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

    Self-doubt, Cultural Barriers Hinder Cambodian Women in Tech

    Longtime Cambodian tech observer Sok Sikieng says that although more women have joined profession in recent years, there remain significant factors hindering women from reaching tech potential

    Trans-Adriatic Pipeline to Boost European Energy Security

    $4.5 billion-pipeline will become operational in 2020 and will deliver gas from Azerbaijan’s Shah Deniz II field to southern Italy

    Video California Celebration Showcases Local Wines, Balloons

    Annual festival showcases the region's harvested agriculture, fine wines and offers opportunities to experience the gentle breeze in a hot air balloon flight

    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.
    Vietnamese-American Youth Optimistic About Obama's Visit to Vietnami
    X
    Elizabeth Lee
    May 22, 2016 6:04 AM
    U.S. President Barack Obama's visit to Vietnam later this month comes at a time when Vietnam is seeking stronger ties with the United States. Many Vietnamese Americans, especially the younger generation, are optimistic Obama’s trip will help further reconciliation between the two former foes. Elizabeth Lee has more from the community called "Little Saigon" located south of Los Angeles.
    Video

    Video Vietnamese-American Youth Optimistic About Obama's Visit to Vietnam

    U.S. President Barack Obama's visit to Vietnam later this month comes at a time when Vietnam is seeking stronger ties with the United States. Many Vietnamese Americans, especially the younger generation, are optimistic Obama’s trip will help further reconciliation between the two former foes. Elizabeth Lee has more from the community called "Little Saigon" located south of Los Angeles.
    Video

    Video First-generation, Afghan-American Student Sets Sights on Basketball Glory

    Their parents are immigrants to the United States. They are kids who live between two worlds -- their parents' homeland and the U.S. For many of them, they feel most "American" at school. It can be tricky balancing both worlds. In this report, produced by Beth Mendelson, Arash Arabasadi tells us about one Afghan-American student who seems to be coping -- one shot at a time.
    Video

    Video Newest US Citizens, Writing the Next Great Chapter

    While universities across the United States honor their newest graduates this Friday, many immigrants in downtown Manhattan are celebrating, too. One hundred of them, representing 31 countries across four continents, graduated as U.S. citizens, joining the ranks of 680,000 others every year in New York and cities around the country.
    Video

    Video Vietnam Sees Strong Economic Growth Despite Incomplete Reforms

    Vietnam has transformed its communist economy to become one of the world's fastest-growing nations. While the reforms are incomplete, multinational corporations see a profitable future in Vietnam and have made major investments -- as VOA's Jim Randle reports.
    Video

    Video Qatar Denies World Cup Corruption

    The head of Qatar’s organizing committee for the 2022 World Cup insists his country's bid to host the soccer tournament was completely clean, despite the corruption scandals that have rocked the sport’s governing body, FIFA. Hassan Al-Thawadi also said new laws would offer protection to migrants working on World Cup construction projects. VOA's Henry Ridgwell reports.
    Video

    Video Infrastructure Funding Puts Cambodia on Front Line of International Politics

    When leaders of the world’s seven most developed economies meet in Japan next week, demands for infrastructure investment world wide will be high on the agenda. Japanese Prime Minister Shinzo Abe’s push for “quality infrastructure investment” throughout Asia has been widely viewed as a counter to the rise of Chinese investment flooding into region.
    Video

    Video Democrats Fear Party Unity a Casualty in Clinton-Sanders Battle

    Democratic presidential front-runner Hillary Clinton claimed a narrow victory in Tuesday's Kentucky primary even as rival Bernie Sanders won in Oregon. Tensions between the two campaigns are rising, prompting fears that the party will have a difficult time unifying to face the presumptive Republican nominee, Donald Trump. VOA national correspondent Jim Malone has more from Washington.
    Video

    Video Portrait of a Transgender Marriage: Husband and Wife Navigate New Roles

    As controversy continues in North Carolina over the use of public bathrooms by transgender individuals, personal struggles with gender identity that were once secret are now coming to light. VOA’s Tina Trinh explored the ramifications for one couple as part of trans.formation, a series of stories on transgender issues.
    Video

    Video Amerikan Hero Flips Stereotype of Middle Eastern Character

    An Iranian American comedian is hoping to connect with American audiences through a film that inverts some of Hollywood's stereotypes about Middle Eastern characters. Sama Dizayee reports.
    Video

    Video Budding Young Inventors Tackle City's Problems with 3-D Printing

    Every city has problems, and local officials and politicians are often frustrated by their inability to solve them. But surprising solutions can come from unexpected places. Students in Baltimore. Maryland, took up the challenge to solve problems they identified in their city, and came up with projects and products to make a difference. VOA's June Soh has more on a digital fabrication competition primarily focused on 3-D design and printing. Carol Pearson narrates.

    Special Report

    Adrift The Invisible African Diaspora

    World Currencies

    EUR
    USD
    0.8954
    JPY
    USD
    109.74
    GBP
    USD
    0.6851
    CAD
    USD
    1.3148
    INR
    USD
    67.673

    Rates may not be current.