“We’re cautious in the short term, but in the long term we’re enthusiastic about Africa,” said one banker, summing up the predominant mood among western bankers. Last year eight economies were shipwrecked on the rocks of recession. Senegal, Liberia, Togo, Sudan, Central African Republic, Uganda, Zaire and Madagascar made 1981 the Year of Reschedulings. Four years earlier only two African states needed IMF help; in 1981, however, 21 African countries drew loans from the IMF.
The economic outlook in 1982 is bleak; the west has exported recession, and growth has halted. Population is rising by some a year, so living standards are dropping in a region which already contains 20 out of the 30 poorest countries in the · world. Falling earnings from cash crops and minerals have pushed up debt service ratios and current account deficits. The average debt service ratio for sub-Saharan oil-importing countries rose from 6% in 1970 to 16% in 1980. The same states suffered a rise in their current account deficits from $1.5 billion in 1970 to $8 billion in 1980. Africa's foreign debt soared from $6 billion in 1970 to $54 billion in 1981.
So syndication managers view Africa with caution. They expect the overall level of African Euromarket borrowing to hold steady in 1982, on a par with last year's $7.25 billion. The 1981 figure was a marked rise on 1980, when Africa took $3.3 billion of syndicated loans. Nigeria's growing appetite for Eurocredits explains much of the increase in 1981.
In spite of the economic gloom, many African states remain good credit risks. The consensus among syndication managers is that spreads will hold steady. "For years bankers have grumbled that African margins are too low," said an American banker, "but they won't rise, unless margins widen across the world."
A British banker commented: “African states defend their margins as points of national honour. So, if returns from African lending ever did rise, we'd see the Nigerian formula of higher fees on the old spreads."
The big borrowers of 1981 are continuing to borrow heavily in 1982. Nigeria last year borrowed $3 billion out of a total $5 billion borrowed by black African states. A huge $1 billion of Nigeria's total was for the construction of the Ajoakuta steelworks.
The oil glut threw Nigeria into a serious foreign exchange crisis at the end of March. In one week oil production slumped from 1,300 barrels a day to 700 million. Western oil companies were urging Nigeria to cut its oil price, and so break the weakest link in the Opec chain. If Nigeria reduced the price, the other Opec states would have to follow. Nigeria is extremely vulnerable to such pressure; oil provides 90% of its exports, and 80% of government revenue. Nigeria normally imports about $1.85 billion of goods each month; with oil production at 700 million barrels a day, the country would suffer a monthly trade deficit of $1.3 billion. Reserves had already fallen to $2.8 billion from $9 billion only a year before. So President Shagari faced a crisis. He froze all letters of credit for imports, temporarily.
Then on April 20, he introduced permanent selective import controls. Shagari also announced a slow down of the government's ambitious five-year $125 billion development programme.
When the crisis hit Nigeria, bankers reacted with sharply divergent views. "We wouldn't touch Nigeria with a bargepole,” said a German banker. “They never pay their debt service on time. Their economy's in a terrible mess." The same line was taken by a syndication manager from one of the big British clearing banks, which became heavily involved in Nigeria when its economy was booming. "We've been cutting back our Nigerian exposure since the last quarter of 1981. We certainly wouldn't join another Nigerian syndicate at the moment. We want to wait and see if the current crisis is just a temporary hiccup, or permanent."
The banks which are most alarmed about Nigeria are those which have only recently begun to lead loans there. The banks which have been involved there for many years take a much more relaxed view of the crisis, and are still willing to lend to Nigeria. A representative of one British bank, long established in Nigeria said: "Over the years we've seen many crises. In July 1981 oil production halved to 700,000 barrels a day, when there was an argument about price. But oil production picked up again. It'll pick up again this time, as soon as the oil companies and the government agree on a price. The only problems are short-term and we're optimistic about the future."
