To fight poverty, Africa should spend like there is a tomorrow

In June, Kenya set a new African record. At $2 billion, the country’s sovereign bond debut was four times oversubscribed. Only one month later, Senegal broke this high.

Zambia and Cote d’Ivoire have been similarly successful in what some call an African bond bonanza.

Interest rates in traditional markets are so low that investors are going after sub-Saharan debt for its high return rates averaging between 5.5 and 7.5 per cent. But they are also attracted by the continent’s promising growth rates, its economic stability, rising exports, and growing private investment.

This is a good thing.
To sustain growth and fight poverty, Africa needs to ramp up investment, particularly to generate more electricity given that 600 million Africans have no access to power. The infrastructure investment gap, estimated to be around $75 billion per year, can be narrowed by, among other measures, raising debt.

This is why bond markets, but also bilateral lending, have become so popular. To be clear, raising debt on the international markets and increasing spending are standard tools for any finance minister. But this should not be a race for issuing more and bigger bonds and shouldn’t result in out-of-control spending.

Not long ago, over 30 African countries benefited from a major international debt relief programme. Now a handful of countries are building up debt again, at a fast pace, often at risky terms and to unsustainable levels. Their debt could reach pre-relief times within a decade.

It matters a lot how these resources are being used. Some countries have started increasing their borrowing and spending with an eye on long-term gains by addressing their infrastructure gap and deploying a mix of economic incentives and investments into Africa’s vast human potential.

But in others, spending remains short-sighted and too few dividends are used to fight poverty.
There are three things for leaders to keep in mind if they want their borrowing and fiscal management to pay off:
First, be patient. It is rarely the quick fix that goes the farthest. So don’t get tempted by political cycles and the lure of electoral wins. Development is an endurance exercise with incremental improvements. When done well, they are more likely to stay, benefiting today’s and tomorrow’s generation.

But populist measures like bumping up civil service salaries or subsidising fuel can quickly become unsustainable. Fuel subsidies help the rich more than the poor, and some African countries spend up to 5 per cent of their GDP on them, leaving little for smarter investments.

Related to this is a second moral of spending. Do what is best for most people, not just a few. Prevent your elites and growing middle class, those who often benefit most from growth and development, from turning into a special interests group that block reforms.

They will always be eager to protect their privileges, and you will have to spend time and effort to build a climate that promotes broad buy-in for difficult reforms. If you wait too long, resistance to more competitiveness, open markets, and revenue collection will grow while opportunities go untapped.

Third, act multi-dimensionally. Investing in new power generation without reforming your ineffective power company will bring little change. Similarly, building schools without improving the quality of teaching can be wasteful. In other words, go for the development “package”, the broad approach.

Infrastructure alone won’t end poverty. The World Bank had to learn this lesson too. While we believed too much in bricks and mortar in our early days, we now understand that bringing together funding, technical expertise, and tested knowledge, go much further.

Together with our clients, we now focus on finding investment solutions that benefit multiple countries in multiple sectors. Just a few months ago, we pooled our own and private funding sources, for which we provided an investment guarantee, to support Mauritania to develop its off-shore gas deposits.

The gas will be converted into electricity and then in part be sold to Senegal and Mali, providing both cheaper and cleaner sources of electricity for those countries. Millions of people will benefit.
The outlook is good. Africa has better institutions today than ever, is more resilient to shocks, and in many places guided by prudent macroeconomic and fiscal policies. Twenty-five years ago, 60 per cent of Africans were extremely poor. Now it’s 48 per cent.

But the decline has been slower than in other regions and inequality is rising in many countries.

This is why leaders need to finance the next stage of their countries’ development. And they can do so without endangering hard-won development gains. But fiscal discipline remains critical to secure long-term growth and finance successful pro-poor policies. It is the virtue that can help protect today’s successes for the next generation. If Africa spends smartly and designs the right development packages, it can continue the continent’s path of success.

Sri Mulyani Indrawati is the managing director and chief operating officer of The World Bank. She previously served as the Finance Minister of Indonesia.

SOURCE: Daily Monitor

Leave a Reply


IGAD and Partners are Keeping an Eye on La Nina Effects on the Region

The Intergovernmental Authority on Development (IGAD) Climate Prediction & Applications Centre (ICPAC) this morning kick started the 44th Greater Horn of African Climate Outlook Forum (GHACOF) during an opening ceremony presided over by the Minister of Environment of Uganda, Hon. Dr. Mary Goretti Kitutu, in Kampala.   The opening ceremony was also attended by the […]

Car bomb kills 5 soldiers outside Somali president’s palace: police

A car bomb claimed by al Shabaab Islamist militants killed five soldiers outside the president’s palace in the Somali capital of Mogadishu and badly damaged two nearby hotels, police said.     Reuters witnesses said gunfire could be heard after the explosion and a huge cloud of smoke could be seen above the president’s palace, […]