Fiscal and Debt Sustainability in Africa

Policies for fiscal sustainability: what African countries and G20 should do.

• Strengthening public investment management through key measures; namely fact based project selection using standardized technical and financial feasibility diagnostics; streamlining delivery of infrastructure by improving the rigor of project designs, contractor selection and management; and more effective use of existing infrastructure, via effective project monitoring, adequate maintenance, and cost-reflective infrastructure tariffs. Others include strengthening multiyear budgeting and infrastructure governance and technical capabilities. Diagnostics, such as public investment management assessments and public expenditure reviews should be undertaken periodically to inform requisite remedial reform measures. G20 countries can support African countries through building and strengthening technical capacity for project appraisals, as well as strengthening public sector capacity to oversee or implement large-scale infrastructure projects.
• Increasing domestic revenue mobilization, by shifting from commodity taxation towards more neutral, broad-based value-added or sales taxes and personal income tax. Simplifying the registration process for businesses, leveraging new technologies to modernize the tax collection system, deepening regional integration and tax coordination, are necessary elements of a broad-based strategy to broaden the tax base. G20 countries can support African countries to strengthen capacity for tax revenue mobilisation; e.g., design of new tax codes, digitisation of tax systems, including capacity to levy taxes on e-commerce and related transactions.
• Increasing domestic savings by improving monetary frameworks, supporting the development of long-term savings instruments, aligning exchange rates on their long-term sustainable level, and reducing monetary financing to tame inflation.
• Developing and implementing fiscal rules to reduce fiscal discretion and allow for more effective fiscal policy. Fiscal rules, if well designed and implemented, can help reduce the pro-cyclicality of government spending, encouraging savings accumulation during hay days.

Policy measures for debt sustainability

Recommendations to the G20 on fiscal and debt sustainability

• Accelerate the projects on debt data reporting and standardization. Support countries to establish publicly available debt registers; set up Debt Management offices, or strengthen capacity where the offices already exist; and ensure linkages between the debt management functions and other public finance management functions. Support development of medium term public investment programs that are linked to the raising of public debt.
• Put in place a framework for an orderly debt resolution mechanism in the context of more diffuse creditor base and other new features of the debt.
• Support efforts by African countries to enforce compliance with taxation in face of domestic revenues lost to profits shifting, and support DRM capacity development more broadly. This would require technical assistance in formulating revenue mobilization policies, attendant legislation and regulations. It would also require support with procurement of software for revenue recording and collection.
• Step up efforts to combat illicit capital outflows from Africa, including helping track and repatriating illicit funds back to African countries. Support should be provided to assessing key risks relating to money laundering and illicit financial flows, and defining mitigation measures; building human and institutional capacity to uphold relevant laws, investigate suspicious activity and recover stolen assets; and providing the infrastructure necessary to track and report cash movements across borders.
• Ensure that multilateral development institutions are adequately capitalized and can use their own resources – and the leverage their credibility affords – to offer countries alternative meaningful solutions to expensive or risky foreign-currency borrowing in international capital markets. Given their development mandate, political neutrality and strong technical expertise and due diligence capacity, multilateral financing is more likely to yield development benefits and have a catalytic role.
• Support countries to improve long-term debt management capacity, governance, and transparency including: Reviewing debt sustainability assessment methodologies to capture new realities, notably security-related expenditures and the quality of public investment, and take into account unique features of African economies, institutions and operations of various markets, including the financial and labour markets.
• Develop innovative tools to finance development. Support the development of African domestic capital markets, potentially through the introduction of African-wide safe assets, with senior tranches potentially guaranteed by the MDBs and marketed to international investors as a mezzanine, investment-grade exposure to frontier market debt.
• Design standard terms and assist African countries in negotiations over innovative sources of funding that limit the need for foreign currency borrowing and exploit mutually advantageous exchanges with traditional or new bilateral lenders. Attention should be paid to crowding-in private capital through risk mitigation instruments to unlock resources that can substitute debt. Multilateral lenders can provide benchmarks and guidelines, as well as low-risk financing tranches for long-term projects.

What African countries should do to improve debt sustainability.