“We're trying to increase our Nigerian exposure,” said the vice-president of a French international bank, already heavily exposed in Nigeria. “Nigeria's underborrowed. Its debt service ratio is only 5.3%, one of the lowest in Africa. Bankers who don’t know Africa make such a fuss about Nigeria. They don't understand you have to take a different attitude when dealing with black Africa; you know the payments will be late, you know sometimes they forget to pay the fees. You have to work hard and go and get the money and hold their hands. Your reward is high fees."
Some bankers expect spreads to rise from ⅞ to 1%, but many believe they will hold at ⅞. Overall returns have risen slightly over the last year: front end fees have gone up by about ¼%, so that they now average over 3%. The official fees are often only ½%: the remainder is paid to the banks by the western contractor for the particular project. ·
“It’s not surprising their administration is rather chaotic; they’re a new state. They've achieved a lot in a short time,” said a syndicate manager from a British clearing bank with experience of Nigeria. “They've healed the wounds of the civil war. They had a new constitution in 1979, and Nigeria's proved itself to be a functioning democracy. Bankers like Shagari, who's sensible and honest. Nigeria's such an important export market, I’m sure bankers will continue to lend there, to finance their domestic clients' exports."
Bankers are uncertain how the foreign exchange crisis will affect Nigeria's appetite for Eurocredits. With a presidential election next year, Shagari will be reluctant to make big cuts in the development plan. He won the 1979 election with only 34% of the vote. In 1983 Shagari, who is a Hausa, will face a coalition of the defeated candidates from 1979: the Ibo leader Azikwe will be backing the candidacy of the Yoruba leader Awolowo. Shagari's development projects include the new capital at Abuja, two new steel works, and a standard gauge railway. On the one hand, reduced oil revenue may tempt the government into stepping up its Euromarket borrowing. On the other hand, election or no election, some projects will have to be cut back, and that may limit Nigeria's demand for Eurocredits. Some bankers believe these two factors may cancel each other out, to produce a Euromarket presence of about $3.5 billion for 1982, compared with last year's $3 billion.
Total outstanding foreign debt is believed to be over $8 billion, a figure surpassed only by Egypt, Algeria and Morocco among ADB members. "Don't be mesmerized by that debt service ratio of 5.3%," one banker said. "The ratio has shot up from only 1.7% in 1980, and it'll continue to rise, as a lot of repayments are bunched around 1983 and 1984. If a country is dependent on a single commodity export, foreign exchange earnings can swing sharply down, creating a cash flow crisis. And reschedulings usually result from a cash flow crisis rather than from the overall level of debt service.”
Nobody suggested that Nigeria would have to reschedule. "The oil glut may prove to be a blessing in disguise," commented a banker. “They will be forced to pick and choose their investment projects, instead of wasting money. The federal government will have to limit borrowing by the states; they took 40% of Nigerian credits last year. At the moment the states borrow whenever they want – they know that the central government guarantees their credits." That banker was proved right. On April 20, Shagari announced a Naira 200 million borrowing ceiling for each state.
Farmers pay the pricefor cheap consumer goods
Nigeria's foreign exchange crisis would not have arisen if the economy had not become dependent on a single export. Nigerian agriculture has been ruined by the buoyancy of the Naira. The value of the Naira was pushed up at first by rising oil exports, and more recently by government policy. It is now about 50% overvalued. The government prefers a high Naira because that cheapens the cost of imports for development projects. Consumers in the town are happy to pay less for imported consumer goods. But farmers have lost the incentive to grow food, undercut by cheap rice and wheat imports. In the 1960s Nigeria exported palm oil, palm kernel, peanuts and peanut oil. But the peasant smallholders who produced these crops lost their markets when the Naira rose too high. Now Nigeria imports all these items. The real value of non-oil exports has dropped 40% since 1964. Agricultural output is stagnant, although the population, which may be 100 million, is growing at an estimated 3% a year. The consequence has been a 250% increase in food imports over the last five years. The overvalued Naira has also stifled industrial growth. From 1950 to 1964, the industrial sector grew from 1 to 5% of GDP. In the succeeding 18 years, the industrial sector has advanced only to 6% of GDP, as cheap imports have hit home industries.
