Abimbola Hakeem Omotola – Economy Watch

Fiscal Governance: Can Africa Avoid The Mistakes Of The West?

Abimbola Hakeem Omotola — Tue, 22 Oct 2013 08:14:00 +0000

Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.

The ongoing debt and financial crises have exposed the dangers of the dysfunctional fiscal governance present in the U.S. and Europe. As African countries prepare to enter sovereign debt markets, they should heed the west’s “warning” – to handle fiscal issues with transparency and accountability or risk heading down the same route.

The past four decades have been described as the “age of the monetarists.” More than ever, the global economy has come to depend on both conventional and unconventional monetary policies by central banks – especially from advanced economies that have become more aggressive on the mandate of increasing employment against price stability – to drive activities in the financial markets and spur growth.

During this period, we have had one unsustainable financial bubble after the other, stoked by the atmosphere of ultra-low interest rate and liquidity surfeit with poor regulatory practices – From the tech bubble to the subprime real estate bubble, which almost brought the world to its knee, and now to what many analysts now refer to as the “great bond bubble”, which could pop anytime.

But if the increasingly powerful monetary authorities have been doing all within their capacity to stimulate growth, albeit at the risk of creating unsustainable bubbles, the fiscal authorities and the political class have been doing directly the opposite. They have proven over and over again to be petty, unnecessarily divisive, inept and corrupt. Societal values and the interests of their immediate society and the global economy comes only after their pursuit of personal wealth and promotion of their political parties polemical ideologies; even at the risk of creating financial and economic instability.

Altogether, fiscal governance has been below par for far too long, leading to the unjustified focus on monetary policies. And no, I am not talking of the state of fiscal governance in the developing world alone but also the developed world where fiscal authorities in recent times have not been providing the right kind of leadership expected of them.

Politicians in the United States have been involved in no less than four fiscal squabbles in as many years: from the debt ceiling debate in 2011, to the fiscal cliff showdown of 2012 and sequestration debacle earlier this year and more recently, the government shutdown conflict and once again debt ceiling face-off. The recent fiscal concerns could best explain why the Federal Open Market Committee decided to keep its Quantitative Easing program in place even when it had been preparing ground for the eventual phasing off of the program. While some might wonder if the fiscal situation in the U.S. is not getting more attention than necessary, it should be noted that the role the US economy play in the globalised world economy is weighty and as such, if her economic stability is threatened, the global economy will react in accordance.

The U.S. is the world’s largest consumer. The entire consumption of Asia’s over 2 billion people is just 40 percent of that of the United States. If politician in Washington had failed to raise the debt ceiling, and keeps giving financial markets reasons to be cautious, confidence would drain in the economy, which could prompt a selloff in the markets, force households to cut consumption and make investors to sit on their funds rather than invest.

Imagine if this happened while the U.S. government remained shut. Commodities prices would likely fall and the impact would be felt by every significant trading partner of the U.S., which is virtually the whole world! Also, countries where U.S. portfolio investors have substantial holdings might begin to witness substantial outflow, which would have a downside on the value of their currencies and foreign reserves. The mild reaction in the financial markets to the recent fiscal squabble in the U.S. thus far is mainly due to the fact that investors don’t want to sell off their positions yet because of the general belief that defaulting on debt is a line politicians are not expected to cross in the world’s largest economy.

But all that will change if the crisis occurs. Even if the default is avoided, for how long will the US keep testing the waters of crisis and creating fiscal uncertainties in the global economy without expecting consequences? What is the guarantee that the same situation won’t occur in the future and perhaps some loony politicians who want to pass a message will ensure the default takes place then? Whether the crisis is averted or not, one thing is sure; the creditability of the United States and her political class will come out badly tainted.

In another case of dysfunctional fiscal governance, fiscal authorities in Southern Europe for years engaged in reckless borrowing and spending on bogus welfare packages that their economies did not have the capacity to repay. The countries involved are yet to recover from the Sovereign debt crisis that resulted from their actions and inactions. PIIGS (Portugal, Italy, Ireland, Greece and Spain), as the worst hit countries in the region are scornfully referred to, are now regarded as the sick men of Europe, if not the world.

The public have since been engaging the fiscal authorities in an endless battle over the austerity measures adopted to tackle the crisis, leading to mass revolt and public protests. This is as Debt-to-GDP ratio in the EU keeps spiralling out of control, with 12 of the 17 eurozone and 14 of 27 wider EU nations having exceeded the 60 percent debt-to-GDP ratio Maastricht guideline for entering the EU. The Greek government in 2004 even confessed to falsifying key statistics on the country’s debt profile to gain EU entry.

This goes to show how excessive borrowing without commensurate increase in productivity can push even relatively strong economies to the brink and this should signal a warning to African countries in the sovereign debt market of the consequences of defaulting, with fiscal governance in the region probably the worst of all.

