IMF Survey: Africa's Improved Debt Outlook Sparks Investor Interest

IMF News, February 25, 2008

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Authors: Marie-Hélène Le Manchec IMF Policy Development, Review Department February
Published: February 25, 2008

Overview

Publication: IMF Survey by Marie-Hélène Le Manchec, IMF Policy Development and Review Department.
Date: February 25, 2008.
Core message: Strengthened macroeconomic fundamentals and lower debt levels following debt relief from the IMF and other international institutions have increased the attractiveness of low-income African countries to a broader universe of investors.

Debt relief impact and debt sustainability findings

Debt relief has significantly reduced the debt burden of African countries and improved the debt sustainability outlook substantially.
21 out of 34 countries were classified on the basis of the DSF at a low or moderate risk of debt distress at end-2007.
Debt relief under the two initiatives is projected to reduce the debt stocks of the 26 African countries by more than 90 percent when all the eligible countries reach the HIPC Initiative completion point.
Debt service paid by these countries has declined by about 3 percentage points of GDP between 1999 and 2006.
Poverty-reducing expenditures have increased by about the same magnitude (about 3 percentage points of GDP between 1999 and 2006).
On average, spending on health, education and other social services is more than five times the amount of debt-service payments in eligible countries post-relief.
Thirty-three African countries are eligible for debt relief of about $80 billion (in end-2006 net present value terms) under the two initiatives.
So far, some $42 billion is being delivered to 19 countries that have already reached the final stage of the debt relief process.
Seven other countries are receiving interim relief.

Investor response and financial market developments

A larger group of bilateral lenders is now active in Africa, with creditors outside the traditional OECD-based donor community initiating or expanding operations.
Private investors have stepped up lending markedly: in the past year, two sub-Saharan African (SSA) countries issued international bonds; in at least eight countries a significant share of domestic securities are held by foreign investors.
More than a dozen SSA economies are now the subject of an international credit rating.
Some African stock markets, though immature, are beginning to take off.

New policy challenges and vulnerabilities

The widening investor base presents opportunities to meet investment needs and support domestic financial market development but also new risks:
- A high share of commercially-based inflows (compared to concessional resources) would increase the volatility and cost of external finance.
- Lending modalities may be more complex and involve explicit or implicit contingent liabilities, complicating resolution of servicing difficulties.
- Increased financial vulnerabilities are a concern, particularly for countries exposed to large and frequent external shocks, risking a new buildup of unsustainable debt.
The Debt Sustainability Framework (DSF) aims to contain the risk of debt distress by guiding borrowing decisions based on forward-looking analysis of debt-related vulnerabilities.

Debt Sustainability Framework (DSF) structure and use

The framework rests on three pillars:

1. Indicative debt burden thresholds linked to the quality of a country's policies and institutions. 2. A standardized forward-looking analysis of debt and debt-service dynamics under a baseline scenario and in the face of plausible shocks. 3. An associated financing strategy.

Features:
- Flexible to account for country-specific circumstances, including large upfront scaling up of non concessional loans.
- Captures vulnerabilities from high or quickly increasing domestic debt.
The DSF is promoted to guide borrowing decisions, facilitate communication between creditors and debtors, and help negotiate financing terms aligned with repayment capacity.

Policy recommendations and capacity-building priorities

Mitigating debt-related vulnerabilities requires:
- Increasing domestic revenue mobilization.
- Diversifying production and export bases to lessen vulnerability to shocks.
- Strengthening regulatory and institutional frameworks of financial systems to monitor exchange, liquidity and rollover risks amid rising private inflows.
- Enhancing public investment selection and debt management capabilities to ensure efficient use of foreign resources.
Financing guidance:
- Concessional external resources remain the most appropriate source of financing for low-income African countries, especially for investments that do not generate cash flows to service commercial debt.
- High volumes of aid remain necessary to finance the development agenda in sub-Saharan Africa.
- Nonconcessional finance is better suited for specific high-return projects, when concessional resources are unavailable and debt sustainability is not at risk.
- As countries gain experience managing commercial borrowing, use of commercial finance would be expected to expand at different paces across countries.

IMF actions and outreach

Debt sustainability analyses are central to IMF policy discussions and advice and can guide sustainable fiscal and borrowing policies.
The IMF, in collaboration with the World Bank, is:
- Providing training to country officials and technical assistance to build effective debt management capacities.
- Reaching out to creditors to encourage the use of debt sustainability analyses to inform lending decisions and support sustainable lending practices.
- Maintaining active contacts with a wide range of creditors to raise awareness of debt sustainability risks and provide analytical tools for assessing prospective financial difficulties.

Article comments should be sent to imfsurvey@imf.org.