The European Business Council for Africa

This week’s editorial comes in the form of our new podcast, which looks at the problem of reading too much into gross domestic product (GDP) figures.

This comes as the African Development Bank warns that Africa’s growth could contract by 3.4% in 2020 due to the virus pandemic. At first glance this sounds like a drastic change in fortunes from the days of 5% average growth across the continent in recent years, driven by high commodity prices and booming investment.

Yet a more nuanced look quickly demonstrates the limits of GDP data in assessing a country’s economic and development prospects, which can actually distort or even misrepresent key indicators.

Despite this GDP statistics are the go-to for economic analysis, often used as the primary indicator of where a country is heading.

The Nurmara team looks at the problems of relying too heavily on GDP data, why this happens, and what some better alternatives might be.

You can listen to the full discussion, which also includes our take on other interesting stories doing the rounds, on Spotify or Apple Podcasts, or by clicking the image below.

Read the full article here.

In a break from the usual format, this week’s editorial comes in the form of our new podcast, which looks at plans to start trading under the African Continental Free Trade Area (AfCFTA) in early 2021.

The original date of July 01, 2020 has been pushed back due to the coronavirus, with initiative’s lead official vowing to press on with implementation regardless of what happens with the pandemic.

On paper this is a major milestone for a plan aimed at nothing short of unifying the continent’s 54 economies into a single, $3tr market, in turn transforming intra-African trade.

The rapid transition from launch in early 2018, to ratification in 2019, and planned active trading by 2021, raises important questions about Africa’s ability to execute on such an ambitious plan.

From underdeveloped infrastructure, to poor trade facilitation, patchy political will, and the region’s first recession in decades - the AfCFTA faces steep obstacles.

The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy.  This conversation with Linda Calabrese – research fellow and development economist at the Overseas Development Institute in London – explores China’s loans to African countries, and the impact COVID-19 (and the resulting economic crisis) could have on debt payments.

Explain the impact of COVID-19 on African countries’ debt vis-à-vis China.

With their economies hit by the COVID-19 crisis, African countries face a double health and economic challenge: they need to allocate resources towardS protecting the health of their citizens, while trying to minimize the negative economic outcomes of the pandemic. At the same time, they are burdened by their debt. Many African countries are paying back what they borrowed and have little room to divert these resources towards more pressing health and economic needs.

China is widely regarded as Africa’s largest bilateral creditor. The Chinese government, banks and SOEs [state-owned enterprises] are estimated to hold 17 percent to 24 percent of Africa’s external debt. But African countries also owe money to other governments, to multilaterals, and to the private sector. The latter is estimated to hold 30 percent of Africa’s total external debt, upward of $130 billion.

South Africa’s government will need to cough up at least $580m in new bailout funding for its failing national carrier South African Airways by July 15, according to details of the latest rescue effort for the carrier released this week.

This is in addition to around $940m already set aside to cover spiralling debt costs and a restructuring plan for the airline, which was placed into ‘business rescue’ - i.e. bankruptcy protection - in December.

The airline has not made a profit since 2012, notching up an estimated $1.6bn in losses in the last 13 years, and has already cost state coffers an estimated $950m in bailouts over the last decade. Additional losses of $345m are projected over the next three years.

It is almost law of nature. Just as the female praying mantis eats her mate after copulation, so too can borrowers and lenders fall swiftly out of love. One minute they are sweetly wooing each other to consummate a deal. Then, the moment it is done, they are at each other’s throats.

So it is odd that African governments and their creditors have not yet fallen out. They have plenty to quarrel about. Africa’s debt crisis has been simmering for some time. Two years ago the imf was already anxious about a growing number of African countries in “debt distress” or at high risk of it. This crisis was brought to the boil by covid-19, which has caused economies to shrink and tax revenues to plunge. Governments have ramped up spending to fight the virus. Investors are scared. In recent weeks the bonds of nine countries have traded at prices indicating that they might not be repaid.

The imf and World Bank have lent emergency cash, but a financing gap of at least $44bn remains. Various bigwigs have called for debt relief, including Abiy Ahmed, Ethiopia’s prime minister, and Larry Summers, a former American treasury secretary. Yet neither borrowers nor lenders seem enthusiastic.

The father of development economics and the father of African nationalism did not take long to fall out. Arthur Lewis had made his name studying industrial revolutions. Kwame Nkrumah, Ghana’s first prime minister, had made his resisting British rule. On independence in 1957 Nkrumah invited Lewis to be his adviser.

It seemed a wise pick. Lewis was astute, respected, and trusted in anti-colonial circles. Later, he would win a Nobel prize for economics (the first black person to do so). In a landmark paper, he argued that in developing economies people were poor because they were in the wrong jobs: move them from subsistence farms into factories and commercial farms and the economy would grow.

The Paris Club, which represents major creditor nations, has announced the suspension of debt service payments for 12 countries including Ethiopia, Chad and Republic of Congo.

This is part of a G20 debt relief initiative to help poor countries weather the coronavirus. Calls for debt relief have become one of the major themes of the crisis, even compelling reluctant China to announce debt repayment suspensions for dozens of developing countries.

Africa, where dozens of economies were already struggling to service soaring debt before the virus, has quickly become the focus of relief efforts.

All of this may give the impression that there’s meaningful help on offer. 

Last month, social media became awash with footage of authorities in China maltreating African residents. In the city of Guangzhou, African migrants were evicted from apartments and denied access to restaurants. A McDonald’s put up a notice saying “black people cannot come in”.

The reaction across Africa was of widespread indignation. #ChinaMustExplain trended as some called on their governments to close Chinese embassies, deport Chinese nationals and recall their ambassadors from Beijing.

African governments scrambled to respond. Ministers made statements on twitter, held meetings, and insisted they would not tolerate such behaviour. Analysts wrote of a “unprecedented rupture” in Africa-China relations.

Uganda’s president Yoweri Museveni this week said he expects the country’s tourism industry to lose $1.6bn in revenue due to the coronavirus pandemic.

Tourism was the country’s main foreign exchange earner in 2017 according to government data, bringing in $1.45bn - putting the $1.6bn figure into context.

Uganda isn’t the only place feeling the pain.

Africa can mount a stronger COVID-19 response strategy by using regional trade blocs to coordinate, consolidate, and connect resources across the continent.