Download Economic and Institutional Reforms for Sustainable Growth in Africa

ECONOMIC AND INSTITUTIONAL REFORMS FOR SUSTAINABLE
GROWTH IN AFRICA
PAPER PRESENTED BY MR. TIMOTHY OGUNTAYO, GROUP
MANAGING DIRECTOR/CEO DESIGNATE OF SKYE BANK PLC, AT
THE
1ST
COVENANT
UNIVERISTY
INTERNATIONAL
CONFERENCE ON AFRICAN DEVELOPMENT ISSUES, MAY 5-6
2014
The Chancellor, Covenant University, Dr. David Oyedepo
The Pro-Chancellor, Covenant University
The Vice Chancellor, Professor C. K. Ayo
Chairman, Conference Organizing Committee
Acting Governor, CBN, Dr. Sarah Alade
Secretary to the Government of the Federation, Senator A.P. Anyim
Director-General, Budget Office Nigeria, Dr. B. Okogu
Professors and other leading academics
Captains of Industry
Distinguished Ladies and Gentlemen
It is a great honor to address this distinguished gathering, at the first
Covenant University International Conference on African Development
Issues. I also commend the Vice Chancellor for providing yet another
opportunity to discuss the prospects of Africa, especially in a period of
sluggish global growth. The title of my paper “Economic and
Institutional Reforms for Sustainable Growth in Africa” is topical,
considering not only the investment opportunities available in Africa
due to huge structural gaps, but also rapid changes that are taking
place on the continent and the amount of capital it has attracted in the
last decade.
We are all aware of the recent successes of emerging economies like
China and Brazil, and the investment capital they attracted in the last
decade. Interestingly, focus is now gradually shifting to developing
economies like Nigeria, South Africa, Angola, Kenya, Ghana, among
others and this is an indication that the continent is taking a positive
turn. If we take a medium to long term perspective, Africa is on the
right path, in spite of its diverse challenges. The perception gap is
closing and there are serious investors who are looking at investing in
many African countries.
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Foreign direct investments, especially from Asia, are expected to
strengthen and this could spur demand for African bonds. But this
would require coherent macroeconomic policy and foreign exchange
regime to cope with capital inflows and economic shocks that could
arise from sudden repatriation of funds.
Despite numerous challenges facing the continent, it could still be
placed as a leading frontier market and an attractive business
destination for investment. Foreign investors have been coming to
Africa to do business, as its market size provides huge opportunities
for retailers. Investments in malls and infrastructure have helped
foreign investors take better advantage of the retail market. Despite
the limited development in consumer finance, demand has grown for
formal retail.
For foreign investors, the trade and investment environment offers
both risk and significant opportunities. Ideally, projects should be
demand-led and supported by industries with big financial clout. Africa
requires infrastructure development and possesses a plethora of
potential infrastructure projects; however there is a lack of capacity to
turn ideas into deals.
CONSTRAINTS TO INVESTMENT GROWTH IN AFRICA
The economic reforms in many developing countries have, no doubt,
facilitated macroeconomic stability. However, diverse structural
problems still remain which have hindered the full exploitation of the
economic potentials of these economies.
Considering that private and foreign direct investments play an
important role in the economic transformation plan of most emerging
economies, it is imperative to address the bottlenecks that has made
Africa’s investment climate unattractive. These bottlenecks would be
discussed below:
Leadership Deficiency: Due to the nature of our public service in
Africa, cumbersome processes are introduced to transactions which in
the real sense could have been done faster and simpler; all in the
guise of red tape and procedure. Also, whereas in Europe and the USA,
the civil service is dominated by the best talents, in Africa, it is a stark
reverse.
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This has affected private sector adversely, to the extent the private
sector businesses depend heavily on government relationships and
contracts for survival, as opposed to being market driven. All these
have contributed to difficulties of doing business in many countries.
For instance, out of the 189 countries sampled on the ‘Ease of Doing
Business Ranking’ for 2013, issued by the World Bank, the
performance of most African countries was sub-optimal, e.g. the best
performing African country, Mauritius, was ranked 20, while most
other African nations’ performance was relatively poor- Rwanda 32,
South Africa 41, Kenya 129, Uganda 132, Mozambique 139, Burundi
140, Sierra Leone 142, Liberia 144, Nigeria 147, Sudan 149, The
Gambia 150, and Chad brought the rear at 189.
