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Liberating Africa from the IMF Debt-Trap

There were times when there riots in Africa, demonstrations against the IMF because of the policy advice they were giving, the conditionalities they were imposing and the difficulties that arose out of the implementation of those conditionalities. – Jakaya Kikwete, former President of Tanzania

I am a child of the 1990s, I grew up in Kenya when the economy was crap, and the politics was hot. Something I used to hear a lot about on the news at the time was the IMF, alongside words like reform, privatization, and taxes.

Today it feels like a bad remake of the film ‘Back to the Future’ because the economy is crap and the politics is hot, and the IMF is driving economic policy. Today Kenya is implementing broad tax increases on fuel, incomes, imports, and businesses and even mulling carbon taxes on the advice of the IMF. Privatization is top of the agenda and ‘reform’ is everywhere, conditions of the IMF program that the country has entered because of fiscal distress. Kenya is not the only country on the continent under an IMF program, Ghana, Zambia, Mozambique, SA etc. are all under IMF ‘guidance’.

In the 1990’s under the structural adjustment programs imposed the IMF, African countries were forced to liberalise their economies, sell off state assets, pull down trade barriers and dismantle social safety nets. Causing immense pain and hardship on the back of policies dictated by disconnected bureaucrats and economists in Washington. Today, African countries are being advised to increase taxes, remove cushioning subsidies and tax breaks, let the value of currencies depreciate and sell off state assets, that are once again causing immense pain.

How did we get back here? How do we get out of it again? Most importantly how do we make sure that it never happens again?

How did we get here?

Getting out of the clutches of the IMF in the first couple of decades of the 2000’s took a lot of hard work, a booming Chinese economy and debt Jubilee from the west. How did we get back here? As with most things it was a combination of stupidity, naivete, and bad luck.

Stupidity: We borrowed too much for projects with disappointing returns (like Kenya’s SGR) or it was outright stolen like the tuna boat scandal in Mozambique. Essentially wasting the money that we had borrowed.

Naivete: After the financial crisis of 2008-09 money in the developed world was cheap, with 0% interest rates. Thus, that money needed by investors, pension funds, banks etc. was looking for returns. African governments seeing cheap money looking for a place to go, floated all manner of Eurobonds, dollar bonds and took syndicated loans and with our aforementioned stupidity, we spent it on the wrong things.

Bad Luck: The Covid-19 pandemic gave every economy a kick in the teeth, stopping growth and investment and then in 2022 the perfect storm hit, inflation forced interest rates up and the cheap money disappeared, at the same time those increased interest rates made the dollar much stronger, thus debt payments had higher interest rates and a dollar penalty. The war in Ukraine caused global food and energy prices to increase steeply, and with most African countries being net fuel and food importers., those imports got more expensive.

How do we get out of it (again)?

In the early 2000s African got lucky on two fronts. The Chinese economy boomed driving demand and prices of the raw materials up and providing a much needed boost for African economies after the IMF induced stagnation of the 1990s. Secondly, many African countries were granted debt relief under the highly indebted poor countries initiative, giving much breathing room to African economies that had been struggling under a significant debt burden. However, the continent cannot rely on lightning striking twice, thus we must actively put in place solutions that get us out of this situation.

Tax reform

First, Africa needs more of its own revenue, which means taxes. However, unlike the IMF’s advice African governments should not be putting additional taxes on their already overburdened citizens who make up their narrow taxbases. As I have written about previously by reforming the tax regimes for natural resources, targeting tax avoidance by multi-nationals, and expanding the tax base, African countries can expand their revenue collection without squeezing their citizens for little gain, with higher income and consumption taxes as many are doing on the advice of the IMF.

Spending Cuts

Second, spending cuts. Governments, particularly African governments waste money on unnecessary or silly things. The most glaring example is Ghana’s national cathedral. Focusing spending on the fundamentals, paying salaries, delivering services and key development projects, while cutting unnecessary spending would give governments some breathing room and ease the crowding out effect in domestic debt markets that is seeing governments borrow every cent they can, leaving little for the private sector to borrow, limiting investment and growth.

The IMF

Third, use the IMF. Not the institution, but its assets through something called Strategic Drawing Rights (SDR) these are interest bearing international reserve assets of member countries of the member countries of the IMF. SDRs are allocated to IMF members in proportion to their quotas of shares. SDR’s are held by states or specified institutions such as the Africa Development Bank (AfDB) as part of their forex reserves or they can be used to pay the IMF for loans or transactions. Many wealthy countries are holding SDRs that they do not use, and in the past the G20 pledged to reallocate $100 billion worth of SDRs to Africa. The Africa Development Bank has calculated that with its AAA credit rating it could leverage the funds as much as 4 times, meaning $100 billion could deliver $400 billion to African economies. Part of that could be used to help African countries refinance and restructure, dollar-based debts.

For instance, Kenya has $2 billion dollar bond payment it must pay in 2024. If it defaults, it would be disastrous to its economy and currency. If it tried to finance the payment through its own revenues it would cripple the government requiring massive cuts to services and personnel. If it tried to refinance the bond through international markets the interest would punish the country for years to come. If through the AfDB Kenya was able to refinance the bond, at favourable rates, for a period of time that made sense, Kenya bond holders would be paid back, and the country would get the economic and fiscal breathing space it needs to invest in development and not tax its private sector and citizens to desperation. This wouldn’t be a bailout or debt Jubilee, in the end Kenya would pay the money back to AfDB. There is no need for the painful choices Kenya and many other African states are being forced into, when the AfDB could use already pledged assets to solve the problem.

How do we make sure it never happens again?

Assuming we can find our way out of this mess, how do we make sure that Africa never loses its economic sovereignty to the IMF or other non-African institutions again. It won’t be easy, and it won’t be simple, but it is worth doing.

Discipline. African countries need to develop fiscal discipline, the days of presidents and political leaders using treasuries as personal playthings must end. If not the vanity projects, white elephants and waste will continue to drive bad debts and IMF bailouts.

African Capital Markets. As the continent comes closer together around trade, climate issues, and payment systems, we should add capital markets to that list. Why go to Europe or America to float sovereign bonds or raise capital, why not do it in Africa. Raising money from markets and investors that better understand and appreciate Africa. Most African markets rely on a combination of domestic markets, draining capital away from the private sector, and unreasonably expensive Eurobonds and syndicated bank loans. Developing regional/pan-African capital market would open a new venue for African countries to borrow potentially in their own currencies.

Expertise. Many of the African finance ministries who “took advantage” of international capital markets over the last two-decades, have, unfortunately shown that they do not fully grasp the complexity and repercussions of these markets. Thankfully long-gone are the days where there are not enough Africans with the right type of skills. There are more than enough qualified African bankers, financial experts and advisors who have worked from wall street to Hong-Kong executing complex transactions and trading in these markets. It is time to bring this expertise in house. Debt departments at ministries of finance need these people staffing them to develop viable debt strategies that are built for long term sustainability.

Conclusion – Back to future

In the film back to the future the protagonist, who went back in time eventually goes back to the future, safe, sound and more secure than before. We must strive for the same for the future of the continent’s fiscal well-being. A prosperous future for Africa, requires Africans being in-charge of our fiscal resources not faceless bureaucrats from the other side of the world. Questions around how African countries tax their citizens, where they spend that tax revenue and what they should be borrowing for should be debated and determined at home not in Washington, Brussels, or Beijing.

Africa is back in the IMF debt trap, and just like in the 1990s African countries are sacrificing their citizens through higher taxes, cutting services, and selling assets as demanded by the IMF in the name of sound economic reform. Getting out of this debt trap will be harder and likely more painful than the last time, but if we don’t our sovereignty will continue to be second class.

