The world economies, especially those of sub-Saharan Africa, have come under pressure in recent months as Brent oil prices slumped. The impact has been worrisome as it has taken a toll on the naira and foreign exchange reserves. Charting a way forward was the focus of the Institute of International Finance (IIF) Africa Financial Summit hosted by Access Bank Plc in Lagos, writes COLLINS NWEZE.
In the last one month, managers of the economy have known little or no rest. They have been taking pains to explain to local and international investors the way out of the ‘economic tsunami’ that has hit the economy.
The Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, used the opportunity presented by the Institute of International Finance (IIF) Africa Financial Summit held in Lagos to explain to the world what the government is doing to wriggle out of the crisis. The naira and foreign exchange reserves have been badly hit.
The minster who spoke on Positioning Africa in the context of an uncertain global environment stressed the need for African countries to adopt belt-tightening measures to cushion the effects of the dwindling prices of crude oil on their economies.
She emphasised the need to plug leakages, increase the drive for revenue as well as develop the non-oil sectors in the continent.
The naira has come under pressure in recent months over sharp fall in the price of Brent oil prices, and the Central Bank of Nigeria’s (CBN’s) determination to save the currency has badly hurt the position of the reserves.
The foreign exchange reserves stood at $37.5 billion on Monday and analysts insisted that the fall in the international price of Nigeria’s benchmark Bonny Light crude to about $78/barrel has fuelled fears that the CBN will be unable to hold the line on the naira exchange rate which closed last week at N176 to dollar.
The minister also urged policy makers in the continent to strive to ensure economic prosperity, arguing that with the right policies, Nigeria and other nations in the continent would be able to sustain growth despite the economic headwinds.
She admitted that events unfolding over the last six months have cast a shadow on global economic recovery in the aftermath of the 2008/09 financial crisis.
Mrs Okonjo-Iweala said the slowdown in global economic activity, coupled with the end in the quantitative easing in the United States (U.S), will affect sub-Saharan Africa’s economy, in addition to other challenges faced at the moment.
She said: “Many countries on the continent depend on commodity exports as the main source of revenue. The ratio of commodity exports to total merchandise exports is very high in several African countries – and to give a few examples, the ratio ranges from 60 per cent in South Africa to 89 per cent in Zambia and Ghana, 96 per cent in DR Congo, and so on.
“In Nigeria, our crude oil exports alone accounted for about 83 per cent of the value of our total exports in 2013, according to our National Bureau of Statistics.”
The minister advised countries in the region to aggressively look for alternative sources of revenues and stem leakages.
“It is now imperative to drive up domestic resource mobilisation, especially taxes. In several African countries, including Nigeria, tax revenue to Gross Domestic Product is below 15 per cent – the conventional (International Monetary Fund) IMF threshold for satisfactory tax performance. There are many leakages and gaps to be plugged, and more effective tax administration could contribute to improving revenues,” she said.
Revenue leakages
The Washington-based thinktank, Global Financial Integrity (GFI), said at least 60 per cent of the nearly $1 trillion in illicit flows from the continent is due to trade mispricing and international tax evasion.
The minister said the GFI has been asked to carry out a study on Nigeria. This, together with the work being done by McKinsey to strengthen tax collection will go a long way to support efforts to drive revenues up.
“Based on the results of the first few months of the year, I’m fairly confident that additional tax revenues from these efforts will surpass the $500 million previously estimated for 2014,” she said.
She explained that based on 2013 data, about 70 per cent of sub-Saharan Africa’s merchandise exports go to countries or zones that are experiencing challenges at the moment- the U.S (10.01 per cent), Europe (26.5 per cent), Japan (three per cent), China (21 per cent), Brazil (three per cent), and India (seven per cent).
The minister said a marked slowdown in these markets would weaken demand for commodity exports from the region, with immediate negative spillover effects on our external and fisscal positions.
She said: “This year, we’ve seen a fall in the prices of several commodities, the most recent of which is oil. Our crude oil – bonny light, which traded at $110.2 per barrel in January this year, reaching $114.6 per barrel by June, is now trading at about $83 per barrel.
“The price of gold, which peaked at about $1383 per ounce in March this year is now trading at around $1160 per ounce. Iron ore which traded at around $130 per dry metric tonne at the beginning of the year is now trading at around $76 per dry metric tonne, which is a loss of more than 40 per cent of its value this year.”