However, Singapore, Hong Kong/China, New Zealand, USA, Denmark,
Malaysia, Korea Republic, Georgia, Norway, and the UK were in the top
10, in that order.
Political Instability: Post independence, most African countries have
witnessed more single party dictatorship rule than democracy. Many
countries remained politically unstable and fragile for a long time due
to the predominance of unconstitutional regimes, particularly military
coups, and this hampered economic growth and development.
Foreign investors deliberately stayed away from the continent due to
political uncertainty. However, political risks have dwindled
significantly in the last decade, and this has made a lot of foreign
investors interested in Africa. Democratic elections have been held in
many countries and its impact on economic growth and development is
evident. For instance, the discussions about rising FDIs into Nigeria
and other emerging markets in the last decade, of which African
countries dominate, cannot be complete without the impact of relative
political stability, as espoused by democracy.
Cost of Doing Business: For an economy to grow faster there is
need for the inflow and sustenance of international investment. Issues
such as, multiple taxation, unpredictable regulations, weak policy
actions and regulatory barriers tend to make the investment
environment unfriendly, discouraging foreign investors from investing
in the continent.
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Many developing countries have a lot of work to do, in the aspect of
making the economy more competitive to attract investments.
Economic growth is highly dependent on FDIs, as such investments
support employment generation, industrialization, transfer of
technology, and the credit rating; as well as contributes to the GDP of
the economy.
Endemic Corruption: This has immobilized the machinery of many
governments such that they are incapable of discharging even the
most basic functions. Due to pervasive corruption, social services
bottlenecks still persist making it imperative for producers to make
arrangements for their own power supply, water supply, and even
security. In most African countries, individuals and businesses have
evolved to become local, municipal, and state governments onto
themselves!
Poor Infrastructure: It is obvious, that the continent suffers from
huge infrastructure deficit. That, entrepreneurs have survived the
harsh economic environment amidst inadequate infrastructure
provided by the governments is testament of their business prowess
and creativity.
The resource requirement for upgrading infrastructure is quite large,
making it important to bring in the private sector to argument the cost
thereby eliminating a significant portion of infrastructural cost that
would have been carried by the government. Areas such as, power,
roads, airports, railway etc would have to be addressed. Existing
infrastructure around the continent needs thorough upgrading in order
to support business growth, especially agriculture which thrives on low
interest loans.
Some of the consequences of these series of challenges are large-scale
poverty, docile population, domineering political systems akin to the
military, inequality in income, widening class dichotomy, and pervasive
brain drain.
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AFRICA’S GROWTH PROSPECTS
After a long period of economic stagnation and decline, Africa
experienced steady growth in the last decade, mainly due to economic
reforms and attendant increased flow of funds. Average GDP growth
was over 5% from 2000 to 2012 compared to 2% in the 1990s.
In 2013, the continent grew by 4% and growth is projected at 4.7%
growth in 2014 and 5% in 2015. Post 2008 financial crisis, growth has
been stronger in Africa than the developed economies as well as
Eastern Europe. East and West Africa have also grown faster than the
rest of the continent, driven by new investments and discoveries of oil
and minerals. Political instability has continued to constrain the growth
in Central and North Africa.
GDP growth particularly in East and West Africa have been sustained
by a combination of sound policy actions of the Central Banks and
external factors such as increase in crude prices, and foreign direct
investments. Oil and mineral exporting countries are expected to
maintain strong growth given relatively high commodity prices.
Considering the abundance of natural resources and population, the
continent has the capacity to significantly outperform its GDP growth
in the previous years. The real sectors of many economies have great
potentials for growth but they have not been fully exploited due to
poor infrastructure.
Africa’s growth trajectory is not only about its natural resources, but
about reforms, including restructuring of regulatory and policy
frameworks, which has brought about a fundamental change in the
business environment, making it a major destination for capital.
It is important to ensure that this growth remains sustainable and
inclusive. In recent time, many Africa countries have focused on
repositioning and strengthening their economies, adopting strategies
that would allow for sustainability, economic diversification, enhanced
productivity and competitiveness, employment generation, social
security and equity.
