Debt Man­age­ment

The african debt cri­sis can be con­trolled by com­pre­hen­sive and sus­tain­able de­vel­op­ment

ChinAfrica - - OPINION - By Zhang Zhongx­i­ang

Re­search by the Uk-based Jubilee Debt Cam­paign showed that debt in some Sub-sa­ha­ran Africa coun­tries has in­creased by 50 per­cent in the past two years, the high­est level since 2005. In­ter­na­tional or­ga­ni­za­tions such as the World Bank and the In­ter­na­tional Mon­e­tary Fund (IMF) have also is­sued warn­ings about po­ten­tial debt cri­sis in Africa. In May, the IMF warned that Sub-sa­ha­ran African na­tions were at risk of debt dis­tress due to heavy bor­row­ing and gap­ing deficits, de­spite an over­all rise in eco­nomic growth.

In fact, the cur­rent African debt cri­sis is par­tial, with 12 African coun­tries record­ing high debt risks, ac­count­ing for only 22 per­cent of the to­tal num­ber of African coun­tries. In ad­di­tion, com­pared to the high­est point of his­tor­i­cal African debt, the cur­rent African debt risk is rel­a­tively con­trol­lable. In 1999, Africa’s ex­ter­nal debt reached $350 bil­lion, equiv­a­lent to 93 per­cent of the gross do­mes­tic prod­uct (GDP) of African coun­tries (ex­clud­ing South Africa). At present, Africa’s ex­ter­nal debt ac­counts for less than one-third of to­tal GDP. From 2015 to 2017, Africa’s ex­ter­nal debt ac­counted for 27.8 per­cent, 31.1 per­cent and 32.4 per­cent of GDP re­spec­tively.

Debt driv­ers

The cur­rent in­crease of debt in Africa is mainly a re­sult of de­creased com­mod­ity prices and a slow­down in eco­nomic growth.

In re­cent years, due to the slug­gish global econ­omy, weak de­mand for bulk com­modi­ties has led to a de­cline in com­mod­ity prices. Tak­ing crude oil price as an ex­am­ple, the price has dropped from $114.8 per bar­rel in Jan­uary 2014 to an av­er­age of $43 in 2016. In ad­di­tion to crude oil, metal raw

ma­te­ri­als fell by 6 per­cent in 2016 com­pared to 2015. Since 2014, the com­mod­ity price in­dex has fallen by more than 40 per­cent.

The eco­nomic struc­ture of African coun­tries is sin­gu­lar and the economies have a huge depen­dence on the world mar­ket. The changes of global com­mod­ity prices have a great im­pact on eco­nomic de­vel­op­ment of African coun­tries. In re­cent years, the con­tin­u­ous de­cline in com­mod­ity prices in the global mar­ket has heav­ily im­pacted

Heav­ily-in­debted coun­tries in Africa are mostly those with sim­ple eco­nomic struc­tures de­pen­dent on the ex­port of re­sources. There­fore, it is im­por­tant for African coun­tries to de­velop an in­de­pen­dent and sus­tain­able econ­omy.

Africa’s eco­nomic de­vel­op­ment, es­pe­cially those re­ly­ing on the ex­port of raw ma­te­ri­als. The eco­nomic growth rate in Africa has dropped from around 5-6 per­cent to 3.7 per­cent in 2015 and on to 1.7 per­cent in 2016. Tax­a­tion in African coun­tries has also de­creased from $499 bil­lion in 2014 to $444 bil­lion in 2016. The in­come de­cline in re­turn af­fects their abil­ity to re­pay debts.

In ad­di­tion, with the strength­en­ing of the U.S. dol­lar and the de­pre­ci­a­tion of Africa’s na­tional cur­ren­cies, the debt bur­den of some African coun­tries has been in­creased. Since 2014, the ap­pre­ci­a­tion of the U.S. dol­lar has reached 15 per­cent. In some African coun­tries, large cur­rency de­val­u­a­tion has oc­curred. For ex­am­ple, Mozam­bique’s cur­rency, Met­i­cal, de­pre­ci­ated 56 per­cent against the U.S. dol­lar, and the An­golan cur­rency Kwanza has de­pre­ci­ated by 41 per­cent against the U.S. dol­lar.

Al­le­vi­at­ing debt bur­den

Ev­ery coun­try needs fi­nanc­ing sup­port dur­ing the eco­nomic take-off phase, es­pe­cially in the ini­tial stage of in­dus­tri­al­iza­tion. With­out fi­nan­cial se­cu­rity, in­dus­tri­al­iza­tion and mod­ern­iza­tion in Africa are dif­fi­cult to achieve. China is not the main cred­i­tor of African coun­tries. China’s fi­nanc­ing sup­port for Africa is mainly in­vested in in­fra­struc­ture con­struc­tion and pro­duc­tion ar­eas, which have greatly im­proved the eco­nomic de­vel­op­ment en­vi­ron­ment and helped Africa at­tract for­eign in­vest­ment, and en­hance its in­de­pen­dent de­vel­op­ment ca­pa­bil­ity.

