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The Horn of Africa States Banking and Finance (Part V)

By Dr. Suleiman Walhad
May 23rd, 2023

The World Bank and the IMF, despite their services and substantial contributions to allaying hunger and starvation and help in other social infrastructures of the region, still confuse the Horn of Africa States region with the East Africa Community. This is a geographical anomaly, which sometimes includes in the Horn of Africa countries like South Sudan, Uganda, Kenya and even Sudan. They sometimes call it the IGAD region or the East Africa region and even the Greater Horn of Africa.

Encyclopedia Britannica defines it more clearly as the easternmost region of the African continent shaped like a rhinoceros horn, which consists of Somalia, Ethiopia, Eritrea and Djibouti. They do not include Kenya or any other country. However, the World Bank and the IMF both include non-Horn African countries into the region.

This anomaly and confusion of the two Bretton Woods organizations helps funnel a lot of funds that would have gone to the Horn of Africa States countries to non-Horn of Africa countries and many of them are East African Community members. They include the three countries of South Sudan, Kenya and Uganda.

The Horn of Africa States is a natural region with historical and geographical justifications unlike countries of the East Africa Community, which appear to double dip on resources of the two Bretton Woods organizations designated for the Sub-Saharan region of Africa. There would, no doubt, be resources for the East Africa Community and resources for the Horn of Africa States. How do they handle when there are such overlaps in their statistics and data/general information and how do they justify it to the Board?

The Horn of Africa States region would need to work on major fronts that include among others:

  • A collective approach to the region’s continuing civil strives and security and hence building peace in the region.
  • A coordinated domestic and foreign policies which works on stabilizing the region’s relations within the region and with external parties. This would help in strengthening the region’s negotiation processes on trade, security and other international issues.
  • An integrated economic and trade systems within the region allowing for the movement of capital, goods and labor within the region with ease.

All these matters and others would need finance and capital, which grease and enable most human activities. Such capital and finance can either be obtained locally or borrowed from others. Grants and aid can only do so much, which usually is unhelpful and sometimes misleading. Grants and aid work for the giver and not for the receiver and it is where the Horn of Africa States region either individually or collectively need to revisit with great care.

The region should work and deploy its own resources for its own development. No nation works for others on benevolence. Each nation and/or country or groups of nations/countries work for its interest individually or collectively.

The two Bretton Woods organizations can only provide supportive funding but not real developmental financing. The story of the GERD and rejection of the two organizations of its financing should not be forgotten in the region. They provide little funding in the form of infrastructure development and even if they do there would be so many strings attached to the financing that a supposedly beneficial project would not generally achieve its intended goals.

The fact that the two organizations do not even define the region properly is indicative of the usual misguided universal policies, which the two organizations follow. These ignore the particularities of the region, which cannot handle many of the conditions attached to any supportive funding they provide.  They are involved in financing agricultural projects, water projects and other seemingly important projects, but the funding of the two organizations would only be supplementary. It is where the need for local solutions for the region’s financing requirements is not only important but necessary.

The region must develop its own tax base and internal revenue systems and local funding sources. The local banks apparently only involve themselves in the private sector, but never in long-term projects, an income stream which they do not take advantage of. Funding a municipality to build a road system or intra-regional infrastructures such as railways and highways or arrange a waste management system or finance other economic assets supported by the governments are still not part of the general outlay of local bank funds. Banks of the region should take advantage of the opportunity at their disposal, which apparently, they currently shy away from.

The Horn of Africa States region would, in this respect, need to coordinate to achieve maximum benefits of its resources using its own available means first. When they collectively work together, they would, indeed, obtain borrowing and developmental loans from beyond the region at lower costs or from within the region itself at even lower costs. There are nearly sixty banks within the region and probably a similar number of other financial institutions, which all have funds stashed away in banks outside the region. These should be used to lend to the governments on long term basis and deployed in the development of the region, which is entirely possible. But the governments, at their end, should create trust within the society on the internal rules and laws of the countries of the region.

We have made proposals in this regard for quite some time, and it appears they are taking shape. We note other organizations are picking up on the concept of integration of the region on economy and trade and even foreign policies and domestic affairs. This is good for the region, and it is only then when the Bretton Woods organizations and other financial institutions from beyond the region would pick up and channel funds in a more systemic approach than is currently the case.

A regional organization and a regional approach to all matters strengthens the region. The leadership of the region, which appears to be drifting apart, should know that the best for the region is ahead and they should take it by the horns. There is now GERD in place and hence energy and there is substantial oil and gas which can be exported when there is still a need for these fossil fuels. There is land and water for food production and there is a large maritime exclusive economic zone, which would give rise to a large blue economy, if only they were listening and hearing, of course. There is also the geostrategic location, which the region should take advantage of, instead of it being busy on its own unexplainable and senseless tribal/ethnic strives.

