Africa’s Private Sector Should take the Helm of Continent’s Sovereign Debt
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Africa’s Private Sector Should take the Helm of Continent’s Sovereign Debt
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By Isaac Kwaku Fokuo, Principal, and Bathsheba Asati, Policy Lead, Botho Emerging Markets Group
November 25, 2022
Originally published in Africa Report Magazine on 23rd November 2022
African countries are facing numerous difficulties in accessing affordable debt to finance their development goals. In September, Kenya treasury bills performed at a record low of 38%, this comes less than 3 months after the country canceled a $982 million Eurobond after investors demanded interest rates of over 20%. In other parts of the continent, Ivory Coast delayed a Eurobond due to the high cost of borrowing from international creditors. Nigeria went ahead with a Eurobond issuance in March but at an interest rate of 8.35% which was two percentage points higher than a bond it had issued only six months earlier. The strains in accessing debt and the high cost of borrowing can partly be attributed to the Covid-19 pandemic, the Russia-Ukraine war, and the looming global economic crisis. But, even without these crises, African countries borrow at very high rates – research finds that African countries pay up to $300 million annually in unjustifiable interest rates. These high interest rates are due to distorted perceptions of risk on the continent, biased credit ratings, and the high bargaining power held by both private and bilateral creditors. Given this, the continent needs a new home-grown solution to provide alternative funding sources to governments and reverse the impending debt crisis. More specifically, the continent needs a private-sector-led debt club that funds and provides technical support to African governments, to address the increasing concerns of debt distress.
Africa’s private sector boasts vast financial and technical resources and is the engine of economic growth across the continent. Pre-pandemic, Africa’s top 500 companies generated a turnover of over $620 billion which represented over 20% of the GDP in 2019. And while the pandemic led to a drop in total turnover, the private sector still accounts for 80% of total production and over 60% of total investments; further, SMEs account for over 50% of the total GDP in Africa. In addition to this, a 2022 report found that a total of US 2.1 trillion in private wealth is held on the continent, a figure that is expected to grow by 38% by 2031. Although the private sector possesses such vast resources, there is very little, and in some cases, diminishing engagement between the private and public sectors especially when it comes to financing government projects. Some of the reasons for this are that the private sector has limited information on governments’ development projects and how they can support them. Moreover, governments rarely engage the private sector when scoping, designing, and prioritizing projects. Finally, and perhaps most importantly, there are currently no structures that allow the private sector to govern and hold their governments accountable should they entrust the government with their resources. A club that allows the private sector to co-create, vet, and oversee government projects will boost the private sector’s willingness to finance government projects.
There are numerous responsibilities for a private-sector-led debt club, but in its initial stages, the club should focus on three key functions. First, the club should set up structures to deter illicit and legal capital flows from the continent, and redirect this capital to financing government projects. It is estimated that the continent loses over $88 billion annually in illicit capital outflows, making Africa a net creditor to the world. Additionally, there is a mass movement of wealth out of the continent marked by an increase in investment migration to countries that offer better living and global mobility options. In the 2022 Africa Wealth Report, Henley & Partners (a firm that provides residency and citizenship by investment services) indicated that the investment migration inquiries received from African clients in Q1 of 2022 were over 29% of the total inquiries received in 2021.
Secondly, the club should disrupt the existing perceptions of risk on the continent by presenting information that better reflects the nuances and opportunities that lie therein. Debt markets are largely based on an information ecosystem fueled by credit rating agencies (CRA) that enjoy a monopoly over how countries are perceived and positioned in international capital markets. Members of the club can counter CRA biases by conducting their own analysis and financing projects at better rates than what international debt markets would offer. By having ‘skin in the game’ the club will boost foreign investors’ confidence in African governments’ debt management and repayment capacity.
Thirdly, the club should serve as one of the key institutions that represent African countries’ collective and individual needs in international and domestic forums. For instance, the Club can be the main voice advocating against the high interest rates that African countries have to pay to raise money in international debt markets. The club can also represent African countries in organizations such as the G20, the Paris Club, and other institutions dealing with African debt. Individual governments can also seek the Club’s support when it comes to raising funds from both private and bilateral creditors, and also when restructuring or renegotiating existing debt.
The idea of forming a debt club is not novel, however, the common trend has been that these clubs are formed by creditors and not by or on behalf of borrowers. On the continent, policy experts have interrogated the idea of forming a club of borrowers led by African governments that fundraise together and hold each other accountable. One of the challenges of a government-led club is that initiating the club would be a time-consuming affair especially since governments would need to sign, and/or ratify the founding instruments to operationalize the club. For instance, it took six years from the conceptualization of the AfCFTA to when it was opened for signing, further, discussions to create an African Monetary Fund have been going on for over 40 years. In addition to this, evidence from the AU shows a general preference for non-interference among African governments which would make it more challenging to implement governance policies and disciplinary measures in a government-led club. Finally, the significance of an African governments’ club would be assessed by its membership, meaning that the founding governments would need to be regional hegemonies. Meaning that if these hegemonies express no interest in joining the club then the credibility and importance of the club would decrease. Even so, governments still have a critical role to play in the success of a private-sector-led club. African governments must engage with the club and seek its support to prove its relevance; governments should also honor the agreements with the club to promote its credibility. In addition to this, individual governments can also provide tax incentives to encourage more individuals and companies to fund the club.
The continent has immense economic potential and is home to the world’s youngest and fastest-urbanizing population. It is projected that consumer and business spending will grow to about $16.1 trillion by 2050. In addition to this, the AfCFTA is set to increase income by $450 million (about 7%) by 2035. Sovereign debt distress, or worse, defaults, could easily reverse all of these growth trends. Further, austerity measures implemented by governments during debt crises would lead to an increase in the cost of doing business. Considering this, the private sector has a lot to gain by playing a larger role in Africa’s sovereign debt landscape by facilitating access to affordable and sustainable debt.