News / Economy

Decade After Debt Relief, Africa's Rush to Borrow Stirs Concern

Reuters
Nearly a decade after Nelson Mandela and anti-poverty activists Bono and Bob Geldof persuaded the rich world to forgive Africa's crushing debts, many countries' debt levels are creeping up again, which could undermine the region's growth boom.
      
As African states line up to join the growing club of dollar bond issuers, economists and analysts warn of a slide back into indebtedness that could undo recent economic gains and create a “Eurobond curse” to match the distorting “resource curse.”
      
“Eurobonds have become like stock exchanges, private jets and presidential palaces. Every African leader wants to have one,” said one investor, asking not to be named.
      
In 2007, Ghana became the first African beneficiary of debt relief to tap international capital markets, issuing a $750 million 10-year Eurobond. Since then, previously debt-burdened countries, such as Senegal, Nigeria, Zambia and Rwanda, have also put their names on the list of bond issuers.
         
Governments seeking to replace declining foreign aid and pay for infrastructure are also taking concessional funds from multilateral institutions, more expensive commercial bank loans and bilateral financing from lenders like China and Brazil.
      
No sub-Saharan countries are in immediate danger of default and most are largely financing themselves domestically, but the debt build-up is stirring up troubling memories of the past.
      
“The financial sector loves to find people to prey on and their most recent prey are governments in developing countries,” Nobel prize-winning economist Joseph Stiglitz told Reuters in an interview during a conference in Johannesburg this month.
      
“They get overindebted, they get a bailout from the World Bank and IMF and they start over again. I think it's unconscionable, but their memory is short and their greed is large, so it's going to happen again,” said Stiglitz.
          
Up to 30 low-income sub-Saharan African countries had their debts reduced under the IMF and World Bank's Highly Indebted Poor Countries (HIPC) initiative, which was later supplemented by the Multilateral Debt Relief Initiative (MDRI).
      
An estimated $100 billion of debt was wiped out, easing countries' onerous debt burdens, often the result of loans taken on by corrupt regimes. These had meant more being spent on debt service payments than on health and education combined.
      
Risk of over-borrowing
          
Although debt sustainability in Africa has improved since the debt relief initiative, a forthcoming World Bank paper warns of a risk of over-borrowing, especially by countries expecting new revenues from resource discoveries. One of the co-authors of the study shared its findings with Reuters.
         
In Ghana, Uganda, Mozambique, Senegal, Niger, Malawi, Benin and Sao Tome and Principe, debt levels are creeping back up. If all continue to borrow and grow at current rates their debt indicators could be back to pre-relief levels within a decade.
      
Others with rapidly rising debt ratios include Ethiopia, Tanzania and Burkina Faso.
      
Nevertheless, the study finds that on average there has only been a modest rise in debt-to-GDP ratios in nearly a decade.
         
In the 26 African HIPC beneficiaries studied, nominal public debt fell from a GDP-weighted average of 104 percent of GDP before relief, to 27 percent by 2006 when most had received full debt relief. Half a decade later the ratio was at 34 percent.
      
The trend has been broadly the same for resource-rich and resource-poor, and high- and low-income economies, said Mark Roland Thomas, a World Bank manager and co-author of the paper, the first review of debt dynamics in Africa since debt relief.
      
Ghana, which sold a new $750 million Eurobond and bought back a portion of the 2017 issue last year, shows how growing debt levels can threaten countries' fiscal dynamics.
      
Ghana's stability and roaring economic growth, reaching 14.5 percent in 2011, have made it an investor favorite. But the government's inability to tame widening fiscal deficits has led to a deterioration in its debt ratios. Its debt now represents just over half of its GDP, from 32 percent in 2008.
      
An expanding current account gap has hit the cedi currency, which has weakened more than 9 percent against the dollar this year, after a 24 percent slide in 2013. Fitch downgraded the cocoa, gold and oil producer to B from B-plus last October.
      
In a sign of waning market confidence, yields on Ghana's sovereign debt are higher than for any other African country with an actively traded international bond, at around 9 percent for its 2023 Eurobond and over 20 percent for domestic debt.
      
Zambia's story is in some ways a slow-motion version of Ghana's. Africa's biggest copper producer, which sold a hugely oversubscribed debut $750 million Eurobond in 2012 and plans to return to the market, was also downgraded by Fitch last year.
      
Zambia's debt is around 30 percent of GDP, still quite low. The government needs to spend on roads and energy but economists worry its current pace of borrowing cannot be sustained.
         
‘Eurobond curse?’
          
