by Etwienana Yaw Amaniampong Nkwantabisa Oteng Asante

The 2000’s saw a boom in economic activities in most countries in Africa moving from the 1990s where Africa wasn’t seen to be much. Suddenly, countries like Ghana, Kenya and Nigeria came to the lime light.

This first pillar of this growth was propelled by shifting terms of trade. This in development economics can be a mirage. You can have improving terms of trade i.e exporting commodities, over short periods of a cycle. But we can tell from as far back as the 1950s from the Latin American structural economic changes that over the long term, any economy that specializes in exporting primary products and importing manufactured one will have terms of phase shifts against them. You can have a temporary boost but if you don’t use that boost to then draw up a structure then you are heading for failure.

In the mid 1980s to early 1990s, for you to import one flip phone or telephone it would cost you 19 barrels of oil. By 2008 one barrel of oil will buy you one of those phones. That gives you an idea of how well the terms of trade shifted. You had oil prices in 1985 to early 1990s of about $10 a barrel and at one point in 1999 to mid 2000s it rose to $140 a barrel. This was a time of rapidly improving technology and cheaper manufactured products and therefore oil could technically give importers much more.

The second pillar of growth in the 2000s was debt. Between 2002 to 2008 , the levels of debt to GDP rose to an all time high after the Paris Club debt relief, HIPC debt relief, debt restructuring and so on. Countries like Nigeria who were at 50% debt to GDP came down to about 5% debt to GDP and this sort of happened across all Africa. This freed up governments balance sheets and then in that decade African countries went on a borrowing binge. Most of these African countries then spent 40-50 percent of every Cedi, Naira, Tanzanian Shilling, CFA et cetera just to service debt. We wrote off the debt and kept building it up bit by bit. What was that debt going into? 

We had rising commodities prices and we monetized all revenues and we were able to spend money and then those in turmoil were able to borrow because the balance sheet could accomodate more debt.

The debts didn’t go to roads, power, refineries, infrastructure etc. the new borrowings were recycled into higher recurrent expenditure. This helped sustain a consumption boom and GDP was growing largely driven by consumer spending. Public sector wage bills in real term rose significantly between 2005-2015. In one African country, Nigeria, the wage bill went up from 443 billion Naira to 1.7 trillion Naira in 2012. Some countries increased minimum wage across board and borrowed money to pay workers.

There is no economic problem that most African countries are facing that their leaders didn’t know will happen. Many deliberate mistakes were made and they ignored every single warning. Economics is a science and there are certain things you do that will lead to certain consequences. The per capita investment in development and the per capita revenues that we get all coming for a resource in an enclave economy do not match. African governments need to retrace their steps. If a policy is wrong, it is wrong.

Sovereign debt was fueling growth. How much can you borrow and consume without producing? You see, all this wouldn’t have happened if we borrowed the right amounts and applied them to the right purposes. Whether it is consumption spending or investment demand, GDP will grow. 

We are in a new reality, what we call the new normal in Africa. A 2-speed Africa. Look at the IMF world economic outlook, you will see that non-commodity Africa will be the fastest growing part of the world even higher than emerging Asia whereas commodity countries like Ghana, Nigeria , Angola are among the lowest growing parts of the world, growing at the rate of Europe and Latin America.

Ethiopia was growing at 11% constantly for years and they took a decision. They reformed. In the past, Ethiopian coffee farmers were getting 10% of the value of coffee from their crops. They asked the question, why can’t we produce coffee from Ethiopia, add value and have it shipped straight to let’s say, Starbucks shop in USA? Their land was good but Farmers had bad farming practices. The President got a loan from the IFC, put the farmers into cooperatives, taught them how to grow, dry, aerate, protect and package coffee. Now farmers are getting 70% of the value of coffee.  So this same president says to Aliko Dangote, come and build a cement factory. I will give you electricity at 3 cents/KWH and that was all the incentive he needed. He went in there, built a sophisticated plant, got electricity for almost next to nothing, but the cost of cement drops by 60%. What happens? Construction industry is boosted, roads are built with cement, jobs are created and new money comes into the system.

In the 1950s and 1960s, the leaders knew that, the colonialists came to take our raw materials, add value and send it back to us and constantly shift the trade terms against us. The then African leader knew that independence was not just about changing anthems and flags but industrialization and addition of value to our raw materials hence the boom in industrialization in that period. 

What is it that works? What is it that those non-commodity Africa has done well? Their model was investment-driven commodity and consumer-driven. Ethiopia, Uganda, Rwanda, Kenya and Ghana lead this pack. Nigeria and Angola are at the bottom in terms of Investment to GDP. This model delivers high growth. If you continue using a consumption and rent-seeking model, your growth is not inclusive. Which is why in most African countries, you have an increase in income distribution inequalities.

There are too many Voodoo economists parading around. Nominal GDP has been rising across African economies and it is driven by recurrent expenditure. There is always a spike in these figures when it is close to elections.  African Economies have quadrupled in hormonal terms since 2005, population is growing but capital expenditure has changed. Population grows, no new roads, no new schools, no new houses, hospitals etc. Our economies create terrorists because they don’t provide opportunities for the youth. If we do not expand the earning base and the production base of the economies through  investments and difficult and appropriate decisions, we will end up having a Malthusian situation where the resources can’t support the population and it will breed wars, pestilence etc. This is Rev. Thomas Malthus , EC 101. 

