‘Orthodoxy in macroeconomics is gone out the window’- Carlos Lopes

The pandemic and accompanying capital flight from emerging and frontier markets demand bold new policies, argues Lopes. Just like richer governments have abandoned economic orthodoxy, so should their African counterparts. They should push much harder for a coordinated approach to restructuring Africa’s debts, he adds.

By the end of this year, African economies should be seeing a wave of investment returning to the continent, in search of yield. Although the launching of the African Continental Free Trade Area on 1 January will have little effect on the ground, it is a key step for negotiating the protocols that will make the single market.

“We are still building the architecture for this ambitious project,” says Lopes. Africa will also be boosted by the young generation of digital entrepreneurs who are quickly adapting to the new global conditions, he adds.

Now the AU Commission’s High Representative for relations with the EU, Lopes brings to the task a combination of practical experience, having been executive secretary of the UN’s Economic Commission for Africa, and intellectual firepower as an academic economist based at the University of Cape Town. He is also co-author of Structural Change in Africa. Lopes talks to The Africa Report about these critical trends heading in 2021.

The Africa Report: What new pressures is the Covid-19 pandemic putting on Africa?

Carlos Lopes: This is going to be very difficult, and I think you have a situation where there is capital flight, there is an increase of illicit financial flows for sure. I don’t have the means to measure it, but you have very worrisome trends and you have the regulators in different countries not being attentive enough to the impact of Covid giving them an opportunity to revisit their monetary policy, their regulatory frameworks, and sort of doing the same thing that they’re used to because they are very conservative and they are not taking note of the fact that orthodoxy in macroeconomics is gone out the window. It’s not any more preached by the IMF, it’s certainly not practiced by the central banks and the key actors in the most developed countries of the Organisation for Economic Cooperation and Development.

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So it’s not for those who are in the margins to keep the orthodoxy that the others have thrown out, but they are, they are because of lack of imagination because they are not really reading the signs that 2021 is going to be so tough.

What should governments and central banks be doing?

Well, certainly they can print money – not all central banks and not in all situations – but they can also have their own stimulus packages. Certainly the central bank of West Africa for the CFA franc zone could print money.  They have all the fundamentals fine to do it, and they could be much more generous in terms of the way they are managing the debt of these countries. They can certainly issue at zero interest rates, much larger proportion than they have already done because they have their Covid bonds that are actually 0% as well.

But that’s one example. Another example is to do the things that the Kenya central bank governor has just announced, which is to restructure the debts on their own, meaning they borrow domestically and they buy their external exposure that is creating lots of difficulties because most of our debt problems – not to underestimate the other dimensions – are provoked by the erosion of the exchange rates and the fact that some of these currencies have lost more than 30% of their value, therefore making the debt in dollars much more higher and making actually our tax collection in dollars much more lower.

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So that is the kind of things that you can manage if you have a robust financial sector in your country, you can borrow domestically, you cap the interest rates domestically because as a regulator you can do so, and that’s what they are going to do. And then you buy the external debt that is exposing you to interest rates that are phenomenal. So that’s another example.

Specifically, what countries have the ability to shore up their finances?

I think the best example is the South African central reserve bank’s reluctance in putting some policies in place that are going to incentivise in terms of regulation, incentivise the capital to remain in the country and then curtail capital flight.

What happened with Naspers is amazing […] to let the owner of 31% of Tencent shares, the largest owner of Tencent, move its capital to Amsterdam and become the fourth-largest corporation in Europe and the largest tech investor in Europe, with $120bn. And the entire Cyril Ramaphosa plan for foreign direct investment mobilisation is $80bn in five years. Its mind boggling, no country in the world would let $120bn escape. You will have to have nice language, you will have to have a diplomatic justification or whatever, but you will not let it happen. And they just did.

Well in fact you know, South Africa is a bargain, in terms of the value of its corporations a lot of — not all of their corporations, a lot of their corporations are being valued below their real market value.

The liquidity of the market is such that this is one of the best places to come and go, you just touch in and out. So unless the regulators put a bit of discipline, it’s going to continue to happen. But I absolutely agree, I don’t want to make this sound just a one-sided story. I absolutely agree that you cannot really just do that, you have also to make sure that you fix the structural problems of the South African economy. So it has to be a tango with the two sides, not just one side, and the structural problems includes the way you deal with the state-owned enterprises, deficits, the management and the corruption in a lot of service provision, the fact that you have a too scattered and fragmented economic policy to make an impact and so on and so forth. So it’s not just debt element.

How serious is the debt crisis for African economies and how do you assess the responses?

I think the Debt Service Suspension Initiative (DSSI) plus package that was approved in the G20 is really a joke plus. The first package was a joke, and now it’s a joke plus. Because the amounts involved in that are insignificant. From the first attempt, which was just delaying payments, is basically the minimum measure that you could put in at the table, and a lot of difficulties to get agreement on that. The end result has been just about $5bn, that is the equivalent of the GDP of Guinea, just for people to have a comparator. So, it’s really very, very a small amount of money.

