Keynote Address Delivered by Dr. Akinwumi A. Adesina, President of the African Development Bank, at the Paris Forum on Debt and Development, organized by the Paris Club and the G20, on November 20, 2015
Thank you very much for inviting me to this important meeting to discuss Debt and Development. The timing of this Forum is especially important, as it is happening just ahead of the COP 21 on climate change, and after two landmark global meetings: the approval of the sustainable development goals and the financing for development conference in Addis Ababa.
There is no doubt that more financing is needed for development. The challenges facing developing countries are immense, especially African countries. The need to produce enough food to feed their populations, meet the rising needs for infrastructure, education, health, water and sanitation, are all major areas that require financing. For example, the infrastructure-financing gap for Africa alone is estimated at $100 billion per year, for which only $50 billion has been mobilized. The scale of resources needed far exceeds what the public financing can provide. The challenge therefore is how to meet these financing needs in ways that are sustainable, with a mix of public and private financing, including domestic and international debt financing.
The Financing for Development conference in Addis Ababa agreed on the need to mobilize domestic resources, improve domestic taxation and effectiveness in the use of public financing to leverage private sector financing. The sustainable development goals, which represent the collective global commitment to ensure major gains in equitable growth and development spanning 19 major goals, have to be financed. This puts even greater pressure on countries to finance their development agenda. Public expenditures are critical to trigger growth, but they must be well managed and sequenced to avoid unsustainable debt overhang.
We must learn from history - the not too pleasant experience, right here in Paris, where the Highly Indebted Poor Countries Initiative (HIPC) was hatched, to address the spiralling of public debt in developing countries. Together with the Multilateral Debt Relief Initiative (MDRI), they allowed many African countries to reduce their debt stocks in exchange for reforms. So far 35 countries have already reached the completion point and have thus received 100% relief on eligible debt from participating creditors. Consequently, the debt ratios of HIPC beneficiaries have declined substantially over the past decade, from an average of 145% of gross national income (GNI) in 2000 to 35% in 2011. As a result, more fiscal space is available to increase spending and borrowing. However, a new tide is rising in Africa: debt stocks are rising raising real concerns that soon countries may be back to pre-debt relief debt levels.
Many countries facing rising domestic interest rates from tightened monetary policies have launched out to the international capital markets to raise funds to support both infrastructure and the rescheduling of debt. For many the attractiveness of low interest rates on global capital markets, which are much lower than domestic borrowing costs, has fuelled the issuance of euro bonds. There is a herd effect: countries, believing that issuing euro bonds launches them to become visible in international capital markets, have followed each other in droves. By 2014, 21 countries in Africa had received credit ratings by international agencies. Between 2006 and 2014, African countries had issued a total of $25.86 billion worth of foreign currency-denominated bonds. In 2014 alone, SSA countries issued $ 7 billion in foreign currency denominated bonds. It has become a race to the top on the yield curves.
The rush to emerging markets has benefited Africa, no doubt, but this is a double-edged sword. The likely increase of interest rates in the US will drive investors out of emerging markets and raise the cost of financing the bond issues at maturity by developing countries. The incentives to go to the international capital markets are partly driven by the more relaxed institutional stance of the IMF that removed most of the limits on borrowing from non-concessionary sources, the absence of conditionality, ease of borrowing compared to multilateral donors and the possibility of using such resources to finance domestic debts which are often very expensive.
Whichever way one looks at it, African countries are getting themselves into deep waters. This is especially so given their dependency on a narrow base of exports - mainly primary commodities. As crude oil price plummeted, as well as for primary exports such as metals and minerals and other agricultural primary commodities, the weakness of the giant is showing, as current account deficits rise, domestic fiscal imbalances increase and domestic currencies weaken. Because of currency mismatch countries are exposed to greater exchange risks. The Overseas Development Institute estimates that exchange rate risk for sub-Saharan Africa between 2013 and 2014 was $10.8 billion or 1.1% of the GDP.
