Africa needs innovative debt to grow, and is turning to international markets
Africa needs to borrow to grow its economy, but it must seek innovative alternative sources of finance.
In the past, African government borrowing largely took the form of loans from development financiers such as the World Bank or International Monetary Fund (IMF).
But following a decade of strong growth, African nations are increasingly turning to international markets to issue debt.
In its 2016 report on economic development in Africa, the United Nations Conference on Trade and Development (Unctad) analysed debt dynamics and development on the continent.
It found that African external debt ratios were manageable despite rapid growth in debt accumulation in recent years.
The average African country saw its external debt stock grow by 7.8% a year between 2006 and 2009.
This accelerated to 10% a year between 2011 and 2013, reaching $443-billion, or 22% of gross national income by 2013.
According to its emerging market debt report for July 2016, credit ratings agency Moody’s said debt is now growing faster than gross domestic product (GDP) and foreign exchange reserves for many emerging market countries.
But, Moody’s said, the Middle East and Africa have, on average, the lowest external vulnerability.
Emerging Europe remains the region with the highest external vulnerability, followed by Latin America and the Caribbean and the Asia-Pacific region.
But growth in private, rather than public, debt is driving the increase, Moody’s said. Private-sector external debt has grown at an annual rate of 14.3% since 2005 compared with a 5.9% growth rate for public-sector debt.
As financial sectors in African countries grow increasingly more sophisticated, the issuing of domestic debt has risen. In some countries, domestic debt rose to about 19% of GDP by the end of 2013, up from 11% of GDP in 1995, said Unctad.
But to achieve the sustainable development goals, which countries have committed to do by 2030, at least $600-billion will be needed each year.
That amount equates to about a third of African countries’ gross national income, the Unctad report said. Development aid and debt are unlikely to cover these needs.
Instead, Unctad proposes three other methods of funding on the continent: public-private partnerships (PPPs), tackling illicit financial flows and finance through remittance, and diaspora savings. But none of these alternatives is without difficulties.
PPPs, according to the World Bank definition, are long-term contractual agreements between a public entity and a private entity to provide a public asset.
The private entity bears significant management responsibility and risk, but it has become an increasingly popular mode of financing critical public infrastructure around the world.
The Unctad report acknowledges the shortcomings of PPPs and said governments must deal with risks –related to planning, communication, commitment, monitoring, regulation and enforcement – to reap the benefits these partnerships offer.
But PPPs represent a major risk to developing countries, according to the Jubilee Debt Campaign, a nonprofit organisation that lobbies for the cancellation of unjust debt.
“Ultimately, PPPs cost much more than if the investment had been financed with direct government borrowing.
“This is because private-sector borrowing costs more, private contractors demand a significant profit and negotiations are normally weighted in the private sector’s favour,” said the organisation.
“The debt payment obligations created by PPPs are not covered at all in World Bank and IMF debt sustainability assessments, meaning that governments’ real future payment obligations are likely to be much higher …”
Clamping down on illicit financial flows is part of a global movement that has gained momentum in recent years. Unctad has estimated that as much as $50-billion is lost in illicit financial flows from Africa each year.
G20 countries, including South Africa, signed on last year to implement a raft of prescribed measures that aim to close up loopholes exploited by tax avoiders, particularly multinational corporations.
But Tax Justice Network Africa’s Kwesi Obeng wrote in a recent article that although the G20’s proposed new rules to tackle tax cheating represent the first serious global effort in this regard, the outcome failed to capture the voice and interests of the Global South, especially on issues regarding permanent establishment and the arm’s-length principle as opposed to a unitary tax regime.
Need for advocacy
Unctad said African nations will not be able to combat illicit financial flows without stronger and more committed co-operation from their regional and international partners.
It acknowledged that greater advocacy was needed from the African Union and the United Nations to raise awareness of the need to implement the findings of a report from the AU high-level panel on illicit financial flows from Africa, published in January 2015.
Remittances in Africa, according to the World Bank, were estimated at $63.8-billion in 2014.
This surpassed official development assistance as well as foreign direct investment flows to the African continent.
As these remittance flows have proved to be fairly stable over the medium and long term, they can be used as security to lower interest rates and extend debt maturity, Unctad said in its report.
Banco do Brazil, for example, raised $250-million in 2002 through a bond secured by future flows of remittances from Japan. But using remittances as collateral for loans requires that they are officially recorded and so must go through official channels.
The problem is that a large portion of remittances go through informal channels to circumvent high costs, which persist owing to poor competition.
Unctad said a great deal of savings from the African diaspora are kept in bank accounts, where they attract low returns. The issuing of “diaspora bonds” could attract these funds.
They would not pay as high a rate as the benchmark rate, but are expected to benefit from investors’ emotional connection with the bond-issuing country. Some African nations have already been successful in placing such bonds.
South Africa, with its large population abroad, would be one of the African nations well placed to benefit from this kind of debt instrument, said Unctad.