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ChangeinAfrica.com

Africa's Economy: A victim of Dept-trap diplomacy or a willing participant


 

Economic Jargon

Firstly let’s get some definitions out of the way. GDP stands for Gross Domestic Product and is the monetary value of a country in terms of traded goods and services. The larger a country’s GDP the bigger their economy. It is measured in dollars.

Secondly, GDP per capita is the average value of contribution made by each individual in a country. It is particularly used as a measure of the quality of life in a country. It is measured in dollars.

GDP growth is the rate at which an economy is expanding or contracting and is measured in %.

Creditor is the party loaning out money to another party.

Debtor is the party borrowing money from the Creditor.

Cashflow is difference between cash flowing into a business and cash flowing out of a business.

 

Overview

As a continent Africa has one of the largest growing economies in the world. In 2019 Africa had a nominal GDP of $2.6 trillion with a growth rate of 3.7%. Nigeria, South Africa and Egypt top the list of countries in Africa with the largest economies as shown by the 2019 GDP bar chart below. Nigeria had a GDP of $410 billion in 2019, which amounts to roughly 16% of Africa’s total GDP, making it the highest gross domestic product in Africa. South Africa's GDP was worth $350 billion and ranked as the second highest on the continent. Thereafter, three North African countries - Egypt, Algeria, and Morocco followed in the list as shown in the Statista chart below.

GDP African countries
GDP African countries

Causes of economic growth in Africa

Economic growth can be brought on by different factors but the three key ones in Africa are:

1. Foreign Direct Investment

Between 2014 and 2018, Statista.com reported that 16 percent of Africa’s Foreign Direct Investments (FDI) originated from China. Chinese direct investment on the African continent represented the main source of FDI, whereas the United States and France held eight percent of the total FDI, respectively.

Foreign direct investment in Africa
Foreign direct investment in Africa

2. Trade in terms of import and export, which could be domestic or foreign.

For example a large part of Nigeria's GDP is generated from exportation of crude oil. Nearly 95 percent of all export value in Nigeria comes from mineral fuels, oils, and distillation products. While in South Africa industries and services make up the largest part of GDP and they also export a large amount of valuable metal and minerals. Statistics show that in Africa crude oil and precious metal are the most export commodities as shown in the map below. Exporting of goods and services within Africa and outside Africa is a big boost to Africa’s economy as it brings in much needed cash flow.

Map of African exports
Map of African exports

3.Growth in population

Recent forecast by The economist shows that by 2050 Africa’s population will double from 1.2 billion to 2.5 billion, with Nigeria‘s population growing from 200 million to 400 million by 2050.

From a Macroeconomics point of view, a growth in African population will lead to an increase in demand for goods and services. This could be a plus or minus to Africa’s economy. It’s a plus if Africa has adequate supply to meet the increase in demand. This would mean an increase in trade of goods and services within Africa, causing the economy to expand. On the other hand, if Africa doesn’t have the capacity to meet the growing demand caused by an increase in population, this will lead to commodities becoming scarce, prices will go up for goods and service, and eventually inflation will set in. According to the author of the book called “The fastest billion” Africa’s GDP is forecasted to grow from $2 trillion today to $29 trillion in today’s money by 2050.

In the next section we are going to examine how realistic it is to assume Africa’s economy will grow in 15 folds. More specifically, who will own the economy.


The impact of decarbonisation on Africa's economy

For Africa's economy to grow from $2 trillion today to $29 trillion in 2050, alot of conditions will have to be fulfilled. For instance, Africa would have to export more than they import to ensure they have a positive cashflow. This could largely be impacted by the reliance of Africa on crude oil exportation. Africa's largest economy is Nigeria, and 95% of their revenue is generated from exportation of crude oil. With most western countries commited to decarbonisation, demand for crude oil will definitely fall by 2050, while demand for renewable and green energy will rise. If Nigeria's economy doesn't divest away from crude oil exportation by 2050 their economy will definitely contract and we won't be surprised if they end up in long term recession. This will significantly impact the growth of Africa's economy because Nigeria is its largest contributor to GDP.