For sustainable development greater focus should be put on domestic resources mobilization, strengthening domestic and regional capital markets to expand savings. Especially critical is the need to raise tax revenues. Much progress is being made. In most African countries, tax revenues have significantly increased from a low of 9.8% of GDP in 2001 to a high of 21% (excluding natural resource taxes) in 2013. The ratio shows large difference when one accounts for natural resource taxes. In 2013, tax to GDP ratio including natural resource tax was 36% compared to 21% (without resource taxes). The total natural resource taxes for 2013 amounted to US$ 215 billion. In nominal terms, tax revenues have increased from about US$ 130 billion in 2001 to US$ 508.3 billion in 2013, and US$ 545 billion in 2014. Although gross domestic savings are low in Africa, they have increased from 18% of GDP in the early 1990s to 23% in 2012.
At the African Development Bank, we are committed to supporting African countries to improve their public financial management. In this regard, particular emphasis has been given to deepening public financial management reform at the national level, as well as extending this support to the sub-national level. The Bank supports reforms aimed at strengthening fiscal revenue frameworks by promoting modernization of revenue administration systems, including the automation and strengthening non-tax revenue collection. Across the 14 countries where the Bank has provided such support, tax revenues rose significantly, from an average 11% to 15% of GDP between 2005 and 2012, while tax rates for business declined from 94% of commercial profits to 54% over the same period. For instance, the Bank provided support to Togo in reforming their revenue management authority with the introduction of new innovative fiscal instruments. Following the reforms, cash revenues increased by 23% to reach US$ 721 million after the authority's first year of operation.
But even more revenue can be accrued from better management of Africa's vast natural resources. Africa accounts for 47% of the world's deposits of platinum, 46% of chromium, 45% of diamonds, 28% of gold and at least 10% of all the discovered oil and gas. The value of all discovered natural resources is estimated to be over $82 trillion. Therefore, Africa is not poor, it just happens to have a lot of poor people. The main problem is that these natural resources are not well managed. Lack of transparency and accountability in natural resource management causes exclusion, triggers conflict and creates inequality. As a Bank, we support the need for greater accountability and transparency in how natural resources are managed in Africa. That is why we established the African Natural Resource Centre with a mandate to assist African countries with policy advice, technical assistance, advocacy and knowledge development for the management of their natural resources. In addition, the African Legal Support Facility of the Bank supports African governments in the negotiations of complex commercial transactions and dealing with transfer pricing and tax avoidance.
But we must plug even greater leakages - especially illicit capital flows out of the continent. It is estimated that Africa loses over $60 billion annually to illicit capital flows. These are huge volumes of resources that can be tapped and used to meet the development financing needs of the continent. The African Development Bank is working closely with international partners and countries to stem this tide. Curtailing illicit financing flows is a huge agenda that needs to be strongly supported by all stakeholders and backed with reforms involving both sending and receiving countries. These include enhancement of transparency in the international financial system, automatic exchange of tax information and double taxation agreements, and strengthening anti-money laundering laws. Creditors themselves must recognize that by not helping to curb illicit capital outflows they undermine the ability of countries to pay their debts.
There is no greater way to give confidence to countries than for their own citizens to invest back in their home countries. Remittances have now become a critical source of financing for sustainable development. Official estimates of remittance flows to Africa increased from $11 billion in 2000 to $ 62 billion in 2014, far exceeding all Official Development Assistance. While remittances are useful for smoothening consumption and investments for households, they hold a huge potential to support the broader development agenda. The African Development Bank estimates that Africa could potentially raise $17 billion annually by securitizing future exports or remittances. The securitization of remittances could be used to raise short-to medium-term financing from African capital markets. Several African countries already have come up with ways to securitize remittances, including the issuance of remittance-backed securities and diaspora bonds.
