A summary of Congressional hearings on U.S. sanctions in Sub-Saharan Africa

This past June, the Senate Foreign Relations Subcommittee on Africa and Global Health Policy held a hearing to discuss U.S. sanctions in Sub-Saharan Africa. The United States, the European Union, and the United Nations impose far more sanctions on Sub-Saharan African targets than on any other region, and these sanction regimes have been changing over the last two decades from broader, country-level sanctions to more targeted sanctions on individuals, like asset freezes or travel bans. This hearing provided a timely opportunity to review the evolving role of sanctions in U.S. foreign policy in Africa, their effectiveness, and key areas for improvement and innovation. A range of witnesses from civil society and academia, most of whom worked previously in public service, shared varied perspectives. While, on the whole, the witnesses believed that the results of sanctions in Sub-Saharan Africa have been mixed, they shared a view that clear, well-designed, targeted sanctions, if aggressively implemented as part of a larger strategy, could significantly influence the behavior of targeted entities. We summarize the main take-aways below.

Sanctions as a tool

The strongest point of consensus among the witnesses is that sanctions are—or at least should be—a tool, and not a policy in and of themselves. In other words, sanctions should be just one of many pressure tactics applied to a target as part of a coherent and well-articulated larger strategy. Sanctions should not be implemented just to “make us feel we are doing something” or as substitutes for other actions, but rather as complements to other tools like aggressive diplomacy, peacekeeping, mediation, and support to civil society.

Brad Brooks-Rubin, policy director of the Enough Project, noted that where sanctions have failed in the region, they failed not because sanctions don’t work in Sub-Saharan Africa, but rather because they were applied only in a limited way. As successful examples of sanctions, Dr. Princeton Lyman, Senior Adviser to the United States Institute of Peace, pointed to Sierra Leone, Liberia, and Côte d’Ivoire, where restrictions in the trade of certain commodities helped weaken rebel forces. In his view, sanctions alone would not have worked in these countries if other actions such as international peacekeepers had not also been deployed.

Encourage multilateral approaches

The witnesses also agreed that U.S. sanctions should not be applied in isolation. Sue Eckert, Senior Fellow at the Watson Institute for International and Public Affairs at Brown University, testified to the growing importance of regional entities in exerting political pressure to sway targets’ behavior. When it comes to U.N. sanctions, which the U.S. has a strong role in shaping, regional sanctions from the African Union or ECOWAS actually preceded those sanctions in approximately 75% of the cases. Overall, regional African organizations are involved in about 95% of the U.N.’s sanctions on African targets. Their involvement reduces targets’ ability to evade sanctions and enhances the norm-setting and stigmatizing function of sanctions.

However, it isn’t always easy to get multilateral support on such a politically fraught issue as sanctions, as countries face different cost-benefit analyses in considering whether to impose sanctions. For instance, South Africa has not gone along with sanctions on Zimbabwe, because as a neighboring country, South Africa is concerned with the risks of economic or political collapse in Zimbabwe on its own economy and stability, and sanctions could play a role in causing or accelerating collapse. Or, in the case of the political crisis in the Democratic Republic of Congo (DRC), the U.S. has recently applied new sanctions to one individual and may be poised to impose more, but the African Union remains divided about how to approach the electoral slippage—a particularly complex issue given the DRC’s many neighbors with competing interests in the country. Dr. Lyman urged that effective DRC sanctions would need to have the support of the African Union and the U.N.

Short of obtaining multilateral support, the U.S. has in some cases even started applying “secondary” sanctions, which imposes sanctions on countries for doing business with those targets the U.S. has sanctioned. A few of the witnesses encouraged this practice, noting that it tends to be “highly effective.”

Set realistic and specific targets: regime change should not be the goal

The speakers agreed that effective sanctions require clear and realistic objectives, and that the effectiveness of sanctions should not be measured by regime change. Dr. Lyman, in particular, cautioned against attempts to use sanctions as a means of achieving deep political transformations, and pointed out that a strong sanctions regime cannot substitute for other essential elements of a democracy, like a well-organized democratic movement. Generally, the more effective sanctions are those aimed at specific objectives, such as a cease-fire, and those that do not threaten the political survival of political elites.

Several of the witnesses encouraged innovation in sanctions policy through the use of nimble, step-wise sanctions: instead of all-or-nothing sanctions that may well be ignored by the targets because they require giving up too much power at once, Dr. Lyman encouraged the adoption of “carefully layered sanctions that can be removed as steps toward transformation.” In other words, specific, smaller actions could be explicitly linked to the lifting of particular sanctions, to urge targets to modify their behavior progressively. Similarly, Dr. Todd Moss, the Chief Operating Officer for the Center for Global Development, urged policymakers to adopt a more creative use of sanctions that would “selectively encourage positive behavior.” In the words of Mr. Brad-Rubin, “[w]hen we fail to explain how the sanctions work and show that they can evolve and be nimble over time, rather than become permanent forms of punishment, we give the likes of Bashir and Mugabe easy wins.”

Clear messaging

Finally, the witnesses cautioned that sanctions can create tricky dynamics. Sanctions lose their potency over time, as targets learn to live with or get around them. However, regimes may try to spin any lifting of sanctions as a political coup for them, so removing sanctions when such action would otherwise be desirable can play into certain targets’ propaganda and prove counterproductive for the U.S. In fact, the very imposition of sanctions can be gamed by the targets, who may point to the sanctions to portray themselves—and the entire country—as victims of U.S. aggression, and shift the blame for institutional failures from their own governments to U.S. policy. Robert Mugabe in Zimbabwe frequently makes such claims, for instance. Accordingly, U.S. policymakers need to be mindful of the unintended dynamics of imposing sanctions, and should develop a clear and context-appropriate game plan for the imposition and lifting of each set of sanctions.

