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After $300bn promise, what next for Africa’s exports to China?

Trade between Africa and China looks set to reach the targets offered in 2021; but what will it take to shift it toward value addition on the continent?

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August 15th, 2024 Opinion by Rosie Wigmore Image : FADEL SENNA/AFP

In 2021, at the eighth Forum on China-Africa Cooperation (FOCAC), China pledged to import total African products worth $300bn over three years. This was not an overly ambitious target given that, based on Chinese import figures, Africa exported $275bn worth of goods to China between 2019 and 2021. Indeed, China has been Africa’s largest bilateral export destination since 2009. Nevertheless, it was still an important target because it was not only the first import target that China had set for Africa, it was also the first import target that had been set for Africa by any development partner.

A key reason for the target was to respond to African demands to reduce growing trade imbalances between Africa and China. To help reach the target, China also announced a range of supportive trade initiatives at FOCAC including $10bn worth of trade financing to boost African exports to China, “green lanes” to fast-track African agricultural exports to China, online shopping festivals to promote and sell African products in China and further increase the scope of African products enjoying zero-tariff treatment.

The good news for Africa is that this target is very likely to be met. Between January 2022 and June 2024, and again based on Chinese import figures, African countries have exported a total of $286bn worth of goods, meaning China has to import just an additional $14bn worth from Africa over the coming months to reach the target. From this perspective, the target has worked: it’s been a success.

The bad news is that over the same period Africa’s trade deficit with China actually widened. For example, in 2021 the trade deficit was $39bn and by 2023 it was $63bn. Furthermore, while there was some diversification, in 2023 just nine African countries, all resource-rich countries, accounted for 83% of exports with China and this trend has continued into 2024.
How to build on trade success

So what can be done in the next iteration of FOCAC to build on the success while also recognising the shortcomings of the target? Continue reading After $300bn promise, what next for Africa’s exports to China? →

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How Africa’s ‘ticket’ to prosperity fueled a debt bomb

Credit ratings were meant to help sub-Saharan countries tap global investors to fund much-needed development. But low scores, heavy borrowing and bad luck have left many struggling with crushing bond debt.
By Libby George, Tom Bergin, Tom Wilson and Lawrence Delevingne
August 1, 202411:55 AM GMT+2Updated 27 min ago
In 2002, Africa seemed poised to rise. Wealthy creditor nations were wiping billions of dollars of unsustainable debt off the books of sub-Saharan countries, and global demand was surging for the commodities the region exports, supercharging hopes of a sustained economic boom.
The United Nations, backed by the United States, had a plan to fuel the expansion: sovereign credit ratings. These metrics — essentially an informed guess of a nation’s ability to repay lenders — would for the first time allow a wide swath of the poorest region on Earth to tap yield-hungry investors in the global bond market. And the cash borrowed wouldn’t come with strict controls on how it would be spent, as is the case with financing from multilateral institutions like the International Monetary Fund. The U.N. heralded the initiative as “an assault on poverty in Sub-Saharan African countries.”
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Today, the optimism has faded, washed away by a deluge of debt.
Essential to the plan were the “Big Three” U.S.-based credit rating agencies — S&P Global Ratings, Moody’s Ratings and Fitch Ratings, which together account for more than 90% of global ratings. The rating agencies collected fees for their services and began applying their complex analyses to the region.
Given the troubled economic history and conditions of sub-Saharan Africa, it came as little surprise that the Big Three gave most countries below-investment-grade, or “junk,” ratings. Those low scores meant the countries had to pay higher interest rates on their bonds to attract investors who might otherwise balk at the risk. The thinking at the time was that African countries’ ratings would improve, and their cost of borrowing decline, as their growing economies allowed them both to repay their debts and invest in development.
Instead, the push for credit ratings set these nations on a path to debt many could not afford. Over the past two decades, more than a dozen sub-Saharan countries borrowed nearly $200 billion from overseas bond investors, according to World Bank figures. As their nations’ finances faltered, African leaders lashed out at the rating agencies with allegations that the firms were biased in their assessments. Reuters did not find evidence of systemic bias in the Big Three’s ratings for the region. Rather, Africa’s debt crisis highlights the potential pitfalls when sophisticated financial markets meet impoverished countries eager for development.

