On the Disliking of Debt-Related External Financing

In recent days there has been discussions, both in the mainstream as well as social media platforms, with regard to how we Africans finance (and intend to finance) our economic development. China seems to be at the center of these discussions, particularly in the context of lending/borrowing. If we step back and relook on the current state of matters as to how most of developing nations finance their economic activities from the external sources’ paradigm – can we see a better option? According to the 2018 World Investment Report, issued by the United Nations Conference on Trade and Development (UNCTAD) — developing economies draws on a few external sources of finance, these mainly include Foreign Direct Investment (FDI), Portfolio equity, Long-term and Short-term loans (private and public), Overseas Development Assistance (ODA), as well as Diaspora Remittances. FDI has been the largest source of external finance over the past decade, and probably the most resilient to economic and financial shocks. To be precise, sources of external financing to Africa stands as follows: ODA & other official flows (36 percent); Diaspora Remittances (28 percent); FDIs (21 percent), Loans and other related investments (14 percent) as well as Portfolio Investment (1 percent). As data indicates, loans are yet to become the main source of external finances to Africa, rather FDIs and Remittances are gaining impact.
The good news here is that the growth of ODA has stagnated over the past decade, currently it amounts to about a quarter of FDI inflows to developing economies. On average, between 2013 and 2017 FDI accounted for 39 per cent of external finance for developing economies.
The other good news is that FDI, being the major source of such financing, does exhibit lower volatility than other sources. Debt-related flows on the other hand are susceptible to sudden stops and reversals – good that it is yet to become major. And to date, portfolio equity flows account for a low share of external finance to developing economies, especially where capital markets are less developed, like in our case, which is not a good sign, but like debt-related flows, portfolio equity are also considered as relatively unstable because of the speed at which positions can be unwound.
Now, under circumstances where many African countries expresses their desire to pursue socio-economic development propelled by industrialization and its imbedded structure – if we assume for a minute that we are serious with our intent this time around — if we think external debt-related finance has some dirty attached into it, where will the financial resources for infrastructure development and industrialization come from? How can we sustainably finance these industrialization drives? Yes, we know for a fact that any successful and sustainable industrialization policy needs to be preceded and/or accompanied by important development/transformation in the financial sector – but while we are developing the financial sector and its institutions, while we are enhancing national capacities to mobilize financial resources, both domestically and externally, what needs to happen?
If we so much dislike debt-related flows, should it come down to FDIs, Yes? but when it comes to FDIs, wouldn’t it be fair for us then if we seriously consider diverting from resource-seeking FDIs into both “market and efficiency-seeking FDIs”. Here, history could be a good teacher, that focusing on “resource-seeking FDIs” without strategic diversification seems like not a sensible approach worth pursuing. Currently the stock of FDIs in Africa is estimated at US$ 867 billion; about US$ 83 billion allocated to the East Africa nations and US$ 20 billion of this is in Tanzania. We know that a significant portion of these FDIs investments are resource and/or commodity-based – actually the decline in FDIs inflows to only about US$ 7.6 billion for the whole of East Africa and US$ 1.2 billion for Tanzania in 2017 relates to this. That’s why the recent challenge in both demand and pricing of commodity quickly got reflected to the reduction in annual FDI inflows to Africa. Much as there are expectations FDIs inflows renewals in 2018, but reasons underpinned such hope for recovery are in tied to better commodity prices. Again, a sensible approach is to create conducive climates to attract such investors from the usual top-10 sources of FDIs for Africa (i.e. US, UK, France, Italy, China, South Africa, Singapole, India, Turkey, etc) to bring their efficiency and market-seeking manufacturing FDIs into textile, automobile, ICT, industrial parks, etc.
If we are hesitant to the market and efficiency seeking FDIs route as well, then a little over a year ago my friends – Ali Mufuruki, Gilman Kasiga, Rahim Mawji and I wrote a book, titled: Tanzania’s Industrialization Journey 2016-2056, under the resource mobilization section of the book, we offered some other proposals we thought to practical given our circumstances. In a relatively lengthy way we labored to explain why we entertained and actually encouraged the idea that we need to proactively and aggressively encourage domestic resources mobilization, basically by strengthen our financial institutions (especially those with long term financing mandates) by enhancing the legal/regulatory and other infrastructure aspects as well as the accompanied financial instruments that will be linked to the practical resource mobilization for industrialization projects and entities that requires such funding. We also indicated the need for introduction of institutions such as industrial development bank(s) and banks to be more involved and align themselves in the country’s industrialization goals. We proposed the need for a combination of ownership (between the state, strategic/industrial investors and the public (via IPOs) and management of entities and projects that execute the industrialization programs. As well as the need to engage the Diaspora in our industrialization not only in financing (through remittances) but also leveraging from their knowledge, skills and experiences.

The Stock Markets and the Financing our Industrialization and Economic Transformation

In my last week’s article, I tried to indicate, picking from other country’s industrial revolutions and transformations perspectives, how they financed their transformation and how necessity it is for a country to transform its domestic financial resources mobilisation as it aims to transform its economy through industrialisation — like we intend to do. Today, I will focus on the need for a vibrancy stock market, as part of the tools economies normally utilise in financing their economic transformation.

History tells us, most successful industrialisation and economic transformation policies were preceded and/or accompanied by important development in the country’s savings and capital formation. The lesson in front of us is somehow clear in the sense that the process of capital formation go hand in hand with efforts to industrialise and transform. In my reading of the National Five Year Development Plan (FYDP-II) 2016/17 – 2020/21, which carries the theme: “Nurturing Industrialisation for Economic Transformation and Human Development”, the almost 400 pages document, the word Dar es Salaam Stock Exchange has been mentioned only once — the DSE mentioning came under the context of trying to explain why FYDP-I didn’t achieve some of its intended objectives. One of the reasons given being the lack of capital and funds to implement some of the key priorities, and DSE underdeveloped being one of the reasons. Other than that, DSE (or the capital market in that matter) has not been mentioned in the FYDP-II and its proposed financing strategies. And I think this is a mistake, similar to the one we made in FYDP-I.