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Foreign investors continue to choose Nigeria over many other African
countries including Kenya and Ghana, for many reasons. In the first
instance, Nigeria is the largest market in sub-Saharan with a
population of over 165 million. The size of the market is all the more
attractive because of the growing and upwardly mobile middle class
and on-going consumer explosion that is being experienced. The
telecommunications sector is a Nigerian story with which we are
familiar. Given the size of its population, Nigeria is a ready market for
investors in power, oil and gas, agriculture, mining and solid minerals,
construction, and hospitality businesses.
While the growth rate of the region has been strong, some countries in
the continent have performed poorly. Growth and development in
certain economies like Guinea Bissau, South Sudan and Central Africa
republic have been hampered by macroeconomic and political
instability. Africa have also faced difficulties translating growth into
meaningful job creation, having high youth unemployment and wide
gender disparities.
TRANSFORMATION GROWTH IN AFRICA
Post-2008 financial crisis, there are indications that African countries
have grown strongly and are making steady progress in addressing
most of its challenging macroeconomic and governance problems;
although they have not fully turned the corner. Most African countries
have successfully implemented microeconomic reforms, with those
that have encouraged trade liberalization experiencing faster growth.
The IMF, the World Bank, and the Paris Club played a key role in
motivating policy changes in many African countries through its debt
relief programme. Economies that benefited from the debt relief efforts
had to adhere to the guidelines of the IMF and World Bank and this
helped reform efforts in Africa. These policies were generally geared
towards improving wealth distribution in these countries and
alleviating poverty.
The reforms in Africa have been quite successful, attracting a lot of
investors. It was not such a long time ago when there seemed to be
very strong support for state-owned monopolies in a sector like
telecommunications.
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The commitment to reforms in the regulatory frameworks,
improvements to the business environment that followed was
instrumental to attracting over $100 billion in investments,
engendering the boom we have seen in Africa’s telecom, Information
and Communication Technology (ICT) and financial sectors.
Despite having over 400 million mobile phones in use across Africa, it
appears that we have not yet fully tapped the potential of the sector.
For instance, less than 50% of Africans have mobile phones and barely
10% have access to the internet.
As Africa takes advantage of the ICT revolution, it is believed that the
next big thing is agriculture. The continent accounts for more than
one-quarter of global arable land. It imports tens of billions of dollars
worth of food each year. Because Africa currently generates about
10% of global agricultural output, it implies that there is huge
potential for growth in a sector now expanding only moderately, at a
rate of 2% to 5% a year.
For agricultural development to be achieved ongoing reforms must be
backed with significant inflow of investments in the sector. African
countries need to do more to attract private investors, notably
indigenous African investors, and to promote value addition.
In current rankings, at least one African country, Mauritius, appeared
on the list of top 30 countries for ease of doing business. In terms of
institutional reforms, Nigeria, Senegal, Burkina Faso, Botswana, and
Eqypt were among the top performers in Africa. These reforms were
mostly in the area of facilitating job creation, improving infrastructure,
and streamlining policies relating to imports and exports. Overall, the
implementation of these reforms clearly showed the commitment of
these governments in the area of establishing strong institutions and
adopting sound policies which would attract foreign investments.
In the area of export, West African countries have acted together to
promote integration in all fields of economic activities, especially in the
area of industrialization. The member states have taken many
initiatives to promote consultation and regional synergies as well as
support economic development. It has made substantial progress in
formulating initiatives particularly in the area of industrial
development.
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The move towards establishing a common market within the ECOWAS
sub-region has occasioned the need for the adoption of a CET
(Common External Tariff) which has four tariff categories with rates at
0% for essential social goods, 5% for essential/basic raw materials,
capital goods and specific inputs, 10% for intermediary products and a
peak rate of 20% for final goods. The import tariffs under the ECOWAS
CET are aimed at harmonizing trade as well as ensuring that all
ECOWAS member countries apply a single tariff.
Nigeria, for instance, has witnessed major reforms in key sectors of its
economy, namely, power, financial services, telecommunications,
agriculture, oil and gas, and maritime, among others. Evidently, the
country’s challenges in the electricity supply chain may have slowed
down the quantum of foreign investors attractable to Nigeria.