The witnesses discussed other unintended consequences of sanctions such as “over-compliance” by private sector actors. Companies may misunderstand the scope of the sanctions and the risks they entail, such that they avoid doing business in an entire country even when only a few individuals in that country are targeted by sanctions. Such over-compliance can result in significant economic and human costs for regular citizens.

To manage the risks of unintended consequences, the witnesses stressed the importance of careful messaging and communication. There should be clear communication—aimed at different audiences, including the targets themselves, businesses, and the greater public—of how the sanctions work, what kind of activities they will not penalize, under what circumstances sanctions will be removed, and what their connection is to underlying policy goals.

This post was written with research assistance from Summer Associate Cristina Alvarez.

As Europe divides, Africa unites with common African Union e-passport

In 2015, African Union (AU) Commissioner for Political Affairs, Dr. Aisha Abdullahi, indicated that a plan was underway to implement a single African passport. After recent announcements that the AU passport would be unveiled at the AU Summit in Kigali this month, the long-awaited continental e-passport has finally been revealed. The first recipients of the pan-African passport were Rwandan President Paul Kagame, whose country hosted the summit, and Chadian President Idriss Deby, the chairperson of the AU. Others to receive some of the first pilot passports will include heads of state, foreign ministers and permanent representatives of the member states to the AU’s Addis Ababa headquarters. The timeline for the common passport roll-out to citizens of member countries is uncertain, although AU officials hope that citizens will have access by 2018.

This long-awaited passport is targeted to address the perennial problem of border openness in sub-Saharan Africa; closed borders are cited as a substantial impediment to both intra-African trade and economic growth.

Out of the 54 countries in Africa, to date, only thirteen allow citizens from any other African country to travel without advance visas. These significant barriers to intra-African travel are believed to be a leading cause of the low levels of trade between nations on the continent. Whereas intra-European trade accounts for approximately 60% of all European trade and intra-North American trade accounts for 40% of all trade on the North American continent, intra-African trade only counts for about 13% of African trade. While a small portion of this difference may be explained by unrecorded informal trade across porous borders, the difference is nevertheless notable.

There is evidence that opening borders can lead to economic growth globally, and experiences on the African continent support this contention. For example, in 2013, Rwanda announced that travelers from any African country could receive a visa on arrival. After improving visa openness, Rwanda’s GDP growth increased to 7% in 2014, tourism revenues rose by 4%, and the number of African travelers to Rwanda increased 22%.

Rwanda has led the charge for the creation of an AU passport. Now, the Rwandan Minister of Foreign Affairs, Louise Mushikiwabo, has indicated that Rwanda is fully prepared to begin issuing the common passport to all of its citizens. In contrast, other African nations would need to enact legislation that would allow them to begin issuing the African Union passports to citizens. Based on the general response to the common passport—the AU has been “overwhelmed” by requests for the passport—it is likely that AU member countries will feel pressure from their own citizens to do so quickly.

Interestingly, Morocco—the only African country that is not currently a member of the AU—has asked to rejoin the organization after a decades-long absence during the same summit in which the AU passports were unveiled. The timing of Morocco’s request could allow the county to take advantage of the new common passport and the expanding perks of AU membership.

The unified passport will undoubtedly present challenges for countries with less advanced border-security technology and fewer resources to devote to border control. Currently, only nine African countries offer eVisas. The AU passport is biometric and considered secure, but the issuance and acceptance of these e-passports at entry points of countries currently without e-passports may present a problem.

Relaxed immigration restrictions may also lead to larger inflows of migrant workers to the more economically stable countries on the continent, which may stoke the sort of anti-immigrant sentiment that led to violence in South Africa last year.

Travelers who are not citizens of AU member countries will not be able to benefit from the common passport, and will still face the relatively restrictive entry requirements on the continent. However, the enhanced labor mobility resulting from the AU’s e-passport program  could have a catalytic effect on trans-African investments and commerce.

The Young African Leaders Initiative: soft power, smart power

In 2010, Africa’s leaders gathered at the African Union in Addis Ababa to celebrate 50 years of independence. In Washington, President Barack Obama marked the occasion by hosting a town hall meeting of young African leaders from nearly 50 countries.

What looked at the time to be a curious way to mark a significant moment in the continent’s history was in fact the genesis of what could become the most innovative Obama initiative in Africa.

When asked during the session by a young woman from Mali why he had convened such a meeting, Obama said that he wanted “to communicate directly to people who may not assume that the old ways of doing business in Africa are the ways that Africa has to do business.” The president added that he wanted the young leaders to meet each other, to develop a network of like-minded people working for a better future, and to reinforce each other’s goals and aspirations.

That town hall marked the launch of the Young African Leaders Initiative (YALI). Over the next two years, YALI engaged Africa’s youth, principally through events coordinated by U.S. embassies throughout the region. Then, during a speech in 2013 in South Africa, Obama announced the establishment of the Washington Fellowship. Subsequently renamed the Mandela Washington Fellowship (MWF), the program initially was designed to bring 500 young leaders to the U.S. for six weeks of executive leadership training at U.S. universities and four days in Washington to meet with each other, leaders in the administration, and to have a town hall with the president. In 2016, the program was increased to 1,000 fellows.

The fellows

When USAID put the application online for the first class of fellows in December 2013, the response was extraordinary. Nearly 50,000 applied for 500 slots. Similar numbers have applied for the two subsequent classes. Over the course of three classes of fellows, there have been 119,000 applications for 2,000 openings.