Take Nigeria and Kenya. Per capita income in Kenya is US$1338 and Nigeria is somewhere over $2000. So on paper Kenya is as half as rich as Nigeria. Kenya raises US$232 as tax revenue per capita and Nigeria raises US$117 dollars. Kenya has a development spend per citizen at US$129 whiles Nigeria stood at US$17. This is a non-commodity versus a commodity economy. If you allow people to create fake bill Of  ladings to claim subsidies and dodging taxes and buy private jets and build mansions, why won’t your economy collapse?

All countries need a planning Minister. Ministers of Planning are the most important economic ministers assuming that he is able to provide a very good plan and the government listens to him or her. They need to think beyond government budgets. All developments don’t have to come from government balance sheets and this is where Investments come in. You don’t have to raise taxes etc. there is a limit to which you can tax a hungry man or a man on an empty stomach. 

We need to adopt an investment driven Model Of Growth. You debt to GDP is 20%  and you spend 30% of your revenue to service debt. That tells you that 70% of your GDP doesn’t generate government revenue. Agriculture is like 30% but how much tax does it pay? Wholesale and retail is let’s say 10% but how much tax does it pay? You have a GDP where the tax is coming from the formal sector, oil sector and telecoms. That’s your government revenue base. And those sectors constitute 30% of your GDP. YOU DONT PAY DEBT FROM GDP, YOU SERVICE DEBTS FROM REVENUE. 

We can’t continue to blame everything concerning the downward trend of economies in oil. If oil forms about 30% of your GDP so if that’s down, what happens to services, what happened to trade, what happened to Agriculture, what happened to the other sectors?

Take Nigeria and Kenya Again.  In 2013, the errors and omissions were in Nigeria’s current account was about $30 billion. When an accountant produces an account and errors are like 60% of the account, what does that tell you? These are National accounts published by the central bank. And these central banks are telling Nigerians that these are monies we think should be in the economy but we can’t find it. Kenya has errors and omissions at 5-10%. But when you can’t explain 50% of where your earnings went then there is a huge problem. Anything below the zero line represents what went out and didn’t come in. You earn the money but you attract less investments apart from portfolio flows. 

We need to attract investments. Nigeria earns more but when you say invest in agriculture, infrastructure etc they will say it’s not profitable, if it isn’t profitable then why is someone investing in agriculture in Ethiopia Kenya and South Africa? Why is someone building roads in those countries and not in Nigeria?

We also need to go on a flexible exchange rate. We can’t be worse of than we were, the economy wasn’t doing well anyway so if we are going to try it let’s try it and do it properly. The market will always revalue itself and adjust. Markets work on the basis of confidence and perceptions. Central banks can raise MPR by 200 basis points and Cash Reserve Ratio (CRR) by 400 basis points and defend the currency. Markets works based on confidence. It’s about stabilizing the currency. Where we are today, the only way we are going to reverse the downward slide of the economy is to increase liquidity in the foreign exchange market and reduce the gap between the official rate and market rate. Flexible exchange rate regime and positive interest rates will always combine to bridge the gap, bring in the dollars we need to finance imports and those imports of raw materials for productions and production is what will lead to growth.  

We need to be able to differentiate between cedi balance sheets and dollar balance sheetsof governments. The Cedi balance sheet of banks is highly diversified. Government deposits are maybe 15%. Banks are financial intermediaries, they engage in what’s called maturity transformation. They borrow short term and lend long term. On their balance sheet they have money coming in every day from current accounts and savings deposits. If you ask them to pay off government deposits they pay off and send marketers out to go and raise monies. On the dollar balance sheet we probably earn dollars from oil sales. The international oil companies have their monies in their foreign and international banks. Very few government agencies or revenues provides dollars and they have lent them out. If you apply the same rule on the cedi and dollar balance sheets without looking at concentration risks you will bring the banks down. Look at the maturity of the assets, give them time to pay back the dollars. Don’t precipitate a banking crisis. Banks lend monies to customers who depend on imports to produce, and if banks can’t buy dollars for those customers, they can’t produce, they can’t pay back their debts. You have built up non-performing loans. 

We also need to eliminate wasteful subsidies. Removal of these subsidies are painful. But the truth is that no system is perfect and the subsidy system benefits a small group of criminals than the whole populace. Subsidize production don’t subsidize consumption. 

We need to look at land registry. In Ghana alone you need about 15 procedures to register, according to the World Bank Doing Business Report and 3-6 months to get a title. The quality of Land administration is 10 out of 30 compared to 22 in the OECD countries. Merge all relevant laws into a single piece of legislation. Land is crucial to addressing poverty in the rural areas. We need to address social issues as part of economic rejuvenation.

Trade with China is largely imports. Exports are oil or solid minerals. China’s interest in Africa is not our development. America’s interest in Africa is not our developments. China, America and Europe’s interests are China, America and Europe’s development. If China is lending us money and we are going to pay back that money by importing equipment from China, we should check that they are properly priced, and that we can’t get them from another part of the world and that they are of a high quality. We need to negotiate trade agreements that are beneficial to us.

We need to take a closer look at the Investment Model………and we need to stop this consumption and debt growth. Sustainable economic growth depends on investments. Governments look to private investment (local and foreign) and the right macroeconomic policies. Address failures in the power sector value chain. Digitize the land administration system . Re-prioritize public spending towards investments and human capital. Adopt appropriate trade and tariff policies.