However, after a sustained neglect of the power sector, some
momentum was gained starting from the return to civil rule in 1999;
an era of reinvigoration of the planning, re-structuring, and re-focusing
of the power sector. One of the pivotal areas of the reform process
was the legislative process. It was on this premise that the Electric
Power Sector Reform Act (EPSRA) 2005 was passed in March 2005
following the recommended reform measures of the Electric Power
Sector Reform Implementation Committee (EPIC).
With the passage of EPSRA 2005, the Nigerian Electricity Regulatory
Commission (NERC) was established to monitor and regulate the
power sector. The agency is also responsible for licensing companies
to generate, transmit, and distribute electricity in Nigeria.
Subsequently, the National Integrated Power Projects (NIPPs) were
established with a view to improving the generation and associated
transmission capacity within the country.
The shipping industry has no doubt impacted on the growth and
development witnessed in the country in recent years. The industry
has undergone various reforms aimed as positioning it as the regional
hub for international freight traffic and trade in the West African subregion. Despite these development and reforms, Nigeria is yet to
become the leading maritime power in Africa.
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The Nigerian government introduced the Cabotage Act in 2003 to
enhance the activities in this sector and more importantly, to empower
Nigerians to build, own and register ships.
In the oil and gas sector, a brief review of the industry would reveal
that the laws regulating the industry have not been comprehensively
reviewed. The major laws are the Petroleum Profit Tax Act 1959 (as
amended) and the Petroleum Act 1969 (as amended), and the
Nigerian National Petroleum Corporation Act of 1977 (as amended).
These laws and other laws regulating the industry, needed to be
updated to reflect the global trend of the oil and gas industry. This
need has resulted to the much talked about Petroleum Industry Bill
(PIB), which proposes the deregulation of the downstream oil and gas
sector. It is hoped that the recent momentum in the likely passage of
the Bill by the National Assembly, will be maintained.
Considering that the refineries owned and managed by NNPC are
comatose, consumption is being met through imports. Therefore,
instead of exporting refined products like other oil producing nations,
Nigeria exports crude oil and import refined products, a very inefficient
means of meeting domestic consumption of petroleum products. Going
forward, government plans to deregulate the sector through licensing
of private refineries and removal of government subsidies to the
downstream sector, and the privatization of existing ones.
Angola has also witnessed a couple of reforms post independence. In
1975, it was identified as moving towards a strong state that would
solve all the social and economic difficulties faced by its society. By
1990, however, following international trends brought about by
globalization, the country adopted the fundamental ideas of a
multiparty political system and a market-oriented economy, together
with the processes of political and economic liberalization that
remained in line with the phenomenon of globalization. Since 1990,
with the support of bilateral and multilateral donors, Angola has
implemented a series of initiatives aimed at reforming its public
administration.
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In 1996, with assistance from the United Nations Development
Programme, Angola launched a Programme for Institutional Reform
and Administrative Upgrading, which focused on decentralizing and
modernizing public administration, and reducing its level of
bureaucracy. The more effective programmes turned out to be those
that focused on improving public services.
In 2002, the Programme for Institutional Strengthening of the Public
Administration was implemented. Subsequently, in the administrative
scope of the Ministry of Finance, budgetary procedures were
established and made sacrosanct. These were in accordance with the
universally accepted principles for good management of public finance,
particularly emphasizing the principles of transparency, accountability,
discipline, and financial equilibrium.
Given scarce resources, justification of public expenditure also became
central feature of the budget process. The year 2003 was generally
considered as marking the beginning of a new era, closing the cycle of
27 years of war, and presenting some achievements of the economic
reforms, especially with regard to monetary and exchange policies.
The Angolan financial sector has also grown significantly and
improvement in terms of upgrading its systems and synchronizing its
regulations in line with international best practices. Co-ordination
between fiscal and monetary policy resulted in a simultaneous
enforcement of fiscal discipline and restrictions on money supply. This
contributed greatly to the easing of inflation.
Economic reforms in Africa have been very glaring and have attracted
attention of many international strategic and financial investors.