The U.S. government kept the qualifications relatively simple. Young men and women from each of sub-Saharan Africa’s 49 countries are eligible to participate, including from countries on which the U.S. has sanctions, such as Sudan, Eritrea, and Zimbabwe. Applicants generally have to be between 25 and 35, proficient in English, possess a proven record of leadership, and have a commitment to return to the continent. Fellows apply for one of three tracks: business and entrepreneurship, civic leadership, or public management.

review of the program found that in the first cohort, the gender split was 50/50, nearly 40 percent owned a business, and a similar number ran a nonprofit organization. Eighty percent of the class had never traveled to the U.S., and more than half grew up outside capital cities.

The key element of the fellows’ program occurs during the specialized six weeks of leadership training that takes place at nearly 40 universities across the U.S. At the universities, the fellows, in cohorts of 20, are exposed not only to programs tailored specifically for their interests, but to other young Africans who share a passion for making a difference in their communities and countries. For most fellows, meeting other young Africans from different countries is one of YALI’s key benefits, as is forging genuine ties with Americans and U.S. institutions.

The narratives of the 2,000 Mandela Washington Fellows illustrate some of the most compelling stories and realities on the African continent today.

Importantly, the MWF program is cost-efficient, as the average cost of a fellow coming to the U.S. is $24,000. At least half is paid by the participating U.S. universities and a host of companies, including Coca-Cola, IBM, the MasterCard Foundation, AECOM, Microsoft, Intel, McKinsey & Company, GE, and Proctor & Gamble, who have made grants or in-kind contributions to the fellowships and the YALI program.

YALI’s broader impact

YALI is having an impact on its participants. An initial assessment by IREX, USAID’s implementing partner, found that over 80 percent of fellows who owned businesses reported an increase in earnings in the year following their fellowship in the U.S. Business fellows also leveraged more than $3 million in new sources of support through loans, grants, equity financing, and in-kind contributions.

Fellows who participated in the civic leadership training reported that the impact of their nonprofit organizations nearly tripled to over 1.6 million beneficiaries, with an average contact per fellow increasing from less than 3,000 to just fewer than 15,000 beneficiaries.

Over 80 percent of the fellows reported that they remained in contact with other fellows during the course of the year, and 70 percent indicated they continued to be involved with their host university. The ongoing connectivity is helped by the three regional conferences in Africa that USAID convenes for program alumni, more than 200 internships on the continent—most sponsored by corporate partners—as well as funding for fellows to attend conferences and other programs after they have returned to Africa.

As part of YALI’s broader reach, USAID created four Regional Leadership Centers (RLCs)—in South Africa, Kenya, Ghana, and Senegal—that offer distance and in-class leadership training to about 3,500 participants annually.

The YALI Network (see the figure below) was established in 2013 as a means to stay connected online to the tens of thousands of young Africans who applied for the fellowship but were not selected as well as others interested in the initiative. The network, which provides access to global leaders in relevant fields and opportunities for collaboration on a range of activities, has attracted nearly 250,000 members. Participants in the RLCs and the YALI Network can earn certificates in various courses, including climate change, women’s empowerment, and the election process.

Paint Yali

Source: YALI Network

YALI, of course is not without its challenges. Recruiting from 49 countries can be exceedingly difficult, and the quality of Skype and telephone connectivity can vary significantly, which impacts the interview process. Due to the high volume of applicants, embassies have learned that they need more time to review applications. Extra efforts have been needed to accommodate fellows with disabilities. YALI’s biggest challenge, though, is winning the support of African leaders who generally have yet to embrace the program due to its unilateral launch.

What’s next?

YALI is a cost-efficient and effective way to invest in Africa’s future, especially as it concerns deepening trade and commerce with the region, strengthening democratic institutions and empowering civil society. If the next administration continues to invest in the program, YALI could become an enduring legacy program of the Obama administration much like the African Growth and Opportunity Act (AGOA) and the President’s Emergency Program on AIDS Relief (PEPFAR) are, respectively, for the Clinton and Bush administrations. Over time, YALI inevitably would contribute to a new generation of transformative African leadership and deeper ties between the U.S. and Africa in a way that few other programs do.

This article originally appeared on The Brookings Institution’s “Africa in Focus” blog.

Six things to consider when doing business in Sub-Saharan Africa

Over the past two decades, Sub-Saharan Africa has caught the attention of an increasing number of investors who are looking for new and promising opportunities. While growth has slowed in some of the region’s oil exporting countries, the “Africa Rising” narrative continues due to the region’s youthful population of 1 billion people (70 percent are under 30), rapid urbanization, and ongoing improvements in democratic governance, economic management, and peace and security. Sub-Saharan Africa remains ripe with potential and opportunity but there are important factors to consider when seeking to do business in the region.

  1. Market boundaries don’t necessarily map onto country borders.

When looking to define the market, it is important to remember that not only is Africa a large and heterogeneous continent but that market boundaries do not necessarily map onto country boundaries. Moreover, there are approximately 50 cities in Africa with one million or more people. As a consequence, one can define the market in terms of regional blocs, or countries (especially if the country is particularly populous, like Ethiopia or Nigeria), urban corridors, or sub-markets within or across countries. In certain cases, trading communities that exist on both sides of a border, or along a particular trading route, are economically similar and might be considered when defining the geography of the market. Similarly, it can make sense to look at an entire sub-region as one market; for example, the East African Community is trying to encourage precisely this outlook as it works to harmonize tariffs and standards across its five members.

  1. Strategic relationships shape business opportunities

Strong local relationships are critical to a business’s successful integration and growth on the continent. Demonstrating a sincere, long-standing commitment and having a continuous on-the-ground presence will be key to developing good partnerships with competent local partners. Given that an increasing number of countries are passing or strengthening local content laws and policies, investors should anticipate working with local partners. However, due diligence into potential partners is critical. Without an understanding of the local terrain and given the persistence of small, well-connected elites, companies risk engaging local partners who are politically exposed persons, which could trigger liability under domestic and foreign anti-corruption laws.

