The EU has ostensibly been trying to move towards a ‘partnership of equals’ with Africa for decades, but a donor-recipient relationship still largely dictates Europe’s policy towards the continent. COVID-19 has worsened this power asymmetry, as many sub-Saharan African countries face crippling debt and collapsing public infrastructure. But the pandemic also offers an opportunity for Africa to break out of a cycle of indebtedness and aid dependency. Europe should play its part in debt relief and dedicate more resources to curbing illicit financial flows. Doing so could pave the way to a more equal EU-Africa partnership, which European Commission President Ursula von der Leyen has made it a strategic priority to achieve.
Africa’s economic development is at a critical juncture: the African Continental Free Trade Area (AfCFTA), which launched its first operational phase in July 2019, commits 54 nations to removing tariffs on goods and liberalising trade in services. If successfully implemented, the AfCFTA may raise GDP and exports substantially. Stronger African economies with a plentiful labour supply could also allow Europe to diversify its supply chains away from Asia, and China, in particular. In the words of EU High Representative Josep Borrell “we need a strong Africa, and Africa needs a strong Europe.” But Africa will be unable to realise its economic potential without a more robust response to the crisis caused by COVID-19. While Europe has devoted trillions to healthcare, income support and emergency lending to businesses, many African governments have had to re-route funds towards healthcare, cutting vital investments in education and public infrastructure, and relolocate development funding away from existing programmes towards the response to COVID-19.
From early in the pandemic, the EU promised to prioritise Africa and reallocated €15.6 billion from existing programmes to the ‘Team Europe’ global coronavirus response. This includes €12.3 billion to address the socio-economic fallout of the pandemic, around a third of which was allocated to Africa (€2.1 billion for sub-Saharan Africa and €1.2 billion for North African countries). EU assistance fills crucial gaps, but many sub-Saharan African governments urgently need more fiscal headroom. To help make this possible, the EU needs to tackle two structural issues: illicit financial flows (IFFs); and mounting debt crises in numerous sub-Saharan African countries. If Africa and Europe are “natural partners”, as von der Leyen claims, EU initiatives in these areas are essential.
IFFs are defined as the cross-border movement of money and assets that are illegal in their source, transfer or use. IFFs include tax avoidance practices, illegal tax evasion and money laundering. Ending them was a priority for the African Union long before the pandemic. The number is significant, with a recent UNCTAD report having found that $88.6 billion per year in revenue is lost by African countries. The EU response to IFFs so far has focused on drawing up annual lists of ‘non-co-operative’ countries on tax and money laundering. But the Organisation of African, Caribbean and Pacific (ACP) States has described it as “unilateral and discriminatory”. The EU’s lists are viewed by some Africans as an attempt to shift the blame to developing countries, despite European countries such as Belgium, Germany, Spain and the UK being among the top 10 destinations for IFFs from Africa.
Europe should make IFFs a sustainable development priority; currently they barely feature in the EU development agenda. First, the EU should advocate the establishment of an inter-governmental forum on IFFs, facilitated by the UN, which could negotiate a new inclusive agreement that fully addresses the problems. Second, the EU should dedicate more resources to international capacity-building projects to counter IFFs, such as the Addis Tax Initiative. This would better equip African governments to audit multinational taxpayers, identify, freeze and recover assets and launch international investigations.
African countries must repay $40 billion in foreign debt in 2020 and up to $50 billion in 2021; in sub-Saharan Africa median government debt-to-GDP levels are forecast to stand at 71% on average by the end of 2020. The G20’s COVID-19 Debt Service Suspension Initiative (DSSI), which postponed debt service payments on official lending to developing countries until 31 December 2020, will provide some relief. The EU should advocate extending the deadline until 2022. However, newer creditors outside of the multilateral system – China and the private sector – have increasingly dominated lending to sub-Saharan Africa in the past decade. China has refused to join the DSSI, while the private sector has overwhelmingly refused to make any concessions on African debt repayments. Hence Europe should start building consensus for a new debt refinancing architecture which includes these newer creditors, putting increased pressure on China and private lenders to join.
Yet debt moratoriums do not always resolve debt crises or foster recovery in the long-term. IMF director Kristalina Georgieva has warned of a “lost generation” and global economic upheaval if tougher action on debt is not taken. IMF research shows that cost of action now could be dwarfed by the cost to global growth, credit and investment should countries (such as Zambia, Angola and Kenya) default on their loans. Thus the EU should consider more radical solutions. One option may be debt swaps such as ‘debt for development’, whereby creditors cancel debt on condition that the money they release is spent on certain projects. Such swaps both encourage sustainable development and relieve the debt burden, and are typically facilitated by international aid organisations which work with governments to structure implementation plans.
The EU should also push for the IMF to issue additional Special Drawing Rights (SDRs) to African governments. In a process similar to quantitative easing, a new SDR allocation would allow these countries access to hard currency to bolster their foreign reserves without being forced into running a current account surplus to pay their debts. Alternatively, debt cancellation would directly help African governments increase their public spending and build resilience to future crises. Debt reductions and interest moratoriums can still leave countries with a large debt stock hindering their development, once repayments are resumed. There is also a strong geostrategic argument for the EU to tackle Africa’s debt distress. Europe faces competition for partnership with Africa from China, which has become Africa’s largest trade partner. However, some African economies are increasingly indebted to Chinese banks, which own around 20% of Africa’s debt, which has led to growing concerns in several African countries about Chinese ‘debt colonialism’. Decisive European action could simultaneously undermine China’s credibility on the continent and build trust with African partners.
European initiatives to confront IFFs and debt distress will not automatically build a healthy EU-Africa partnership or stimulate a strong African economic recovery from COVID-19. These measures must be accompanied by others such as increased investment in African infrastructure and the diversification of exports. Intra-continental trade currently accounts for only 17% of African exports compared to 69% in Europe and 59% in Asia. The AfCFTA has the potential help build a strong domestic market, providing a basis on which African economies can diversify. But as part of a recovery effort, tackling IFFs and debt relief are an ideal place to start. The EU has long been accused of imposing its own priorities on the EU-Africa partnership; the COVID-19 pandemic is a chance for Europe to respond to African priorities, following through on its ambitions for an agreement based on equality in an era where the EU is in need of new friends. Europe should seize the opportunity to build a ‘partnership of equals’ – based on trade and investment, rather than development aid and debt.
‚Europe Needs a Strong Africa, But Will It Work to Achieve One?‘ – Insight by Katherine Pye – Centre for European Reform / CER.