Page 4 - NILE EXPLORER

Editorial

External Debt and Capital

Flight in Sub-Saharan

Africa

n page 21, we analyze the rapid it is difficult to determine the sustainable Fred O. Oduke - Managing Editor
simultaneously an importer and an
Obuild-up of loans that has pushed level of such ratios, their chief practical exporter of capital.
East African countries close to a debt value is to warn of potentially explosive
crisis. The five East African Community growth in the stock of foreign debt. There are four main ways through which
(EAC) member countries - Burundi, If additional foreign borrowing capital from Africa is exported: The
Kenya, Rwanda, Tanzania and Uganda, increases the debt-service burden more first is through capital infrastructure
excluding South Sudan - have together than it increases the country’s capacity projects whose financiers also provide
amassed more than $100 billion to carry that burden, the situation must contractors to the projects, and employ
domestic and foreign debt, stretching be reversed by expanding exports. If it foreigners at the expense of locals,
their repayment budgets to the limit. is not, and conditions do not change, this is besides sub-contracting supply
Kenya and Burundi have the highest more borrowing will be needed to make construction materials and machinery
for construction to companies from the
loan distress profiles relative to their payments, and external debt will grow lending country.
EAC peers, with their debt to GDP ratios faster than the country’s capacity to
projected to exceed 60 per cent by the service it. The second, is corruption, where
end of this year. According to the IMF, EAC countries government officials and politicians
In economic policy, it is generally closed 2019 with very high debt-to-GDP collude to inflate the real cost of
infrastructure projects, with much of
expected that developing countries, ratios, with Burundi’s ratio reaching a
facing a scarcity of capital, will acquire high of 63.5 per cent from 58.4 per cent the proceeds laundered and invested in
external debt to supplement domestic the previous year. It is followed by Kenya western capitals. The net effect being that
saving; however, the rate at which they and Rwanda whose debt-to-GDP ratios profits are expatriated, local suppliers
borrow abroad - the “sustainable” level of increased to 61.6 per cent and 49.1 per and local economies denied revenue, as
foreign borrowing - depend or be relative cent from 60.1 per cent and 40.7 per cent this funds are send back to the lending
to three factors, foreign and domestic respectively during the same period the country and finally, the project fails
saving, investment, and economic previous year. to have impact on employment levels
growth. Countries in sub-Saharan Africa have respectively. Foreign employees remit
money back home.
It should be standard policy that “growth generally adopted a development
is relative to debt”: meaning that a strategy that relies heavily on foreign The third is tax evasion, where foreign
country should borrow abroad as long as financing from both official and private investors and local businesses alike use
the capital thus acquired produces a rate sources. Unfortunately, this has meant import/ export processes to over invoice
of return that is higher than the cost of that for many countries in the region the or under invoice in dealing with foreign
the foreign borrowing. In that event, the stock of external debt has built up over suppliers or when importing, with parts
borrowing country is increasing capacity recent decades to a level that is widely payment being retained in exporting/
and expanding output with the aid of viewed as unsustainable. Importing countries. Finally, is the more
foreign savings. The massive growth in external debt blatant procurement in government,
In theory, it is possible to calculate the in sub-Saharan Africa - particularly particularly, buying from abroad, where
over-invoicing collusion is the norm.
sustainable level of foreign borrowing, from China - over the past two decades
based, for example, on the terms, has given rise to concerns about the Have you ever wondered why in Africa,
maturity, and availability of foreign detrimental effects of the debt on it is not the businessmen who are the
capital. In practice, however, the task is investment and growth, principally the richest men and women; rather it is the
nearly impossible, since such information well-known “debt overhang” effect. civil servants, state officers and politicians
is not readily available. Furthermore, there is now considerable that are wealthy. It is disturbing that
Thus, various ratios, such as that of debt to evidence that the buildup in debt is as the debt burden increases on the
exports, debt service to exports, and debt increasingly accompanied by increasing continent, so is the number of wealthy
to GDP (or GNP), have become standard capital flight from the region. In men and women, leaving country coffers
measures of sustainability. Even though other words, sub-Saharan Africa was empty and the majority poor.

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