- May 1, 2023
- Posted by: AITRC 2
- Categories: News, Blog, Report
WEEKLY TRADE POLL FOR AFRICAN COUNTRIES
APRIL 2023
African countries face the challenge of fostering real economic sector growth while adhering to fiscal responsibility laws and regulations that limit debt accumulation. The fiscal responsibility regulation aims to increase inter-governmental fiscal cooperation in pursuit of greater macroeconomic stability, as well as to encourage fiscal restraint and competent financial management of public resources.[1] The real economic sectors, including manufacturing, agriculture, and services, play a crucial role in job creation, income generation, and poverty reduction. However, the question arises as to whether African countries can achieve substantial sectoral growth without accumulating significant debt levels, as mandated by fiscal responsibility laws. For instance, Sub-Saharan Africa’s total external debt stock in 2020 was US$702.4 billion, up from US$380.9 billion in 2012, while the debt owing to official creditors, which include multilateral lenders, states, and government agencies, grew from approximately US$119 billion to US$258 billion.[2] Real economic sector growth is critical for African countries to achieve sustainable and inclusive development. A robust real sector also contributes to improved living standards, poverty reduction, resilience to external shocks and economic diversification.
However, debt can serve as a vital source of financing for real economic sector growth, enabling countries to invest in infrastructure, human capital, and technology. It allows for capital-intensive projects and facilitates industrialization. Nevertheless, an overreliance on debt can lead to unsustainable debt levels, jeopardizing long-term development prospects and fiscal stability. Although some governments borrowing from their home capital market cause fewer debt crises, positive externality, and reduced capital outflow in the domestic capital market, many African countries choose external borrowing over domestic borrowing, which eventually imposes the burden of loan repayment.[3]
WEEKLY AFRICA TRADE POLLS (FOURTH WEEK APRIL, 2023)
As a result of this, Africa International Trade and Commerce Research (AITCR) conducted trade poll for African countries to gauge the feasibility of African countries achieving substantial sectoral growth without relying heavily on debt by evaluating the public opinion of fiscal responsibility laws and regulations into Africa’s complexities and potential pathways for sustainable development, as the fiscal responsibility law stipulates. Findings from the poll, reveal that 58 percent of the respondents assert that African countries can grow their real economic sectors without accumulating debt, as the Fiscal Responsibility Law stipulates “to a large extent”, 26 percent opined that African countries could grow their real economic sectors without securing more debt, as the Fiscal Responsibility Law stipulates “to an extent”, 16 percent said that African countries could grow their real economic sectors without accumulating debt, as the Fiscal Responsibility Law stipulates “to a little extent”. Thus, the poll findings reveal that African countries can grow their real economic sectors without taking on a lot of debt, as the Fiscal Responsibility Law stipulates.
In Africa, governments with low levels of external debt typically experience faster economic growth and greater public investment. However, high levels of external debt can stifle African public investment and economic progress. This appears feasible given that domestic saving levels in Africa are typically insufficient to generate the level of investment necessary for growth and development, necessitating the use of borrowed money to finance such initiatives. External debt may therefore have a favourable effect on investment and economic expansion. Still, African nations presumably employ external debt to cover their deficits and fund economic initiatives that can boost growth. If a nation borrows excessively above a predetermined endogenous threshold level of debt, it could have detrimental effects. African countries will need to recognize the significance of trade and institutional variables like corruption while implementing a sustained external debt strategy that promotes growth in order to benefit from the favourable effects of external debt on investment and growth, even at lower levels of external debt. The bottom line is that, as the growth-debt model recommends, African countries should only borrow when they have done a sufficient study and are confident that the borrowed funds will enhance their economies.[4]
To prevent severe economic crises, we recommend implementing the following frameworks:
i. Domestic Resource Mobilization: Strengthening domestic revenue mobilization through improved tax administration, combating tax evasion, and reducing illicit financial flows can provide sustainable funding for sectoral growth.
ii. Public-Private Partnerships (PPPs): Engaging the private sector through well-structured PPPs can attract investment, expertise, and technology to support sectoral development without solely relying on government debt.
iii. Foreign Direct Investment (FDI): Actively attracting responsible FDI can provide additional resources for sectoral growth. Creating an investor-friendly environment, offering incentives, and implementing effective investment promotion strategies can attract FDI inflows.
