Borrow and make simultaneous reforms!

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Remember the Heavily Indebted Poor Countries (HIPC) initiative, launched by the World Bank and IMF in 1996 to ease the debt burden of low-income economies? A total of 37 countries were eligible, mostly in sub-Saharan Africa, and debt relief granted amounted to US$99bn. In isolated cases such as Mozambique, the debt burden is now greater than preceding relief. In many others, it is growing rapidly, prompting warnings from multilaterals, sundry economists and the media of a new ensnarement.

  • The warnings have some validity but are delivered from developed economies with hard and soft infrastructure in place, decent credit ratings and often worse debt ratios.
  • At the FT Africa summit, we attended in London last week, the Ghanaian finance minister, Ken Ofori-Atta, said that the infrastructure gap in Africa required an annual investment of US$90bn to US$120bn. Some estimates are higher still: a figure of US$130bn to US$170bn has been recently attributed to the African Development Bank.
  • The minister’s point was that governments do not have the resources themselves to plug the gap and therefore have to tap loan/bond markets. Their remit is to secure the best terms available among the competing sources of external finance. We understood that playing the China card can lead others to open their sovereign wallets.
  • We can quibble about how much infrastructure finance the African economies can absorb annually due to domestic constraints. It may be no more than US$40bn but governments still need to raise the funds. One possible route lies through FDI. Pravin Gordhan, the South African minister of public enterprises, told the summit that President Cyril Ramaphosa will this week host a conference with the aim of securing the investment of US$100bn over several years.
  • The conference might prove a great success but governments still need to borrow. If they don’t, the gap will widen and the establishment of diversified, modern economies becomes more elusive.
  • If they do borrow on a large scale, they have to make complementary reforms if they are not to return to pre-HIPC debt distress. Above all, they have to boost tax revenue, particularly from the non-oil economy in Nigeria’s case.
  • Debt service’s share of FGN revenue has risen steadily and consumes more funds than capital outlays despite the successful policy of debt externalisation. The infrastructure gap has to be plugged across Africa, however, and we have to trust that governments will make the essential borrowings and reforms.
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