Rethinking African infrastructure: investing in the small for big results

The Africa Development Bank estimates that Africa needs as much as 175 billion US dollars a year by 2025, to close the infrastructure gap, which is cited as a significant constraint on its growth.

The notion of the infrastructure gap has driven African governments to borrow and spend billions on roads, railways airports, dams, and other large, ambitious infrastructure projects. However, this binge of infrastructure is starting to be questioned and rightly so. The continent is dotted with shiny infrastructure projects which are struggling to justify themselves as they have not created the growth, employment, revenues and development promised. Many have been vehicles for corruption and have burdened taxpayers with enormous debts which we are struggling to repay.

Much of this large infrastructure is built on the “build it and they will come” principle. That these huge projects will attract investment, industry and generate economic activity that will ensure that they can pay for itself. It is time to rethink this approach. Does Africa need Infrastructure, yes, however we need to rethink our approach to infrastructure. Investing in “small” infrastructure, that provides immediate benefits to citizens and drives quality of lie and economic development. Rural roads, urban roads, last mile internet and electricity connectivity, pedestrian infrastructure, community healthcare infrastructure, warehousing, and cold storage.

Build it for those that are there.

On May 31st, 2017, President Uhuru Kenyatta opened the first phase of the largest infrastructure project in Kenya’s history, christening it the ‘Madaraka Express’. It was the Chinese built Standard Gauge Railway (SGR) which parallels the old colonial line from Mombasa on Kenya’s coast through the capital Nairobi to Lake Victoria and on into Uganda. President Kenyatta hailed the railway as a developmental gamechanger stating that ‘Large and vibrant towns will grow along its length, new factories and hotels, and service businesses will employ hundreds of thousands of young people. Farmers will earn more as their produce makes its way to buyers faster and cheaper’. Not only has none of this come to pass, but the railway has also been losing money and bleeding the country dry with debt payments. In the 2021-22 financial year the railway reported an operating loss of 31 million US dollars while the country made 209 million dollars of debt payments for the railway.

Across the continent this tale is repeated mega infrastructure projects, justified as the foundation upon which Africa’s future development will be based. Mega railways, airports, ports, dams, and power stations, that will kickstart manufacturing industries, transform large scale agriculture and make the continent more attractive to investors. These projects, by and large have not done so, instead becoming a drain on the public purse, threatening critical services and other development projects as we try to pay back loans.

It is clear from the mess that many of us have gotten ourselves into, that Africa needs to rethink the “build it and they will come philosophy” for how it invests in infrastructure, and the type of infrastructure it invests in.

Thinking small: Rural Roads, warehousing, pedestrians, and the last mile.

What small infrastructure should African governments be investing in. It should be small infrastructure that enhances the productivity and growth of the majority of livelihoods in the economy. It should infrastructure that improves the daily lived experience of citizens. It should be infrastructure that drives the growth of local economies and industries. And there are a number of options that would serve one or more of these objectives.

  1. Rural Roads

Much of the mega-infrastructure investment on the continent has focused on transcontinental highways meant to spur intra-African trade, expressways to beat the traffic menace in cities and superhighways for national prosperity. However, most African countries remain primarily agricultural economies. ‘Agriculture employs approximately 65–70% of the African workforce, supports the livelihoods of 90%of Africa’s population, and accounts for about a quarter of the continent’s GDP’[1]. Enhancing rural transport networks will improve access to markets, particularly for small farmers allowing them to get their produce to market quicker and cheaper. It will reduce the cost of getting goods and services to rural communities and make travel to regional centres easier. All critical to improving opportunities and livelihoods for local communities.

  1. Warehouses

This is a subject I have written about previously, certified warehouses that can properly store agricultural goods, would reduce post-harvest losses. Africa loses approximately 100 million tonnes or $4 billion worth of food to post harvest losses. If not lost that food would reduce the cost of food, improve availability and boost incomes throughout the value chain from farm to fork. Proper storage would save lot of this food. Beyond just improving food supplies, certified storage would improve farmer access to credit and markets as certified storage is the foundation of commodities exchange systems.

Beyond agriculture, certified warehouses with refrigerated facilities would enable the provision of healthcare by enabling the storage of medicines and vaccines that can then be distributed to local facilities or clinics at short notice.

  1. Small urban infrastructure

Infrastructure in African cities is a perennial problem, causing epic traffic, hurting businesses, and creating unfortunate living conditions for many. What this requires isn’t investments in superhighways and expansive public transport systems, but people focused infrastructure. As previously written, “78 per cent of Africa’s population commutes by foot and on bicycles every day,[2]”. Investing in sidewalks, footbridges, cycle lanes, road crossings, footpaths etc. will save lives and make the lives of millions of people easier.

Second investing in “aesthetic” infrastructure such as parks, streetlights, signage, and street markings. This may seem frivolous, but it serves a purpose, people need green spaces for their mental and physical well-being, well-lit and marked streets enhance safety, service delivery and facilitate businesses. Improving the liveability of cities by investing in small urban infrastructure will serve to improve quality of life and the business environment boosting urban economies.

  1. The last mile

The last mile can be broadly defined as the final stage of a network or transportation network before its final destination. It is the fibre cable that brings internet to individual buildings, the electricity line that connects homes to the grid, the telco tower providing cell service and the road leading to your front gate. Investment in the last-mile is about making sure those that would be bypassed by dispassionate cost-benefit analysis. This investment in the last mile does not mean governments must spend billions building power cables and fibre lines. Innovative structures, such as Kenya Universal Service Fund, which uses funds from fees and levies paid by telecommunications companies to fund the building of infrastructure and provision of services in underserved areas. This is why Kenya has 98%[3] of the population covered by a mobile network, which in turn has opened access to mobile money and internet services making Kenya a global digital leader.

Conclusion: building small to enable the big

People often talk about Africa’s fundamentals (large young population that is underserved market), when making the case for large investor attracting infrastructure. However, what they forget, is that those fundamentals will remain theoretical unless those people have livelihoods and growing incomes. Shifting infrastructure investment to serve those people and create those incomes is a much more powerful magnet for investment than any argument based on theoretical potential.

African leaders spend a lot of time talking about the Asian Tigers and the extraordinary economic growth. What they often fail to mention is that those countries, invested in creating domestic demand growth by improving the incomes of their populations. Through land reform, education and strategic investment, they created the domestic demand that provided the base upon which their industries could grow. Investing in people and local economy focused is one of those strategic investments.

For Africa, investing in enabling “small” infrastructure, that improves people’s lives and livelihoods shall do more to boost our economies than massive billion-dollar projects aimed at theoretical investors for potential future growth. Boosting domestic livelihoods, incomes and demands is self-reinforcing, it creates demand which local industries can respond to and that investors want to tap into. Which will, in future, justify infrastructure mega projects that are built to support real economic development.

 

[1] Africa Development Bank, https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/AEB_Volume_8_Issue_3.pdf

[2] UNEP https://www.unep.org/news-and-stories/press-release/better-infrastructure-and-policies-can-protect-billion-african

[3] Kenya National Bureau of Statistics, 2023 Economic Survey, p.303

Rethinking African debt restructuring

Under its current form, that is imperialism-controlled, debt is a cleverly managed re-conquest of Africa, aiming at subjugating its growth and development through foreign rules. Thus, each one of us becomes the financial slave, which is to say a true slave.- Thomas Sankara

Several African countries have a significant problem. They are highly indebted, in a post-covid low growth global economy, with high inflation driven by wars and broken supply chains. Many African states are unable to effectively deal with the lack of growth or cushion people from inflation. All because the hangover of the pre-covid debt binge has left us without fiscal space.

