New banknotes in Ghana, where improved economy helped leave recent $750 million bond issue oversubscribed (photo: Gbekide Barnus/Panapress)
PRIVATE CAPITAL FLOWS
Ghana successfully entered the international capital market in September 2007 by issuing a $750 million bond issue. It was more than four times oversubscribed; total bids exceeded $3.2 billion. In spite of increased volatility in international capital markets, Gabon followed in December with a $1 billion bond issue to repay Paris Club debt. The terms were similar to those for Ghana.
These bond sales are the logical outcome of the growing interest of international investors in Africa, and in emerging and developing countries worldwide. The economic situation of sub-Saharan African (SSA) countries has improved markedly; collectively they are experiencing the highest growth and lowest inflation in 30 years.
Countries in the subcontinent have substantially improved their economic policies, they have received significant HIPC and MDRI debt relief, and the external environment is favorable. That is why investors are increasingly turning to SSA countries in their search for yield, diversification, and potential. Some market analysts see in Africa a new asset class—a "frontier emerging market."
Foreign holdings
Besides raising funds on international capital markets, several African mature stabilizers—countries that have made significant progress toward macroeconomic stability and debt sustainability—have succeeded in selling treasury bills in their own currency to foreign investors. At the end of June 2007, foreigners held about 11 percent of Ghana's domestic currency government debt valued at more than $400 million. Reportedly, in Zambia, foreigners hold more than 14 percent of local currency government debt and hold a significant share in Tanzania and Uganda.
This heightened international investor interest presents SSA countries with significant opportunities but also with significant challenges. The opportunities are obvious. With international donors not yet delivering on their Gleneagles promise to double aid to help low-income countries meet the Millennium Development Goals, funds from private investors offer SSA governments an alternative and readily available source of financing for major projects, including urgent infrastructure needs.
Unless these new sources of debt financing are carefully managed, SSA countries could once again find themselves in debt distress. It will therefore be critical for those countries to ensure that new borrowing does not undermine their newly earned debt sustainability. Sound management of external and total debt and managing public finances to ensure that debt proceeds are used effectively will be vital.
Debt sustainability
SSA countries will need to make debt sustainability central to their economic planning. The focus needs to be on total debt because the line between external and domestic debt is becoming increasingly blurred. SSA countries need comprehensive debt management systems that allow them to choose between different financing options in a way that is consistent with their economic policy objectives.
Strengthening public financial management (PFM) is essential, so that the spending financed by loans is efficient. SSA countries also need to broaden the domestic investor base for local currency debt so that sudden capital inflows or outflows do not destabilize the market.
The IMF is helping SSA countries in all these areas. In close collaboration with the World Bank, IMF staff are working to help national authorities build their capacity for debt sustainability analysis and for managing public finances. The IMF/World Bank external debt sustainability framework (DSF) can help countries detect debt vulnerabilities early and guide the design of policies to prevent the reemergence of external debt distress.
Capacity-building assistance
The IMF's public debt analysis is increasingly useful for analyzing total public debt in low-income countries. As part of the IMF's Medium-Term Debt Strategy pilot, countries such as Ghana can benefit from capacity-building assistance in this area. Again in close collaboration with the World Bank and other development partners, the IMF is helping SSA countries reinforce their PFM systems.
Besides addressing such management issues, SSA governments must, if they are to use actual and potential inflows effectively, undertake a number of additional reforms. First, they need to build their domestic financial systems so they can effectively channel capital inflows to the domestic economy.
Upgrading supervision of the financial sector will be increasingly important. Governments also need to strengthen market infrastructure and transparency of trading, settlement, and depository systems. Careful sequencing of these reforms will be essential.
Development finance
Despite the increasing importance of nonconcessional financing, concessional financing should remain the main source of development finance for the foreseeable future. The challenge here is for donors rather than recipient countries: It is important not only that they increase their support, in line with international commitments, but also make it more predictable and more timely.
Another factor SSA countries must take into account is the increased role of emerging creditors, such as China; the main challenges here are transparency and integration into the country's debt sustainability and macroeconomic frameworks.
But ultimately, financing of the private sector, including non-debt-creating foreign direct investment, will be the key to financing sustainable growth in sub-Saharan Africa. For this it will be essential to continue to improve the environment for doing business to encourage international investors to provide money not just to SSA governments, but to the private sector in Africa.
