According to Bloomberg BusinessWeek (Feb 22, 2010), national governments have about $55 trillion debt- more than double the tally a decade ago. Standard & Poor’s anticipates lowering the credit ratings of many countries including Botswana, South Africa and Ghana within a year. South Africa has a rating of BBB+, the current rating of Greece.
Over the last few months, Greece has shown that the experiment with a single regional currency could also be catastrophic (euro currency has been hailed as the pulse of the European economy in the last few years). In good times, Greece borrowed and over borrowed at low interests on the promise that it could keep its budget deficit low. It was rewarded with admission into the European Union single currency. But alas, the country was on another world. It over spent to the point that debt is about 125% of GDP, more than double the EU benchmark. In the investing world, it is being punished right now. Many have betted against this high debt. And the euro is under a major test since the debut in Jan 1, 1999. It is not only Greece; Portugal, Ireland, Italy and Spain (they complete the PIIGS) are brooding on the same paths.
Let’s get back to Africa. See Towards knowledge economic communities in Africa.
We wrote this article in early 2009 calling into attention the need to revamp the whole concept of African single currency. Our point is that strengthening the regions through infrastructure and advancing our knowledge capability will be a worthwhile effort by AU and NEPAD than the whole program of blind folded single currency.
If the current rating of South Africa is this poor, perhaps if one country in Africa messes up as Greece did in the EU, there will be no means to bail out the whole continent. It is becoming riskier to think of this common currency as many African leaders are not fiscal conservatives. They will borrow and overspend their nations into trouble. Traditionally, monetary policies could have helped worked out the magic through currency manipulations, but under a supranational central bank, no African nation will have that power.
The implication will be drowning the entire continent along. And the good responsible ones will suffer and the AU will lose credibility as enforce of fiscal rigor. And it will be a domino effect that will cripple the continent. Africa is too leveraged on commodities and hydrocarbons that our chances of coming out of any vicious cycle will be very difficult.
Let us we focus on advancing technology and knowledge capital in Africans to mitigate the impacts of trade shocks across the continent. This will help the continent better prepare for the cyclical ups and downs. Let Africa build technology clusters and advance knowledge. It is a better idea of having integration when regions join resources to create Knowledge Economic Communities (KEC). If African regions are connected through technology partnerships and networks, we will realize that currency integration will evolve naturally in this already interconnected world. Our monetary structures are weak and a single currency could hurt Africa deeply since our national budgets are still deficits-prone. Greece has offered a practical lesson for African scholars of current integration and we have to plan very well.
orginally penned in early 2010