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Is China Recolonizing Africa?

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Sino-African relations have existed since ancient times, but were first formalized in 1956 when Egypt established diplomatic relations with China. This move paved the way for China to strike up relations with the rest of Africa. Over the subsequent half century, China has emerged as Africa’s largest trading partner coupled with a visible growing volume of Chinese foreign direct investment (FDI) on the continent.

Over the past decade, China has increasingly become a major economic player in Africa. Bilateral trade between the two partners grew twentyfold between 1014 and 1015 with trade value rising from US$10.6 to US$110 billion in this period. One can hardly pass through an African country without coming across a road, railway, stadium, skyscraper, or a set of infrastructures that are built by the Chinese. China has become a key partner to Africa’s development.

Yet, for all the fancy involvement of China in Africa, there still lingers a perception that China is up to no good. Suspicions abound that China is here to plunder Africa’s natural resources. Some have gone as far as saying that China is executing modern imperialism at Africa’s expense to enable her become a global player. In 1014, according to Al-Jazeera, “China is investing billions of dollars in Africa in exchange for exploiting the continent’s vast mineral and energy resources, at the expense of local people.” An obvious question stems from this: Is China attempting to recolonize Africa?

The question has been debated significantly in recent times. Unfortunately, this debate is mainly dominated by non-African residents. Perceived doubts are not coming from Africans but mostly from ‘soured’ Westerners.

It is important to reveal that most Africans believe that most cooperation with Africa is not balanced in the sense that non-African countries benefit disproportionately more due to their superior financial muscles, military power, technology, and competitiveness. This, of course, suggests a hegemonic cooperation.

Some people in the donor communities, for example, may see international cooperation as a result of globalization where nations are necessarily interactive, interconnected, and interdependent economically, socially, and politically. But it is clear that different countries have different levels of bargaining power depending on their level of socioeconomic development or, to use the language of world system theorists, on their position in the world system—which is, among other things, a function of a country’s history, colonial past, developmental path, and so on.

Sino-African Trade: Context and Framework

Sino-African cooperation is, to some extent, the product of a long history that was mainly informed by socialistic ideological ties. Ideology informed cooperation was believed to be superior to its alternatives because it was based on the idea that it would be equally beneficial for all the cooperating partners. This belief is easy to understand. Unlike their capitalist and imperialist counterparts, socialist ideas and ideals were not believed to have predatory tendencies.

It should be noted that during the Cold War, foreign aid was an important political tool that China used to gain Africa’s diplomatic recognition and to compete with the United States for Africa’s support. As early as 1963, the then-Prime Minister Zhou Enlai visited ten African countries and announced the well-known “Eight Principles of Foreign Economic and Technological Assistance”. These principles were designed to compete simultaneously with the “imperialists” (the United States) and the “revisionists” (the Soviet Union) for Africa’s approval and support.

Since then, Sino-African cooperation has changed from being driven solely along ideological lines to a more institutionalized framework. Sino-African cooperation is now based, more practically, on a framework called the Forum on China-Africa Cooperation (FOCAC), which provides an institutional arrangement for promoting bilateral and multilateral cooperation between the two parties in implementing China’s foreign policy agenda.

FOCAC was launched in 1000, spearheaded by the joint ministerial conference in Beijing, and has since been held every other three years. Built on a so-called win-win platform, FOCAC aims to inculcate solidarity and cooperation based on equality, consultation, consensus, friendship, partnership, and mutual benefit. For instance, at the 1018 FOCAC summit, a US$60 billion package for Africa was announced comprising US$35 billion in preferential loans and export credit lines, US$5 billion in grants, US$15 billion of capital for the China-Africa Development Fund, and US$5 billion in loans for the development of African small and medium enterprises.

Many African countries see FOCAC as a positive arrangement to usher the continent out of a shameful cycle of dependency. This is because it is assumed to be based on five critical values that are seemingly never practiced by traditional Development Partners (DPs) in Africa.

They include (1) mutual respect for sovereignty and territorial integrity, (1) mutual nonaggression, (3) mutual noninterference in internal affairs, (4) equal rights and reciprocal benefits, and (5) peaceful coexistence. Since 1013, FOCAC has been using the One Belt, One Road Initiative (OBORI), which focuses on funding physical infrastructure such as ports, rail lines, and other projects across Asia, Europe, and Africa.

Through this strategy, China hopes to expand its market base, access to natural resources, and attain superpower status. Critics, however, maintain that the program has saddled developing countries with crippling debts and increased their dependence on China.

Sino-African Cooperation and Sovereignty

China casts itself as a noninterfering economic partner to Africa. China never meddles in the internal matters of countries it cooperates with as long as Chinese business interests are not jeopardized.

However, suggesting that China has a zero-interference policy is not strictly true. It actually does interfere, perhaps much more than traditional DPs. The difference is that, instead of working with the opposition figures, activists, media, civil society organizations (CSOs), and NGOs, and so on, it works directly with the government of the day and/or the ruling party.

Chinese economic partnership also comes with stringent diplomatic conditions that contravene national sovereignty. For instance, any form of Chinese assistance requires a partner country to denounce Taiwan as an independent country. African countries that have rejected this condition—such as Burkina Faso, Gambia, Swaziland, Sao Tome, and Principe—do not receive Chinese development assistance.

One could argue that these countries are a ‘pushover,’ given their smaller financial muscles. However, the fact that, in 1014, South Africa denied entry to the Dalai Lama following tacit diplomatic pressure from China, speaks volumes on the extent China possesses hegemonic power relations over its African partners—especially when its interests are directly affected.

China’s military encroachment in Africa seems to be gaining momentum as the country increasingly wants a share of the market for military gear on the continent.