I say ‘our’ because my country, Kenya, is heavily indebted and desperately trying to avoid a default. As a result, I have watched the debt restructuring processes in Zambia and Ghana closely, as it is not unlikely that the same process will be dominate headlines in Nairobi. It is clear from the example of Zambia and Ghana, that we must rethink our approach to debt restructuring if we are going to dig ourselves out of this debt hole.

What’s going on in Ghana & Zambia

Like much of the rest of the continent Ghana and Zambia borrowed from mix of creditors. Domestic and international bondholders, syndicated loans from banks, concessional lending from development institutions, bilateral lending from foreign governments and commercial loans from state bank Chinese enterprises.

Thus unlike the debt jubilee of the early 2000’s African debt forgiveness is not a simple matter of getting it onto the agenda of a G8 meeting. You must bring all these various stakeholders, with wildly different interests, and sometimes open hostility towards each other, to the table to restructure interest and principal payments.

Unfortunately, as we can see in Ghana and Zambia these various interests combine to make a restructuring process a near impossible slog. Large IMF bailouts (often the goal of the restructuring process) is conditioned upon consensus among the majority of creditors. However, the bondholders won’t even come to the table, the Chinese (bilateral and development) can’t agree with the west, and the world bank and commercial Chinese lenders are unwilling to take terms worse than governments or bondholders. So they get stuck in limbo, both Zambia and Ghana have defaulted, but neither are anywhere near a satisfactory outcome to restructuring negotiations with their creditors.

A different approach

It’s a clear signal to the rest of the continent that we must approach this differently. African countries must restructure their debt because we need the fiscal space to invest in our countries and drive growth. We need the fiscal space to cushion citizens from the soaring cost of living. What use is a government that just pays your tax money to other people.

  1. Start talking now.

If you wait for default before you start negotiating with your creditors, it is too late. It Is crucial to sit down with your creditors before it is a crisis to restructure loan terms. If the context of a restructuring is a fiscal strategy when you are solvent rather than a crisis, your negotiating partners will be much more open to engagement. Not all of these talks will be successful, but some will be and every bit helps.

  1. Tax reform

Fundamentally only two things will get you out of a debt hole. Economic growth and revenue growth. Our complex, badly policed tax systems leak revenue and offer opportunity for corruption, while also limiting growth through encumbering businesses with unnecessary rules and compliance costs or having to pay bribes. Tax reform does not mean increasing taxes, all that will do is punish existing taxpayers. Rather African governments can aim for three things.

  1. Close compliance gaps – there are lots of people who should be paying taxes who aren’t. Bringing them into the tax system is a quick and painless way to bring in additional revenue.
  2. Create an easy, affordable, and painless pathway for the informal sector to become formal taxpaying businesses, to broaden the taxbase over the long term.

Tax reform is critical to jumpstarting our economies with organic indigenous growth and increased tax revenues will give any country more room to negotiate in a debt restructuring process.

  1. Tap into domestic capital.

One of the causes of the current crises is that African countries binged on “cheap” foreign debt. This should be a lesson to African countries that we must tap into more African capital. It is much better to borrow in our own currencies from our own people. To do so African countries need to create attractive long term bonds and investment instruments that people can invest in or even swap short term debt for. In addition, African countries should look in to the creation of diaspora bonds, aimed at tapping the pool of capital built by citizens living abroad.

  1. Communicate

I have written previously that good communication is good policy. This is doubly true when it comes to capital markets. They must believe the credibility of your policies and plans, to buy into a restructuring process. This means communicating at all levels. Through policy documents, high-level bilateral engagements, public forums, the press, public education etc. You must explain reinforce, repeat, and defend your strategy to the point that it becomes the dominant narrative. You must engage your key stakeholders (such as creditors, IMF and World Bank board members, key foreign governments, etc.), often, in person and with credible high level representatives so they are personally sold and invested in your success.

A lack of communication creates information black holes and erode any confidence in whatever restructuring plans you may have. Markets are fickle things, and capital is cowardly. A lack of confidence has plunged countries towards crises, a recent stark example being the short lived prime-ministership of Liz Truss in the UK.

Restructuring debts smartly

It is exhausting. African governments have been here before. Borrowed large amounts of money from foreign creditors, to fund development that doesn’t quite happening and end up endangering their own solvency.

The last time this happened, Africa got a debt Jubilee. That will not happen this time. The nature of our creditors and debt has changed. Our only viable pathway is to embark on debt restructuring processes that will save us from bleeding ourselves dry to pay debts rather than fund development. It won’t be easy, and we will have to pay, but a reformulated approach to restructuring could make that payment less painful and give us the space to grow.

2023 from an African policy perspective: opportunities amidst global headwinds and risks.

There is an old joke about Russian history, that every chapter ends with the sentence “and then it got worse.” Its an apt joke when thinking back on 2022 and looking ahead to 2023. In large part because Russia making things worse has been a feature of the last 12 months and will continue to be so in 2023.

From an African perspective, 2022 was a tough year. Just as the world was opening up and getting control of the Coronavirus, Russia invaded Ukraine sparking off a geopolitical and energy crisis, stoking already rising inflation to alarming levels. This prompted western central banks to respond by raising interest rates and the value of the dollar soared, hurting Africa by increasing the cost of all imports, fuel and food included.

And then it got worse.

2023 will be another tough year in many respects. Inflation, energy turmoil, China’s economy will not prop up the global economic growth and, geopolitical competition between the US, China, and Russia will continue play out in Africa.

Thus, policy makers on the continent must navigate these global headwinds. However, as I have written about before, there is opportunity in crisis and if policy makers on the continent are brave enough and imaginative enough, a bleak global picture can be turned into one of green shoots for Africa.

The Economy – growth can be found

The economic challenge facing Africa this year is not to be envied. Inflation will continue to be a significant problem across most economies continuing to make food, fuel, electricity and other necessities more expensive straining households and businesses alike. Debt crises already in progress in Ghana and Zambia are likely to spread to other countries on the continent who have over borrowed and spent irresponsibly. Sluggish global growth (or recessions) will drag down growth on the continent. Add to this Africa’s two largest economies, Nigeria, and South Africa, will be focused on two general elections.

Thus, policy makers have two goals. First, to navigate a tough economic environment. This must involve blunting inflation through a combination of short-term interventions that protect citizens and business from the worst impact and long term strategies to fix structural issues that make Africa vulnerable to imported inflation (you can read a more detailed analysis here). Second is the debt problem, like Zambia, countries at risk of debt crises must proactively engage their creditors, and bond holders to get ahead of crises and maintain confidence in their economies and if possible, get some debt forgiven or terms changed to make their payback less burdensome. In addition long term debt frameworks should be put in place to end the cycle of debt accumulation, crises, begging, and forgiveness, otherwise, in another decade we will be back in the same place. Finally, the need to cut unnecessary spending and combat corruption is obvious but I will not spill any more ink on the subject.

The second economic imperative is to find growth, and this is where imagination and boldness is needed. If growth is not going to be driven by the global economy, borrowing or government spending we must find it with innovative policy home, domestically and regionally, and there are a number of strategies that can be employed.

  • On the regional front, this is the perfect opportunity to double down on the African Continental Free Trade Agreement (AfCFTA), to build continental trade links that can be alternative source of growth. If this is aligned with the strategic investments in areas like warehousing  intra-African trade could be significantly stimulated.
  • An area of untapped potential is tax reform. Our complex, badly policed tax systems leak revenue and offer opportunity for corruption. Reforming our tax systems and moving towards an African multinational tax consensus could unlock revenues for governments and unleash the potential of African business.
  • Reforming domestic credit policies to unlock lending to MSME’s and small farmers could unlock the significant potential of Africa’s small businesses and small farmers that could drive employment, business growth and agricultural productivity.
  • Finally, International capital markets will be distorted for some time with many unwilling to invest in Africa. It will thus be important to put in place policies that encourage domestic investors (e.g., pension funds, mutual funds, etc) to engage with and invest in African businesses and commodities.

