Africa: what economic strategy for tomorrow?

Three years after the appearance of Covid-19 and the announcement of various initiatives by the international community in favor of African economies, what is the concrete situation on the ground? A brief reminder is in order to understand the current issues

Africa: what economic strategy for tomorrow?

Three years after the appearance of Covid-19 and the announcement of various initiatives by the international community in favor of African economies, what is the concrete situation on the ground? A brief reminder is in order to understand the current issues. Prior to 2020, nine of the ten fastest growing economies were in Africa. But much of those gains have been wiped out by the pandemic and subsequent economic crisis in its wake. Many African countries are now grappling with rising inflation on energy and food prices, in addition to debt service requirements, which are increasingly difficult to meet. “Structurally, nothing has changed, except the rise in interest rates, annoys Romuald Wadagni, Minister of Economy and Finance of Benin. We have a structural problem of financing our economies, insists the Minister of State, due to the perception of risk, which is decorrelated from reality, he continues. "States like Benin and others have not defaulted in 20-30 years, but the various risk rankings of some of the most important international institutions categorize them as hyper-risky!" he says, a few minutes from taking part in the Council of Ministers.

It all started with the US Federal Reserve, when it decided to raise interest rates at a breakneck pace, tackling inflation, which was skyrocketing due to rising global fuel prices and foodstuffs after the Russian invasion of Ukraine. A real headache for central banks around the world and particularly in Africa. Many countries then instituted fuel or food subsidies to help reduce the impact, but this instead had the effect of increasing budget deficits, leading to rising debt levels at some point. where precisely the financing of this debt has suddenly become much more expensive.

As if the situation weren't bad enough, most African countries still rely on US dollar-denominated debt to help fund their economies.

More than a subject that strangles the Beninese minister, the question of financing constitutes a veritable Gordian knot for all governments in Africa. The situation is very complex, because while African economies have shown resilience following the shock of the pandemic, they have since faced many external and internal difficulties, underline the latest reports on the African economy of the African Bank. Development and the French Development Agency (AFD). In "The African economy in 2023", AFD experts highlight the resilience of the most diversified economies (Benin, Senegal, Côte d'Ivoire), which have returned to their pre-crisis level in 2022, but point to "the urgent need for diversification of these economies to counteract demographic change and the many other challenges, in particular climatic". Faced with these well-identified issues, the ability of governments to act is partly burdened by two elements: debt, which has only increased in recent years, and significantly tightened international financial conditions. "Since last year, with the cascading rise in interest rates, be it the Fed, the ECB and even some local central banks, access to financing at the international level has become complicated and expensive for our countries" , analyzes Romuald Wadagni, former Partner at Deloitte. "These major issues that we were working on, before the cascade of crises - Covid-19 and the war in Ukraine - broke out, are still relevant," summarizes the Beninese minister. In his opinion, all this is because the disconnect in the assessment of African risk from reality still exists, he adds.

The doubt about the African risk resurfaced in the years 2015-2016, at a time when continental growth fell back below the 2% mark, in particular under the combined effect of the fall in the price of raw materials and the terrorist threat. growing in several states, particularly in the Sahel. The problematic approach to governance in a certain number of countries has also been used in the arguments of cautious investors and certain institutions. “Even today, when investors want to lend to an African state, they find it difficult to do so, in the long term, because they find it difficult to project themselves and when they take the leap, it is very often at higher than average rates, because they say to themselves that the risk of default is too high in Africa", notes, bitterly, Romuald Wadagni, whose country had succeeded in 2021 to issue eurobonds over a period thirty years old.

And this is where the think tank A New Road on African Debt comes in, devoted to issues of African debt and the financing of the continent's economies, and which brings together decision-makers, institutions, banks, many private operators, but also also financial and legal experts. Launched, in the midst of a pandemic, in Abidjan, Côte d'Ivoire, its members are publishing, these days, a "pact of responsibility" *, intended for both African leaders and heads of international financial institutions, or even the private sector. Either a first text in the form of a charter which brings together lines of thought and above all solutions, thought from the continent and other parts of the world, on the economic trajectory of Africa in the concert of nations. “The future of our world is being played out in Africa. Its development, the development of its economies and the improvement of the quality of life of its populations must remain a shared and priority concern despite the current geopolitical, security and health crises,” reads the preamble recently posted online.