Finally, entering into partnerships with other stakeholders—such as local companies along the supply chain, development finance institutions, and international and local not-for-profits—can lead to a strategic division of resources to overcome market challenges. These strategic relationships can also generate a positive identity in the market for a new investor as well as invaluable market intelligence.

  1. Government involvement in the private sector is a fact of life

African governments tend to be closely involved in the private sector, both officially and unofficially. Accordingly, it is key to develop amicable working relationships with the government at all levels and to align commercial objectives with the government’s development agenda. Virtually every country has a five or ten-year development strategy and companies should be familiar with it, especially in their sector, be it health, finance, manufacturing, etc.

This type of commercial engagement strategy will enable international companies to respond appropriately if governments’ priorities or composition unexpectedly and suddenly shift in response to internal and external pressures. Companies that are nimble, flexible and not overly reliant toward any given politician, party, or policy reduces the risk that political change will upend the business model.

  1. Mind the infrastructure gap

The dearth of “hard” infrastructure—such as roads, power, telecommunications—across Africa is well known and must be accounted for in any planned business ventures. But businesses also must find ways to address deficiencies in the “soft” infrastructure, such as the existence and enforcement of legal and regulatory frameworks, quality and safety standards, and functional educational and health systems. Companies need to develop short-, medium- and long-term plans for how to bridge both the hard and soft infrastructure gaps. Additionally, companies should consider risk insurance, options for dispute resolution, and tapping into private networks that serve public functions, such as local trade associations, among other methods of working around these structural deficits.

For many investors, the shortage of skilled local talent is the most challenging aspect of the soft infrastructure gap. Uneven local educational inputs are the primary obstacle. Expats, who typically require salary premiums and visa requirements that can be challenging, are only a short-term solution. Businesses should consider investing early in on-the-job training to groom local talent, and may wish to enter into strategic partnerships with local NGOs and universities to create and nurture a talent pipeline.

  1. The market data deficit makes it harder to do business-as-usual

For an investor, the data deficit in Africa makes decision-making harder. When it comes to market and research analysis, conducting diligence on prospective local partners, or assessing customers’ credit history, investors need to be aware that traditional means of data gathering and analysis are often unavailable, which requires alternative approaches. While the data gap is narrowing thanks to the increasing use of mobile communications to collect information, at this point, on-the-ground presence remains the best way to mitigate this problem.

  1. Finding local counsel

There are very skilled lawyers across jurisdictions in Africa that can provide useful on-the-ground expertise. If possible, it is useful to interview several firms to determine the best fit and to identify potential conflicts of interest, which may be more of an issue in countries with limited numbers of qualified firms. In addition, there are a growing number of legal networks across the continent that can be useful to tap into as well.

Agreement in principle announced for an EU regime on conflict minerals

In a so-called “trilogue” meeting on June 16, the European Parliament, the Council of Ministers, and the European Commission reached a “political” agreement on the key elements of a regulation that would implement a due diligence and reporting regime for conflict minerals imported in the EU.

It has taken more than three years since the first consultations by the European Commission to reach this tentative result. The final texts will only be presented in the fall when the “technical” part of the regime will have been approved. But this agreement in principle is noteworthy because it reconciles what had previously been very divergent views of the participants in the “trilogue.”

The original proposal of the European Commission, presented in March 2014, was rather careful and less far reaching than the U.S. legislation, in Section 1502 of the Dodd Frank Act. In the original European legislation, only the “upstream” importers were targeted, not the “downstream operators,” and no mandatory requirements would have been imposed—only a voluntary implementation of the OECD due diligence guidance, encouraged by various incentives. The products were the same as in Section 1502 of the Dodd Frank Act (the 3 Ts—tin, tantalum, tungsten—and gold) but the geographical scope of the legislation was wider: not just the Great Lakes region of Central Africa but all “conflict affected and high-risk areas” in the world.

The 2014 proposal of the European Commission was, as is the case for most EU legislative instruments, sent simultaneously to the Council of Ministers and the European Parliament, with the aim of arriving at a common agreement in “first reading” affording both bodies the opportunity to formalize their own positions, and thus making it more difficult to reach a compromise.

The European Parliament concluded its deliberation in May 2015, having introduced very radical amendments to the European Commission proposal on the last day of the debate in plenary: reporting would be mandatory and would include all “downstream” users of the minerals.

The Council of Ministers only started very discreet consideration of the texts in September 2015, careful not to give the impression of being less concerned than the European Parliament with the harm caused by the mining of the identified minerals in conflict-affected areas, but keen to avoid the huge burden which the implementation of the European Parliament’s position would have caused to the 800,000 companies concerned in the “downstream” side of the trade.

The Dutch presidency of the Council of Ministers, which started on January 1, 2016, was determined to conclude the discussion before the end of its term. The Netherlands has been very committed for many years at the national level to the issue of conflict minerals. In fact, their “conflict-free tin initiative” and other actions were promoted and managed at the level of the royal family. But the first meetings with the delegation of the European Parliament were very difficult. NGOs and civil society strongly supported the mandatory character of the European Parliament’s regime, and industry was not keen to lobby openly against these proposals, due to the sensitivities of the issue. Because of this, a result could only come in the last month of the Dutch Presidency, with substantive as well as discreet support by the EU Commission.

What Are the Terms of the Deal?

