk and conform with environmental and social impact criteria. Such scrutiny should be rewarded with improved risk ratings for the nation.

For their part, issuers should be obligated to reveal the full costs of a transaction, including the costs of the underlying goods (in the case of Mozambique, the real cost of the tuna fishing fleet, and the cost of the inducements also!). Nor is the full cost limited to items appearing on the balance sheet. As Sylma Du Plessis, partner at Alkebulan reminds us, ‘many deals are structured in such a way that commitments are given off the balance sheet, whether through direct government guarantees or indirect take or pay offtake arrangements, such as power purchase agreements that place commitments directly or indirectly on the State (as in the case of Eskom in South Africa).

The role of the World Bank (IFC and MIGA) in structuring and insuring credit must improve also. These institutions often provide credit support to banks where most of the value ends up with the banks, not the country itself – in particular with difficult-to-price derivatives that get guaranteed by insurance companies and MIGA and are not always priced appropriately based on market prices, leading to significant mark to market gains for banks and limiting the credit lines available to countries.  

And finally, industry should take note  that high  levels of debt distress leads governments to  introduce new taxes (in 2019 the Zambian government has attempted to introduce a new sales tax),  or to pursue arbitrary and discriminatory enforcement of regulations aimed at  raising the funds they need to bridge the deficit. In such instances, companies would be wise to anticipate regulatory shifts and to work with industry peers to proactively raise and resolve concerns, while presenting feasible alternatives. Saying nothing and doing nothing is an act of sabotage.

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Opinions

The Taiwan Question: China ramps up military exercises to rebuff US provocations

18th August 2022

US House Speaker Nancy Pelosi’s visit to Taiwan has violated the One-China policy, and caused the escalation of tensions across the Taiwan Strait. Experts and political observers across the spectra agree that Pelosi’s actions and subsequent pronouncements by US President Joe Biden gave impetus to an already simmering tension in the Taiwan Strait, provoking China to strengthen its legitimate hold on the Taiwan Strait waters, which the US and Taiwan deem as ‘international waters’.

Pelosi’s visit to China’s Taiwan region has been heavily criticised across the globe, with China arguing that this is a serious violation of the one-China principle and the provisions of the three China-US Joint Communiqués.  In response to this reckless move which seriously undermined China’s sovereignty, and interfered in China’s internal affairs, the expectation is for China to give a firm response. Pelosi visit violated the commitments made by the U.S. side, and seriously jeopardized peace and stability across the Taiwan Strait.

To give context to China’s position over Taiwan region, the history behind gives us perspective. It is also important to note that the history between China and Taiwan is well documented and the US has always recognized it.

The People’s Republic of China recognises Taiwan as its territory. It has always been  the case even before the Nationalist Republic of China government fled to the previously Japanese-ruled Island after losing the civil war on the mainland in 1949. According to literature that threat was contained for decades — first with a military alliance between the US and the ROC on Taiwan, and after Washington switched diplomatic recognition to the PRC in 1979 by the US One China policy, which acknowledges Beijing’s position that Taiwan is part of One China. Effectively, Taiwan’s administration was transferred to the Republic of China from Japan after the Second World War in 1945, along with the split between the People’s Republic of China (PRC) and the Republic of China (ROC) as a consequence of the Chinese Civil War. Disregarding this history, as the US is attempting to do, will surely initiate some defence reaction on the side of China to affirm its sovereignty.

However, this history was undermined since Taiwan claimed to democratise in the 1990s and China has grown ever more belligerent. Furthermore, it is well documented that the Biden administration, following the Trump presidency, has made subtle changes in the way it deals with Taipei, such as loosening restrictions on US officials meeting Taiwanese officials – this should make China uneasy. And while the White House continues to say it does not support Taiwanese independence, Biden’s words and actions are parallel to this pledge because he has warned China that the US would intervene militarily if China attacked Taiwan – another statement that has provoked China.

Pelosi, in her private space, would know that her actions amount to provocation of China. This act of aggression by the USA seriously undermines the virtues of sovereignty and territorial integrity which has a huge potential to destabilize not only the Taiwan Strait but the whole of the Asia- Pacific region.  The Americans know very well that their provocative behavior is deliberately invoking the spirit of separatism masqueraded as “Taiwan independence”.  The US is misled to think that by supporting separatism of Taiwan from China that would give them an edge over China in a geopolitics. This is what one Chinese diplomat said this week: “The critical point is if every country put their One-China policy into practice with sincerity, with no compromise, is going to guarantee the peace and stability across the Taiwan Strait.”  Therefore, it was in the wake of US House speaker Nancy Pelosi’s visit to Taiwan, that China, in a natural response revealed plans for unprecedented military exercises near the island, prompting fears of a crisis in the Taiwan Strait and the entire Asia-Pacific region. The world community must promote and foster peace, this may be achieved when international laws are respected. It may also happen when nations respect the sovereignty of another. China may be in a better space because it is well capacitated to stake its territorial integrity, what about a small nation, if this happens to it?