After dozens of interviews with current and former Big Three employees, large investors and officials with government and multinational organizations, along with a review of hundreds of pages of regulatory and legal filings, Reuters found that the Big Three weren’t fully prepared for the challenges of rating a region awash in poverty and unfamiliar with the process, and that many of the nations involved weren’t ready for the torrent of cash their credit ratings unlocked.
The upshot: Billions of dollars meant to pay for badly needed improvements to infrastructure, education and healthcare are now going toward interest payments. Sub-Saharan Africa’s average debt ratio has almost doubled in the past decade — from 30% of gross domestic product at the end of 2013 to nearly 60% in 2022. The region today has the highest rate of extreme poverty in the world.
When debt service crowds out spending on infrastructure and other public goods, “the country doesn’t grow, and you just end up in a vicious cycle of poverty,” said Christopher Egerton-Warburton, founding partner of Lion’s Head Global Partners, a London-based investment bank that has advised African governments.
The financial burden carries deadly potential. In June, anti-government riots exploded across Kenya in protest against proposed tax increases, including levies on bread, cooking oil and other staples, to help fund payments on the roughly $80 billion Kenya owes creditors. The rioting, which continued after the proposal was withdrawn, left dozens dead and many more injured.

Bad luck plays a part in Africa’s debt debacle. Some nations weren’t ready when prices plunged for commodities that underpin their economies. After the COVID-19 pandemic shuttered the global economy, cautious bond investors pulled back. The Big Three slashed ratings for many sub-Saharan countries. Then as global inflation pushed upward, major central banks raised interest rates, increasing borrowing costs. Several African nations ended up defaulting on their bonds or struggling to pay debts.
How Africa’s ‘ticket’ to prosperity fueled a debt bomb
A cocoa pod growing on a farm in Ghana, the world’s No. 2 exporter of the commodity. REUTERS/Francis Kokoroko
That’s what happened to Ghana, a top cocoa producer. It defaulted on most of its external debt in 2022, after rising debt costs prompted Moody’s to cut its credit rating. At the time, Ghana said its interest payments were consuming up to 100% of government revenue.
After the downgrade, Ghana’s Finance Ministry took aim at Moody’s, issuing a statement in which it alleged “institutionalized bias,” and declared, “We shall actively continue to support the global outcry against this leviathan.”
The ministry publicly named the Paris-based lead analyst for Ghana and her supervisor, and asserted that she had not visited Ghana since Moody’s assigned her to it earlier that year.
Moody’s declined to comment on the episode. Neither the analyst nor her supervisor responded to requests for comment.
Continue reading How Africa’s ‘ticket’ to prosperity fueled a debt bomb →

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Africa’s funds too often dormant or misused, reports Mo Ibrahim Foundation

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The Foundation says that Africa could do much better in using the financial resources at its disposable to achieve development outcomes.

June 21st, 2024 ByLuke Kilian

Africa must put in place new processes to allocate “dormant or misused” funds in order to meet the Sustainable Development Goals by 2030 and the African Union’s Agenda 2063, argues a new report from the Mo Ibrahim Foundation.

While the annual cost of achieving the SDGs and the African Union’s Agenda 2063 in Africa is estimated by various sources at between $870bn and $1.3 trillion, Africa’s four main sources of finance (revenues, personal remittances, official development assistance and foreign direct investment) amounted to just $829.7bn in 2022, the Foundation reports.

However, the report argues that resources mostly exist, but either lack the relevant processes to be effectively allocated or are either dormant or misused.

Mo Ibrahim, the Sudanese-British telecoms billionaire who chairs the foundation, said that Africa must overhaul its processes to ensure money is getting to where it is needed.

“We need a complete change of paradigm. This is not about Africa coming to the developed world with a begging bowl and developed countries considering how much more they can pledge. This is about smarter money, not just more money. As this report outlines, the money is already there. But current processes prevent resources from being used to properly address the challenges.”

“What I hope this report will show…is that the money is there, but mainly stuck in pipes, or misused.”

That echoes arguments made by the African Union. Domestic resource mobilisation could cover 75-90% of the financing needs for Agenda 2063 on average per country, according to the African Union.

“The money to finance Africa’s future is right here on the continent and within the global African diaspora. It lies in our natural resources, our people, and our innovations,” says Nardos Bekele-Thomas, CEO of African Union Development Agency.

The issue, however, is that the resources are not being used and remain dormant. Issues highlighted by the report include illicit financial flows (IFFs) – which cost Africa an estimated $100bn a year – and weak tax systems.

The money raised from ending IFFs could surpass both ODA received ($81bn annually) and remittances sent back to the continent ($97bn annually).

On taxes, Africa has the lowest government revenue in the world. In 2024, only 5 countries comprise over half (53.7%) of total Africa’s revenues: South Africa, Algeria, Egypt, Morocco and Nigeria.

“With the average tax-to-GDP ratio in Africa still at 15.6%, half the OECD average, strengthening tax systems appears a quick win. Indeed, Africa lost $46 billion in corporate taxes due to tax incentives in 2019, more than half of ODA received,” the Foundation says.
Debt not the answer

Africa’s total external public debt has almost tripled since 2009, rising from $220bn to $655bn in 2022. This is the highest public debt stock Africa has had in over a decade. Countries have had to cut essential public spending, diverting development funds to debt servicing.