For Michael Cirami, an emerging markets fund manager at Eaton Vance Corp, Ghana and Zambia challenge the notion that sustained growth is a given for African nations. While international bonds bring countries into the global financial market and scrutiny from investors can improve policymaking, there may also be a flipside of looser fiscal policy, he said.
      
“I wonder and sometimes fear about a Eurobond curse, particularly in sub-Saharan Africa, where all of a sudden you get what seems like a windfall of money and you end up with policymaking deteriorating,” he said.
      
Ghana's GDP will likely only grow by 4.8 percent in 2014, the IMF estimates, from 5.5 percent last year. The market has less faith than the government that future growth will be enough to repay debtors, said Antoon de Klerk, a fund manager at Investec.
      
“If Ghana's growth falls short of expectations, it will very quickly run into debt servicing problems,” de Klerk wrote in a note to clients.
          
Ghana's finance ministry declined to comment.
          
In Zambia, ministry of finance permanent secretary Felix Nkulukusa told Reuters that concessional financing from the IMF and World Bank was insufficient to fund big infrastructure projects, forcing the country to turn to private creditors.
      
“The pace of borrowing is sustainable because we are not going to be borrowing forever,” he said.
          
The World Bank and IMF say Ghana and Zambia's debt is sustainable at current levels but Ghana is vulnerable to shocks.
          
Tougher questions
      
Despite misgivings about certain countries, Africa is still in a fundamentally different place than it was 20 or 30 years ago when the old debts were taken on, thanks to robust growth and better public sector management, said Todd Moss, a senior fellow at the Washington-based Center for Global Development.
      
Borrowing from private creditors also puts a higher burden on leaders to be responsible, Moss said, “whereas borrowing from the World Bank, there's clearly a dynamic of lend and forgive.”
      
The challenge for governments will be to ensure that borrowed funds are invested wisely and not mismanaged.
      
Eurobonds may also be a short-term funding solution for Africa as tapering of the U.S. Federal Reserve's bond-buying stimulus ends an era of low interest rates in the rich world that sent investors rushing to higher-yielding emerging markets.
      
Investors will do more homework on issuers' fundamentals than in the past and ask tougher questions about use of funds, bankers say. A key test will be if infrastructure investments generate returns that enable governments to service their debts.
      
Nick Dearden, director of the World Development Movement, said governments should use borrowed funds to reduce commodity dependency, which is still a widespread problem for Africa.
      
“Getting more minerals out of the ground may be very beneficial for Western nations... but if it's not developing African economies in a genuine way they're likely to be left with the debt and none of the resources they've invested in,” said Dearden.

You May Like

Yemen Brings US, Iran Closer to Naval Face-off

US sending two more ships to waters off coast of Yemen to take part in 'maritime security operations' More

Minorities Become Majority Across US

From 2000 to 2013, minorities became the majority in 78 counties in the United States. Here's where those demographic shifts are happening More

Japan's Maglev Train Breaks Own Speed Record

Seven-car 'magnetic levitation' train traveled at more than 600 kilometers per hour during test run Tuesday More

This forum has been closed.
Comment Sorting
Comments
     
by: Japhet
March 18, 2014 3:13 PM
What about Zimbabwe? please explain the state of their economy .

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
New Brain Mapping Techniques Could Ease Chronic Paini
X
Shelley Schlender
April 20, 2015 7:03 PM
Pain has a purpose - it can stop you from touching a flame or from walking on a broken leg. As an injury heals, the pain goes away. Usually. But worldwide, one out of every five people suffers from pain that lasts for months and years, leading to lost jobs, depression, and rising despair when medical interventions fail or health experts hint that a pain sufferer is making it up. From Boulder, Colorado, Shelley Schlender reports that new methods for mapping pain in the brain are providing validation for chronic pain and might someday guide better treatment.
Video

Video New Brain Mapping Techniques Could Ease Chronic Pain

From Boulder, Colorado, Shelley Schlender reports that new methods for mapping pain in the brain are providing validation for chronic pain and might someday guide better treatment.
Video

Video Hope, Prayer Enter Fight Against S. Africa Xenophobia

South Africa has been swept by disturbing attacks on foreign nationals. Some blame the attacks on a legacy of colonialism, while others say the economy is to blame. Whatever the cause, ordinary South Africans - and South African residents from around the world - say they're praying for the siege of violence to end. Anita Powell reports from Johannesburg.
Video

Video Italy Rescues Migrants After Separate Deadly Capsize Incident

Italy continued its massive search and rescue operation in the Mediterranean Monday for the capsized boat off the coast of Libya that was carrying hundreds of migrants, while at the same time rescuing Syrian migrants from another vessel off the coast of Sicily. Thirteen children were among the 98 Syrian migrants whose boat originated from Turkey on the perilous journey to Europe.
Video

Video New Test Set to Be Game Changer in Eradicating Malaria

The World Health Organization estimates 3.4 billion people are at risk of malaria, with children under the age of five and pregnant women being the most vulnerable. As World Malaria Day approaches (April 25), mortality rates are falling, and a new test -- well into the last stage of trials -- is having positive results in Kenya. Lenny Ruvaga reports for VOA from Nairobi.
Video

Video Are Energy Needs Putting Thailand's Natural Beauty at Risk?

