PFM blog

Managing debt for future generations

29 July 2016
Image Blog 2016 Managing Debt For Future Generations English

Several analysts have warned that African governments face a looming debt crisis. Proponents of this view frame their arguments on the risks linked to the cost and increasing appetite for sovereign bonds by a group of about 10 countries. The African Development Bank (AfDB), however, argues that the continent is far from a debt crisis. The AfDB argument is based on the relatively low average debt to GDP levels of around 17 to 18 per cent. However, it is worth noting that many of the 54 African countries cannot yet access foreign debt capital markets. Both arguments have merit. Although the majority of countries have low levels of debt, this argument masks a worrying trend of high and unsustainable debt levels in about a dozen of the larger African economies.

While several commentators will warn that debt levels above 50 per cent of GDP should be avoided, the greater concern is the costs of debt and the medium-term impact on public spending.

Primarily, a government has to ensure that there will always be funding for its activities, such as the payment of the salaries of nurses and teachers, and also the costs of a President’s trip to a UN meeting. If the choices are made to fund these things, then the money has to be found. Some is collected domestically, the rest has to be borrowed, and intuitively, the less a government may want to borrow will result in it doing less or having to reschedule certain expenditure to a later date.

Image Blog Managing Debt For Future Generations Money

Okay, so I have probably over-simplified an extremely complex operation that involves managing the daily cash that a government will require and the associated risks, knowing where to find the money in local and international markets and which instruments to use, and keeping a record of all inflows and outflows. When the capability to perform the functions of a public debt office is lacking, or where political considerations result in unsustainable borrowing, or the lure of expensive money entices a government to proceed with an infrastructure project, a country is more than likely to breach what would be considered a sustainable level of debt repayment. This is further worsened by the types of debt that some countries incur, which is mainly foreign and expensive.  

The ‘looming Africa debt crisis’ view is therefore true for those countries that are considered to have reached a level of debt, mainly foreign debt, that undermines spending plans, and at worst, may result in a default – where countries are unable to repay. This is true for not more than 10 African countries. A combination of the following factors explain why debt has become a problem:

  • Debt and cash-management capabilities were not prioritised following the huge debt relief programme between 1999 and 2005, whose aim was to ensure that no poor country is saddled with a debt burden that it cannot manage;
  • The appetite and issuance of foreign denominated bonds, such as Eurobonds and other foreign denominated debt are increasingly being used to fill a financing gap for infrastructure investments and also for recurrent expenditure. Concessional loans from multilateral development banks have an average interest rate of 1.6 per cent and a repayment period of 28 years, whereas the Eurobonds in question have an average floating rate of 6.2 per cent and a repayment period of 11 years;
  • The decline in commodity prices, such as oil, combined with rising interest costs, policy slippages and external shocks have dampened the medium-term growth prospects.

In April 2016, CABRI launched a programme that will support public debt management and bond market development reforms. The programme will also collect, analyse and publish public debt statistics on a central platform for use by practitioners and market participants. So far the programme has had an in-conversation workshop on cash management with cash managers from Ghana, Mauritius, Namibia, Seychelles, South Africa, Uganda and Zambia. In August 2016, CABRI will facilitate a workshop to support Ugandan debt management officials to analyse challenges and develop actions that will guide the newly established public debt office.

As an African intergovernmental organisation, CABRI’s view on the “looming debt crisis” is that, while there is no need for panic, African countries must take it upon themselves to develop capabilities to manage their borrowing strategies so that the cost of debt does not significantly undermine future spending plans. And even worst, does not lead to a debt default.

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