Wednesday, February 21, 2024
NewsAfrican leaders must stop abusing borrowed funds: ECA economists

African leaders must stop abusing borrowed funds: ECA economists

Economists of the United Nations Economic Commission for Africa (UNECA) have warned African leaders against the practice of utilizing borrowed public funds for “useless” projects.

The advice came during the presentation of the World Economic Situation and Prospects report earlier this month in Addis Ababa. The report forecasts economic growth in Africa will be modest this year, owing to high borrowing costs, geopolitical instability, and climate change impacts.

UNECA economist Hopestone Kayiska Chavula (PhD) stressed the significance of the constraints posed to African economies by debt repayment.

“The most important thing we should know is that borrowing is not bad, but we borrow for what? How are we going to use the money that we borrow? Where is it going?” asked Chavula.

He went on to critique bad spending practices.

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“I will not mention the country, but there is one country that borrowed money and used it to build something funny; there was even a joke about it, and it was an embarrassment to see that you borrow millions and build something useless because we are heading towards an election,” said the economist.

He indicated that many African countries are heading into elections and the funds their governments borrow might go into funding election campaigns.

“When we borrow, we have to invest in the productive sector. Over the long term, that money will pay back itself after 30 years. If you invest in the manufacturing sector and enhance industrialization diversification, that money will multiply itself and pay back in the long term,” said Chavula.

The economist observed that foreign development assistance as well as direct investment in Africa has declined over the years, and called for efforts to mobilize domestic resources as well as foreign investment in the continent.

Likewise, the Director of Macroeconomics and Governance Division at UNECA, Adam Elhiraika, urged African governments to focus on industries and invest in infrastructure and productive sectors that promote industrialization.

Economists also noted that average tax revenues, which were expected to top 25 percent, stand at a disappointing 16.6 percent of GDP, which is insufficient for fulfilling development priorities.

The report highlights sustainability challenges as a significant headwind to Africa’s growth prospects. According to the latest estimates, 18 countries in Africa recorded a debt-to-GDP ratio of over 70 per cent in 2023, with many of them facing debt distress.

Access to, and high cost of, development financing remains a daunting challenge, with debt overhangs preventing many African countries from accessing funds at affordable rates from international capital markets. Borrowing costs remain elevated, with estimates showing that borrowing costs for African countries are approximately four times higher than that of developed countries, according to the report.

It articulated that as Africa’s economic growth is forecasted to recover moderately in 2024 and 2025, this recovery is expected to be supported by a broad range of macroeconomic and other policy tools, mainly to minimize the adverse spillover effects of monitoring tightening that developed countries are actually practicing, which have very significant repercussions for African countries.

Many African economies faced significant inflationary pressures in 2023, largely because of high fuel and food prices.

Elhiraika said ECA is coordinating with African ministers of finance for global financial architecture reform.

“We are calling for financial reform for better treatment of African debt and debt problems and to improve access to international resources, especially at the time of foreign overseas development assistance. We need international financial institutions like the IMF, the World Bank, and others to enhance access to long-term borrowing,” he said.

Slower global growth, tightening monetary conditions and elevated inflation weigh on growth outlook and sustainable development, and geopolitical instability will continue to adversely impact several regions in Africa, notably the Sahel and North Africa, the report indicated.

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Video from Enat Bank Youtube Channel.

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