In addition to the recent incursions of several African countries into the sovereign debt market, even without strong macroeconomic fundamentals, the high political risk and lack of transparency and accountability in fiscal governance further compounds their problems. In this realm, the taxman is a public enemy and recurrent expenses takes an unwholesome chunk of the government budget, even as public office holders keeps going home with fat pay checks and debt is being accumulated.

President Goodluck Jonathan of Nigeria recently sent the 2014-2016 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper to the National Assembly and in conflict to the Minister of the Finance earlier promise to reduce the percentage of recurrent expenses in the nation’s budget, the document revealed that recurrent spending is being proposed to average 72.2 percent. Budget implementation level, even if measured by the amount released to MDA’s and not the level of implementation of projects budgeted for the fiscal year has persistently been below 75 percent.

Late passage of budget due to endless debate on benchmark crude price for the fiscal year is also a common occurrence In Nigeria and other countries that depend on export of primary commodities for revenue. Government also sometimes dole out huge amount of money to placate striking trade unions, even when provisions aren’t made for such in the fiscal year. One wonders where and how those funds are sourced and appropriated without supplementary budget being passed before the funds are released.

It is not enough to state problems and expected consequences without solutions, which is why this is a call on fiscal authorities the world over to put their acts together and be more responsible when dealing with fiscal issues. The global community is already losing confidence in the ability of politicians in the developed world to resolve polemical ideological differences without hurting the welfare of the global economy.

Ultra low interest rate can only spur real growth and improve employment when the general macroeconomic environment is stable, and not riddled with fiscal inefficiency and uncertainties as we have now. In developing countries, both the private and the public sectors as well as Non Governmental Organizations (NGO’s) need to come up with more initiatives to make fiscal authorities be more effective, transparent and accountable.

By Abimbola Hakeem Omotola

Abimbola is the Editor-in-Chief of Economic Insight, the students’ press outfit of the Department of Economics, Obafemi Awolowo University, Ile Ife Nigeria and Vice President/Director of Projects of REP-Africa, an Ile Ife based NGO which seeks to get involved in generation preservation.

Get more special features in your inbox: Subscribe to our newsletter for alerts and daily updates.

Do you have a strong opinion on this article or on the economy? We want to hear from you! Tell us what you think by commenting below, or contribute your own op-ed piece at [email protected]

The post Fiscal Governance: Can Africa Avoid The Mistakes Of The West? appeared first on Economy Watch.

What The BRICS Development Bank Means For Africa

Abimbola Hakeem Omotola — Thu, 01 Aug 2013 09:35:47 +0000

Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.

The statutes of a new development bank proposed by leaders of BRICS could be ready as soon as next year, as leaders of emerging economies plan to create a funding institution that can rival Western institutions such as the World Bank and the IMF, whom they accuse of bias and reflecting the interest of rich nations.

The unexpected announcement by BRICS leaders at its Durban conference in earlier in March to establish a parallel development institution to challenge the dominance of the IMF and World Bank must have ruffled a few feathers across the Western World.

The decision, according to South African International Relations Minister Nkoana-Mashabane, was made “as a result of the need to change the way business is conducted in international finance institutions”.

The Bretton Woods Institutions – the World Bank and the International Monetary Fund (IMF) – have hitherto been enjoying a degree of monopoly in global development financing services. The IMF has for over half a century been the prominent multilateral global financial institution responsible for funding trade deficits and making macroeconomic policy recommendations to countries of the world. Meanwhile, the World Bank has been largely responsible for funding development projects in third world countries.

However, the fact that they are to a large extent owned and controlled by Western countries and their allies in Asia has made both institutions derided and denounced as neo-liberal imperialist organizations by several leftist regimes and intelligentsia in developing countries, especially in the South America and Africa continents.

This is perhaps why the BRICS announcement is likely to have elicited joy among the conservative intelligentsia in these two continents. However, a cautionary note is necessary in order not to get lost in the euphoria: The road ahead will be thorny as the proposed bank will face series of challenges.

Earlier this year, CBN Governor Sanusi Lamido described trade relations between Africa and China as “a new form of imperialism”, raising fears that the BRICS development bank would be hindered due to the blemished reputations of some of its prominent would be financers – China and Russia. Sanusi further declared that, “China – like the US, Brazil, Russia, UK, and the rest – is in Africa not for Africa’s interest but its own”.

Sansui’s overt warning alongside the social media backlash that greeted Nigerian President Goodluck Jonathan’s recent bilateral agreements in China should give advocates of the BRICS development bank sleepless nights. What the dissenting voices of African intellectuals, civil societies and social media are saying is crystal clear; China and the rest of the BRICS are trying to be the new imperial lords, but they are our peers and can be rivaled.

