Africa Watch – Africa’s millstone

11th September 2023

A report by the ONE Campaign highlights that vulnerable countries, already facing high debt risk, are grappling with economic pressures due to rising interest rates and a shortage of affordable World Bank funding. According to the research, African countries pay 500% more for borrowing from capital markets than if they had sufficient World Bank support. This could result in an extra $56 billion in repayment costs for African countries on new debt raised from 2017 to 2021. Furthermore, the lack of affordable capital affects Africa and hinders global efforts to combat climate change, as the continent’s renewable energy and carbon capture potential remains untapped.

For years, the World Bank has been a source of cheap credit for vulnerable countries worldwide. As African countries struggle to stay above water after the Russia-Ukraine crisis and elevated debt levels, affordable loans are needed to import food and other essentials. Talks about debt forgiveness send negative signals to the market, and loan defaults affect countries’ credit ratings. As Western institutions reduce aid, African governments turn to China.

However, China’s support may be limited, given its Belt and Road reevaluation. To thrive, Africa must fund viable projects to meet commercial standards. Africa’s productivity lags behind Asia and the Middle East, where low-cost manufacturing drives competitiveness. The Southeast Asians found their competitive advantage at a low cost of manufacturing which turned the region into the world’s factory. Over time, many have pivoted from low-tech production to high-tech offerings which rival those in developed economies.

With a young workforce already in place, African countries need electricity and capital to grow, but political instability and poor governance continue to constrain development. The World Bank and other organisations can only do so much. African countries must work on becoming economically productive economies and emerge as highly creditworthy borrowers with a commendable low-risk profile. This entails becoming highly business-friendly by streamlining regulatory frameworks, making substantial investments in infrastructure, facilitating better access to financial resources, upholding the rule of law and championing governmental transparency and accountability. These initiatives will make African countries more attractive to foreign investors and create a more enabling business environment.

African economies should be rewired to become highly competent at international trade within and outside the continent. Loans and public revenue streams should also be utilised prudently and transparently. There should be a strengthening of financial management systems, oversight mechanisms for government spending, transparency and accountability measures in governance. At the end of the day, financing is business, not charity. When African countries set these things in place, they put themselves in a better position to negotiate for improved lending terms and quantities because of the quality associated with having them as borrowers.