In spite of the difficulties, most Eurobankers are optimistic about the future of Nigeria's economy. They keep in mind the country's proven oil reserves of 17 billion barrels.
Morocco took the second biggest African slice of the Euromarket in 1981, borrowing over $900 million to build an oil refinery and a steel plant, and to develop the phosphate mines. Eurobankers disagree on Morocco; some think it a safe risk, while others steer clear, noting its 30% debt service ratio and the unpopularity of King Hassan. Morocco has had to borrow heavily to make good its current account deficit, which was probably over $2 billion in 1981, when phosphate prices went down. To make matters worse, Morocco has to import half its food. The government manages to offset much of the deficit through Saudi and American bilateral aid. And last year the IMF agreed to lend $1 billion dollars over three years. But soft money is not sufficient to cover the current account deficit, so the government is reluctantly continuing to borrow on the Euromarkets. Outstanding foreign debt is $10 billion.
Some bankers are encouraged by King Hassan's austere economic policies. Following IMF prescriptions, in June 1981 Hassan increased food prices by removing subsidies. In the riots which followed 500 people died, but the government succeeded in cutting the borrowing requirement.
The development programme of the Ivory Coast required syndicated loans worth $600 million in 1981. Bankers are not worried by the debt service ratio of 30%, for they consider the Ivory Coast to be the model of a well-run African economy. "We're always happy to lend to the Ivory Coast," said a French banker. "It's politically stable, and French advisers ensure an efficient administration. And the government did what the IMF told them to do." The IMF arrived in February 1981, when low cocoa prices and government overspending produced a balance of payments problem. In return for $600 million of IMF money over three years, the government cut back its ambitious public works programme, limited its borrowing requirement and withdrew subsidies from consumer goods.
The economic outlook is bright: by the mid-1980s the Ivory Coast should be earning $3 to 5 billion a year from oilfields which are due to start production this year. Unlike Nigeria, the Ivory Coast is not likely to become dependent on one export. It has displaced Ghana as the world's leading cocoa producer, by offering the farmers high prices for the crop. The government has also developed exports of coffee and timber. Although the foreign debt is already $6 billion, bankers can be expected to step up their lending to this model economy when the oil money starts to flow. Both Kenya and Zambia remain regular Euromarket customers, in spite of their current account difficulties. Zambia borrowed $200 million in 1981, for its copper mines and for foreign exchange. Kenya borrowed $100 million for foreign exchange. There has been little either country could do to prevent huge current account deficits. Both countries are oil importers and were hit by the price rises in the 1970s. In Kenya, the cost of oil imports as a percentage of exports rose from 1% in 1973, to 36% in 1980. And both economies have suffered from the slump in commodity prices. Copper and cobalt accounted for 95% of Zambia's exports; while tea and coffee provided 60% of Kenya's export earnings. Kenya's debt service ratio soared to 19%, and Zambia's to 23%. Only substantial drawings from the IMF have prevented foreign exchange crises.
Eurobankers are still prepared to lend to both countries, though only on a short-term basis to Zambia. Bankers like the relatively efficient administration and the political stability in both Kenya and Zambia. Both countries pay their debt service on time and respect IMF advice, though in March the IMF delayed further Zambian drawings, unhappy with food subsidies. As soon as world growth resumes, these economies should pick up.
"Africa may be in recession, but it's still an exciting continent," said an American banker. "There are so many under- borrowed countries." One such underborrowed state is Cameroon. Its healthy agriculture makes it self-sufficient in food, and it exports cocoa and coffee. Cameroon is rich in gas, and expects to export 10 to 20 million tons of oil a year by 1985.
