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Africa Rising Debt: Irresponsible spenders, corruption, the looting machine and illicit financial outflows May 23, 2018

Posted by OromianEconomist in Uncategorized.
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Odaa OromoooromianeconomistThe TPLF Corruption network

A study of 39 African countries from 1970 to 2010 found that for every dollar borrowed, up to 63 cents left the continent within five years. The money is often siphoned out as private assets, suggests Léonce Ndikumana, one of the researchers, based at the University of Massachusetts, Amherst. Some banks seem more interested in juicy fees than good governance.
China’s involvement in Africa has made it harder to assess the situation. Countries such as Zambia and Congo-Brazzaville have taken out opaque loans from Chinese companies. Angola has borrowed more than $19bn from China since 2004, mostly secured against oil. Such loans often have built-in clauses to review repayments as prices fluctuate, says Deborah Brautigam of the China-Africa Research Initiative at Johns Hopkins University. But there is little precedent for restructuring Chinese loans. Nor is China a full member of the Paris Club, which co-ordinates the actions of creditors when things go wrong.
Though much of the money borrowed by states comes from foreign investors, some is provided by local banks. They find it easier to buy government bills than to assess the reliability of businesses or homebuyers. Moody’s, a ratings agency, estimates that African banks’ exposure to sovereign debt is often 150% of their equity. So a sovereign-debt crisis could fast turn into a banking one.


Africa in the red: Increasing debt in many African countries is a cause for worry

Unfortunately the keenest borrowers are also feckless spenders

The Economist


“A FOOL’S bargain.” That is how Idriss Déby, Chad’s president, now describes the state oil company’s decision to borrow $1.4bn from Glencore, an Anglo-Swiss commodities trader, in 2014. The loan was to be repaid with future sales of crude, then trading above $100 a barrel. But two years later, as the price dived, debt payments were swallowing 85% of Chad’s dwindling oil revenue. For weeks schools have been closed and hospitals paralysed, as workers strike against austerity. On February 21st, after fractious talks, Chad and Glencore agreed to restructure the deal.

Chad’s woes recall an earlier era, when African economies groaned beneath unpayable debts. By the mid-1990s much of the continent was frozen out of the global financial system. The solution, reached in 2005, was for rich countries to forgive the debts that so-called “heavily indebted poor countries”, 30 of which were in Africa, owed to the World Bank, IMF and African Development Bank. With new loans and better policies, many of these countries turned their economies around. By 2012 the median debt level in sub-Saharan Africa (as defined by the IMF) fell to just 30% of GDP. Today the median debt level is over 50% of GDP. That is low by international standards, but interest rates are generally higher for African countries, which collect relatively little tax. Economic growth slowed in response to lower commodity prices. As a consequence, there is much less revenue to service debts. The pace of borrowing has picked up. The IMF reckons that five sub-Saharan African countries are already in “debt distress”, with nine more at high risk of joining them. Lending to Africa surged after the financial crisis, when interest rates in rich countries sank to historic lows. Fund managers chased the high yields of African government bonds and the profits from a commodities boom. The biggest lenders to Africa had long been Western governments. But since 2006, 16 African countries have sold their first dollar-denominated bonds to foreign investors. Interest rates in the rich world remain low, so several countries are scrambling back to the market this year. Senegal’s $2.2bn Eurobond was five times oversubscribed on March 6th. Borrowing makes sense for poor countries if it finances things like roads, schools and hospitals, which improve welfare and support economic growth. But the keenest borrowers in Africa are also feckless spenders. Take Ghana, which racked up debt as it ran an average annual budget deficit of 10% from 2012 to 2016. When a new government entered office last year, it found a $1.6bn “hole” in the budget. The new chairman of the state cocoa board found that a $1.8bn loan meant to fund cocoa production in 2017 was “all gone”.

Ghana got a three-year loan of $918m from the IMF in 2015, ensuring a degree of transparency. Commercial loans are easier to hide. In Mozambique, three state-owned companies borrowed $2bn in deals arranged by European banks. Most of this was done in secret. The proceeds were squandered on overpriced security gear and a bogus fleet of trawlers. An audit could not trace $500m. The once-buoyant economy sank and Mozambique defaulted on its debt last year.

