Africa’s Tryst with Bilateral Funding

It’s raining money in Africa! For instance, as the India-Africa Forum Summit 2015 concluded in New Delhi last October, Indian Prime Minister Narendra Modi announced a concessional credit of USD10 billion for Africa over the next five years. This credit is in addition to the ongoing Indian credit lines for African countries.Other plans announced by the Indian Premier include grant assistance amounting to USD600 million, which will include USD100 million from the India-Africa Development Fund and USD10 million from the India-Africa Health Fund.
Similarly, during the Forum on China-Africa Cooperation Summit held last December in Johannesburg, Chinese President Xi Jinping pledged USD60 billion of support to development projects. This includes USD5 billion of free aid and interest-free loans, USD35 billion of preferential loans and export credit, USD5 billion of additional capital via the China-Africa Development Fund and Special Loan for the Development of African Small and Micro Enterprises, and a China-Africa production capacity cooperation fund with the initial capital of USD10 billion.
To cap this all, there is a new multi-lateral bank taking shape – the New Development Bank, which is operated by BRICS nations. Having launched last year, the Bank is getting ready to focus on Africa for big-ticket business on behalf of its investors. Africa never had it so good!
Most of the financial packages directed towards the continent cover various facets of industrialisation, agricultural modernisation and infrastructure development – all of which aim to reduce poverty and raise standards of living. These sectors are economic pivots and it’s not nuclear science to understand that every dollar invested in these sectors will generate more than two dollars.
However, the mute question is how the diverse African leadership will approach these financial packages in a given time frame and when will the African population enjoy the fruits of these efforts.
One big hurdle seems to be the public debt position of the majority of the African countries. Although bilateral credit may be customised and freely structured into debt, equity, economic assistance, and grants, among other forms, it has a repayment obligation that reflects on the overall public debt sustainability of a country. Africa’s average external debt level today is 23Pct of the gross domestic product (GDP), which is much better than it was ten years ago.
Nevertheless, for many countries this level is approaching 40Pct or more of GDP when computed together with private debt (sovereign bonds and bilateral) and domestic debt. Big African economies like Nigeria, Ethiopia, Zambia, Mozambique, Senegal and Sudan are the worst hit when it comes to external debt sustainability due to falling commodity prices and the strong US dollar.
It is good to raise dollar denominated funds during the low interest rates regime; however, repayment obligations balloon when the dollar becomes strong vis-à-vis local currency. Africa’s dollar earning export basket is shrinking by the day as China, India and other leading manufacturing economies import less from the continent but export their goods there at an increasing rate.
A few countries are already engaged in rescheduling bilateral debt with India and China. The International Monetary Fund is constantly raising red flags on the issue in order to avoid a debt crisis similar to the one the continent faced in 1980. A number of African countries are now reluctant to tap bilateral funds backed by a sovereign guarantee out of fear that it may result in a reduction in long-term borrowing on concessional terms from Bretton Woods multilateral organisations.
Therefore, maintaining macroeconomic stability and public debt sustainability is a major challenge to African policy makers today. It will be interesting to see the “mechanism” that the African countries may adopt to access the bilateral funds pledged by India and China.
The apparent “home policy conundrum” is another hurdle. Every African country has a national plan document prepared by the world’s best consultant. However, at a micro level, a bankable project document just does not exist. To add to the confusion, regime change; misplaced short term priorities; and disasters like Ebola, terrorism and social unrest influence national priorities at regular intervals.
During the past four years, the ‘public-private partnership/build, operate, and transfer’ (PPP/BOT) bug has bit most developing economies in Africa. The net result is that no greenfield project worth its value has been launched or executed in Africa. Both India and China funding is essentially equipment and services finance-based project funding and the project ownership plays an important role in getting such funding. Also, to access these funds one needs clear-cut project documents like feasibility studies and detailed project reports, etc.
Realising its absence, these funding countries have also provided for project equity, development finance and grants to finance studies. Nevertheless, the recipient country needs to have clarity on project structure, operations and maintenance, and risk mitigation policies in place to facilitate such funds.
Bilateral funding has many more shades. To begin with, such funding is driven by a contractor, who typically pre-sells (or rather, pre-contracts) the project to the recipient country with a promise to facilitate the funding. Efforts are being made by both India and China to instil transparency in the process; however, the process is not as robust as the one followed by the Bretton Woods multilateral organisations.
Secondly, there is a strong political shade to bilateral funding, especially in case of Chinese financing, where a number of concessions in terms of long-term access to natural resources and trade access are interwoven into the funding contract. In this regard, there have been examples in the recent past of political upheavals due to faulty execution and one-sided contract agreements.
Thirdly, there are no examples to suggest that bilateral funding will generate PPP/BOT models that African countries are yearning to develop.
Nevertheless, it is a known secret that bilateral funding has three core priorities – strategic diplomacy, ideological values and commercial benefit. The Americans, Japanese and Europeans have practiced it before and now it is time for the Asian tiger economies. There is no reason to complain, as it means Africa is gaining greater leverage. Let’s wait and watch how the continent grabs the committed funds for mass development before we pass judgement.