I think what has happened is that the IMF has been quite dynamic in providing some support way beyond the G20. They have really performed well in that front. They are close to $30bn in between commitments and disbursements to face Covid, which is way more than all the other multilateral development institutions combined.

The IMF has really being quite dynamic and has been quite responsive. But they are also the authors of these packages because they have to respond to their member states, and all they are doing is just the second-best or third-best or fourth-best because they can’t really get the political support for the preferred solution, and the preferred solution is of course the special drawing rights, which is very difficult to accept.

So the second-best is probably to do some restructuring, but before you get there a lot of the actors are saying, well, we don’t know enough about the Chinese debt as the number-one creditor they may actually play solo. So unless we have a platform that obliges everybody to follow the same rules, it’s going to be very difficult to even talk about restructuring. That’s what the DSSI plus offers.

Why do I say it’s a joke plus? I’m not minimising the fact that we need that step. But to be discussing at this late hour a debt step that is quite complex on its own, and then delaying payments for another six months, I think it’s not taking seriously the plight of Africa. Because after all, all that we have done is just to suffer from a pandemic and its impact, [which is ] mostly exogenous.

Why do I say mostly exogenous? Because the sanitary dimensions of the pandemic in Africa as we know have not been as severe as in other parts of the world. Activities are possibly in Africa ready to go back to before any other region of the world, maybe with the exception of China. Yet we cannot do it for economic reasons that have to do with the global dimensions of the crisis.

For instance, at this moment the United Kingdom is withdrawing overseas development assistance (ODA), the European Union is not putting any additional money on their ODA, rather recycling commitments that were already there and transforming them into a Covid response. To have the US completely absent from this discussion and actually being the number-one opponent of the special drawing rights solution [at the IMF], it’s all quite shocking.

Because we don’t have access to concessional funding, we have capital flight in amounts that surpass ODA and then we don’t have the latitude to negotiate our debt properly. And then some there elements are being thrown in: you have a reputational risk that is mostly induced by the rating agencies. Then you have a situation where the countries don’t have much manoeuvre, little fiscal space despite reforms that have been done, that have been praised.

What sort of policies and initiatives could make a difference to the debt burden?

The solutions paradoxically are going to be much more internal, because I think African countries are realising that there is very little hope outside. Where can we get something? So they are looking into their pension funds, they are looking into increasing incentives for remittances, they are introducing new mechanisms to fund their SMEs, and they are trying to survive a period that they know is going to be very difficult while not compromising some of their major projects.

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I think the most intelligent countries are doing something else that I think is quite remarkable. They are making the calculation that for some of the infrastructure-related debt, they can probably buy out the equity of the foreign investors at a sale price, very cheap. It’s worth contracting some additional debt to buy that equity even if the interest rates are quite high. You’re not going to have another opportunity like this.

We need to put together a much more robust integration effort through the continental free trade area. The way we deal with our pension funds is extremely important, because there is a lot of money parked there that is not productively put to use.

What are your concerns with the role of the credit ratings agencies in Africa?

We need a bit more of a regulatory framework. This cannot be just a goodwill and a code-of-conduct-based business. It has to be tangible. It has to be based on a certain parameters that are real. And I say real because I’m not minimising the rating agencies’ very thorough research on the economic dimensions that count for their ratings. But we know that all the research and all that they do in economic terms accounts for about 50% of their judgment, the other 50% is political.

That’s where we have a problem, and of course my main questioning of the rating agencies behaviour is on two registers; the first is the fact that they are not consistent. The way they treat African countries is consistently different from the way they will treat other countries with the same indicators.

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Then the second problem that I have is that they are not really working for the good of their customers, their constituents, because they push the countries to the brink all the time and, that’s not good for business.

When you have a situation where you have a debt with interest rates that are unjustifiably high for the performance of the country, of which there are many examples in Africa, what is the interest of the rating agencies pushing that country to the brink when they know that it’s completely unsustainable. That type of debt doesn’t make sense from any sort of economic logic? And that’s where we have a problem. I’m not surprised for instance they pushed South Africa more than other countries because this is the most liquid market in Africa.

How important it the launch of the African Continental Free Trade Area to the continent’s future?

The launch is going to be symbolic, and I think its importance is precisely that. Symbolically, we need to give the message that the momentum is not lost, despite Covid-19, and that forging ahead has become the number-one project of the continent. So unless we have a demonstration of that political momentum, it’s going to fade.

But from a practical point of view absolutely nothing is going to change with the launch because we are still negotiating protocols that are critical for the free trade agreements that it will operate. And we have a secretariat that has just started in the middle of the pandemic with a couple of individuals.

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This has to become a very complex machinery. Right now, the competence and intelligence relating to this area is scattered in different institutions that have been putting together the effort. We really are not yet at the stage where the border official knows what to do and the customs official has a schedule that has been printed in the relevant working language.

