* Rich country budget cuts likely to squeeze aid
* African governments responding with eurobond plans
* Less aid may mean more open, deeper local markets
By Ed Cropley, African Investment Correspondent
JOHANNESBURG, June 7 (Reuters) - The dire state of rich countries’ public finances is likely to squeeze aid to Africa in the next few years, although it may be the bitter pill the fast-growing continent needs to wean itself off handouts.
Britain’s new Conservative administration has pledged to keep aid spending at 0.7 percent of GDP, but given the massive cuts needed to balance the country’s books, it will be a tough promise to keep, analysts say.
Other European countries are in a similar boat.
"After the financial crisis, Western publics are understandably a bit sceptical about forking out for what they see as an open-ended commitment," said Tom Cargill, an Africa analyst at London’s Chatham House think-tank.
"My concern is that leads to a knee-jerk reaction of just shutting the taps off. That would be disastrous," he said.
Even though sub-Saharan economies grew at a pacy 5 percent before the 2009 global slump, aid to the poorest continent also rose after the Group of Seven (G7) richest states promised in 2005 to double development assistance.
The ONE Campaign led by Irish rockers-turned-lobbyists Bob Geldof and Bono said last month the G7 would miss that target, but was on track to provide $13.7 billion of the $22.6 billion extra pledged at the landmark meeting in Scotland.
Despite Africa’s huge population — now more than a billion — such increases have undoubtedly had a positive impact, especially in areas such as public health.
For instance, in April the World Health Organisation said Africa had made "dramatic" steps in tackling malaria in the last decade, mainly due to donor-funded treatment drives and provision of insecticide-treated bed-nets.
However, the extra cash has caused aid to become more entrenched in African budgets, even in "success stories" such as Uganda, Tanzania and Zambia that relied on charity for around half their revenue in 2008, according to World Bank figures.
Critics also argue that aid undermines the social contract that should exist between an elected administration and its people, creating lazy, unaccountable and corrupt government.
Now, with rapidly growing populations and the prospect of an aid slowdown — if not outright reverse — African governments are scoping out alternative, less fickle, funding sources: more domestic debt, a broader tax base and foreign bonds.
Worryingly, none of the options are easy or quick.
"They’re long-term things. You can’t just do them for the next budget," said Citibank Africa analyst Coura Fall.
"Eurobonds take time and they’re costly, so the only alternative is domestic funding. And how do they do that? Many are talking about increasing their revenue base but how can they do that significantly for the next fiscal year?"
Despite a decade of growth fuelled by high commodity prices, economic liberalisation, rising foreign investment, particularly from China, and official debt forgiveness, aid is still big bucks in Africa.
According to the World Bank, in 2008 it exceeded tax and other revenue such as customs and mineral duties in 14 sub-Saharan states, amounting to $38 billion across the region.
Put differently, that is $49 dollars for every African and the equivalent of 21 percent of overall government receipts.
However that picture is changing as post-financial crisis realities, including a surprisingly buoyant Africa, sink in. At one end of the equation, donors appear to be applying the squeeze, albeit one dressed up as failure by recipients to meet funding conditions.
For instance, backers of Tanzania’s socialist administration slashed aid by $220 million to $534 million for the 2010/11 budget, citing concerns about the progress of economic reforms.
In response, the government said it was dusting off plans to get a credit rating and launch a $500 million eurobond.
Similarly, Uganda reported a 20 percent rise in tax receipts for the first half of the 2009/10 financial year, evidence that a drive to reduce donor dependence is taking shape.
Uganda too has floated the idea of a eurobond as it waits for oil — forecast at 100,000-150,000 barrels a day — to come on-stream in 2015 from new fields in its Lake Albert region.
With economic growth forecasts well above 5 percent, relatively low levels of external debt and lots of mineral beneath their soil, such countries should be able to raise foreign cash on a scale way beyond domestic borrowing limits.
According to analysts, Angola, which rivals Nigeria as Africa’s biggest oil producer, is likely to be able to borrow at 8 percent if it proceeds with plans for up to $4 billion in international bonds this year, roughly in line with a landmark $750 million eurobond launched by Ghana in 2007.
That is not to say Africa’s long-term financing needs are taken care of.
The World Bank says it needs to invest more than $90 billion a year, double what it is now spending, to drag its awful infrastructure into the 21st century — sums that dwarf even the billions of dollars in cheap loans and minerals-for-roads deals that China is rolling out across the continent.
There is also the risk of states coming off aid hitting a short-term budget crunch that damages their growth prospects or ability to squeeze the most out of a resource windfall, thereby driving up the costs of alternative long-term financing.
"Any immediate decision that a politician might be looking for in Europe to cut aid because a country discovers oil would be dangerous," said ONE Campaign director Jamie Drummond. "Smartly targeted aid could make oil revenues go further."
At the very least, the turmoil of the last 18 months has pushed policymakers on both sides of the aid divide to confront an issue normally swept under the diplomatic carpet.
"African governments don’t like talking about aid. It’s like welfare," said Chatham House’s Cargill. "But there should be the beginnings of a conversation about how we help African countries move to a situation where they do not need aid."