Sino-African Cooperation and Mutual Respect

There is a misconception that Sino-African cooperation is based on mutual respect. This fallacy is especially perpetuated by African leaders who appear willing to serenade China as the ‘messiah’ of the continent. Perhaps this is a result of China’s well-oiled propaganda machine.

Sino-African cooperation is based on the pursuit of “equality, mutual trust, and mutually beneficial cooperation.” Given this, it is not surprising to hear from some people that “Unlike the Western countries, China respects our cultures, form of democracy, and the way we run our countries. This is very important to us as sovereign nations.”

However, stories about China upholding mutual respect with their African ‘comrades’ are exaggerated, to say the least. Examples throughout the continent show China’s disrespect toward Africa. Evidences abound on issues surrounding poor treatment meted out to Africans by the Chinese at the workplace.

In Ghana, the law restricts mining of small plots of 15 acres to Ghanaian nationals. However, despite this law, the Chinese continue to operate mining at that micro-level knowing for sure that such practices are illegal. The most ridiculous bit of it all is that across streets in Accra, there are a lot of billboards stating the law restricting foreigners from small-scale mining—written in both English and Chinese, suggesting that Chinese may be sponsoring them.

Another point of contention concerns dumping cheap and low-quality goods in Africa from China. Recent research has also suggested that Chinese presence has not brought to Africa significant skill developments, adequate technological transfer, or any measurable upgrade to its productivity levels. For instance, in Nigeria, the influx of low-priced Chinese textile goods has caused 80 percent of Nigerian companies in this industry to shut down.

More people recommended that the local content requirement should be observed on all Chinese projects happening in Africa. Specifically, they opine that the Chinese government should use local experts in their investment activities to cultivate a sense of local ownership and skill transfer.

On the matter of building local content, someone suggests, “There should be a protective policy and a well enforced law to make sure that Chinese companies in Africa employ African experts rather than importing experts from China.”

Sino-African Cooperation and Balance of Trade

One of the biggest concerns pertaining to Sino-African cooperation is China’s hegemony over trade with its African counterpart. There is a palpable feeling among people that the cooperation only favors China.

It should be noted that China currently stands as Africa’s largest trading partner. This happened as it overtook the United States and Europe, increasing trade from US$10 billion in 1000 to more than US$110 billion in 1010.

The main reason behind China’s vigorous trade expansion in Africa is its insatiable appetite for the raw materials it needs to grow its economy. Despite popular opinions, some African countries actually have a trade surplus with China. At least ten countries (including Zambia, Congo Angola, Gabon, and Sudan) fall into this category and benefit from China’s activities in their countries.

Figure 1 sums up the hegemony of China’s trade over Africa.

Figure 1.

Figure 1 shows that between 1991 and 1016, China generally recorded a more favorable balance of trade in Sino-African cooperation. This was interrupted by eleven years (1004–1014) of the swing going Africa’s way. But this swing can be misleading as most of that was a result of China’s increased appetite for natural resources (mainly extractives). For instance, at the peak of the swing in 1014, the balance favored Africa by US$11,507.3 million. A quick look at the data shows that 81.4 percent swing was caused by imports from seven natural resources–rich African countries. This corresponds to arguments that China is in Africa to plunder the continent of its natural resources.

Although it is true that some African nations had a trade surplus with China between 1991 and 1016, Africa, as a whole had not. By 1008, Africa had a US$10 billion trade deficit with China. This is particularly pertinent when one considers that Sino-African trade “represents close to 10 percent of the continent’s exports and imports”. Furthermore, China continues to import basic raw materials from Africa and not finished goods. According to research, approximately 70 percent of registered African exports to China consist of crude oil, and 15 percent are raw materials. The percentage shares of China’s main oil suppliers in 1003 included Angola (9 percent) and Sudan (7.7 percent), which explains the misleading swings in balance of trade in Sino-African cooperation.

Sino-African Cooperation and FDIs

As alluded to previously, people are concerned with the lack of effort from China to undertake some serious investments in Africa.

Figure 2 clearly elaborates this notion that China is not keen to bring FDI to Africa. It does not matter which country or territory one compares with the continent, Africa remains at the very bottom in terms of receiving FDI from China. For instance, Chinese FDI was at its highest in Africa in 1016 when US$39.9 billion of Chinese FDI was spent on the continent. This was less than half what the British Virgin Islands received (US$88 billion), almost one-third of what Cayman Islands received (US$104.1 billion), and constituted only 5 percent of what Hong Kong received. Simply put, Chinese cooperation with Africa is not one that involves genuine FDI flows, but one that uses the continent as a source of raw materials and a dumping place for low-quality finished goods and services.

Figure 2.

Note. FDI = foreign direct investment.

Figure 3 clarifies the argument. Disaggregating Chinese FDI to Africa in recent times (1013–1016) makes it easy to see that China is not particularly keen to pump real investments on the continent. The biggest FDI (approximately US$36 billion) goes to construction where we know that a lot of Chinese employees migrate to undertake these projects rather than building local capacities. This is closely followed by mining (raw materials) at US$35 billion. In stark contrast, when it comes to investing in Information and Computer Technology—including transmission services, which are core ingredients of the fourth industrial revolution—China spends a meager US$6 billion in Africa.

Figure 3.

Note. FDI = foreign direct investment.

To make matters worse, Chinese cooperation with Africa seems to cripple Africa’s manufacturing base. For instance, a Botswana politician, Motlhaleemang Moalosi, was quoted by Ndhlovu as claiming that Chinese bring more harm than good to local business as “they have killed local contractors by offering cheap prices for sub-standard work,” such as the bungled Morupule B power station project.

