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Could aid squeeze help Africa?

June 8, 2010

GUINEA/The dire state of rich countries’ public finances is likely to squeeze aid to Africa in the next few years, although it may be the bitter pill the fast-growing continent needs to wean itself off handouts.

Even though sub-Saharan economies grew at a pacy 5 percent before the 2009 global slump, aid to the poorest continent also rose after the Group of Seven (G7) richest states promised in 2005 to double development assistance.

The ONE Campaign led by Irish rockers-turned-lobbyists Bob Geldof and Bono said last month the G7 would miss that target, but was on track to provide $13.7 billion of the $22.6 billion extra pledged at the landmark meeting in Scotland.

Despite Africa’s huge population — now more than a billion — such increases have undoubtedly had a positive impact, especially in areas such as public health.

However, the extra cash has caused aid to become more entrenched in African budgets, even in “success stories” such as Uganda, Tanzania and Zambia that relied on charity for around half their revenue in 2008, according to World Bank figures.

Critics also argue that aid undermines the social contract that should exist between an elected administration and its people, creating lazy, unaccountable and corrupt government.

Now, with rapidly growing populations and the prospect of an aid slowdown — if not outright reverse — African governments are scoping out alternative, less fickle, funding sources: more domestic debt, a broader tax base and foreign bonds.

Worryingly, none of the options are easy or quick.

“They’re long-term things. You can’t just do them for the next budget,” said Citibank Africa analyst Coura Fall. “Eurobonds take time and they’re costly, so the only alternative is domestic funding. And how do they do that? Many are talking about increasing their revenue base but how can they do that significantly for the next fiscal year?”

Despite a decade of growth fuelled by high commodity prices, economic liberalisation, rising foreign investment, particularly from China, and official debt forgiveness, aid is still big bucks in Africa.

According to the World Bank, in 2008 it exceeded tax and other revenue such as customs and mineral duties in 14 sub-Saharan states, amounting to $38 billion across the region.

Put differently, that is $49 dollars for every African and the equivalent of 21 percent of overall government receipts.

However that picture is changing as post-financial crisis realities, including a surprisingly buoyant Africa, sink in.

At one end of the equation, donors appear to be applying the squeeze, albeit one dressed up as failure by recipients to meet funding conditions.

For instance, backers of Tanzania’s socialist administration slashed aid by $220 million to $534 million for the 2010/11 budget, citing concerns about the progress of economic reforms. In response, the government said it was dusting off plans to get a credit rating and launch a $500 million eurobond.

Similarly, Uganda reported a 20 percent rise in tax receipts for the first half of the 2009/10 financial year, evidence that a drive to reduce donor dependence is taking shape. Uganda too has floated the idea of a eurobond as it waits for oil — forecast at 100,000-150,000 barrels a day — to come on-stream in 2015 from new fields in its Lake Albert region.

With economic growth forecasts well above 5 percent, relatively low levels of external debt and lots of mineral beneath their soil, such countries should be able to raise foreign cash on a scale way beyond domestic borrowing limits.

According to analysts, Angola, which rivals Nigeria as Africa’s biggest oil producer, is likely to be able to borrow at 8 percent if it proceeds with plans for up to $4 billion in international bonds this year, roughly in line with a landmark $750 million eurobond launched by Ghana in 2007.

That is not to say Africa’s long-term financing needs are taken care of.

The World Bank says it needs to invest more than $90 billion a year, double what it is now spending, to drag its awful infrastructure into the 21st century — sums that dwarf even the billions of dollars in cheap loans and minerals-for-roads deals that China is rolling out across the continent.

There is also the risk of states coming off aid hitting a short-term budget crunch that damages their growth prospects or ability to squeeze the most out of a resource windfall, thereby driving up the costs of alternative long-term financing.

“Any immediate decision that a politician might be looking for in Europe to cut aid because a country discovers oil would be dangerous,” said ONE Campaign director Jamie Drummond. “Smartly targeted aid could make oil revenues go further.”

At the very least, the turmoil of the last 18 months has pushed policymakers on both sides of the aid divide to confront an issue normally swept under the diplomatic carpet.

“African governments don’t like talking about aid. It’s like welfare,” said Chatham House’s Cargill. “But there should be the beginnings of a conversation about how we help African countries move to a situation where they do not need aid.”

Comments

Aid to Africa is the Biggest Racket going. Whole Bureaucracies’ sole Raison D’etre is to snaffle up Aid and divert it. The Institutions that give Aid first buy themselves a Prado before a single Recipient receives a Dime. There is a need for Aid in extremis. Why not deliver it via the Mobile Phone? Oh I forgot, that would mean Unemployment for so many.
Aly-Khan Satchu
http://www.rich.co.ke

Posted by AlyKhanSatchu | Report as abusive
 

Here’s an excerpt from a speech Dr. Ngozi Iweala, managing director of the World Bank recently gave. This would help both donor and recipient countries.
“In 2009, DAC bilateral donors gave $27 billion in net disbursements of aid to sub-Saharan Africa. Imagine that instead of doling out the money in small annual contributions, DAC donors decided to give a big push to Africa. They could issue African Development Bonds in New York, with a yield that matches the US 30-year Treasury bond rate, currently averaging around 4.5% per year. The payments on such a bond (principal plus interest) would amount to a little more than 6 cents for each dollar raised. There should be no additional risk premium because payments would be made directly by the Treasuries of the US, UK and other rich donors. This means that if donors agreed on paying out just $6 billion a year in cash towards debt service on African Development bonds—less than a quarter of what is currently given and less than the shortfall in the Gleneagles promise to Africa, African countries could receive $100 billion in cash immediately.

Infrastructure spending needs for Sub-Saharan Africa (capital plus operations and maintenance) are estimated at $93 billion per year; deducting the amount governments actually spend and raising efficiency leaves a net funding gap $31 billion a year, mostly in the power sector.5 Therefore, a $100 billion bond could go a long way in filling the gap for a few years. Most importantly, issuing a bond like this could change perceptions overnight about Africa as a place to do business. Faced with secure financing of $100 billion, private firms across the world would line up to provide infrastructure in Africa. ”

Read the entire speech at worldbank (dot) org

Posted by badra818 | Report as abusive
 

Thanks Badra818 for bringing that up. Additionally there are benefits for the private firms in expanding their market’s base and ride (reverse) the current economic downturn. The hidden potential of this improvement will be the real gain for Africa and so it’s a win/win. The fate of the world is now linked more than ever.

Posted by Magdi | Report as abusive
 

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