The "Big Bond": How to Maintain African Growth While Reducing the Fiscal Burden on Donors

This post originally appeared as an op-ed on Project Syndicate.

Sub-Saharan African countries are at a critical juncture. With China's slowdown and the collapse in commodity prices, growth slipped to 3.4 percent in 2015, on average just over half what it has been for the past 15 years. Estimated growth for 2016 is below the population growth rate of about 2 percent, thus negative in per capita terms.

Aside from continuing to help reduce poverty, infant mortality, disease and malnutrition, healthy and sustained growth is the only way to create good jobs for Africa’s burgeoning youth population (the fastest-growing in the world). Otherwise, as Gerd Mueller, Germany’s Development Minister, noted in a recent press conference, "If the youth of Africa can't find work or a future in their own countries, it won't be hundreds of thousands, but millions that make their way to Europe."

One way to create jobs and support sustained growth is massive infrastructure investment, planned and implemented in the kind of joined-up way that has never been attempted before across Africa. Public infrastrucrture is critical—highways and bridges and rail to link rural markets in landlocked countries to Africa’s urban consumers and external markets, urban mass transit and internet infrastructure to accommodate enlarged commercial activity, and electricity transmission lines connecting privately financed power plants and grids. So are major public-private regional projects to knit together the region’s many tiny economies, creating economies of scale for African agriculture and industry, increasing export potential and reducing domestic prices of food and manufactured goods.

Governments in Africa are spending more on public infrastructure themselves. But outside finance is still critical, especially for regional projects—not surprisingly rarely a top priority for national governments,and likely to lose favor with Africa’s traditionally generous donors, including the United States and Europe, where foreign aid for Africa is set to shrink.

We need a solution that works for Africa, and that is also politically and economically acceptable to the West.

We propose using international capital markets to leverage foreign aid funds to generate the capital needed to kickstart massive infrastructure investment. We call it the Big Bond and here’s how it might work.

Donors raise $100 billion upfront. How? The borrow in the markets against future aid flows, exploiting current low interest rates at home and generating new resources. They pass on the interest cost to African countries, reducing their fiscal costs. Meanwhile African countries benefit as well, from lower interest costs and better terms relative to Eurobonds. How $100 bilion? Official development assistance (ODA) to Africa is about $50 billion per year, of which approximately $35 billion consists of pure grants. With the 30-year US Treasury at about 3 percent, securitizing just over $5 billion of this $35 billion would enable donor countries to raise $100 billion upfront.

Audacious as it may seem, passing on the interest costs could actually bolster debt sustainability in African countries, according to a study of 33 countries by the African Development Bank’s Policy Innovation Lab,which found that a 3 percent interest rate in US dollar terms would be lower than the marginal cost of commercial borrowings undertaken by several African countries over the last 5 years. Moreover, the far longer maturities and grace periods compared to market finance would reduce the growing pressure on foreign exchange reserves.

Frontloading aid is not new. It was successfully used to finance vaccines in the early 2000s, saving millions of lives in the developing world. Big Bond resources, managed by the African Development Bank, could be used to co-finance with private investors or help guarantee financing for major regional infrastructure projects long left on the drawing board by individual governments and traditional donors, such as the East Africa Railway connecting Dar-es-Salaam, Kigali and Bujumbura and the Lagos to Abidjan highway.  

The "Big Bond" could also help reinvigorate the relationship between donors and African countries. With investments that also create country-level benefits, the Big Bond can serve as an attractive carrot for the reforms critical to raising the absorptive capacity of African countries in selecting and executing sound public infrastructure investments. Moreover by offering maturities and grace periods far longer than the market, the Big Bond will alleviate these macroeconomic pressures

This approach modernizes the architecture of aid to Africa at a crucial time. It could support higher and more sustainable growth in Africa while lowering the burden on donors. It would rewrite the relationships of foreign aid and be a daringly efficient use of donor nations’ resources.

Copyright: Project Syndicate, 2017


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