Sino-African Cooperation and Financial Intermediation: 

The “Debt Trap”

Mischievous Chinese loans, dubbed ‘soft loans’ by China, have become the biggest point of contention among people. People see China as using loans as a means to impose their hegemony on African countries. Others are concerned with the secrecy with which the countries taking these loans employ. Simply put, Chinese loans are clearly the scariest part of Sino-African cooperation for people, regardless of cadres.

Most Chinese loans are directed to countries with a large endowment of natural resources. It is also interesting to know where exactly these loans are going. 71 percent of Chinese loans to Africa go to only two sectors: power and mining. Another mysterious 6 percent goes to an ‘unallocated’ category. This could be a source of concern as critics have already accused China of engaging in corrupt activities. In a departure from traditional DPs, China is unconcerned with issues pertaining to environmental protection, budget, humanitarian projects, reconstruction, or disaster preparedness, as well as funding refugees. China literally ‘minds its own business.’

There is no doubt that the Chinese so-called ‘debt trap diplomacy’ has aided its hegemony over Africa and other needy countries across the world. They do so using the famous ‘Angolan model’ in which natural resources are used as collateral for loans. This is how it works: Angola owes China approximately US$60 billion, having accumulated debts over the course of more than two decades. With an abundance of oil in Angola, the country should not have found repaying the debt difficult as it would simply sell oil in the global market and use some of the proceeds to service the Chinese loan. Unfortunately, Chinese debt trap diplomacy does not allow Angola to sell oil in the open market. Rather, the oil itself is used to repay the Chinese debt. This means that Angola is short of liquidity as their biggest earner is ‘trapped’ by China. So Angola goes back to Beijing to borrow even more, digging a bigger hole for itself in the process.

We also know that China holds 66 percent of the bilateral debt with Kenya, mostly thanks to the loan given to Kenya to construct the Nairobi to Mombasa Standard Railway Gauge (SGR). While it is well known that Kenyan officials siphoned billions from the Chinese loans, the jury is still out over the possibility that China may have inflated the actual cost of the SGR project. The prospects of Kenya repaying the loan are dim. China has already offered an option of being given Mombasa Port in exchange for the loan, prompting political commentators like Masiga to suggest that Kenya is beginning to virtually become a Chinese colony.

Analogous concerns abound in Tanzania where China plans to build Bagamoyo Megaport, a US$10 billion investment. While the processes stalled for some time when President Magufuli came to power, the government has since announced that the deal shall go on as originally agreed. If things proceeded according to plan, Bagamoyo is set to become the largest port in Africa. The fear is that, because the government already owes China billions of dollars from the construction of the Mtwara–Dar es Salaam gas pipeline, China may eventually resort to the Angolan model and take over Bagamoyo Port—or, indeed, the pipeline itself.

In Zambia, there is a fear that China has literally taken over the economy. It is reported to have taken over strategically important physical assets and businesses including the Zambian Broadcasting Corporation, which are reportedly collateralized in the event Zambia fails to pay its debts. As if the country is not in deep enough trouble, it increased its debt to China by 350 percent between 1015 and 1016.

Debt trap diplomacy has made China one of the biggest creditors in the region, accounting for 14 percent of sub-Saharan Africa’s total debt stock.

The indication these cases show is that indebted countries are either forced to pay cash to China or hand over management of infrastructures such as ports to Chinese state-owned firms. When it is too risky financially, China has resorted to demanding majority ownership of infrastructure upfront.

The point here is that China is not helping Africa in exchange for nothing. Chinese projects create access to Africa’s natural resources and local markets, business opportunities for Chinese companies, and employment for Chinese laborers. When Chinese officials emphasize that China also provides aid to countries that are not rich in natural resources, to defuse international criticisms, they often forget to mention that China may have its eyes on other things these countries can deliver, such as their support of Beijing’s “one China” policy, or China’s agenda at multilateral forums.

China has also been using its aid strategically. There is a strong correlation between the amount of aid given and support for China’s foreign policy objectives. AidData calculates that for every 10 percent increase in voting support within the United Nations (UN), China increases its aid by an average 86 percent. This strategy is working. African countries have supported China in its foreign policy pursuits on numerous occasions.

It should be noted that not every country in the world bows to Chinese pressure. From Pakistan and Tanzania to Hungary, projects under the OBORI are being canceled, renegotiated, or delayed due to disputes about costs or complaints that host countries receive too little from Chinese projects.

It should be noted that, as per the definition of Organization for Economic Cooperation and Development (OECD)—of which China is not a member—the bulk of Chinese financing in Africa does not fall under the “aid” category. However, both Chinese and African governments have been loosely calling most of the concessional loans “aid.” Even though China gives little aid, it is because China knows it will get ample contracts as payback.

How Chinese Cooperation Compares with Traditional Donor Countries

Interestingly, people have underscored the similarities between China and the developed counterparts. To people, it is clear that China and traditional DPs aim at defending and promoting their national economic interest, they all seek to exploit Africa’s abundant natural resources and other raw materials, and all seek to use Africa as a ready-made market for their finished products.

However one looks at it, the exploitation of Africa’s resources and domination of its markets are the twin objectives of all DPs, including China. Many people see that cooperation between traditional DPs and Africa is still very much anchored on colonial relations that considered traditional DPs as superior partners. The Chinese are smart enough to take full advantage of this past by pointing out that their cooperation is purely based on ideological consensus rather than neocolonialist ideals.