In essence, the combination of peer rivalry within the BRICS and between other developing countries might undermine the BRICS development bank in future if proper checks are not put in place. The question of whether the member counties have similar objectives is also likely to come up in future. Consider for example Russia’s willingness to grant development facilities to North Korea or Syria (if Assad continues to hold sway) through the jointly established bank.

However, in as much as these factors will be a challenge to the Bank when established, the initiative should not be killed as therein lies several benefits. The “monopoly creates inefficiency” argument could be extended to multilateral global development financing and since a new development financing institution is unlikely to emerge from the West at this present period, the BRICS effort should be applauded. A robust and competitive global development banking structure, if place in the context of the Western free market ideology; will be good for developing economies. It will mean greater access to development facilities at cheaper rates.

Infrastructural development which the proposed BRICS development bank is expected to focus on is key, for African countries and indeed other third world countries development. ICT, energy, water and sanitation, education, health and transport infrastructures are major areas where development assistance is in order to overcome massive infrastructural deficit in the continent.

The World Bank pointed out in a 2007 report that the continent requires $75 billion (about 12% of the African continent GDP then) of infrastructure investment yearly to address its infrastructural deficit with. The African Development Bank in 2012 also reported that $93 billion is required every year till 2020 to close Africa’s infrastructure gap. The question then is how African countries will source funds to address this critical infrastructure challenge in the wake of current volatility in commodity prices, which happens to be the major source of revenue for most African states. This is bearing in mind that foreign exchange earnings is needed to import capital equipments which will drive infrastructural development.

The World Bank has for several years been the largest multilateral financier of development infrastructure in Africa. The multilateral financing group committed over $12 billion into Sub Saharan Africa in 2012. The other multilateral giant in the continent; African Development Bank which began operation in 1966 has provided little competition to the World Bank as it contributes less than 6% of total development assistance to the continent (less than $50 billion as at 2007) and has had to grapple with shortages of fund which almost led to its collapse in 1995.

Several unilateral efforts by some advanced economies have, and are still being made to ease the infrastructural challenges facing countries in the continent. One of it is the Power Africa initiative which the U.S. President Barrack Obama announced during his recent visit to some African states. The efforts have however been inadequate partly due to pervasive corruption and the lack of the development facilities extended. No doubt, an alternative source of infrastructure development finance is needed to redress the infrastructural deficit of the continent.

[quote] This makes the over $4.4 trillion cumulatively held in foreign reserves by the BRICS nations a viable alternative funding source for development projects in African countries, even if just 1% of the reserve is committed to the project. If put to good use, the fund will in no small way assist in alleviating the problem of acute shortages of infrastructures in the third world in the medium to long term. [/quote]

There is no disputing the fact that the individual countries that makes up BRICS have their own challenges which could make their “paternal gesture” of funding developmental projects in other counties (while their own people are still suffering) seem like a no brainer. India with its uncontrolled population growth, poverty, human rights challenges and corruption presents a pathetic scenario. Brazil, India, China and South Africa have been unable to neither reduce poverty nor rid their public sector of pervasive corruption while still grappling with human right challenges. Russia is also notoriously known for corruption, racism and other human right problems.

However, they have valuable policy lessons that Africa can learn from and the huge success of their developmental projects cannot be discounted. Brazil, for example, has succeeded in lifting an estimated 35million of its citizens to the middle class while the country itself has gone on to become a key exporter of manufactured products. India’s urbanization and technological development experience is also worth learning from while China’s rapid sophistication and urbanization, even amid recent threats of slowdown and persistent human right concerns are still points of reference. This is not to overlook South Africa’s giant strides in industrialization and Russia’s technological and education infrastructural development.

In essence, it is not just loans and grants that other developing nations may stand to benefit from the BRICS development bank, but also their expertise in development management in the 21^st century. The BRICS are no doubt luminaries among their peers and as such, other developing countries have a lot to learn from them.

However, the BRICS development bank should be wary of not committing the same mistake of concentrating power in the hands of few, which the IMF and World Bank have often been criticized for. BRICS leaders should be cognizant of including representatives of other developing nations in the decision making process of the development bank. It will not only ensure its acceptability among other developing countries but will also undoubtedly give it an edge over the World Bank in the continent. The would-be administrators of the bank should also ensure the bank is not hijacked for the purpose of making political diplomatic statements to the West at the slightest provocation, rather than focusing on the development issues at hand.

Abimbola Hakeem Omotola

Get more special features in your inbox: Subscribe to our newsletter for alerts and daily updates.

Do you have a strong opinion on this article or on the economy? We want to hear from you! Tell us what you think by commenting below, or contribute your own op-ed piece at [email protected]

The post What The BRICS Development Bank Means For Africa appeared first on Economy Watch.