African Countries Must Exploit Domestic Resources to Mobilize Development

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Experts participating in the ongoing African Economic Conference in Kigali, Rwanda, have discussed ways to exploit domestic resources ahead of global uncertainty and a decline in foreign aid to finance their development.

Although Africa has enjoyed a decade of robust growth, the good performance has not translated into inclusive growth.

In a high-level plenary session, titled “Development Strategies and Financing”, featuring a panel made up of Economic and Finance Ministers, and Government representatives from Rwanda, South Africa, Guinea and Comoros, there was a call for improvements to financial intermediation to enhance domestic resource mobilization and access to credit in order to meet the long-run financial resource needs of investors.

William Kalema, Country Managing Director, BDO East Africa, said in the uncertainty of global financial and economic crises, African countries should exploit resources such as increasing remittances, or issuing domestic and international bonds.

“This is the time when foreign money is cheap to borrow and money centres are willing to take up African bonds,” he said.

This requires putting in place policies that are open to international investors and favour remitting or transferring money and strengthening institutions to implement policies.

For African countries to issue bonds, they need to sort out macroeconomic fundamentals like inflation, which is a prerequisite to mobilize resources from different investors and different markets.

“Countries will have to look to domestic resource mobilization and private-sector inflows to make up for the sharp decline in foreign support,” Kalema said.

While macroeconomic stability leads to such investment, instability will put pressure on currency and lead to capital flight.

Stressing that, the conference heard that such resources should be earmarked for potential infrastructure development and it should be invested within African, not abroad, which would benefit both bond-holders and the issuing country.

One of the successful bonds in Africa is the recent Zambian bond, valued at US $750 million with a 5.37 per cent coupon rate for 10 years. Other African countries that plan to follow Zambia’s lead in creating infrastructure bonds including Kenya, Angola, Tanzania and Nigeria.

“High remittances and an appetite for bonds represent a vote-of-confidence to our governments and improves transparency,” said Kalema. For this reason, he said, “we need to build good governance, political and economic stability.”

Many countries do not have well-defined strategies to take advantage of the present commodity boom, and have failed to exploit the advantages offered by the international trading environment due to weak production capacities.

Other strategies to mobilize domestic resources mentioned were increasing the domestic tax base and tax compliancy and remove all barriers to trade, and to give incentives to attract investments and identify innovative projects.

Sitti Alfeine, Commissioner General of Planning in Comoros, said integration should be considered crucial in resource mobilization. Comoros managed to mobilize US $500 million from different foundations in the region, particularly in education and health, which was integrated in the single national financing.

Private domestic investment is being revived in only a few countries, and inefficient financial systems and weak tax collection mechanisms that are heavily reliant on narrow tax base undermine domestic resource mobilization.

Rwandan Finance Minister, John Rwangombwa, shared the Rwandan experience, including the recently launched solidarity fund, where every Rwandan is willingly contributing, and so far the fund has mobilized US $30 million. Other strategies include creating awareness on tax compliancy and reforms to increasing the tax base.

For innovative financing, finance strategies need to be tailed to each country because Africa is not homogenous and the same strategies will work for all.

The four-day annual conference working under the theme, “Inclusive and Sustainable Development in an Age of Economic Uncertainty” is a forum for African leaders to re-strategize policies that will lead to inclusive growth.