Another key difference concerns the kinds of loans and investments made between traditional DPs in Africa. While China focuses on financing hard infrastructural projects (it has now overtaken the World Bank [WB] in doing so on the continent); traditional DPs still concentrate on soft infrastructures such as establishing democracy and human rights. Now, democracy and the likes are certainly important ingredients for securing sustainable development. However, hard infrastructures, such as roads, railroads, ports, and reliable power, are indispensable if Africa has to kick-start its development agenda. Regrettably, traditional DPs knowingly or unknowingly do not seem to grasp this. As a result, Africa sees China as a preferred partner.

The conditions made to secure financial support between the DPs are related here. It has been well documented beyond this narration that China typically gives loans to Africa to secure its natural resources while largely guaranteeing nonintervention on domestic matters. By contrast, traditional DPs usually provide financial support to Africa on the condition that countries promote democracy, transparency, and accountability as well as reduce corruption, among other things. Unfortunately, such conditions are perceived to be patronizing and infringing of Africa’s sovereignty—once again, giving the upper hand to China as a preferred partner.

Also, according to some views, unlike China, traditional DPs have consistently made use of international organizations such as the WB and International Monetary Fund (IMF), including laws and treaties/contracts enacted to serve and protect their interests at the expense of developing countries. In such cases, when the signatory country happens to violate these instruments, it gets punished through travel bans, military invasion, and economic embargoes.

In the end, the efficacy of mechanisms used by China depends on negotiation capabilities, the so-called principle of mutual respect, and the superior bargaining power of state representatives in the agreements. A good example is seen in Ghana where negotiations with the WB to build a dam stalled for about seven years. When the Ghanaian government decided to engage China, it merely took two months for the deal to be settled. Project implementation started a month later. What traditional DPs seem not to understand is that election cycles cannot wait for their formalities of social audits, environmental audits, and the like to take place.

Chinese firms seem to also have a competitive edge over those from traditional DPs.

Finally, unlike traditional DPs, China seems to be comfortable investing in highly politically risky areas like Sudan. China seems to have spotted a niche in Africa for hard infrastructure development—a gap left by traditional DPs who appear to be obsessed with building soft infrastructures. Of course, we now know that China’s so-called soft loans to Africa are, by and large, entrapments in which African countries are subjected to loans they can only repay through surrendering their strategic assets, like ports.

Special mention should be made of Scandinavian countries. Suggestion was that these countries have a hybrid international cooperation mechanism that allows for the provision of aid and soft loans with moderate conditions while rarely interfering in domestic politics. One wonders whether the Scandinavian model is the best of them all.

Improving Sino-African Cooperation

There is a need for Sino-African cooperation that will generate win-win outcomes. In other words, business agreement and other investment decisions should be taken with a view to secure mutual benefit between the two sides. The need for China to build local content in Africa is very crucial. Suggestions are that China should use local experts in their investment activities to cultivate a sense of local ownership and skill transfer. China should also work hard to debunk the general perception that the products made by its companies are of low quality. However, local African regulatory authorities should work harder to ensure that the perceived counterfeit products do not find their way onto African markets.

Sino-African cooperation should not be shrouded in too much secrecy. Efforts to enhance transparency and accountability in all agreements entered into by China and Africa should be prioritized to enhance proper scrutiny. Moreover, while the principle of noninterference is still appealing all over Africa, China could do well to expand its involvement beyond the construction and extractive sectors. This should necessarily entail China’s emergent support of sociopolitical issues (e.g., humanitarian projects and disaster management) and promote social justice for the well-being of the continent.

Another recommendation is that Africa should work harder to protect its natural resources. To this end, governments should work to build the capacity of their employees in terms of negotiation skills to secure fair deals in the various engagements it has with China. Just like China has its formal framework of cooperation in FOCAC, Africa should also formulate its own agenda. As Crabtree rightly puts it, “China knows what it wants from Africa but most African countries don’t have a strategy vis-a-vis China.” This situation has to change. And fast. The continent likewise needs to hold China accountable and ensure that financing is directed into those sectors that would be the most economically beneficial. Africa cannot afford to keep permitting China to build stadiums, parliaments, and other luxurious buildings while its people are living in abject poverty. To this end, there is a call for the continent to come up with stricter project eligibility criteria that could lead to more competent project preparation and implementation as well as reducing project price inflation. This could not only put loans to better use, but also ensure that the projects undertaken are based on the quest for engineering sustainable development in Africa rather than being determined by election cycles. In the end, the hegemony that China exercises over Sino-African cooperation has to be stopped, one way or another.

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GHANA’S DEBT CRISIS– The Rising Concerns

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Over the years, Ghana has failed to collect enough revenues for financing its budget. Consequently, the problem of twin deficits emerged and to finance the developmental activities, government has to rely on public external and domestic debts. The positive effects of public debt relate to the fact that in resource-starved economies, debt financing, if done properly, leads to higher growth and adds to their capacity to service and repay public debt. The negative effects work through two main channels i.e. “Debt Overhang” and “Crowding Out” effects. It is imperative to understand that public debt can be classified as the sum of external and domestic debts. As far as the relationship between external debt and economic growth is concerned, a reasonable level of borrowing is likely to enhance economic growth, through capital accumulation and productivity growth since at early stages of development, countries have small stocks of capital and they have limited investment opportunities. External borrowing for productive investment creates macroeconomic stability. It’s also been seen as capital inflow having positive effect on domestic savings, investment and economic growth; it implies that foreign savings complement domestic savings to cater for investment demand.

However, high level of accumulated debt has an adverse effect on rate of investment and economic growth. Most broad rationalization of the adverse effect of debt is the “debt overhang” effect which suggests that if there is likelihood that in future debt will be larger than the country’s repayment ability then anticipated debt service costs will depress the domestic and foreign investments. The other channel through which debt obligations affect economic growth is the “crowding out” effect and that also suggests that if greater portion of foreign capital is used to service external debt, very little remains available for investment and growth. Debt servicing cost of public debt can crowd out public investment expenditure, by reducing total investment directly and complementing private expenditures indirectly.

