Tag: 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.

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 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.  

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.