No new texts have been presented at this stage, but according to the participants and the press release, the following principles have been accepted by all three parties participating in the trilogue:

  • Direct importers of tin, tungsten, tantalum, and gold and their ores in the EU will be required to conduct due diligence when they import them from conflict-affected and high-risk areas. This due diligence obligation will also apply to the smelters and refiners processing such minerals. Affected importers, smelters, and refiners would also be required to report on the results of their due diligence. Only “the smallest importers” (e.g. for dentistry) will be exempted. Recycled metals, existing EU stocks, and byproducts will be exempted from the regulation. To be noted: the European Commission had proposed a voluntary “supply chain due diligence self-certification of responsible importers” and “an annual list of smelters and refiners considered responsible suppliers.” Most of these—around 400 companies and 20 smelters—will now be required to report on the sourcing of the minerals they import or refine.
  • There will be no obligation for manufacturers, importers and sellers of finished products, the so-called “downstream chain.” However, large EU firms making or selling goods containing conflict minerals—i.e., those “subject to the EU Directive on ‘nonfinancial reporting’” (with more than 500 employees)—will be “encouraged” to report (voluntarily) on their sourcing practices based on a new set of performance indicators to be developed by the EU Commission. They will also be “able to join” a registry to be set up by the commission. As mentioned above, the compromise does not retain the amendment introduced in the plenary meeting of the European Parliament requiring “downstream companies to . . . provide information on the due diligence practices they employ for responsible supply chains.”
  • The geographical scope is the one proposed by the commission, and is identified as all “conflict affected and high risk areas” in the world. The regulation will include a general principles-based definition and, according to the political understanding, the commission will select experts via a tender procedure to draw up an “indicative and not exhaustive” list of areas, which will be included in a “handbook for the operators” it will also develop.
  • A review clause will be included, requiring the commission to report “in a couple of years’” on the “effectiveness of the regulation, taking into account both its impact on the ground and compliance by EU firms.” If the conclusions are negative, the EU should “consider additional mandatory measures.”

Important technical work remains to be done in order to finalize the texts of the regulation and its annexes. As announced in the press conference, this work will continue during the Slovak presidency and an agreed text is meant to be available “in a few months,” which will then need to be approved by the Council of Ministers and the European Parliament. If all goes well, we can expect the legislation to be in place in the fall, with probably a two years’ transition period before compliance is required.

Nigeria floats the naira

On May 25th, the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, made the long-awaited announcement that the country would no longer peg the naira at N197 to the dollar. This change went into effect on Monday, which was the first time in recent history that the naira’s value was determined by market forces. The change represents the latest significant macroeconomic policy change by the government, following the lifting of fuel subsidies and restrictions on fuel imports last month.

Nigeria had held its currency at N197-199 to the dollar for the last 16 months, despite the steep dive in oil prices, which accounted for approximately 90% of Nigeria’s earnings from exports. The drop in the price of oil and decline in exports caused a severe foreign exchange shortage, forcing the Nigerian government to restrict currency exchange. Emefiele banned the use of forex for the importation of several dozen products—ranging from toothpicks and Indian incense to private airplanes—in mid-2015, followed by a restrictive limitation of dollar-denominated ATM transactions for bank customers. The Central Bank then discontinued the sale of foreign exchange to currency exchange operators in the country in mid-January 2016, and blocked many online payments in foreign currencies for Nigerian cardholders. Throughout this period, the black market exchange rate soared as high as N360 to the dollar.

While most welcome the new policy, the government has made it clear that the policy change will not improve the economy overnight. According to some reports, there is up to $4 billion worth of unmet demand in the forex market that must be addressed. There are concerns that this significant backlog may take longer than the targeted four weeks to clear following this week’s policy shift.

Still, international actors have lauded Nigeria’s forex policy shift. IMF spokesman Gerry Rice conveyed the IMF’s view on the issue, stating in a letter to Nigerian President Buhari that the government’s policy shift “is an important welcome step,” and that “it will provide greater flexibility in . . . the foreign exchange market.”

Nigeria was one of few oil-exporting countries to maintain its fixed currency value following the dramatic decline in the price of oil. Other oil-exporters, such as Angola and Russia, allowed their currency rates to float. Experts believe that the official exchange rate will settle somewhere between N275 and N300 in the new market, although Emefiele wrote in a letter to President Buhari that he expects the exchange rate to stay closer to N250 to the dollar.

The naira took a predictable dive, of about 23 percent, against the dollar following the currency float. The resulting devaluation of the naira will have several immediate effects on Nigeria’s economy. One positive effect is that the flotation of the naira will boost exports, as the ensuing devaluation will make Nigerian exports cheaper. The CBN also hopes that the devaluation will ease business transactions for those that have found it difficult to procure foreign currency. However, a rise in inflation is also expected to accompany the devaluation.

At this time, it remains unclear if this policy shift will be accompanied with the easing of other restrictions that have limited business operations in Nigeria, such as the limitations on repatriation of currency. With the prices of consumer goods soaring, individuals and entities still limited in their access to foreign currency, and the economy retracting for the first time in more than a decade, the CBN Governor and President Buhari will have to make many more substantial policy changes to battle inflation and recession.

Zimbabwe’s economic reform challenges

Ten months ago, on August 26, 2015, Zimbabwe’s 92-year old leader, Robert Mugabe, announced a 10-point plan to revitalize economic growth. Since then, the government has taken steps that signal the intention to transform a moribund economy. But the question is whether a Mugabe-led government can be successful in restoring growth and confidence in a once-promising economy that has been severely mismanaged for the better part of two decades.

An economic reform initiative in Zimbabwe has been long overdue. GDP growth has dropped well below 2 percent, and the economy is half the size it was 15 years ago. The country is experiencing its most severe drought in 20 years due to El-Niño conditions and nearly three million people are at risk of starvation. Poverty is expected to rise in 2016, and the poor, especially in the rural areas, will be most impacted.