However, there are some challenges for leveraging remittances. For instance, the transfer costs to sub-Saharan Africa are among the highest in the world, at an estimated average of 6.15% of transaction amounts in destination country in 2014, compared to 3.2% in Europe and 5.2% for Central Asia and the Middle East, and 2.9% in South Asia. This is a crucial challenge that needs to be addressed to bring the transfer costs down substantially. That is possible if we continue to support financial sector development in African countries by leveraging technology and digital payment platforms, promoting innovation, strengthening the financial infrastructure and systems and leveraging the regional integration dynamics of the recent phenomenon of cross border banking taking place in Africa.
Sovereign wealth funds can also play major roles in financing development. Africa is witnessing a rapid growth in sovereign wealth funds. The number of countries with sovereign wealth funds has grown from 15 in 2009 to 20 by 2014. The total assets under management for the sovereign wealth funds increased from $114 billion in 2009 to $ 162 billion in 2014. These constitute an untapped source of additional financing, which if well managed, can go a long way to bridge the long term financing needs for big-ticket infrastructure development and regional integration projects, among others. The African Development Bank will continue to assist African countries to save for the rainy day by increasing the size of their sovereign wealth funds, to allow them to have buffers against commodity price volatilities.
Equally important is the rising volumes of pension funds. Pension fund assets in Africa are estimated at $334 billion or about 20% of the GDP of African countries. Pension funds and life insurance funds need to be mobilized for financing development.
We must support countries to deepen their capital markets. The scarcity of long term financing, due to underdeveloped financial markets, limits the availability of domestic financing for development. While national and regional stock markets can help to mobilize savings and match them optimally with investment needs, the size, depth and sophistication of many of these markets remains thin. The African Development Bank is currently supporting the African Financial Markets Initiative directed towards long-term development of Africa's bond markets. As domestic bond markets mature, countries will be able to further accelerate the use of local currency bond issues to support their long-term financing needs.
As the general business and investment climate continues to improve, Africa is witnessing rapid growth in foreign direct investment, which increased from $33.8 billion in 2005 to $ 55.5 billion in 2014. While the flows are highly concentrated in a few countries, FDI remains a major source of financing development in Africa, as in other emerging economies.
But we must not forget that multilateral development banks still remain the largest suppliers of financing for developing countries. Multilateral development banks will play a major role in the financing of the Sustainable Development Goals. At the Financing for Development Conference in Addis Ababa, Multilateral Development Banks (MDBs) agreed to leverage their balance sheets to extend more than $ 400 billion in financing over the next three years. They also committed to work more closely with private and public-sector partners to help mobilize the resources needed to meet the historic challenge of achieving the SDGs. One of the ways that the multilateral development banks hope to achieve this is through MDB Exposure Exchange which is expected to reduce exposure risk concentration and free up headroom for greater lending to countries.
In closing, let me summarize key issues that I believe we must pay greater attention to, for sustainable financing for development, based on lessons from the African context.
First, developing countries cannot afford to go back to the days of HIPC where the Paris Club had to underwrite the cancellation of debts. This can be achieved through stronger macroeconomic, debt and public financial management.
Second, while the international capital markets offer seemingly attractive opportunities for countries, greater attention needs to be put on avoiding piling up international debts for financing debt restructuring.
Third, the free for all approach of borrowing on the international capital market can boomerang as interest rates rise in the developed economies and capital flight occurs from emerging markets. This will raise the cost of financing the foreign currency denominated debts.
Fourth, countries should focus on adding value to their primary commodities and avoid the negative effects such as the burst of the commodity super cycle that now threatens countries with high dependency on exports of primary commodities.
Finally, there is no substitute for greater efforts to mobilize domestic financing through expansion of the fiscal space, tax policy reforms and revenue collection, and the development of domestic and regional capital markets to mobilize savings to match long term financing needs of countries.
Yes, the world needs sustainable development. But without sustainable financing, this cannot occur. Creditors and debtors, whether multilateral, bilateral or global financing capital providers have a mutual responsibility to ensure sustainable debt management.
I love the city of Paris, just like the rest of you - and I really look forward to being here soon for the COP 21 - but we certainly should not come back to Paris to speak of another HIPC. One HIPC is more than enough!