Africa must invest borrowings wisely; Corruption and mismanagement remain major problems

April 13, 2014 7:33 pm

Africa must invest borrowings wisely

Corruption and mismanagement remain major problems

South of the Sahara desert economic growth has flourished over the past decade. It is a remarkable transformation. Back in the 1980s and 1990s, sub-Saharan Africa was mired in seemingly endless rounds of painful defaults and debt relief negotiations. Today it is a magnet for international investors.

Huge challenges remain. But despite the hurdles, strong growth on the back of high commodity prices, foreign investment, political stability and improved economic governance has allowed a rising number of countries to tap the sovereign bond market – unthinkable only a few years ago.

This trend is not limited to Africa – Central Asia and Latin America have seen a similar transformation – but it has benefited most. In 2010-2012 net private flows to sub-Saharan countries doubled compared with 2000-2007. In 2006 and 2007, the Seychelles and Ghana became the first countries in the region outside South Africa to issue bonds on the international markets. Since then a roll call of countries – from Nigeria to Rwanda; Zambia to Angola – have followed suit. In total, African countries raised last year a record $10bn from the global bond market, up from $1bn a decade ago.

This is a welcome development, a sign that investors see in Africa a new landscape of opportunities. And the continent badly needs the financing to close a huge infrastructure gap that international and regional development agencies would not be able to resolve alone.

Over time, the use of bonds should also bring much-needed market discipline to the continent. The yield difference among countries is slowly becoming part of the domestic political debate in Africa; so too are the – sometimes imperfect – views of credit rating agencies. It is better that Africa relies on public capital markets than on shadowy deals with China.

Yet the bond-issuance spree also entails risks. First and foremost is the use of the money raised. After years of kleptocracy, democracy has arrived in large parts of sub-Saharan Africa. But corruption and mismanagement remain major problems. After nearly a decade of borrowing, some African countries have remarkably little to show for the money – too much has ended up financing fuel subsidies and higher civil servant salaries rather than necessary investment. Countries must be clearer about how they will use the funds – and deliver on their plans.

Second, the market has so far not enforced much discipline, partly thanks to the ultra-loose monetary policies of the world’s leading central banks. As interest rates in the industrialised world plunged to almost zero, investors sought higher yields in frontier markets such as Africa, driving interest rates there to artificially low levels. In late 2012 and early 2013 the market looked bubbly. Take Rwanda: Kigali tapped the market in April 2013 partly in response to the suspension of western aid in protest at the policies of President Paul Kagame. The market should have imposed a penalty rate; yet Rwanda was able to raise a $400m 10-year bond paying interest rates of less than 7 per cent.

Third, the reliance on foreign investors leaves Africa exposed to the animal spirits of global markets. The region must remember that capital flows are like a bee that produces honey today but can sting tomorrow. Governments should prepare for a reversal of easy financing conditions. As the International Monetary Fund has warned, deeper integration with international markets makes sub-Saharan Africa more vulnerable to global financial shocks.

As they seek to finance their future needs on international markets, the nations of Africa will face many challenges. But if they heed the warnings of the international community about the need to spend wisely and honestly, then African governments can forge a lasting relationship with investors.