Category: public finance

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 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.

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.  

Participatory Budgeting for Africa: Development by the people, for the people, of the people

On the 13th of January 2020, the Matatu (minibus) operators of Kasarani in Nairobi had enough. The Kasarani – Mwiki road that was used by thousands of people every day was in a deplorable state, driving the transport operators, residents, and pedestrians crazy by doubling the price of public transport and travel times. So, they did what unhappy citizens in a democracy do, they protested. The residents of the area protested for 3 days, enduring the brutal attempts of the police to stop these protests. Tragically a 17-year-old boy was shot dead by the police, and only then did the relevant authorities and Nairobi’s elected leaders finally take notice and step in to commit to having the road fixed. This is not unique to Nairobi or Kenya, across the continent, people are constantly decrying the poor state of public goods and services that their governments deliver, in South Africa, they are so common they have a name, “service delivery protests.”

At the centre of this dissatisfaction sits the most impenetrable and stiflingly boring yet critically central government process, budgets. Complex and obscure by design, budgets are drafted and passed in a process that few understand, engage with, or can change. Yet how and where the government decides to spend public money has a direct impact on citizens, and far too often across Africa, those decisions are driven by private (often corrupt) interests or the priorities of lenders and donors. In my previous post, I argued that the pandemic has broken the system of economic, policy and political norms and Africa has an opportunity to reshape its vision of development. Part of that is recognising that markets cannot, nor should they do everything, especially delivering effective public goods and services. Coupled with that recognition must also be a change to the way that public money is spent on those goods and services because it is clear that the way we fund and hold public spending accountable is not working either. That we must bring the budget process closer to people so that it better reflects the needs and aspirations of our communities. How do we do this? Through an approach called participatory budgeting, where communities get to decide how public money will be spent in their localities.

What is participatory budgeting and how does it work.

Participatory budgeting is a process of democratic deliberation and decision making, where people come together to decide how to spend part of a public budget. It can take place on a small scale at the service or neighbourhood level, or it can be done at the city or state level. It is in reality remarkably simple people from a particular area or community come together to:

  • Discuss their issues and priorities,
  • Identify projects or services that would address those needs,
  • Vote on which one of those is going to be funded,
  • Monitor budget execution, procurement, and project implementation.

Some may argue that this is how traditional budget processes work. That the public can participate in the formal budget process by going to public participation forums and lobbying their legislators. However, as someone who has been involved in this process, it is exceedingly hard for ordinary citizens to get their concerns across. Lobbying, around government budgets, is dominated by corporations, special interest groups and politicians and it is usually focused and tax breaks, subsidies, and pet projects. Civil society is often relegated to the periphery and individual citizens are barely heard. Furthermore, this national or regional budgeting process prioritises projects and programmes at those levels over local issues that may not affect a large enough number of people to get noticed. The divide between people and their political establishments is at the widest during the budgeting process. It is hard to access the process of budget making and it is so big and complicated it is nearly impossible for the average person to understand. Here is Kenya’s budget for this fiscal year, thousands of pages of impenetrable numbers, spending and project codes, hard for even an economist or accountant to make sense of. Yet it determines how much money goes to health care, building roads, schools, paying the police etc.

Participatory budgeting does not stop national or regional budgeting, rather it just sets aside a certain amount of money for local communities to use. This is not an alien concept to African countries, where there are already various forms of federalism or devolution that see national governments give tax revenues to regional units to use in their own budgeting process. Participatory budgeting is an extension of subnational decision making at a more localised level, but most importantly it involves the participation of groups that are usually side-lined. The poor, minorities, women, and those who typically feel their voices are not heard but do not matter. By showing up, and participating, the things that matter to them can not only be heard but get funded.

From Porto Alegre to Paris

In 1989, the newly elected Workers’ Party overturned the decision-making process so that citizens decided how a portion of a city’s budget was spent. By 1997, sewer and water connections went up from 75% to 98%; health and education budgets increased from 13% to about 40%; the number of schools quadrupled, and road building in poor neighbourhoods increased five-fold. Importantly, participation in budgeting meetings grew from fewer than 1,000 people per year in 1990 to about 40,000 in 1999. Extraordinarily, participatory budgeting not only encourages people to pay taxes and fees but, in some cases, people have even asked for higher taxes – because they can see where it goes.

In 2014, after a new mayor was elected, Paris began the world’s largest experiment in participatory budgeting. In its first incarnation, Parisians could vote on how to spend €20 million on 15 possible projects identified by the city. The next year they began a comprehensive participatory budgeting exercise. €65 million was set aside and citizens generated and voted on their own project ideas. Between 2014 and 2020, the city has committed to reserving €500 million to be spent through participatory budgeting. In 2016, 158,964 people voted on how to spend nearly €100 million, including €10 million set aside for schools.

Paris and Porto Alegre are not the only cities to have tried participatory budgeting, more than fifteen hundred cities around the world have implemented some form of citizen-led budgeting. Showing that not only is it effective but it can be adapted to wildly different contexts and cultures.