China’s loans to Africa are mostly con­ces­sional loans with low in­ter­est rates. In ad­di­tion, the three ma­jor ad­van­tages of Chi­nese in­fra­struc­ture con­struc­tion en­ter­prises - high cost per­for­mance, fast ad­min­is­tra­tive ap­proval process and high qual­ity - save a lot of in­fra­struc­ture con­struc­tion costs for rel­e­vant coun­tries and cre­ated a lot of em­ploy­ment op­por­tu­ni­ties for the lo­cals. It has been rec­og­nized by the in­ter­na­tional com­mu­nity that Chi­nese in­vest­ment has boosted Africa’s eco­nomic growth.

In June 2017, Mckin­sey pub­lished a re­port called Dance of the Lions and Dragons, which pointed out that China’s in­vest­ment and busi­ness ac­tiv­i­ties in Africa brought three ma­jor eco­nomic div­i­dends to the re­gion. The first is job cre­ation and skills de­vel­op­ment. Among the 1,000 Chi­nese en­ter­prises sur­veyed in Africa, 89 per­cent of em­ploy­ees are African. The sec­ond is the trans­fer of knowl­edge and new tech­nolo­gies. Chi­nese com­pa­nies have pro­moted the mod­ern­iza­tion of African mar­kets by in­tro­duc­ing new prod­ucts and tech­nolo­gies to African coun­tries. In the past three years, about 48 per­cent of Chi­nese com­pa­nies have in­tro­duced new prod­ucts or ser­vices to African, and 36 per­cent have in­tro­duced new tech­nolo­gies. The third is fi­nanc­ing and in­fra­struc­ture de­vel­op­ment. China’s low-cost fi­nanc­ing chan­nels and sig­nif­i­cant im­prove­ments in in­fra­struc­ture have been widely rec­og­nized by African coun­tries. As a re­sult, China’s in­vest­ment and fi­nanc­ing in Africa is con­ducive to al­le­vi­at­ing the debt bur­den of the coun­tries con­cerned.

De­vel­op­ment is key

At present, heav­ily-in­debted coun­tries in Africa are mostly those with sim­ple eco­nomic struc­tures de­pen­dent on the ex­port of re­sources. There­fore, it is im­por­tant for African coun­tries to de­velop an in­de­pen­dent and sus­tain­able econ­omy.

In fact, some African coun­tries have al­ready be­gun their eco­nomic trans­for­ma­tion for a di­ver­si­fied econ­omy by de­vel­op­ing in­fra­struc­ture, un­lock­ing the po­ten­tial of the pri­vate sec­tor, help­ing work­ers im­prove their skills and cre­at­ing jobs - es­pe­cially for women and youth. Many of these at­tempts are suc­cess­ful. For ex­am­ple, East African coun­tries like Dji­bouti, Ethiopia, Kenya, Rwanda and Tan­za­nia, with­out hav­ing rich min­eral re­sources, achieved sound eco­nomic growth in 2015 and 2016, with a higher growth rate than many African coun­tries rich in min­eral re­sources. By re­struc­tur­ing their economies for com­pre­hen­sive de­vel­op­ment, these coun­tries with fewer re­sources made re­mark­able achieve­ments. In 2015, Ethiopia, Ivory Coast and Rwanda saw a growth rate of 10.2 per­cent, 8.8 per­cent and 7.1 per­cent, re­spec­tively.

In ad­di­tion, to solve the debt prob­lem, it is nec­es­sary to ad­here to the con­cept of in­ten­sive de­vel­op­ment and em­pha­size the en­hance­ment of the in­de­pen­dent and sus­tain­able de­vel­op­ment of African coun­tries, to pre­vent them from in­creas­ing their debt bur­den. This is some­thing China is aware of. On July 2018, Chi­nese Pres­i­dent Xi Jin­ping made a re­mark in a signed ar­ti­cle pub­lished by the Sene­galese daily news­pa­per Le Soleil ahead of his state visit to the coun­try. Xi said China wishes to have closer dis­cus­sions and co­op­er­a­tion with Sene­gal to see to it that fi­nanc­ing ar­range­ments are based on sound plan­ning, eco­nom­i­cally fea­si­ble and done in a step-by-step man­ner, thus en­sur­ing their sus­tain­abil­ity. With the grad­ual im­prove­ment of the world eco­nomic sit­u­a­tion, Africa’s econ­omy is gen­er­ally sta­bi­liz­ing and re­cov­er­ing. Ac­cord­ing to the IMF, Africa’s eco­nomic growth rate will reach 3.4 per­cent in 2018 and 3.8 per­cent in 2019. There­fore, there is rea­son to be­lieve that the pos­si­ble debt cri­sis of African coun­tries will be eased as these economies be­gin to grow.

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