2018 - 2019 Edition of Citi Perspectives for the Public Sector

Citi Perspectives for the Public Sector |  2018-2019 49 Africa Debt: Distress Déjà vu or Development Driver? W arnings of unsustainable debt levels of African sovereigns are reverberating once again, two decades after the IMF and the World Bank launched the Heavily Indebted Poor Countries (HIPC) Initiative. The debt forgiveness program was prompted by recognition that countries were diverting precious financial resources from poverty reduction and development projects to servicing their growing debt burdens. The HIPC initiative was subsequently supplemented by the Multilateral Debt Relief Initiative (MDRI) to accelerate progress in achieving the Millennium Development Goals (MDGs). So were the African sovereigns, with the assistance of the HIPC/MDRI debt relief programs, successful in delivering on poverty reduction and meeting the MDGs over the past ten years? Are we facing another debt crisis in Africa based on similar historic conditions, or has the environment evolved sufficiently to avert similar problems? And what tools and strategies are available to African countries to allow them to safely navigate debt financing? This article assesses how the African region has progressed against key development goals, compares the situations of today versus that of the mid-90s, and outlines how sovereigns can appropriately manage the liabilities and risks of their debt portfolios to mitigate against debt distress. Africa rising narrative During the mid-1990s, Sub-Saharan Africa sovereigns did not have access to the global financial system and relied on official bilateral and multilateral debt. Countries such as Ghana, Zambia and Cote d’Ivoire accumulated unmanageable levels of debt well above 100% of GDP. They struggled to pay interest payments on existing loans and were unable to raise new financing to build necessary infrastructure such as roads, schools or hospitals. Over time, 30 African countries received a clean slate by means of $76 billion of debt relief through the HIPC/MDRI programs. Fast forward to 2018 and much of Africa has enjoyed almost uninterrupted growth; a quarter of its countries achieved a real compound annual growth rate above 5.5% per year over the past two decades. 1 Part of this is attributed to debt-financed infrastructure investment as Africa continues to address its infrastructure gap (which requires nearly $100 billion in investment a year). Governments are making progress; there was infrastructure investment of an estimated $324 billion in 2016 and Peter Sullivan Head of Africa Public Sector, Citi 1 On a compounded annual basis. Source: calculated from IMF data. Anh Khuat Vice President EMEA Public Sector, Citi Katia Badr Associate EMEA Public Sector, Citi