Emphasis should be placed on more effective and efficient use of debt, including through institutional and governance reforms to strengthen debt management and data transparency. The specific measures include:

• Reducing reliance on risky and volatile debt sources. Developing innovative and alternative mechanisms of development financing such as Public Private Partnerships, securitization of infrastructure assets, privatization as recently demonstrated by Ethiopia. In addition, creation of an asset class for public projects, using the leverage afforded by safe capital from multilateral institutions is equally important. However, it is important to adequately quantify and mitigate the underlying fiscal risks from PPPs and government guarantees.
• Increasing the maturity of external debt when possible at reasonable costs, making use of guarantees provided by multilateral institutions to tap liquidity at the long-end of the yield curve (20 to 30 years’ bonds), on the model of Kenya’s recent issue of a 30-year bond in February 2018.
• Using more flexible, counter-cyclical and state-contingent debt instruments to relieve the debt burden during recessions, through commodity hedging or GDP-indexed instruments. Key implementation challenges should be mitigated, notably the high liquidity and novelty premium charged at first issuance and the increased risk of moral hazard, especially when the borrower assumes excessive risks in the knowledge that relief will be provided. Fiscal rules may also be considered in the management of windfalls.
• Developing domestic safe assets through enhanced credibility and independence of monetary and debt management authorities, with the support of the MDBs’ debt management initiatives and technical assistance.
• Greater transparency in debt management, including commitment by governments to release in real-time all data on old and new debt from all sources. This will require efforts to standardize data gathering practices, develop data collection systems, address data gaps, notably in the accounting of SOE-related liabilities and contingent liabilities arising from sovereign guarantees to individual projects, and consolidate govern

For the appendix, please refer to the full text policy brief here.
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¹ In addition, valuable inputs were provided by Annalisa Prizzon (Overseas Development Institute); and Witness Simbanegavi and Njuguna Ndungu (African Economic Research Consortium).
² The more detailed analysis of the challenge facing the African countries is available at: https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/WPS_No_227_Public_Debt_Sustainability_in_Africa_Building_Resilience_and_Challenges_Ahead_H.pdf.
³ Defined by sustainable financing practices for both borrowers and creditors. See Berensmann (2018) for some of these ideas.
⁴ Eurobonds issues by SSA governments stood at about USD200 million in 2006 but rose to about USD 6.3 billion in 2015 (Hogan Lovells, 2017 database), a more than thirtyfold increase in just a decade. Eurobond issues by SSA have proved quite popular with investors, with many such issuances being oversubscribed (e.g., Senegal).
⁵ Defined as “money that is illegally earned, transferred, or utilized, whereby somewhere at its origin, movement, or use, the money broke laws and hence it is considered illicit” Global Financial Integrity
⁶ African Development Bank and Global Financial Integrity (2013):”Africa’s Illicit Financial Flows: What do They Tell us?”
⁷ The relevance of countering IFFs has been recognized by the international community: with a global commitment through the Sustainable Development Goals and the Addis Ababa Action Agenda, have committed to “redouble efforts to substantially reduce IFFs by 2030.”

References

Barhoumi, K., Ha Vu, Shirin Nikaein Towfighian, and Rodolfo Maino. (2018). “Public Investment Efficiency in Sub-Saharan African Countries: What Lies Ahead?” IMF African Department Series No. 18/09, International Monetary Fund, Washington DC.

Berensmann. K. (2018). “The global debt governance system for developing countries: deficiencies and reform proposals”, in Third World Thematic: TWQ Journal.

Coulibaly, Brahima, Dhruv Gandhi, Lemma Senbet. (2019). “Is sub-Saharan Africa facing another systemic sovereign debt crisis?” Policy Brief. Africa Growth Initiative, The Brookings Institution.

Kararach, G., Kedir, A., Ajambo, E. and Souminen, H. (2017). “Fiscal Policy, Long-Term Growth and Structural Transformation in Africa”, in Lopes, Carlos, Hamdok, Abdalla, Elhiraika, Adam (Eds.), Macroeconomic Policy Framework for Africa’s Structural Transformation, Palgrave Macmillan.

Mustapha, S., and A. Prizzon. (2018). “Africa’s Rising debt: How to Avoid a New Crisis.” ODI Briefing Papers.

World Bank Group. 2018. Africa’s Pulse, volume 18. Washington, DC: World Bank.