For those of us who have spent years addressing the difficulties of African economies, the metamorphosis now taking place across the continent is a welcome sign. Among other things, it has led to rapid changes in the nature and scale of financing strategies, both in the public and the private sectors – a development few would have dared dream barely a decade ago. This fact alone belies persistent claims of African exceptionalism.
Yet while our belief in Africa’s potential stirs optimism, our experience commands caution. The increasing attention on Africa among creditors worldwide is good news for the continent’s development – after decades of socio-economic crisis and chronic underinvestment. It is in the interests of all public players concerned to support this process. But changes to African financing carry risks that will need to be carefully managed, at a time when many countries are graduating from IMF programmes.
Three simultaneous (r)evolutions have altered the structure of sovereign debt on the continent in recent years, as African countries have sought to diversify their sources of funding.
As debt relief improved the solvency of many states, new international creditors resolutely stepped forward in Africa – as exemplified by China’s announcement of a $5 billion loan to the Democratic Republic of Congo last month. China’s presence has been largely welcomed by Africans, and justly so: it provides an unprecedented
opportunity for the continent to anchor itself to a new motor of world growth. Yet Africans, Indians, Chinese and Europeans alike perceive the intrinsic risks these new loans – contracted outside any multilateral framework – represent, with respect to debt sustainability that has only just been achieved, and at great cost. It is crucial that the international donor community enters into sustained dialogue with these new creditors, who are increasingly mindful of their reputation in Africa and the world.
Developments in debt issuance
Although most public attention has focused on the emergence of new sovereign lenders, we should not overlook the renewed capacity for many African countries to issue debt, which has led to a boom in local-currency government bonds. This type of financing has close to tripled in the space of two years in the West African Economic and Monetary Union, leading some to dread the development of a speculative bubble.
Should this development be feared? Experience shows that, when conducted under favourable circumstances, local-currency commercial borrowing can bring multiple benefits to developing economies. Beyond the obvious advantage of avoiding exchange rate risks, the issuance of public bonds stimulates local savings, which are traditionally scarce in sub-Saharan economies – partly due to the lack of worthwhile investments. It increases ownership of the resources mobilized by governments, and carries built-in incentives for improved budgetary discipline and transparency.
But excessive volatility is a concern when a large proportion of this debt is held by foreign investors, such as hedge funds, who tend to pull out abruptly, triggering exogenous financial crises. Local markets also suffer from a lack of liquidity and excessively short maturities. International development banks can play an important role in deepening these nascent markets, prolonging maturities and broadening the pool of investors, as well as by offering sound debt sustainability analysis and pushing the transparency agenda.
Commercial debt control
In a very recent development, several African countries have also gained access to international capital markets as global investors moved to “frontier markets” in search of higher yields. Here too, the issuance of bonds in these markets by countries just emerging from debt relief – such as Ghana, whose debt service ratio fell from 11% of GDP in 2000 to not much more than 1% today – has been a source of concern. The sustainability of this commercial debt is legitimately questioned, as it essentially relies on self-discipline, outside of IMF guidelines. If past practices are anything to go by, Paris Club members are right to worry.
Still, we should not be too quick to dismiss the continent’s long-awaited integration into financial globalization, when most of these countries’ credit ratings are improving steadily. The role of international development actors should be to address volatility and vulnerability, while using to the full the levers that these new financing options offer for Africa’s development. This implies stepping up national and international efforts to fight corruption and money-laundering practices, and for the IMF to broaden the scope of its ever-more crucial monitoring programmes.
But focusing excessively on these three changes to Africa’s public debt would be missing half of the equation, namely the radical transformations of private-sector activity on the continent. The past year has seen the creation of several investment funds dedicated to sub-Saharan Africa, foreign direct investment is on the rise, and workers’ remittance flows have doubled in the space of five years. Official development assistance has clearly lost the monopoly in financing the continent’s growth. This, however, leaves many tasks for the public development bodies who want to make use of private capital’s incredible lever.
Innovative tools, such as insurance against exchange rate fluctuations, mechanisms to cover first losses on small and medium-sized enterprises or loans whose yearly payments are adjusted according to commodity prices on international markets – products recently developed by AFD and its private-sector entity Proparco – can help reduce the risk for investors and local businesses. The lack of sectoral diversification of FDI flows and the relative dearth of equity in Africa can be addressed by creating risk capital investment funds specialized in under-financed sectors.
These initiatives can also help plug the gap between microfinance and hedge-fund macro finance, thereby supporting the small-scale private-sector activity that constitutes much of Africa’s economy. More fundamentally, by working side-by-side with African states to improve regional infrastructure and build commercial capacity, development banks can increase the productivity of African economies and their integration into world markets – one of the fundamental motors of growth.
Jean-Michel Severino is managing director of the Agence Francaise de Developpement and was previously a World Bank vice-president