Leveraged corruption

A study of 39 African countries from 1970 to 2010 found that for every dollar borrowed, up to 63 cents left the continent within five years. The money is often siphoned out as private assets, suggests Léonce Ndikumana, one of the researchers, based at the University of Massachusetts, Amherst. Some banks seem more interested in juicy fees than good governance. China’s involvement in Africa has made it harder to assess the situation. Countries such as Zambia and Congo-Brazzaville have taken out opaque loans from Chinese companies. Angola has borrowed more than $19bn from China since 2004, mostly secured against oil. Such loans often have built-in clauses to review repayments as prices fluctuate, says Deborah Brautigam of the China-Africa Research Initiative at Johns Hopkins University. But there is little precedent for restructuring Chinese loans. Nor is China a full member of the Paris Club, which co-ordinates the actions of creditors when things go wrong. Though much of the money borrowed by states comes from foreign investors, some is provided by local banks. They find it easier to buy government bills than to assess the reliability of businesses or homebuyers. Moody’s, a ratings agency, estimates that African banks’ exposure to sovereign debt is often 150% of their equity. So a sovereign-debt crisis could fast turn into a banking one. Disaster can still be averted in most African countries. Abebe Shimeles of the African Development Bank warns against sudden spending cuts, which would leave half-finished infrastructure projects to rust. Research from the IMF suggests that the least costly way to deal with fiscal imbalances in Africa is to raise meagre tax-to-GDP ratios, which have crept up by just a couple of percentage points this century. Other proposals aim to make lenders share more risk with borrowers by, for example, linking interest payments to growth or commodity prices. Some suggest changing laws in America and Britain, where most debt is issued, so that countries are not liable for loans agreed to by leaders acting without due authority. Organisations such as the IMF could be more robust, speaking out early when countries seem to be in a downward debt spiral. As it is, the costs of bad borrowing rarely fall on leaders or their lenders, which often makes politicians borrow (and steal) more. “It’s the common man that actually bears the brunt,” says Bernard Anaba of the Integrated Social Development Centre, a Ghanaian advocacy group. The people of Chad, now paying for Mr Déby’s foolish bargain, would surely agree.-  For more click here for  The Economist



Related (Oromian Economist Sources):


ECONOMIC COMMENTARY: THE DEBT CHALLENGE TO AFRICAN GROWTH,    


What are the main disadvantages of FDI in local developing economies? -Research gate


Corruption is a major contributor to Africa’s stunted development.-Afro Barometer

By corroding and weakening governance institutions and the democratic values of human rights, gender equality, justice, and the rule of law, it has hindered the continent’s progress toward peace and prosperity. A 2002 AU study estimated that Africa loses about $150 billion annually to corruption. Illicit financial outflows, particularly in the extractive industry, cost the continent about $50 billion per annum – far exceeding the official development assistance that African countries receive from Organization for Economic Cooperation and Development countries ($27.5 billion in 2016).


Africa’s Looting Machine: Warlords, Tycoons, Smugglers and the Systematic Theft of Africa’s Wealth review – ‘the raping of a continent’

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VICE: POST-COLONIAL COLONIALISM: The West Extorts Way More Money from Africa Than It Gives in Aid June 16, 2017

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Many decades after the official end of the western empires in Africa, the continent is still being sucked dry by a cartel made up of small local elites, multi-national companies and foreign governments. The money given to Africa to help its so-called “development” is referred to as “aid”, when in fact it should be seen as a form of reparations for a history of colonisation and ongoing domination that has left the African people almost as far from economic and social justice as they were when the European empires packed up and left in the years following the end of the Second World War.

POST-COLONIAL COLONIALISM
The West Extorts Way More Money from Africa Than It Gives in Aid

By OSCAR RICKETT, VICE, Jun 15 2017



We should be putting our western guilt to good use and pressuring government to regulate “investment” in the continent.


The world’s second-largest continent, Africa, is still defined in the western media in just two principle ways.

The more “woke” understanding of Africa is the idea of “Africa Rising”, which is defined by images of young people on bustling streets speaking on mobile phones. “Africa Rising” stories tend to focus on smart entrepreneurs doing something tech-related in massive urban centres like Lagos, Nairobi or Cape Town. They promote an image of the continent that is considered modern and future-focused. These stories are often, as the Kenyan journalist Parselelo Kantai once put it to me, “insidious little fictions manufactured by global corporate finance”.

The other main narrative is the more familiar one: hapless Africa, the tragic continent that can only continue to survive with the help of aid money provided to it by outsiders. This is the narrative of Live Aid and Bono, the story told to us immediately after news reports of famine and unrest in places that, we are made to believe, just can’t get by without western charity.

Given these two themes, it would seem unlikely that more money is taken out of the 47 countries that form what is commonly called “Sub-Saharan Africa” than is put back in. Yet, British and African campaign groups, including Global Justice Now, released a report this month which found that, in 2015, much more money was taken out of Africa in the form of illegal extraction of natural resources, tax avoidance and spiralling interest on debt repayments than was “given” to the continent in the form of aid and grants.

