Commentaries | Sep 07,2019
Oct 16 , 2021
By Austine Sequeira ( Austine Sequeira is an independent consultant. He can be reached at email@example.com. )
The COVID-19 pandemic has worsened the debt-stocks of most Sub-Saharan Africans. It has also created an excellent opportunity for resetting public programmes that include the public debt, domestic taxation and FDI policies, writes Austine Sequeira (PhD), independent consultant.
The COVID-19 induced economic crisis has kept heads of States and their Finance ministers busy firefighting to manage public debts. The world's GDP fell by 4.3pc in 2020, according to the World Bank, the sharpest contraction seen since the Great Depression.
Economic shrinkages have resulted in lower taxes and savings and retreat of investors from foreign direct investment (FDI). Governments have therefore resorted to debt financing. Inflows from the World Bank and IMF have added to public debt, although the debt service suspension initiative has helped the poorest and the most vulnerable countries save interest charges.
Emerging challenges to economic managers of the African developing countries, especially the underdeveloped countries, are enormous. Pre-COVID-19, these countries already had highly elevated levels of public debt, which has now been accentuated to a higher level without any means to extinguish it in the ensuing decade. External debt of Sub-Saharan African countries in 2020 amounted to 44pc percent of Gross National Income (GNI), one of the highest it has ever been. For many low-income Sub-Saharan countries, the external debt growth has outstripped the domestic economic growth rate.
While these percentages may not be a cause for worry compared to the public debt of developed countries like China and the United States, the debt service, especially non-multilateral debt service and defaults, may gallop in the near term. Bilateral credit, especially by the likes of China, India and Japan, could be the biggest casualties leading to a political confluence of ideologies. China has been the largest creditor of all low-middle income countries in the world, including the Sub-Saharan countries. One can imagine the socio-political influence of China in times of debt defaults in these countries. In this regard, the World Bank has already sounded warning bells for Angola, Pakistan, Maldives, and Sri Lanka.
Falling exports and equity inflows are two fundamental reasons to test the debt service capabilities of Sub-Saharan Countries. Fall in exports increases both capital and current account deficit and restricts the ability of a nation to service foreign currency debt. Multilateral initiatives like Heavily Indebted Poor Countries (HIPC), Debt Service Suspension Initiative (DSSI -G20) and Multilateral Debt Relief Initiative (MDRI) are seen to benefit these countries marginally in the long run. Nevertheless, it is a vicious circle. A high domestic growth rate is the key to success. Unfortunately, for the Sub-Saharan countries, this is easier said than done.
An increase in Gross Domestic Product (GDP) or GNI is a product of an increase in the domestic production of goods and services, which inter alia depends on capital formation, which in turn purely depends on equity inflows, corporate investment, and individual domestic saving rate. High tax rates and a bad tax regime has historically desisted global investors from investing in Sub-Saharan countries.
Net equity inflows (NEI) have been falling in low-middle income countries, especially for those in Sub-Saharan Africa. During the height of the pandemic and thereafter, China and India garnered more than half of global FDI inflows purely due to containment of the pandemic and relaxation of barriers to foreign investment. Lifting foreign exchange restrictions in major industries, piloting free trade zones, and diversifying FDI in the technology-related service sector were key to such high FDI inflows. Some African countries have replicated the success of these Asian nations and are currently enjoying the fruits. However, for the rest of Sub-Saharan Africa, it is the same old story of missed opportunities.
Another critical aspect that chains the domestic growth is domestic tax rates and tax administration. Recently the OECD announced a global deal to enforce a minimum tax rate of 15pc on corporates wherever they operate. One hundred thirty-six nations signed the deal, excluding Kenya, Nigeria, Pakistan, and Sri Lanka. The minimum tax rate is a new benchmark and has great significance when it comes into force in 2023. Governments may set whatever tax rate they want; however, the deep-pocketed manufacturers and service sector multinationals will scout investment destinations that peg their tax rates closer to 15pc. Tax administrators and regulators in this region must understand that a lower tax rate and the larger tax base is the only option for increasing domestic investment and GDP.
The COVID-19 pandemic has created an excellent opportunity for resetting public programs that include the public debt, domestic taxation and FDI policies to increase GDP and efficient public debt administration. The leadership of Sub-Saharan countries may either perish or prosper according to their capacity to benchmark their policies with successful developing nations elsewhere. The debt created for themselves will grow bigger and bigger, severely restricting their ability to steer the economy.
PUBLISHED ON Oct 16,2021 [ VOL 22 , NO 1120]
Commentaries | Sep 07,2019
Commentaries | Apr 04,2020
Radar | Jun 20,2020
Commentaries | Jul 24,2021
Fortune News | Dec 28,2019
Obituary | Dec 05,2020
Radar | Oct 23,2021
Radar | Aug 06,2022
My Opinion | Jul 17,2022
Viewpoints | Sep 03,2022
Photo Gallery | 60502 Views | May 06,2019
Photo Gallery | 52451 Views | Apr 26,2019
Fortune News | 49871 Views | Jul 18,2020
Fortune News | 49099 Views | Sep 01,2021
Commentaries | Dec 04,2022
Life Matters | Dec 04,2022
My Opinion | Dec 04,2022
Sunday with Eden | Dec 04,2022
Agenda | Dec 04,2022
Editorial | Dec 04,2022
Jul 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
Nov 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
Nov 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
Oct 16 , 2021 . By HAWI DADHI
Residing in a country with no capital market, an organised marketplace for trading se...
Leaders of the National Election Board are in a charm offensive mood, of a sort. Last week, they organised a rare tour for members of the me...
When the country's most senior diplomats and envoys return back to their posts after two-week debriefings, they leave behind a point or two...
Dec 4 , 2022
Last week saw enraged university lecturers' threatening to stage a strike. They addre...
Nov 26 , 2022
In the wake of the liberalization of the telecom sector, Ethiopian authorities have m...
Nov 19 , 2022
The rounds of talks to end wars in Ethiopia held in Pretoria, South Africa, and Nairo...
Nov 12 , 2022
Two weeks have passed since negotiators from Ethiopia's federal government and the TP...
What are the odds of seeing a housemaid who loves the job dearly and wakes up every morning to do the chores with excitement? Well, this...
Dec 3 , 2022
The nostalgia for the combustible engine, with the noise and smell of burned fossil f...
Dec 4 , 2022 . By MUNIR SHEMSU
A self-proclaimed industrial park alias "Hawassa Textile & Industrial Park" canno...
Dec 4 , 2022 . By BERSABEH GEBRE
Awash Bank shareholders voted to boost the paid-up capital to 55 billion Br in the ne...
Dec 4 , 2022 . By RAHEL BOGALE
The expansion project under the country's largest referral hospital runs aground due...
Or see contact page