This economic think tank calls for a collective leap forward to bring about a paradigm shift in addressing African economic emergencies. It is also addressed to African leaders, and invites them to make the singularity of the current world economic situation a turning point to reinvent their development models, starting from their realities. “We have entered a world of multi-crises. It is no longer just about Covid-19 or the war in Ukraine, argues Anne-Laure Kiechel, founding president of Global Sovereign Advisory (GSA), unfortunately, we will face other crises, it is inevitable. She continues, "African countries don't have the fiscal space to be able to deal with these kinds of shocks, nor the same tools to respond to them as the West has," she says, in a thinly veiled allusion to the checkbook policy that has once again become the norm among developed countries, two years after massive lockdown-related aid packages, and despite historically high public debts. "Either way, not having the same weapons, you have to, somewhere, allow them to have immediate impact on a large scale," she says. Whatever actions are taken, in the end the objective is always to mobilize funding”.

Indeed, many promises were made to African states in the context of the Covid-19 pandemic, whether it was the debt service suspension initiative, which had been presented as a major step forward, or the "framework common" for the restructuring of the debt of poor countries and set up by the G20 to facilitate negotiations by bringing together creditor countries such as China and members of the Paris Club, or the issuance of special drawing rights of the Fund international currency. But in the end, it is clear that these initiatives, for several reasons, did not have the expected effects. Already in December 2021, IMF Managing Director Kristalina Georgieva said the common G20 framework "needs to be strengthened" to address the difficult debt outlook in 2022. "There are a lot of initiatives but no change," says Nicolas Jean, co-founder of A New Road, partner and member of the executive committee of Gide Loyrette Nouel. "Our responsibility pact is more like a charter, around which we would like to bring together as many economic actors as possible on the continent, including representatives of civil society, he explains to Point Afrique. The aim is to propose concrete measures country by country or region by region, depending on the case or the theme, he continues. Concretely, the signatories of the text will be able to propose very specific implementation measures on the basis of the general principles, objectives and commitments appearing in the pact.

"We are in a world in which the fact of having shocks - whether shocks on exports, shocks on imports, more global shocks - must be taken into account, argues Anne-Laure Kiechel, this d 'as much as, from time to time, we forget to remember, even before Covid-19, Africa, which is often said to be too indebted, in fact, is underfunded, including on funding that has been promised by international institutions but which, for several reasons, do not arrive at their destination and will not be effectively disbursed", citing the striking example of SDRs. Thanks to this tool, the international community was able to raise 650 billion dollars and, of this amount, approximately 30 billion went to low-income countries, including 23 billion for sub-Saharan Africa, in proportion to the GDP of each country and without conditionalities. It was then discussed, during a Summit on the financing of African economies held in Paris in May 2021, to reallocate part of the SDRs (100 billion) from rich countries to developing economies. However, three years later, only $73 billion has been pledged. Institutional constraints, and the lack of political will are pointed in the convincing failure of this approach. "What we observe, on the other hand, is a decline in the disbursement of promised funding due to the complexity of the processes, underlines Anne-Laure Kiechel, these funding instruments are not as adapted as that to the needs of the countries. »

Over-indebted countries do not necessarily have a high stock of debt – what matters is their ability to service their debt, which is tested by the current high costs of financing in difficult financial conditions . "What we realized is that African economies have no problem raising debt," said Roselyne Chambrier Chalobah, CEO of Arise Côte d'Ivoire, a pan-African group created by the tycoon. Indian Gagan Gupta. The problem is the cost, and today, even more than before the pandemic, the question arises of the impact of this funding on key sectors such as education, health, on the real problems that African countries are experiencing," says the co-founder of A New Road. The situation is becoming more and more urgent. By 2024, African countries are expected to experience temporary spikes in debt servicing costs, also known as "debt walls". “The ball is on both sides, African countries must continue to work to have better governance, to reassure lenders and demonstrate that the risk is not as high as perceived. And on the other hand, the markets must review their channels for collecting country risk assessment data,” insists Romuald Wadagni.

