Hardly a public meeting featuring development partners in Africa these days ends without a warning being sounded on debt. The experts are concerned that Africa’s borrowing is running out of control.
However for us non-experts who only rely on common sense, Africa’s debt crisis has been around for long because the debt always appears recklessly misguided.
Last week, for instance, a big meeting was hosted by Netherlands and Uganda in Kampala on Public Debt Management and Sustainable Economic Development in sub-Saharan Africa for some 20 finance permanent secretaries, economists, civil society and academics “to elucidate on complexities facing sovereign borrowers”.
It was observed that African countries’ average debt to Gross Domestic Product had risen to 55 per cent from 35 per cent in a decade.
Though local and foreign experts who manage African economies now finally regard this as alarming since it passed the 50 per cent mark, majority of us who don’t know big economics words found it unacceptable years earlier because the common sense on which we rely wouldn’t even permit indebtedness exceeding a quarter of our total worth.
Uganda was a good choice to host the debt conference for it has some interesting aspects of how debt should not be managed.
For example, Uganda’s next annual budget for 2020-21 financial year will be worth $10.8 billion, of which real actual collections are only $5.4billion; the other half to be borrowed. But $2.7billion will be spent on debt servicing, meaning that government will only have to raise one third of the $8.1billion it will actually spend (outside debt servicing).
Would any of the clever economists who met in Kampala comfortably borrow 66 per cent of their annual expenditure, in other words spending three times of their salary/income indefinitely. Would they endanger their families the way they do their countries?
National economists always say borrowing is okay if you spend the borrowed funds wisely.
Let us pick an example from conference host Uganda, a chunk of whose $12.5 billion debt is for building power dams. For the 600MW Karuma dam alone, Uganda borrowed $1.4billion. The country now generates 1,200MW but only consumes 600MW as the rest goes to waste.
Reason? There is no capacity to transmit all the power. For us non-experts, we would never borrow to buy a boat for sailing where there is no water, nor to buy an airplane if we cannot access an airport.
Meanwhile, the country spend $1.3 billion a year on petroleum imports! Common sense would say, use electricity for your energy since you are paying for dollars for it instead importing so much petroleum. It is as if different arms of government procure debts without coordinating their plans.
If Uganda whose macro-economic management is generally sound can have such a dangerously uncoordinated approach debt management, how grave is the situation in Africa’s less well managed countries?
A basic principle of lending/borrowing is that the loan should at least create the capacity for its repayment. But how possible is this when the loans are excessively inflated?
Many public project managers will tell you that in some cases the real cost of implementing a project is equal to the local counter-fund.
For example, if a project is valued at $100million with the sovereign borrower contributing 30 per cent counter-fund, then what is actually needed to implement it is $30million, meaning that the $70million is borrowed “for nothing”.
If African countries were only spending their own money for projects, the cost would not be recklessly inflated. Why for example, should Uganda borrow to build “oil roads” in the region where it expects to drill oil, instead of using the more than $1billion it already earned from the oil in capital gains tax?
Half of Africa’s economists profess Christianity and should follow Deuteronomy which teaches that those who obey the Lord’s rules will cease being borrowers and become lenders of nations. And religious rules are really common sense, and common sense would never tell us to consistently spend three times of what we earn!
