In June, Kenya set a new African record. At two billion dollars, the country’s sovereign bond debt was four times oversubscribed. Only one month later, Senegal broke this.
Zambia and Cote d’Ivoire have been similarly successful in what some call an African bond bonanza. Interest rates in traditional markets are so low that investors are going after sub-Saharan debt for its high return rates, averaging between 5.5pc and 7.5pc. But they are also attracted by the continent’s promising growth rates, its economic stability, rising exports and growing private investment.
This is a good thing. To sustain growth and fight poverty, Africa needs to ramp up investment, particularly to generate more electricity – given that 600 million Africans have no access to power. The infrastructure investment gap, estimated to be around 75 billion dollars a year, can be narrowed by, among other measures, raising debt.
This is why bond markets, and also bilateral lending, have become so popular. To be clear, raising debt on the international markets and increasing spending are standard tools for any finance minister. But this should not be a race for issuing more and bigger bonds, and should not result in out-of-control spending.
Not long ago, over 30 African countries benefited from a major international debt relief program. Now a handful of countries are building up debt again, at a fast pace, often with risky terms and at unsustainable levels. Their debt could reach pre-relief times within a decade.
It matters a lot how these resources are being used. Some countries have started increasing their borrowing and spending with an eye on long-term gains by addressing their infrastructure gap and deploying a mix of economic incentives and investments into Africa’s vast human potential.
But in others, spending remains short-sighted and too few dividends are used to fight poverty.
There are three things for leaders to keep in mind if they want their borrowing and fiscal management to pay off:
Patience is important – it is rarely the quick fix that goes the furthest. So, do not get tempted by political cycles and the lure of electoral wins.
Development is an endurance exercise with incremental improvements – when done well, they are more likely to stay, benefiting today’s and tomorrow’s generations.
But, populist measures, like bumping up civil service salaries or subsidising fuel, can quickly become unsustainable. Fuel subsidies help the rich more than the poor, and some African countries spend up to five percent of their gross domestic product (GDP) on them, leaving little for smarter investments.
Related to this is a second moral of spending. Do what is best for most people, not just a few. Prevent the elites and growing middle class, those who often benefit most from growth and development, from turning into special interest groups that block reforms.
They will always be eager to protect their privileges, and leaders will have to spend time and effort to build a climate that promotes broad buy-in for difficult reforms. If one waits too long, resistance to more competitiveness, open markets and revenue collection will grow while opportunities go untapped.
Acting multi-dimensionally also helps. Investing in new power generation without reforming your ineffective power company will bring little change.
Similarly, building schools without improving the quality of teaching can be wasteful. In other words, go for the development “package”, the broad approach.
Infrastructure alone cannot end poverty. The World Bank had to learn this lesson too. While we believed too much in bricks and mortar in our early days, we now understand that bringing together funding, technical expertise and tested knowledge, go much further.
The outlook is good. Africa has better institutions today than ever; is more resilient to shocks and in many places guided by prudent macroeconomic and fiscal policies. Twenty-five years ago, 60pc of Africans were extremely poor, now it is 48pc.
But the decline has been slower than in other regions and inequality is rising in many countries. This is why leaders need to finance the next stage of their countries’ development.
And they can do so without endangering hard-won development gains. But fiscal discipline remains critical to secure long-term growth and finance successful pro-poor policies.
It is this virtue that can help protect today’s successes for the next generation. If Africa spends smartly and designs the right development packages, it can continue along the continent’s path of success.
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