For the think tank, other approaches, which African countries can adopt to restore growth in a sustainable way and sheltered from the headwinds of the global economy, can be explored: "Perhaps we are not looking enough export strategies or the means to reduce the debt, because it is not just a question of reducing expenditure, insists Anne-Laure Kiechel. Above all, the requirement must be less around budgetary orthodoxy and more around real work on vulnerabilities and the creation of value and export, she argues. This means that if you lend a lot of money to a country, it must work to manage its imports and this because certain countries are penalized by that. Not allowing these countries to go into debt from time to time is also condemning them for more fundamental things in the long term. “, she is impatient.

This issue of preparing for the future on the continent is taken very seriously, as for the more optimistic, production on the continent would help alleviate some of the challenges in the global supply chain. The African Development Bank recently released the 2022 Africa Industrialization Index, confirming that Africa's most industrialized economies have made the greatest efforts to move away from economic dependence on from extractive industries to value-added sectors. "Private actors have every interest in taking their responsibilities and supporting governments in the ongoing transformation and industrialization processes," says Roselyne Chambrier Chalobah, former director of development for the Olam group in Gabon, a subsidiary of the Singaporean agribusiness giant. What is very encouraging and concrete is that most governments have realized the multipolarization of value chains. They can now, through public-private partnerships, rely on an agile private sector to create a virtuous circle, and at the end of it we have job creation, there are ripple effects on SMEs and even donors are looking at these models where the state has a regulatory role for industrial transformation, points out Roselyne Chambrier Chalobah. Of course, it will take time, maybe decades, until the industries are competitive. »

The countries that have made the greatest progress over the past decade are Senegal, which is in 7th place, Ethiopia, which moved up to 2nd place and also Benin, which jumped 14 places to the 11th place, Tanzania and Uganda follow closely. This is a major game changer for these states historically dependent on commodity exports with minimal, if any, local processing. These sectors have provided foreign exchange, tax revenues and jobs, but have not allowed these countries to achieve sustained productivity gains.

Other African countries have already shown the way, such as South Africa, Morocco, Egypt and Mauritius, with proactive and market-oriented industrial policies, which has been key to the progress they have made. achieved in terms of GDP per capita, standard of living and human development. "Even people who had a fairly high risk perception come to open factories locally, participate in the training of human resources, with vocational training centers which are dedicated to the trades found in industrial zones, insists Roselyne Chambrier Chalobah . The dynamic is there so that value is created locally, without our States having to resort to borrowing from institutions that charge very high rates. »

“Under the pretext that the perception of risk is extremely high in Africa, investors were coming in with certain assumptions, they were increasing everything, and waiting for aid to finance all of this. Today, times have changed, wants to believe Nicolas Jean. SMEs, whether French or international, should consider that Africa is a privileged ground for economic exploration, because, according to him, the tools are being put in place, the raw materials are there. , the workforce too, thanks to demographics. We now simply have to continue to hammer home the following message: “the African adventure is structured”, with public-private partnerships, with local businesses that also have skills to contribute. Another important point, adds Nicolas Jean, private South-South partnerships are also part of the solution to the financing problems of African economies. The continent is therefore experiencing a historic moment that cannot be understood solely through the prism of global geopolitical and geoeconomic conflicts.

"When you don't know where you are going, says an African proverb, look where you come from. This is the approach in which the members of A New Road have resolutely subscribed, which is meeting in Cotonou, Benin, to continue the debates.

* The signatory members of the "Responsibility Pact" can be found on the A New Road website.