Ahead of the African Union Summit: How to boost East African economies?

Claire Elder- Doctoral researcher in Politics and International Relations, University of Oxford

Heads of African States are due to attend the African Union (AU) meeting in Nouakchott, Mauritania, from June 25 to July 2, 2018, under the theme “Winning the Fight against Corruption: A Sustainable Path to Africa’s Transformation”.

Beyond the scourge of corruption, the Bertelsmann Stiftung’s BTI Global 2018 report on South and East Africa showed that economies in the region face three obstacles: rapidly falling incomes due to persistently low global commodity prices, a political climate of exclusion and repression, and widespread insecurity.

“Violent conflicts have torpedoed hopes for transformation,” the report said. “The civil war in South Sudan, ongoing since 2013, has brought the young country’s economy to the point of collapse and robbed the starving population of political prospects. Likewise, Somalia’s population is waiting in vain for a breakthrough after two decades of government failure and persistent violent conflicts.”

East Africa, led by Ethiopia, Kenya, Tanzania and Rwanda, continues to lure foreign and regional investors with an estimated growth of 5.6 percent in 2017, expected to reach 5.9 percent in 2018, according to the African Development Bank (AfDB). Despite the region’s boom – pushed by more spending on mega infrastructure projects in Ethiopia, Kenya, Uganda and Tanzania – these countries still rank low on other listings, including on corruption.

Kenya and Ethiopia have a better track-record than Tanzania but still provide a weak competitive environment for domestic capitalists and are known for widespread nepotism in the provision of business contracts.

Climbing Debt Burdens

Corruption issues are linked to an emerging debt crisis in the region, with risks of liquidity shortage and default that is reportedly fueled by the rising public expenditure in such large infrastructure projects and poor management. Across sub-Saharan Africa, government debt rose to 53 percent of GDP in 2017, compared with just 11 percent in 2011. To give a specific example, Djibouti’s public debt reached 87 percent of gross domestic product.

Vulnerability to debt comes from civil conflict and looser fiscal policies, as well as fraud and corruption. Opaque loans and China’s involvement in Africa has made it harder to assess the situation. Their investments include the $1.3 trillion Belt and Road Initiative, as well as the Africa-Asia corridor with a pledge of a $200 billion in proposed infrastructure.

China’s Enthusiasm Cooling

The region’s fastest growing economy, Ethiopia is expected to surpass Kenya by 2019 but faces political and economic turmoil after the resignation of Hailemariam Desalegn in April. The new prime minister Abiy Ahmed (the youngest head of government in Africa) champions economic diplomacy and opening the boundaries for foreign investors, but has been weaker on reform agendas. Such diplomacy includes trips to Sudan over the development of Port Sudan, and the selling of minority stakes of state monopolies, such as national airlines, telecommunications and shipping companies, to foreign and domestic investors.

Political uncertainty and low returns on big infrastructure development caused China to announce in June a scaling down of investment after it was reported that the Ethio-Djibouti railway was performing below its expected capacity.

The Financial Times reports that Sinosure, China’s leading export and credit insurance firm, is no longer backing Chinese banks for projects in Ethiopia with the enthusiasm seen over much of the past decade.

Focus on Kenya

Meanwhile, in Kenya, large industrialization projects have succumb to widespread corruption and ongoing disputes over land and financial management, as well as poor relationships with domestic businesses.

In a notable example, the Lamu Port South Sudan Ethiopia Transport – the largest regional transport corridor worth $24.5 billion – launched in 2012 has only reached 45 percent completion. In late May 2018, both Kenya and Ethiopia called on private corporations to fill the funding gaps, even though the project remains straddled with corruption over land titles.

While Kenya continues to attract the most financial and technology investment despite rising political uncertainty, corruption is still a huge issue, and managerial systems and expansion capacity of domestic firms is still poor.

At the same time, the push for port development along the East Africa coast and the nearby Suez Canal has brought other issues for the region.

Rising Regional Tensions

The merging of new strategic and commercial policies from the Gulf threaten regional industrialization plans and key state-building agendas that have in turn brought diminished transparency to business plans and regional relations.

On one hand, experts raise concerns about the large influx of port development on rising public debt, and not least for countries like Somalia, Eritrea and Sudan that rank the poorest on nearly all governance indicators.

These issues have come to a fore surrounding the operations of the world’s now third largest port operator, DP World. Critical concerns have been raised about erratic policies and financial mismanagement that saw DP World lose its concession over Doraleh Container Terminal in 2018 to Chinese operators.

In the short-term, such influx of investment has brought Somalia and Somaliland to blows over the Berbera port agreement as Somalia still claims sovereign control over Somaliland’s capacity to sign foreign investment contracts despite the country’s de facto independence in 1991. This has led to the suspension of long-awaited talks between Somaliland and Somalia slated to occur in April under Swiss mediation.

The long-term aim for the UAE is to increase trade with fast-growing economies like Ethiopia and tapping into East Africa’s swelling consumer class, but the short-term impacts of such shocks on public debt, building regional integration and political conflict are already being felt.

Shifting regional alliances, large-infrastructure projects and growing political uncertainty in the region are key agenda points for the summit as they have direct implications for transparency and corruption reform agendas.

Claire Elder is currently a doctoral candidate in Politics and International Relations at the University of Oxford. She is also a consulting political analyst, having worked previously for International Crisis Group (ICG) on Somaliland/Somalia.

This post was first published by Global Policy and is republished here with permission.