The report, entitled Honest Accounts 2017 , finds that the countries of Africa are “collectively net creditors to the rest of the world, to the tune of $41.3 billion [£32.2 billion] in 2015”.

Rather than Africa being a hapless continent dependent on the rest of the world, it is the exploited continent whose natural resources are enriching a local and global elite at the expense of the vast majority of its citizens, and whose governments can do little about the illegal syphoning of revenue into tax havens.

According to War on Want, 101 (mostly British) companies listed on the London Stock Exchange control an identified $1.05 trillion (£820 billion) worth of resources in Africa in just five commodities: oil, gold, diamonds, coal and platinum. Twenty-five of those companies are incorporated in tax havens.

While African countries receive around $19 billion (£14 billion) in aid in the form of grants, $68 billion (£53 billion) is taken out in capital flight. The main culprits are multinational corporations and corrupt officials with their large infrastructure of lawyers, bankers, accountants and financial advisors skilled in tax dodging.

The main device used is transfer pricing. By overpricing imports and under-pricing exports on customs documents, companies and individuals can move money to tax havens. This means that multi-national companies deliberately misreport the value of their imports or exports in order to reduce the tax they have to pay on them. Furthermore, these same companies repatriate $32 billion (£25 billion) in profits made in Africa to their home countries every year. Money made on the continent of Africa, then, is returned to enrich those outside of Africa.



The report goes on to say that African governments paid out $18 billion (£14 billion) in debt interest and principal payments in 2015. Though they received $32.8 billion (£25.6 billion) in loans, the overall level of debt is rising rapidly, and loans often lock African governments into even more debt: private lenders, the report notes, “are encouraged to act irresponsibly because when debt crises arise, the IMF, World Bank and other institutions lend more money, which enables the high interest to private lenders to be paid, whilst the debt keeps growing”. Ghana is losing 30 percent of its government revenue to debt repayments. Private lenders benefit, while ordinary Africans suffer.

Illegal logging, fishing and the trade in wildlife and plants are also hurting Africa, with an estimated $29 billion (£22.6 billion) a year being stolen from the continent through these practices. Climate change is hitting the continent particularly badly; though of course the extractive and industrial practices that led to climate change were a phenomenon of non-African countries.

As Bernard Adaba, policy analyst with ISODEC in Ghana, says: “‘Development’ is a lost cause in Africa while we are haemorrhaging billions every year to extractive industries, western tax havens and illegal logging and fishing. Some serious structural changes need to be made to promote economic policies that enable African countries to best serve the needs of their people rather than simply being cash cows for western corporations and governments.”

Many decades after the official end of the western empires in Africa, the continent is still being sucked dry by a cartel made up of small local elites, multi-national companies and foreign governments. The money given to Africa to help its so-called “development” is referred to as “aid”, when in fact it should be seen as a form of reparations for a history of colonisation and ongoing domination that has left the African people almost as far from economic and social justice as they were when the European empires packed up and left in the years following the end of the Second World War.

Recognising the troubling role western governments and companies play in the impoverishment of Africa could serve as a beginning to reverse this process. The Honest Accounts report proposes a number of steps that can be taken to help reverse the flow of money out of Africa, including putting less faith in the extractives industry, enabling transparent and responsible lending and regulating the investment that corporations bring in to African countries.

Tax havens are a key issue, one that was recognised in Labour’s election manifesto, which said that the “current global tax system is deeply unjust”. Jeremy Corbyn’s party promises to “act decisively on tax havens”, which play a key role in allowing vast sums of money to be taken out of Africa. The UK enablesthis wealth extraction to take place and sits at the head of a vast network of tax havens.

Finally, there is the need for more public recognition of what is going on. This is not about stoking up western guilt; it is about identifying the causes behind rising inequality in Africa and elsewhere, and about correcting a lazy media narrative that patronises and insults Africans while keeping everyone in a state of ignorance. The truth is this: Africa is still being plundered. It is time western governments and the western media stopped pretending otherwise.

 


 

Aid: World is plundering Africa’s wealth of ‘billions of dollars a year’ May 25, 2017

Posted by OromianEconomist in Africa, Africa and debt.
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African countries received $162bn in 2015, mainly in loans, aid and personal remittances. But in the same year, $203bn was taken from the continent, either directly through multinationals repatriating profits and illegally moving money into tax havens, or by costs imposed by the rest of the world through climate change adaptation and mitigation. This led to an annual financial deficit of $41.3bn from the 47 African countries where many people remain trapped in poverty. – Honest Accounts 2017.