“Debt cannot be the way out, as stock and servicing costs have tripled since 2009, and its increasingly complex structure renders traditional relief efforts obsolete,” the report finds.

Arkebe Oqubay, former senior minister and special adviser to the prime minister of Ethiopia and a contributor to the report, says that debt cancellation must be high up the agenda.

“Debt cancellation and restructuring should be the core solution to address the debt stress and financial pressure in African countries. It is of the utmost urgency to establish new financing mechanisms for African development.”
Utilising Africa’s resources

With the ongoing green revolution, Africa’s mineral reserves are in high demand as they are critical for renewable energy and low-carbon technologies. The report suggests that for the continent to make the most of this, it will have to not just produce raw materials but manufacture, design and refine them, in order to access higher value chains. More than 70% of the world’s cobalt is produced in DR Congo, yet Chinese companies account for 68% of the global cobalt refining capacity. Around 80% of the DR Congo’s cobalt output is owned by Chinese companies which produce higher value products such as batteries.

Another way to unlock more money is through Africa’s carbon-sinking capacity, according to the report. The Congo Basin forest offsets more than the whole African continent’s annual emissions. According to the African Carbon Markets Initiative (ACMI), Africa only uses 2% of its annual carbon credits and should aim to sell $100bn worth of credits a year by 2050.

Source, African Business, 21st June 2024

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The Promise of Africa’s “Plan A” for a Flourishing Future

As Africa emerges as the world’s youngest continent, boasting six out of the 10 fastest-growing economies, the global community is taking notice of its unprecedented growth trajectory. In this context, YPO (Young Presidents Organization) member and Group CEO at ForAfrika, Isak Pretorius passionately advocates for embracing Africa’s inherent potential through a profound approach he calls “Investing in Africa’s Plan A.”

Pretorius asserts that when we engage with African communities and nations, we uncover an array of ingenious plans waiting to be supported and nurtured. Central to his advocacy is the importance of investing in Africa the right way, emphasizing that “when we do that, we will see that Africa’s plan succeeds.” This underscores the vital role of aligning resources with community-owned initiatives to foster sustainable success.
A Crucial Moment for Africa

Pretorius’s call to action resonates deeply with leaders worldwide, as they increasingly recognize Africa’s significance and potential for strategic investments.

According to the International Monetary Fund, many economies are grappling with stagnation or decline in working-age populations. In contrast, Africa is poised to become a major contributor to the global workforce by 2050. YPO member Yaw Benneh-Amponsah, Managing Director of Merson Capital in Ghana, emphasizes Africa’s evolving demographics, noting, “Africa’s population is growing. We are becoming a more educated population. We’re young and adventurous.”

demogr

This demographic evolution presents vast opportunities for Africa. Indeed, now is the time to chart a new course for Africa, one that secures its position and commands respect on the global stage
Embracing Africa’s “Plan A”

Against this exciting backdrop, Africans are coming up with their own versions of “Plan A” for the future. These aspirations hold the potential to usher in greater safety, peace and digital connectivity, noted Sanjay Rughani, CEO of Standard Chartered for Tanzania and YPO member, during YPO’s Global Impact Summit in Rwanda earlier this year. “It’s about becoming self-reliant,” he said.

Moreover, Africans are finding solutions in areas such as climate, infrastructure, energy and water management that have value beyond Africa’s borders. “Africa has its own fair share of challenges, and very often, we’ve had to find our own solutions to those challenges,” notes YPO member, Fola Laoye, Co-Founder and CEO at Iwosan Investments Limited in Nigeria. “It’s great that we have the opportunity to bring some of those solutions to the rest of the world.”
Empowering Africa’s Youth: Catalysts for Change

With high-quality traditional jobs in short supply, one critical foundation of any long-term plan for Africa’s future will be stopping the brain drain and giving young people a good reason to build their careers on the continent.

Entrepreneurship is an ideal way to do that, say many experts, and it’s already taking root organically. Young people looking for ways to make a living are driving the world’s highest rate of entrepreneurship, as the Brookings Institute notes in the Foresight Africa 2024 report.

Africa has gotten further ahead in technology than anticipated, and that factor, in combination with its youthful population, has been a powerful force, according to Laoye. “Small-scale businesses are finding the value of compounding and growing quite quickly with technology and therefore are bringing some tech-enabled solutions to the world,” says Laoye.
Taking Ownership of Africa’s Future

As Benneh-Amponsah asserts, “We should take ownership of our own plan and let that be plan A. Even if our plan is not as well-resourced as people from other jurisdictions, whatever resources we have, we should be able to risk those on our own plan. In shaping the future, the key thing is to believe in our own potential to take control of our future.”