Certain aspects of the reform initiative represent significant departures from past policies and deserve careful review. The bigger challenge is whether the program can succeed, given the government’s poor track record on human rights, respect for the rule of law, and the intensifying competition to fill Zimbabwe’s growing leadership vacuum, considering Mugabe’s advanced age.

Moreover, the recent announcement by Reserve Bank Governor John Mangudya that he will introduce local “bond notes” has raised fears that the cash-strapped economy will return to the chaos and hyper-inflation that crippled the economy prior to the move to the dollar in 2009. Even though local coins have already been introduced into the economy, and Mangudya has a $200 million loan from the Africa Export-Import Bank to support the notes, his plan for a local currency has deepened the country’s economic anxiety, especially among Zimbabwean businesses and professionals.

The reforms

There is no question that Zimbabwe is taking strides to reform its economy.

At the annual IMF/World Bank meetings in Lima, Peru last October. Zimbabwe’s finance minister, Patrick Chinamasa, and Mangyuda presented a plan to settle the country’s $1.8 billion debt to the international financial institutions (IFIs). Zimbabwe has been in default for 15 years to the IFIs and is the only nation in the world in arrears to the World Bank’s non-concessional lending window, the IBRD. The government recently completed successfully an IMF Staff Monitored program that has paved the way for this effort by building a favorable track record.

The repayment plan is predicated on a loan of nearly $1 billion from Algeria, to be repaid over 10 years, and bridge financing of $400 million from the Africa Export-Import Bank that will be used to settle the country’s obligation to the African Development Bank. Given low oil prices, however, it is unclear when the loan will become available although Algerian authorities have indicated they intend to provide the resources.

An element of flexibility has also been introduced into the government’s indigenization policy, Mugabe’s signature program that requires foreign investors to give majority control of their investments to locals. Line ministers, such as in agriculture and industry, are now able to negotiate indigenization plans with investors. While 51 percent equity will have to be handed over by foreign companies who invest in natural resources, “empowerment credits” can be negotiated to achieve the 51 percent threshold in other sectors.

Even in its revised form, though, Zimbabwe’s indigenization policy is the most onerous set of local content requirements of any country in Africa and remains a significant deterrent to attracting new investment.

Another reform proposed by the Zimbabwe government is a program now being advertised by the Ministry of Lands and Rural Resettlement that would enable farmers to lease land for 99 years. A fully functioning long-term lease program, including transferable title, would enable farmers to use their leases as collateral with commercial banks to secure loans. As important, 99-year leases would help restore the rule of law to a sector defined by violence, illegal seizures, and cronyism. Commercial banks, however, do not yet have sufficient confidence in the structure of the program or that land seizures have stopped completely and the banks have not begun to accept the leases as collateral for commercial loans to farmers.

Compensating white farmers

Perhaps the most unexpected reform was the March announcement made by Finance Minister Chinamasa that the government of Zimbabwe would pay “fair compensation” to the estimated 4,800 white farmers forced off their land. Few issues have been as central to Zimbabwe’s isolation in the global community as the forced evictions and land seizures that began in 2000 and destroyed the country’s most productive economic sector. Sustained progress in restitution would be an important indicator of the government’s commitment to a new era of respect for the rule of law.

The government expects to finance the compensation program, which according to some estimates would cost more than $10 billion, through the imposition of a land tax, treasury bills, and donor support. The government has since announced that it has begun to repay former white commercial farmers who lost land and has undertaken a countrywide effort to evaluate the seized farms in order to pay the former landholders for the improvements they made.

However, the land compensation program has been described as an “illusion of reform,” by former Finance Minister Tendai Biti’s People’s Democratic Party (PDP). Indeed, under present circumstances, it is hard to envision Zimbabwe replicating Uganda’s experience where authorities have returned an estimated 3,493 of the more than 8,170 properties confiscated from the Asian community by Idi Amin in the early 1970s.

The U.S. and Zimbabwe

The United States would be prudent, nevertheless, to encourage Zimbabwe’s efforts to revitalize its economy. Specifically, the U.S. should engage the country’s private sector that largely supports the reform program. For example, the President’s Advisory Committee on Doing Business in Africa could conduct a fact-finding visit to the country and representatives from Zimbabwe’s private sector could be invited to participate in the second U.S.-Africa Business Forum in September in New York.

The U.S. should also coordinate its policy with the European Union, which lifted its sanctions and asset freeze in 2014, except for a travel ban on President Mugabe and his wife, Grace. After 13 years, U.S. sanctions on Zimbabwe have outlived their usefulness. Washington claims that the program is “targeted” on 98 individuals and 68 entities, but the broader perception in the international business community is that the U.S. has sanctions on all of Zimbabwe. Moreover, reform critics, such as Grace Mugabe and her supporters, point to U.S. sanctions to rally support for herself and her husband.

A pragmatic U.S. approach would contribute to progress on the reforms and Zimbabwe’s reengagement with the international community and the IFIs. However, a revised U.S. approach to the country should be predicated on achievement of specific economic reform targets, respect for human rights, and the rule of law and, ultimately, free and fair elections in 2018.

This article originally appeared on The Brookings Institution’s “Africa in Focus” blog.

African Development Bank Group Annual Meetings Energize Africa

The theme of this year’s African Development Bank (AfDB) meetings, which ran from May 23rd to the 27th, was timely and necessary: “Energy and Climate Change.” In the first day of the meetings, AfDB President Akinwumi Adesina announced the AfDB Group agenda for the continent’s economic transformation, which includes The New Deal on Energy for Africa 2016-2025, the Strategy for Jobs for Youth in Africa 2016-2025, and plan for Africa’s Agricultural Transformation.

