Economist urges African countries to come out of Aid Addiction

Dr John Kwakye, Senior Economist, Institute of Economic Affairs, on Wednesday called on African countries to stop the over-reliance on foreign aid since it had not help in transforming their economies.

According to him the continent’s long dependence on foreign aid had led to complacency and apathy in seeking alternative sources of mobilizing development resources.

While foreign aid has been used to finance development projects, finance technical assistance, or import critical commodities, Dr Kwakye said the long reliance on foreign aid had emanated in part from the advice of its development partners.

Dr Kwakye was speaking on the topic: “Overcoming Africa’s Addiction to Foreign Aid: A look at some Financial Engineering to Mobilise Other Resources.”

He said aid had not been enough to meet the developmental needs of the continent because more often than not donors did not keep to their pledges.

Besides the volatility and uncertainty over the delivery of aid means that countries had to either cut their budgets or abandoned planned projects.

“Africa’s dependence on foreign aid, however, comes with costs. Aid resources have not matched Africa’s vast development needs, particularly relating to building physical and human capital,” he said.

In addition, aid has increased the continent’s indebtedness with high servicing costs, thereby diverting resources away from development and social projects.

He said tied aid in the form of forced purchases from supplying countries and imposition of policy conditionalities, had often not served the interests of African countries.

Dr Kwakye said these problems meant that it was time Africa broke the ‘aid addiction,’ given its costs through tapping of alternative resources.

He said there was the need to broaden the tax base by roping into the tax net informal operators and self-employed, reducing exemptions and enforcing compliance.

On the expenditure side, he said, there was the need for prioritization by curtailing non-essential spending to create space for priority spending.

He said there was also the need for the use of domestic capital market to provide long-term funds for the budget and other developmental activities in the key sectors of the economy including health, education, roads, railways, ports, telecommunication, water and energy.

Dr Kwakye said bonds could be issued by government, municipalities and the private sector, adding however that it would be necessary to develop appropriate institutional infrastructure and legal framework.

“A stable macroeconomic and political environment will also be conducive for the market,” he said.

Dr Kwakye also suggested that countries took steps to harness the potential of remittances through adopting pragmatic measures such offering terms that make it more attractive to route remittance through formal rather than informal channels and reducing remittance costs by improving the financial infrastructure and regulatory framework; and courting remittances through reciprocal bilateral arrangements.

In addition, he suggested the use of Diaspora bonds to tap resources from Africa’s Diaspora populations.

“While allowing them to earn some return, they will also be contributing to the development of the continent. Diaspora bonds can be used to tap into the wealth of the African Diaspora and for return of flight capital held abroad by Arica’s residents,” Dr Kwakye added.

Other means for countries to shore up revenue include the use of future foreign exchange flows for today’s development through securitization and also reverse capital flight by stemming capital outflows and recovering stolen wealth hidden abroad.

He said the first required strengthening anti-corruption institutions to check financial abuse by political leaders and to institute strong punitive measures for offenders while the second called for using vehicles established by international bodies working together to recover countries’ stolen assets, including the Stolen Assets Recovery (STAR) initiative.

The STAR initiative also helps countries establish institutions that can detect and deter illegal flow of funds.