FYDP-II is right — our local stock market is relatively underdevelopment. After almost 20 years of existence, the DSE is still narrow and thin, domestic market capitalisation (Tshs. 8.5 trillion) ratio to GDP is only about 10 percent, liquidity/turnover ratio (averaging about Tshs. 800 billion p.a) to market capitalisation is also about 10 percent. Only 17 domestic listed companies (23 inclusive of cross listings) are listed, and three currently outstanding corporate bonds. Government’s listed bonds worth about Tsh. 4.8 trillion are also listed, less than 5 percent of our current GDP; and the total number of investors at the Exchange is only about 450,000 — closer to only one percent of total investable population.

In my opinion, the upside potential is high, but only if we consciously decide to create and pursue the right policies under this context. Previously (& currently), the stock market has not been part of the country’s development plans (the same seems to apply under FYDP-II). DSE has not been treated as the primary national engine of capital formation and economic development by the Government or the donors. For instance, instead of driving most privatisations through the DSE and creating a tax efficient structure for companies listed on the exchange and investors in listed securities, different policies are normally chosen. The consequences of these policies are an economically weak stock market (as rightly stated in the FYDP-II), without a vastly adequate supply of securities in the market place. This is a big lost opportunity for financial inclusion, domestic capital formation and broad-based economic empowerment.

To avoid repeating similar mistakes, FYDP-II should specifically aim to revolutionise the growth and vibrancy of the stock market in the process of sustainable domestic capital formation as we strategies to finance our future. FYDP-II should have made DSE as one of the tenets of financing the envisaged industrial programs and its related infrastructure programs. How can the government facilitate growth and development of the stock markets? — there are several tools that can be deployed to achieve this objective. I will mention a few:

Out of hundreds of privatised state-owned entities, only seven (7) were privatised via listing into the exchange. These are TOL Gases, TBL, TCC, Swissport, Tanga Cement, Twiga Cement, and NMB. Hundreds of others were privatised via private sales, large part of these didn’t bring the financing, skills, technology or job creation, as was envisaged and most of these entities are no longer in operations. Comparably, entities that were privatised through the stock market on an efficient combination of ownership, by: the government, strategic/industrial investors and the public (by way of IPOs); have been more impactful, both socially and economically compared to entities that were privatised through private sales. The 7 mentioned companies are some of the largest tax payers, they provide some of most quality jobs — propelling their employees to middle income earners, being listed entities, they are relatively more effective for tax administration purpose. I therefore, urge the government to learn from this experience; the remaining SOEs should be conducted across the DSE. With the vibrant stock market (brought by, among others, privatisation of SOEs through the DSE), entrepreneurs, industrialist and business owners from the private sector will be attracted to use the capital market for their enterprises growth and development as well as an exit mechanism. This is how consideration to use the stock market for funding industrialisation would be meaningful.

Apart from privatisation, the government should also implement policies and legislative actions whose spirit was to facilitate growth of the local stock market, a wider economic empowerment and an inclusive growth i.e. policies such the economic empowerment; financial inclusion; local content; privatisation, etc. Furthermore, the Mining Act of 2010 as well as the Electronic and Postal Communications Act (EPOCA) of 2010 (amended in 2011) are some of the legislative actions meant to economically empower local citizens by way of ownership in such key sectors of our economy, however, provisions of these laws in the context of ownership distribution hasn’t been implemented, or for the case of EPOCA, the 2015 regulation provided an option. Were these laws implemented, we would have increased the depth, liquidity and the number of local investors in our stock market; that’s how we will encourage more savings and domestic capital formation.

Additionally, we should proactively and aggressively encourage domestic savings by pursuing programs that will introducing other financial instruments that can then be used as investment platforms for many. Financial instruments such as, common stock (for common ownership), micro savings bonds, infrastructure bonds, municipals revenue bonds, real estate investment schemes, collective investment schemes, etc must be championed by both the government and private sector using existing and potential financial institutions. These financial instruments should be linked to the practical industrialisation projects and enterprises that requires such funding.

As we pursue this approach, we need to be mindful of the fact that our current savings rate as a proportion of our GDP is about 20 percent while the country’s investment rate per annum is about 30 percent of the GDP, the gap is financed using foreign funds and capital. We need to gradually reduce this gap by way of developing our domestic capability to raise the rate of domestic savings and capital formation.

Blending private domestic and foreign investment through shareholding on the state-owned enterprises is vital for creating a vibrant local capital market. In relation to FYDP-II financing, a combination of government’s substantial ownership in existing (and new industries) via financial interests/commitments, combined with large number of shares trading publicly in the stock market, plus joint ventures between strategic/industrial investors on one hand and small investors (via IPOs) on the other hand, plus debt instruments i.e. syndicated trade credits, project finance will encourage the financing of the envisaged industrial program, enterprises and projects.

The FYDP-II has mentioned many strategies of financing identified priority sectors and projects; i.e. increase tax revenue by broadening our base; establishment or enhancement of specialist banks; foreign direct investments (FDIs); domestic borrowing; issuance of sovereign bonds, etc. What is clearly missing is the intent to grow the stock market so it can facilitate capital raising, encourage savings and capital formation — which is vital for the envisaged industrialisation program and for economic transformation. We shouldn’t continuously avoid this opportunity.


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