Africa Reducing corruption promotes human capital, private investment and growth

With cautious investor sentiment in a world of uncertainty, Africa has much to gain by eliminating the roots of corruption.

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Africa has a soul play

Africa has a soul

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The commodities boom may be over, but sub-Saharan Africa is still experiencing growth. This is a remarkable fact considering that the continent is a net exporter of primary commodities.

By adopting sound investment policies over the past two decades, in tandem with key reforms, many African Governments started a trajectory of economic growth that is set to beat the “resource curse.” Although governance has improved, the perception on transparency remains a concern for international analysts and large institutional investors.

The research on this subject indicates that beyond societal flaws in morality and ethics, corruption thrives in context of generalized poverty, inadequate remuneration, inappropriate work conditions and convoluted administrative procedures.

This observation alone poses risks for reputable investors and businesses that wish to take advantage of the growing investment opportunities in the continent. Because in fact, many African nations are just compensating for the long periods of economic subservience, political instability and sluggish growth that plagued the continent during the end of the previous century.

Corruption reduces the amount of investment that truly goes into the production of goods and services, thereby affecting job creation, industrialization and economic growth. A recent World Bank report indicates that nearly $1 trillion is paid each year in bribes around the world.

World Bank Enterprise Surveys data also shows that Sub-Saharan Africa has some of the world’s highest levels of corporate bribery. Its data shows that 22.6% of companies surveyed in the region have experienced at least one bribe payment request.

This compares to 24% for MENA, 30% for East Asia and Pacific, 10.4% for Latin America and the Caribbean and only 1.9% for high-income OECD countries. Thus, addressing the causes of corruption is important for investment efficiency and socioeconomic development in Africa.

In the current context of low commodity prices, the Governments of many extractive economies in the continent are resorting to expenditure cuts and refocussing on key national priorities such as health, nourishment, public safety and attracting investments.

Major oil producers, such as Angola and Nigeria are courting foreign banks and investors in a bid to maintain the inward flow of exchangeable currencies to the domestic economy in order to sustain the past investment levels. This exercise is favouring exotic funding models, such as PPPs, BOOTs, and even absolute privatizations.

As additional support for inward private investment, countries such as Senegal, Nigeria and Angola have set up sovereign wealth funds, dedicated to the highest standards of transparency and accountability, which co-invest alongside private investors in key domestic industries.

Angola’s sovereign wealth fund, Fundo Soberano de Angola (FSDEA), which was created in 2012 with a $5 billion endowment ensued rigorous governance measures before it spent a single penny of the nation’s money. Deloitte & Touch, was appointed by the government to independently audit its financial performance.

And it signed up to the generally accepted principles and practices defined by the International Working Group of Sovereign Wealth Funds, an association established by the IMF. FSDEA is required to produce financial statements in accordance with the International Financial Reporting Standards.

Other noticeable steps have been taken to improve institutional efficiency in the continent. Many Governments have committed to reducing bureaucratic red tape and reinforcing the legislative and judicial systems in recent years.

Rwanda, Morocco, Kenya, Ghana and Angola, have simplified their tax regimes and reduced the time required to start-up a business by reducing the minimum investment criteria, offering one-stop shops for administrative support and all nature of registrations, and investing in business-critical infrastructure, such as energy and transport.

The commitment to reducing corruption has even reached one of the region’s most serious economic concerns – money laundering. The Financial Action Task Force (FATF), for instance, removed Angola from its black list in 2016, after confirming the national adoption of a set of strict banking regulations, set to improve transparency in the business sector.

Algeria was also removed from the black list this year – illustrating that two major economies in the continent have made significant progress in addressing this issue. A research carried out by the Hong Kong Baptist University estimate that each 1% increase in the corruption level reduces the growth rate by about 0.72%. Therefore, the measures being adopted by African Governments are key for socioeconomic development.

Over recent decades, the socio-political context of African nations has improved dramatically. Since the beginning of the current century, the number of civil conflicts have steadily declined, in tandem with establishment of democracies and adoption of market reforms.

This socio-political stability has set the continent on a growth path with several of the continents economies are among the fastest growing in the world. And whereas there is scope for improvement, African governments have proven to be committed to this positive trajectory.

So, it is up to international analysts and large institutional investors to add optimism to their observations in order to reap the benefits of undisputable growth or let the more audacious others take over.

This is a feature by José Filomeno dos Santos, Chairman of the Board of Directors, Fundo Soberano de Angola.

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