Growing Need. Many see the New Deal on Energy as a highlight of the meetings. The New Deal was first announced in January, along with a Transformative Partnership for Energy in Africa (TPEA), at the World Economic Forum. Adesina, in discussing the plan, has pointed out that over 645 million Africans lack access to electricity, while over 700 million do not have access to clean energy for cooking. Unfortunately, this has become the  “norm” on the continent. The lack of stable energy is handicapping the growth on the continent by raising operating costs and inhibiting  productivity. For example, Nigeria,  the continent’s largest economy, is reportedly only producing enough electricity to power some areas of the country for around 5 hours a day. Africa’s second largest economy, South Africa, has experienced increased costs, with electricity prices quadrupling in the last 10 years; furthermore, power shortages plagued the country throughout 2015.

Goals. The specific delineated goals of the New Deal are to:

  • increase on-grid generation to add 160 GW of new capacity by 2025
  • increase on-grid transmission and grid connections that will create 130 million new connections by 2025, 160 per cent more than today
  • increase off-grid generation to add 75 million connections by 2025, 20 times what we have today
  • increase access to clean cooking energy for around 130 million households.

Opportunity. The AfDB Group plan relies on domestic and international financing. According to the New Deal, “to achieve universal access by 2025, innovative mechanisms are required to mobilize an additional USD 40-70 billion annually in domestic and international capital.” This would represent a more than 100% increase in the current investment levels. Adesina hopes to coordinate this increased investment through the recently launched TPEA. This type of expansion represents a significant opportunity to firms, ranging from financiers to construction. The added security of the extensive AfDB partnership network may make these opportunities particularly attractive.

Support. Although the plan was initially announced several months ago, it is the annual AfDB meetings that seem to have propelled the plan forward. Rwandan President Paul Kagame and Kenyan President Uhuru Kenyatta both endorsed the New Deal during the meetings. Other leaders to endorse the plan include, Olusegun Obasanjo, former President, Federal Republic of Nigeria; Horst Koehler, former President of Germany; Nick Hurd, Parliamentary Undersecretary of State for International Development, United Kingdom; Carlos Lopes, the United Nations Under Secretary General and Executive Secretary of the UN Economic Commission for Africa; as well as Jay Ireland, the President and Chief Executive Officer of General Electric Africa. This growing support from both public and private leaders and institutions is the only way that Adesina’s ambitious plan can succeed. Governments on the continent and investors alike must fall in line with the call to double energy investment on the continent, or else the AfDB will find that the US$12 billion it has dedicated to energy investment will fall short of creating long-lasting change. When the plan was first announced, it was unclear how much change it would actually bring to the continent; however, with the growing list of endorsements from leaders on the continent, it seems that the New Deal may be what was needed to energize the continent into action.

Commercializing Africa’s Rapid Urbanization

In a recent interview, Executive Director of the Nairobi-based United Nations Human Settlements Programme (UN-Habitat) Dr. Joan Clos stated that “urbanization will be a big opportunity for Africa in the coming years.”  It comes as no surprise that harnessing the potential of Africa’s  urbanization will be a top agenda item at Habitat III, the major UN conference on housing and sustainable urban development that will be held in October of this year.  Already home to three of the world’s megacities, Africa is set to be more urban than rural by 2030 and two-thirds urban by 2050.  The private sector has a critical role to play in efforts to leverage the opportunities created by this rapid urbanization.  Across the region, the sector is transforming what some regard as the ills of urbanization — namely, limited space, traffic and waste — into innovative and profitable ventures. 

Coworking. In cities, space can be one of the most limited — and, as a result, one of the most expensive — commodities and therefore lends itself to collaborative consumption.  From Cape Town to Cairo, shared workspace has become all the rage on the continent particularly with the technology community.  With 40 hubs in 20 countries, Afrilabs is one of the region’s largest networks of shared workspaces.  It provides members with space but also with knowledge sharing and collaboration as well as developing capacity and financial sustainability. 

Energy harvesting.  Through piezoelectric technology, London-based Pavegen has figured out a way to harvest energy from one of the key characteristics of cities: foot traffic.  The technology works by harvesting the kinetic energy generated by footfall and converting it into electricity that can be deployed or stored.  It already has been used to generate energy from dance clubs, marathons, music festivals, public transportation stations, schools, shopping centers, and other areas where crowds gather.  At the end of last year, Pavegen launched its largest installation in Africa: a people-powered football pitch in Lagos.  The solar and kinetic energy generated by the pitch can power streetlights in the neighborhood for up to 24 hours.

Waste management. Some see waste as an urban plague whereas others recognize it as “money just lying in the streets.”  In Nigeria, WeCyclers uses a fleet of cargo bicycles to collect household recycling in densely populated low-income neighborhoods and sells the aggregated material onto local manufacturers and recycling processors.  In South Africa, Repurpose School bags repurposes plastic waste into school bags that have solar panel flaps which provide lighting for nighttime studying.  In Ethiopia, soleRebels repurposes a wide range of discarded materials from tires to clothes and transforms them into eco-friendly footwear (in fact, the world’s only World Fair Trade Organization fair trade footwear company).  In Kenya, EcoPost turns plastic waste into lumber for use in fencing, landscaping and other applications.  The list of profitable business opportunities in Africa’s waste market goes on.

These are just some of the innovators who are demonstrating that the private sector should be a leading voice in Habitat III’s discussions about realizing the opportunity presented by Africa’s  urbanization.

Africa, TPP and TTIP: Integration or Isolation?

With the demise of the Doha Development Round at the WTO Ministerial in Nairobi this past December, the multilateral approach to global trade negotiations has largely ended. Given that the number of regional trade agreements has increased from 70 in 1990 to more than 270 today, it appears that it is every region for itself when it comes to global trade.

