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

Westgate Mall Attack Survivors Confront Painful Memories

On anniversary of terror attack, survivors discuss how they have coped with trauma they experienced that day More

Iraqi Kurd President Urges World Community to Protect Syrian City

Islamic State fighters are besieging Kobani, also known as Ayn al-Arab, after seizing at least 21 surrounding villages in a major assault against city on Syria's northern border with Turkey More

Video Whaling Summit Votes to Uphold Ban on Japan Whale Hunt

Conservationists hail ruling as a victory, but Tokyo says it will submit revised plans for a whale hunt in 2015 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.
Russian Economy Reeling After New Western Sanctionsi
X
September 18, 2014 2:28 AM
A new wave of Western sanctions is hitting Russia’s economy hard. State-owned energy firms continue to bleed profits and Russia’s national currency plunged to a new low this week after the U.S. and the European Union announced new sanctions to punish Russia's aggressive stance in eastern Ukraine. But as Mil Arcega reports, the sanctions could also prove costly for European and American companies.
Video

Video Russian Economy Reeling After New Western Sanctions

A new wave of Western sanctions is hitting Russia’s economy hard. State-owned energy firms continue to bleed profits and Russia’s national currency plunged to a new low this week after the U.S. and the European Union announced new sanctions to punish Russia's aggressive stance in eastern Ukraine. But as Mil Arcega reports, the sanctions could also prove costly for European and American companies.
Video

Video Belgian Researchers Discover Way to Block Cancer Metastasis

Cancer remains one of the deadliest diseases, despite many new methods to combat it. Modern medicine has treatments to prevent the growth of primary tumor cells. But most cancer deaths are caused by metastasis, the stage when primary tumor cells change and move to other parts of the body. A team of Belgian scientists says it has found a way to prevent that process. Zlatica Hoke has more.
Video

Video Mogadishu's Flood of Foreign Workers Leaves Somalis Out of Work

Unemployment and conflict has forced many young Somalians out of the country in search of a better life. But a newfound stability in the once-lawless nation has created hope — and jobs — which, some say, are too often being filled by foreigners. Abdulaziz Billow reports from Mogadishu.
Video

Video A Dinosaur Fit for Land and Water

Residents and tourists in Washington D.C. can now examine a life-size replica of an unusual dinosaur that lived almost a hundred million years ago in northern Africa. Scientists say studying the behemoth named Spinosaurus helps them better understand how some prehistoric animals adapted to life on land and in water. The Spinosaurus replica is on display at the National Geographic museum. VOA’s George Putic has more.
Video

Video Iraqi Kurdistan Church Helps Christian Children Cope find shelter in churches in the Kurdish capital, Irbil

In the past six weeks, tens of thousands of Iraqi Christians have been forced to flee their homes by Islamic State militants and find shelter in churches in the Kurdish capital, Irbil. Despite U.S. airstrikes in the region, the prospect of people returning home is still very low and concerns are starting to grow over the impact this is having on the displaced youth. Sebastian Meyer reports from Irbil on how one church is coping.
Video

Video NASA Picks Boeing, SpaceX to Carry Astronauts Into Space

The U.S. space agency, NASA, has chosen Boeing and SpaceX companies to build the next generation of spacecraft that will carry U.S. astronauts to the International Space Station by the year 2017. The deal with private industry enables NASA to end its dependence on Russia to send space crews into low Earth orbit and back. Zlatica Hoke has more.
Video

Video Future of Ukrainian Former President's Estate Uncertain

More than six months after Ukraine's former President Viktor Yanukovych fled revolution to Russia, authorities have yet to gain control of his palatial estate. Protesters occupy the grounds and opened it to tourists but they are also refusing to turn it over to the state. VOA's Daniel Schearf reports from Mezhigirya, just north of Kyiv.
Video

Video China Muslims Work to Change Perceptions After Knife Attacks

China says its has sentenced three men to death and one woman to life in prison for a deadly knife attack in March that left more than 30 dead and 140 injured. Beijing says Muslim militants from China's restive western region of Xinjiang carried out the attacks. Now, more than six months after the incident, residents in the city are still coping with the aftermath. VOA's Bill Ide has more from Kunming.


Carnage and mayhem are part of daily life in northern Nigeria, the result of a terror campaign by the Islamist group Boko Haram. Fears are growing that Nigeria’s government may not know how to counter it, and may be making things worse. More

AppleAndroid

World Currencies

EUR
USD
0.7768
JPY
USD
108.84
GBP
USD
0.6124
CAD
USD
1.0999
INR
USD
61.042

Rates may not be current.