French-advised President Ahidjo has ensured sound administration and political stability for 22 years, and he has limited the debt service ratio to 7%. Cameroon has not borrowed on the Euromarkets since 1979, and if it returns to them in 1982 it can expect much finer terms than the 1½% it achieved three years ago.
Gabon is another country where bankers are queueing up to lend, and spreads should become finer. Gabon rescheduled in 1977, since when it has swallowed IMF medicine, with happy results. Oil exports helped balance the budget and the current account. Foreign debt was repaid. The world's second largest manganese reserves lie under the interior of Gabon, and President Bongo is building a railway to reach them. This project is expected to require Euromarket finance.
Botswana would achieve fine Euromarket terms if it decided to borrow. Though the economy has been hit by the low price of diamonds, bankers like the conservative economic management. Rich resources of coal and metals are still under- developed. The government of Botswana, like that of Cameroon, believes borrowing to be profligate and rather immoral.
Zimbabwe experienced Africa's highest growth rate in 1981, an exceptional 7%. "We'd love to lend there, provided it stays politically stable,” said a British banker. “The economy’s got everything going for it: much white expertise, an industrial base, a debt service ratio of only 10%, and the finance minister Chidzero is a good chap." The Zimcord aid programme may not cover the expected $500 million current account deficit this year, in which case Zimbabwe will resort to the Euromarkets, where last year it took $360 million in syndicated loans.
Tunisia is the safest credit risk in Africa. Spread averaged ½% above Libor in 1981. To the bankers' chagrin, it borrowed only $83 million in 1981 (for oil exploration) and nothing in the previous two years. Tunisia turned in an impressive economic performance last year: 6½% growth, 9% inflation and a debt service ratio of only 12%. President Bourguiba has never needed to go to the IMF, but he practises the sort of economic management the IMF would approve.
Neighbouring Algeria is a greatly improved credit risk. In the late 1970s it would often borrow several billion a year on the Euromarkets, for the development of its industrial base. By 1979, foreign debt had risen to $23 billion, and the debt service ratio was a dangerous 33%. For the last three years sensible policies have improved Algeria's credit rating. President Chadli has reduced dependence on crude oil exports, by developing gas fields, LNG, and refined petroleum products. Chadli shunned the Euromarkets and paid back debt. Outstanding foreign debt has been reduced to $14 billion, and the debt service ratio has fallen to 25%. Last year Algeria successfully refinanced $500 million of Sonatrach credits at finer margins. The Ministry of Finance claims that it will not seek new syndicated loans in 1982, but the oil glut could force it to reconsider.
Egypt could borrow more
Bankers regard Egypt as under borrowed. Last year private Egyptian companies borrowed $355 million on the Euromarkets. Bankers like both the open-door policies retained by President Mubarak, and the debt service ratio of 18%. The current account balanced in 1981, thanks to $3 billion of oil exports. However the oil glut is causing problems in 1982: oil revenue is expected to fall to $2 billion, and a current account deficit of $300 to 600 million is predicted.
The government has already returned to the Euromarkets, with a $200 million syndicated loan for the balance of payments in March. More Euromarket forays can be expected. Some bankers are worried by the price subsidies, which cost Egypt $2 billion a year, and the decline in such sources of foreign exchange as canal dues, workers' remittances and tourism.
'Angola's got it!'
Angola made its Euromarket debut last year. Its two loans, one for a ship purchase and one for oil exploration, totalled $80 million. "You name the mineral – Angola's got it!" declared an American banker. "The western oil companies have found that the Marxists are reasonable people to work with. And we've discovered that they're prompt with their interest payments. We'd be happy to look at further credits to Angola, though we'd prefer it if certain powers stopped backing Unita, as that hinders the return of political stability."