TFTA and CFT

In certain respects, Africa is well positioned in this new era regional trade relations.

The Tripartite Free Trade Agreement (TFTA), signed in Sharm-el-Sheikh, Egypt in June 2015, brings the Common Market of Eastern and South Africa (COMESA), the East African Community (EAC) and the Southern Africa development Community (SADC) into the continent’s largest free-trade zone covering 26 countries and stretching from Cape Town to Cairo.

Already, it is estimated that the volume of intra-regional trade among these three blocks has increased from $2.3 billion in 1994 to $36 billion in 2014, a more than 12 fold increase from 7 percent to 25 percent of trade over 20 years. While low compared to the EU (70%) or Asia (50%), it is a positive trend line.

The TFTA is an important boost for regional integration in Africa and is seen as a stepping stone for Africa to realize its ambition of creating a Continental Free Trade Agreement (CFTA). Implementation is behind schedule, however, and efforts are being made to complete the negotiations within the 36 months set out in the roadmap.  Other challenges include poor infrastructure, high transaction costs and low levels of industrialization.

Africa and TPP

While Africa moves internally to increase trade among the 54 nations on the continent, a large portion of the global economy is moving toward more integrated trade across regions, as exemplified by the Trans Pacific Partnership (TPP).

The 10 countries in the Asia-Pacific region in addition to the U.S. and Canada who make up the TPP countries collectively account for 40 percent of the world’s GDP and 26 percent of the world’s trade. Moreover, TPP is likely to expand to include South Korea, Indonesia and other Asian nations.

While TPP does not appear to work against Africa’s global trade interests in the short term, it bears watching closely. Vietnam, for example, exported $7.7 billion worth of textiles and apparel to the U.S. last year even though there was a 17 percent tariff in place. In 2014, African countries, such as Ethiopia, Kenya, Lesotho and Tanzania exported nearly $1 billion worth of clothes to the U.S. under the African Growth and Opportunity Act (AGOA) with no tariffs.

Under TPP, Vietnam’s tariff on apparel exports to the U.S. will be cut significantly and baseline  growth in apparel exports to the U.S. could increase by 50 percent by 2025, according to the Eurasia Group.  This growth is expected to displace a share of China’s apparel exports to the U.S. but it could be detrimental to some African countries, such as Ethiopia and Kenya, who are seeking to ramp up their AGOA apparel export.

Africa and TTIP

The negotiation of TTIP is a more complex and immediate challenge to the U.S.-Africa trade relationship. Over the last decade the EU has put in place reciprocal Economic Partnership Agreements (EPAs) with most African nations. Last year, the U.S. last year renewed the non-reciprocal AGOA through 2025. If the U.S. does not address this asymmetry in the context of the TTIP negotiations, it will be ceding a long-term commercial advantage to European firms investing in Africa and exporting to that market.

For example, under the terms of its free trade agreement with the EU, South Africa allows imports from Europe at a 4.5 percent general tariff rate. In contrast, U.S. exports to South Africa face an average general tariff of 19.5 percent. According to USTR, the competitiveness of U.S. exports to South Africa “will further erode” once the EU-SADC EPA comes into force. The disadvantage to U.S. products and companies will increase across Africa in coming years as the EPAs enter into effect unless the U.S. takes steps now to address the imbalance.

Transitioning From AGOA

In his January 28 remarks at a hearing on the post-AGOA relationship, the U.S. Trade Representative, Ambassador Michael Froman, noted that the US has free trade agreements with 20 countries today, compared with 3 in 2000. However, none of these are in Sub-Saharan Africa, and Ambassador Froman did not propose one. He did say that he would make recommendations in June on advancing the U.S.-Africa trade and investment agenda.

Given the amount of time required to negotiate and ratify trade agreements, it is not too soon to begin laying the groundwork for the post-AGOA relationship. Clearly, reciprocity will have to be a key element of this new relationship.

In practice, the emerging trade relations with the East African Community (EAC) could serve as a precursor to a new relationship. In February 2015, the U.S. and the EAC signed a cooperation agreement that focuses on implementation of the WTO’s Trade Facilitation Agreement, enhancing food safety, plant and animal health and building capacity to meet Global Trade Standards.  In fact, over the next several years, it would be beneficial to start negotiating agreements in areas such as services, intellectual property and investment, that could provide the foundation for an FTA. Indeed, if the U.S. can be successful in creating a free trade agreement with the EAC, it is conceivable that other countries, such as Ethiopia, Mozambique and Mauritius could become part of, or “plug into,” an increasingly regional FTA with the U.S.

As for TPP, an informal mechanism should be established so that African governments can be informed about the implementation of this agreement and how it might impact Africa’s trade relations with the U.S. and Asian partners. One recommendation would be to establish a working group or advisory committee of the TPP Commission and the African Union that might meet every two years.

TTIP presents a more immediate issue. At minimum, there should be some type of advisory mechanism so that the AU can stay informed of the progress of the TTIP negotiations, given that the EU is Africa’s largest trading partner, the growing importance of U.S.-African trade relations and a need to balance the asymmetry of the EPAs and AGOA. In the spirit of reciprocity, it would also be helpful if the U.S. was invited as an observer to Africa ministerial meetings related to the TFTA and CFTA.

The global trading system may be becoming more regionalized but Africa needs to be active in this process if it is to transcend its marginalized position of 3.3% of global exports. Having a place at the table, however informal, while TPP is being implemented and TTIP is negotiated, would help to ensure that Africa does not become more isolated as it works to integrate regionally.

Witney Schneidman is a nonresident fellow at the Africa Growth Initiative in the Global Economy and Development program of the Brookings Institution. This piece was first posted on Brookings’ Africa in Focus blog.

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