Continuing, she said prices of some agricultural commodities are also on a downward spiral, with the price of cocoa falling by about 10 per cent from $3,252 per tonne at the end of September which is just a few weeks ago, to about $2,900 per tonne now. Cotton has also taken a hit, from about 93.5 cents per pound a year ago to 63.5 cents now, while coffee which traded at 221.4 cents per pound just a month ago, is trading at about 186.3 per pound now – which is nearly 20 per cent fall in price within a month.
The minister said the end of quantitative easing by monetary authorities in the U.S. is resulting in a reversal of foreign investor sentiment in emerging markets including frontier markets such as sub-Sahara Africa.
“Capital outûows are putting pressure on countries with large external financial needs. In addition, regional challenges, such as the recent outbreak of the Ebola virus in West Africa is weighing down on the region’s short to medium term economic outlook,” she said.
Okonjo-Iweala said the ensuing decline in activity may lead to reduced appetite for investment, with more long-term implications on the growth momentum in the sub region. She added that sub-Saharan Africa’s economy is expected to continue to perform respectably in the face of global economic challenges.
Access Bank CEO speaks
The Group Managing Director, Access Bank Plc, Herbert Wigwe said banks are not fringe players in global economic equation, arguing that many of the lenders have helped in building multinational companies that have made Africa proud.
Wigwe said: “At Access Bank, we believe in the future of Africa. We have set ourselves the ambitious target of becoming the world’s most respected African Bank. For us that means more than being the biggest, the fastest growing, or even the most profitable in the short term.
“It means building a strong, sustainable institution that sets new standards in governance and transparency and which actively helps other financial institutions to do the same. It means driving financial inclusion by extending banking services to a new and growing cohort of businesses and individuals who will be the growth champions of tomorrow. And it means keeping our customers at the heart of everything we do.”
Africa rising
Wigwe said Africa’s private sector has woken from its slumber and a new spirit of entrepreneurship is sweeping across the continent.
“The criticisms in the 1960s that Africa has underdeveloped middle class that does not contribute to the growth of capital would be ludicrous today. A vibrant, growing consumer class is increasingly serviced by innovative local capital. From Fast Moving Consumer Goods to telecoms, street vendors to sophisticated local retailers, the African private sector is driving economic growth.
“When taken together, the investment case is clear. We have the market, the market environment, and the entrepreneurial zeal that means that business can thrive,” he said.
Wigwe said Africa must align with global standards and best practice while maintaining the cultural identities and local knowledge and worldview which allow it to act and react to local economic realities.
“We must take on board and test new innovations in banking while ensuring that we maintain the best aspects of the ways we work today. And we must also take advantage of the technological revolution that is changing the face of banking all over the world but be careful to ensure that we do not become slaves of data; that it doesn’t replace judgment and experience.
“Technology has enhanced access to capital, expertise and distribution, and aided the storage and use of data; it presents us with a profound opportunity to deepen and widen access to financial services to people and companies across the continent and we should ensure that we use it for good,” he said.
Africa economies
Senior Manager at IIF, Andrew DeSouza, said South Africa, Nigeria, Kenya, Ghana, Tanzania, Côte d’Ivoire and Zambia constitute one of the fastest growing areas of the world this year estimated at 4.9 per cent. However, several factors, both internal and external, have stopped it from growing faster.
He explained that prospects for stronger growth next year and beyond are encouraging, but there are pockets of concern.
He said: “Lower commodity prices and faltering global demand in recent years have hit export earnings and weakened the current accounts in several countries. The impact has not been uniform, however, due to varying degrees of natural resource dependence and deviations in price movements across different commodities. Diversifying economic activity, broadening the export base, and adding domestic value to natural resource extraction will be key to sustaining growth and reducing vulnerability.”
Hydrocarbons are becoming more important in Africa, and will continue to do so going forward. Oil and gas discoveries in East Africa could be a game changer over the next decade, providing revenue for much-needed infrastructure development and turning around large current account deficits, he added.
DeSouza explained that a major constraint on growth and economic diversiûcation has been the grossly inadequate power generating capacity in most countries. The tide now appears to be turning, however, and plans are already being implemented in a number of countries to ramp up generation and improve transmission and distribution.
For him, fiscal pressures have intensified and government debt is on the rise. “The biggest challenge is to increase revenue without dampening growth while shifting resources towards development spending. The countries with the largest deûcits tend to be those that have let their wage bills spiral,” he said.
The IIF manager said the rapid adoption of mobile technology in recent years has led to a marked increase in ûnancial inclusion in many countries. Kenya was at the forefront of this revolution with the introduction of M-Pesa in 2007, but this has spread to other countries and the technology is becoming increasingly more sophisticated and widely adopted.