Virtually all of the global growth is in emerging markets and Africa has
been named ‘the last great frontier’. Capital inflows to Sub-Saharan
Africa alone rose from $35.8 billion in 2009 to an estimated $41.1
billion in 2010, and are projected to rise to $48.5 billion this year.
Foreign direct investments to Africa rose nearly six-fold from only $15
billion in 2000 to $88 billion in 2008. More than 20 African countries
received at least $500 million each in foreign investment in 2008.
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Foreign direct investments to Africa dwarfed flows to India which were
$42 billion in 2008 and came very close to flows to China. Foreign
Direct investments to Africa are expected to surpass $150 billion by
2015.
One thing we know about investment capital is that, it does not go to
places where it is not safe and where it would not make money for
investors. Given the rising flow of capital into Africa, it is evident that
the reforms have been somewhat successful and the strong growth
would be sustained in the medium term.
TWO INSTITUTIONAL REFORMS SUCCESS STORIES: BOTSWANA
AND MAURITIUS
Botswana:
At independence in 1966, Botswana’s per capita income was among
the lowest in the world. Majority of its human development indicators
were extremely poor- life expectancy was 37 years, primary school
completion rate was less than 2%, 12 kilometres of paved roads
existed, 22 Batswana had graduated from University and 100 from
secondary school. And this is a predominantly tropical, landlocked
country.
However, these poor indices have since been turned around. One can
argue that they met with some luck upon discovery of diamonds later,
but effective and transparent governance, and good economic
management practices fueled by reforms have been crucial to the
Botswana success story and helped them avoid the ubiquitous
‘resource curse’ for which African countries are noted. Botswana did
not follow the import substitution policy, and it did not expand stateowned enterprises, which employ low ratio of labour.
The question is: why was Botswana successful at reforms when some
other African countries have failed? The anwer lies in the fact that their
story success story was a part of larger reforms which cover many
institutions and not ‘silo reforms’. For instance, Freedom House, an
organization noted for measuring political rights and civil liberties, puts
that country as number 1 in Africa, scoring 2.0 on its scale of
‘Countries with Strong Economic Performance Saw an Improving Trend
in Institutions’.
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Botswana government established
rule of law, and maintained high
believe that government existed
development as opposed to
aggrandizement.
respect for property rights and the
transparency making the populace
to serve the people and promote
being an instrument for self-
Today, the following are the indices of Botswana: real GDP growth of
3.94%, GDP per capita of $61,263, 13.6% youth unemployment rate
7.54% inflation rate, and 11% lending rate.
Mauritius:
The future of Mauritius was so dismal that in 1961, seven years before
its independence, having had the uncanny privilege of having been
colonized by the Dutch, the French, and the British; James Meade, a
Nobel Prize winner in Economics predicted a gloomy picture for that
country on the basis of weather vagaries and price shocks, and lack of
job opportunities outside the sugar sector.
Today, with a combination of political stability, strong institutional
framework, low level of corruption, and favorable regulatory
environment a foundation of economic growth had been laid, while
open trade policies have contributed to sustaining growth.
A mono-product economy at independence, with low amount ot arable
land, and high population growth rate, Mauritius has emerged as a
regional entrepot and tourism destination as well as Africa’s best
performer in the ‘Ease of Doing Business Index’, being in 20 th position
out of 189 countries sampled in the world.
This unique country achieved this successful trajectory by instituting
prudent, proactive fiscal policy, focus on improving human
development indicators such as education, health, etc, and focused
decrease in income inequality. For instance, from life expectancy at
birth of 62 years in 1970, it improved to 73 years in 2008, infant
mortality dropped from 64 per 1,000 live births in 1970 to 15 in 2008.
In 1975, 40% of Mauritian households were below the presumed
poverty line, in 1992 it fell to 11%, and in 2010 it was less than 2%.
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One major piece of legislation that has become synonymous with the
success story is the Business Facilitation Act 2006 which provided a
new, streamlined legal framework for business operations in Mauritius.
The legislation facilitates doing business and acquisition of property by
foreigners, and among other things, enables small enterprises to
commence business within three (3) working days!
In terms of industry focus, Mauritius’ exemplary story on economic
and institutional reforms was based on the tripod- sugar, Export
Processing Zones (EPZs), and tourism.
