Sun, Jul 17, 2016
More creative accounting from the continent.
The IMF economist has forever stood a legendary figure within the development canon, the shadowy envoy of Africa's complicated history with foreign aid. Yet despite the ire directed towards the major international financial institutions by political economists, no party as been at fault in recent years as Africa's political elite, legends in their own right for their stunning acts of fiscal recklessness.
From the late 1990s, development economists have railed against the ever-increasing amounts of financial aid which flows to African governments each year, citing the lack of correlation between foreign investment and recipient governments' ability [or desire] to provide basic services for their people.
William Easterly, noted professor of political economy at New York University, has been a particularly harsh critic. In his controversial report, Planners vs. Searchers in Foreign Aid, Easterly argues that development assistance from the West isn't just ineffective -- it's plain harmful. Though not opposed to foreign aid, Easterly and peers argue that increasing the amount of aid received by developing governments produces the nasty effect of reducing the ratio of domestic tax revenue to total GDP. Why subsidize mediocrity? (Afghanistan stands out as a particularly extreme example, with more than 97% of its GDP coming from foreign aid.)
Despite decades of experience dealing with the blow-back from failing to meet conditional loan payments however, a number of African governments have fallen back into the same trap, with Mozambique revealed to have been hiding nearly $2 billion in foreign-held debt according to a recent IMF report. The revelation by President Filipe Nyusi holds the potential to devatate one of Africa's safest economies, which now faces the prospect of skyrocketing interest on bond repayments owed to foreign lenders.
Joining Mozambique in the ranks of states employing creative accounting techniques? Kenya and Tanzania, both of which are believed to have "lost" upwards of $1 billion in the past few years. With the highly-complex and poorly understood "Eurobond" becoming all the rage among African economies hungry for foreign investment, we're sure to see more of these emerge, with 16 states combining for a total Eurobond debt of $21 billion. With interest rates at a record high due a slew of issues in the global economy, including the threat of Brexit and Brazil's fall from grace, there is little doubt that more African nations will soon be in the market for financial support from international creditors. And the cycle continues.
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