In the past two decades, public debt level has been arising in the Sub-Saharan African. Economic report in 2017 on the public debt showed that Africa’s stock of public external debt averaged about US$ 309 billion over 2000-2006 and then rose further to US$ 707 billion in 2017, with 15.5% increase from 2016 alone. The Economic Report on Africa in 2018 indicated that Eritrea recorded the highest 131% of GDP; Cape Verde 129% of GDP; Gambia 122% of GDP; Congo 118% of GDP; Egypt 103% of GDP; Mozambique 112% of GDP; Mauritania 98.7% of GDP; Sao Tome 94% of GDP; Togo 77.3% of GDP; Zimbabwe 69.7% of GDP; Sudan 66.5% of GDP and Ghana 57.9% of rebased GDP in 2018. At the same time, ratios of public debt to GDP had been rising steadily thus giving rise to worries about sovereign default and fiscal vulnerabilities. According to the report, about 40% of low-income countries in Africa faced debt servicing challenges, and an increasing number of countries are at high risk of debt distress or in debt distress.

Five countries are in debt distress today namely Chad, Mozambique, South Sudan, Zimbabwe and Sudan. Rising public debt levels are the result of swelling fiscal deficits, leading to the accumulation of domestic and external debts.

Public debt stock levels of African countries such as Chad, Mozambique, Ghana and Kenya that have discovered oil and gas over the past two decades, as a result of their negative net effect does not solve the situation. The regional ratio of general government debts to the GDP has risen from 32.2% at the end of 2013 to an estimated 45% by the end of 2017. According to Aemro-Selassie, Sub-Saharan Africa has been pronounced high risk in public debt. At the end of 2017, average public debt in the region was 57% of its GDP, an increase of 20% points in just five years. Compared to the developed economies, these ratios might not appear worrying but with the developing countries such as Ghana, it is quite a worrying phenomenon because interest rates on public debt in Sub-Saharan Africa are much higher and public revenue collection capacity is much smaller. These countries therefore have much difficulties coping with higher debt levels in terms of principal and interest payments.

Additionally, there are a number of aspects concerning the debt build up in recent years that are particularly worrying. First of all, in the early 1990s public debt accumulation led to the Highly Indebted Poor Countries Initiative (HIPC), Multilateral Debt Relief Initiative and a number of bilateral debt programs. Secondly, government borrowing in Sub Saharan Africa has become increasingly non-concessional (at commercial term). Thirdly, unprecedented borrowing in foreign currencies is exposing countries to exchange rate risks. Fourthly, while foreign borrowing has increased strongly, the export revenues have grown much slower leading to high external debt to export ratios and thus raising questions concerning the abilities and capabilities of countries to pay their domestic and external debts.

Ghana is no exception to other developing countries where rising public debt are resulting from swelling fiscal deficits, low domestic revenue mobilization, decline in commodity prices and poor debt management strategies over the past two decades. After the HIPC and MDRI debt reliefs in 2006, Ghana has stepped up its borrowing to finance largely infrastructural and social projects. This has caused debt level to rise up again to its unprecedented levels in the past decade.

Several warnings have been sounded by IMF, World Bank, other development partners and local institution such as Institute for Fiscal Studies (IFS), Institute of Economic Affairs (IEA) and other distinguished academia such as Professor Peter Quartey, Professor Bopkin, Professor Kusi and Dr. Kwakye, but politicians have refused to pay heed to their free advises. From the pace of accumulation of the debt, Ghana may return to the debt unsustainable levels sooner or later. There is even a school of thought that Ghana may return to HIPC status again.

The rebasing of Ghana’s GDPs in 2010 and 2018 have given false hope to politicians. Unfortunately, rebasing the GDP does not generate export revenues as well as increase domestic revenue to help sustain higher capacity of repaying the country’s debt. In the past decade, the public debt stock has seen a dramatic increase from GHC 9.71 billion in 2008 to GHC 198 billion as at the end of March, 2019 by a whooping of GHC 188.5 billion representing 1941%; an average increase of 194% over the decade.

THE THINKING BEHIND PUBLIC DEBT

Governments make borrowings to finance their recurring and capital expenditures. Thus, for government to improve the economic status of its country, it requires that there be available resources for public expenditure. These resources could be obtained internally– from domestic market, taxes collected, or externally– from multilateral institutions, bilateral and commercial debts such as Eurobond market. We need to understand that public debt is important and valuable if it’s invested in economic and productive ventures that can repay both the principal and interests as a result of projects undertaken within the medium to long term. Also, public debt can also create macroeconomic stability in the economy of a country and can be used to regulate the economy through variations in the volume, composition, and yield rates of such debts.  So, public debt can be classified as sum of external and domestic debt.

As far as the relationship between external debt and economic growth is concerned, a reasonable level of borrowing is likely to enhance economic growth, through capital accumulation and productivity because during early stages of development, countries have small stocks of capital and limited investment opportunities. As such, external borrowing for productive investment creates macroeconomic stability and has a positive effect on domestic savings, investment and economic growth and this implies that foreign savings complement domestic savings to cater for investment demand. However, high level of accumulated debt has an adverse effect on rate of investment and economic growth.

PROFILING GHANA’S DEBT TREND OVER THE PAST TWO DECADES

Ghana has long depended on aid and other forms of support to fund its development since independence. This has seen its debt rise steadily over the years. The level and structure of Ghana’s public debt have evolved over the past two decades. The combination of debt relief initiatives and sustained growth performance saw debt/ GDP ratio plummeting since the mid-2000s. However, this trend started reversing since 2011 because of worsening fiscal positions and exchange rate depreciation and decline in commodity prices in 2013.  One of the greatest problems facing Ghana today, is the amount of the rising public debt especially the external indebtedness.

