- April 17, 2023
- Posted by: AITRC 2
- Categories: News, Blog, Report
WEEKLY TRADE POLL FOR AFRICAN COUNTRIES
APRIL 2023
In recent years, African countries have sought sovereign loans to finance development projects to enhance their industrial capacities and infrastructure development from international financial institutions such as the World Bank, the International Monetary Fund (IMF), Africa Development Bank, African Export-Import Bank and other funding partners. While sovereign loans can provide short-term financing for development projects, they also pose a risk to the sustainability of African economies when loan repayment default is recorded.
Loan default, reflected in poor loan repayment practices, is an issue that has received attention from researchers and stakeholders, but in Africa, limited practical measures exist to address this challenge. Loan default is defined as the failure to repay approved or disbursed loans to borrowers, which is worrisome because it affects the financial institutions, people, businesses, and the economy as well as the ability to sustain industrial expansion. In Africa and around the world, loan default continues to be a serious danger to financial institutions and the sector as a whole.[1]
The occurrence of loan defaults has a number of detrimental effects. According to researchers, loan default resulting from non-performing loans has the potential to slow economic growth, reduce private investment, and raise unemployment because there won’t be enough money available for business owners with legitimate investment objectives to carry out the planned projects. This limits their potential contribution to sustainable development.
WEEKLY AFRICA TRADE POLLS (SECOND WEEK APRIL, 2023)
In light of this, Africa International Trade and Commerce Research (AITCR) conducted a weekly trade survey for African nations to analyze and gauge their opinions of Africans on how sufficient their countries’ loan repayment strategy is to sustain industrial expansion and intra-African trade. Finding from the poll, reveals that 20 percent of the respondents assert that African countries’ loan repayment strategy to sustain the industrial expansion and intra-African trade is “very sufficient”, 30 percent opined that African countries’ loan repayment strategy to sustain the industrial expansion and intra-African trade is only “little sufficient”, while 50 percent said that African countries’ loan repayment strategy to sustain the industrial expansion and intra-African trade is “not sufficient”. Thus, the poll reveals that African countries have insufficient loan repayment strategies to sustain the industrial expansion and intra-African trade, with the high level of risk involved with lending, which in turn drives the possibility for loan repayment default, preventing future access to credit across the continent.[2]
Consequently, to sustain the industrial expansion and intra-African trade, African countries must develop loan repayment strategies that align with their development priorities. There are several strategies that African countries can adopt to repay sovereign loans; they are as follows:
A. Strengthen Export Diversification and Import Substitution
African countries must develop policies that promote value addition, export diversification, and import substitution. Governments must invest in the development of value chains that can increase exports and reduce imports. This will enable African countries to generate more foreign exchange, which can be used to repay their loans. Import substitution will also promote the growth of domestic industries, create jobs, and reduce the dependence of African economies on foreign goods and services.
B. Promote Fiscal Discipline
African countries must exercise fiscal discipline to ensure that they do not accumulate excessive debts. Governments must maintain a balanced budget and avoid borrowing beyond their repayment capacity. African countries should develop policies that promote revenue mobilization and reduce wasteful spending. Governments must also prioritize investment in critical sectors such as education, health, and infrastructure, which can spur economic growth and development.
C. Negotiate Favorable Loan Repayment Terms
African countries must negotiate favourable loan repayment terms with their lenders. This can involve lengthening the repayment period, reducing interest rates, or both. Governments should also negotiate debt relief and debt forgiveness where necessary. This will provide African countries with the breathing space they need to implement their development programs and repay their loans.
D. Strengthen Regional Integration and Intra-African Trade
The African Continental Free Trade Area (AfCFTA) agreement provides African countries with a unique opportunity to increase intra-African trade and promote industrialization. African countries must seize this opportunity by developing policies and reforms that promote regional integration and intra-African trade. Governments must invest in the development of regional infrastructure, such as roads, railways, and ports, which can reduce the cost of doing business and promote regional trade.
E. Enhance Transparency and Accountability
African countries must enhance transparency and accountability in their loan management and repayment processes. Governments must ensure that loans are used for their intended purposes and that the benefits are realized. They must also provide timely and accurate information on their debt levels and loan repayment schedules. This will enhance the credibility of African countries in the international financial markets and improve their access to finance.
Conclusion
African countries must develop sustainable loan repayment strategies that will ensure continued economic growth and development, particularly in sustaining industrial expansion and intra-African trade. Export diversification, import substitution, fiscal discipline, and debt restructuring are some of the strategies that African countries can adopt to repay their loans. African countries need to continue implementing these strategies and ensure their loan repayments do not compromise their other development priorities. The AfCFTA agreement provides African countries with a unique opportunity to increase intra-African trade, currently at 16% and promote industrialization. African countries should seize this opportunity and ensure that their loan repayment strategies are sufficient to sustain industrial expansion and intra-African trade. In Africa, it is important to have a solid loan repayment strategy in order to achieve sustainable industrial expansion.
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[1] Full article: Improving loan repayment in Ghana: Does financial literacy matter? (tandfonline.com)
[2] ‘Why SMEs experience difficulty getting loans’ – Vanguard News (vanguardngr.com)