The major indices of the economy of Mauritius today include: real GDP
growth of 3.10%, GDP per capita of $281,314, 8% unemployment
rate, 3.85% inflation rate, and 8.67% lending rate, and $170 monthly
minimum wage.
FUTURE GROWTH IN AFRICA
Improved governance, growth, and stability across most of Africa have
unleashed private sector value creation and investment in a wide
range of industries. Africa’s growth is being propelled by its reforms,
improved governance, and greater business confidence leading to
business and community-based pressure for more transformation.
This process is greatly increasing the expectations and aspirations of
African political and business leadership. Given the ongoing reforms
and the increasing inflow of capital, growth in Africa could outstrip
Asia’s in the medium term. One reason to believe that African growth
may outpace Asia’s is Africa’s greater ability to leap frog in the
adoption of new technologies and innovative governance and financing
strategies. Telecommunication penetration in Africa has increased from
2% of the population in 2000 to 37% in 2008, not far behind the
average in the BRIC.
Competition in African telecommunication markets, particularly since
the arrival of Bharti, the Indian operator, is driving costs and tariffs
down to extraordinarily low levels stimulating demand and the rapid
uptake of new technologies. Safaricom, the leading Kenyan mobile
operator, is moving beyond Kenya’s modern telecoms infrastructure
and is expanding its fibre optic network right through East Africa
including into politically challenging markets like Somalia.
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The point worth noting is that most of this growth will be coming from
varied sectors, reducing the continent’s dependence only on its
resource base. Africa being a resource rich nation will continue to
profit from rising global demand and prices for oil, natural gas,
minerals, food, arable land, and the like. Africa’s economy is largely
diversified with resources contributing around one-third to Africa’s GDP
growth. The remaining two-third is contributed by the strong
performance
of
the
services
sector,
particularlgffyy
telecommunications, retail trade and transportation, and also the
manufacturing sector.
These diversities are attracting many global players and, as a result,
Africa is witnessing huge foreign investment inflows. Capital flows to
Africa are higher than three of the four BRIC countries. Today, Africa is
ahead of Brazil, India, and Russia and second only to China in terms of
capital flows. China is already a huge investor in the continent’s
economies.
Looking at the Chinese success, many European players are eying
Africa as their next favourite investment destination. Russia and lately
other European countries have concluded bilateral agreements with
Nigeria and other African countries. It is also worth noting that
countries are no longer coming to Africa solely to extract resources.
They are beginning to stay and help make important infrastructure
improvements in the continent.
Many of these economies are entering into infrastructure partnerships
with the foreign investors whereby the investors are asked to develop
the country’s infrastructure in return for carrying out business. Thus,
Africa, whose inadequate infrastructure has up till now been an
impediment to its growth, is turning around.
CONCLUSION
I wish to conclude with the assertion that many African countries have
what it takes to be among the top 20 economies in the world and
decisively tackle issues hindering industrial development and economic
growth acceleration.
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In order to attain our potential as a forward-looking continent, I have
mentioned the importance of funding and provision of adequate
infrastructure. I have also mentioned the importance of skills
development, macroeconomic stability, and implementing policies that
promote the inclusion of all segments of society in the growth process,
and continued focus on large-scale and enduring reforms in our
various institutions.
In this, Africa has to be fast, flexible, and agile to be able to exploit
ever growing opportunities in a fast changing world. It needs strong
partnerships and to nurture a sense of ownership by its citizens in the
growth process.
I thank you for listening.
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Acknowledgments:
1. World Bank’s “Yes Africa Can”- Success Stories for a Dynamic
Continent, edited by Punam Chuhan-Pole and Manka Angwafo,
2011
2. “Mauritius: An Economic Success Story”, Ali Zafar, in World
Bank’s “Yes Africa Can”- Success Stories for a Dynamic Continent
3. “Botswana’s Success: Good Governance, good Policies, and Good
Luck”, Michael Lewin, in World Bank’s “Yes Africa Can”- Success
Stories for a Dynamic Continent
4. “An African Success Story: Botswana”, Daron Acemoglu, Simon
Johnson, and James Robinson, 2001
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