Experts warn African nations against foreign loans

Dollar and Yen

Buoyed by external trade shocks, resulting in search for alternative source of funds for financing public expenditures, African countries have been called upon to exercise restraint in sourcing for loans. This is even as the government of Nigeria may have shelved any plan to increase taxes, especially the Value Added Tax (VAT), at least this year and until 2017.

Speaking to The Guardian shortly after yesterday’s opening ceremonies of the High Level Ministerial Segment of the Conference of Ministers — Africa Development Week – holding in Addis Ababa, the Minister of State of Budget and National Planning, Mrs. Zainab Ahmed, said while the government may have shelved plans at increasing the VAT from its present five percent, in favour of widening the revenue base to capture areas where taxes are not being paid, it may, however, have to revisit the possibility of increasing the amount of VAT next year. “This is, however, a decision that would be discussed and achieved at the Federal Executive Council,” she stressed.

The event attracted a number of dignitaries, including the Prime Minister of Ethiopia, Mr. Hailemariam Desalgen, Prime Minister of Democratic Republic of Congo, Mr. Augustin Matata Ponyo Mapon, Vice President of Namibia, Mr. Nickey Iyambo, Chairperson of African Union Commission, Dr. Nkosazana Dlamini Zuma, UN Under-Secretary-General and Executive Secretary of the Economic Commission for Africa (ECA), Dr. Carlos Lopes, African ministers of finance, economic planning, budgeting, development and health, including Mrs. Ahmad.

The minister stressed that the government’s immediate priority now is to identify and registered tax defaulters. “This year our consideration is expanding the tax bases. Simply put, there are many organisations that are not paying the taxes. Our first attention is to register as many people and as many people as possible, before considering increase of taxes. Next year, we might be looking in that direction, but that is not a decision the ministry would take. It would be a process that would be open to consultations with all stakeholders. We would need to do some consultations and assessments, because so many businesses have collapsed. And when this is the case, it is not the good time to start increasing taxes. We need to first of all build trust in the economy and enables businesses to come back fully on stream and employ more people, before we start thinking of increasing taxes. Even in 2017, we have to first of all make that assessment to see how businesses are coming back on stream. Even if the decision is to increase the taxes, it might not be across the board, it might just be at some selected areas,” she told The Guardian, while also disclosing that the Presidency is yet to receive the 2016 budget from the National Assembly. “Maybe, by the end of this week the National Assembly would return to the executive the approved national budget.”

Others at the event also included at least 10 former African Heads of Government, led by former Mozambique President, Joaquim Alberto Chissano, former Head of State, General Yakubu Gowon, and former South Africa President, Mr. Thabo Mbeki. Nigeria’s former minister of finance, Mrs. Ngozi Okonjo-Iweala, was among the dignitaries.

In his speech, the Ethiopia Prime Minister stressed that the theme of the conference, ‘Towards an Integrated and Coherent Approach to Implementation, Monitoring and Evaluation of Agenda 2063 and the SDGs’, is auspicious and timely. “It focuses on the operationalisation of the global and regional development frameworks within the context of national planning,” he said.

As for Nigeria in specific, Mrs. Ahmad assured that the development plan the government is working on is based on prioritising Nigeria’s national objectives, within the context of the country’s interest, while not being unmindful of best examples elsewhere. “The domestic resource enhancement is a primary goal for us. We are mobilising resources domestically to the extent that the 2016 budget is driven 70 percent from non-oil sector. Nigeria is also contributing positively to regional initiatives at economic sustainability and development. We are well aware that integration is still very low due to infrastructural deficit, poor governance and conflicts,” the minister stated. She also disclosed that the government has put in specific measures in rationalising public expenditures to reduce wastages, which can be channelled towards improving critical infrastructure and towards enhancing social initiatives for the people.

Speaking against the backdrop of Africa’s total foreign debt, which he noted has been higher than 30 percent of GDP since 2010 and projected to have risen to 37.1 percent by the end of 2015, Lopes, however, explained that the net foreign debt, as a share of GDP, is only one per cent, having been negative since 2006 because of Africa’s international reserves. “This debt level is also comparable to other developing countries and is well below that of advanced economies. For example, the total debt for OECD countries was nearly 80 percent of the OECD GDP in 2008 and was expected to grow to 111.2 percent in 2015. The champion of debt is Japan with GDP/debt ratio of 230 percent,” the UNECA boss said.

But while sovereign debt is driven by advanced and powerful economies asynchronous monetary policies, he noted there is no coherent mechanism to govern any future sovereign debt crises. “Creditor specific mechanisms used to facilitate past debt restructurings are no longer available. Although a sovereign debt restructuring mechanism was proposed by the IMF more than a decade ago, there is still no international agreement on the topic to date. There is a general consensus that the existing rules are too creditor-friendly, but that a push for an international agreement that is too borrower friendly might not be the best way forward,” Lopes said.

But most crucially, according to him, the biggest undercurrent of the debt debate should be the pervasive effects of Quantitative Easing that have created easy credit for debilitated economies of developed countries that have contracted 54 percent since the beginning of the financial crisis of 2008-9. According to Lopes, “Obviously, something has to give and in this case it is the increase in the cost of borrowing for the poor ones.

“In fact, there is a need for flexibility in placing debt ceilings and assessing debt. African countries should not be over-constrained or unduly deprived. The issue of debt sustainability will essentially depend on a comprehensive treatment of all components of debt in a debt restructuring, and the provision of clear mechanism to engage all stakeholders to build up consensus on how to close the gaps in financial architecture. This is going to be difficult for rich countries to accept.

“Neither monetary policy nor the financial sector is doing what it’s supposed to do. It appears that the flood of liquidity has disproportionately gone toward creating financial wealth and inflating asset bubbles, rather than strengthening the real economy. Despite sharp declines in equity prices worldwide, market capitalization as a share of world GDP remains high. The risk of another financial crisis cannot be ignored. This will not be the making of Africa.”



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