There is no doubt that more financing is needed for development. The challenges facing developing countries are immense, especially African countries.
Producing enough food to feed their populations, meeting the rising needs for infrastructure, education, health, water and sanitation, are all major areas that require financing. For example, the infrastructure-financing gap for
Africa
alone is estimated at
100 billion dollars per year, for which only
50 billion dollars has been mobilised.
The scale of resources needed far exceeds what the public financing can provide. The challenge, therefore, is how to meet these financing needs in ways that are sustainable, with a mix of public and private financing, including domestic and international debt financing.
The third Financing for Development (FfD) conference in Addis Abeba agreed on the need to mobilize domestic resources, improve domestic taxation and effectiveness in the use of public financing to leverage private sector financing. The sustainable development goals, which represent the collective global commitment to ensure major gains in equitable growth and development spanning 19 major goals, have to be financed. This puts even greater pressure on countries to finance their development agenda. Public expenditure is critical to trigger growth, but must be well managed and sequenced to avoid unsustainable debt overhang.
We must learn from history - the not too pleasant experience, where the Highly Indebted Poor Countries Initiative (HIPC) was hatched, to address the spiralling of public debt in developing countries. Together with the Multilateral Debt Relief Initiative (MDRI), they allowed many African countries to reduce their debt stocks in exchange for reforms.
So far, 35 countries have already reached the completion point and have thus received 100pc relief on eligible debt from participating creditors. Consequently, the debt ratios of HIPC beneficiaries have declined substantially over the past decade, from an average of 145pc of gross national income (GNI) in 2000 to 35pc in 2011. As a result, more fiscal space is available to increase spending and borrowing. However, a new tide is rising in
Africa
: rising debt stocks are raising real concerns that soon countries may be back to pre-debt relief debt levels.
Many countries facing rising domestic interest rates from tightened monetary policies have launched out to the international capital markets to raise funds to support both infrastructure and the rescheduling of debt. For many, the attractiveness of low interest rates on global capital markets, which are much lower than domestic borrowing costs, has fuelled the issuance of euro bonds.
There is a herd effect: countries, believing that issuing euro bonds enhances their visibility in international capital markets, have followed each other in droves. By 2014, 21 countries in
Africa
had received credit ratings by international agencies. Between 2006 and 2014, African countries had issued a total of
25.86 billion dollars worth of foreign currency-denominated bonds. In 2014 alone, Sub-Saharan African countries issued
seven billion dollars in foreign currency denominated bonds. It has become a race to the top on the yield curves.
The rush to emerging markets has benefited
Africa
, no doubt, but this is a double-edged sword. The likely increase of interest rates in the US will drive investors out of emerging markets and raise the cost of financing the bond issues at maturity by developing countries. Incentives to go to international capital markets are partly driven by the more relaxed institutional stance of the
IMF. The fund removed most of the limits on borrowing from non-concessionary sources. The absence of conditionality, ease of borrowing compared to multilateral donors and the possibility of using such resources to finance domestic debts which are often very expensive, are all part of this new stance.
Whichever way one looks at it, African countries are getting themselves into deep waters. This is especially so given their dependency on a narrow base of exports - mainly primary commodities. As crude oil price plunged, as well as the prices of primary exports such as metals, minerals and agricultural primary commodities, the weakness of the giant is showing. Current account deficits are rising, domestic fiscal imbalances are increasing and domestic currencies are getting weaker.
Because of currency mismatch countries are exposed to greater exchange risks. The Overseas Development Institute (ODI) estimates that exchange rate risk for sub-Saharan Africa between 2013 and 2014 was 10.8 billion dollars or 1.1pc of the gross domestic product (GDP).
For sustainable development, greater focus should be put on domestic resources mobilization, strengthening domestic and regional capital markets to expand savings. Especially critical is the need to raise tax revenue.
Much progress is being made. In most African countries, tax revenue has significantly increased from a low of 9.8pc of GDP in 2001 to a high of 21pc (excluding natural resource taxes) in 2013. The ratio shows large difference when one accounts for natural resource taxes.
In 2013, tax to GDP ratio including natural resource tax was 36pc compared to 21pc (without resource taxes). The total natural resource taxes for 2013 amounted to 215 billion dollars. In nominal terms, tax revenues have increased from about 130 billion dollars in 2001 to 508.3 billion dollars in 2013, and 545 billion dollars in 2014. Although gross domestic savings are low in
Africa
, they have increased from 18pc of GDP in the early 1990s to 23pc in 2012.
But even more revenue can be accrued from better management of
Africa's
vast natural resources.
Africa
accounts for 47pc of the world's deposits of platinum, 46pc of chromium, 45pc of diamonds, 28pc of gold and at least 10pc of all the discovered oil and gas. The value of all discovered natural resources is estimated to be over
82 trillion dollars.
Therefore,
Africa
is not poor, it just happens to have a lot of poor people. The main problem is that these natural resources are not well managed. Lack of transparency and accountability in natural resource management causes exclusion, triggers conflict and creates inequality.
