Financial creativity crucial for East Africa

East Africa should continuously cooperate with Developmental Financial Institutes, known as DFIs, to deal with the peak period of debt repayment.

Countries in the region are dealing with a growing debt burden and will gradually reach the peak period for repayment, due to the major commitment to infrastructure financed by the DFIs.

One solution is for countries to cooperate with DFIs continuously to deal with the repayment issue and convert the burden into an opportunity for growth.

Benefiting from infusions of external capital, East African countries have seen unprecedented levels of stable economic growth over the last decade. However, as a consequence, the peak period for debt repayment is also arriving.

For example, Kenya's treasury will have to deploy approximately 40 percent of its tax revenues just to service loans next year.

Should we view the side-effects of progress in loans as a sign to cut down engagement with DFIs? The answer is definitely no.

In fact, the current debt situation has already benefited from low interest rates and well-designed repayment models provided by DFIs.

It's hard to imagine the completion of the expensive Mombasa-Nairobi Standard Gauge Railway without the support of concessional loans from the Export-Import Bank of China. The modern railway has become a perfect model to leverage the low-cost overseas capital to accelerate domestic construction and foster tremendous opportunities for Kenya's national strategy and regional development.

Meanwhile, DFI loans are often designed to facilitate repayment with grace periods. Accordingly, Tanzania was firmly rated by the IMF as a state with low risk of external debt distress, despite having a high external debt rate of roughly 70 percent.

One fact contributing to this is that roughly all the external debt of Tanzania remains under DFIs, especially multilateral DFIs, such as the International Developments Association and the African Development Bank. For example, DFI financing assists Tanzania considerably in stabilizing its repayment burden and debt distress.

With the help of external DFI financing, other often-neglected spillover effects help to foster socioeconomic development.

Although there is a seemingly inappropriate budget allocation deficiency for education and health in African countries, the robust economic growth and technology transfer will gradually and effectively compensate for social welfare.

This so-called share squeezing is temporary, and could be the beginning of new advantages, as some Asian countries experienced after World War II.

Technology transfer, an increasingly vital principle in any project in Africa, will also partially compensate for insufficient investment in education. There is even an argument that the completion of a large-scale project is a graduation ceremony for the local workers involved.

However, it is difficult for government leaders to wait for the spillover effects to take effect. That requires time.

Currently, Tanzania's leadership is launching unprecedented campaign to enhance the country's competitive capacity in the form of tax reform. The government plans to collect taxes evaded or underpaid going back 20 years. Other than political factors, the tax revenue to be collected is expected to relieve Tanzania's repayment burden and dependence on development aid, especially for those with intervention suspicions.

The necessity to correct tax evasion should never be denied, but time is needed to examine the results of this ambitious and dangerous campaign.

It's obvious that this controversial operation has already offset the state's potential spillover effects. The business environment has been damaged, since the Tanzania Revenue Authority is being urged to collect a fixed amount in a limited time, which leads to unreasonable fines without transparency.

Large numbers of entrepreneurs, who are not only the pillar of support for the state in this difficult period but also the tunnel for spillover effects, have been driven away or even into bankruptcy.

Moreover, the government's attitude toward developmental financial engagement should never be packed in the form of nationalism, no matter whether or not the engagement has strings attached. A complete deviation away from external financing will put the country into worse financial condition than ever.

The answer to financial difficulties lies in continuous and deeper cooperation with DFIs, rather than completely pulling away. Further cooperation is the pivot of reversing the vicious cycle of the debt burden. Creative use of DFIs, such as introducing Public and Private

Partnerships, will not only leverage more smart capital and relieve sovereign guarantees, but also improve the state's financial management skills.

Financial creativity brings more learning opportunities to technocrats than simple lending. New skills will, over time, enhance the state's financial condition from both sides.

The author is a master's candidate at SciencesPo, Paris. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 12/16/2016 page13)