As to why military exercises by Beijing; it is an expected response because China was provoked by the actions of Pelosi. To fortify this position, Chinese President, Xi signed a legal basis for China’s People’s Liberation Army to “safeguard China’s national sovereignty, security and development interests”. The legal basis will also allow military missions around disaster relief, humanitarian aid and peacekeeping. In addition the legal changes would allow troops to “prevent spillover effects of regional instabilities from affecting China, secure vital transport routes for strategic materials like oil, or safeguard China’s overseas investments, projects and personnel.  It then follows that President Xi’s administration cannot afford to look weak under a US provocation. President Xi must protector China’s sovereignty and territorial integrity, of which Taiwan is a central part.” Beijing is very clear on One-China Policy, and expects all world players to recognize and respect it.

The People’s Liberation Army has made it clear that it has firepower that covers all of Taiwan, and it can strike wherever it wants. This sentiments have been attributed to Zhang Junshe, a researcher at the PLA Navy Research Institute. Zheng further said, “We got really close to Taiwan. We encircled Taiwan. And we demonstrated that we can effectively stop intervention by foreign forces.” This is a strong reaction from China to warn the US against provocation and violation of the One-China Policy.

Beijing’s military exercises will certainly shake Taiwan’s confidence in the sources of its economic and political survival. The potential for an effective blockade threatens the air and shipping routes that support Taiwan’s central role in global technology supply chains. Should a humanitarian situation arise in Taiwan, the blame would squarely be on the US.

As China’s military exercises along the Taiwan Strait progress and grow, it remains that the decision by Nancy Pelosi to visit China’s Taiwan region gravely undermined peace and stability across the Taiwan Strait, and sent a wrong signal to “Taiwan independence” separatist forces. This then speaks to international conventions, as the UN Secretary-General António Guterres explicitly stressed that the UN remains committed to the UN General Assembly Resolution 2758. The centerpiece is the one-China principle, namely, there is but one China in the world, the government of the People’s Republic of China is the sole legal government representing the whole of China, and Taiwan is a part of China. It must be noted that the US and the US-led NATO countries have selectively applied international law, this has been going on unabated. There is a plethora of actions that have collapsed several states after they were attacked under the pretext of the so-called possession of weapons of mass destruction illuminating them as threats – and sometimes even without any valid reason. to blatantly launch military strikes and even unleash wars on sovereign countrie

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Opinions

Internal party-democracy under pressure

21st June 2022

British novelist, W. Somerset Maugham once opined: “If a nation values anything more than freedom, it will lose its freedom; and the irony of it is that if it is comfort or money that it values more, it will lose that too.”

The truism in these words cannot be underestimated, especially when contextualizing against the political developments in Botswana. We have become a nation that does not value democracy, yet nothing represent freedom more than democracy. In fact, we desire, and value winning power or clinging to power more than anything else, even if it harms the democratic credentials of our political institutions. This is happening across political parties — ruling and opposition.

As far as democracy is concerned, we are regressing. We are becoming worse-off than we were in the past. If not arrested, Botswana will lose its status as among few democratic nations in the Africa. Ironically, Botswana was the first country in Africa to embrace democracy, and has held elections every five years without fail since independence.

We were once viewed as the shining example of Africa. Those accolades are not worth it any more. Young democracies such as South Africa, with strong institutions, deserves to be exalted. Botswana has lost faith in democracy, and we will pay a price for it. It is a slippery slope to dictatorship, which will bring among other excess, assault on civil liberties and human rights violations.

Former President, Festus Mogae once stated that Botswana’s democracy will only become authentic, when a different party, other than the Botswana Democratic Party (BDP) wins elections, and when the President of such party is not from Serowe.

Although many may not publicly care to admit, Mogae’s assertion is true. BDP has over the years projected itself as a dyed-in-the-wool proponent of democracy, but the moment its stay in power became threatened and uncertain, it started behaving in a manner that is at variance with democratic values.  This has been happening over the years now, and the situation is getting worse by the day.

Recently, the BDP party leadership has been preaching compromise and consensus candidates for 2024 general elections. Essentially, the leadership has lost faith in the Bulela Ditswe dispensation, which has been used to selected party candidates for council and parliament since 2003. The leadership is discouraging democracy because they believe primary elections threaten party unity. It is a strange assertion indeed.

Bulela Ditswe was an enrichment of internal party democracy in the sense that it replaced the previous method of selection of candidates known as Committee of 18, in which a branch committee made of 18 people endorsed the representatives. While it is true that political contest can divide, the ruling party should be investing in political education and strengthening in its primary elections processes. Democracy does not come cheap or easy, but it is valuable.