Global economic conditions will be unfavourable for some time. However, I firmly believe that should not hold Africa back. With intelligent and creative economic policy, Africa can stoke growth in its domestic and regional economies.

Geopolitics – wary opportunity

This is a subject I have written on previously. The world is changing, the USA is more focused on competition with China and containing Russia, and this great power competition will be played out on the continent as well. The EU and Britain are concerned with solving domestic issues such as immigration and energy access and this will shape their approach to Africa. And there is rise of regional powers (India, Japan, Brazil, turkey, Australia, Saudi Arabia etc.)  who will all be interested in expanding their relationships with the continent.

From a geopolitical perspective, Africa first must be wary. During the cold war we became a playground for superpower competition and that cannot be allowed to happen again, African interests must come first, adventurism must be resisted.

However, this also opens opportunities. If we can understand the interests and goals of various geopolitical players, we can use that to our advantage where interests are aligned. For example:

  • As the US and West seeks to diversify its supply chains and sources of raw materials outside of China, Africa could use this to attract investment into alternative industrial supply chains in Africa, and better deals for raw materials especially the rare earths, cobalt, and lithium critical for electronics.
  • Deeper engagement with the middle powers and attracting their investment could give Africa an alternative source of investment outside of China and USA and dilute their influence.
  • Strategically leveraging the fifty-four votes at the UN and other global bodies could be used to put African voices in strategic places (the UN security council, G20, COP, IMF etc.) to help shape the global agenda.
  • Critical issues, like immigration in Europe or the need to offset carbon emission in the middle east or Australia can be used to leverage investment in critical areas on the continent. E.g., immigration can be stopped with job creation, or carbon emissions could be offset by green energy in Africa. Where can the funding for that come from?

2023 – tough but doable

2023 will be a tough year not just for Africa but the world. This is should not be an excuse for a lack of progress and development on the continent. We must use our own agency and through policy. With intelligent, forward looking and sometimes creative policy, we can achieve positive results despite an unfavourable global environment. In crisis and adversity there is opportunity, it is time for Africa to start taking advantage of those opportunities and 2023 is the perfect time to do so.

Charting Africa’s Energy Future

Africa’s Energy Future

 

The world is at a crossroads. The war in Ukraine has seen Russia force Western Europe into an energy crisis, and the wider world has been subjected to higher energy prices to keep the lights on and cars on the road.

In Africa, this pain is being felt as energy-driven inflation. Coupled with the rise of the dollar which is making everything paid for in dollars, such as oil gas and coal, wheat, maize, cooking oil and fertilizer even more expensive, doubling the pain. The focus of most policymakers is on the immediate cost of energy and its impact on the cost of living. However, the question we should be asking ourselves is, what is Africa’s energy future?

In a world where the impacts of climate change are causing a myriad of natural disasters, should we be investing in hydrocarbons? What technologies will provide the right mix for the continent, and how do we transition to that mix? Energy is not just electricity and petroleum, its cooking, heating, fertiliser production and the lifeblood of a modern digital economy.

How we chart our energy future will determine our socioeconomic future. Unlike the industrial revolution or the rise of the Asian tigers, we do not have the luxury of using oil, gas, and coal without concern for the consequences. Nevertheless, Africa does need an energy revolution as the foundation for a developmental one, and for that to happen, we must ask the tough questions about the continent’s energy future.

What must Africa’s energy future achieve?

As the continent thinks about its energy future there are a number of factors that must be considered as part of the equation for developing a viable long-term energy strategy.

  1. Access

Currently, about 43% of the continent, over six hundred million people do not have access to energy. Energy access is critical to improving standards of living, basic services (lights in schools, refrigeration and working machines in hospitals etc.) and as a foundation for growth (energy is critical for the development of any sort of industry). Thus, the first imperative is that Africans must have access to affordable and reliable energy.

  1. Sustainability

Africa is facing the brunt of the global climate crisis and we cannot be responsible for pouring fuel on an already raging fire. Africa should not and must not try to power the development of the continent by burning hydrocarbons. We must find and use alternatives. Many see this as unfair, as the developed world blocking the path that they used to industrialise while making Africa pay the price for their past sins. While morally, there may be validity to this argument, it does us no good to make it, as we would bear the brunt of its consequences both now and in future generations. As I have written before rather than treat climate change as a disaster that happens to us, we must also see it as an opportunity as I have written about previously. Seize the opportunity to leapfrog the hydrocarbon phase and make Africa a Green economic hub. An opportunity to develop new crops for Africa whose IP is owned by Africa that does not need as much energy-intensive fertiliser. An opportunity to stop begging for aid but instead use our oil, gas, and coal reserves to instead make money to fund our energy revolution off of carbon credits.

  1. Africa first

Africa’s energy future cannot be another victim of decisions made in foreign capitals. By this, I mean that we cannot allow Africa to be the casualty of the developed world’s net zero strategies, which will affect the continent in a number of ways.

First and foremost, what is the long-term viability of Africa’s, oil, gas and coal deposits, which an energy-starved west is pushing us to develop? Yet, in the long term, they will choose their own net-zero path and leave the continent with stranded assets. Should we consider the option of selling these assets as carbon credits or offsets instead rather than taking the financial and environmental risks of developing them (you can read more about this idea here).

Second, it is likely that development financing and aid will have new “climate” conditionalities attached as extensions of national climate goals further reinforcing Africa’s need to rely on taxes, not aid and decouple ourselves from the policy whims of Brussels or Washington.

  1. Security

Africa must be in control of its energy future, the fuel, resources, and technology that is used to produce that energy must be in Africa. As the current crisis in Europe shows, without control of your own energy, your destiny is decided by international energy markets. Thus, if Africa decides to pursue green hydrogen, it must be produced on the continent, and we must have an ownership stake in the plants and technology doing so. Energy security ensures accessibility.

Charting a path to the future

Charting Africa’s energy future will require crafting an energy policy that combines the four elements of accessibility, sustainability, security, and primacy. How they are combined and balanced will look different in each African country (and therefore I have not advocated any specific energy solutions in this post). However, there are things we can do as a continent (or regions of the continent), which can have a positive impact such as developing inter-connected grids. Sharing knowledge, expertise, and investment (how can Kenya’s expertise in geothermal energy be applied on the continent). Most importantly, what African financing solutions can we develop to fund an energy transformation on the continent?

Energy is the lifeblood of any economy and the foundation of socio-economic transformation. If Africa is to develop and build a better future energy will be a key part of that story. We must be deliberate and forward-thinking in how we build our energy infrastructure to ensure that better future. We cannot take it for granted or wait for someone else to produce the solution or the funding. Through smart, deliberate policy we can take charge of our continent’s energy future and take control of the future of our economies and societies.

Solving Africa’s inflation problem

Inflation is back.

Covid has ravaged our economies and scrambled supply chains. Russia invaded Ukraine upended global commodities markets. The impact of these on the global economy is that inflation is back. Prices across the board are rising, and Africa has not escaped this phenomenon, it is causing real pain, as protests across the continent show. However, Africa is in a real bind, our governments don’t have the financial firepower to cushion their citizens easily, and the causes of inflation are beyond our control in the short term.

Much like the coronavirus pandemic there are some tough choices to make. These must be tailored to our context. Outside help will be hard to come by, and for the long term, there are lessons to be learned to ensure that we use the current situation to make sure we never end up here again.

