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The timing seems good. Global interest rates are at historic lows and real yields that justify the risks of lending are hard to find. Many global investors want to make environmental, social, and governance (ESG) impacts. The marriage with African governments who need capital to finance development and close the continent’s infrastructure gap seems natural.
Smith travelled to 26 African countries when he was conducting research for his book. The detailed country breakdowns on national debt trajectories of 16 countries (Kenya, Senegal, the Côte D’Ivoire, Rwanda, Ethiopia, Angola, Uganda, Tanzania, Namibia, Zimbabwe, South Africa, Gabon, Nigeria, Zambia, the Seychelles and Egypt) are among the book’s strong points. Non-African investors who still think of the continent as a generic destination have no excuse left.
Western lenders will have to either charge a premium to reflect the opacity, learn to adapt and devise new kinds of lending, or walk away, with all the risks which that entails.
Many of the book’s arguments are attractive. Debt should not come just from the world’s recognised financial centres, but also from other African countries. African free trade should work in parallel with attempts to increase intra-African lending and investment.
One of the main claims is that Africa’s problems revolve around the investment uses to which debt is put, and the ability of states to collect tax revenue to make debt sustainable, rather than in absolute debt levels.
- Too often, loans are either consumed by governments or poorly invested, meaning that debt repayment obligation will be there long after a short-term lift to economic activity has vanished.
- If African countries can convert debt more reliably into productive investment, then it can become a financing solution rather than a millstone.
Smith argues that one of the most crucial gaps in the debt relief discussions of the 2000s was the lack of emphasis on building public investment systems.
- A consequence of structural adjustment programs was that the role of the state was reduced too far, and many of African national development banks were closed.
- Rather than dispersing responsibilities across a range of government ministries, the book says, public investment projects could be better delivered by national or regional development banks with the skills to deliver complex investment projects while mobilising private-sector financing.
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Opaque Chinese loans
The full picture, of course, is yet more complex and unclear. As Smith notes, many frontier countries in Africa have experienced a big increase in borrowing from China, while still getting loans from traditional sources. The result, he says, is that “frontier African countries are typically growing and borrowing like a middle-income country, but not managing to collect government revenue or export like one.”
Many Africans, as Smith notes, have criticised Chinese loans due to the lack of African jobs created and the absence of environmental safeguards. Much of the Chinese lending to Africa is opaque and governed by non-disclosure agreements (NDAs). This, Smith argues, will need to change if overall Africa borrowing is to be optimised.
Here, the book seems at its least convincing.
- The idea that the Western powers could open up membership of the Paris Club, and allow China a bigger role on the boards of the IMF and the World Bank, seems far-fetched as NATO now deems China a security threat which is rapidly expanding its nuclear arsenal and engaging in military co-operation with Russia.
- In terms of realpolitik, there is no chance of China ending the use of NDAs on its African loans. As Africa continues to borrow, it will do so on terms that are at least partly invisible.
- Western lenders will have to either charge a premium to reflect the opacity, learn to adapt and devise new kinds of lending, or walk away, with all the risks which that entails.
African governments may be able to find ways to invest their loans better – but don’t expect the process to be a fully transparent one.
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