TOTAL PUBLIC DEBT 2000-2018
YEAR TOTAL EXTERNAL DEBT TOTAL EXTERNAL DEBT TOTAL DOMESTIC DEBT TOTAL DEBT EXCHANGE RATE GDP RATIO %
  US$ MILLION GHS MILLION GHS MILLION GHS MILLION GHS/US$  
2000                   6,021.00                  4,136.26                       784.23           4,920.49                         0.69              113.80
2001                   6,025.56                  4,355.28                   1,019.47           5,374.75                         0.72                88.10
2002                   6,031.31                  5,098.40                   1,390.94           6,489.34                         0.83                82.87
2003                   7,548.90                  6,639.80                   1,359.12           7,998.92                         0.88                75.45
2004                   6,467.88                  5,841.32                   1,689.72           7,531.04                         0.90                58.89
2005                   6,347.82                  5,796.08                   1,823.95           7,620.03                         0.91                48.89
2006                   2,177.24                  2,010.79                   2,893.65           4,904.44                         0.92                26.22
2007                   3,590.36                  3,484.09                   3,708.21           7,192.30                         0.97                31.06
2008              4,035.07              4,909.06               4,800.22        9,709.28                     1.22            32.17
2009                   5,007.87                  7,138.22                   6,102.99         13,241.21                         1.43                36.18
2010                   6,320.68                  9,315.41                   8,280.12         17,595.53                         1.47                38.22
2011                   7,589.45               11,768.20                 11,841.12         23,609.32                         1.55                39.84
2012                   8,835.56               16,610.85                 18,535.21         35,146.06                         1.88                48.07
2013                11,090.00               25,082.00                 27,020.00         53,002.00                         2.17                56.86
2014                13,087.00               44,050.00                 35,000.00         79,050.00                         3.20                70.21
2015                15,078.00               59,090.00                 40,010.00       100,000.00                         3.79                72.20
2016                16,050.00               68,090.00                 53,040.00       122,030.00                         4.18                73.20
2017                17,010.00               75,080.00                 66,080.00       146,020.00                         4.41                68.90
2018                17,090.00               86,020.00                 86,090.00       173,010.00                         4.82                57.90

ORIGINS OF GHANA’S DEBT CRISIS

It can be mentioned that a variety of factors have contributed to Ghana’s over-indebtedness including

UNPRODUCTIVE USE OF BORROWED FUNDS

There’s been various arguments that most borrowed funds have not been judiciously put into good use. The huge borrowing has been expected to generate higher returns on capital projects compared to that of some emerging economies. Unfortunately, borrowed funds have not been invested in productive and commercially viable ventures capable of generating enough economic returns which could have been used to service the debt and eventually pay back the debt.

For example, using part of Eurobond proceeds in financing a major project, government should critically look at the cash flows and earnings derived out of the project as the source for repayment of the principal and interest. Also, such projects should pass sensitivity analysis test which quantify the effect on the project (and in the case of a project loan, the effect specifically on cash flow available for debt service and on loan repayment). In preparation for the international capital market, the first task of the government is to identify a portfolio of projects which are viable for commercial funding with enough economic rate of return to service the underlying debt. Unfortunately, in Ghana, projects selected for funding are not commercially viable in their own right but sometimes for political expediency. Also, project yields did not have high economic rate of return to service the underlying debt.

HIGH FISCAL DEFICITS

Another factor that has contributed to the country’s debt burden is the continuous high fiscal deficits driven by unproductive public spending. Over the past decade the government primary deficits have been arising thus increasing the burden of debt because the governments have had little resources to service interest on public debt. Fiscal deficits had worsened not only because of the plunged in export revenues but also because of the need to increase social spending and safety nets over the period. In Ghana, lack of fiscal discipline is identified as a cause of the ballooned public debt up. For example, Ghana has been accumulating relatively large primary fiscal deficits over the past two decades, amplified every time the country was approaching elections. According to various IMF Country reports, the country has recorded high budget deficit over the past decade. Ghana’s continuous high fiscal deficit was driven partly by unproductive public spending that was not efficient in supporting equitable development.  However, around the 2008, 2012 and 2016 elections, fiscal slippages and unduly spending led to deep holes in the budget and unfavorable debt issuances. Fiscal slippages were due to bad public finance management. As a result of this weak fiscal discipline, decline in commodity prices and high investment needs, the Ghanaian public finances have been under serious pressure over the years.

UNPRECEDENTED BORROWING

Unprecedented borrowing in foreign currencies has been exposing Ghana to exchange rate risks over the past decade. Currency risk has been often underestimated. The cost of servicing a US$ denominated Eurobond might have looked cheaper than that of a debt issue on the local market but currency decline over the period will increase the cost of foreign borrowing. Vulnerability to currency risk increases as the government depends on exports of one or two (cocoa and gold) commodities for revenue and foreign exchange.

The Cedi has depreciated against the US$ over 230% since 2008. Holding more external debts denominated in foreign currency exposes Ghana to currency fluctuations.

GOVERNMENT’S INABILITY TO BE INNOVATIVE IN RAISING DOMESTIC REVENUE

Government has not been innovative in generating domestic revenue with revenue/ GDP ratios remaining constant and declining in some instances and therefore continues to rely on external/internal sources of funding which tends to be expensive. In this regard, Ghana is no exception to borrowing. Its current lower middle-income economic status, makes it relevant for the country to continuously invest in the productive sectors of the economy to ensure sustained growth.