Any unity that we desire so much at the expense of democracy is not true unity. Like W. Somerset Maugham said, democracy would be lost in the process, and ultimately, even the unity that was desired would eventually be lost too. Any solution that sacrifice democracy would not bring any results in the long run, except misery.

We have seen that also in opposition ranks. The Umbrella for Democratic Change (UDC) recently indicated that its incumbent Members of Parliament (MPs) should not be challenged for their seats. While BDP is sacrificing democracy to stay in power, UDC is sacrificing democracy to win power. It is a scary reality given the fact that both parties – ruling and opposition — have embraced this position and believe democracy is the hindrance to their political ambitions.

These current reality points to one thing; our political parties have lost faith in democracy. They desire power more than, the purpose of power itself. It is also a crisis of leadership across the political divide, where we have seen dissenting views being met with persecution. We have seen perverting of political process endorsed by those in echelons of power to manipulate political outcomes in their favour.

Democracy should not be optional, it should be mandatory. Any leader proposing curtailing of democracy should be viewed with suspicion, and his adventures should be rejected before it is too late. Members of political parties, as subscribers of democracy, should collectively rise to the occasion to save their democracy from self-interest that is becoming prevalent among Botswana political parties.

The so-called compromise candidates, only benefits the leadership because it creates comforts for them. But for members, and for the nation, it is causing damage by reversing the gains that have been made over the years. We should reject leaders who only preach democracy in word, but are hesitant to practice it.

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Opinions

The Big Deal About Piracy

21st June 2022
piracy

Piracy of all kinds continues to have a massive impact on the global creative industry and the economies of the countries where it thrives.

One of the biggest misconceptions around piracy is that an individual consumer’s piracy activities, especially in a market the size of Botswana’s, is only a drop in the pool of potential losses to the different sectors of the economy piracy affects.

When someone sitting in Gaborone, Botswana logs onto an illegal site to download King Richard online, they don’t imagine that their one download will do anything to the production house’s pocket or make a dent in the actors’ net worth. At best, the sensitivity towards this illegal pirating activity likely only exists when contemplating going about pirating a local musician’s music or a short film produced locally.

The ripple effects of piracy at whatever scale reach far beyond what the average consumer could ever imagine. Figures released by software security and media technology company, Irdeto, show that users in five major African territories made approximately 17,4 million total visits to the top 10 identified piracy sites on the internet.

The economic impact of this on the creative industry alone soars to between 40 and 97.1 billion dollars, according a 2022 Dataprot study. In addition, they estimate that “illegally streamed copyrighted content consumes 24% of global bandwidth”.

As Botswana’s creative industry remains relatively slight on the scale of comparison to industries such as Nollywood and Nilewood where the creative industry contributes a huge proportion to West and East Africa’s respective GDPs, that does not imply that piracy activities in Botswana do not have a similar impact on our economy and the ability of our creative industry to grow.

When individuals make decisions to illegally consume content via internet streaming sites they believe they are saving money for themselves in the name of enjoying content they desire to consume. Although this is a personal choice that remains the prerogative of the consumer, looking beyond the fact that streaming on illegal content sites is piracy, the ripple effect of this decision also has an endless trail of impact where funds which could be used to grow the local creative industry through increased consumption, and revenue which would otherwise be fed back into Botswana’s economy are being diverted.

“Why can’t our local creative industry grow?” “Why don’t we see more home-grown films and shows in Botswana?” are questions constantly posed by those who consume television content in Botswana. The answer to this lies largely in the fact that Botswana’s local content needs an audience in order for it to grow. It needs support from government and entities which are in a position to fund and help the industry scale greater heights.

Any organisational body willing to support and grow the local creative industry needs to exist and operate in an economy which can support its mandates. Content piracy is a cycle that can only be alleviated when consumers make wiser decisions around what they consume and how.

This goes beyond eradicating piracy activities in so far as television content is concerned. This extends to the importation and trade in counterfeit goods, resale of goods and services not intended for resale across the border, outside its jurisdiction, and more. All of these activities stunt the growth of an economy and make it nearly impossible for industries and sectors to propel themselves to places where they can positively impact society and reinvest into the country’s economy.

So what can be done to turn the tide here in Botswana in order to see our local production houses gain the momentum required to produce more, license more and expand their horizons? While those who enforce the law continue to work towards minimizing piracy activities, it’s imperative that as consumers we work to make their efforts easier by being mindful of how our individual actions play a role in preventing the success of our local creative networks and our economy’s growth.

Whether you are pirating a Hollywood Blockbuster, illegally streaming a popular Motswana artist’s music, or smuggling in an illegal decoder to view content restricted to South Africa only, your actions have an impact on how we as a nation will make our mark on the global landscape with local creative productions. Thembi Legwaila is Corporate Affairs Manager, MultiChoice Botswana

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