Africa Weekly Review: More trouble for Nigeria’s Governor Soludo; IMF reservations about the DRC/China agreement; currency redenomination in Zimbabwe

Nigeria: New Governor wanted

A report into the Africa Finance Corporation (AFC) by the office of Babagana Kingibe, the Secretary to the Nigerian federal government, has added to the difficulties of the governor of the Central Bank of Nigeria (CBN), Charles Soludo. The full document is not formally in the public domain but some copies of the final version (without signatures on the final page) are in circulation.

The AFC is the brainchild of Soludo and intended to be a pan-African institution with a mandate to invest in the continent’s infrastructure. Although Soludo envisaged AFC as a privately owned and managed operation, the CBN made an equity contribution of US $463 million to kick-start the project, funded from sales of naira-denominated Treasury paper. The governor and his allies also leaned on local banks to invest in the AFC: two of them, the United Bank of Africa and the First Bank of Africa, each have 9 per cent stakes alongside the CBN’s 42.5 per cent interest.

AFC’s mission still to be accomplished

The report from Kingibe’s office finds that the CBN did not have authorization either from the National Assembly or from the President to use CBN money to fund its investment in the AFC. It also notes that funds were committed before the corporation was legally operational. It notes tartly that there is evidence of the AFC using these funds to invest in global money markets, but zero evidence so far of any investment in infrastructure development.

Soludo is accused in the report of gross negligence, recklessness and gross abuse of office. Even before this report it was very likely that his current term of office, which runs until mid-2009, would be his last. He was seen as having overstepped his authority with a series of policy announcements in August 2007, including the redenomination of the naira. As a protégé of the former president, Olusegun Obasanjo, he was in any case vulnerable. It is also worth mentioning that he has poor relations with Shamsuddeen Usman, unsuccessful challenger to Soludo for the CBN governorship in 2004 and now Nigeria’s finance minister.

DRC: A clear message from the IMF

The IMF mission in Kinshasa released a statement on 28 July following a recent staff mission. The main point in the statement, alongside the discussion of the official economic programme, is a comment about the agreement between the government and the Chinese companies. The mission raised specific questions about the deal’s impact on debt and debt sustainability. If these questions are not answered to the satisfaction of the IMF, the DRC’s path toward comprehensive debt relief would appear to be blocked; but if the agreement is amended to reflect the IMF’s concerns, it may no longer be to the satisfaction of its signatories.

In our Africa Weekly Review dated 24 July we noted the potential open-ended financial repercussions of the agreement as well as the likely reservations of the IMF and the broader donor community. According to some investors at the exotic end of emerging markets, the IMF has had its day in Africa, and China can now take its place in international development finance. If this point of view is put into a Congolese context, it would suggest that the government would be likely to stick to the agreement with China and reject any major concessions to the IMF: if the path to debt relief is blocked as a result, China would then fill the financing vacuum. We hear this argument quite often, not only with regard to the DRC/China accord but equally in relation to the Ivory Coast, where the Fund leaned on the government not to borrow offshore from non-resident institutions in local currency at market rates.

This stance has several flaws worth noting. The first is that the Congolese government, by becoming dependent on one bilateral partner, would have limited access to financing from multilateral and other bilateral sources. The second is that the open-ended nature of the agreement makes it unlikely that the government would be able to meet the cost of Chinese infrastructure works from its share of mining profits. In this case, it would need to either borrow the shortfall from China or else give additional mining concessions or other assets to its Chinese partners. Other mining investors in the DRC, who are waiting for the start of renegotiations under the contract review on 5 August, would be anxious about the second possibility.

The merits of Fund conditionality

A third flaw is that the conventional path to debt relief leaves the IMF with considerable leverage until “completion point” when the debts are cancelled and the borrowing government is said to make its exit from its unsustainable burden. At times the Fund comes over as an exasperating international bureaucracy. However, it also seeks to tie borrowers to policy and structural conditions in the name of macroeconomic (not sectoral) stability. The Congolese/Chinese accord has no such conditionality, nor would we expect it from a commercial agreement.

The scale of the external debt stocks whose cancellation is being considered is almost incidental. This debt totalled US$9.8 billion at the end of 2006, divided between bilateral (US$6.2 billion), multilateral (US$$3.3 billion) and private (US $300 million). The debt mostly originates from unpaid loan agreements from the Mobutu era and includes a large element of capitalised interest. We can safely say that at least the bilateral and private creditors will have long since written off these debt obligations.

Zimbabwe: No more billions to spend

The announcement on 30 July by the Reserve Bank of Zimbabwe (RBZ) of a currency redenomination with effect from 1 August is the repeat of a formula that has already been tried without success. Such a step can work only if inflation has been mastered and if a macroeconomic framework is in place to contain price pressures. This has been proved, inter alia, in Turkey and Ghana. Clearly these conditions do not exist in Zimbabwe, despite the call for a six-month wage and price freeze from Gideon Gono, the RBZ Governor. Neither the employers’ body nor the trades union umbrella group have shown any interest in the idea.

ZWD10 billion will now become ZWD1, but sadly this new Zimbabwean dollar will not have any additional purchasing power. As we noted in our first Weekly Review dated 18 July, prices are more than doubling every hour according to the most recent official estimate of annual inflation (2.2 million per cent). In the absence of a credible anti-inflation strategy supported by an international rescue package, the RBZ’s announcement will have to be repeated. The relief for bank counters and the country’s computers therefore will be short-lived.

No money creation, no Mugabe

The centrepiece of an anti-inflation strategy has to be a rapid slowdown in money creation. This requires an assault on the budget deficit, which in turn means a huge reduction in public spending. However, since the Mugabe government needs to pay the employees and purchase the equipment without which it cannot survive, we are not hopeful. The financing package will not be released unless the president is removed from power or at least sidelined. Our call, therefore, remains that a regime change will come about as a result of economic crisis.

One of the organisations central to the survival of the regime is the state-controlled printer of banknotes. Fidelity Printers and Refiners depends on imported technology and spare parts, and has been known to suffer production delays as a result.

Recent research reports:

South African mining: Opportunities in a changing regulatory environment
Government negotiations are not one-sided

Ivory Coast: Electoral risk ahead
A strong economic rebound would likely follow a successful election outcome

Nigeria Quarterly
Robust macro framework gives ample breathing space

With best regards,

Gregory Kronsten
Director, Africa Research
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