Reflections on Sustainable Debt Strategies for African States: The Case of West Africa
By Daniel Ndoye
Several countries in West Africa have established ambitious development programs that aim for strong and sustained growth that significantly reduces poverty.
In order to finance these programs, countries are increasingly moving towards low-concessional or non-concessional funds, such as securities issued on international financial markets. One can observe an increase in the external debt ratio combined with a decline in the concessionality level (see table). This change in the debt structure raises concerns and evokes the excessive debt of the 1990s. Indeed, some countries in West Africa, such as Ghana and Niger, have already seen their risk of debt deteriorate, as indicated by the debt sustainability analysis conducted by the IMF and the World Bank between 2013 and 2015.
Thus, the question is how, and to what extent, can these states take on debt to realize their investment programs without compromising their ability to repay. There is no single answer that applies to all countries. However, the recommendations outlined below can guide governments as they develop their financing strategies.
The basic condition for debt sustainability is to first ensure that internal and external revenues can cover debt commitments. Improving the public financial management framework is crucial in this regard to increase the mobilization of domestic resources and enhance the quality of public spending. This will reduce debt risks, establish the country’s credibility and mobilize external resources under more favourable conditions. Special emphasis must also be placed on expanding the export base of goods and services.
Secondly, the use of concessional resources should be favoured, especially in countries facing economic and social fragility, such as those who have recently been affected by the Ebola virus disease epidemic.
It is still possible to achieve growth objectives with non-concessional debt finance, as long as governments, development finance institutions adhere to certain principles that ensure debt sustainability.
The first principle is to set a limit. This limit should be related to the macroeconomic situation of the country, including the debt structure and vulnerability level, but also its ability to manage debt. Moreover, development finance institutions should provide more flexibility in terms of access to their non-concessional resources – resources that are in fact much more affordable than those mobilized directly on the international financial markets. Development finance institutions such as the AfDB which enjoys a triple-A rating can raise funds on the markets at very low rates, so they can in turn lend to African countries at very competitive rates. This is the context in which the AfDB decided in 2014 – potentially and within the limits of debt sustainability – to open its non-concessional window to all those countries with low to moderate debt risk.
The second principle concerns the use of non-concessional resources for profitable projects. These resources should be mobilized primarily through projects that are highly profitable and have a high growth impact. They can be particularly suitable for project financing in the form of a public-private partnership (PPP).
The third principle is the search for the most favourable conditions. This involves having a healthy and stable financial management framework that reassures investors. It is also important to develop domestic securities markets, such as the regional financial market of the West African Economic and Monetary Union (WAEMU), the Nigerian Stock Exchange and the Ghana Stock Exchange, that allow financing institutions to raise funds in local currency. These institutions would then have the opportunity to provide loans in local currency, reducing the exposure of the debt to foreign exchange risk. Countries should also make greater use of instruments set up by financial institutions to enable them to reduce borrowing costs, such as the partial credit risk guarantees implemented by the AfDB.
The fourth principle is to increase countries’ financial management capacity. Access to more diversified but also more complex resources requires an effective framework for debt management. It requires greater use of hedging products to minimize the various risks (exchange rates, variable interest rates, commodity prices). At this level, the contribution of technical and financial partners is important, through the provision of technical assistance to governments and debt and risk management instruments.
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