Thailand's appetite for more electricity has led to the construction of new dams along the Mekong River to the north and new coal plants near the country's famous beaches in the south. A proposed coal plant in a so-called "green zone" has touched off a debate. VOA's Steve Sandford reports.
Video

Video Overwhelmed by Migrants, Italy Mulls Military Action to Stabilize Libya

Thousands more migrants have arrived on the southern shores of Italy from North Africa in the past two days. Authorities say they expect the total number of arrivals this year to far exceed previous levels, and the government has said military action in Libya might be necessary to stem the flow. VOA's Henry Ridgwell reports.
Video

Video Putin Accuses Kyiv of ‘Cutting Off’ Eastern Ukraine

Russian President Vladimir Putin, in his annual televised call-in program, again denied there were any Russian troops fighting in Ukraine. He also said the West was trying to ‘contain’ Russia with sanctions. Henry Ridgwell reports on reactions to the president’s four-hour TV appearance.
Video

Video Eye Contact Secures Dog's Place in Human Heart

Dogs serve in the military, work with police and assist the disabled, and have been by our side for thousands of years serving as companions and loyal friends. We love them. They love us in return. VOA’s Rosanne Skirble reports on a new study that looks at the bio-chemical bond that cements that human-canine connection.
Video

Video Ukrainian Volunteers Search for Bodies of Missing Soldiers

As the cease-fire becomes more fragile in eastern Ukraine, a team of volunteer body collectors travels to the small village of Savur Mohyla in the what pro-Russian separatists call the Donetsk Peoples Republic - to retrieve bodies of fallen Ukrainian servicemen from rebel-held territories. Adam Bailes traveled with the team and has this report.
Video

Video Xenophobic Violence Sweeps South Africa

South Africa, long a haven for African immigrants, has been experiencing the worst xenophobic violence in years, with at least five people killed and hundreds displaced in recent weeks. From Johannesburg, VOA’s Anita Powell brings us this report.
Video

Video Apollo 13, NASA's 'Successful Failure,' Remembered

The Apollo 13 mission in 1970 was supposed to be NASA's third manned trip to the moon, but it became much more. On the flight's 45th anniversary, astronauts and flight directors gathered at Chicago's Adler Planetarium to talk about how the aborted mission changed manned spaceflight and continues to influence space exploration today. VOA’s Kane Farabaugh reports.
Video

Video Badly Burned Ukrainian Boy Bravely Fights Back

A 9-year-old Ukrainian boy has returned to his native country after intensive treatment in the United States for life-threatening burns. Volodia Bubela, burned in a house fire almost a year ago, battled back at a Boston hospital, impressing doctors with his bravery. Faith Lapidus narrates this report from VOA's Tetiana Kharchenko.
Video

Video US Maternity Leave Benefits Much Less Than Many Countries

It was almost 20 years ago that representatives of 189 countries met at a UN conference in Beijing and adopted a plan of action to achieve gender equality around the world. Now, two decades later, the University of California Los Angeles World Policy Analysis Center has issued a report examining what the Beijing Platform for Action has achieved. From Los Angeles, Elizabeth Lee has more.
Video

Video Endangered Hawaiian Birds Get Second Chance

Of the world's nearly 9,900 bird species, 13 percent are threatened with extinction, according to BirdLife International. Among them are two Hawaiian honeycreepers - tiny birds that live in the forest canopy, and, as the name implies, survive on nectar from tropical flowers. Scientists at the San Diego Zoo report they have managed to hatch half a dozen of their chicks in captivity, raising hopes that the birds will flutter back from the brink of extinction. VOA’s George Putic reports.
Video

Video Exhibit Brings Renaissance Master Out of the Shadows

The National Gallery of Art in Washington has raised the curtain on one of the most intriguing painters of the High Renaissance. Mostly ignored after his death in the early 1500s, Italian master Piero di Cosimo is now claiming his place alongside the best-known artists of the period. VOA’s Ardita Dunellari reports.

VOA Blogs

World Currencies

EUR
USD
0.9247
JPY
USD
118.78
GBP
USD
0.6657
CAD
USD
1.2190
INR
USD
62.395

Rates may not be current.