Other bankers are put off by the lack of any economic statistics, the absence of infrastructure, and Angola's refusal to join international organizations such as the IMF. In the long term, the Angolans must be potential big borrowers on the Euromarkets: the wealth from oil and diamonds should allow them to create an infrastructure and exploit their minerals. There are several good risks in Africa, but they are reluctant to borrow. And bankers are reluctant to increase their exposure to most African states, so long as the recession retains its hold on the continent. Stagnant growth, falling export earnings and burgeoning current account deficits all encourage bankers to be cautious; so it is unlikely that Africa's share of the Euromarket this year will be any greater than last year's 4.2%. When growth resumes, that share should rise.
Can they manage without the IMF?
All over Africa a bitter argument is raging. African finance ministers and central bank governors blame the economic crisis on external factors. It's not our fault, they argue. Oh yes it is, reply the World Bank and the IMF. Last year's World Bank report laid the blame squarely on the African governments. The report accused the politicians of applying the wrong economic policies.
The politicians reply that the World Bank and the IMF ignore the political and social dimension of government. For example, the IMF habitually demands an end to food subsidies; when they were removed in Sudan this January and in Morocco last July, widespread rioting resulted. The IMF repeatedly calls for devaluations; the last four Ghanaian governments which have devalued or talked about devaluing have swiftly been overthrown.
In the late 1970s, external factors did make a big impact. The oil importing states reeled from the blow of the 1979 Opec price rise. The cost of Sudan's oil imports, for example, rose from $90 million in 1975/6, to $400 million in 1980/1. At the same time the west entered recession, and commodity prices plummeted. Most African economies depend on one or two commodity exports: Senegal and Gambia, for example, earn over half their foreign exchange from groundnut exports, while Mali and Upper Volta receive half their export earnings from cotton. The world bought less of African minerals and cash crops, at lower prices.
However, African economies would have been better equipped to bear the external shocks if African agriculture had not been steadily declining over two decades. African food production grew at 1.5% a year during the 1970s, while population rose at something like 2.7% a year. The consequence was that the continent's food imports grew by 10% a year. Angola, Mozambique, Uganda, Togo, Ghana, Mauritania and Congo all suffered an absolute decline in food production during the 1970s.
Most African governments overvalue their currencies, to satisfy the town dwellers who enjoy cheap imported consumer goods. Cheap food also floods in, undercutting domestic farmers. In Ghana, for example, the townspeople now eat imported wheat and rice, instead of traditional foods like cassava and yam. And the high exchange rate has hit cash crop production. Ghana's cocoa is no longer competitive on the world markets, and exports have slumped. Long before the recent drop in commodity prices, Africa's share of world exports was falling.
Many governments make their state marketing agencies offer unrealistically low prices to farmers. The urban consumers benefit, but farmers lose the incentive to produce. Tax policy, too, often favours the town against the countryside; high taxes are needed to finance subsidies on food prices in the towns. If, during the last two decades, governments had not biased policy against agriculture, they would not now be using so much precious foreign exchange on food imports.
High oil prices and falling export earnings not only pushed up current account deficits, they also smothered economic growth. Some governments tried to tackle these twin problems by stepping up their foreign borrowing, to stimulate growth and offset deficits. Senegal, Madagascar, Liberia and Morocco followed this path, hoping to immunize themselves from the effects of the recession. But they only postponed the date at which the IMF would fly in and impose painful policies.
Rising world interest rates made debt service difficult for the countries which borrowed. So did the shortfall in export earnings. Eight countries had to reschedule in 1981 and half the sub-Saharan states had to submit themselves to IMF tutelage. Critics of the IMF say that devaluation does not necessarily improve the balance of trade: they claim that because few African countries have market economies, imports and exports are not elastic enough to respond to devaluation. While many IMF programmes, such as those in Zaire and Sudan, have broken down in failure, the IMF can point to successful case histories: in Gabon, the Ivory Coast and Mauritius, IMF medicine has restored the economies to health.
When the west pulls itself out of recession, Africa should follow. Large inflows of foreign capital will be needed to develop Africa's rich resources, which are mostly still buried. Africa remains the last great region of earth whose Euromarket potential is largely untapped.