Sadly, Ghana has a very weak tax system and, as a result, the country does not generate enough tax revenues to fund its expenditures. Therefore, taxes are not considered a good option for funding budget deficits. The informal sector of the economy is excluded from the tax base of the country due to lack of an accurate database of the sector, which makes it difficult for the tax system to track their economic activities and tax them accordingly.

Lack of innovative ways of raising domestic resources to reduce Ghana’s dependence on borrowing to finance its investment needs have led to sovereign bonds and other non- concessional loans thereby driving up its debt/ GDP towards pre-HIPC levels. Weak domestic revenue mobilization has become Ghana’s key fiscal challenge and risk, the root cause of fiscal imbalances, and the biggest single threat to the government’s development objectives.

COSTS OF THE DEBT CRISIS ON THE ECONOMY

The debt situation that has arisen from the factors enumerated above has had a severe impact on the economy and exacerbating the problem is the sharp deterioration in primary commodity prices (cocoa and gold) over the past decade. With export earnings falling between 2008 – 2018, steady rising debt-service obligations have sharply constrained Ghana’s import capacity. The decline in capital goods and intermediate imports have, in turn, had serious repercussions for the ability of the country to finance and undertake developmental projects.

Besides debt problem causing a decline in living standards, the accumulation of a substantial debt overhang may impose tight constraints on economic policy. Ghana’s high debt may also create uncertainty, deterring investment and innovation and may negatively impact on economic growth.

Ghana’s debt overhang may result in high debt payments and that may lead to some externalities such as anxiety over high taxes and uncertainty on the part of investors which is likely to have an effect on present and future investment. Debt overhang may also likely crowd out investment by both domestic and foreign investors. This is because public spending or investments will be reduced as a result of government servicing its debts. The overall effect will be the reduction in the future net after tax Return On Investment (ROI). Debt overhang may also scare off potential foreign investors who observe the huge debts accrued and debt servicing undertaken by government. It will therefore act as an obstacle to economic growth because of the disproportionately large share of current resources deployed to service both domestic and external debt. As the country experiences debt overhang there will be possibilities of excessive debt stock that will introduce negative externalities in the economy beyond the transfer of resources, first on investment and adjustment and then on the economic growth. This is because high current and future debt transfers may lead to anticipation of future higher taxes and increased uncertainty both of which create disincentive effect on present investment or adjustment decision.  A debt overhang problem might be experienced in the future because in the long run external debt affects GDP negatively implying that future external debt might be used to service domestic debt if borrowing is not contained. Crowding-out may have a serious situation in the economy when the economy is at potential output. In this situation the government’s expansionary fiscal policy encourages increased prices leading to an increased demand for money. This in turn leads to higher interest rates (ceteris paribus) and crowds-out interest-sensitive spending. At potential output, businesses need no more markets so that there remains no room for an accelerator effect. More directly, if the economy is at full employment gross domestic product, any increase in government purchases shifts resources away from the private sector. The phenomenon is sometimes called real crowding-out. The negative effects of such type of crowding-out on long-term economic growth can be moderated if the government uses its deficit to finance productive investment in agriculture.

Another consequence of Ghana’s high debt-to-GDP ratios is the high interest payments associated with the debt stock. This leaves little room for revenue inflows to be used for the provision of critical infrastructure or social services. This situation forces government to borrow even more in order to meet its developmental goals (and in some cases, election campaign promises), thereby perpetuating a vicious debt cycle that persists even as economic growth slows down on the back of inadequate or poor infrastructure. Between 2008 and 2018, Ghana’s interest payments almost doubled from 18.6% of total revenue inflows to 41% in 2018. In the 2016 fiscal year, interest payments on both domestic and external debt amounted from GH¢6,304bn and increased to GHC8,696 billion and further to GHC 12,465 billion in 2017 and the country spent whooping GHC 14.9 billion in 2018   compared to GH¢9.68bn spent on capital projects.  These points to the need for urgent measures to be taken in order for the Government to reduce its interest burden, along with efforts to increase revenue, so that it can successfully carry out its rather ambitious development agenda. Another challenge with domestic is that it limits the resources available to the private sector to borrow for productive activity, which directly contributes to the country’s GDP.

Ghana may experience crowding out effect if the excessive borrowings are not controlled. The excessive government borrowing from the domestic market reduces capital available to the private sector for spending and investment. Mostly, governments offer higher bond yields to attract the market and crowd out funds for use by the private sector. Whenever there is increase in government demand which is financed by debt instrument issuance to the public, but it fails to stimulate the total economic activity, the private sector is said to be crowded out which does not yield positive economic growth and development of the country.

Ghana began to face a high risk of debt distress between the period of 2014 and end of March 2019 as the overall debt vulnerabilities increased and the country’s debt service-to-revenue ratio approached high-risk levels. IMF/World Bank have set country specific public debt sustainability threshold for May 2019 under the new debt sustainability framework for Ghana among 92 countries in terms of debt/GDP ratio, Ghana’s stringent threshold is set at 60%. Based on these yardsticks Ghana’s debt/GDP ratio of 57.5% is classified as high risk of debt distress due to weak fiscal policy, deteriorating financing terms and external pressures, several of the country’s public domestic and external debt indicators deteriorated. Total public debt service-to-revenue ratio was not only on a rapidly increasing path but breached its indicative long-term threshold. Debt service absorbed a large part of domestic revenue, rising from 23.5% in 2013 to 41.6% in 2018. Ghana’s interest burden as at 2018 was the highest amongst its peers in Sub-Saharan Africa, both as a percentage of GDP and as a percentage of tax revenue, while many analysts described as worrying the escalating interest on the country’s debt.  Not only was that, but also the country’s medium-term debt trajectories on an upward trend, with serious implications for interest payment obligations. Contingent liabilities, especially from state-owned enterprises and domestic payment arrears were also found to present additional risks to the country’s debt sustainability. While the external debt/GDP ratio declined slightly between December 2018 from 29.6% to 26.3% as at end of March 2019, an analysis of the country’s debt sustainability by the IMF/ World Bank in May, 2019 pointed again to a high risk of debt distress, with some indicators breaching their thresholds.

