Africa's development financing is a big headache

PETER KAYULA
Correspondent | Friday October 29, 2010 00:00

 However, a group of African researchers states that the quest by many countries in the continent, with exception of South Africa, to transform their economies through industrial development financing seems has run into a cul-de-sac.

In a draft research finding paper ahead of its presentation and publication in Zambia this month, the researchers give reasons for the failure of development financing in Africa.

At the same time, they paint a gloomy picture of efforts by African countries to, once again cope with the worst of their economic problems.

 The research team, under Stonemark Media Services of Zambia, whose work was done in three African countries, stresses that lack of financing by commercial banks in industrial development has contributed to stagnation of investment in Africa.

Other reasons include the failure to achieve targets for the African government sectors as a result of lack of feasibility studies and advanced stages of preparation due to lack of experienced staff in project design and implementation, which has slowed down the execution of projects.

The research done under one year states that ministries and provincial planning officers in Africa fail  to produce even  those reports needed to facilitate evaluation of the extent to which planning had been carried out and the African governments' treasury general financial control of ministerial spending is  inadequate.

'Despite the limits of debt servicing capacity, especially in international lending, debt overhung, high interests returns demanded by the banking institutions, collateral security dispensation, insufficient information on the debtors financial position or accurate assessment of the borrowers' ability or willingness to repay, monetary and financial institutions still remain the first base towards the attainment of  industrial development.'

Banks contribute in the provision of short-term credit and long-term investment funds to facilitate establishment of essential industrial and agriculture projects, as credit is expanded,' the researchers hinted.

Central banks shortly after independence: African governments took measures to increase national control of their monetary and banking systems.

The first step was the establishment of the central bank. It was originally set up under the national Act and hence the sole issuer of currency.

In a Republican country other stated objectives included the maintenance of internal stability and external balance of payments. In the commercial banks, the aim is to shift the direction and increase the volume of credit. 

At the time of independence, the commercial banks of African countries were almost owned by foreign interests.

Since the commercial banks are the primary source of short-term credit for investment in the private sector and are potentially an important source of credit for government development projects, the question of the formulation of appropriate policies towards the institutions was of pressing importance.

The chairman and managing director of Tanzania National Bank of Commerce, A.J Nsekela, addressing a UNIDO seminar in Dar Es Salaam on 27 January 1969 entitled 'The Place of Financial Management in Industrial Development', said:

'In developing countries, investment resources are so pitifully small and the demands upon them so excessively large that their prudent allocation becomes a matter of paramount importance.

'If development is to proceed at any politically acceptable rate, efficient resource allocation and avoidance of waste should in theory become matters of the highest priority....as a consequence of this change in ownership (of productive enterprise) we have not only increased  the volume of resources available to Tanzania by reducing outflows of scarce foreign exchange, and by retaining profits in Tanzania for use in the development budget, but we have also gained complete control of the policies of those enterprises....'.

The researchers predict that continued interaction of key variables in the lending and borrowing of development cash from associated institutional structures is likely to create a sound integrated economy capable of increasing production and enhancing living standards on the continent.

While the standards of living of the majority of Africans are very low, the draft research paper reveals that there is plenty of evidence to suggest that the provision of short-term or long-term loans from commercial banks has benefited some groups and individuals and some large companies.

The objectives of the research, whose findings will be presented at an investment conference to be held in Ndola, Zambia this month-end, include the creation of awareness at policy and decision making levels on the need to support participatory development financing methodologies so as to build the capacity of local institutions and the raising of awareness to enable communities to define their demands for development.

However, some sources with business interests in Africa have questioned the lighter side of the research in development financing when banks are always asking for high interest rates and seeking collateral security which cripples the ability of many investors to participate.

The fear to engage in business in Africa is perhaps best described in an article in an American weekly entitled: 'Enterprise: Profits for Africa'.

The article asserts that several years after two thirds of Africa had been liberated, the reactions of most potential investors were summarised by a European businessman in Kenya's capital, Nairobi.

He said: 'Let's face it. Africa investment is dicey. Why risk your shareholders' money?'

The article went on, however, to explain that for one great company, the answer has been: 'Why not?' The company is Lonrho. The name is a contraction of its earlier title, London and Rhodesia Limited.

But researchers, in the draft copy, boldly assert that abstract debates about the view of commercial banks as money-mongers interested only in interest returns and business risks approaches, are not likely to be very fruitful.

The draft research copy says upon the attainment of independence, East African governments considered the possibilities as well as the difficulties of reshaping the inherited monetary and financial institutions to ensure that surpluses produced were re-invested to finance their planned strategies for development.

The financial institutions' structure inherited from the colonial era was founded on the assumption that private profit making enterprises constituted the necessary engine for development.

The monetary and banking systems were controlled by foreign private banking interests, the research copy stresses.

The first generation of African leaders is fast being replaced by relatively better educated leaders capable of learning from their predecessors.

But when African governments began, under the guidance of the World Bank and the International Monetary Fund (IMF), to implement austere economic reform programmes, mainly the Structural Adjustment Programme (SAP) which meant withdrawal of subsidies, increase of prices, retrenchment of workers, imposition of fees for educational and health services, the measures affected mostly those who are already suffering.

 The World Bank estimates that 70 percent of Zambians live below the poverty line, so SAP has meant widespread suffering even if some of the better off sections of societies experienced improvements in their living patterns.

In the Southern Africa oil producing country, Angola, the government whose industrial development financing has changed the country within a short period of time after attaining independence, will launch a complete overhaul of its tax regime to improve collection of revenue, especially from corporate companies.

Minister of State, Carlos Feijo, said last Friday that a management consulting firm - Mc Kinsey and Company - has been hired to help advise on how to fix a tax regime that has not been updated since the end of the bloody civil war in 2002.

The kind of funds required for industry include long-term loans for the initial heavy investment in plant and basic capital equipment, medium term credit for financing purchases of some kind of machinery and short-term credit to finance the day-to-day operations of the industry.

In Kenya, with a tourism command base, the economy will grow by 5.2 percent in 2010, a government advisory body said, a forecast that exceeds the government's previous estimates. The economy registered a positive growth of 2.6 percent last year and is on course to recovery.

The government had forecast growth of 4.5 percent for 2010 for the East African country with the largest economy which stumbled after the post-election crisis of 2007.

It is widely recognised that the problem of financing development, either through the investment of private funds, public tax revenue, public debt or returns on state corporate tax, are interrelated.

The issue is: What complex of financial institutions should be created and what kind of political policies should be pursued to ensure the most effective direction of all potential investible surpluses to the implementation of development financing strategies. (Sila Press Agency)