But we must plug greater leakages - especially illicit capital flows out of the continent. It is estimated that
Africa
loses over
60 billion dollars annually to illicit capital flows. These are huge volumes of resources that can be tapped and used to meet the development financing needs of the continent.
Curtailing illicit financial flows is a major agenda that needs to be strongly supported by the global community and backed with reforms involving both sending and receiving countries. These include enhancement of transparency in the international financial system, automatic exchange of tax information and double taxation agreements, and strengthening anti-money laundering laws. Creditors themselves must recognise that by not helping to curb illicit capital outflows they undermine the ability of countries to pay their debts.
There is no greater way to give confidence to countries than for their own citizens to invest back in their home countries. Remittances have now become a critical source of financing for sustainable development. Official estimates of remittance flows to
Africa
increased from
11 billion dollars in 2000 to
62 billion dollars in 2014, far exceeding all Official Development Assistance (ODA). While remittances are useful for smoothing consumption and investments for households, they hold a huge potential to support the broader development agenda.
The securitization of remittances could be used to raise short- to medium-term financing from African capital markets. Several African countries already have come up with ways to securitize remittances, including the issuance of remittance-backed securities and Diaspora bonds.
However, there are some challenges for leveraging remittances. For instance, the transfer costs to sub-Saharan Africa are among the highest in the world, at an estimated average of 6.15pc of transaction amounts in destination country in 2014, compared to 3.2pc in
Europe
and 5.2pc for
Central Asia
and the
Middle East
, and 2.9pc in
South Asia
. This is a crucial challenge that needs to be addressed to bring the transfer costs down substantially. That is possible if we leverage technology and digital payment platforms, promote innovation, strengthen financial infrastructure and systems and leverage regional integration dynamics of the recent phenomenon of cross border banking taking place in
Africa
. These measures provide vital support to financial sector development in African countries.
Sovereign wealth funds can also play major roles in financing development.
Africa
is witnessing rapid growth in sovereign wealth funds. The number of countries with sovereign wealth funds has grown from 15 in 2009 to 20 by 2014. Total assets under management for the sovereign wealth funds increased from
114 billion dollars in 2009 to
162 billion dollars in 2014. These constitute an untapped source of additional financing, which if well managed, can go a long way to bridge the long term financing needs for big-ticket infrastructure development and regional integration projects, among others.
Equally important is the rising volume of pension funds. Pension fund assets in
Africa
are estimated at
334 billion dollars or about 20pc of the GDP of African countries. Pension funds and life insurance funds need to be mobilized for financing development.
We must support countries to deepen their capital markets. The scarcity of long term financing, due to underdeveloped financial markets, limits the availability of domestic financing for development. While national and regional stock markets can help to mobilize savings and match them optimally with investment needs, the size, depth and sophistication of many of these markets remain thin. As domestic bond markets mature, countries will be able to further accelerate the use of local currency bond issues to support their long-term financing needs.
As the general business and investment climate continues to improve,
Africa
is witnessing rapid growth in foreign direct investment, which increased from
33.8 billion dollars in 2005 to
55.5 billion dollars in 2014. While the flows are highly concentrated in a few countries, FDI remains a major source of financing development in
Africa
, as in other emerging economies.
But we must not forget that multilateral development banks still remain the largest suppliers of financing for developing countries. Multilateral development banks will play a major role in the financing of the Sustainable Development Goals (SDGs). At the FfD Conference in Addis Abeba, Multilateral Development Banks (MDBs) agreed to leverage their balance sheets to extend more than 400 billion dollars in financing over the next three years.
They also committed to work more closely with private and public-sector partners to help mobilize the resources needed to meet the historic challenge of achieving the SDGs. One of the ways that the multilateral development banks hope to achieve this is through MDB Exposure Exchange which is expected to reduce exposure risk concentration and free up headroom for greater lending to countries.
Even then, developing countries cannot afford to go back to the days of HIPC where the Paris Club had to underwrite the cancellation of debts. This can be achieved through stronger macroeconomic, debt and public financial management. While the international capital markets offer seemingly attractive opportunities for countries, greater attention needs to be put on avoiding piling up international debts for financing debt restructuring.
The free for all approach of borrowing on the international capital market can boomerang as interest rates rise in the developed economies and capital flight occurs from emerging markets. This will raise the cost of financing the foreign currency denominated debts. Hence, countries should focus on adding value to their primary commodities and avoid the negative effects such as the burst of the commodity super cycle that now threatens countries with high dependency on the export of primary commodities.
There is no substitute for greater efforts to mobilize domestic financing through expansion of the fiscal space, tax policy reforms and revenue collection, The development of domestic and regional capital markets is also necessary for mobilizing savings to match long term financing needs of countries.
Yes, the world needs sustainable development. But without sustainable financing, this cannot occur. Creditors and debtors, whether multilateral, bilateral or global financing capital providers have a mutual responsibility to ensure sustainable debt management.
- President of the African Development Bank (AfDB). This Commentary Is a Summarised Form of His Speech At the Paris Forum On Debt & Development.
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