Making participatory budgeting work in Africa

How can we make participatory budgeting work for Africa? Crucially, we should not be too prescriptive the contextual differences between countries, urban and rural areas, within cities, between arid, desert, coastal and forest areas, are too broad and diverse for a one size fits all solution. Rather, what we can focus on is putting the right elements in place that would allow participatory budgeting to take root.

  • Leadership buy-in. This has been critical in fostering a working and positive citizen-led budgeting process. Getting mayors, governors, and other local leadership to buy into the process creates the political space and bureaucratic support for it to work.
  • Engagement and the involvement of local civil society and community leaders. Who can help raise awareness and at least initially act as a trusted interlocutor between citizens and governments they are sceptical of.
  • Critically for participatory budgeting to work, people need to be able to participate, which means setting up spaces both physically and online where people can access information, propose ideas, debate them, vote on them and later track their progress.
  • Fundamentally for participatory budgeting to work, there must be a specific ringfenced budget available, which requires governments to set aside money that citizens can utilise.

This may all seem unlikely, but whether it was in 1989 in Porto Alegre Brazil, 2004 in Torres Venezuela, or in 2014 in Paris, these elements can and have come together. I see no reason to think that it cannot happen in Africa.

Democratic dollars

A study of participatory budgeting in Brazil not only found participatory budgets to be effective, but also to be versatile and flexible and led to the inclusion of traditionally marginalised groups in their governance.

Across the continent, we don’t just have a leadership problem we have a governance problem as well. We vote for “leaders” every few years and spend the intervening period complaining about their ineffectiveness, lack of service delivery, corruption, and stupidity. To fix this I firmly believe we must deepen our democracy and ground the policymaking process in the real needs and aspirations of citizens. Participatory budgeting is one way of doing this, giving communities a say in where some of their tax money goes, and actively seeking to address their needs and concerns. Democratising some of the Rands, Kwachas, Cedi’s, Shillings and Naira’s that are spent in vain on development every year.

It is not a panacea; our problems are diverse and will not be solved by one thing. But by bringing the power and the money closer to the people we can not only fund projects and services that are critical to those people we can strengthen our democracies and systems of governance. And that in doing so we can reshape the social contract and connection between the governed and their governments to be a genuine one of consent and delivery rather than the apathy, disappointment and coercion that all too often defines the social contract in Africa. And just as importantly, it will help Africa build a future where whole communities do not have to riot, and young men lose their lives for want of service delivery.

Core features for African Post-Covid-19 economic stimulus packages.

The global coronavirus pandemic has not only put public health and health systems under threat it has undermined livelihoods, businesses, and economies across the continent. As a result, many policymakers are turning their attention to how to get those economies started again, as they shift from the public health response. Some countries such as South Africa and Kenya have already released details on their stimulus packages. Each African country will need to come up with a package that works for them specifically. However, as diverse as these packages may be there are some core features and opportunities that I think apply to most if not all African states. That will not only aid in jumpstarting their economies but lay a foundation for long-term growth through tax reform, building social safety nets, and putting money in the right places. African states may not have the financial firepower that the developed world has deployed to keep their economies alive, but with some creative and bold policymaking African governments can not only jumpstart their economies out of the Coronavirus malaise but also lay the foundations for long term growth.

Investing in the right places

There are two sectors, agriculture, and the informal economy, that define sub-Saharan African economies, and will require specific focus in any form of stimulus.

Agriculture is the foundation of the African economy. At least 60% the population of sub-Saharan Africa are smallholder farmers, and about 23% of sub-Saharan Africa’s GDP comes from agriculture. Stimulus measures aimed at the agriculture sector are critical. This should include

  • Subsidies for inputs (fertiliser, seed, pesticides, etc.) for farmers, that will ease the cost of farming in a tough year.
  • Heavy investment in small farmer training and education that will enhance the skills and productivity of small farmers.
  • Investment in rural infrastructure such as warehouses and rural roads that improve farmer incomes cut the cost of storing and moving goods from farm to market, making those goods cheaper for consumers.
  • Facilitating through guarantees the provision of credit to businesses along the agricultural value chain that provides services to farmers, move agricultural goods or process agricultural goods.

Boosting agricultural incomes, productivity, and efficiency, will not only help drive growth out of the crisis but also help make food cheaper and more plentiful for consumers. In short, an agriculture targeted stimulus could be the foundation for long term food security

The second critical sector is the informal sector. The IMF has estimated that on average the informal sector contributes between 25% and 65% of GDP in Sub-Saharan Africa with Mauritius and South Africa at the low-end under 25% and Tanzania (over 50%) and Nigeria (over 60%) at the other end, and that the sector accounts for between 30% to 90% of non-agricultural employment.

For the informal sector, the key to a stimulus lies in cheap credit (or grants if the government can afford it). Many informal businesses have been subjected to weeks or months of low business volumes (or none at all) due to restrictions put in place to control the virus. This means they do not have working capital, to reopen and restart they will require this capital, and cheap credit is a quick and effective means of providing it. Governments can provide credit to Micro and small enterprises (as most informal businesses are) through existing channels that the informal sector already uses, such as mobile lending, cooperatives, savings groups, and microfinance institutions. Restarting the informal sector is critical to ensuring that people have jobs and incomes, livelihoods that do not just keep the economy turning but the food on tables and kids in school.