On the contrary, South Africa, which has Africa's second largest economy has a more diverse economy when compared to Nigeria. They are the world's largest producer of precious metals such as gold, chromium and platinium. They are also involved with automobile manufacturing, metalworking, technology, machinery, textiles, iron and steel, IT, chemicals, fertiliser, foodstuffs, manufacturing and commercial ship repair. What's more impressive is that Nigeria was only $60 billion in GDP ahead of South Africa in 2019, yet South Africa don't export crude oil. We forecast that by 2050 South Africa will be Africa's largest economy because a the reduction in crude oil demand won't impact South Africa the way it would impact Nigeria's economy. Still, even if South Africa becomes Africa's largest economy, it still will not be able to cover the deficit left by Nigeria's contribution to Africa's GDP. The only solution is for Nigeria to diversify its economy and grow other sectors such as manufacturing, farming and Fintech. The demand is clearly there but most of it is being addressed through importation. Nigeria needs to stop importing goods/services and instead focus on creating production capability and capacity at home.


Africa’s growing debt

I like comparing economies with businesses because it makes more sense when you are explaining stuff to your audience. Africa's economy is like a business and in business you finance operations either through taxation, borrowing or other sources of cashflow. A healthy economy is one that maintains a good balance between cash inflow (such as corporate tax, export revenue, returns on foreign investment) and cash outflow (such as debt and interest paid on borrowing). If your cash outflow exceeds yours cash inflow, then your economy is effectively in recession and owing more money than it is receiving. Africa's growing debt/borrowing when compared to the value of their economy in GDP is alarming and a cause for concern as shown on Statista’s bar chart below.

Below are a few facts and forecasts our research dug up from the public domain:


Depth Trap Diplomacy


We have established that Africa’s debt, especially in Sub Sahara African countries, is growing at an alarming rate when compared to their GDP. We would now like to examine the creditors instead of the debtors. Using the country-business analogy, let’s briefly look at a typical creditor debtor relationship.


In business creditors loan money to people based their capability to afford debt and their history of paying back debt. This is usually referred to has the credit worthiness of a person or business. A lot of factors are considered when loaning a person or business money. Two important ones are Cashflow and income stream. If a person or business doesn’t have a constant source of income then no creditor will loan them money. More importantly if their cash outflow is more than their cash inflow, no business will loan them money even if they have a constant source of income. How does this relate to China’s foreign direct investment in Africa? Well China is the creditor in this story, loaning money to African countries that already have growing debt but more importantly they are loaning money to African countries with a negative cashflow. These countries spend more money than they generate from local trade and export. To sustain their economy they end up borrowing to cover their budget deficit.

The term used to describe what China is doing to Africa is called Debt-trap diplomacy. The creditor country intentionally extends excessive credit to a debtor country already struggling with debt or on the brink of becoming cashflow negative. This induces the debtor into a debt trap because any surplus cashflow goes towards paying interest and since these countries still need cashflow they borrow more. This is done with the intention of extracting economic and political concessions from the debtor country when it becomes unable to meet its debt repayment obligations. The conditions of the loans are kept secret and the borrowed money commonly paid to contractors from the creditor country.


Over the last decade China has increased its investment in Africa. According to the Jubilee Debt Campaign, a charity that calls for the debts of developing nations to be written off, as much as 20 percent of African governments’ external debt is owed to China. Between 2012 to 2017, Chinese loans to Sub Sahara Africa grew tenfold to more than $10bn per year, according to the ratings agency Moody’s. In 2001, Chinese loans totalled under $1bn.

Moody rating agency did note that China’s loans to African countries will help to address the persistent financing gap but also highlighted the lack of transparency over the conditions attached to Chinese lending, and a lack of reform and governance requirements compared with those required by multilateral official creditors, may limit the long-term benefits to Sub Sahara Africa.


Conclusion

It is clear Africa's GDP is growing especially in Sub Sahara Africa, but there are risks to this economic growth forecast that need to be addressed now. One them is the over reliance of Nigeria (Africa's biggest economy) on Crude oil exportation, which accounts for 95% of their revenue. The second and most important one is the growing amount of debt as a percentage of Africa's GDP. This leads us the most important point, that China using Dept trap diplomacy to leverage Africa into economic and political concession which could see us going back to an era of colonisation where the western world exploited us for our resources. Our African leaders need to act now to reduce and control the debt we have accrued from China and ensure we don't fall into a debt trap that would see our economy grow but leave us without a controling interest in our own economy. Unfortunately the statistics do show that Africa is a willing participant in China's Dept trap diplomacy. We leave you with a chart from Financial Times showing the outstanding debt different African countries have with China. Angola currently owes China about $3 billion while Nigeria owes China.


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