At the end of 2008, total foreign exchange reserves of Africa stood at $460bn. A country likeNigeriapresently has sufficient foreign reserves to cover her imports for the next twenty four months. One requires more than a lay understanding of macro- economics to decipher what Africa stands to gain in her continuous pile up of savings in a currency that is loosing its value and awe by the day, while the continent’s hundreds of million of inhabitants suffer extreme deprivation. Concisely, what utility does bulky foreign exchange reserves serve the beleaguered continent ofAfrica?
To pursue a meaningful conversation in the subject of Africa’s foreign exchange reserves, the peculiar monetary history of the continent must be borne in mind. As is well understood,Africawas drafted into the global economic system through the process of colonialism. During colonial times, the foreign exchange earned from the sale of exports was compulsorily held inBritainin the case of Anglophone Africa.Britainauthorized the issuance of local currencies based on the strength of the foreign reserves of individual colonies. In this way, Africa was forced to surrender all export earnings toBritain, to trade and to invest the proceeds in her own economy as she deemed fit, with no benefit at all accruable to the colonies.
By 1955, Africa’s sterling reserves in Britain was GBP1, 446million – more than 50% of the entire reserves of Britain and the commonwealth. The case of Francophone Africa was no different – only more pathetic – for the CFA, fifty years after the end of formal colonial rule, is still directly linked with the French Franc nay Euro. Currently, the Francophone countries have to meet certain obligations to the French and European treasury including the requirement to deposit a certain amount of reserves at any given time.
While Africa’s foreign exchange reserves was used to build Europe and by extension America, the rest of the world held their foreign reserves in gold until 1973. With the de-linking of the dollar from gold, the retention of foreign reserves in strong and stable currencies, most notably the United States dollars became the norm; most countries hold their reserves in US treasury bills and bonds. It is worthy of note that in the investment of foreign reserves, safety and liquidity take precedent over other considerations, demanding that reserves be held in the most stable investments that unfortunately yield the lowest returns.
The international monetary regime dictates that the foreign reserve of a country be used as the yardstick to determine its ability to repay its foreign debt or to make payments for its imports. Theoretically, it is expected that the foreign reserves of a developing country, of which most ofAfricafall under, should be enough to meet its import requirement for at least six months. Global monitoring institutions serve as watchdogs to sanction any country that defaults in this requirement, usually by downgrading the country’s credit rating, making further borrowing difficult.
The obligations of the international monetary structure means that although Africa has $460billion held up in foreign economies at insignificant interest rates, yet, the continent is constrained to seek for other more expensive sources of capital mobilization, which it needs to invest in crucial infrastructural expansion and manpower development. Simply put, Africa cannot assess her foreign reserves to solve her problems, for fear of being ostracized from the global trading arrangement. A declaration of credit unworthiness by the powers that be means catastrophe of epidemic proportion for the import dependent continent.
India’s foreign reserve stand at roughly USD$281million (October 2009), up from USD$3million in the early 1990s. This increase is directly linked to increased exports, capital workflow and work remittances. The rise inIndia’s external reserve has led to several Indian economists and leaders making a case to invest the reserves in the infrastructural improvement needed to sustain the country’s rapid growth rate. In the case of China whose mostly dollar based foreign reserve stand at approximately USD$2.132trillion, the fast depreciating value of the dollar has forced the leadership of the country to lead the pack of those clamoring for a removal of the US dollar as the global trading currency, while it searches desperately for internal measures to save her reserves from further devaluation.
The colonial legacy of economic lethargy, engendered when all monetary decisions were taken in Europe and passed down to the European colonial administrators who in turn instructed their African underlings, has left Africa in a situation where no action is being taken regarding the utilization of her huge foreign reserves to benefit the continent. African leadership displays an unsurprising apathy to the issue of the continent’s foreign reserves, and is more interested in clamoring for increased aid. As during the colonial era, Europe and now theUnited Statescontinue to manage and benefit fromAfrica’s external reserves.
On the part of Africa’s intellectual class, rather than research for appropriate mechanisms to ensure that Africa’s foreign reserves cease to prop the faltering Western economies, many African economists, resident and in the Diaspora are more inclined to take after their Western counterparts in analyzing the global economic crises and what the United States and Europe must do towards a restoration of their economies.
However, some conscious Africans have spoken out regarding the continent’s foreign reserves. In its October 2009 issue, NewsAfrica magazine interviewed Jean-Louis Ekra president of the African Export Import Bank. Ekra mulled for the channeling of Africa’s foreign reserves to institutions such as the African Development Bank (AFDB). This according to him will ensure that the Western rating institutions will not downgrade the continent, being that the AFDB, an internationally accredited institution will guarantee the disbursement of the loan. A brilliant suggestion, no doubt, from a patriot concerned aboutAfrica’s continued cash drain in the form of foreign reserves.
The reservation about the AFDB and its like is that it is a stooge of the World Bank and other similar international agencies. The question this observation begs is more than threefold; shouldAfrica’s foreign reserve be expended in the same cycle of running the bureaucracy of AFDB? Should paying international consultants huge sums of money for works sometimes shoddily executed, and often a repetition of what some other institution had done in the past, take precedence over verifiable infrastructural and human development indicators? Should the continent’s foreign reserves be expended in the sponsorship of irrelevant workshops and conferences on subjects far removed fromAfrica’s immediate need, but of much importance to the West?
The institution’s track record will provide the answers; apart from its noble sounding name and perhaps aspirations, the AFDB has not, in its forty five year history of existence, shown itself to be radically different from other institutions whose development efforts in Africa have yielded scant benefits. There is little in the form of strategic development achievements that can be attributed to the efforts of the AFDB. In this regard, it is expedient that the investment ofAfrica’s foreign reserve within the continent not assume a business-as- usual approach if any verifiable success is to be recorded.
The colonially entrenched cycle of enriching the West to the detriment of Africa must be reversed.Africacannot keep begging and borrowing to fund development efforts, while it has money invested in another nation at little or no profit and at the risk of being further devalued. There is need for serious research and thought to be invested in this matter by African leadership and experts, towards arriving at a germane solution that would benefit the hundreds of millions of poverty stricken people on the continent. Ways of reducing imports and improving intra-continental trade for the one billion inhabitants of the continent should be seriously explored. Fifty years after independence,Africais only a victim of her own ignorance and inability to rise up to the challenge to change the existing colonially imposed structure.
First published by NewsAfrica London, October 2009.