World is plundering Africa’s wealth of ‘billions of dollars a year’

Research by campaigners claims aid and loans to the continent are outweighed by financial flows to tax havens and costs of climate change mitigation

The headquarters of the African Union in Addis Ababa, Ethiopia
The headquarters of the African Union in Addis Ababa, Ethiopia. Campaigners said illicit financial flows account for $68bn a year. Photograph: Sean Gallup/Getty Images

More wealth leaves Africa every year than enters it – by more than $40bn (£31bn) – according to research that challenges “misleading” perceptions of foreign aid.

Analysis by a coalition of UK and African equality and development campaigners including Global Justice Now, published on Wednesday, claims the rest of the world is profiting more than most African citizens from the continent’s wealth.

It said African countries received $162bn in 2015, mainly in loans, aid and personal remittances. But in the same year, $203bn was taken from the continent, either directly through multinationals repatriating profits and illegally moving money into tax havens, or by costs imposed by the rest of the world through climate change adaptation and mitigation.

This led to an annual financial deficit of $41.3bn from the 47 African countries where many people remain trapped in poverty, according to the report, Honest Accounts 2017.

The campaigners said illicit financial flows, defined as the illegal movement of cash between countries, account for $68bn a year, three times as much as the $19bn Africa receives in aid.

Tim Jones, an economist from the Jubilee Debt Campaign, said: “The key message we want to get across is that more money flows out of Africa than goes in, and if we are to address poverty and income inequality we have to help to get it back.”

The key factors contributing to this inequality include unjust debt payments and multinational companies hiding proceeds through tax avoidance and corruption, he said.

African governments received $32bn in loans in 2015, but paid more than half of that – $18bn – in debt interest, with the level of debt rising rapidly.

The prevailing narrative, where rich country governments say their foreign aid is helping Africa, is “a distraction and misleading”, the campaigners said.

Aisha Dodwell, a campaigner for Global Justice Now, said: “There’s such a powerful narrative in western societies that Africa is poor and that it needs our help. This research shows that what African countries really need is for the rest of the world to stop systematically looting them. While the form of colonial plunder may have changed over time, its basic nature remains unchanged.”

The report points out that Africa has considerable riches. South Africa’s potential mineral wealth is estimated to be around $2.5tn, while the mineral reserves of the Democratic Republic of the Congo are thought to be worth $24tn.

However, the continent’s natural resources are owned and exploited by foreign, private corporations, the report said.

Bernard Adaba, policy analyst with Isodec (Integrated Social Development Centre) in Ghana said: “Development is a lost cause in Africa while we are haemorrhaging billions every year to extractive industries, western tax havens and illegal logging and fishing. Some serious structural changes need to be made to promote economic policies that enable African countries to best serve the needs of their people, rather than simply being cash cows for western corporations and governments. The bleeding of Africa must stop!”

However, Maya Forstater, a visiting fellow for the Centre for Global Development, a development thinktank, said the report did not provide a meaningful look at the issues.

Forstater said: “There are 1.2 billion people in Africa. This report seems to view these people and their institutions as an inert bucket into which money is poured or stolen away, rather than as part of dynamic and growing economies. The $41bn headline they come up with needs to be put into context that the overall GDP of Africa is some $7.7tn. Economies do not grow by stockpiling inflows and preventing outflows but by enabling people to invest and learn, adapt technologies and access markets.

“Some of the issues that the report raises – such as illegal logging, fishing and the cost of adapting to climate change – are important, but adding together all apparent inflows and outflows is meaningless.”

Forstater also questioned some of the report’s methodology.

The coalition of campaigners, including Jubilee Debt Campaign, Health Poverty Action, and Uganda Debt Network, said those claiming to help Africa “need to rethink their role”, and singled out the British government as bearing special responsibility because of its position as the head of a network of overseas tax havens.

Dr Jason Hickel, an economic anthropologist at the London School of Economics, commenting on the report, agreed that the prevailing view of foreign aid was skewed. Hickel said: “One of the many problems with the aid narrative is it leads the public to believe that rich countries are helping developing countries, but that narrative skews the often extractive relationship that exists between rich and poor countries.”

A key issue, he said, was illicit financial flows, via multinational corporations, to overseas tax havens. “Britain has a direct responsibility to fix the problem if they want to claim to care about international poverty at all,” he said.

The report makes a series of recommendations, including preventing companies with subsidiaries based in tax havens from operations in African countries, transforming aid into a process that genuinely benefits the continent, and reconfiguring aid from a system of voluntary donations to one of repatriation for damage caused.


