November 28, 2019

Letter from Malabo

We attended the annual meetings of the African Development Bank (AfDB) in Malabo (Equatorial Guinea) in mid-June, and want to share our take on three of the talking points. These are the African Continental Free Trade Area (AfCFTA), the indebtedness of the continent and China in Africa.

Our sense is that some policymakers view the AfCFTA as a solution to their economic problems without much input on their part. There is, however, usually a correlation of sorts between the amount of work put into a project and the benefit derived from it. We chatted in a taxi with a Congolese government official, as one does, and found our analysis confirmed by his myopia. The trade area would merely have to adopt the EU model, he argued, and all would be well. If regional integration is rushed, not properly planned and/or pursued with a non-economic agenda, tensions emerge and some participants seek to leave the party. The origins of the EU were laid in the 1950s, we recall.

The AfDB’s director for regional development and a panelist in a session on open doors endorsed the project, as one would expect: the bank has provided a grant of US$5m towards the trade area’s secretariat. That said, she sought to rein in any exuberance. She noted that intra-EU trade had grown strongly because of the development of supply chains over many years. She then made a telling practical observation, which some could term subjective. Africans in her experience needed to welcome each other as they welcomed foreigners if the mobility of talent was to become a driver of the AfCFTA.

We learnt from the presentation by the AfDB treasurer, Hassatou N’sele, that the continent’s ratio for general government debt/GDP has deteriorated from 34 per cent in 2008 to 59 per cent in 2018. She was citing a broad measure of indebtedness, for which Nigeria’s burden would be about 30 percent including state governments, AMCON, the NNPC and sundries according to our estimates.

This is a steep increase over a decade, and encourages the view that the fruits of the borrowing are seldom visible beyond recurrent spending such as salaries. Whichever figures we cite for the gap in investment spending, it is obvious that Africa is falling short. The UN Economic Commission for Africa estimates that the continent requires spending on healthcare of US$66bn per year. For the sake of perspective, the AfDB approves funding of +/- US$10bn per year in total. At the same time, venture capital and private equity together raised US$17bn for projects in Africa between 2009 and 2017, of which just 3 per cent was allocated to healthcare.
Calls for a second round of debt relief would not be popular with the Paris and London clubs. The US Treasury has already said as such. The ratio for Africa as a whole tells many very different stories, however. Mozambique has been a disaster and Zambia is not far behind. A few governments have made very large mistakes, whether as a result of fraud or poor planning. Yet all governments have development agendas for their economies, which require substantial borrowing because their revenue generation is generally inadequate to cover the associated costs. They need to boost tax collection, remove exemptions, tackle fraud, draw more on technology and pursue high-profile non-payers. These efforts will not be rewarded in a hurry. Governments should borrow in the interim, and several have tapped a receptive sovereign Eurobond market that is still scrambling for new issues with a decent yield and is not overly bothered with World Bank-style conditionality.

Our final talking point is the position of China in Africa. A panel contribution from the country’s deputy governor at the AfDB was highly instructive and more frank that we had expected. Governments should always be looking to improve their business climate, she said, and China’s gaps were accounting, regulation and flexible financing products. Its development policy was “maturing”, which was a subtle acknowledgement of past mistakes, and China had only been operating in this field for about ten years.

Chinese procurement should be more open, and it had not always been a good idea to import Chinese labour for large infrastructure projects. We think she may have had the rebuilding of the Benguela railway in mind and recall the photographs at the time of tented towns to house the imported workers. The deputy governor was indulging in the dark art of public relations in the face of increasingly negative news flow but we should still recognize the demonstration of openness. She was keen to point to the trend for Chinese project co-financing with multilateral development banks such as the AfDB.

As for the event itself, we did not have the technology to count the delegates but had the distinct impression that numbers were down on the meetings the previous year in Busan (South Korea). This was certainly the case with fellow bank economists, think tanks, NGOs, regional bodies and portfolio investors. Our hunch would explain why discussion panels were dominated by AfDB employees and representatives of shareholder governments, both groups being mandatory attendees of the annual meetings. Such discussions tend to be livelier when the panels are more diverse and include the private sector. The annual meetings were the poorer for its absence.


Gregory Kronsten

Head, Macroeconomic & Fixed Income Research