Another crisis fewer options

The current inflationary crisis is problematic because its causes are not native to the continent. Meaning that the tools at our disposal to deal with it in the short term are limited. The primary drivers of inflation are the global supply chain disruptions caused by the pandemic which have not been resolved. Second the war in Ukraine has meant that two of the world’s largest suppliers of oil, gas, wheat, fertilizer, and cooking oil have suddenly stopped shipping those commodities driving the prices of food and energy up all over the world. Africa is a net importer of wheat, fertilizer, oil and gas, and cooking oil, less supply and higher prices will have broad impacts throughout the economy.  Third, the developed world’s response to inflation has been for their central banks to raise interest rates, and the Federal Reserve Bank in the USA has been particularly aggressive. This has strengthened the dollar in relation to African currencies, making buying global commodities or goods in global markets more expensive, while at the same time making dollar denominated debt payments more expensive, meaning our governments have even less money to spend on other priorities.

The causes of the current inflationary crisis are not homegrown and that severely limits the tools available to African Governments to mitigate it. Interest rate rises, the tool most commonly used to fight inflation, is effective when the cause of inflation is too much demand or an overheating economy. That is not the case here, and despite African central banks raising rates it won’t have much impact beyond dampening already weak economies. Governments have tried to use what little fiscal space they have to subsides fuel and other basic commodities. However, this too will have little impact as African governments do not have the financial firepower to do much else beyond cushion the impact of inflation rather than shield people from it.

Short Term fixes

So, what can we do in the short-term? Despite limited options there are a few things that African governments can do ease some of the pressure inflation is putting on their people. First is to look at their tax regimes, many countries levy various combinations of VAT, Excise and import duties on fuel, fertiliser, and basic food commodities. Examining and reducing those in the short term will provide some price relief, though the government may lose some revenue its much simpler and cheaper than providing subsidies.

Second, is to apply subsidies where they will have the most impact, do not subsidize fuel, that’s a losing battle with global commodity markets, rather subsidise commodities like fertilizer to ensure farmers can produce as much food as possible domestically and ease some of the pressure caused by imported food prices. Target support at public transport providers both formal and informal to enable them to keep their prices affordable. We need to spend our little money where it has the biggest impact, not where it generates the best PR.

Third help your private sector strengthen and diversify their supply chains, make your embassies and consulates available to support local companies trying to find cheaper supply alternatives or even bring the power of state to bear through diplomatic ties or credit guarantees to lower the risk and the prices local businesses have to pay for global inputs.

Fourth, governments and central banks must be honest with their people and businesses, explain why what is happening, is happening and how it is being dealt with. Managing expectations or guiding markets can be just as effective as many policy interventions.

These measures won’t stop inflation. However, they will mitigate it. Which is better than simply copying what others are doing and raising interest rates, doling out cathartic subsidies and crossing our fingers hoping for a break.

Long term solutions

I have written previously that the pandemic showed us that we cannot rely on the rest of the world to help in a crisis especially when they too are affected. The inflation-crisis is global and in Washington, London, and Brussels they are far more worried about their own people than what it is doing to the ability of poor Africans to put food on the table. Thus, we must take a step back and look at the structural issues that have landed us in this predicament and aim to fix them so that next time the global economy is thrown into turmoil we are not turned into basket cases

1.    Diversify, diversify diversify

It is critical that Africa learn from and rectify a key mistake. Over reliance on small number of suppliers will hurt when that supply is restricted. It is key that Africa deliberately looks to develop alternative sources of wheat, fertilizer, cooking oils and energy. This needs to be done both domestically, regionally, and internationally. How can we strengthen the domestic production of these goods, can we identify regional suppliers and use the ACFTA or regional economic blocs to access that supply and can we make sure there is regional and ideological diversity among our global suppliers so that if one of them ever faces crisis it is not transmitted wholesale onto the shelves of African shops?

This diversification must also extend to what we consume, President Museveni of Uganda may have sounded insensitive when he told Ugandans to eat cassava instead of bread if the price of bread is too high, but he was not wrong. If we can nudge African consumers to use goods and products that can be grown or made cheaply here, it is the ultimate insulation from supply-side driven inflation that we are experiencing now.

2.    Develop domestic debt markets

A massive problem facing governments with large amounts of foreign loans (e.g., Zambia, Kenya, Ghana etc.) is the weakening of their currencies, locking them into a vicious cycle of a strengthening dollar draining money out of the country as debt payments become more expensive. Strengthening domestic local currency debt markets will ease this pressure in the future, and while every country may not be able to develop a fully fledged bond market, that need not be an issue. African countries can issue debt in other African countries with better developed markets, it may not be ideal, but it would be cheaper for Zambia to issue Rand denominated debt rather than dollar debts.

3.    Tax systems that make sense

As pointed out previously, in many African countries the tax systems are reinforcing rather than mitigating inflation. African governments need to take a step back and look at those tax systems to identify where they do more harm than good (e.g., taxes on basic commodities) but also identifying taxes that can be used as policy levers. Raised or lowered as appropriate when needed.

4.    Africanise monetary policy

By this I mean there must be a recognition that monetary policy in Africa cannot simply copy what happens in Washington or London, or blindly implement what the IMF recommends. It is clear that our fiscal and monetary policies must be better collaborated to ensure that our debt strategies are geared to tap domestic sources as far as possible. That interventions in currency markets are timed and designed to have the least impact on citizens and that interest rates are used when appropriate in reaction to conditions and developments in our markets. To do this we must reassess the African approach to monetary policy, with the questions of what affects our citizens, markets and businesses at the centre.

5.    Fuel

Often the largest contributor to inflation is rising fuel prices. It is not possible to completely get rid of the need for oil and gas but concerted long term action can ensure that demand for oil and gas is reduced. Further reducing African economies exposure to oil price driven inflation.

What parts of our transport systems can we electrify, make more efficient or switch to alternative fuels? How and where do we invest in biofuels and renewables? What’s needed to make our energy systems more efficient? All big questions, but worth answering not only to reduce exposure to price spikes but also to make a contribution to mitigating climate change.

Rebuilding for resilience 

Inflation is painful, and we are all feeling it. From a policy perspective it is tricky to solve when it driven by factors outside of our control like wars in Europe and highly optimised supply chains falling apart. However, our policy cupboard being is not empty. There are things African governments can do in the short term to ease the pain, but it will not be a cure all and they must be honest about that.

In the long term, we must rebuild African economies with resilience in mind. Not just against pandemics but against an increasingly uncertain world where crises and economic shocks are more commonplace. There will be situations in the near future that will increase inflationary pressure globally and on African economies. We must diversify and contextualize our approach to economic policy making to ensure that this rebuilding for resilience is done with the African context, citizens, and businesses at its centre.

Africa will face inflationary crises in the future, lets use this one to make sure we are prepared for them 

 

Africa needs its own CoP

“No more empty promises, no more empty summits, no more empty conferences. It’s time to show us the money. It’s time, It’s time, it’s time. And don’t forget to listen to the people and places most affected.” – Vanessa Nakate Ugandan Climate activist

In November 2021, the world came together for the 26th meeting of the Conference of Parties, CoP 26, in Glasgow. To build on the Paris climate change agreement and work towards keeping global temperature rises to 1.5 degrees or below. The outcome of summit was a disappointing agreement with weak promises to “phase down” instead of phase out coal, and a reaffirmation of the Paris agreement. Much of the progress hoped for at the summit was again punted down the road for finalisation at a future summit.