We are still building the architecture of this very ambitious project. This being said, we have signs that the direction the continent is taking in relation to Covid-19 already enshrines the philosophy of the AfCFTA: the joint procurement initiative, the discussions about the vaccine, the establishment of the special envoys for financing post-crisis.

How significant are the innovators in digitisation on the continent and the start-ups attracting investors?

I think this new crop of young entrepreneurs, a lot of them coming from the diaspora or with very good connections with the diaspora is very promising. It’s promising partly because they discount the ecosystem challenge, because the ecosystem is terrible, right? But they discount it, and they try to operate using technology as a way of bypassing the inefficiencies of the administration and the ecosystem.

And I think that’s very promising because that’s the way to go. It’s about leapfrogging, isn’t it? And I think what really plays in their favour is the market is just growing. On the digital front, the market is phenomenal. Africa is catapulting forward the number of individuals with access to different levels of broadband and digital services.

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When you see what Togo has done with its social response to Covid-19 — it was all digitalised, no intermediaries, everybody could apply directly and there was cross-checking with databases and you get your contributions directly on your phone. That is phenomenal. You don’t see it even in European countries. That’s the beauty of leapfrogging: lots of innovations in Morocco, in Rwanda, in a number of countries.

I’m really quite excited and I think the financing troubles of today are going to disappear in about a year or so […]. I think there is a lot of money that will have to have a way of becoming profitable, and Africa is going to be a very good bet, and particularly in these areas.

What about the impact of US-China trade wars and geopolitical competition?

It’s affecting Africa in a way that is not very positive because you have the tech war that is camouflaged as a trade war. It’s all about the technological innovations and improvements like artificial intelligence, 3D printing, how you are going to do with digital expansion, the energy transition and it’s about how you get to the next wave of improvements that depend so much on data, transmission capabilities and processing.

I believe that China is very well positioned to take over in this front, not immediately but over time. In some areas they are already ahead like nanotechnology, and I believe that Africans could have benefited from this sort of Chinese leadership.

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The Chinese wanted to have a more important geopolitical presence, and Africa was a very cheap pick from a financial point of view. With 4% of its foreign direct investment it can “buy Africa”, China is the most dominant. So, it’s very cheap.

Unfortunately, the geopolitical developments have created so much tension between the US and China. I don’t think they will go away just because President Donald Trump has not been re-elected. I think the mega-trend will remain. It will be more gentle and it will be more civil, but it is not going to change.

You have a situation that is the worst of both worlds for Africa. You have the US withdrawing and you have the Chinese becoming much more aware of public opinion views about the way they behave. They are not so interested in throwing money at Africa as they used to. They announced this in a forecast three years ago, but it’s just becoming more obvious with the pandemic that it’s not going to be business as usual.

So Africans that used to go for China as an alternative for lack of funding from the West are becoming irritated by the fact that Chinese are not as willing as they used to consider projects.

Where does Africa stand in this new geopolitics?

So where are we in this? I believe that it is in our interest that there is some normalcy in the relationship between China and the US, which is going to be difficult but not impossible. Europeans have a very important role to play.

After the Second World War we had to create Bretton Woods. After the 2008-2009 crisis we had to create the G20. So, we need to create something that is going to regulate the world differently. But if that doesn’t happen, I think the Africans will have to play with their continental free trade area as the element that will allow them to have some agency in such a turbulent world that is going to be very tense.

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There is a widening range of countries trying to boost economic and security ties with Africa. How is that influencing countries’ foreign policies and inter-state relations on the continent?

We are already seeing signs of what you describe with some countries wanting to have some influence through the countries that are close to them … influence over the rest of the continental agenda.

But the very close friends of China have not been able to influence the rest of the continent to treat China in a certain way. Likewise for the European Union, likewise for Japan, likewise for the US, and sort of the big economies that have a presence in the continent.

The Mo Ibrahim Foundation’s recent analysis on African governance recorded a decline in standards over the past decade. What is driving this?

The governance of the world has been going down, has been regressing, and Africa again is not isolated from the trends. Look at how many countries where the debate has become focused on rights being challenged, sometimes with a lot of violence.

It’s not really a surprise that Africa echoes this trend. I think what we are witnessing in the world is a bit of a challenge of the rights approach in general. In Africa I would say that you have a lot of leaders that are very much aware of the fact that public opinion was becoming much more powerful, influential.

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Therefore, they have to play their politics, taking into account a much stronger civil society voice. And that’s where you got the African Charter on Human and Peoples’ Rights approved and all that. So, there was a movement, the African Peer Review Mechanism that deals with governance issues, all these different institutions and movements were on the rise.

Now there is a sort of a pushback: why should we be so attentive to the rights approach when the “owners of the initial ideas” are associated with the West? Many of these ideas are not necessarily Western, but they are perceived as such. Now the calculation is: if the “owners of the ideas” misbehave, we should not be the ones behaving?