iv. Export-Led Growth and Economic Diversification: Emphasizing export promotion and diversification can enhance foreign exchange earnings, reduce reliance on debt, and stimulate sectoral growth. Targeted policies, trade facilitation measures, and market access expansion can drive export-oriented development.
v. Enhancing Productivity and Competitiveness: Improving productivity through investment in technology, research and development, and human capital can boost sectoral growth without heavy reliance on debt. Policies that foster innovation, skills development, and efficiency gains are crucial in this regard.
vi. Strengthening Regional Integration: Enhancing regional integration can create larger markets, promote economies of scale, and foster knowledge and technology transfer, supporting sectoral growth. African countries can prioritize regional trade agreements, infrastructure development, and harmonization of policies to maximize the benefits of regional integration.
vii. Improving Governance and Institutional Capacity: Enhancing governance and institutional frameworks is essential for effective resource management and reducing corruption. Strengthening institutions responsible for sectoral oversight, regulation, and transparency can create an enabling environment for sustainable growth.
viii. Investing in Human Capital: Allocating resources to education, skills development, and healthcare can enhance human capital, driving productivity and innovation in real economic sectors. By investing in the population’s capabilities, African countries can foster sustainable growth and reduce the need for debt financing.
ix. Strengthening Financial Sector Stability: A robust financial sector facilitates access to credit for businesses in the real sector, enabling them to invest and expand without relying heavily on debt financing. African countries should prioritize strengthening their financial sectors to support real economic sector growth. This involves implementing sound banking regulations, enhancing risk management frameworks, and promoting financial stability.
x. Building Resilience to External Shocks: African countries should prioritize building resilience to external shocks to mitigate the risks associated with debt-financed growth. This involves implementing macroeconomic stabilization measures, diversifying export markets, and developing contingency plans for managing economic crises. By adopting a proactive approach to risk management, countries can minimize the potential negative impacts on their real economic sectors.
xi. Developing Local Capital Markets: Promoting the development of local capital markets can provide an alternative source of financing for real economic sectors. Developing local capital markets enhances domestic resource mobilization and reduces dependence on external debt. African countries can establish and strengthen stock exchanges, encourage the issuance of corporate bonds, and promote venture capital and private equity investments.
xii. Targeted Sector-Specific Policies: African countries can adopt sector-specific policies tailored to different industries’ unique needs and challenges. For instance, in the agricultural sector, governments can invest in irrigation systems, provide access to improved seeds and fertilizers, and offer technical assistance to farmers. In manufacturing, policies can focus on upgrading infrastructure, facilitating access to technology, and supporting industrial clusters. Countries can promote growth and competitiveness without excessive debt accumulation by addressing sector-specific bottlenecks.
xiii. Strengthening Economic Integration: Deepening economic integration within Africa can create larger and more integrated markets, fostering sectoral growth. African countries should prioritize the implementation of regional trade agreements, harmonize trade policies, and invest in cross-border infrastructure projects. Facilitating the movement of goods, services, and capital within the continent promotes intra-African trade, reduces dependence on external markets, and enhances the growth potential of real economic sectors.
xiv. Enhancing Skills Development and Innovation: Skills development and innovation investments are vital for the growth of real economic sectors. African countries should prioritize education and vocational training programs that align with the needs of industries. This ensures a skilled workforce that can drive productivity, technological advancement, and entrepreneurship. Encouraging innovation and supporting research and development activities can also boost the competitiveness of African industries, reducing the need for debt financing.
xv. Strengthening Regional Value Chains: African countries can collaborate to strengthen regional value chains, promoting intra-African trade and industrialization. Countries can enhance sectoral growth by identifying areas of complementarity and encouraging value-added production within the region. This approach reduces dependence on imports, creates jobs, and fosters economic diversification.
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[1] https://www.thisdaylive.com/index.php/2021/07/16/how-the-fiscal-responsibility-law-can-fix-the-economy/
[2] https://theconversation.com/debt-distress-in-africa-biggest-problems-and-ways-forward-182716
[3] https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0264082
[4] https://www.researchgate.net/publication/353025361_The_external_debt_burden_and_economic_growth_in_Africa_a_panel_data_analysis