More relevant to us is to ask whether Africa’s goals were met. Frankly, no (you can read more here). On climate finance and technology transfers from the developed world to poor countries old unmet promises were remade, while African countries are already spending billions on climate adaption. On climate responsibility developed countries refused to accept responsibility for historic emissions and climate related losses.

The CoP process is not working for Africa, which despite being responsible for only 3.8% of emissions will be hardest hit by climate change, and through 26 CoP processes the progress on Africa’s climate agenda has been marginal. There is no reason to expect CoP 27 in Egypt in 2022 will be any different. In an earlier article I wrote about the need to strengthen African multilateralism, and climate change is an area that is ripe for that sort of initiative. Africa needs its own CoP, tailored around its climate needs and goals, mobilising climate finance and driving global climate action.

What should AfriCop look like?

Since 1992, world governments have met to forge a global response to the climate emergency. Under the 1992 United Nations Framework Convention on Climate Change, COP stands for conference of the parties under the UNFCCC, the supreme decision-making body of the Convention.

This can be replicated under the African Union, all that would be needed is a resolution under the Heads of State Summit establishing an African Conference of Parties. The key question is what would this AfriCop do what should be its purpose?

1.Get rid of the begging bowl

There are two realities of climate funding that Africa must deal with

  1. It is clear that the developed world cannot be relied on to keep its promise to provide $100 billion a year of climate funding. I
  2. Despite promises made by multinationals and hedge funds, the private sector cannot be relied upon to provide adequate climate funding or investment. The case of the UN backed climate fund launched with much fanfare and promises on the brink of collapse is emblematic of this.

As a result, it is time to get rid of the current funding strategy of holding out the begging bowl and develop a new funding model. This can and should be a core mandate of an AfriCop and there are several options available to Africa:

  • Africa could use its vast Fossil Fuel resources. Not by digging up the coal, oil, and gas, rather by selling it as a carbon offset. Realising the potential earnings and profits from these resources, while keeping that carbon that would otherwise have been emitted into our atmosphere in the ground. I explore the idea in more detail here.
  • Africa’s mineral wealth goes beyond hydrocarbons, lithium, cobalt, copper, and rare earths that are critical for the manufacture of green technology are all found in abundance in Africa. This resource extraction, where it leaves continent, needs to be taxed properly closing off avenues for transfer pricing and other tax avoidance strategies. Something I wrote about here
  • In 2016 the AU decided to implement a 0.2% levy on imported goods to finance the AU and reduce dependency on donor funding. This is an idea that can be revived, by imposing a tax on the carbon content of goods imported to Africa from industrialised economies most responsible for historic greenhouse gas emissions, the tax could potentially be waived if they meet their climate funding promises.

All these mechanisms would create funds in individual countries which they could use these as they please, maintaining the agency of those countries to decide what is most critical for them. A portion potentially going to one of the regional or African development banks to disburse to climate related projects or programs that have a continental or regional impact.

2. Develop and drive an African Climate agenda and voice

A dedicated AfriCop would be in the unique position of focusing on Africa’s climate needs and African solutions to climate change. And this presents two critical opportunities.

First to develop a much stronger foundation for the African Group of Negotiators when representing Africa at global summits and treaty negotiations, a stronger more united African voice would have a much greater impact on the world stage and would weaken the efficacy of divide and rule tactics.

Second, to build bridges and common positions with the other developing world countries and regions that face a similar climate dilemma (largest impacts with the least resources to mitigate or prevent them) developing strategies and proposals that can be put forward and pushed at a global level for the benefit of the so-called Global South.

Third, AfriCop can provide a constant consistent African voice on climate both on the continent and on the world stage. Not just coordinating and pushing an agenda but telling Africa’s story on the impact of climate and what we are and can do about it.

Conclusion

Some of you may be reading this thinking that Africa does not need yet another organisation to add to the plethora of regional and continental organisations across the continent that do little. I share that scepticism; however, of all things the Covid-19 Pandemic gives me hope.

After the Ebola crisis of 2014, the 26th Ordinary Assembly of Heads of State and Government to improve coordination among health institutions among African Union member states in dealing with disease threats set up, The Africa Centres for Disease Control and Prevention (Africa CDC) as a public health agency of the African Union to support the public health initiatives of member states and strengthen the capacity of their health institutions to deal with disease threats. The Africa CDC has exceeded the expectations of many throughout the pandemic, it has worked to coordinate responses across the continent, collectively acquire PPE, resources, and vaccines for the continent, spread learnings and experience from one country to all and worked to help government across Africa more effectively manage the pandemic.

Climate poses a similar challenge to health threats. Those threats pose a challenge to us all, second no individual country has the capacity and resources to face the challenge alone. Third, this issue affects aid and grant giving nations and like the pandemic, when they are under threat, Africa is an afterthought at best. Thus, similar conditions exist in climate policy as they did in health for a pan-African institution or initiative to find wide acceptance, buy in and cooperation among African governments and publics to make it viable. Africa needs its own CoP, its way to drive an Africa focused agenda both at home and on the global stage, and the elements exist for it to be viable and successful.

After Ukraine: Africa in a new world order

For the times they are a-changin’ – Bob Dylan

In 1956 Britain, France and Israel invaded Egypt. Their goal was to regain control of the Suez Canal and to remove the Egyptian president Gamal Abdel Nasser, who had nationalised the Anglo-French owned Suez Canal Company, which administered the canal. However, pressure from the USA, USSR and UN led to the withdrawal of invading forces. More importantly the episode humiliated the British and French governments, it signalled the end of the era of the Western European powers as the worlds major powers directing global events and using gunboat diplomacy to get what they wanted and confirmed the Cold War powers the USA and USSR.

On February 24th Russia invaded the Ukraine, setting off the first large scale inter-state war in Europe since the end of World War 2 in 1945. Not only does this action break the post-war European security settlement, but the weak response of the West imposing piecemeal sanctions that have neither stopped or deterred Russia, like Suez in 1956, signals the end of the post-Cold war world dominated by the West. That while the USA and EU remain global military and economic powers, they are not, as George Bush once put it, “the deciders”.

A new world order is emerging, where there is no pre-eminent power like the USA, but one where there are two global powers (the USA and China), regional powers (Russia, India, UK, Japan, Brazil) and supra-state alliances like the EU all competing to satisfy their interests and goals. Where does Africa fit in this new world order? How does Africa position itself and work to ensure that its agenda is met and is Africa’s voice is heard on the world stage?

1.   What will this new world look like for Africa

Russia has shattered international norms that have existed since the end of Second World War and signalled the beginning of the post war settlement.

  • In the face of a much more assertive Russia the West, specifically the EU/NATO will itself have to be a lot more assertive and will look to match or outcompete Russia not just in Europe but across the globe including in Africa.
  • While the USA will still be a global superpower, it will not be the only one as it has been in the past. It clearly sees its main competitor as China, and while the main theatre of competition will be in the Pacific. The USA is already keen to compete with China in Africa where it sees China as having gained an advantage.
  • For China they will be looking to continue growing their influence and footprint on the continent especially in relation to the USA and Europeans.
  • In addition to the big 3 (USA, China and the EU) regional powers, Russia, Japan, India, Brazil, Turkey and the Gulf States will all be looking to grow their influence on the continent.

What does this mean for Africa, what is this influence that these world and regional powers are looking for. As has always been the case, the world continues to covet Africa’s resources, the traditional resources of oil, gas, precious and industrial metals, but more than that Africa has the resources (rare earths, lithium etc,) that are needed for the green transition. With the worlds largest population of young people, Africa is also a critical market for the future and access to those markets is becoming increasingly important. In short, Africa is strategically and economically valuable and as a result in a multipolar world there are significant risks around how the rest of the world engages with Africa. However, if Africa rises to the challenge and is smart about how it navigates this new reality there is a significant opportunity reshape Africa’s influence and place in the world.