 

DW: Africa’s new sovereign debt crisis March 25, 2017

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Africa’s new sovereign debt crisis


Mail & Guardian Africa, 21 March 2017


Mozambique is the first major African nation in recent times to become unable to meet obligations to international creditors

A decade after the last major debt write-down, African states are again in difficulties. (DW/M. Sampaio)
A decade after the last major debt write-down, African states are again in difficulties. (DW/M. Sampaio)

Finance ministers and central bankers from the G20 group of the world’s most influential industrialised and emerging economies met in Baden Baden, Germany on the 17/18 March. The German NGO Erlassjahr.de (Jubilee Germany), which campaigns for debt relief, saw this as an opportunity to draw attention to the growing debt problems of many developing countries. The NGO has identified as many as 40 African countries which are showing signs of heavy indebtedness.

“This is not surprising because today’s economic indicators are telling a story very similar to the situation in the late 1970s and early 1980s which led to the Third World debt crisis,” said Jürgen Kaiser, political coordinator at Jubilee Germany. In the wealthy industrialised countries, interest rates are very low, but in Africa investors can fetch returns of between seven and 15 percent.  This leads to large capital flows from the North to the South.

The debt trap: declining commodity prices
“The low interest rates encourage countries to take out big loans which they then have difficulty paying back,” Kaiser said. The situation becomes particularly precarious when commodity prices fall. This leads to a subsequent decline in tax revenue in economies that are dependent on oil, natural gas, coal or other raw materials.

This latest debt crisis may come as a surprise to some people because numerous developing countries had a large share of their debts written down under the Heavily Indebted Poor Countries (HIPC) Initiative.  However, commentators who were convinced at the time that that this initiative launched by the World Bank, the International Monetary Fund and the G-8 group of leading industrialised nations, including Germany, would solve the developing nations’ debts problems turned out to be wrong.

Mozambique insolvent again despite debt relief
Figures released by Jubilee Germany show how unsustainable the HIPC initiative was. Among the 40 African states where the indebtedness indicators were flashing red, 26 went through the HIPC program. One of those countries was Mozambique. In January 2017, the country ceased paying back its debts on time. In 2012, Mozambique’s obligations to its creditors amounted to 40 percent of Gross Domestic Product (GDP), they now total 130 percent. Banks and investment funds were keen to lend Mozambique money believing it would be safe because the country possesses huge reserves of coal and natural gas. Those investors have been left empty-handed.

Debt explosion in Angola, Ghana, Kenya and South Africa
“Mozambique is a very dramatic case. It is the first country to cease repayments in such an abrupt significant manner since HIPC debt relief,” said Jürgen Kaiser. “But countries such as Gambia or Ghana, which also have an abundance of natural resources, are in a very critical situation as well. Senegal, which does not have much in the way of natural resources, is also in difficulties once again,” he added.

On analysing World Bank data of African nations’ indebtedness with foreign countries, it quickly becomes apparent that a large number of African economies have recently acquired dramatic levels of new debt. Between 2005 and 2015 – the most recent year for which figure are available – Angola, Ghana, Kenya and South Africa have witnessed a threefold increase in their debt levels. Smaller countries such as Cape Verde also borrowed fresh capital during this time frame.

The solution: international insolvency proceedings?
Currently there is no internationally recognised set of proceedings to settle the affairs of a country which has become insolvent. Many countries have such mechanisms for individuals and companies, but all attempts to create insolvency proceedings for sovereign states have been blocked by a lobby consisting of banks and nation states.

IMF Managing Director Anne Kruger proposed the creation of a Sovereign Debt Restructuring Mechanism in 2001. It would have been administered by the IMF, but the proposal was blocked by the United States. It wasn’t the only proposal. In 2014, the UN General Assembly adopted a resolution “towards the establishment of a multilateral legal framework for sovereign debt restructuring processes.” There were 124 votes in favor, 41 abstentions and 11 votes against. This resolution was non-binding and the chances of it being implemented are slim. One of the 11 states that voted against it was Germany.

“That could have been a mechanism that could have helped us move forward right now,” said Jürgen Kaiser referring to Africa’s present debt crisis. “Insolvency proceedings would mean that it wouldn’t be just the creditors who would decide when debts should written down on or not. In the past that practice has led to debt relief being dispensed too late, on too small a scale, or not at all.

Sovereign debt restructuring was not on the agenda of the G20 meeting of finance ministers and central bankers at the weekend, but if more developing countries follow Mozambique’s example and default on loan repayments, then it could be that G-20 will be forced to tackle the issue of debts levels.