There is a need now to set up a secretariat to help work and found a regional H.A.S. organization and some or all of the leaders of the region should take up the mantle to realize it. Countries like Kenya and Uganda and others, which currently take advantage of the chaos in the region would not be happy with such an organization, but they should be assured that H.A.S. is not against them, but to help the region find its roots and ensure that it does not fall again into the hands of others. The Ministers of Foreign Affairs and the Ministers of Finance of the region, and eventually the Prime Ministers and Presidents of the region should be arranging summits to lay the groundwork for the project.

The Horn of Africa States region is generally synonymous with conflicts and hunger and starvation, all principally man-made as non-abeyance of the rule of law, corruption, nepotism and subservience accepted by some of its politicians/technicians for a fistful of dollars, exasperate the region. It would appear the region is still engaged in short-sighted projects based on the old single-state format, which cannot address today’s issues and block formations.

Some of the governments of the region still follow the old paradigms of international finance, which is not supportive of the region, which encourages continued dependence on conditioned and expensive financing and/or conditioned grants from foreign parties. In failed states like Somalia, politicians do not even manage the country but their own self-interest.

Capricious foreign parties generally corrupt local authorities. No direct follow-up on the usage of funds granted and or lent is made for supposedly important projects in the region. It is, therefore, necessary that the regional authorities create regional institutions that have checks and balances. The financial system of the region, thus, needs a complete overhaul, where the principal of the rule of law applicable on all parties and citizens, must be put in place. The rule of law is not synonymous with whatever a government official says or decrees even if it is a president or prime minister or any other authority. It is how trust can be instilled and local finance can be easily raised locally for development of the region.

The region needs to create institutions that are transparent with all economic projects, especially those that need financing from either local or foreign parties being based on competitive and open bidding, managed by competent authorities which follow efficiencies in all processes. Most people are not breakers of the rule of law, but chaos can spring from situations where the holder of the highest position in a country is seen by the populace as corrupt.

Financial development in the region though growing remains small. It is dominated by banks while non-bank financial institutions remain small and undeveloped. Non-bank financial institutions include among others pension funds, which are mostly currently managed, if any, by governments as the largest employer in all of the H.A.S. countries remain to be the governments.  There is generally no asset management, and finance and insurance companies remain small as well. There are very few leasing companies and equity markets are almost non-existent.

Finance plays a key role in development as it provides the necessary funds for any economic activity, which in turn improves employment and the cycle continues with respect to consumption and hence more production and more taxes for the government. Governments in the region pay more attention to the political aspect of life and little to the key ingredients of any governance, which include finance and capital. The better an economy, the more stable a country is, and it is here where the governments of the region have generally failed.

A concerted effort on the part of governments in reforming the financial aspects of the region through setting up regional institutions including associations of the banking and finance communities of the region and the chambers of commerce would lead to creating better environments for economic growth and hence less instability.

Most, if not all, African countries including the states of the Horn of Africa States region, when it comes to development, concentrate on and prioritize agriculture, water development, energy, infrastructures such as roads, rail and ports, coastal and marine activities, mining and industries but never really concern themselves with the issue of financial development, the key element in all of these and other activities of the continent and region. Other than politics, most energy in the region and the continent is spent on non-financial economic assets.

Regional financial institutions involving the development of a single financial market in the region would be helpful and the financial community in the region should be encouraged by the governments of the region to participate in the development of the other sectors of the economies of the region be it transport related, marine and other infrastructure related projects, mining, manufacturing with special emphasis on local manufacture to reduce imported inflation which take its toll on the region. It is incredible to see in the markets of the Horn of Africa States chicken eggs from Brazil or milk imported from the most unusual of places like Saudi Arabia or tomato powder imported from China, when all of these could be produced in the region.

The region owns a substantial and growing banking institutions. In Ethiopia there are some 30 banks with foreign banks soon to join. In Djibouti there are some 11 banks while in Somalia there are currently13 banks and finally in Eritrea some 3 banks. The region should be developing a substantial commercial and investment banking industry, which should be enabled to operate throughout the region.

National and regional umbrella bodies should be set up to help develop the industry. These are generally prerequisites for the development of a professional and reputable banking industry. They could be in the form of bankers’ associations or associations of the CEOs of banks and financial institutions or associations of the individual sectors of the industry such as an association of insurance companies or leasing companies and/or investment banks and companies.




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