Bor­row­ing re­spon­si­bly: Africa’s debt chal­lenge

coun­tries may be bor­row­ing too much and too fast

Africa Renewal - - CONTENTS - By Jo­ce­lyne Sam­bira

It’s been a rough year for the West African coun­tries most af­fected by the Ebola virus that has rav­aged their com­mu­ni­ties and crip­pled their economies, dis­rupt­ing agri­cul­ture and trade.

Forecast to lose a com­bined $1.6 bil­lion in pre­dicted eco­nomic growth in 2015, the peo­ple of Guinea, Liberia and Sierra Leone breathed a col­lec­tive sigh of re­lief when the In­ter­na­tional Mon­e­tary Fund (IMF) for­gave a com­bined $100 mil­lion in loans, shortly af­ter dis­burs­ing $130 mil­lion in aid last Septem­ber. The in­ten­tion was to free up funds for re­lief and re­cov­ery ef­forts.

But with the need to over­haul their health sys­tems, these coun­tries are once again ac­cu­mu­lat­ing debt—like the $160 mil­lion in­ter­est-free loan await­ing ap­proval by the IMF ex­ec­u­tive board.

The ac­qui­si­tion of new debt is an emerg­ing pat­tern among ben­e­fi­cia­ries of the world’s most com­pre­hen­sive debt re­duc­tion pro­gramme to date. The 1996 Heav­ily In­debted Poor Coun­tries (HIPC) Ini­tia­tive, sup­ple­mented by the 2005 Mul­ti­lat­eral Debt Re­lief Ini­tia­tive, has helped 35 sub-Sa­ha­ran African coun­tries can­cel $100 bil­lion in ex­ter­nal debt. These in­ter­na­tion­ally co­or­di­nated re­lief pro­grammes, man­aged by the World Bank, IMF and the African De­vel­op­ment Bank, were de­signed to find a sus­tain­able so­lu­tion to Africa’s debt bur­den.

No longer forced to di­vert scarce re­sources to re­pay costly loans amassed dur­ing the Cold War pe­riod by cor­rupt and re­pres­sive regimes, the poor­est and most in­debted coun­tries on the con­ti­nent were able to lower their public debt and in­crease so­cial spend­ing by al­most 3.5% of their gross do­mes­tic prod­uct be­tween 2001 and 2012, the World Bank and IMF claim. For ex­am­ple, Benin used its sav­ings from debt to in­vest in ru­ral pri­mary health care and HIV pro­grammes. Tan­za­nia abol­ished pri­mary school fees and Mozam­bique be­gan of­fer­ing free im­mu­niza­tion to chil­dren.

Free­ing up ad­di­tional re­sources for de­vel­op­ment was another aim of the HIPC ini­tia­tive. How­ever, a lot of the money for­given was al­ready tied up in ar­rears, mean­ing it was owed but had not yet been re­im­bursed, so there was no new cash flow and no real sav­ings in terms of re­sources.

In some coun­tries the write-off just helped mop up over­due debt. And while the ini­tia­tive did erase most of the for­eign debt of these coun­tries, it did not clear all of it. What the whole process did achieve, ac­cord­ing to a Huff­in­g­ton Post ar­ti­cle by Marcelo Guigale, a World Bank di­rec­tor, was in­still­ing “dis­ci­pline” that came in handy when the price of oil, gas and min­er­als climbed in the mid-2000s and the tech­nolo­gies to look for these nat­u­ral re­sources got bet­ter. To qual­ify for a debt can­cel­la­tion, coun­tries had to be trans­par­ent in their oper­a­tions and open to scru­tiny, and they had to mon­i­tor and re­port their poverty re­duc­tion strate­gies, in­vest sav­ings into so­cial pro­grammes and re­frain from ac­cu­mu­lat­ing ex­pen­sive debt. Which is why, ac­cord­ing to Mr. Guigale, African gov­ern­ments had “more money to spend and new of­fers to bor­row—this time from pri­vate bankers.”

Faced with the phas­ing out of the HIPC ini­tia­tive and a de­cline in of­fi­cial de­vel­op­ment as­sis­tance, some coun­tries seized the op­por­tu­nity pro­vided by their health­ier bal­ance sheets and con­tin­ued eco­nomic growth to ex­plore new sources of fund­ing. China, lead­ing the group of emerg­ing economies called BRICS (Brazil, Rus­sia, In­dia, China and South Africa), has been in­vest­ing heav­ily in in­fra­struc­ture.

In­ter­na­tional bond mar­kets pro­vide another av­enue. Ac­cord­ing to Amadou Sy, the di­rec­tor of the Africa Growth Ini­tia­tive at the Brook­ings In­sti­tu­tion, a US think tank, 12 coun­tries in sub-Sa­ha­ran Africa have is­sued a to­tal of $15 bil­lion in in­ter­na­tional sov­er­eign bonds. In­vestors are also keen to snatch up these bonds, se­duced by the con­ti­nent’s favourable growth out­look and prom­ise of high re­turns. The World Bank re­ports av­er­age GDP in sub-Sa­ha­ran Africa is pro­jected to re­main broadly un­changed at 4.6% in 2015, ris­ing grad­u­ally to 5.1% in 2017.

Some observers worry that coun­tries are bor­row­ing too much and too fast. “Africa may have the fastest-grow­ing con­ti­nen­tal econ­omy on the planet,” free­lance jour­nal­ist Richard Walker writes in the Economist, “but grow­ing fastest of all is debt—per­sonal, cor­po­rate and gov­ern­ment.”

Mr. Walker points to Ghana’s is­suance in late 2014 of $1 bil­lion in euro-de­nom­i­nated bonds, although the coun­try is deep in debt and has what he calls Africa’s “worst-per­form­ing cur­rency.” The West African na­tion was one of the first ben­e­fi­cia­ries of the HIPC ini­tia­tive.