2.   Learn from the past, stand apart from the competition

During the Cold War when the USA and USSR were competing for global influence and Africa became a theatre for this competition. With the superpowers throwing their considerable weight behind various regimes to support their own strategic or ideological interests, despite those regimes being the opposite of the principles espoused by the superpowers. As result the West backed the apartheid regime in South Africa, and Mobutu in Zaire while the Soviet Union backed regimes like the Derg in Ethiopia, and both sides pursued proxy wars in the Congo, Angola, Algeria etc. making conflicts bloodier and more tragic than they otherwise would have been.

It is critical to avoid this happening again. Africa must be truly unaligned, which means having cordial and open relations with everyone but not being a formal ally of anyone beyond the Afro-Caribbean bloc that would put Africa in the cross hairs of the global powers. Not only will this maintain our neutrality when conflicts break out among the global powers, it will prevent Africa from again becoming a theatre for the proxy wars of the great powers, where African blood is spilt to achieve the strategic goals of foreign powers. Finally, true neutrality will enhance our voice on the global stage positioning the continent as an honest, neutral voice in global affairs, something that has had value throughout history.

3.   Strengthen African Multilateralism

In his speech at the UN Security Council after the Russian invasion of Ukraine the Kenyan Ambassador stated that “Multilateralism lies on its deathbed tonight. It has been assaulted today as it as it has been by other powerful states in the recent past.”. Between Trump and Russia’s recent actions, global multilateralism is in indeed on its deathbed. However, that does not mean African multilateralism cannot play a significant role. By African multilateralism, I mean a set of norms and ways of engaging with the outside world that are agreed upon through pan African institutions, namely the AU and ACFTA. African states will not agree on everything and have different priorities. If Mali prefers a Russian security alliance to a French one, that is their choice, if Djibouti chooses Chinese economic investment over American that is their decision. However, we should all be able to agree what the boundaries of acceptable behaviour from outside the continent are and a set of measures that should those boundaries be breached can be implemented with wide consensus. Much in the same way that ECOWAS takes measures when there is a coup in their region, the AU or CFTA could impose sanctions (e.g., restricting trade in critical goods) on the offending states.

Doing so would set a tone for how the world engages with Africa and impose consequences for those looking to turn back the clock and act in an “imperial” manner.

4.   Unite on core issues

Though not every African country will agree on anything there are some things that we can agree on such as:

  • The need to grow Intra-African trade and change the terms of African trade with the wider world.
  • The need to act on climate change and fund resilience, mitigation, and the green transition in Africa.
  • The need to change the international tax system to be fairer.

Around these core issues on which African states agree there is the opportunity to craft a common position and push that on the world stage as one. Building common cause with other nations to drive joint priorities. Focus on these core issues where global powers cannot play divide and rule would further entrench Africa’s position as a serious player on the global stage.

This time must be different

The Russian invasion of Ukraine is the death knell of the Post-World War 2 and Post-Cold War settlement that has given the world an unprecedented period in which states rarely went to war with each other.

As the new multipolar world order emerges and takes shape, Africa cannot let what happened in the past happen again. We must make sure that Africa is not a venue for exploitation, extraction and proxy wars. This will require deliberate, smart, coordinated and flexible foreign policy from African states. Acting in concert where possible, and where not, within an agreed upon set of norms and practices. If we do so, Africa can ensure that not only does it navigate the new global reality but helps shape the terms of this new reality in are

Africa needs its own tax deal  

“African leaders have to wake up and tax those who have money” – Winnie Byanyima executive director of UNAIDS 

On 8 October 2021, 136 out of the 140 countries involved the negotiations signed an agreement to tax multinationals. On the surface this seems like a significant achievement. Getting broad international agreement on anything beyond platitudes is almost impossible these days, let alone where the USA agrees to it. However, like most global deals the primary drivers of this deal (and thus the interests it serves) are those of the developed world (particularly the USA) where most of these large multinationals are from.  

Interestingly Kenya and Nigeria have refused to sign the deal, both are not thrilled by the comparatively low tax rate agreed upon and the removal of policy making space that the deal implies.  

Taxes are critical, especially for African states that have a myriad of needs to finance. Africa, does need a multilateral tax deal, but not this one. Rather, what the continent needs is its own deal, that suits Africa’s interests rather than those of Washington and Brussels.  

What is the deal and why is it a problem  

The global tax deal known as the ‘two-pillar solution,’ was initiated by the Organisation for Economic Co-operation and Development (OECD) and aims to counter tax evasion and avoidance, which are increasing under the digital economy. The two pillars of the deal are simple: 

  1. Companies with a turnover of more than $17bn and a profitability of more than 10% will have to pay their taxes in the country where they make their turnover,  rather than in the country where their head office is located. 
  2. In addition, a minimum tax of 15% on the profits of companies with a turnover of more than $850m will be introduced to limit global tax competition 

The official OECD statement, says that the aim is to “reform international tax rules and ensure that multinational enterprises pay their fair share of taxes wherever they operate.” 

However, there are some significant issues with the deal which are particularly problematic for Africa and are why Nigeria and Kenya have refused to sign on.  

  • Most African countries have tax rates that are higher than 15% (in Kenya and Nigeria it is 30%). This reduced rate would reduce revenue collected on corporate profits.

    average corporate tax rates in Africa and select markets https://home.kpmg/za/en/home/services/tax/tax-tools-and-resources/tax-rates-online.html

  • The 15% rate would either create a two-tier tax system where big multinationals have 15% rate and local companies have the higher national rate. Or it would force countries to bring their tax rates down in line with the OECD, again forcing them to give up significant revenue. 
  • The OECD tax deal “will require all parties to eliminate all taxes on digital services and other similar measures relevant to all businesses and commit to not introducing such measures in the future.” This closes the policymaking space for African countries in the ICT sector which is impacting (and making money from) almost all the other parts of the economy. Furthermore, as the Financial Transparency Coalition points out “ Oxfam estimates that 52 countries in the global South are likely to be net payers in this deal as a result of having to end their digital taxes. They would be forced to do this in exchange for an uncertain revenue flow from a deal that will come into effect in 2023 at the earliest and is not due to be renewed before 2030.” 

In short, this multinational tax deal does not work for Africa, it will limit our ability to collect revenue from large multinational companies, particularly the behemoths in the ICT sector.  

Bucking the trend 

If the global multilateral tax deal does not work for the continent, then the logical thing is for Africa to forge its own deal. The size, growth and demographics of the African market are significant enough that the big multinational companies (especially tech) are investing heavily on the continent. Pledging billions of dollars in investment, building billion-dollar fibre cables, and investing in new African headquarters. Subjecting these large multinational companies to a consistent tax regime across the continent would not fundamentally alter the attractiveness of the African market or endanger investment or jobs.  

Luckily, for the last several years Africa has been forging the continental free trade area, and this can be used to develop and implement an African multilateral tax deal, that enables the continent to raise more revenue, evens the playing field for African companies and preserves the continents policy making space and this can consist of 3 key elements.  

  1. Instead of the 15% proposed by the OECD a 25% tax on multi-national companies of more than $17bn and a profitability of more than 10%. African countries would be allowed to charge lower rates for companies whose beneficial ownership is located in Africa.  
  2. A climate tax on imported goods that have a high carbon footprint in their production. Rather than begging the developed world for funds for the green transition and to mitigate the impacts of climate change, it can be raised by taxing carbon imported onto the continent from those same countries.  
  3.  A tax on transfer pricing to prevent companies (especially extractives companies) from using clever accounting to minimise their tax exposure on the continent. 

