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Africa's great state enterprise sell-off

If I make x and spend x+1, I accumulate debt. If I fail to make my debt payments, traditional lenders like banks won’t lend me any more money. My only remaining option, is to borrow from friends and family, or a lender of last resort. If I fail to pay these lenders back, I’ll have to sell the family car, my furniture, and possibly the wife’s jewelry. 

Dutchmen participate in an auction in the Dutch countryside

Divestiture of state assets is fraught with risk. Caution, not exuberance over for immediate debt relief, should be the fiscal motto of every African nation. (Creative Commons)


Several African nations consistently spend x+1, when their revenues are x. This is usually done based on a formula, a safe ratio of debt to GDP, and on an assessment of the future growth of their economies. 


But, when the dollar wildly appreciated in 2022, many African nations found their debt to GDP ratios going into unsustainable territory. To continue to finance their sudden ballooning debt, those who could borrowed from neighbors, sometimes rich Arab states, but more often than not, they turned to countries like China for assistance. 


When these avenues of financing began to be exhausted, several African nations turned to the IMF. The IMF standbys signed thereafter, came with conditionality. Some countries are now required to allow their currencies to float freely, and others are required to privatize select state assets, or both. 


The expanding debt exposure of African states has already led some Asian countries to substitute their debt for equity in state firms. Loans are now consistently written off for exclusive mining rights of one natural resource after another. Couple this with the IMF requirement to privatize select state firms, and Africa will witness a great state asset sell off in 2023.


African nations must travel this divestiture road with caution. One thing African nations consistently forget is that with certain types of foreign direct investment comes domestic profit repatriation. Too much FDI might challenge a country’s ability to find the foreign exchange necessary to regularly repatriate the profits made by foreign investors in the domestic economy. This could be particularly precarious for countries like Nigeria, Ghana and Egypt who are already struggling to secure hard currency for basic imports. 


What these countries need is domestic investment, not adverse forms of FDI that will trigger higher levels of demand for hard currency. If a large number of state enterprises are purchased by foreign direct investors, this will lead to the eventual rise in domestic demand for hard currency, which in turn can cause the foreign debt stock held by a nation to become even harder to finance. 


When you make x, but spend x+1, you can lose your shirt. As a nation state, your shirt is your comparative advantage, usually entrusted to select state enterprises. Divestiture of select state assets is fraught with risk. Caution, not exuberance over using divestiture for immediate debt relief, should be the fiscal motto of every African nation in 2023. Divestitures, and debt equity swaps, that are not well thought out, are not our friends.

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