Côte d’Ivoire, the Demo­cratic Re­pub­lic of the Congo, Gabon, Namibia, Nige­ria, Rwanda, Sene­gal and Zam­bia also ben­e­fi­cia­ries of the debt can­cel­la­tion pro­gramme, have also is­sued sim­i­lar bonds.

Even with the re­cent surge in bor­row­ing, most of the post-HIPC coun­tries are not at risk of “debt dis­tress,” a group of econ­o­mists with the World Bank in­sists. Dino Moretto, Ti­homir Stucka and Tau Huang con­cede that “some coun­tries may be bor­row­ing too quickly,” but they also spec­ify that “over­all, gov­ern­ments have been bor­row­ing re­spon­si­bly since re­ceiv­ing debt re­lief.”

The trio ex­plain that one of the ob­jec­tives of the debt re­lief pro­gramme was to clear debt over­hang and al­low coun­tries to bor­row again, re­spon­si­bly. Many coun­tries have been care­ful in tak­ing on loans at com­mer­cial terms, and the World Bank and other de­vel­op­ment banks have been giv­ing grants in lieu of loans to riskier, poorer coun­tries.

Africa’s cur­rent debt

Africa’s cur­rent debt is the low­est it has been in decades, Ox­ford Univer­sity pro­fes­sor Mthuli Ncube and Eco­nomic Ad­vi­sor at the African De­vel­op­ment Bank Zuzana Brix­iova con­cur in their re­view for the Euro­pean Cen­tre for De­vel­op­ment Pol­icy Man­age­ment. The fastest de­cline, they stress, is posted by the most in­debted coun­tries, be­cause of debt re­lief and ac­com­pa­ny­ing pru­dent poli­cies.

Aid has been crit­i­cal in help­ing low­in­come coun­tries lift peo­ple out of poverty, but fi­nanc­ing to the re­gion has also in­creased in qual­ity and quan­tity, spurred by the 2002 Mon­ter­rey Con­sen­sus and sub­se­quent 2008 Doha Con­fer­ence. These UN-backed global con­fer­ences brought to­gether heads of state and top lead­ers in fi­nance, busi­ness and hu­man­i­tar­ian groups to re­al­ize a vi­sion called Fi­nanc­ing for De­vel­op­ment ( FfD). The Mon­ter­rey Con­sen­sus was also the im­pe­tus be­hind the HIPC ini­tia­tive, since it called for in­no­va­tive mech­a­nisms to ad­dress the debt owed by poor na­tions.

Mean­while, the FfD July 2015 con­fer­ence in Ad­dis Ababa is in­tended to ad­vance the de­bate on “re­spon­si­ble lend­ing and bor­row­ing” by tabling is­sues on im­prov­ing do­mes­tic re­source mo­bi­liza­tion, in­clud­ing strength­en­ing tax ad­min­is­tra­tion, curb­ing il­licit fi­nan­cial flows, scal­ing up in­fra­struc­ture in­vest­ment and at­tract­ing pri­vate sec­tor fi­nanc­ing.

“De­spite mis­giv­ings about cer­tain coun­tries, Africa is still in a fun­da­men­tally dif­fer­ent place than it was 20 or 30 years ago when old debts were taken on,” Todd Moss, a se­nior fel­low at the Washington-based Cen­tre for Global De­vel­op­ment, told Reuters, adding that tak­ing out loans from pri­vate cred­i­tors puts a “higher bur­den” on lead­ers to be re­spon­si­ble.

To keep from re­vert­ing to old ways, an­a­lysts say, post-HIPC African coun­tries will have to be smart with their han­dling of new loans. Bor­row­ing strate­gies need to be put in place so gov­ern­ments can get a re­turn on their in­vest­ments in or­der to ser­vice their debts. Gov­ern­ments also need to be pre­pared to with­stand shocks from price fluc­tu­a­tions on the nat­u­ral re­source mar­kets and must re­duce their de­pen­dency on com­mod­ity ex­ports. Di­ver­si­fy­ing bor­row­ing sources is another way to sen­si­bly man­age public debt, says Cit­i­group economist David Cowan in the Africa Re­search In­sti­tute pub­li­ca­tion,

Coun­ter­points, re­fer­ring to sov­er­eign bonds as an al­ter­na­tive to con­ces­sional loans.

While con­ces­sional loans come with no strings at­tached, help raise a coun­try’s debt pro­file and put it on the radar of in­ter­na­tional debt mar­kets, Mr. Cowan cau­tions that they do present cur­rency risks and can ex­pose a de­fault­ing bor­rower to spe­cific le­gal risks, no­tably from hedge funds or pri­vate eq­uity funds, also known as “vul­ture funds.”

Good old-fash­ioned tax col­lec­tion, trans­parency and tap­ping into lo­cal cur­rency debt mar­kets are av­enues that should not be ig­nored. In the end, sound fis­cal and com­ple­men­tary mon­e­tary poli­cies will pre­vail. It’s too soon to pre­dict whether the post-HIPC African coun­tries will main­tain sus­tain­able lev­els of public debt while wran­gling with bot­tle­necks such as weak in­sti­tu­tions, in­fra­struc­ture in­vest­ment gaps, poverty and (in some places) in­sta­bil­ity. Only time will tell.

Ca­bles and wires in stor­age at Reroy Ca­bles. The Ghana­ian com­pany aug­mented its cap­i­tal with a bank loan se­cured with the help of the In­ter­na­tional Fi­nance Cor­po­ra­tion, an af­fil­i­ate of the World Bank.

Panos/Nyani Quarmyne

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