African taxes in African markets 

As I have written about before Africa needs tax revenue, if we are ever to throw away the begging bowl and end the dependency on aid, we must be reliant on revenues raised on the continent. Like Kenya and Nigeria, I do not believe that the OECD tax deal is good for the continent. It limits our ability to raise that much needed revenue and limits the policy space available to make tax policy in the future in effect outsourcing African tax policy to the developed world.  

What is needed is for Africa to forge its own multilateral tax deal, one that is aimed at raising revenue, stopping tax evasion and illicit flows out of the continent, and protecting and enhancing African enterprises. This will not be easy, African countries have found it extremely hard to develop and implement multilateral tax policy. This does not mean that it is not worth trying.  

Using Africa’s black gold to fund a green future 

“Stabilizing the climate will require strong, rapid, and sustained reductions in greenhouse gas emissions, and reaching net-zero CO2 emissions.” highlights IPCC Working Group I Co-Chair Panmao Zhai.  

The latest Intergovernmental Panel on Climate Change (IPCC) report makes for sober reading. The climate crisis is unequivocally caused by human activities and is affecting every corner of the planet’s land, air, and sea already. The fact sheet on Africa does not make for pleasant reading we will experience more heatwaves, more floods, more unpredictable weather, and more extreme weather events. The whole continent is vulnerable, our largely rain-fed agriculture, underdeveloped infrastructure, existing inequalities, and poverty will all amplify the impacts of climate change that are now certain.  

In a previous article, I advocated that we use climate change as an opportunity to harness science and technology and equip our farmers with tools to feed the continent in an era of shifting weather patterns. To leapfrog fossil fuel energy and lay the foundation of Africa’s economic and social development on green sustainable energy. 

This is still the case; however, not only must Africa innovate to mitigate the impacts of Climate change on the continent, but we also must fund it. The global commitment to provide US$ 100 billion a year is falling woefully short. Furthermore, as the Coronavirus pandemic has shown, when crisis strikes, Africa is left to fend for itself. As the impacts of climate change become more pressing and deadly, the rich world will focus increasingly on solving their own problems just as they have done with Covid vaccines.  

Thus, Africa must develop a financing strategy not based on the generosity of the rich world, the philanthropy of global billionaires, the whims of development banks or the iniquity of global markets. To do that Africa will have to make use of its own resources, and, in a delicious irony, Africa’s black gold, the oil, gas and coal can be used for this purpose. Not by burning it or digging out of the ground and selling it. But, by leaving it where it is and selling it as a carbon offset.  

The Financing Dilemma  

Because developing countries would be hardest hit by climate change yet have the least resources to invest in mitigation measures or invest in clean energy and sustainable solutions to our development needs. The developed world committed to mobilizing the finance necessary to do this. As a result, at COP16 the developed world agreed to an Accord, that states that: “developed country Parties commit, in the context of meaningful mitigation actions and transparency on implementation, to a goal of mobilizing jointly USD 100 billion per year by 2020 to address the needs of developing countries”.  

This goal has never been met. And with the impacts of the Coronavirus pandemic and the resources devoted by the developed world to their own needs, I am not hopeful that funding will materialise. Furthermore, the financing solutions being proposed are the same old, same old of “mobilising external financing and private-sector solutions,” which can be translated as getting money from donors and banks. That’s a formula that has not worked for 70 years.  

Using our black gold 

Africa’s natural wealth, especially oil has often been more of a curse than a boon, added to that, it is humanity’s use of those hydrocarbons that are the cause of the problem we find ourselves in. Thus, Africa finds itself with an odd problem, it would be mad not to exploit these resources, they are a vital source of income. However, it is that very exploitation that will come back and bite us as a cause of climate change.  

It is estimated that Africa has: 

  • 499 billion MMBtu (Metric Million British Thermal Unit) of proven gas reserves (7.1% of global proven reserves), 
  • proven reserves of 125 billion barrels of oil.  
  • Proven reserves of 36.7 billion metric tonnes of coal  

At the time of writing, the price of oil is US$ 68 per barrel, US$ 3 per MMBtu of Gas and US$149 per tonne of coal. Meaning that Africa has about 8.5 trillion dollars’ worth of Oil, 1.4 trillion dollars’ worth of gas and 5.4 trillion dollars’ worth of coal. While that may be their value, to get their true value you would have to factor in a heavy discount for the cost of developing the fields/mines, the profits of the oil, gas and coal companies and the environmental degradation and impact of their extraction. Beyond that, as the world moves away from hydrocarbons, these assets will become increasingly stranded as the world strives to buy less of them.  

Selling the oil without burning it  

Increasingly companies and governments are investing in carbon offsets and offset credits. A carbon offset broadly refers to a reduction in Green House Gas (GHG) emissions – or an increase in carbon storage (e.g., through the planting of trees) – that is used to compensate for emissions that occur elsewhere. A carbon offset credit is a transferrable instrument certified by governments or independent certification bodies to represent an emission reduction of one metric tonne of CO2 or an equivalent amount of other GHGs.  

The oil, gas and coal under African soil have an approximate equivalent of 53.7 billion and 114 billion and 91 trillion metric tonnes of carbon dioxide respectively1. Currently, carbon offsets sell at $3-5 per tonne, using a conservative price of $3 Africa’s oil, gas and coal assets would be worth $275 trillion. That may seem low but the price of carbon offsets is expected to rise to between $20-$50 within the next 10 years bringing them in line with the oil prices which would more than double those estimates.2 

Thus, rather than developing these assets, Africa can sell the potential carbon emissions as carbon offsets. Africa would sell the potential emissions from all that oil, coal and gas to companies and governments that want to emit carbon. This would do three crucial things. First, it would lock that carbon in the ground, if we are ever going to solve the problem of climate change, we must stop burning fossil fuels. Even though Africa has contributed the least to the current problem we can make sure we never become part of the problem by leaving that carbon in the ground. Second, it would give Africa an income stream that is wholly owned by Africa. No oil companies, no production sharing contracts, no royalties, and no drilling and mining projects that destroy ecosystems. That money can be spent financing Africa’s own green and sustainable industrial revolution and mitigating the effects of the damage already done by investing in our agriculture and infrastructure to ensure that they can cope with a changing climate. Third, it would remove our dependence on the generosity of the rich world, debt, or capriciousness of the market, giving Africa true ownership of its climate response.  

To make this a reality much smarter people than I would need to figure out key elements of turning our hydrocarbons into carbon offsets.  

  1. A mechanism for certifying hydro-carbon reserves and quantifying the potential carbon emissions.  
  2. A pricing strategy that does not put too many offsets onto the market at the same time to ensure that viable prices are kept.  
  3. A verification and enforcement mechanism to ensure that any reserves sold as an offset are not exploited and sold by those looking to have their cake and eat it too.  

Keep it in the ground  

Africa has contributed the least to climate change, yet we will bear some of its worst consequences. We cannot rely on the rich world to live up to aid and financial mobilisation promises if Africa is to deal with the dual challenge of climate change. That dual challenge is to ensure that our own development does not contribute further to climate change and that we put in place measures to deal with the consequences of global warming. We are not responsible for the past of others, but we must seize responsibility for our future.  

Selling the potential carbon emissions from African hydrocarbon reserves can be a critical tool in meeting that dual mandate. It will keep the GHG in the ground and maximise Africa’s contribution to ensuring a net-zero world. And it would give us the revenues to fund sustainable development and climate mitigation, on our terms, designed by Africans for Africans rather than at the World Bank or the Gates foundation.  

It may seem crazy, but oil, gas and coal may be just what Africa needs to stop climate change.