Why Financing Government is more rewarding in Africa than financing enterprise and the threat to economic integration

The African Continental Free Trade Area's gradual implementation has reignited discussions on the potential of intra-African trade, currently at 16%–17%. It is acknowledged that enhancing economic integration will make producing, investing, and trading in Africa more fruitful, thereby fueling growth, employment, and shared prosperity across the continent's 1.5 billion inhabitants.

However, a concerning trend has emerged: financing government affairs appears to be more lucrative than financing enterprise in many African economies. Research from the Africa Prosperity Network (APN) indicates that implementing visa-free travel and interconnected payment systems alone could boost intra-African trade beyond 25% within the first five years of adoption.

By enabling a tailor in Bamako to showcase his garments on Instagram and a customer in Maputo purchasing instantly using her mobile money wallet in Mozambican meticais, a commercial highway would materialize, enticing investors and financiers to inject capital into transport and logistics. Ghanaian President John Dramani Mahama's recent call for local-currency trade settlements and integrated digital payments, alongside bolstering local processing of Africa's mineral and agricultural resources, underscores the urgency of this issue.

For Africa's single market to prosper, it must become more rewarding to produce, invest, and trade. Simplifying movement and payments are indispensable, but they will yield far greater results if the businesses that serve that market can also access affordable financing. The challenge lies in many African economies where governments borrow heavily at high-interest rates, enabling banks and investors to reap substantial returns from Treasury bills and bonds, with less operational burden than investing in production.

Manufacturers and agribusinesses, despite their potential to create jobs, encounter difficulties attracting capital or securing loans when government securities provide attractive returns. High nominal yields may not necessarily translate into high real returns, as inflation and currency depreciation can diminish them. Government bonds can finance infrastructure, but persistent deficits drain scarce savings and drive up borrowing costs for businesses.

The potential repercussions echo America's experience of financialization, where financial returns and shareholder valuations overshadow business decisions, potentially leading to a decline in manufacturing dominance. In Africa, the danger is that financing government becomes more attractive than financing enterprise. This is why the Africa Prosperity Network advocates for affordable finance to be a cornerstone of Africa's integration agenda.

A robust single market with over 1.5 billion consumers would bolster the business case for factories, agricultural processing, and regional supply chains. Nevertheless, market access alone cannot finance machinery or fulfill orders. Without stronger African production, there is a risk of integrating markets primarily for goods manufactured elsewhere.

The Africa Credit Rating Agency, spearheaded by Dr. Sifiso Falala, aims to address the issue of how African risks are evaluated and secure affordable financing for productive investments. The integration of markets and sound economic management must advance concurrently, with low, stable inflation, credible public finances, reliable electricity, predictable taxation, and enforceable contracts fostering an environment conducive to productive enterprise.