Friday, 9 August 2019

From HIPC to CwA: New Trends in Public Debt

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
[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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