Combined the agriculture and the informal sector account for at least 40% of most African economies and are the primary providers of employment. The design of any African economic stimulus must have a significant focus on these two sectors if it is going to have any significant impact.

Tax reform

Some countries have introduced a set of tax cuts to ease consumer pain and help save businesses money. While tax relief will help a bit, outside of South Africa the tax base of most African countries is simply not big enough for tax cuts to have a big simulative effect.

However, taxes are a problem across the continent. African governments, do not collect enough taxes relying on a narrow base of taxpayers paying into a system riddled with tax loopholes, breaks and exemptions. Furthermore, the crisis will put millions out of work and cut the revenues of businesses significantly. However, as the American saying goes, never let a good crisis go to waste. This crisis presents a perfect opportunity for African governments to pursue genuine tax reform, that will help broaden the tax base and mobilize domestic funding for development rather than debt.

We can do this by reforming the tax system to make it, simpler. Make it easy to pay, easy to track and hard to confuse, this can be done through a combination of.

  • Removing existing individual and corporate tax breaks and exemptions while bringing down headline corporate tax rates.
  • Removing transfer pricing loopholes that allow large corporations to avoid paying local taxes.
  • Put in place new frameworks that will assess the proposed and existing tax breaks based on their verifiable impact. In other words, the impact of existing tax breaks should be clearly evident in the data and the justification for a new tax break should also include clear indicators on if it is working. This would prevent the myriad of loopholes creeping back into the system

Getting more companies in the tax net, on an evening playing field while doing away with all the complexity that enables the avoidance of taxes will broaden the tax base. This can be accompanied by a marginal lowering of headline rates as there will be more people and companies paying taxes. A smaller burden on more people will result in less stress on consumers and companies and higher tax revenue when the post-crisis recovery starts.

Safety Nets

One thing the crisis has done is put severe stress on the safety nets and support systems that most Africans rely on. Those with jobs, both formal and informal, often support their immediate and extended families. Foreign remittances (migrant workers sending money back home) has grown by ten times in the last 2 decades. This is a critical source of income and support for millions around the continent and in many countries is one of the largest sources of foreign currency and inward investment. Domestic and international transfers which essentially form our social safety nets are being ravaged. As the domestic economy sheds jobs and opportunities, incomes whether formal or informal will be cut or lost entirely. Internationally, as we have already seen job losses will be immense, and African migrants will be part of that and the World Bank expects international remittances to fall by 23%. Millions around the continent will be without vital support from struggling friends and families and governments must step in. This can take one of two forms:

  1. Give people money. Cash transfers (as I laid out in a previous post) are simple and effective and in a crisis potentially lifesaving. In Togo the government has deployed a cash transfer program called Novissi targeted at people whose daily income is no longer guaranteed due to disruptions caused by the Coronavirus crisis, using existing mobile money platforms. The cash transfer does not fully replace people’s incomes, but it does provide a lifeline, ensuring that people do fall into desperation. It also shows that a mass cash transfer program is possible and need not break the bank.

 

  1. The second option is to invest heavily and quickly in the provision and delivery of key services. Ensure that critical needs such as power, healthcare, sanitation are provided cheaply or free as widely as possible and that critical income-generating venues such as food markets can run with social distancing and sanitary measures in place, that would ensure income generation but also keep people safe.

Neither of these two solutions (or a combination of both) should be short term solutions. Building viable social safety nets is a key need across the continent and if included in a stimulus package, they could be the basis for long term remaking of the social contract across the continent. Without putting in place viable safety nets to replace the informal ones that are being worn thin by the pandemic we may see more people forced into desperate poverty, which would set endanger millions more lives and threaten social stability.

Speed is key

 

The primary goal of any stimulus plan is to move an economy out of a crisis or recession. To do so the stimulus must be deployed quickly before too many businesses and consumers go broke or permanently change how they do things. In deploying their stimulus programs, African governments must ensure that they are deployed quickly. Businesses need credit before they go bankrupt, farmers need inputs before the next planting season and people need to eat today not next quarter. Getting a stimulus package out of government treasuries and into the economy as quickly as possible will amplify its effectiveness.

The right type of stimulus

 

No two stimulus programs will be the same, African economies are diverse and the priorities of each government differ. However, there are common features across the continent that will need to be addressed. With limited resources, we must be smart and bold. That requires putting our resources where the majority of African’s earn their livelihoods in the agricultural sector and informal economy. Making sure that vulnerable communities whose livelihoods have been decimated or support systems undone, get adequate support. And it is an opportunity to reset a tax system that is not fit for purpose to one that can raise the resources we need to fund our long-term development.

African economies need a jumpstart out of what the IMF is calling “an unprecedented threat to development”. As we design our stimulus programs, we must do so in a way that does not just tick the boxes of orthodox economic thinking but addresses the realities of our economies and looks to the future.