The nine LICs (low-income countries) of the
twelve CwA (Compact with Africa) countries have been part of the so-called Heavily Indebted Poor Countries (HIPCs)
in the 1990s. They were part of the HIPC initiative and were granted debt
relief from bilateral Paris Club creditors from 1996. Further, Multilateral Debt Relief Initiative
(MDRI) in 2005 allowed for cancellation of claims on HIPC completion point
countries by the IMF, World Bank Group and African Development Bank. These are
exactly those multilaterals that run the Compact initiative today. In this
sense, the CwA initiative is a déjà vu experience
for Africa´s HIPC countries.
The HIPC / MDRI Initiative has clearly reduced
the indebtedness of the beneficiaries and in some cases led to a reboot after a
"Lost Decade of Development”. Debt relief has enabled most countries to
return to the capital market or access it for the first time. The new borrowing
that has taken place since then has already led a number of countries back into
debt problems. For the assessment of “Risk of Debt Distress”, IMF debt
sustainability analysis classified seven of the 35 post-completion HICs as high
(and none in default) end 2015; by end 2018, ten countries were assessed as
high debt distress and two were in default[1].
Table 1 provides a snapshot of the most recent
indicators of debt sustainability since the launch of the CwA initiative for
the twelve CwA countries. Only public debt figures are available are available
for the period 2016-2018, the year preceding the CwA launch (2016) and the last
observation (2018/19). The first two columns refer to central government debt
as a percentage of GDP, which excludes state-owned enterprises and subnational
public authorities. While public debt ratios in CwA countries remain relatively
low by OECD-level standards, so is their debt tolerance. The debt ratios have
been on an upward trend during 2017-19, from 60.4 to 63.5 % of GDP, quite
strongly so in Senegal and Tunisia. Debt tolerance, as implied by CPIA scores,
has remained stagnant, as did sovereign ratings by Standard & Poor´s or
Moody´s.
Growth forecasts and thus debt sustainability
assessments of the IMF and World Bank should be treated with scepticism, as the
IMF has been found to be biased, especially for IMF program countries for which
growth estimates tend to be too optimistic[2].
Currently, most recent IMF/WBG assessments of CwA countries´ debt
sustainability would signal some scope for debt finance (including contingent
liabilities implied by public-private partnerships) in Rwanda only, given the
moderate public debt ratio paired with good CPIA scores. By contrast, Ethiopia
and Ghana are gauged as ´high debt distress´ so that they should prefer foreign
direct investment, portfolio equity finance and grants over debt finance.
Senegal tops the group of CwA countries with the worst public debt dynamics as
the respective debt-GDP ratio has soared by more than 14 percentage points
since the launch of the Compact. Public debt ratios are largely driven by the
difference between growth and interest rates[3]
on public debt, the primary budget balance, and, as emerging countries had to
learn in the 1980s, by the exchange rate[4].
Countries with solid institutions are perceived
as more debt tolerant in the IMF/WBG debt sustainability framework (DSF). This
requires for low-income countries improved CPIA scores (those do not exist for
middle-income countries). Lower public and corporate debt means less default
risk, less exposure to currency and maturity mismatches in public and private
balance sheets and better sovereign ratings. Countries with sustainable debt
levels have more fiscal space and buffers to engage in private-public
partnerships and other forms of blended finance that entail contingent public liabilities.
A sound debt situation is a prerequisite for portfolio and bank credit
investment to fund infrastructure. However, neither is a solid debt situation
given in all CwA countries nor has it improved anywhere.
[1] Jürgen
Kaiser (2019), 20 Jahre nach der Schuldenerlass- Initiative des Kölner
G8-Gipfels: Was wurde aus den HIPC-Ländern? Friedrich-Ebert-Stiftung, Globale
Politik und Entwicklung, Berlin, April.
[2] Indermit Gill, Kenan Karakülah, and Shanta Devarajan
(2019), Stressful speculations about public debt in Africa, Brookings
Institute, Washington DC, June.
[3] While IMF growth estimates tend to be biased,
effective interest rates on public debt are hard (or costly) to acquire.
Senegal most recently paid 5.5% on FCFA (=€) public treasury bonds. See https://agenceecofin.com/finances-publiques/0406-66690-l-etat-du-senegal-choisit-le-marche-des-titres-publics-pour-son-retour-sur-le-marche-financier-regional
[4] Helmut Reisen (1989), Public Debt, External
Competitiveness, and Fiscal Discipline in Developing Countries, Princeton
Studies in International Finance No. 66, Princeton NJ.
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