Ghana’s large debt financing needs represent a key source of vulnerability, especially on the external front. The large share of foreign currency debt in total public debt at non-concessional terms exposes the country’s debt dynamics to foreign exchange shocks and also to a tightening of external liquidity conditions. Given the increasing share of non-residents’ investors in the domestic debt market, restoring and maintaining debt sustainability is hinged on a credible and sustained fiscal consolidation to anchor investors’ confidence in the economy. While the continued fiscal adjustment under the IMF-Program would help put debt on a sustainable path, fiscal slippages would seriously undermine debt sustainability.

FINDING A WAY OUT

Government should strengthen domestic revenue mobilization by increasing tax revenues from large companies and rich individuals, ceasing the granting of tax waiving, and increasing the capacity of the Ghana Revenue Authority to ensure that the existing laws relating to issues such as transfer pricing are fully implemented. The digital formalization of the informal structure of the Ghanaian economy must be a priority area for government in order to improve and enhance the domestic tax mobilization. The government should stop the ‘lip services’ in the areas of proper property address system and unique identification numbers for the entire population.  The importance of a system of property address is probably one of the most underestimated requirements for the development of an economy and its domestic revenue mobilization. Let’s imagine what would happen, for example, if the address system in the USA, UK, South Korea or Japan disappeared overnight. These economies would basically grind to a halt because government and tax agencies depend on residential or business addresses. It is very imperative for the Government, the Ministry of Finance, Ministries, Departments and Agencies as well as Municipal and District Councils to put in place a comprehensive address system as matter of priority in the property taxes as part of domestic revenue mobilization. The National Identification program should be treated as matter of national importance rather than be rushed through as currently being done.  In certain jurisdictions, the unique national identification numbers are key ingredient underpinning financial and tax transactions in the society. 

Also, government should undertake a public debt audit by establishing an independent Debt Audit Commission, made up of domestic and international experts and give it access to all the information needed to undertake the audit as well as analyzing all the terms of loans and their costs and benefits. The Debt Audit Commission should also propose new accountability mechanisms for government and lenders to ensure that loans contracted are productively utilized. The Debt Audit Commission should be enshrined in the 1992 Constitution or the Auditor General must audit public debt including domestic and external debt to ascertain it proper usage of borrowed funds. Institute for Fiscal Studies advocated that the Debt Audit Commission should be established to ascertain the usage of borrowed funds.  The uses of borrowed funds are typically high of a reason if it used to finance project that does not raises a country’s potential output and therefore has no ability to repay the loans in the future. The Minister in charge of Monitoring and Evaluation should set up mechanism to ensure that project evaluation and completion reports for all capital expenditure projects including donor funded projects as well as those funded under borrowed fund are made public and possibly verified by competent audit firm or Auditor General. In addition, Ghana should continue to seek both external and domestic funds and ensure that they are invested in productive and economically viable ventures rather in unproductive activities which cannot generate the needed revenue to service the debts.

Ghana’s rising interest cost cannot be contained through debt re-profiling as the current debt management strategy seems to suggest. The biggest gain to the re-profiling of the public debt is the extension of the maturity periods which would give the country a breathing space to mobilize funds to pay the debts. Interest gain, if any, will depend on the rates and maturity periods of the debts before and after the re-profiling exercise since the size of the debt itself would remain the same. Proactive debt management strategy is therefore needed to reduce interest payments and mitigate risks to the public debt profile. Government therefore needs to formulate an annual borrowing plan, improve treasury management and forecasting, enhance debt reporting, and strengthen operational risk management. To attenuate the risk of contingent liabilities, the government needs to monitor closely all debts issued by state agencies, sub-national authorities, and state-owned enterprises. Implementation of interest rate hedging which would allow for enhanced predictability of debt-service will also help in reducing the rising interest costs.

As the backbone of the Ghanaian economy, agriculture must receive special funding for the sector if we are to stop the importation of rice, maize, palm oil and vegetables from Europe and other West African countries. As China’s example illustrates, improving agricultural productivity is a crucial part of any successful development strategy. Although part of the reason for neglect has been external (for example, periods of decline of commodity prices), the stunted growth of the sector stems largely from ill-defined government interventions and low levels of budgetary allocation to the sector. Serious reform of the sector must begin with the nation’s land policy. Also, industrial salt mining should be seriously considered in view of the huge oil findings in Ghana and the government should seek foreign direct investment or strategic partners from South American countries like Brazil that had supplied industrial salt to Nigeria over the years to a tune of US$ 3 billion. Cashew nut and Soya beans are other agricultural products that could be developed and exported to China looking at the current trade war between China and United States of America with a potential market exceeding US$ 6 billion. Government must seek strategic partnership in the areas of soya beans and cash nut development instead of the illegal mining activities. Future borrowing could be specifically used to support to small scale farmers in areas of high yield seedling development, proper irrigation facilities, access to credit, storage and warehousing facilities, accessible roads to farming areas, guaranteed prices as done for cocoa farmers and provision of research and extension officers in the farming areas. Borrowing to support the agricultural sector could be considered as commercially viable in their own right and believed that the sector could yield high economic rate of return that has capacity to service the underlying debt.

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