Greek lessons for West Africa (II): Borrowing and the importance of intergenerational equality

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by Yannis Arvanitis

Several policy-makers have cautioned African countries to carefully learn lessons from the Greek debt crisis. Given the importance of debt sustainability to supporting economic growth in Africa and elsewhere, this article is the second in a series of blog entries aimed at promoting debate and distilling the key lessons of the Greek crisis that are applicable in West African countries.

In the past five years, inclusive growth has become the “name of the game”: it is a central feature of the AfDB’s 2013-2022 Ten Year Strategy, as well as those of other development actors such as the World Bank or the policy-oriented Organisation for Economic Co-operation and Development (OECD). A broad consensus on the definition of such growth, as provided by the World Bank, is that it pertains “both to the pace and pattern of growth”, and inclusiveness is a “concept that encompasses equity, equality of opportunity, and protection in market and employment transitions.” Such a definition is now well understood by governments in developed and developing countries. Yet there is an aspect to it which – as the case of Greece showed – is often forgotten: the pursuit of this objective is intergenerational.

Now, how can the Greek crisis provide useful lessons to West Africa?  This post will focus on the issue of borrowing. Governments borrow to finance expenditure. Good practice has it that borrowing should be turned into efficient investments which can trigger the necessary growth required to repay the loan (and generate further economic, social and financial returns). The inclusive growth objective nuances this claim by showing that for adequate returns to take place, investments should not just generate returns, but also be as socially and spatially inclusive as possible. Indeed, several posts on this blog have highlighted that non-inclusive growth has many downsides/forgone opportunities (e.g. related to spatial or gender inequalities).

The levels of Greek borrowing in the past 20 years have proven to be unsustainable, as the crisis has shown. The low interest rates from which Greece benefitted as it entered the Eurozone allowed for much cheaper borrowing, and a surge of investments which have not all delivered in terms of returns[1]. Investors’ overconfidence and their short memory on Greece’s pre-Eurozone credit history fueled lending. In the short term, growth picked up and GDP per capita rose by nearly 50% between 1996 and 2006. Yet, at the same time, government spending ballooned, and tax receipts did not follow through. It turns out that the government borrowed more than it could/should. In this respect, a lesson for West African countries is to accelerate reforms for more efficient tax policies and administration. Indeed, if incomes rise, the progressivity of taxation should lead to proportionally higher receipts over time. This assumes that tax collection and tax policy is efficient. If it is not the case, revenues cannot follow growth-induced spending.

Borrowing is easy. Paying back is a difficult task. And since borrowing involves receiving money today and the obligation to repay later, the question is who will be standing “later” to repay, and how fair/equitable is that to the next generation? Today, Greeks are emigrating due to the country’s economic and social situation and a brain-drain is occurring as prospects for the future remain grim. Africans cannot afford such a brain drain as Greece is facing. At the end of the day, even if one argues that the investments made by the Greek government seemed “inclusive” at the time they were made, it remains that they were.

In a recent post on our blog, it was noted that “debt, particularly foreign currency debt, has become an important source of development finance for West African economies.” Ghana was the first West African country to issue such a bond in 2007 for USD 750 million, with interest rates as high as 8.5%. In the region, Senegal and Côte d’Ivoire have followed suit. In local markets, even countries such as Guinea-Bissau have opted for bond issuance, although at much shorter tenures (1 year) and amounts (15 billion FCFA or about USD 25 million).

It is true that borrowing is necessary for growth – and this post does not argue against it. Yet Greece reminds us that we should never be over-confident. In countries such as Guinea-Bissau, considering the high level of recurring expenditure, current budget deficits and tight cash management, it is unclear whether most of the borrowing is aimed at (inclusive) growth spurring investments. In fact, part of it is destined to roll-over previous liabilities. Against this background, it is crucial that a borrowing reduction plan is put together and public finances consolidated before sound and growth-led borrowing is made, as argued in a blog by Daniel Ndoye reflecting on Sustainable Debt Strategies for West Africa.

For other West African countries, borrowing should be kept at pace with investment project maturity. Having a shopping list of projects to finance should not be a condition for borrowing. Have a series of well-crafted investments underpinned by studies is a better way to avoid future generations ending up with piles of debt and unproductive investments/infrastructure. Last but not least, countries should not be lured by the apparent “success” of their debt issuances – just as Greece was by such success and corresponding declining borrowing rates. Quantitative easing in developed markets has pushed investors to emerging markets in search of yield. This is a short-term condition. Eyes and minds should be turned to the long-term. If we are serious about inclusive growth, we should always think about the generation coming next. What are your views?

[1] According to European Central Bank (ECB) data, from January 2000 to December 2008, long-term (10 years) interest rates for Greece averaged 4.48%. From January 2009 to December 2015, they averaged 11.3%, with a peak at 29.24% in February 2012.


Yannis Arvanitis - Senegal 18/02/2016 16:05
Dear Theo,
Many thanks for your comment. In terms of debt sustainability, the key issue is whether the real cost of debt (i.e. the rate paid for it) exceeds or falls short of the long-term real sustainable growth rate. Empirical evidence shows that in the long term this is not the case as growth tends to be lower than rates, hence a need to run a primary surplus at some point (you can link that to the idea of ‘intertemporal budget constraint, i.e. that current debt level should be equal to the NPV of the future primary balance). In this regard, the successful fiscal consolidation (if well undertaken) you mention is indeed key, not only with regards to the debt sustainability arithmetic, but also as a way to restore confidence in the country and allow renewed interest in its bonds. The point is however to have this long-term perspective and avoid ending up like Greece…
sigis aberi - 17/02/2016 12:06
bon contenu
Theo Braimah Awanzam - Ghana 17/02/2016 11:02
With the US Fed’s raised interest rates, the short term condition mentioned will gradually fizzle out and international investors’ interest in emerging markets will cool. In the medium term, macroeconomic stability matters for emerging markets to reduce risk, increase investors’ interest and reduce spreads. I think if African countries like Ghana can sustain the on-going fiscal consolidation, investors will be interested in the country’s bonds even at the current yields.