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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. 1|Page 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. 2|Page 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. 3|Page 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. 4|Page 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. 5|Page 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. 6|Page 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. 7|Page 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. 8|Page 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. 9|Page 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. 10 | P a g e 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’. 11 | P a g e 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%. 12 | P a g e 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. 13 | P a g e 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. 14 | P a g e 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. 15 | P a g e 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 16 | P a g e