The engagement of local leaders will also allow for better execution of any plans, Benneh-Amponsah believes. “The unique contribution that we can make is to bring our perspective to the table, which relates back to taking ownership of our progress because a lot of solutions fail since they are not sensitive to the context,” he said. “Who understands the African context better than those of us who are taking risks, risking our own resources on African solutions?” And, as leaders outside of Africa get involved in the progress that is already percolating, local leadership will be the key to building sustainable success.
YPO – Empowering Leaders to Shape a Better Future

Ultimately, it will take many leaders to craft a compelling vision for Africa’s future and come together to put it into action. To this end, YPO plays a pivotal role in this endeavor by empowering business leaders to shape a brighter tomorrow and harness the collective power of better leadership in lives, businesses and the world.

If you are interested in joining YPO’s global network of the world’s most influential business leaders driving positive change, visit www.ypo.org/acf/ or contact africa@ypo.org to learn more.

Source: The Africa Report, 28th May 2024

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IMF projects improved growth for Africa but debt and limited taxes still prompt concern

he International Monetary Fund (IMF) projects that the continent’s economic growth will reach 3.5% in 2024 and 4% in 2025.

Some of the factors fuelling this optimism include the fact that inflation has almost halved, public debt ratios have broadly stabilised, and several countries have issued Eurobonds this year, ending a two-year hiatus from international markets.

“After peaking at almost 10% in late 2022, inflation has nearly halved to around 6% in the early part of the year thanks to decisive action by central banks,” Abebe Aemro Selassie, the director of the African department at the IMF, told reporters during the Fund’s spring meetings this April.

He emphasised that lower inflation has translated to slower food price increases, terming this as a “positive development” for a region where the cost-of-living crisis has been acute in recent years. “In addition, fiscal consolidation efforts are starting to pay off, with the median public debt stabilising at around 60% of GDP, halting a 10-year upward trend,” he observed.

Not out of the woods yet

“These are encouraging signs. But the region is not out of the woods yet,” cautions Selassie, citing concerns around high borrowing costs amid a crippling funding squeeze facing several countries on the continent. “Far too many countries still face a funding squeeze. Their borrowing costs are high, and funding sources curtailed. Government interest payments now account for about 12% of revenues, more than double the level a decade ago. And official development assistance has become scarcer.”

The impact of these challenges on Africa is significant. Rather than increasing investment in critical areas such as health, education, agriculture, and infrastructure – sectors that can drive development and lift millions out of poverty – governments are allocating essential funds toward debt servicing. This has implications for the region’s growth prospects and its ability to withstand future shocks, argues Selassie, who oversees the IMF’s operations and engagement with 45 countries across sub-Saharan Africa.

He believes that in the face of these challenges, governments in the region should prioritise domestic resource mobilisation, laying emphasis on tax policies that help governments cut their deficits. Specifically, he called for African countries to “cut back tax expenditures” that undermine equity. Tax expenditures are special provisions in the tax code – such as exclusions, deductions, deferrals, credits, and preferential tax rates – that benefit specific activities or groups of taxpayers. He also called for continued digitization of tax procedures to boost efficiency and transparency.

Getting African countries to pay more tax, while ensuring that the burden is equitably shared and economic stability and growth are not compromised in the process, will be key in bolstering Africa’s efforts to reduce its unhealthy reliance on international debt markets.

Many African countries receive a much lower proportion of their GDP in tax than do countries on other continents, according to a report by the Organisation for Co-operation and Economic Development (OECD). The report, which covers tax revenue data for 30 African countries between 1990 and 2018, shows that the average tax-to-GDP ratio for the 30 African countries was 16.5% in 2018. This compared with an average of 34.3% in the 38 OECD member states; and 23.1% for the Latin American and Caribbean nations.

Calls for global financial architecture reform grow louder

Africa’s challenge in collecting sufficient taxes partly stems from international firms exploiting loopholes in the global taxation system to evade paying taxes on the continent, leading African countries to an unhealthy reliance on international debt markets.

“A new global tax system attentive to the needs of the global south is a key priority,” notes Brahima Coulibaly, vice president and director of global economy and development, Brookings Institution. There are positive signs that the global taxation system is moving toward greater equity. Last year, an Africa-backed resolution at the United Nations (UN) paved the way for transferring control of international tax rules from the OECD – comprising 38 wealthy countries – to the UN. This shift ensures that all 193 member states are on a more equal footing, giving African countries a fairer chance at shaping outcomes on negotiations relating to international taxation.

Continue reading IMF projects improved growth for Africa but debt and limited taxes still prompt concern →

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